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Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 193301

March 11, 2013

MINDANAO II GEOTHERMAL PARTNERSHIP, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x-----------------------x
G.R. No. 194637
MINDANAO I GEOTHERMAL PARTNERSHIP, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO, J.:
G.R. No. 193301 is a petition for review1 assailing the Decision2 promulgated on 10 March 2010 as well as the Resolution3 promulgated on 28 July 2010 by the
Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 513. The CTA En Banc affirmed the 22 September 2008 Decision4 as well as the 26 June 2009
Amended Decision5 of the First Division of the Court of Tax Appeals (CTA First Division) in CTA Case Nos. 7227, 7287, and 7317. The CTA First Division
denied Mindanao II Geothermal Partnerships (Mindanao II) claims for refund or tax credit for the first and second quarters of taxable year 2003 for being filed out
of time (CTA Case Nos. 7227 and 7287). The CTA First Division, however, ordered the
Commissioner of Internal Revenue (CIR) to refund or credit to Mindanao II unutilized input value-added tax (VAT) for the third and fourth quarters of taxable year
2003 (CTA Case No. 7317).
G.R. No. 194637 is a petition for review6 assailing the Decision7 promulgated on 31 May 2010 as well as the Amended Decision8 promulgated on 24 November
2010 by the CTA En Banc in CTA EB Nos. 476 and 483. In its Amended Decision, the CTA En Banc reversed its 31 May 2010 Decision and granted the CIRs
petition for review in CTA Case No. 476. The CTA En Banc denied Mindanao I Geothermal Partnerships (Mindanao I) claims for refund or tax credit for the first
(CTA Case No. 7228), second (CTA Case No. 7286), third, and fourth quarters (CTA Case No. 7318) of 2003.
Both Mindanao I and II are partnerships registered with the Securities and Exchange Commission, value added taxpayers registered with the Bureau of Internal
Revenue (BIR), and Block Power Production Facilities accredited by the Department of Energy. Republic Act No. 9136, or the Electric Power Industry Reform Act
of 2000 (EPIRA), effectively amended Republic Act No. 8424, or the Tax Reform Act of 1997 (1997 Tax Code), 9 when it decreed that sales of power by
generation companies shall be subjected to a zero rate of VAT.10 Pursuant to EPIRA, Mindanao I and II filed with the CIR claims for refund or tax credit of
accumulated unutilized and/or excess input taxes due to VAT zero-rated sales in 2003. Mindanao I and II filed their claims in 2005.
G.R. No. 193301
Mindanao II v. CIR
The Facts
G.R. No. 193301 covers three CTA First Division cases, CTA Case Nos. 7227, 7287, and 7317, which were consolidated as CTA EB No. 513. CTA Case Nos.
7227, 7287, and 7317 claim a tax refund or credit of Mindanao IIs alleged excess or unutilized input taxes due to VAT zero-rated sales. In CTA Case No. 7227,
Mindanao II claims a tax refund or credit of P3,160,984.69 for the first quarter of 2003. In CTA Case No. 7287, Mindanao II claims a tax refund or credit
of P1,562,085.33 for the second quarter of 2003. In CTA Case No. 7317, Mindanao II claims a tax refund or credit of P3,521,129.50 for the third and fourth
quarters of 2003.
The CTA First Divisions narration of the pertinent facts is as follows:
xxxx
On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer (BOT) contract with the Philippine National Oil Corporation Energy
Development Company (PNOC-EDC) for finance, engineering, supply, installation, testing, commissioning, operation, and maintenance of a 48.25 megawatt
geothermal power plant, provided that PNOC-EDC shall supply and deliver steam to Mindanao II at no cost. In turn, Mindanao II shall convert the steam into
electric capacity and energy for PNOC-EDC and shall deliver the same to the National Power Corporation (NPC) for and in behalf of PNOC-EDC. Mindanao II
alleges that its sale of generated power and delivery of electric capacity and energy of Mindanao II to NPC for and in behalf of PNOC-EDC is its only revenuegenerating activity which is in the ambit of VAT zero-rated sales under the EPIRA Law, x x x.
xxxx
Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by generation companies from ten (10%) percent to zero
(0%) percent.
In the course of its operation, Mindanao II makes domestic purchases of goods and services and accumulates therefrom creditable input taxes. Pursuant to the
provisions of the National Internal Revenue Code (NIRC), Mindanao II alleges that it can use its accumulated input tax credits to offset its output tax liability.
Considering, however that its only revenue-generating activity is VAT zero-rated under RA No. 9136, Mindanao IIs input tax credits remain unutilized.
Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT zero-rating of the EPIRA in computing for its VAT payable when it filed
its Quarterly VAT Returns on the following dates:
CTA Case No.

7227

Period Covered
(2003)
1st Quarter

Date of Filing
Original Return

Amended Return

April 23, 2003

July 3, 2002 (sic),

April 1, 2004 &


October 22, 2004
7287

2nd Quarter

July 22, 2003

April 1, 2004

7317

3rd Quarter

Oct. 27, 2003

April 1, 2004

7317

4th Quarter

Jan. 26, 2004

April 1, 2204

Considering that it has accumulated unutilized creditable input taxes from its only income-generating activity, Mindanao II filed an application for refund and/or
issuance of tax credit certificate with the BIRs Revenue District Office at Kidapawan City on April 13, 2005 for the four quarters of 2003.
To date (September 22, 2008), the application for refund by Mindanao II remains unacted upon by the CIR. Hence, these three petitions filed on April 22, 2005
covering the 1st quarter of 2003; July 7, 2005 for the 2nd quarter of 2003; and September 9, 2005 for the 3rd and 4th quarters of 2003. At the instance of Mindanao
II, these petitions were consolidated on March 15, 2006 as they involve the same parties and the same subject matter. The only difference lies with the taxable
periods involved in each petition.11
The Court of Tax Appeals Ruling: Division
In its 22 September 2008 Decision,12 the CTA First Division found that Mindanao II satisfied the twin requirements for VAT zero rating under EPIRA: (1) it is a
generation company, and (2) it derived sales from power generation. The CTA First Division also stated that Mindanao II complied with five requirements to be
entitled to a refund:
1. There must be zero-rated or effectively zero-rated sales;
2. That input taxes were incurred or paid;
3. That such input VAT payments are directly attributable to zero-rated sales or effectively zero-rated sales;
4. That the input VAT payments were not applied against any output VAT liability; and
5. That the claim for refund was filed within the two-year prescriptive period.13
With respect to the fifth requirement, the CTA First Division tabulated the dates of filing of Mindanao IIs return as well as its administrative and judicial claims,
and concluded that Mindanao IIs administrative and judicial claims were timely filed in compliance with this Courts ruling in Atlas Consolidated Mining and
Development Corporation v. Commissioner of Internal Revenue (Atlas).14 The CTA First Division declared that the two-year prescriptive period for filing a VAT
refund claim should not be counted from the close of the quarter but from the date of the filing of the VAT return. As ruled in Atlas, VAT liability or entitlement to a
refund can only be determined upon the filing of the quarterly VAT return.
CTA
Case No.

Period
Covered
(2003)

Date Filing
Original
Return

Amended
Return

Administrative
Return

Judicial Claim

7227

1st Quarter

23 April 2003

1 April 2004

13 April 2005

22 April 2005

7287

2nd Quarter

22 July 2003

1 April 2004

13 April 2005

7 July 2005

7317

3rd Quarter

25 Oct. 2003

1 April 2004

13 April 2005

9 Sept. 2005

7317

4th Quarter

26 Jan. 2004

1 April 2004

13 April 2005

9 Sept. 200515

Thus, counting from 23 April 2003, 22 July 2003, 25 October 2003, and 26 January 2004, when Mindanao II filed its VAT returns, its administrative claim filed on
13 April 2005 and judicial claims filed on 22 April 2005, 7 July 2005, and 9 September 2005 were timely filed in accordance with Atlas.
The CTA First Division found that Mindanao II is entitled to a refund in the modified amount of P7,703,957.79, after disallowing P522,059.91 from input
VAT16 and deducting P18,181.82 from Mindanao IIs sale of a fully depreciated P200,000.00 Nissan Patrol. The input taxes amounting to P522,059.91 were
disallowed for failure to meet invoicing requirements, while the input VAT on the sale of the Nissan Patrol was reduced by P18,181.82 because the output VAT for
the sale was not included in the VAT declarations.
The dispositive portion of the CTA First Divisions 22 September 2008 Decision reads:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED to REFUND or to ISSUE A TAX
CREDIT CERTIFICATE in the modified amount of SEVEN MILLION SEVEN HUNDRED THREE THOUSAND NINE HUNDRED FIFTY SEVEN AND
79/100 PESOS (P7,703,957.79) representing its unutilized input VAT for the four (4) quarters of the taxable year 2003.
SO ORDERED.17
Mindanao II filed a motion for partial reconsideration.18 It stated that the sale of the fully depreciated Nissan Patrol is a one-time transaction and is not incidental
to its VAT zero-rated operations. Moreover, the disallowed input taxes substantially complied with the requirements for refund or tax credit.
The CIR also filed a motion for partial reconsideration. It argued that the judicial claims for the first and second quarters of 2003 were filed beyond the period
allowed by law, as stated in Section 112(A) of the 1997 Tax Code. The CIR further stated that Section 229 is a general provision, and governs cases not covered by
Section 112(A). The CIR countered the CTA First Divisions 22 September 2008 decision by citing this Courts ruling in Commisioner of Internal Revenue v.
Mirant Pagbilao Corporation (Mirant),19 which stated that unutilized input VAT payments must be claimed within two years reckoned from the close of the
taxable quarter when the relevant sales were made regardless of whether said tax was paid.
The CTA First Division denied Mindanao IIs motion for partial reconsideration, found the CIRs motion for partial reconsideration partly meritorious, and
rendered an Amended Decision20 on 26 June 2009. The CTA First Division stated that the claim for refund or credit with the BIR and the subsequent appeal to the
CTA must be filed within the two-year period prescribed under Section 229. The two-year prescriptive period in Section 229 was denominated as a mandatory
statute of limitations. Therefore, Mindanao IIs claims for refund for the first and second quarters of 2003 had already prescribed.

The CTA First Division found that the records of Mindanao IIs case are bereft of evidence that the sale of the Nissan Patrol is not incidental to Mindanao IIs VAT
zero-rated operations. Moreover, Mindanao IIs submitted documents failed to substantiate the requisites for the refund or credit claims.
The CTA First Division modified its 22 September 2008 Decision to read as follows:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED to REFUND or to ISSUE A TAX
CREDIT CERTIFICATE to Mindanao II Geothermal Partnership in the modified amount of TWO MILLION NINE HUNDRED EIGHTY THOUSAND EIGHT
HUNDRED EIGHTY SEVEN AND 77/100 PESOS (P2,980,887.77) representing its unutilized input VAT for the third and fourth quarters of the taxable year
2003.
SO ORDERED.21
Mindanao II filed a Petition for Review,22 docketed as CTA EB No. 513, before the CTA En Banc.
The Court of Tax Appeals Ruling: En Banc
On 10 March 2010, the CTA En Banc rendered its Decision23 in CTA EB No. 513 and denied Mindanao IIs petition. The CTA En Banc ruled that (1) Section
112(A) clearly provides that the reckoning of the two-year prescriptive period for filing the application for refund or credit of input VAT attributable to zero-rated
sales or effectively zero-rated sales shall be counted from the close of the taxable quarter when the sales were made; (2) the Atlas and Mirant cases applied
different tax codes: Atlas applied the 1977 Tax Code while Mirant applied the 1997 Tax Code; (3) the sale of the fully-depreciated Nissan Patrol is incidental to
Mindanao IIs VAT zero-rated transactions pursuant to Section 105; (4) Mindanao II failed to comply with the substantiation requirements provided under Section
113(A) in relation to Section 237 of the 1997 Tax Code as implemented by Section 4.104-1, 4.104-5, and 4.108-1 of Revenue Regulation No. 7-95; and (5) the
doctrine of strictissimi juris on tax exemptions cannot be relaxed in the present case.
The dispositive portion of the CTA En Bancs 10 March 2010 Decision reads:
WHEREFORE, on the basis of the foregoing considerations, the Petition for Review en banc is DISMISSED for lack of merit. Accordingly, the Decision dated
September 22, 2008 and the Amended Decision dated June 26, 2009 issued by the First Division are AFFIRMED.
SO ORDERED.24
The CTA En Banc issued a Resolution25 on 28 July 2010 denying for lack of merit Mindanao IIs Motion for Reconsideration. 26 The CTA En Banc highlighted
the following bases of their previous ruling:
1. The Supreme Court has long decided that the claim for refund of unutilized input VAT must be filed within two (2) years after the close of the taxable
quarter when such sales were made.
2. The Supreme Court is the ultimate arbiter whose decisions all other courts should take bearings.
3. The words of the law are clear, plain, and free from ambiguity; hence, it must be given its literal meaning and applied without any interpretation.27
G.R. No. 194637
Mindanao I v. CIR
The Facts
G.R. No. 194637 covers two cases consolidated by the CTA EB: CTA EB Case Nos. 476 and 483. Both CTA EB cases consolidate three cases from the CTA
Second Division: CTA Case Nos. 7228, 7286, and 7318. CTA Case Nos. 7228, 7286, and 7318 claim a tax refund or credit of Mindanao Is accumulated unutilized
and/or excess input taxes due to VAT zero-rated sales. In CTA Case No. 7228, Mindanao I claims a tax refund or credit ofP3,893,566.14 for the first quarter of
2003. In CTA Case No. 7286, Mindanao I claims a tax refund or credit ofP2,351,000.83 for the second quarter of 2003. In CTA Case No. 7318, Mindanao I claims
a tax refund or credit ofP7,940,727.83 for the third and fourth quarters of 2003.
Mindanao I is similarly situated as Mindanao II. The CTA Second Divisions narration of the pertinent facts is as follows:
xxxx
In December 1994, Mindanao I entered into a contract of Build-Operate-Transfer (BOT) with the Philippine National Oil Corporation Energy Development
Corporation (PNOC-EDC) for the finance, design, construction, testing, commissioning, operation, maintenance and repair of a 47-megawatt geothermal power
plant. Under the said BOT contract, PNOC-EDC shall supply and deliver steam to Mindanao I at no cost. In turn, Mindanao I will convert the steam into electric
capacity and energy for PNOC-EDC and shall subsequently supply and deliver the same to the National Power Corporation (NPC), for and in behalf of PNOCEDC.
Mindanao Is 47-megawatt geothermal power plant project has been accredited by the Department of Energy (DOE) as a Private Sector Generation Facility,
pursuant to the provision of Executive Order No. 215, wherein Certificate of Accreditation No. 95-037 was issued.
On June 26, 2001, Republic Act (R.A.) No. 9136 took effect, and the relevant provisions of the National Internal Revenue Code (NIRC) of 1997 were deemed
modified. R.A. No. 9136, also known as the "Electric Power Industry Reform Act of 2001 (EPIRA), was enacted by Congress to ordain reforms in the electric
power industry, highlighting, among others, the importance of ensuring the reliability, security and affordability of the supply of electric power to end users. Under
the provisions of this Republic Act and its implementing rules and regulations, the delivery and supply of electric energy by generation companies became VAT
zero-rated, which previously were subject to ten percent (10%) VAT.
xxxx
The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by generation companies from ten (10%) percent to zero
percent (0%). Thus, Mindanao I adopted the VAT zero-rating of the EPIRA in computing for its VAT payable when it filed its VAT Returns, on the belief that its
sales qualify for VAT zero-rating.
Mindanao I reported its unutilized or excess creditable input taxes in its Quarterly VAT Returns for the first, second, third, and fourth quarters of taxable year 2003,
which were subsequently amended and filed with the BIR.
On April 4, 2005, Mindanao I filed with the BIR separate administrative claims for the issuance of tax credit certificate on its alleged unutilized or excess input
taxes for taxable year 2003, in the accumulated amount ofP14,185, 294.80.

Alleging inaction on the part of CIR, Mindanao I elevated its claims before this Court on April 22, 2005, July 7, 2005, and September 9, 2005 docketed as CTA
Case Nos. 7228, 7286, and 7318, respectively. However, on October 10, 2005, Mindanao I received a copy of the letter dated September 30, 2003 (sic) of the BIR
denying its application for tax credit/refund.28
The Court of Tax Appeals Ruling: Division
On 24 October 2008, the CTA Second Division rendered its Decision29 in CTA Case Nos. 7228, 7286, and 7318. The CTA Second Division found that (1)
pursuant to Section 112(A), Mindanao I can only claim 90.27% of the amount of substantiated excess input VAT because a portion was not reported in its quarterly
VAT returns; (2) out of the P14,185,294.80 excess input VAT applied for refund, only P11,657,447.14 can be considered substantiated excess input VAT due to
disallowances by the Independent Certified Public Accountant, adjustment on the disallowances per the CTA Second Divisions further verification, and additional
disallowances per the CTA Second Divisions further verification;
(3) Mindanao Is accumulated excess input VAT for the second quarter of 2003 that was carried over to the third quarter of 2003 is net of the claimed input VAT for
the first quarter of 2003, and the same procedure was done for the second, third, and fourth quarters of 2003; and (4) Mindanao Is administrative claims were filed
within the two-year prescriptive period reckoned from the respective dates of filing of the quarterly VAT returns.
The dispositive portion of the CTA Second Divisions 24 October 2008 Decision reads:
WHEREFORE, premises considered, the consolidated Petitions for Review are hereby PARTIALLY GRANTED. Accordingly, the CIR is hereby ORDERED TO
ISSUE A TAX CREDIT CERTIFICATE in favor of Mindanao I in the reduced amount of TEN MILLION FIVE HUNDRED TWENTY THREE THOUSAND
ONE HUNDRED SEVENTY SEVEN PESOS AND 53/100 (P10,523,177.53) representing Mindanao Is unutilized input VAT for the four quarters of the taxable
year 2003.
SO ORDERED.30
Mindanao I filed a motion for partial reconsideration with motion for Clarification31 on 11 November 2008. It claimed that the CTA Second Division should not
have allocated proportionately Mindanao Is unutilized creditable input taxes for the taxable year 2003, because the proportionate allocation of the amount of
creditable taxes in Section 112(A) applies only when the creditable input taxes due cannot be directly and entirely attributed to any of the zero-rated or effectively
zero-rated sales. Mindanao I claims that its unreported collection is directly attributable to its VAT zero-rated sales. The CTA Second Division denied Mindanao Is
motion and maintained the proportionate allocation because there was a portion of the gross receipts that was undeclared in Mindanao Is gross receipts.
The CIR also filed a motion for partial reconsideration32 on 11 November 2008. It claimed that Mindanao I failed to exhaust administrative remedies before it
filed its petition for review. The CTA Second Division denied the CIRs motion, and cited Atlas 33 as the basis for ruling that it is more practical and reasonable to
count the two-year prescriptive period for filing a claim for refund or credit of input VAT on zero-rated sales from the date of filing of the return and payment of
the tax due.
The dispositive portion of the CTA Second Divisions 10 March 2009 Resolution reads:
WHEREFORE, premises considered, the CIRs Motion for Partial Reconsideration and Mindanao Is Motion for Partial Reconsideration with Motion for
Clarification are hereby DENIED for lack of merit.
SO ORDERED.34
The Ruling of the Court of Tax Appeals: En Banc
On 31 May 2010, the CTA En Banc rendered its Decision35 in CTA EB Case Nos. 476 and 483 and denied the petitions filed by the CIR and Mindanao I. The
CTA En Banc found no new matters which have not yet been considered and passed upon by the CTA Second Division in its assailed decision and resolution.
The dispositive portion of the CTA En Bancs 31 May 2010 Decision reads:
WHEREFORE, premises considered, the Petitions for Review are hereby DISMISSED for lack of merit. Accordingly, the October 24, 2008 Decision and March
10, 2009 Resolution of the CTA Former Second Division in CTA Case Nos. 7228, 7286, and 7318, entitled "Mindanao I Geothermal Partnership vs. Commissioner
of Internal Revenue" are hereby AFFIRMED in toto.
SO ORDERED.36
Both the CIR and Mindanao I filed Motions for Reconsideration of the CTA En Bancs 31 May 2010 Decision. In an Amended Decision promulgated on 24
November 2010, the CTA En Banc agreed with the CIRs claim that Section 229 of the NIRC of 1997 is inapplicable in light of this Courts ruling in Mirant. The
CTA En Banc also ruled that the procedure prescribed under Section 112(D) now 112(C)37 of the 1997 Tax Code should be followed first before the CTA En Banc
can act on Mindanao Is claim. The CTA En Banc reconsidered its 31 May 2010 Decision in light of this Courts ruling in Commissioner of Internal Revenue v.
Aichi Forging Company of Asia, Inc. (Aichi).38
The pertinent portions of the CTA En Bancs 24 November 2010 Amended Decision read:
C.T.A. Case No. 7228:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the First Quarter of 2003. Pursuant to Section 112(A) of the
NIRC of 1997, as amended, Mindanao I has two years from March 31, 2003 or until March 31, 2005 within which to file its administrative claim for
refund;
(2) On April 4, 2005, Mindanao I applied for an administrative claim for refund of unutilized input VAT for the first quarter of taxable year 2003 with
the BIR, which is beyond the two-year prescriptive period mentioned above.
C.T.A. Case No. 7286:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the second quarter of 2003. Pursuant to
Section 112(A) of the NIRC of 1997, as amended, Mindanao I has two years from June 30, 2003, within which to file its administrative claim for refund
for the second quarter of 2003, or until June 30, 2005;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT for the second quarter of taxable year 2003 with the
BIR, which is within the two-year prescriptive period, provided under Section 112 (A) of the NIRC of 1997, as amended;
(3) The CIR has 120 days from April 4, 2005 (presumably the date Mindanao I submitted the supporting documents together with the application for
refund) or until August 2, 2005, to decide the administrative claim for refund;

(4) Within 30 days from the lapse of the 120-day period or from August 3, 2005 to September 1, 2005, Mindanao I should have elevated its claim for
refund to the CTA in Division;
(5) However, on July 7, 2005, Mindanao I filed its Petition for Review with this Court, docketed as CTA Case No. 7286, even before the 120-day period
for the CIR to decide the claim for refund had lapsed on August 2, 2005. The Petition for Review was, therefore, prematurely filed and there was failure
to exhaust administrative remedies;
x x x xC.T.A. Case No. 7318:
(1) For calendar year 2003, Mindanao I filed with the BIR its Quarterly VAT Returns for the third and fourth quarters of 2003. Pursuant to Section
112(A) of the NIRC of 1997, as amended, Mindanao I therefore, has two years from September 30, 2003 and December 31, 2003, or until September
30, 2005 and December 31, 2005, respectively, within which to file its administrative claim for the third and fourth quarters of 2003;
(2) On April 4, 2005, Mindanao I applied an administrative claim for refund of unutilized input VAT for the third and fourth quarters of taxable year
2003 with the BIR, which is well within the two-year prescriptive period, provided under Section 112(A) of the NIRC of 1997, as amended;
(3) From April 4, 2005, which is also presumably the date Mindanao I submitted supporting documents, together with the aforesaid application for
refund, the CIR has 120 days or until August 2, 2005, to decide the claim;
(4) Within thirty (30) days from the lapse of the 120-day period or from August 3, 2005 until September 1, 2005 Mindanao I should have elevated its
claim for refund to the CTA;
(5) However, Mindanao I filed its Petition for Review with the CTA in Division only on September 9, 2005, which is 8 days beyond the 30-day period
to appeal to the CTA.
Evidently, the Petition for Review was filed way beyond the 30-day prescribed period. Thus, the Petition for Review should have been dismissed for being filed
late. In recapitulation:
(1) C.T.A. Case No. 7228
Claim for the first quarter of 2003 had already prescribed for having been filed beyond the two-year prescriptive period;
(2) C.T.A. Case No. 7286
Claim for the second quarter of 2003 should be dismissed for Mindanao Is failure to comply with a condition precedent when it failed to exhaust
administrative remedies by filing its Petition for Review even before the lapse of the 120-day period for the CIR to decide the administrative claim;
(3) C.T.A. Case No. 7318
Petition for Review was filed beyond the 30-day prescribed period to appeal to the CTA.
xxxx
IN VIEW OF THE FOREGOING, the Commissioner of Internal Revenues Motion for Reconsideration is hereby GRANTED; Mindanao Is Motion for Partial
Reconsideration is hereby DENIED for lack of merit.
The May 31, 2010 Decision of this Court En Banc is hereby REVERSED.
Accordingly, the Petition for Review of the Commissioner of Internal Revenue in CTA EB No. 476 is hereby GRANTED and the entire claim of Mindanao I
Geothermal Partnership for the first, second, third and fourth quarters of 2003 is hereby DENIED.
SO ORDERED.39
The Issues
G.R. No. 193301
Mindanao II v. CIR
Mindanao II raised the following grounds in its Petition for Review:
I. The Honorable Court of Tax Appeals erred in holding that the claim of Mindanao II for the 1st and 2nd quarters of year 2003 has already prescribed
pursuant to the Mirant case.
A. The Atlas case and Mirant case have conflicting interpretations of the law as to the reckoning date of the two year prescriptive period for
filing claims for VAT refund.
B. The Atlas case was not and cannot be superseded by the Mirant case in light of Section 4(3), Article VIII of the 1987 Constitution.
C. The ruling of the Mirant case, which uses the close of the taxable quarter when the sales were made as the reckoning date in counting the
two-year prescriptive period cannot be applied retroactively in the case of Mindanao II.
II. The Honorable Court of Tax Appeals erred in interpreting Section 105 of the 1997 Tax Code, as amended in that the sale of the fully depreciated
Nissan Patrol is a one-time transaction and is not incidental to the VAT zero-rated operation of Mindanao II.
III. The Honorable Court of Tax Appeals erred in denying the amount disallowed by the Independent Certified Public Accountant as Mindanao II
substantially complied with the requisites of the 1997 Tax Code, as amended, for refund/tax credit.
A. The amount of P2,090.16 was brought about by the timing difference in the recording of the foreign currency deposit transaction.
B. The amount of P2,752.00 arose from the out-of-pocket expenses reimbursed to SGV & Company which is substantially suppoerted [sic]
by an official receipt.
C. The amount of P487,355.93 was unapplied and/or was not included in Mindanao IIs claim for refund or tax credit for the year 2004
subject matter of CTA Case No. 7507.
IV. The doctrine of strictissimi juris on tax exemptions should be relaxed in the present case.40

G.R. No. 194637


Mindanao I v. CIR
Mindanao I raised the following grounds in its Petition for Review:
I. The administrative claim and judicial claim in CTA Case No. 7228 were timely filed pursuant to the case of Atlas Consolidated Mining and
Development Corporation vs. Commissioner of Internal Revenue, which was then the controlling ruling at the time of filing.
A. The recent ruling in the Commissioner of Internal Revenue vs. Mirant Pagbilao Corporation, which uses the end of the taxable quarter
when the sales were made as the reckoning date in counting the two-year prescriptive period, cannot be applied retroactively in the case of
Mindanao I.
B. The Atlas case promulgated by the Third Division of this Honorable Court on June 8, 2007 was not and cannot be superseded by the
Mirant Pagbilao case promulgated by the Second Division of this Honorable Court on September 12, 2008 in light of the explicit provision
of Section 4(3), Article VIII of the 1987 Constitution.
II. Likewise, the recent ruling of this Honorable Court in Commissioner of Internal Revenue vs. Aichi Forging Company of Asia, Inc., cannot be applied
retroactively to Mindanao I in the present case.41
In a Resolution dated 14 December 2011,42 this Court resolved to consolidate G.R. Nos. 193301 and 194637 to avoid conflicting rulings in related cases.
The Courts Ruling
Determination of Prescriptive PeriodG.R. Nos. 193301 and 194637 both raise the question of the determination of the prescriptive period, or the interpretation of
Section 112 of the 1997 Tax Code, in light of our rulings in Atlas and Mirant.
Mindanao IIs unutilized input VAT tax credit for the first and second quarters of 2003, in the amounts ofP3,160,984.69 and P1,562,085.33, respectively, are
covered by G.R. No. 193301, while Mindanao Is unutilized input VAT tax credit for the first, second, third, and fourth quarters of 2003, in the amounts
of P3,893,566.14,P2,351,000.83, and P7,940,727.83, respectively, are covered by G.R. No. 194637.
Section 112 of the 1997 Tax Code
The pertinent sections of the 1997 Tax Code, the law applicable at the time of Mindanao IIs and Mindanao Is administrative and judicial claims, provide:
SEC. 112. Refunds or Tax Credits of Input Tax. -(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against
output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable
foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP):
Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or
services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales.
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in
accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred
twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
x x x x 43 (Underscoring supplied)
The relevant dates for G.R. No. 193301 (Mindanao II) are:
CTA
Case No.

Period
covered by
VAT Sales in
2003 and
amount

Close of
quarter
when sales
were
made

Last day
for filing
application
of tax
refund/tax
credit
certificate
with the
CIR

Actual date of
filing
application for
tax refund/
credit with the
CIR
(administrative
claim)44

Last day for


filing case
with CTA45

Actual Date
of filing case
with CTA
(judicial
claim)

7227

1st Quarter,
P3,160,984.69

31 March
2003

31 March
2005

13 April 2005

12 September
2005

22 April 2005

7287

2nd Quarter,
P1,562,085.33

30 June
2003

30 June
2005

13 April 2005

12 September
2005

7 July 2005

7317

3rd and 4th


Quarters,
P3,521,129.50

30
September
2003

30
September
2005

13 April 2005

12 September
2005

9 September
2005

31
December
2003

2 January
2006
(31
December
2005 being

a Saturday)
The relevant dates for G.R. No. 194637 (Minadanao I) are:
CTA
Case
No.

Period
covered by
VAT Sales in
2003 and
amount

Close of
quarter
when sales
were
made

Last day
for filing
application
of tax
refund/tax
credit
certificate
with the
CIR

Actual date of
filing
application for
tax refund/
credit with the
CIR
(administrative
claim)46

Last day for


filing case
with CTA47

Actual Date
of filing case
with CTA
(judicial
claim)

7227

1st Quarter,
P3,893,566.14

31 March
2003

31 March
2005

4 April 2005

1 September
2005

22 April 2005

7287

2nd Quarter,
P2,351,000.83

30 June
2003

30 June
2005

4 April 2005

1 September
2005

7 July 2005

7317

3rd
and 4th
Quarters,
P7,940,727.83

30
September
2003

30
September
2005

4 April 2005

1 September
2005

9 September
2005

31
December
2003

2 January
2006
(31
December
2005 being
a Saturday)

When Mindanao II and Mindanao I filed their respective administrative and judicial claims in 2005, neither Atlas nor Mirant has been promulgated. Atlas was
promulgated on 8 June 2007, while Mirant was promulgated on 12 September 2008. It is therefore misleading to state that Atlas was the controlling doctrine at the
time of filing of the claims. The 1997 Tax Code, which took effect on 1 January 1998, was the applicable law at the time of filing of the claims in issue. As this
Court explained in the recent consolidated cases of Commissioner of Internal Revenue v. San Roque Power Corporation, Taganito Mining Corporation v.
Commissioner of Internal Revenue, and Philex Mining Corporation v. Commissioner of Internal Revenue (San Roque):48
Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given by law to the Commissioner to decide whether to grant or deny San
Roques application for tax refund or credit. It is indisputable that compliance with the 120-day waiting period is mandatory and jurisdictional. The waiting period,
originally fixed at 60 days only, was part of the provisions of the first VAT law, Executive Order No. 273, which took effect on 1 January 1988. The waiting period
was extended to 120 days effective 1 January 1998 under RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has been in our statute books for more
than fifteen (15) years before San Roque filed its judicial claim.
Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates the doctrine of exhaustion of administrative remedies and
renders the petition premature and thus without a cause of action, with the effect that the CTA does not acquire jurisdiction over the taxpayers petition. Philippine
jurisprudence is replete with cases upholding and reiterating these doctrinal principles.
The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions of the Commissioner of Internal Revenue in cases involving x x x
refunds of internal revenue taxes." When a taxpayer prematurely files a judicial claim for tax refund or credit with the CTA without waiting for the decision of the
Commissioner, there is no "decision" of the Commissioner to review and thus the CTA as a court of special jurisdiction has no jurisdiction over the appeal. The
charter of the CTA also expressly provides that if the Commissioner fails to decide within "a specific period" required by law, such "inaction shall be deemed a
denial" of the application for tax refund or credit. It is the Commissioners decision, or inaction "deemed a denial," that the taxpayer can take to the CTA for
review. Without a decision or an "inaction x x x deemed a denial" of the Commissioner, the CTA has no jurisdiction over a petition for review.
San Roques failure to comply with the 120-day mandatory period renders its petition for review with the CTA void. Article 5 of the Civil Code provides, "Acts
executed against provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity." San Roques void petition for
review cannot be legitimized by the CTA or this Court because Article 5 of the Civil Code states that such void petition cannot be legitimized "except when the law
itself authorizes its validity." There is no law authorizing the petitions validity.
It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law cannot claim or acquire any right from his void act. A right
cannot spring in favor of a person from his own void or illegal act. This doctrine is repeated in Article 2254 of the Civil Code, which states, "No vested or acquired
right can arise from acts or omissions which are against the law or which infringe upon the rights of others." For violating a mandatory provision of law in filing its
petition with the CTA, San Roque cannot claim any right arising from such void petition. Thus, San Roques petition with the CTA is a mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the 120-day period just because the Commissioner merely asserts that
the case was prematurely filed with the CTA and does not question the entitlement of San Roque to the refund. The mere fact that a taxpayer has undisputed excess
input VAT, or that the tax was admittedly illegally, erroneously or excessively collected from him, does not entitle him as a matter of right to a tax refund or credit.
Strict compliance with the mandatory and jurisdictional conditions prescribed by law to claim such tax refund or credit is essential and necessary for such claim to
prosper. Well-settled is the rule that tax refunds or credits, just like tax exemptions, are strictly construed against the taxpayer.
The burden is on the taxpayer to show that he has strictly complied with the conditions for the grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply because the Commissioner chose not to contest the numerical
correctness of the claim for tax refund or credit of the taxpayer. Non-compliance with mandatory periods, non-observance of prescriptive periods, and nonadherence to exhaustion of administrative remedies bar a taxpayers claim for tax refund or credit, whether or not the Commissioner questions the numerical
correctness of the claim of the taxpayer. This Court should not establish the precedent that non-compliance with mandatory and jurisdictional conditions can be
excused if the claim is otherwise meritorious, particularly in claims for tax refunds or credit. Such precedent will render meaningless compliance with mandatory
and jurisdictional requirements, for then every tax refund case will have to be decided on the numerical correctness of the amounts claimed, regardless of noncompliance with mandatory and jurisdictional conditions.

San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine because San Roque filed its petition for review with the CTA more than
four years before Atlas was promulgated. The Atlas doctrine did not exist at the time San Roque failed to comply with the 120-day period. Thus, San Roque cannot
invoke the Atlas doctrine as an excuse for its failure to wait for the 120-day period to lapse. In any event, the Atlas doctrine merely stated that the two-year
prescriptive period should be counted from the date of payment of the output VAT, not from the close of the taxable quarter when the sales involving the input VAT
were made. The Atlas doctrine does not interpret, expressly or impliedly, the 120+30 day periods.49 (Emphases in the original; citations omitted)
Prescriptive Period for
the Filing of Administrative Claims
In determining whether the administrative claims of Mindanao I and Mindanao II for 2003 have prescribed, we see no need to rely on either Atlas or Mirant.
Section 112(A) of the 1997 Tax Code is clear: "Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the
close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to
such sales x x x."
We rule on Mindanao I and IIs administrative claims for the first, second, third, and fourth quarters of 2003 as follows:
(1) The last day for filing an application for tax refund or credit with the CIR for the first quarter of 2003 was on 31 March 2005. Mindanao II filed its
administrative claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims have
prescribed, pursuant to Section 112(A) of the 1997 Tax Code.
(2) The last day for filing an application for tax refund or credit with the CIR for the second quarter of 2003 was on 30 June 2005. Mindanao II filed its
administrative claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were
filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
(3) The last day for filing an application for tax refund or credit with the CIR for the third quarter of 2003 was on 30 September 2005. Mindanao II filed
its administrative claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims
were filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
(4) The last day for filing an application for tax refund or credit with the CIR for the fourth quarter of 2003 was on 2 January 2006. Mindanao II filed its
administrative claim before the CIR on 13 April 2005, while Mindanao I filed its administrative claim before the CIR on 4 April 2005. Both claims were
filed on time, pursuant to Section 112(A) of the 1997 Tax Code.
Prescriptive Period for
the Filing of Judicial Claims
In determining whether the claims for the second, third and fourth quarters of 2003 have been properly appealed, we still see no need to refer to either Atlas or
Mirant, or even to Section 229 of the 1997 Tax Code. The second paragraph of Section 112(C) of the 1997 Tax Code is clear: "In case of full or partial denial of the
claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected
may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or
the unacted claim with the Court of Tax Appeals."
The mandatory and jurisdictional nature of the 120+30 day periods was explained in San Roque:
At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory periods were already in the law. Section 112(C) expressly grants the
Commissioner 120 days within which to decide the taxpayers claim. The law is clear, plain, and unequivocal: "x x x the Commissioner shall grant a refund or
issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents." Following the
verba legis doctrine, this law must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA
without waiting for the Commissioners decision within the 120-day mandatory and jurisdictional period. The CTA will have no jurisdiction because there will be
no "decision" or "deemed a denial" decision of the Commissioner for the CTA to review. In San Roques case, it filed its petition with the CTA a mere 13 days after
it filed its administrative claim with the Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day period, and it cannot blame anyone but
itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty dayperiod, appeal the decision or the unacted claim with the Court of Tax Appeals. (Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should be applied exactly as worded since it is clear, plain, and
unequivocal. As this law states, the taxpayer may, if he wishes, appeal the decision of the Commissioner to the CTA within 30 days from receipt of the
Commissioners decision, or if the Commissioner does not act on the taxpayers claim within the 120-day period, the taxpayer may appeal to the CTA within 30
days from the expiration of the 120-day period.
xxxx
There are three compelling reasons why the 30-day period need not necessarily fall within the two-year prescriptive period, as long as the administrative claim is
filed within the two-year prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may, within two (2) years after the close of the taxable quarter when the sales
were made, apply for the issuance of a tax credit certificate or refund of the creditable input tax due or paid to such sales." In short, the law states that the taxpayer
may apply with the Commissioner for a refund or credit "within two (2) years," which means at anytime within two years. Thus, the application for refund or credit
may be filed by the taxpayer with the Commissioner on the last day of the two-year prescriptive period and it will still strictly comply with the law. The two-year
prescriptive period is a grace period in favor of the taxpayer and he can avail of the full period before his right to apply for a tax refund or credit is barred by
prescription.
Second, Section 112(C) provides that the Commissioner shall decide the application for refund or credit "within one hundred twenty (120) days from the date of
submission of complete documents in support of the application filed in accordance with Subsection (A)." The reference in Section 112(C) of the submission of
documents "in support of the application filed in accordance with Subsection A" means that the application in Section 112(A) is the administrative claim that the
Commissioner must decide within the 120-day period. In short, the two-year prescriptive period in Section 112(A) refers to the period within which the taxpayer
can file an administrative claim for tax refund or credit. Stated otherwise, the two-year prescriptive period does not refer to the filing of the judicial claim with the
CTA but to the filing of the administrative claim with the Commissioner. As held in Aichi, the "phrase within two years x x x apply for the issuance of a tax credit
or refund refers to applications for refund/credit with the CIR and not to appeals made to the CTA."

Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive period (equivalent to 730 days), then the taxpayer must file his
administrative claim for refund or credit within the first 610 days of the two-year prescriptive period. Otherwise, the filing of the administrative claim beyond the
first 610 days will result in the appeal to the CTA being filed beyond the two-year prescriptive period. Thus, if the taxpayer files his administrative claim on the
611th day, the Commissioner, with his 120-day period, will have until the 731st day to decide the claim. If the Commissioner decides only on the 731st day, or
does not decide at all, the taxpayer can no longer file his judicial claim with the CTA because the two-year prescriptive period (equivalent to 730 days) has lapsed.
The 30-day period granted by law to the taxpayer to file an appeal before the CTA becomes utterly useless, even if the taxpayer complied with the law by filing his
administrative claim within the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period adds a condition that is not found in the law. It results in truncating 120 days
from the 730 days that the law grants the taxpayer for filing his administrative claim with the Commissioner. This Court cannot interpret a law to defeat, wholly or
even partly, a remedy that the law expressly grants in clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The taxpayer can file his administrative claim for refund or
credit at anytime within the two-year prescriptive period. If he files his claim on the last day of the two-year prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days from such filing to decide the claim. If the Commissioner decides the claim on the
120th day, or does not decide it on that day, the taxpayer still has 30 days to file his judicial claim with the CTA. This is not only the plain meaning but also the
only logical interpretation of Section 112(A) and (C).50 (Emphases in the original; citations omitted)
In San Roque, this Court ruled that "all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal in
Aichi on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional."51 We shall discuss later the effect of San Roques
recognition of BIR Ruling No. DA-489-03 on claims filed between 10 December 2003 and 6 October 2010. Mindanao I and II filed their claims within this period.
We rule on Mindanao I and IIs judicial claims for the second, third, and fourth quarters of 2003 as follows:
G.R.
Mindanao II v. CIR

No.

193301

Mindanao II filed its administrative claims for the second, third, and fourth quarters of 2003 on 13 April 2005. Counting 120 days after filing of the administrative
claim with the CIR (11 August 2005) and 30 days after the CIRs denial by inaction, the last day for filing a judicial claim with the CTA for the second, third, and
fourth quarters of 2003 was on 12 September 2005. However, the judicial claim cannot be filed earlier than 11 August 2005, which is the expiration of the 120-day
period for the Commissioner to act on the claim.
(1) Mindanao II filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005, before the expiration of the 120-day period.
Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao IIs judicial claim for the second quarter of 2003 was prematurely filed.
However, pursuant to San Roques recognition of the effect of BIR Ruling No. DA-489-03, we rule that Mindanao IIs judicial claim for the second
quarter of 2003 qualifies under the exception to the strict application of the 120+30 day periods.
(2) Mindanao II filed its judicial claim for the third quarter of 2003 before the CTA on 9 September 2005. Mindanao IIs judicial claim for the third
quarter of 2003 was thus filed on time, pursuant to Section 112(C) of the 1997 Tax Code.
(3) Mindanao II filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September 2005. Mindanao IIs judicial claim for the fourth
quarter of 2003 was thus filed on time, pursuant to Section 112(C) of the 1997 Tax Code.
G.R.
Mindanao I v. CIR

No.

194637

Mindanao I filed its administrative claims for the second, third, and fourth quarters of 2003 on 4 April 2005. Counting 120 days after filing of the administrative
claim with the CIR (2 August 2005) and 30 days after the CIRs denial by inaction,52 the last day for filing a judicial claim with the CTA for the second, third, and
fourth quarters of 2003 was on 1 September 2005. However, the judicial claim cannot be filed earlier than 2 August 2005, which is the expiration of the 120-day
period for the Commissioner to act on the claim.
(1) Mindanao I filed its judicial claim for the second quarter of 2003 before the CTA on 7 July 2005, before the expiration of the 120-day period.
Pursuant to Section 112(C) of the 1997 Tax Code, Mindanao Is judicial claim for the second quarter of 2003 was prematurely filed. However, pursuant
to San Roques recognition of the effect of BIR Ruling No. DA-489-03, we rule that Mindanao Is judicial claim for the second quarter of 2003 qualifies
under the exception to the strict application of the 120+30 day periods.
(2) Mindanao I filed its judicial claim for the third quarter of 2003 before the CTA on 9 September 2005. Mindanao Is judicial claim for the third
quarter of 2003 was thus filed after the prescriptive period, pursuant to Section 112(C) of the 1997 Tax Code.
(3) Mindanao I filed its judicial claim for the fourth quarter of 2003 before the CTA on 9 September 2005. Mindanao Is judicial claim for the fourth
quarter of 2003 was thus filed after the prescriptive period, pursuant to Section 112(C) of the 1997 Tax Code.
San Roque: Recognition of BIR Ruling No. DA-489-03
In the consolidated cases of San Roque, the Court En Banc53 examined and ruled on the different claims for tax refund or credit of three different companies. In
San Roque, we reiterated that "following the verba legis doctrine, Section 112(C) must be applied exactly as worded since it is clear, plain, and unequivocal. The
taxpayer cannot simply file a petition with the CTA without waiting for the Commissioners decision within the 120-day mandatory and jurisdictional period. The
CTA will have no jurisdiction because there will be no decision or deemed a denial decision of the Commissioner for the CTA to review."
Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in San Roque recognized that BIR Ruling No. DA-489-03 constitutes
equitable estoppel54 in favor of taxpayers. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-claimant need not wait for the lapse of the 120-day
period before it could seek judicial relief with the CTA by way of Petition for Review." This Court discussed BIR Ruling No. DA-489-03 and its effect on
taxpayers, thus:
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a difficult question of law. The abandonment of the Atlas
doctrine by Mirant and Aichi is proof that the reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of law. The
abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit they received or could
have received under Atlas prior to its abandonment. This Court is applying Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the
reversal by this Court of a general interpretative rule issued by the Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply
prospectively. x x x.

xxxx
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all taxpayers or a specific ruling applicable only to a
particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not by a particular taxpayer, but by a government agency
tasked with processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance. This
government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in its query to
the Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the agency was in fact asking the Commissioner what to do in cases like the
tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10
December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional.
xxxx
Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Truly,
Taganito can claim that in filing its judicial claim prematurely without waiting for the 120-day period to expire, it was misled by BIR Ruling No. DA-489-03.
Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03, which shields the filing of its judicial claim from the vice of prematurity. (Emphasis in the
original)
Summary of Administrative and Judicial Claims
G.R. No. 193301
Mindanao II v. CIR
Administrative
Claim

Judicial Claim

Action on Claim

1st Quarter, 2003

Filed late

--

Deny, pursuant to
Section 112(A) of the
1997 Tax Code

2nd Quarter, 2003

Filed on time

Prematurely filed

Grant, pursuant to
BIR Ruling No. DA-489-03

3rd Quarter, 2003

Filed on time

Filed on time

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

4th Quarter, 2003

Filed on time

Filed on time

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

Administrative
Claim

Judicial Claim

Action on Claim

1st Quarter, 2003

Filed late

--

Deny, pursuant to
Section 112(A) of the
1997 Tax Code

2nd Quarter, 2003

Filed on time

Prematurely filed

Grant, pursuant to
BIR Ruling No. DA-489-03

3rd Quarter, 2003

Filed on time

Filed late

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

4th Quarter, 2003

Filed on time

Filed late

Grant, pursuant to
Section 112(C) of the
1997 Tax Code

G.R. No. 194637


Mindanao I v. CIR

Summary of Rules on Prescriptive Periods Involving VAT


We summarize the rules on the determination of the prescriptive period for filing a tax refund or credit of unutilized input VAT as provided in Section 112 of the
1997 Tax Code, as follows:
(1) An administrative claim must be filed with the CIR within two years after the close of the taxable quarter when the zero-rated or effectively zerorated sales were made.
(2) The CIR has 120 days from the date of submission of complete documents in support of the administrative claim within which to decide whether to
grant a refund or issue a tax credit certificate. The 120-day period may extend beyond the two-year period from the filing of the administrative claim if
the claim is filed in the later part of the two-year period. If the 120-day period expires without any decision from the CIR, then the administrative claim
may be considered to be denied by inaction.
(3) A judicial claim must be filed with the CTA within 30 days from the receipt of the CIRs decision denying the administrative claim or from the
expiration of the 120-day period without any action from the CIR.

(4) All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court
in Aichi on 6 October 2010, as an exception to the mandatory and jurisdictional 120+30 day periods.
"Incidental" Transaction
Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction in the course of its business; hence, it is an isolated transaction
that should not have been subject to 10% VAT.
Section 105 of the 1997 Tax Code does not support Mindanao IIs position:
SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services, and any
person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This
rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental
thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of trade or business. (Emphasis supplied)
Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay) 55 and Imperial v. Collector of Internal Revenue (Imperial)56 to
justify its position. Magsaysay, decided under the NIRC of 1986, involved the sale of vessels of the National Development Company (NDC) to Magsaysay Lines,
Inc. We ruled that the sale of vessels was not in the course of NDCs trade or business as it was involuntary and made pursuant to the Governments policy for
privatization. Magsaysay, in quoting from the CTAs decision, imputed upon Imperial the definition of "carrying on business." Imperial, however, is an unreported
case that merely stated that "to engage is to embark in a business or to employ oneself therein."57
Mindanao IIs sale of the Nissan Patrol is said to be an isolated transaction.1wphi1 However, it does not follow that an isolated transaction cannot be an incidental
transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the 1997 Tax Code would show that a transaction "in the course of trade or business"
includes "transactions incidental thereto."
Mindanao IIs business is to convert the steam supplied to it by PNOC-EDC into electricity and to deliver the electricity to NPC. In the course of its business,
Mindanao II bought and eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao IIs property, plant, and equipment. Therefore,
the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao IIs business which should be liable for VAT.
Substantiation Requirements
Mindanao II claims that the CTAs disallowance of a total amount of P492,198.09 is improper as it has substantially complied with the substantiation requirements
of Section 113(A)58 in relation to Section 23759 of the 1997 Tax Code, as implemented by Section 4.104-1, 4.104-5 and 4.108-1 of Revenue Regulation No. 795.60
We are constrained to state that Mindanao IIs compliance with the substantiation requirements is a finding of fact. The CTA En Banc evaluated the records of the
case and found that the transactions in question are purchases for services and that Mindanao II failed to comply with the substantiation requirements. We affirm
the CTA En Bancs finding of fact, which in turn affirmed the finding of the CTA First Division. We see no reason to overturn their findings.
WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court of Tax Appeals En Bane in CT A EB No. 513 promulgated on 10 March 2010,
as well as the Resolution promulgated on 28 July 2010, and the Decision of the Court of Tax Appeals En Bane in CTA EB Nos. 476 and 483 promulgated on 31
May 2010, as well as the Amended Decision promulgated on 24 November 2010, are AFFIRMED with MODIFICATION.
For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first quarter of 2003 is DENIED while its claims for the second, third, and fourth
quarters of 2003 are GRANTED. For G.R. No. 19463 7, the claims of Mindanao I Geothermal Partnership for the first, third, and fourth quarters of 2003 are
DENIED while its claim for the second quarter of 2003 is GRANTED.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 187485

February 12, 2013

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
SAN ROQUE POWER CORPORATION, Respondent.
X----------------------------X
G.R. No. 196113
TAGANITO MINING CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
x----------------------------x
G.R. No. 197156

PHILEX MINING CORPORATION, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
CARPIO, J.:
The Cases
G.R. No. 187485 is a petitiOn for review1 assailing the Decision2 promulgated on 25 March 2009 as well as the Resolution3 promulgated on 24 April 2009 by the
Court of Tax Appeals En Banc (CTA EB) in CTA EB No. 408. The CTA EB affirmed the 29 November 2007 Amended Decision4 as well as the 11 July 2008
Resolution5 of the Second Division of the Court of Tax Appeals (CTA Second Division) in CTA Case No. 6647. The CTA Second Division ordered the
Commissioner of Internal Revenue (Commissioner) to refund or issue a tax credit for P483,797,599.65 to San Roque Power Corporation (San Roque) for
unutilized input value-added tax (VAT) on purchases of capital goods and services for the taxable year 2001.
G.R. No. 196113 is a petition for review6 assailing the Decision7 promulgated on 8 December 2010 as well as the Resolution8 promulgated on 14 March 2011 by
the CTA EB in CTA EB No. 624. In its Decision, the CTA EB reversed the 8 January 2010 Decision9 as well as the 7 April 2010 Resolution10of the CTA Second
Division and granted the CIRs petition for review in CTA Case No. 7574. The CTA EB dismissed, for having been prematurely filed, Taganito Mining
Corporations (Taganito) judicial claim for P8,365,664.38 tax refund or credit.
G.R. No. 197156 is a petition for review11 assailing the Decision12promulgated on 3 December 2010 as well as the Resolution13 promulgated on 17 May 2011
by the CTA EB in CTA EB No. 569. The CTA EB affirmed the 20 July 2009 Decision as well as the 10 November 2009 Resolution of the CTA Second Division in
CTA Case No. 7687. The CTA Second Division denied, due to prescription, Philex Mining Corporations (Philex) judicial claim for P23,956,732.44 tax refund or
credit.
On 3 August 2011, the Second Division of this Court resolved14 to consolidate G.R. No. 197156 with G.R. No. 196113, which were pending in the same Division,
and with G.R. No. 187485, which was assigned to the Court En Banc. The Second Division also resolved to refer G.R. Nos. 197156 and 196113 to the Court En
Banc, where G.R. No. 187485, the lower-numbered case, was assigned.
G.R. No. 187485
CIR v. San Roque Power Corporation
The Facts
The CTA EBs narration of the pertinent facts is as follows:
[CIR] is the duly appointed Commissioner of Internal Revenue, empowered, among others, to act upon and approve claims for refund or tax credit, with office at
the Bureau of Internal Revenue ("BIR") National Office Building, Diliman, Quezon City.
[San Roque] is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal office at Barangay San Roque,
San Manuel, Pangasinan. It was incorporated in October 1997 to design, construct, erect, assemble, own, commission and operate power-generating plants and
related facilities pursuant to and under contract with the Government of the Republic of the Philippines, or any subdivision, instrumentality or agency thereof, or
any governmentowned or controlled corporation, or other entity engaged in the development, supply, or distribution of energy.
As a seller of services, [San Roque] is duly registered with the BIR with TIN/VAT No. 005-017-501. It is likewise registered with the Board of Investments
("BOI") on a preferred pioneer status, to engage in the design, construction, erection, assembly, as well as to own, commission, and operate electric powergenerating plants and related activities, for which it was issued Certificate of Registration No. 97-356 on February 11, 1998.
On October 11, 1997, [San Roque] entered into a Power Purchase Agreement ("PPA") with the National Power Corporation ("NPC") to develop hydro-potential of
the Lower Agno River and generate additional power and energy for the Luzon Power Grid, by building the San Roque Multi-Purpose Project located in San
Manuel, Pangasinan. The PPA provides, among others, that [San Roque] shall be responsible for the design, construction, installation, completion, testing and
commissioning of the Power Station and shall operate and maintain the same, subject to NPC instructions. During the cooperation period of twenty-five (25) years
commencing from the completion date of the Power Station, NPC will take and pay for all electricity available from the Power Station.
On the construction and development of the San Roque Multi- Purpose Project which comprises of the dam, spillway and power plant, [San Roque] allegedly
incurred, excess input VAT in the amount of 559,709,337.54 for taxable year 2001 which it declared in its Quarterly VAT Returns filed for the same year. [San
Roque] duly filed with the BIR separate claims for refund, in the total amount of 559,709,337.54, representing unutilized input taxes as declared in its VAT
returns for taxable year 2001.
However, on March 28, 2003, [San Roque] filed amended Quarterly VAT Returns for the year 2001 since it increased its unutilized input VAT to the amount of
560,200,283.14. Consequently, [San Roque] filed with the BIR on even date, separate amended claims for refund in the aggregate amount of 560,200,283.14.
[CIRs] inaction on the subject claims led to the filing by [San Roque] of the Petition for Review with the Court [of Tax Appeals] in Division on April 10, 2003.
Trial of the case ensued and on July 20, 2005, the case was submitted for decision.15
The Court of Tax Appeals Ruling: Division
The CTA Second Division initially denied San Roques claim. In its Decision16 dated 8 March 2006, it cited the following as bases for the denial of San Roques
claim: lack of recorded zero-rated or effectively zero-rated sales; failure to submit documents specifically identifying the purchased goods/services related to the
claimed input VAT which were included in its Property, Plant and Equipment account; and failure to prove that the related construction costs were capitalized in its
books of account and subjected to depreciation.
The CTA Second Division required San Roque to show that it complied with the following requirements of Section 112(B) of Republic Act No. 8424 (RA
8424)17 to be entitled to a tax refund or credit of input VAT attributable to capital goods imported or locally purchased: (1) it is a VAT-registered entity; (2) its
input taxes claimed were paid on capital goods duly supported by VAT invoices and/or official receipts; (3) it did not offset or apply the claimed input VAT
payments on capital goods against any output VAT liability; and (4) its claim for refund was filed within the two-year prescriptive period both in the administrative
and judicial levels.
The CTA Second Division found that San Roque complied with the first, third, and fourth requirements, thus:
The fact that [San Roque] is a VAT registered entity is admitted (par. 4, Facts Admitted, Joint Stipulation of Facts, Records, p. 157). It was also established that the
instant claim of 560,200,823.14 is already net of the 11,509.09 output tax declared by [San Roque] in its amended VAT return for the first quarter of 2001.

Moreover, the entire amount of 560,200,823.14 was deducted by [San Roque] from the total available input tax reflected in its amended VAT returns for the last
two quarters of 2001 and first two quarters of 2002 (Exhibits M-6, O-6, OO-1 & QQ-1). This means that the claimed input taxes of 560,200,823.14 did not form
part of the excess input taxes of 83,692,257.83, as of the second quarter of 2002 that was to be carried-over to the succeeding quarters. Further, [San Roques]
claim for refund/tax credit certificate of excess input VAT was filed within the two-year prescriptive period reckoned from the dates of filing of the corresponding
quarterly VAT returns.
For the first, second, third, and fourth quarters of 2001, [San Roque] filed its VAT returns on April 25, 2001, July 25, 2001, October 23, 2001 and January 24, 2002,
respectively (Exhibits "H, J, L, and N"). These returns were all subsequently amended on March 28, 2003 (Exhibits "I, K, M, and O"). On the other hand, [San
Roque] originally filed its separate claims for refund on July 10, 2001, October 10, 2001, February 21, 2002, and May 9, 2002 for the first, second, third, and
fourth quarters of 2001, respectively, (Exhibits "EE, FF, GG, and HH") and subsequently filed amended claims for all quarters on March 28, 2003 (Exhibits "II, JJ,
KK, and LL"). Moreover, the Petition for Review was filed on April 10, 2003. Counting from the respective dates when [San Roque] originally filed its VAT returns
for the first, second, third and fourth quarters of 2001, the administrative claims for refund (original and amended) and the Petition for Review fall within the twoyear prescriptive period.18
San Roque filed a Motion for New Trial and/or Reconsideration on 7 April 2006. In its 29 November 2007 Amended Decision, 19 the CTA Second Division found
legal basis to partially grant San Roques claim. The CTA Second Division ordered the Commissioner to refund or issue a tax credit in favor of San Roque in the
amount of 483,797,599.65, which represents San Roques unutilized input VAT on its purchases of capital goods and services for the taxable year 2001. The CTA
based the adjustment in the amount on the findings of the independent certified public accountant. The following reasons were cited for the disallowed claims:
erroneous computation; failure to ascertain whether the related purchases are in the nature of capital goods; and the purchases pertain to capital goods. Moreover,
the reduction of claims was based on the following: the difference between San Roques claim and that appearing on its books; the official receipts covering the
claimed input VAT on purchases of local services are not within the period of the claim; and the amount of VAT cannot be determined from the submitted official
receipts and invoices. The CTA Second Division denied San Roques claim for refund or tax credit of its unutilized input VAT attributable to its zero-rated or
effectively zero-rated sales because San Roque had no record of such sales for the four quarters of 2001.
The dispositive portion of the CTA Second Divisions 29 November 2007 Amended Decision reads:
WHEREFORE, [San Roques] "Motion for New Trial and/or Reconsideration" is hereby PARTIALLY GRANTED and this Courts Decision promulgated on
March 8, 2006 in the instant case is hereby MODIFIED.
Accordingly, [the CIR] is hereby ORDERED to REFUND or in the alternative, to ISSUE A TAX CREDIT CERTIFICATE in favor of [San Roque] in the reduced
amount of Four Hundred Eighty Three Million Seven Hundred Ninety Seven Thousand Five Hundred Ninety Nine Pesos and Sixty Five Centavos
(483,797,599.65) representing unutilized input VAT on purchases of capital goods and services for the taxable year 2001.
SO ORDERED.20
The Commissioner filed a Motion for Partial Reconsideration on 20 December 2007. The CTA Second Division issued a Resolution dated 11 July 2008 which
denied the CIRs motion for lack of merit.
The Court of Tax Appeals Ruling: En Banc
The Commissioner filed a Petition for Review before the CTA EB praying for the denial of San Roques claim for refund or tax credit in its entirety as well as for
the setting aside of the 29 November 2007 Amended Decision and the 11 July 2008 Resolution in CTA Case No. 6647.
The CTA EB dismissed the CIRs petition for review and affirmed the challenged decision and resolution.
The CTA EB cited Commissioner of Internal Revenue v. Toledo Power, Inc.21 and Revenue Memorandum Circular No. 49-03,22 as its bases for ruling that San
Roques judicial claim was not prematurely filed. The pertinent portions of the Decision state:
More importantly, the Court En Banc has squarely and exhaustively ruled on this issue in this wise:
It is true that Section 112(D) of the abovementioned provision applies to the present case. However, what the petitioner failed to consider is Section 112(A)
of the same provision. The respondent is also covered by the two (2) year prescriptive period. We have repeatedly held that the claim for refund with the BIR and
the subsequent appeal to the Court of Tax Appeals must be filed within the two-year period.
Accordingly, the Supreme Court held in the case of Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue that the twoyear prescriptive period for filing a claim for input tax is reckoned from the date of the filing of the quarterly VAT return and payment of the tax due. If the said
period is about to expire but the BIR has not yet acted on the application for refund, the taxpayer may interpose a petition for review with this Court
within the two year period.
In the case of Gibbs vs. Collector, the Supreme Court held that if, however, the Collector (now Commissioner) takes time in deciding the claim, and the period of
two years is about to end, the suit or proceeding must be started in the Court of Tax Appeals before the end of the two-year period without awaiting the decision of
the Collector.
Furthermore, in the case of Commissioner of Customs and Commissioner of Internal Revenue vs. The Honorable Court of Tax Appeals and Planters Products,
Inc., the Supreme Court held that the taxpayer need not wait indefinitely for a decision or ruling which may or may not be forthcoming and which he has
no legal right to expect. It is disheartening enough to a taxpayer to keep him waiting for an indefinite period of time for a ruling or decision of the Collector (now
Commissioner) of Internal Revenue on his claim for refund. It would make matters more exasperating for the taxpayer if we were to close the doors of the courts of
justice for such a relief until after the Collector (now Commissioner) of Internal Revenue, would have, at his personal convenience, given his go signal.
This Court ruled in several cases that once the petition is filed, the Court has already acquired jurisdiction over the claims and the Court is not bound to wait
indefinitely for no reason for whatever action respondent (herein petitioner) may take. At stake are claims for refund and unlike disputed assessments, no
decision of respondent (herein petitioner) is required before one can go to this Court. (Emphasis supplied and citations omitted)
Lastly, it is apparent from the following provisions of Revenue Memorandum Circular No. 49-03 dated August 18, 2003, that [the CIR] knows that claims for VAT
refund or tax credit filed with the Court [of Tax Appeals] can proceed simultaneously with the ones filed with the BIR and that taxpayers need not wait for the
lapse of the subject 120-day period, to wit:
In response to [the] request of selected taxpayers for adoption of procedures in handling refund cases that are aligned to the statutory requirements that refund cases
should be elevated to the Court of Tax Appeals before the lapse of the period prescribed by law, certain provisions of RMC No. 42-2003 are hereby amended and
new provisions are added thereto.
In consonance therewith, the following amendments are being introduced to RMC No. 42-2003, to wit:

I.) A-17 of Revenue Memorandum Circular No. 42-2003 is hereby revised to read as follows:
In cases where the taxpayer has filed a "Petition for Review" with the Court of Tax Appeals involving a claim for refund/TCC that is pending at the
administrative agency (Bureau of Internal Revenue or OSS-DOF), the administrative agency and the tax court may act on the case separately. While the
case is pending in the tax court and at the same time is still under process by the administrative agency, the litigation lawyer of the BIR, upon receipt of the
summons from the tax court, shall request from the head of the investigating/processing office for the docket containing certified true copies of all the documents
pertinent to the claim. The docket shall be presented to the court as evidence for the BIR in its defense on the tax credit/refund case filed by the taxpayer. In the
meantime, the investigating/processing office of the administrative agency shall continue processing the refund/TCC case until such time that a final decision has
been reached by either the CTA or the administrative agency.
If the CTA is able to release its decision ahead of the evaluation of the administrative agency, the latter shall cease from processing the claim. On the other
hand, if the administrative agency is able to process the claim of the taxpayer ahead of the CTA and the taxpayer is amenable to the findings thereof, the concerned
taxpayer must file a motion to withdraw the claim with the CTA.23 (Emphasis supplied)
G.R. No. 196113
Taganito Mining Corporation v. CIR
The Facts
The CTA Second Divisions narration of the pertinent facts is as follows:
Petitioner, Taganito Mining Corporation, is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal office at 4th
Floor, Solid Mills Building, De La Rosa St., Lega[s]pi Village, Makati City. It is duly registered with the Securities and Exchange Commission with Certificate of
Registration No. 138682 issued on March 4, 1987 with the following primary purpose:
To carry on the business, for itself and for others, of mining lode and/or placer mining, developing, exploiting, extracting, milling, concentrating, converting,
smelting, treating, refining, preparing for market, manufacturing, buying, selling, exchanging, shipping, transporting, and otherwise producing and dealing in
nickel, chromite, cobalt, gold, silver, copper, lead, zinc, brass, iron, steel, limestone, and all kinds of ores, metals and their by-products and which by-products
thereof of every kind and description and by whatsoever process the same can be or may hereafter be produced, and generally and without limit as to amount, to
buy, sell, locate, exchange, lease, acquire and deal in lands, mines, and mineral rights and claims and to conduct all business appertaining thereto, to purchase,
locate, lease or otherwise acquire, mining claims and rights, timber rights, water rights, concessions and mines, buildings, dwellings, plants machinery, spare parts,
tools and other properties whatsoever which this corporation may from time to time find to be to its advantage to mine lands, and to explore, work, exercise,
develop or turn to account the same, and to acquire, develop and utilize water rights in such manner as may be authorized or permitted by law; to purchase, hire,
make, construct or otherwise, acquire, provide, maintain, equip, alter, erect, improve, repair, manage, work and operate private roads, barges, vessels, aircraft and
vehicles, private telegraph and telephone lines, and other communication media, as may be needed by the corporation for its own purpose, and to purchase, import,
construct, machine, fabricate, or otherwise acquire, and maintain and operate bridges, piers, wharves, wells, reservoirs, plumes, watercourses, waterworks,
aqueducts, shafts, tunnels, furnaces, cook ovens, crushing works, gasworks, electric lights and power plants and compressed air plants, chemical works of all kinds,
concentrators, smelters, smelting plants, and refineries, matting plants, warehouses, workshops, factories, dwelling houses, stores, hotels or other buildings,
engines, machinery, spare parts, tools, implements and other works, conveniences and properties of any description in connection with or which may be directly or
indirectly conducive to any of the objects of the corporation, and to contribute to, subsidize or otherwise aid or take part in any operations;
and is a VAT-registered entity, with Certificate of Registration (BIR Form No. 2303) No. OCN 8RC0000017494. Likewise, [Taganito] is registered with the Board
of Investments (BOI) as an exporter of beneficiated nickel silicate and chromite ores, with BOI Certificate of Registration No. EP-88-306.
Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue vested with authority to exercise the functions of the said office,
including inter alia, the power to decide refunds of internal revenue taxes, fees and other charges, penalties imposed in relation thereto, or other matters arising
under the National Internal Revenue Code (NIRC) or other laws administered by Bureau of Internal Revenue (BIR) under Section 4 of the NIRC. He holds office
at the BIR National Office Building, Diliman, Quezon City.
[Taganito] filed all its Monthly VAT Declarations and Quarterly Vat Returns for the period January 1, 2005 to December 31, 2005. For easy reference, a summary
of the filing dates of the original and amended Quarterly VAT Returns for taxable year 2005 of [Taganito] is as follows:
Exhibit(s)
L to L-4

Quarter

Mode of filing

Filing Date

Original

Electronic

April 15, 2005

M to M-3

Amended

Electronic

July 20, 2005

N to N-4

Amended

Electronic

October 18, 2006

Original

Electronic

July 20, 2005

Amended

Electronic

October 18, 2006

Original

Electronic

October 19, 2005

Amended

Electronic

October 18, 2006

Original

Electronic

January 20, 2006

Amended

Electronic

October 18, 2006

Q to Q-3

1st

Nature of
the Return

2nd

R to R-4
U to U-4

3rd

V to V-4
Y to Y-4
Z to Z-4

4th

As can be gleaned from its amended Quarterly VAT Returns, [Taganito] reported zero-rated sales amounting to P1,446,854,034.68; input VAT on its domestic
purchases and importations of goods (other than capital goods) and services amounting to P2,314,730.43; and input VAT on its domestic purchases and
importations of capital goods amounting to P6,050,933.95, the details of which are summarized as follows:
Period
Covered

Zero-Rated Sales

Input VAT on
Domestic
Purchases and

Input VAT on
Domestic
Purchases and

Total Input VAT

Importations
of Goods and
Services

Importations
of Capital
Goods

01/01/05 03/31/05

P551,179,871.58

P1,491,880.56

P239,803.22

P1,731,683.78

04/01/05 06/30/05

64,677,530.78

204,364.17

5,811,130.73

6,015,494.90

07/01/05 09/30/05

480,784,287.30

144,887.67

144,887.67

10/01/05 12/31/05

350,212,345.02

473,598.03

473,598.03

P1,446,854,034.68

P2,314,730.43

P6,050,933.95

P8,365,664.38

TOTAL

On November 14, 2006, [Taganito] filed with [the CIR], through BIRs Large Taxpayers Audit and Investigation Division II (LTAID II), a letter dated November
13, 2006 claiming a tax credit/refund of its supposed input VAT amounting to 8,365,664.38 for the period covering January 1, 2004 to December 31, 2004. On the
same date, [Taganito] likewise filed an Application for Tax Credits/Refunds for the period covering January 1, 2005 to December 31, 2005 for the same amount.
On November 29, 2006, [Taganito] sent again another letter dated November 29, 2004 to [the CIR], to correct the period of the above claim for tax credit/refund in
the said amount of 8,365,664.38 as actually referring to the period covering January 1, 2005 to December 31, 2005.
As the statutory period within which to file a claim for refund for said input VAT is about to lapse without action on the part of the [CIR], [Taganito] filed the
instant Petition for Review on February 17, 2007.
In his Answer filed on March 28, 2007, [the CIR] interposes the following defenses:
4. [Taganitos] alleged claim for refund is subject to administrative investigation/examination by the Bureau of Internal Revenue (BIR);
5. The amount of 8,365,664.38 being claimed by [Taganito] as alleged unutilized input VAT on domestic purchases of goods and services and on
importation of capital goods for the period January 1, 2005 to December 31, 2005 is not properly documented;
6. [Taganito] must prove that it has complied with the provisions of Sections 112 (A) and (D) and 229 of the National Internal Revenue Code of 1997
(1997 Tax Code) on the prescriptive period for claiming tax refund/credit;
7. Proof of compliance with the prescribed checklist of requirements to be submitted involving claim for VAT refund pursuant to Revenue
Memorandum Order No. 53-98, otherwise there would be no sufficient compliance with the filing of administrative claim for refund, the
administrative claim thereof being mere proforma, which is a condition sine qua non prior to the filing of judicial claim in accordance with the
provision of Section 229 of the 1997 Tax Code. Further, Section 112 (D) of the Tax Code, as amended, requires the submission of complete documents
in support of the application filed with the BIR before the 120-day audit period shall apply, and before the taxpayer could avail of judicial remedies
as provided for in the law. Hence, [Taganitos] failure to submit proof of compliance with the above-stated requirements warrants immediate dismissal
of the petition for review.
8. [Taganito] must prove that it has complied with the invoicing requirements mentioned in Sections 110 and 113 of the 1997 Tax Code, as amended, in
relation to provisions of Revenue Regulations No. 7-95.
9. In an action for refund/credit, the burden of proof is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to the
claim for refund/credit (Asiatic Petroleum Co. vs. Llanes, 49 Phil. 466 cited in Collector of Internal Revenue vs. Manila Jockey Club, Inc., 98
Phil. 670);
10. Claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation (Commissioner of Internal
Revenue vs. Ledesma, 31 SCRA 95) and as such, they are looked upon with disfavor (Western Minolco Corp. vs. Commissioner of Internal
Revenue, 124 SCRA 1211).
SPECIAL AND AFFIRMATIVE DEFENSES
11. The Court of Tax Appeals has no jurisdiction to entertain the instant petition for review for failure on the part of [Taganito] to comply with the provision of
Section 112 (D) of the 1997 Tax Code which provides, thus:
Section 112. Refunds or Tax Credits of Input Tax.
xxx

xxx

xxx

(D) Period within which refund or Tax Credit of Input Taxes shall be Made. In proper cases, the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred (120) days from the date of submission of complete documents in support of the application filed in
accordance with Subsections (A) and (B) hereof.
In cases of full or partial denial for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed
above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred
twenty dayperiod, appeal the decision or the unacted claim with the Court of Tax Appeals. (Emphasis supplied.)
12. As stated, [Taganito] filed the administrative claim for refund with the Bureau of Internal Revenue on November 14, 2006. Subsequently on February 14, 2007,
the instant petition was filed. Obviously the 120 days given to the Commissioner to decide on the claim has not yet lapsed when the petition was filed. The petition
was prematurely filed, hence it must be dismissed for lack of jurisdiction.
During trial, [Taganito] presented testimonial and documentary evidence primarily aimed at proving its supposed entitlement to the refund in the amount of
8,365,664.38, representing input taxes for the period covering January 1, 2005 to December 31, 2005. [The CIR], on the other hand, opted not to present
evidence. Thus, in the Resolution promulgated on January 22, 2009, this case was submitted for decision as of such date, considering [Taganitos] "Memorandum"
filed on January 19, 2009 and [the CIRs] "Memorandum" filed on December 19, 2008.24

The Court of Tax Appeals Ruling: Division


The CTA Second Division partially granted Taganitos claim. In its Decision25 dated 8 January 2010, the CTA Second Division found that Taganito complied with
the requirements of Section 112(A) of RA 8424, as amended, to be entitled to a tax refund or credit of input VAT attributable to zero-rated or effectively zero-rated
sales.26
The pertinent portions of the CTA Second Divisions Decision read:
Finally, records show that [Taganitos] administrative claim filed on November 14, 2006, which was amended on November 29, 2006, and the Petition for Review
filed with this Court on February 14, 2007 are well within the two-year prescriptive period, reckoned from March 31, 2005, June 30, 2005, September 30, 2005,
and December 31, 2005, respectively, the close of each taxable quarter covering the period January 1, 2005 to December 31, 2005.
In fine, [Taganito] sufficiently proved that it is entitled to a tax credit certificate in the amount of 8,249,883.33 representing unutilized input VAT for the four
taxable quarters of 2005.
WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED.Accordingly, [the CIR] is hereby ORDERED to
REFUND to [Taganito] the amount of EIGHT MILLION TWO HUNDRED FORTY NINE THOUSAND EIGHT HUNDRED EIGHTY THREE PESOS AND
THIRTY THREE CENTAVOS (P8,249,883.33) representing its unutilized input taxes attributable to zero-rated sales from January 1, 2005 to December 31, 2005.
SO ORDERED.27
The Commissioner filed a Motion for Partial Reconsideration on 29 January 2010. Taganito, in turn, filed a Comment/Opposition on the Motion for Partial
Reconsideration on 15 February 2010.
In a Resolution28 dated 7 April 2010, the CTA Second Division denied the CIRs motion. The CTA Second Division ruled that the legislature did not intend that
Section 112 (Refunds or Tax Credits of Input Tax) should be read in isolation from Section 229 (Recovery of Tax Erroneously or Illegally Collected) or vice versa.
The CTA Second Division applied the mandatory statute of limitations in seeking judicial recourse prescribed under Section 229 to claims for refund or tax credit
under Section 112.
The Court of Tax Appeals Ruling: En Banc
On 29 April 2010, the Commissioner filed a Petition for Review before the CTA EB assailing the 8 January 2010 Decision and the 7 April 2010 Resolution in CTA
Case No. 7574 and praying that Taganitos entire claim for refund be denied.
In its 8 December 2010 Decision,29 the CTA EB granted the CIRs petition for review and reversed and set aside the challenged decision and resolution.
The CTA EB declared that Section 112(A) and (B) of the 1997 Tax Code both set forth the reckoning of the two-year prescriptive period for filing a claim for tax
refund or credit over input VAT to be the close of the taxable quarter when the sales were made. The CTA EB also relied on this Courts rulings in the cases
of Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi)30 and Commisioner of Internal Revenue v. Mirant Pagbilao Corporation
(Mirant).31 Both Aichi and Mirant ruled that the two-year prescriptive period to file a refund for input VAT arising from zero-rated sales should be reckoned from
the close of the taxable quarter when the sales were made. Aichi further emphasized that the failure to await the decision of the Commissioner or the lapse of 120day period prescribed in Section 112(D) amounts to a premature filing.
The CTA EB found that Taganito filed its administrative claim on 14 November 2006, which was well within the period prescribed under Section 112(A) and (B)
of the 1997 Tax Code. However, the CTA EB found that Taganitos judicial claim was prematurely filed. Taganito filed its Petition for Review before the CTA
Second Division on 14 February 2007. The judicial claim was filed after the lapse of only 92 days from the filing of its administrative claim before the CIR, in
violation of the 120-day period prescribed in Section 112(D) of the 1997 Tax Code.
The dispositive portion of the Decision states:
WHEREFORE, the instant Petition for Review is hereby GRANTED. The assailed Decision dated January 8, 2010 and Resolution dated April 7, 2010 of the
Special Second Division of this Court are hereby REVERSED and SET ASIDE. Another one is hereby entered DISMISSING the Petition for Review filed in CTA
Case No. 7574 for having been prematurely filed.
SO ORDERED.32
In his dissent,33 Associate Justice Lovell R. Bautista insisted that Taganito timely filed its claim before the CTA. Justice Bautista read Section 112(C) of the 1997
Tax Code (Period within which Refund or Tax Credit of Input Taxes shall be Made) in conjunction with Section 229 (Recovery of Tax Erroneously or Illegally
Collected). Justice Bautista also relied on this Courts ruling in Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue
(Atlas),34 which stated that refundable or creditable input VAT and illegally or erroneously collected national internal revenue tax are the same, insofar as both are
monetary amounts which are currently in the hands of the government but must rightfully be returned to the taxpayer. Justice Bautista concluded:
Being merely permissive, a taxpayer claimant has the option of seeking judicial redress for refund or tax credit of excess or unutilized input tax with this Court,
either within 30 days from receipt of the denial of its claim, or after the lapse of the 120-day period in the event of inaction by the Commissioner, provided that
both administrative and judicial remedies must be undertaken within the 2-year period.35
Taganito filed its Motion for Reconsideration on 29 December 2010. The Commissioner filed an Opposition on 26 January 2011. The CTA EB denied for lack of
merit Taganitos motion in a Resolution36 dated 14 March 2011. The CTA EB did not see any justifiable reason to depart from this Courts rulings
in Aichi and Mirant.
G.R.
Philex Mining Corporation v. CIR

No.

197156

The Facts
The CTA EBs narration of the pertinent facts is as follows:
[Philex] is a corporation duly organized and existing under the laws of the Republic of the Philippines, which is principally engaged in the mining business, which
includes the exploration and operation of mine properties and commercial production and marketing of mine products, with office address at 27 Philex Building,
Fairlaine St., Kapitolyo, Pasig City.
[The CIR], on the other hand, is the head of the Bureau of Internal Revenue ("BIR"), the government entity tasked with the duties/functions of assessing and
collecting all national internal revenue taxes, fees, and charges, and enforcement of all forfeitures, penalties and fines connected therewith, including the execution

of judgments in all cases decided in its favor by [the Court of Tax Appeals] and the ordinary courts, where she can be served with court processes at the BIR Head
Office, BIR Road, Quezon City.
On October 21, 2005, [Philex] filed its Original VAT Return for the third quarter of taxable year 2005 and Amended VAT Return for the same quarter on December
1, 2005.
On March 20, 2006, [Philex] filed its claim for refund/tax credit of the amount of 23,956,732.44 with the One Stop Shop Center of the Department of Finance.
However, due to [the CIRs] failure to act on such claim, on October 17, 2007, pursuant to Sections 112 and 229 of the NIRC of 1997, as amended, [Philex] filed a
Petition for Review, docketed as C.T.A. Case No. 7687.
In [her] Answer, respondent CIR alleged the following special and affirmative defenses:
4. Claims for refund are strictly construed against the taxpayer as the same partake the nature of an exemption;
5. The taxpayer has the burden to show that the taxes were erroneously or illegally paid. Failure on the part of [Philex] to prove the same is fatal to its
cause of action;
6. [Philex] should prove its legal basis for claiming for the amount being refunded.37
The Court of Tax Appeals Ruling: Division
The CTA Second Division, in its Decision dated 20 July 2009, denied Philexs claim due to prescription. The CTA Second Division ruled that the two-year
prescriptive period specified in Section 112(A) of RA 8424, as amended, applies not only to the filing of the administrative claim with the BIR, but also to the
filing of the judicial claim with the CTA. Since Philexs claim covered the 3rd quarter of 2005, its administrative claim filed on 20 March 2006 was timely filed,
while its judicial claim filed on 17 October 2007 was filed late and therefore barred by prescription.
On 10 November 2009, the CTA Second Division denied Philexs Motion for Reconsideration.
The Court of Tax Appeals Ruling: En Banc
Philex filed a Petition for Review before the CTA EB praying for a reversal of the 20 July 2009 Decision and the 10 November 2009 Resolution of the CTA
Second Division in CTA Case No. 7687.
The CTA EB, in its Decision38 dated 3 December 2010, denied Philexs petition and affirmed the CTA Second Divisions Decision and Resolution.
The pertinent portions of the Decision read:
In this case, while there is no dispute that [Philexs] administrative claim for refund was filed within the two-year prescriptive period; however, as to its judicial
claim for refund/credit, records show that on March 20, 2006, [Philex] applied the administrative claim for refund of unutilized input VAT in the amount of
23,956,732.44 with the One Stop Shop Center of the Department of Finance, per Application No. 52490. From March 20, 2006, which is also presumably the date
[Philex] submitted supporting documents, together with the aforesaid application for refund, the CIR has 120 days, or until July 18, 2006, within which to decide
the claim. Within 30 days from the lapse of the 120-day period, or from July 19, 2006 until August 17, 2006, [Philex] should have elevated its claim for refund to
the CTA. However, [Philex] filed its Petition for Review only on October 17, 2007, which is 426 days way beyond the 30- day period prescribed by law.
Evidently, the Petition for Review in CTA Case No. 7687 was filed 426 days late. Thus, the Petition for Review in CTA Case No. 7687 should have been dismissed
on the ground that the Petition for Review was filed way beyond the 30-day prescribed period; thus, no jurisdiction was acquired by the CTA in Division; and not
due to prescription.
WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED DUE COURSE, and accordingly, DISMISSED. The assailed Decision
dated July 20, 2009, dismissing the Petition for Review in CTA Case No. 7687 due to prescription, and Resolution dated November 10, 2009 denying [Philexs]
Motion for Reconsideration are hereby AFFIRMED, with modification that the dismissal is based on the ground that the Petition for Review in CTA Case No. 7687
was filed way beyond the 30-day prescribed period to appeal.
SO ORDERED.39
G.R. No. 187485
CIR v. San Roque Power Corporation
The Commissioner raised the following grounds in the Petition for Review:
I. The Court of Tax Appeals En Banc erred in holding that [San Roques] claim for refund was not prematurely filed.
II. The Court of Tax Appeals En Banc erred in affirming the amended decision of the Court of Tax Appeals (Second Division) granting [San Roques]
claim for refund of alleged unutilized input VAT on its purchases of capital goods and services for the taxable year 2001 in the amount of
P483,797,599.65. 40
G.R. No. 196113
Taganito Mining Corporation v. CIR
Taganito raised the following grounds in its Petition for Review:
I. The Court of Tax Appeals En Banc committed serious error and acted with grave abuse of discretion tantamount to lack or excess of jurisdiction in
erroneously applying the Aichi doctrine in violation of [Taganitos] right to due process.
II. The Court of Tax Appeals committed serious error and acted with grave abuse of discretion amounting to lack or excess of jurisdiction in erroneously
interpreting the provisions of Section 112 (D).41
G.R. No. 197156
Philex Mining Corporation v. CIR
Philex raised the following grounds in its Petition for Review:
I. The CTA En Banc erred in denying the petition due to alleged prescription. The fact is that the petition was filed with the CTA within the period set by
prevailing court rulings at the time it was filed.
II. The CTA En Banc erred in retroactively applying the Aichi ruling in denying the petition in this instant case.42

The Courts Ruling


For ready reference, the following are the provisions of the Tax Code applicable to the present cases:
Section 105:
Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leasesgoods or properties, renders services, and any person
who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.
xxxx
Section 110(B):
Sec. 110. Tax Credits.
(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If
the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters : [Provided, That the input tax inclusive of input
VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT:] 43 Provided, however,
That any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue
taxes, subject to the provisions of Section 112.
Section 112:44
Sec. 112. Refunds or Tax Credits of Input Tax.
(A) Zero-Rated or Effectively Zero-Rated Sales. Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two
(2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable
input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales under Section 106(A)(2) (a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable foreign
currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP):
Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or
properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall
be allocated proportionately on the basis of the volume of sales.
(B) Capital Goods.- A VAT registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods
imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within
two (2) years after the close of the taxable quarter when the importation or purchase was made.
(C) Cancellation of VAT Registration. A person whose registration has been cancelled due to retirement from or cessation of business, or due to
changes in or cessation of status under Section 106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a
tax credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of
the application filed in accordance with Subsection (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the
period prescribed above, the taxpayer affected may,within thirty (30) days from the receipt of the decision denying the claim or after the
expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
(E) Manner of Giving Refund. Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the
necessity of being countersigned by the Chairman, Commission on Audit, the provisions of the Administrative Code of 1987 to the contrary
notwithstanding: Provided, that refunds under this paragraph shall be subject to post audit by the Commission on Audit.
Section 229:
Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum
alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such
suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) 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.
(All emphases supplied)
I. Application of the 120+30 Day Periods
a. G.R. No. 187485 - CIR v. San Roque Power Corporation
On 10 April 2003, a mere 13 days after it filed its amended administrative claim with the Commissioner on 28 March 2003, San Roque filed a Petition for Review
with the CTA docketed as CTA Case No. 6647. From this we gather two crucial facts: first, San Roque did not wait for the 120-day period to lapse before filing its
judicial claim;second, San Roque filed its judicial claim more than four (4) years before the Atlas45 doctrine, which was promulgated by the Court on 8 June
2007.
Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given by law to the Commissioner to decide whether to grant or deny San
Roques application for tax refund or credit. It is indisputable that compliance with the 120-day waiting period is mandatory and jurisdictional. The waiting
period, originally fixed at 60 days only, was part of the provisions of the first VAT law, Executive Order No. 273, which took effect on 1 January 1988. The waiting
period was extended to 120 days effective 1 January 1998 under RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has been in our statute
books for more than fifteen (15) years before San Roque filed its judicial claim.

Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates the doctrine of exhaustion of administrative remedies and
renders the petition premature and thus without a cause of action, with the effect that the CTA does not acquire jurisdiction over the taxpayers petition. Philippine
jurisprudence is replete with cases upholding and reiterating these doctrinal principles.46
The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions of the Commissioner of Internal Revenue in cases involving x x x
refunds of internal revenue taxes."47 When a taxpayer prematurely files a judicial claim for tax refund or credit with the CTA without waiting for the decision of
the Commissioner, there is no "decision" of the Commissioner to review and thus the CTA as a court of special jurisdiction has no jurisdiction over the appeal. The
charter of the CTA also expressly provides that if the Commissioner fails to decide within "a specific period" required by law, such "inaction shall be deemed a
denial"48 of the application for tax refund or credit. It is the Commissioners decision, or inaction "deemed a denial," that the taxpayer can take to the CTA for
review. Without a decision or an "inaction x x x deemed a denial" of the Commissioner, the CTA has no jurisdiction over a petition for review.49
San Roques failure to comply with the 120-day mandatory period renders its petition for review with the CTA void. Article 5 of the Civil Code provides, "Acts
executed against provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity." San Roques void petition for
review cannot be legitimized by the CTA or this Court because Article 5 of the Civil Code states that such void petition cannot be legitimized "except when the law
itself authorizes [its] validity." There is no law authorizing the petitions validity.
It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law cannot claim or acquire any right from his void act. A right
cannot spring in favor of a person from his own void or illegal act. This doctrine is repeated in Article 2254 of the Civil Code, which states, "No vested or acquired
right can arise from acts or omissions which are against the law or which infringe upon the rights of others."50 For violating a mandatory provision of law in filing
its petition with the CTA, San Roque cannot claim any right arising from such void petition. Thus, San Roques petition with the CTA is a mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the 120-day period just because the Commissioner merely asserts that
the case was prematurely filed with the CTA and does not question the entitlement of San Roque to the refund. The mere fact that a taxpayer has undisputed excess
input VAT, or that the tax was admittedly illegally, erroneously or excessively collected from him, does not entitle him as a matter of right to a tax refund or credit.
Strict compliance with the mandatory and jurisdictional conditions prescribed by law to claim such tax refund or credit is essential and necessary for such claim to
prosper. Well-settled is the rule that tax refunds or credits, just like tax exemptions, are strictly construed against the taxpayer .51 The burden is on the
taxpayer to show that he has strictly complied with the conditions for the grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply because the Commissioner chose not to contest the numerical
correctness of the claim for tax refund or credit of the taxpayer. Non-compliance with mandatory periods, non-observance of prescriptive periods, and nonadherence to exhaustion of administrative remedies bar a taxpayers claim for tax refund or credit, whether or not the Commissioner questions the numerical
correctness of the claim of the taxpayer. This Court should not establish the precedent that non-compliance with mandatory and jurisdictional conditions can be
excused if the claim is otherwise meritorious, particularly in claims for tax refunds or credit. Such precedent will render meaningless compliance with mandatory
and jurisdictional requirements, for then every tax refund case will have to be decided on the numerical correctness of the amounts claimed, regardless of noncompliance with mandatory and jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine because San Roque filed its petition for review with the CTA more
than four years before Atlas was promulgated. The Atlasdoctrine did not exist at the time San Roque failed to comply with the 120- day period. Thus, San
Roque cannot invoke the Atlas doctrine as an excuse for its failure to wait for the 120-day period to lapse. In any event, the Atlasdoctrine merely stated that the
two-year prescriptive period should be counted from the date of payment of the output VAT, not from the close of the taxable quarter when the sales involving the
input VAT were made. TheAtlas doctrine does not interpret, expressly or impliedly, the 120+3052 day periods.
In fact, Section 106(b) and (e) of the Tax Code of 1977 as amended, which was the law cited by the Court in Atlasas the applicable provision of the law did not yet
provide for the 30-day period for the taxpayer to appeal to the CTA from the decision or inaction of the Commissioner. 53 Thus, the Atlas doctrine cannot be
invoked by anyone to disregard compliance with the 30-day mandatory and jurisdictional period. Also, the difference between the Atlas doctrine on one
hand, and the Mirant54 doctrine on the other hand, is a mere 20 days. TheAtlas doctrine counts the two-year prescriptive period from the date of payment of the
output VAT, which means within 20 days after the close of the taxable quarter. The output VAT at that time must be paid at the time of filing of the quarterly tax
returns, which were to be filed "within 20 days following the end of each quarter."
Thus, in Atlas, the three tax refund claims listed below were deemed timely filed because the administrative claims filed with the Commissioner, and the petitions
for review filed with the CTA, were all filed within two years from the date of payment of the output VAT, following Section 229:
Period Covered

Date of Filing Return


& Payment of Tax

Date of Filing
Administrative Claim

Date of Filing
Petition With CTA

2nd Quarter, 1990


Close of Quarter
30 June 1990

20 July 1990

21 August 1990

20 July 1992

3rd Quarter, 1990


Close of Quarter
30 September 1990

18 October 1990

21 November 1990

9 October 1992

4th Quarter, 1990


Close of Quarter
31 December 1990

20 January 1991

19 February 1991

14 January 1993

Atlas paid the output VAT at the time it filed the quarterly tax returns on the 20th, 18th, and 20th day after the close of the taxable quarter. Had the twoyear
prescriptive period been counted from the "close of the taxable quarter" as expressly stated in the law, the tax refund claims of Atlas would have already prescribed.
In contrast, the Mirant doctrine counts the two-year prescriptive period from the "close of the taxable quarter when the sales were made" as expressly stated in the
law, which means the last day of the taxable quarter. The 20-day difference55 between the Atlas doctrine and the later Mirant doctrine is not material to San
Roques claim for tax refund.
Whether the Atlas doctrine or the Mirant doctrine is applied to San Roque is immaterial because what is at issue in the present case is San Roques non-compliance
with the 120-day mandatory and jurisdictional period, which is counted from the date it filed its administrative claim with the Commissioner. The 120-day period
may extend beyond the two-year prescriptive period, as long as the administrative claim is filed within the two-year prescriptive period. However, San Roques
fatal mistake is that it did not wait for the Commissioner to decide within the 120-day period, a mandatory period whether the Atlas or the Mirant doctrine is
applied.

At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory periods were already in the law. Section 112(C)56 expressly grants
the Commissioner 120 days within which to decide the taxpayers claim. The law is clear, plain, and unequivocal: "x x x the Commissioner shall grant a refund or
issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents." Following
the verba legis doctrine, this law must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the
CTA without waiting for the Commissioners decision within the 120-day mandatory and jurisdictional period. The CTA will have no jurisdiction because there
will be no "decision" or "deemed a denial" decision of the Commissioner for the CTA to review. In San Roques case, it filed its petition with the CTA a mere 13
days after it filed its administrative claim with the Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day period, and it cannot blame
anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty
day-period, appeal the decision or the unacted claim with the Court of Tax Appeals. (Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should be applied exactly as worded since it is clear, plain, and
unequivocal. As this law states, the taxpayer may, if he wishes, appeal the decision of the Commissioner to the CTA within 30 days from receipt of the
Commissioners decision, or if the Commissioner does not act on the taxpayers claim within the 120-day period, the taxpayer may appeal to the CTA within 30
days from the expiration of the 120-day period.
b. G.R. No. 196113 - Taganito Mining Corporation v. CIR
Like San Roque, Taganito also filed its petition for review with the CTA without waiting for the 120-day period to lapse. Also, like San Roque, Taganito filed its
judicial claim before the promulgation of the Atlas doctrine. Taganito filed a Petition for Review on 14 February 2007 with the CTA. This is almost four
months before the adoption of the Atlas doctrine on 8 June 2007. Taganito is similarly situated as San Roque - both cannot claim being misled, misguided, or
confused by the Atlas doctrine.
However, Taganito can invoke BIR Ruling No. DA-489-0357 dated 10 December 2003, which expressly ruled that the "taxpayer-claimant need not wait for the
lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review." Taganito filed its judicial claim after the issuance
of BIR Ruling No. DA-489-03 but before the adoption of the Aichi doctrine. Thus, as will be explained later, Taganito is deemed to have filed its judicial claim
with the CTA on time.
c. G.R. No. 197156 Philex Mining Corporation v. CIR
Philex (1) filed on 21 October 2005 its original VAT Return for the third quarter of taxable year 2005; (2) filed on 20 March 2006 its administrative claim for
refund or credit; (3) filed on 17 October 2007 its Petition for Review with the CTA. The close of the third taxable quarter in 2005 is 30 September 2005, which is
the reckoning date in computing the two-year prescriptive period under Section 112(A).
Philex timely filed its administrative claim on 20 March 2006, within the two-year prescriptive period. Even if the two-year prescriptive period is computed from
the date of payment of the output VAT under Section 229, Philex still filed its administrative claim on time. Thus, the Atlas doctrine is immaterial in this case.
The Commissioner had until 17 July 2006, the last day of the 120-day period, to decide Philexs claim. Since the Commissioner did not act on Philexs claim on or
before 17 July 2006, Philex had until 17 August 2006, the last day of the 30-day period, to file its judicial claim. The CTA EB held that 17 August 2006 was
indeed the last day for Philex to file its judicial claim. However, Philex filed its Petition for Review with the CTA only on 17 October 2007, or four hundred
twenty-six (426) days after the last day of filing. In short, Philex was late by one year and 61 days in filing its judicial claim. As the CTA EB correctly found:
Evidently, the Petition for Review in C.T.A. Case No. 7687 was filed 426 days late. Thus, the Petition for Review in C.T.A. Case No. 7687 should have been
dismissed on the ground that the Petition for Review was filed way beyond the 30-day prescribed period; thus, no jurisdiction was acquired by the CTA Division; x
x x58(Emphasis supplied)
Unlike San Roque and Taganito, Philexs case is not one of premature filing but of late filing. Philex did not file any petition with the CTA within the 120-day
period. Philex did not also file any petition with the CTA within 30 days after the expiration of the 120-day period. Philex filed its judicial claim long after the
expiration of the 120-day period, in fact 426 days after the lapse of the 120-day period. In any event, whether governed by jurisprudence before, during, or
after the Atlas case, Philexs judicial claim will have to be rejected because of late filing. Whether the two-year prescriptive period is counted from the date of
payment of the output VAT following the Atlas doctrine, or from the close of the taxable quarter when the sales attributable to the input VAT were made following
the Mirant and Aichi doctrines, Philexs judicial claim was indisputably filed late.
The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of the Commissioner on Philexs claim during the 120-day period is,
by express provision of law, "deemed a denial" of Philexs claim. Philex had 30 days from the expiration of the 120-day period to file its judicial claim with the
CTA. Philexs failure to do so rendered the "deemed a denial" decision of the Commissioner final and inappealable. The right to appeal to the CTA from a decision
or "deemed a denial" decision of the Commissioner is merely a statutory privilege, not a constitutional right. The exercise of such statutory privilege requires strict
compliance with the conditions attached by the statute for its exercise.59 Philex failed to comply with the statutory conditions and must thus bear the
consequences.
II. Prescriptive Periods under Section 112(A) and (C)
There are three compelling reasons why the 30-day period need not necessarily fall within the two-year prescriptive period, as long as the administrative claim is
filed within the two-year prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may, within two (2) years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax credit certificate or refund of the creditable input tax due or paid to such sales." In short,
the law states that the taxpayer may apply with the Commissioner for a refund or credit "within two (2) years," which means at anytime within two
years. Thus, the application for refund or credit may be filed by the taxpayer with the Commissioner on the last day of the two-year prescriptive period
and it will still strictly comply with the law. The twoyear prescriptive period is a grace period in favor of the taxpayer and he can avail of the full period
before his right to apply for a tax refund or credit is barred by prescription.
Second, Section 112(C) provides that the Commissioner shall decide the application for refund or credit "within one hundred twenty (120) days from the
date of submission of complete documents in support of the application filed in accordance with Subsection (A)." The reference in Section 112(C) of the
submission of documents "in support of the application filed in accordance with Subsection A" means that the application in Section 112(A) is the
administrative claim that the Commissioner must decide within the 120-day period. In short, the two-year prescriptive period in Section 112(A) refers to
the period within which the taxpayer can file an administrative claim for tax refund or credit. Stated otherwise, the two-year prescriptive period does
not refer to the filing of the judicial claim with the CTA but to the filing of the administrative claim with the Commissioner . As held in Aichi, the
"phrase within two years x x x apply for the issuance of a tax credit or refund refers to applications for refund/credit with the CIR and not to
appeals made to the CTA."

Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive period (equivalent to 730 days 60), then the taxpayer
must file his administrative claim for refund or credit within the first 610 days of the two-year prescriptive period. Otherwise, the filing of the
administrative claim beyond the first 610 days will result in the appeal to the CTA being filed beyond the two-year prescriptive period . Thus, if
the taxpayer files his administrative claim on the 611th day, the Commissioner, with his 120-day period, will have until the 731st day to decide the
claim. If the Commissioner decides only on the 731st day, or does not decide at all, the taxpayer can no longer file his judicial claim with the CTA
because the two-year prescriptive period (equivalent to 730 days) has lapsed. The 30-day period granted by law to the taxpayer to file an appeal before
the CTA becomes utterly useless, even if the taxpayer complied with the law by filing his administrative claim within the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period adds a condition that is not found in the law. It results in truncating 120 days
from the 730 days that the law grants the taxpayer for filing his administrative claim with the Commissioner. This Court cannot interpret a law to defeat, wholly or
even partly, a remedy that the law expressly grants in clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The taxpayer can file his administrative claim for refund or
credit at anytime within the two-year prescriptive period. If he files his claim on the last day of the two-year prescriptive period, his claim is still filed on time. The
Commissioner will have 120 days from such filing to decide the claim. If the Commissioner decides the claim on the 120th day, or does not decide it on that day,
the taxpayer still has 30 days to file his judicial claim with the CTA. This is not only the plain meaning but also the only logical interpretation of Section 112(A)
and (C).
III. "Excess" Input VAT and "Excessively" Collected Tax
The input VAT is not "excessively" collected as understood under Section 229 because at the time the input VAT is collected the amount paid is correct and
proper. The input VAT is a tax liability of, and legally paid by, a VAT-registered seller61 of goods, properties or services used as input by another VAT-registered
person in the sale of his own goods, properties, or services. This tax liability is true even if the seller passes on the input VAT to the buyer as part of the purchase
price. The second VAT-registered person, who is not legally liable for the input VAT, is the one who applies the input VAT as credit for his own output VAT. 62 If
the input VAT is in fact "excessively" collected as understood under Section 229, then it is the first VAT-registered person - the taxpayer who is legally liable and
who is deemed to have legally paid for the input VAT - who can ask for a tax refund or credit under Section 229 as an ordinary refund or credit outside of the VAT
System. In such event, the second VAT-registered taxpayer will have no input VAT to offset against his own output VAT.
In a claim for refund or credit of "excess" input VAT under Section 110(B) and Section 112(A), the input VAT is not "excessively" collected as understood under
Section 229. At the time of payment of the input VAT the amount paid is the correct and proper amount. Under the VAT System, there is no claim or issue that the
input VAT is "excessively" collected, that is, that the input VAT paid is more than what is legally due. The person legally liable for the input VAT cannot claim that
he overpaid the input VAT by the mere existence of an "excess" input VAT. The term "excess" input VAT simply means that the input VAT available as credit
exceeds the output VAT, not that the input VAT is excessively collected because it is more than what is legally due. Thus, the taxpayer who legally paid the input
VAT cannot claim for refund or credit of the input VAT as "excessively" collected under Section 229.
Under Section 229, the prescriptive period for filing a judicial claim for refund is two years from the date of payment of the tax "erroneously, x x x illegally, x x x
excessively or in any manner wrongfully collected." The prescriptive period is reckoned from the date the person liable for the tax pays the tax. Thus, if the input
VAT is in fact "excessively" collected, that is, the person liable for the tax actually pays more than what is legally due, the taxpayer must file a judicial claim for
refund within two years from his date of payment. Only the person legally liable to pay the tax can file the judicial claim for refund. The person to whom the
tax is passed on as part of the purchase price has no personality to file the judicial claim under Section 229.63
Under Section 110(B) and Section 112(A), the prescriptive period for filing a judicial claim for "excess" input VAT is two years from the close of the taxable
quarter when the sale was made by the person legally liable to pay theoutput VAT. This prescriptive period has no relation to the date of payment of the
"excess" input VAT. The "excess" input VAT may have been paid for more than two years but this does not bar the filing of a judicial claim for "excess" VAT under
Section 112(A), which has a different reckoning period from Section 229. Moreover, the person claiming the refund or credit of the input VAT is not the person
who legally paid the input VAT. Such person seeking the VAT refund or credit does not claim that the input VAT was "excessively" collected from him, or that he
paid an input VAT that is more than what is legally due. He is not the taxpayer who legally paid the input VAT.
As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer in the chain of transactions. For simplicity and efficiency in tax
collection, the VAT is imposed not just on the value added by the taxpayer, but on the entire selling price of his goods, properties or services. However, the
taxpayer is allowed a refund or credit on the VAT previously paid by those who sold him the inputs for his goods, properties, or services. The net effect is that the
taxpayer pays the VAT only on the value that he adds to the goods, properties, or services that he actually sells.
Under Section 110(B), a taxpayer can apply his input VAT only against his output VAT. The only exception is when the taxpayer is expressly "zero-rated or
effectively zero-rated" under the law, like companies generating power through renewable sources of energy. 64 Thus, a non zero-rated VAT-registered taxpayer
who has no output VAT because he has no sales cannot claim a tax refund or credit of his unused input VAT under the VAT System. Even if the taxpayer has sales
but his input VAT exceeds his output VAT, he cannot seek a tax refund or credit of his "excess" input VAT under the VAT System. He can only carry-over and
apply his "excess" input VAT against his future output VAT. If such "excess" input VAT is an "excessively" collected tax, the taxpayer should be able to seek a
refund or credit for such "excess" input VAT whether or not he has output VAT. The VAT System does not allow such refund or credit. Such "excess" input VAT is
not an "excessively" collected tax under Section 229. The "excess" input VAT is a correctly and properly collected tax. However, such "excess" input VAT can be
applied against the output VAT because the VAT is a tax imposed only on the value added by the taxpayer. If the input VAT is in fact "excessively" collected under
Section 229, then it is the person legally liable to pay the input VAT, not the person to whom the tax was passed on as part of the purchase price and claiming credit
for the input VAT under the VAT System, who can file the judicial claim under Section 229.
Any suggestion that the "excess" input VAT under the VAT System is an "excessively" collected tax under Section 229 may lead taxpayers to file a claim for refund
or credit for such "excess" input VAT under Section 229 as an ordinary tax refund or credit outside of the VAT System. Under Section 229, mere payment of a tax
beyond what is legally due can be claimed as a refund or credit. There is no requirement under Section 229 for an output VAT or subsequent sale of goods,
properties, or services using materials subject to input VAT.
From the plain text of Section 229, it is clear that what can be refunded or credited is a tax that is "erroneously, x x x illegally, x x x excessively or in any manner
wrongfully collected." In short, there must be a wrongful payment because what is paid, or part of it, is not legally due. As the Court held in Mirant, Section 229
should "apply only to instances of erroneous payment or illegal collection of internal revenue taxes." Erroneous or wrongful payment includes excessive
payment because they all refer to payment of taxes not legally due. Under the VAT System, there is no claim or issue that the "excess" input VAT is "excessively
or in any manner wrongfully collected." In fact, if the "excess" input VAT is an "excessively" collected tax under Section 229, then the taxpayer claiming to apply
such "excessively" collected input VAT to offset his output VAT may have no legal basis to make such offsetting. The person legally liable to pay the input VAT can
claim a refund or credit for such "excessively" collected tax, and thus there will no longer be any "excess" input VAT. This will upend the present VAT System as
we know it.
IV. Effectivity and Scope of the Atlas , Mirant and Aichi Doctrines

The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the two-year prescriptive period under Section 229, should
be effective only from its promulgation on 8 June 2007 until its abandonment on 12 September 2008 in Mirant. The Atlas doctrine was limited to the
reckoning of the two-year prescriptive period from the date of payment of the output VAT. Prior to the Atlas doctrine, the two-year prescriptive period for claiming
refund or credit of input VAT should be governed by Section 112(A) following theverba legis rule. The Mirant ruling, which abandoned the Atlas doctrine, adopted
the verba legis rule, thus applying Section 112(A) in computing the two-year prescriptive period in claiming refund or credit of input VAT.
The Atlas doctrine has no relevance to the 120+30 day periods under Section 112(C) because the application of the 120+30 day periods was not in issue in Atlas.
The application of the 120+30 day periods was first raised inAichi, which adopted the verba legis rule in holding that the 120+30 day periods are mandatory and
jurisdictional. The language of Section 112(C) is plain, clear, and unambiguous. When Section 112(C) states that "the Commissioner shall grant a refund or issue
the tax credit within one hundred twenty (120) days from the date of submission of complete documents," the law clearly gives the Commissioner 120 days within
which to decide the taxpayers claim. Resort to the courts prior to the expiration of the 120-day period is a patent violation of the doctrine of exhaustion of
administrative remedies, a ground for dismissing the judicial suit due to prematurity. Philippine jurisprudence is awash with cases affirming and reiterating the
doctrine of exhaustion of administrative remedies.65 Such doctrine is basic and elementary.
When Section 112(C) states that "the taxpayer affected may, within thirty (30) days from receipt of the decision denying the claim or after the expiration of the one
hundred twenty-day period, appeal the decision or the unacted claim with the Court of Tax Appeals," the law does not make the 120+30 day periods optional just
because the law uses the word "may." The word "may" simply means that the taxpayer may or may not appeal the decision of the Commissioner within 30 days
from receipt of the decision, or within 30 days from the expiration of the 120-day period. Certainly, by no stretch of the imagination can the word "may" be
construed as making the 120+30 day periods optional, allowing the taxpayer to file a judicial claim one day after filing the administrative claim with the
Commissioner.
The old rule66 that the taxpayer may file the judicial claim, without waiting for the Commissioners decision if the two-year prescriptive period is about to expire,
cannot apply because that rule was adopted before the enactment of the 30-day period. The 30-day period was adopted precisely to do away with the old rule,
so that under the VAT System the taxpayer will always have 30 days to file the judicial claim even if the Commissioner acts only on the 120th day, or does
not act at all during the 120-day period. With the 30-day period always available to the taxpayer, the taxpayer can no longer file a judicial claim for refund or
credit of input VAT without waiting for the Commissioner to decide until the expiration of the 120-day period.
To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly against the taxpayer. One of the conditions for a judicial claim of
refund or credit under the VAT System is compliance with the 120+30 day mandatory and jurisdictional periods. Thus, strict compliance with the 120+30 day
periods is necessary for such a claim to prosper, whether before, during, or after the effectivity of the Atlas doctrine, except for the period from the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when the Aichi doctrine was adopted, which again reinstated the 120+30 day periods as
mandatory and jurisdictional.
V. Revenue Memorandum Circular No. 49-03 (RMC 49-03) dated 15 April 2003
There is nothing in RMC 49-03 that states, expressly or impliedly, that the taxpayer need not wait for the 120-day period to expire before filing a judicial claim
with the CTA. RMC 49-03 merely authorizes the BIR to continue processing the administrative claim even after the taxpayer has filed its judicial claim, without
saying that the taxpayer can file its judicial claim before the expiration of the 120-day period. RMC 49-03 states: "In cases where the taxpayer has filed a Petition
for Review with the Court of Tax Appeals involving a claim for refund/TCC that is pending at the administrative agency (either the Bureau of Internal Revenue or
the One- Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance), the administrative agency and the court may act on the
case separately." Thus, if the taxpayer files its judicial claim before the expiration of the 120-day period, the BIR will nevertheless continue to act on the
administrative claim because such premature filing cannot divest the Commissioner of his statutory power and jurisdiction to decide the administrative claim
within the 120-day period.
On the other hand, if the taxpayer files its judicial claim after the 120- day period, the Commissioner can still continue to evaluate the administrative claim. There
is nothing new in this because even after the expiration of the 120-day period, the Commissioner should still evaluate internally the administrative claim for
purposes of opposing the taxpayers judicial claim, or even for purposes of determining if the BIR should actually concede to the taxpayers judicial claim. The
internal administrative evaluation of the taxpayers claim must necessarilycontinue to enable the BIR to oppose intelligently the judicial claim or, if the facts and
the law warrant otherwise, for the BIR to concede to the judicial claim, resulting in the termination of the judicial proceedings.
What is important, as far as the present cases are concerned, is that the mere filing by a taxpayer of a judicial claim with the CTA before the expiration of
the 120-day period cannot operate to divest the Commissioner of his jurisdiction to decide an administrative claim within the 120-day mandatory
period,unless the Commissioner has clearly given cause for equitable estoppel to apply as expressly recognized in Section 246 of the Tax Code.67
VI. BIR Ruling No. DA-489-03 dated 10 December 2003
BIR Ruling No. DA-489-03 does provide a valid claim for equitable estoppel under Section 246 of the Tax Code. BIR Ruling No. DA-489-03 expressly states that
the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review ."
Prior to this ruling, the BIR held, as shown by its position in the Court of Appeals, 68 that the expiration of the 120-day period is mandatory and jurisdictional
before a judicial claim can be filed.
There is no dispute that the 120-day period is mandatory and jurisdictional, and that the CTA does not acquire jurisdiction over a judicial claim that is filed before
the expiration of the 120-day period. There are, however, two exceptions to this rule. The first exception is if the Commissioner, through a specific ruling, misleads
a particular taxpayer to prematurely file a judicial claim with the CTA. Such specific ruling is applicable only to such particular taxpayer. The second exception is
where the Commissioner, through a general interpretative rule issued under Section 4 of the Tax Code, misleads all taxpayers into filing prematurely judicial
claims with the CTA. In these cases, the Commissioner cannot be allowed to later on question the CTAs assumption of jurisdiction over such claim since equitable
estoppel has set in as expressly authorized under Section 246 of the Tax Code.
Section 4 of the Tax Code, a new provision introduced by RA 8424, expressly grants to the Commissioner the power to interpret tax laws, thus:
Sec. 4. Power of the Commissioner To Interpret Tax Laws and To Decide Tax Cases. The power to interpret the provisions of this Code and other tax laws shall
be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising
under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate
jurisdiction of the Court of Tax Appeals.
Since the Commissioner has exclusive and original jurisdiction to interpret tax laws, taxpayers acting in good faith should not be made to suffer for adhering to
general interpretative rules of the Commissioner interpreting tax laws, should such interpretation later turn out to be erroneous and be reversed by the
Commissioner or this Court. Indeed, Section 246 of the Tax Code expressly provides that a reversal of a BIR regulation or ruling cannot adversely prejudice a
taxpayer who in good faith relied on the BIR regulation or ruling prior to its reversal. Section 246 provides 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 Sections 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 any document required of him by the Bureau of Internal
Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis supplied)
Thus, a general interpretative rule issued by the Commissioner may be relied upon by taxpayers from the time the rule is issued up to its reversal by the
Commissioner or this Court. Section 246 is not limited to a reversal only by the Commissioner because this Section expressly states, " Any revocation, modification
or reversal" without specifying who made the revocation, modification or reversal. Hence, a reversal by this Court is covered under Section 246.
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a difficult question of law. The abandonment of
the Atlas doctrine by Mirant and Aichi69 is proof that the reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of law. The
abandonment of the Atlasdoctrine did not result in Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit they received or could
have received under Atlas prior to its abandonment. This Court is applying Mirant and Aichiprospectively. Absent fraud, bad faith or misrepresentation, the
reversal by this Court of a general interpretative rule issued by the Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply
prospectively. As held by this Court in CIR v. Philippine Health Care Providers, Inc.:70
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, this Court held that under Section 246 of the 1997 Tax Code, the Commissioner of Internal Revenue is
precluded from adopting a position contrary to one previously taken where injustice would result to the taxpayer . Hence, where an assessment for
deficiency withholding income taxes was made, three years after a new BIR Circular reversed a previous one upon which the taxpayer had relied upon, such an
assessment was prejudicial to the taxpayer. To rule otherwise, opined the Court, would be contrary to the tenets of good faith, equity, and fair play.
This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp.1wphi1 in the later cases ofCommissioner of Internal Revenue v. Borroughs,
Ltd., Commissioner of Internal Revenue v. Mega Gen. Mdsg. Corp., Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.) Inc.,
and Commissioner of Internal Revenue v. Court of Appeals. The rule is that the BIR rulings have no retroactive effect where a grossly unfair deal would
result to the prejudice of the taxpayer, as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet Corporation, wherein the taxpayer was entitled to tax refunds or credits based on the BIRs own
issuances but later was suddenly saddled with deficiency taxes due to its subsequent ruling changing the category of the taxpayers transactions for the purpose of
paying its VAT, this Court ruled that applying such ruling retroactively would be prejudicial to the taxpayer. (Emphasis supplied)
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all taxpayers or a specific ruling applicable only to a
particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not by a particular taxpayer, but by a government agency
tasked with processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance. This
government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in its query to
the Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the agency was in fact asking the Commissioner what to do in cases like the
tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10
December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional
However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four reasons: first, it is admittedly an erroneous interpretation of the law; second, prior
to its issuance, the BIR held that the 120-day period was mandatory and jurisdictional, which is the correct interpretation of the law; third, prior to its issuance, no
taxpayer can claim that it was misled by the BIR into filing a judicial claim prematurely; and fourth, a claim for tax refund or credit, like a claim for tax exemption,
is strictly construed against the taxpayer.
San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it filed its judicial claim prematurely on 10 April 2003, before the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003. To repeat, San Roque cannot claim that it was misled by the BIR into filing its judicial claim prematurely because
BIR Ruling No. DA-489-03 was issued only after San Roque filed its judicial claim. At the time San Roque filed its judicial claim, the law as applied and
administered by the BIR was that the Commissioner had 120 days to act on administrative claims. This was in fact the position of the BIR prior to the issuance of
BIR Ruling No. DA-489-03. Indeed, San Roque never claimed the benefit of BIR Ruling No. DA-489-03 or RMC 49-03, whether in this Court, the CTA, or
before the Commissioner.
Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Truly,
Taganito can claim that in filing its judicial claim prematurely without waiting for the 120-day period to expire, it was misled by BIR Ruling No. DA-489-03.
Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03, which shields the filing of its judicial claim from the vice of prematurity.
Philexs situation is not a case of premature filing of its judicial claim but of late filing, indeed very late filing. BIR Ruling No. DA-489-03 allowed premature
filing of a judicial claim, which means non-exhaustion of the 120-day period for the Commissioner to act on an administrative claim. Philex cannot claim the
benefit of BIR Ruling No. DA-489-03 because Philex did not file its judicial claim prematurely but filed it long after the lapse of the 30-day period following the
expiration of the 120-day period. In fact, Philex filed its judicial claim 426 days after the lapse of the 30-day period.
VII. Existing Jurisprudence
There is no basis whatsoever to the claim that in five cases this Court had already made a ruling that the filing dates of the administrative and judicial claims are
inconsequential, as long as they are within the two-year prescriptive period. The effect of the claim of the dissenting opinions is that San Roques failure to wait for
the 120-day mandatory period to lapse is inconsequential, thus allowing San Roque to claim the tax refund or credit. However, the five cases cited by the
dissenting opinions do not support even remotely the claim that this Court had already made such a ruling. None of these five cases mention, cite, discuss, rule or
even hint that compliance with the 120-day mandatory period is inconsequential as long as the administrative and judicial claims are filed within the twoyear prescriptive period.
In CIR v. Toshiba Information Equipment (Phils.), Inc.,71 the issue was whether any output VAT was actually passed on to Toshiba that it could claim as input VAT
subject to tax credit or refund. The Commissioner argued that "although Toshiba may be a VAT-registered taxpayer, it is not engaged in a VAT-taxable business."
The Commissioner cited Section 4.106-1 of Revenue Regulations No. 75 that "refund of input taxes on capital goods shall be allowed only to the extent that such
capital goods are used in VAT-taxable business." In the words of the Court, "Ultimately, however, the issue still to be resolved herein shall be whether respondent

Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods and services, to which this Court answers in the affirmative." Nowhere
in this case did the Court discuss, state, or rule that the filing dates of the administrative and judicial claims are inconsequential, as long as they are within the twoyear prescriptive period.
In Intel Technology Philippines, Inc. v. CIR,72 the Court stated: "The issues to be resolved in the instant case are (1) whether the absence of the BIR authority to
print or the absence of the TIN-V in petitioners export sales invoices operates to forfeit its entitlement to a tax refund/credit of its unutilized input VAT attributable
to its zero-rated sales; and (2) whether petitioners failure to indicate "TIN-V" in its sales invoices automatically invalidates its claim for a tax credit certification."
Again, nowhere in this case did the Court discuss, state, or rule that the filing dates of the administrative and judicial claims are inconsequential, as long as they are
within the two-year prescriptive period.
In AT&T Communications Services Philippines, Inc. v. CIR,73 the Court stated: "x x x the CTA First Division, conceding that petitioners transactions fall under
the classification of zero-rated sales, nevertheless denied petitioners claim for lack of substantiation, x x x." The Court quoted the ruling of the First Division
that "valid VAT official receipts, and not mere sale invoices, should have been submitted" by petitioner to substantiate its claim. The Court further stated: "x x
x the CTA En Banc, x x x affirmed x x x the CTA First Division," and "petitioners motion for reconsideration having been denied x x x, the present petition for
review was filed." Clearly, the sole issue in this case is whether petitioner complied with the substantiation requirements in claiming for tax refund or credit. Again,
nowhere in this case did the Court discuss, state, or rule that the filing dates of the administrative and judicial claims are inconsequential, as long as they are within
the two-year prescriptive period.
In CIR v. Ironcon Builders and Development Corporation,74 the Court put the issue in this manner: "Simply put, the sole issue the petition raises is whether or not
the CTA erred in granting respondent Ironcons application for refund of its excess creditable VAT withheld." The Commissioner argued that "since the NIRC does
not specifically grant taxpayers the option to refund excess creditable VAT withheld, it follows that such refund cannot be allowed." Thus, this case is solely about
whether the taxpayer has the right under the NIRC to ask for a cash refund of excess creditable VAT withheld. Again, nowhere in this case did the Court discuss,
state, or rule that the filing dates of the administrative and judicial claims are inconsequential, as long as they are within the two-year prescriptive period.
In CIR v. Cebu Toyo Corporation,75 the issue was whether Cebu Toyo was exempt or subject to VAT. Compliance with the 120-day period was never an issue
in Cebu Toyo. As the Court explained:
Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue that respondent Cebu Toyo Corporation, as a PEZA-registered
enterprise, is exempt from national and local taxes, including VAT, under Section 24 of Rep. Act No. 7916 and Section 109 of the NIRC. Thus, they contend
that respondent Cebu Toyo Corporation is not entitled to any refund or credit on input taxes it previously paid as provided under Section 4.103-1 of Revenue
Regulations No. 7-95, notwithstanding its registration as a VAT taxpayer. For petitioner claims that said registration was erroneous and did not confer upon the
respondent any right to claim recognition of the input tax credit.
The respondent counters that it availed of the income tax holiday under E.O. No. 226 for four years from August 7, 1995 making it exempt from income tax but not
from other taxes such as VAT. Hence, according to respondent, its export sales are not exempt from VAT, contrary to petitioners claim, but its export sales
is subject to 0% VAT. Moreover, it argues that it was able to establish through a report certified by an independent Certified Public Accountant that the input taxes
it incurred from April 1, 1996 to December 31, 1997 were directly attributable to its export sales. Since it did not have any output tax against which said input taxes
may be offset, it had the option to file a claim for refund/tax credit of its unutilized input taxes.
Considering the submission of the parties and the evidence on record, we find the petition bereft of merit.
Petitioners contention that respondent is not entitled to refund for being exempt from VAT is untenable . This argument turns a blind eye to the fiscal
incentives granted to PEZA-registered enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute, the respondent had two options with respect
to its tax burden. It could avail of an income tax holiday pursuant to provisions of E.O. No. 226, thus exempt it from income taxes for a number of years but not
from other internal revenue taxes such as VAT; or it could avail of the tax exemptions on all taxes, including VAT under P.D. No. 66 and pay only the preferential
tax rate of 5% under Rep. Act No. 7916. Both the Court of Appeals and the Court of Tax Appeals found that respondent availed of the income tax holiday for four
(4) years starting from August 7, 1995, as clearly reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where respondent specified that it was
availing of the tax relief under E.O. No. 226. Hence, respondent is not exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is
engaged in taxable rather than exempt transactions. (Emphasis supplied)
Clearly, the issue in Cebu Toyo was whether the taxpayer was exempt from VAT or subject to VAT at 0% tax rate. If subject to 0% VAT rate, the taxpayer
could claim a refund or credit of its input VAT. Again, nowhere in this case did the Court discuss, state, or rule that the filing dates of the administrative and judicial
claims are inconsequential, as long as they are within the two-year prescriptive period.
While this Court stated in the narration of facts in Cebu Toyo that the taxpayer "did not bother to wait for the Resolution of its (administrative) claim by the CIR"
before filing its judicial claim with the CTA, this issue was not raised before the Court. Certainly, this statement of the Court is not a binding precedent that the
taxpayer need not wait for the 120-day period to lapse.
Any issue, whether raised or not by the parties, but not passed upon by the Court, does not have any value as precedent. As this Court has explained as early
as 1926:
It is contended, however, that the question before us was answered and resolved against the contention of the appellant in the case of Bautista vs. Fajardo (38 Phil.
624). In that case no question was raised nor was it even suggested that said section 216 did not apply to a public officer. That question was not discussed nor
referred to by any of the parties interested in that case. It has been frequently decided that the fact that a statute has been accepted as valid, and invoked and applied
for many years in cases where its validity was not raised or passed on, does not prevent a court from later passing on its validity, where that question is squarely
and properly raised and presented. Where a question passes the Court sub silentio, the case in which the question was so passed is not binding on the Court
(McGirr vs. Hamilton and Abreu, 30 Phil. 563), nor should it be considered as a precedent. (U.S. vs. Noriega and Tobias, 31 Phil. 310; Chicote vs. Acasio, 31
Phil. 401; U.S. vs. More, 3 Cranch [U.S.] 159, 172; U.S. vs. Sanges, 144 U.S. 310, 319; Cross vs. Burke, 146 U.S. 82.) For the reasons given in the case of McGirr
vs. Hamilton and Abreu, supra, the decision in the case of Bautista vs. Fajardo, supra, can have no binding force in the interpretation of the question presented
here.76 (Emphasis supplied)
In Cebu Toyo, the nature of the 120-day period, whether it is mandatory or optional, was not even raised as an issue by any of the parties. The Court never passed
upon this issue. Thus, Cebu Toyo does not constitute binding precedent on the nature of the 120-day period.
There is also the claim that there are numerous CTA decisions allegedly supporting the argument that the filing dates of the administrative and judicial claims are
inconsequential, as long as they are within the two-year prescriptive period. Suffice it to state that CTA decisions do not constitute precedents, and do not bind this
Court or the public. That is why CTA decisions are appealable to this Court, which may affirm, reverse or modify the CTA decisions as the facts and the law may
warrant. Only decisions of this Court constitute binding precedents, forming part of the Philippine legal system.77 As held by this Court in The Philippine
Veterans Affairs Office v. Segundo:78

x x x Let it be admonished that decisions of the Supreme Court "applying or interpreting the laws or the Constitution . . . form part of the legal system of the
Philippines," and, as it were, "laws" by their own right because they interpret what the laws say or mean. Unlike rulings of the lower courts, which bind the
parties to specific cases alone, our judgments are universal in their scope and application, and equally mandatory in character. Let it be warned that to defy
our decisions is to court contempt. (Emphasis supplied)
The same basic doctrine was reiterated by this Court in De Mesa v. Pepsi Cola Products Phils., Inc.:79
The principle of stare decisis et non quieta movere is entrenched in Article 8 of the Civil Code, to wit:
ART. 8. Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the legal system of the Philippines.
It enjoins adherence to judicial precedents. It requires our courts to follow a rule already established in a final decision of the Supreme Court. That decision
becomes a judicial precedent to be followed in subsequent cases by all courts in the land. The doctrine of stare decisis is based on the principle that once a question
of law has been examined and decided, it should be deemed settled and closed to further argument. (Emphasis supplied)
VIII. Revenue Regulations No. 7-95 Effective 1 January 1996
Section 4.106-2(c) of Revenue Regulations No. 7-95, by its own express terms, applies only if the taxpayer files the judicial claim " after" the lapse of the 60-day
period, a period with which San Roque failed to comply. Under Section 4.106-2(c), the 60-day period is still mandatory and jurisdictional.
Moreover, it is a hornbook principle that a prior administrative regulation can never prevail over a later contrary law, more so in this case where the later law was
enacted precisely to amend the prior administrative regulation and the law it implements.
The laws and regulation involved are as follows:
1977 Tax Code, as amended by Republic Act No. 7716 (1994)
Sec. 106. Refunds or tax credits of creditable input tax.
(a) x x x x
(d) Period within which refund or tax credit of input tax shall be made - In proper cases, the Commissioner shall grant a refund or issue the tax credit for
creditable input taxes within sixty (60) days from the date of submission of complete documents in support of the application filed in accordance with
subparagraphs (a) and (b) hereof. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from receipt of
the decision denying the claim or after the expiration of the sixty-day period, appeal the decision or the unacted claim with the Court of Tax
Appeals.
Revenue Regulations No. 7-95 (1996)
Section 4.106-2. Procedures for claiming refunds or tax credits of input tax (a) x x x
xxxx
(c) Period within which refund or tax credit of input taxes shall be made. In proper cases, the Commissioner shall grant a tax credit/refund for creditable input
taxes within sixty (60) days from the date of submission of complete documents in support of the application filed in accordance with subparagraphs (a) and (b)
above.
In case of full or partial denial of the claim for tax credit/refund as decided by the Commissioner of Internal Revenue, the taxpayer may appeal to the Court of Tax
Appeals within thirty (30) days from the receipt of said denial, otherwise the decision will become final. However, if no action on the claim for tax credit/refund
has been taken by the Commissioner of Internal Revenue after the sixty (60) day period from the date of submission of the application but before the lapse
of the two (2) year period from the date of filing of the VAT return for the taxable quarter, the taxpayer may appeal to the Court of Tax Appeals.
xxxx
1997 Tax Code
Section 112. Refunds or Tax Credits of Input Tax
(A) x x x
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be made. In proper cases, the Commissioner shall grant the refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed
in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the
period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the
hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
There can be no dispute that under Section 106(d) of the 1977 Tax Code, as amended by RA 7716, the Commissioner has a 60-day period to act on the
administrative claim. This 60-day period is mandatory and jurisdictional.
Did Section 4.106-2(c) of Revenue Regulations No. 7-95 change this, so that the 60-day period is no longer mandatory and jurisdictional? The obvious answer is
no.
Section 4.106-2(c) itself expressly states that if, "after the sixty (60) day period," the Commissioner fails to act on the administrative claim, the taxpayer may file
the judicial claim even "before the lapse of the two (2) year period." Thus, under Section 4.106-2(c) the 60-day period is still mandatory and jurisdictional.
Section 4.106-2(c) did not change Section 106(d) as amended by RA 7716, but merely implemented it, for two reasons. First, Section 4.106-2(c) still expressly
requires compliance with the 60-day period. This cannot be disputed.1wphi1
Second, under the novel amendment introduced by RA 7716, mere inaction by the Commissioner during the 60-day period is deemed a denial of the claim. Thus,
Section 4.106-2(c) states that "if no action on the claim for tax refund/credit has been taken by the Commissioner after the sixty (60) day period," the taxpayer
"may" already file the judicial claim even long before the lapse of the two-year prescriptive period. Prior to the amendment by RA 7716, the taxpayer had to wait

until the two-year prescriptive period was about to expire if the Commissioner did not act on the claim.80 With the amendment by RA 7716, the taxpayer need
not wait until the two-year prescriptive period is about to expire before filing the judicial claim because mere inaction by the Commissioner during the 60-day
period is deemed a denial of the claim. This is the meaning of the phrase "but before the lapse of the two (2) year period" in Section 4.106-2(c) . As Section
4.106- 2(c) reiterates that the judicial claim can be filed only "after the sixty (60) day period," this period remains mandatory and jurisdictional. Clearly, Section
4.106-2(c) did not amend Section 106(d) but merely faithfully implemented it.
Even assuming, for the sake of argument, that Section 4.106-2(c) of Revenue Regulations No. 7-95, an administrative issuance, amended Section 106(d) of the Tax
Code to make the period given to the Commissioner non-mandatory, still the 1997 Tax Code, a much later law, reinstated the original intent and provision of
Section 106(d) by extending the 60-day period to 120 days and re-adopting the original wordings of Section 106(d). Thus, Section 4.106-2(c), a mere
administrative issuance, becomes inconsistent with Section 112(D), a later law. Obviously, the later law prevails over a prior inconsistent administrative issuance.
Section 112(D) of the 1997 Tax Code is clear, unequivocal, and categorical that the Commissioner has 120 days to act on an administrative claim. The taxpayer can
file the judicial claim (1) only within thirty days after the Commissioner partially or fully denies the claim within the 120- day period, or (2) only within thirty
days from the expiration of the 120- day period if the Commissioner does not act within the 120-day period.
There can be no dispute that upon effectivity of the 1997 Tax Code on 1 January 1998, or more than five yearsbefore San Roque filed its administrative claim
on 28 March 2003, the law has been clear: the 120- day period is mandatory and jurisdictional. San Roques claim, having been filed administratively on 28
March 2003, is governed by the 1997 Tax Code, not the 1977 Tax Code. Since San Roque filed its judicial claim before the expiration of the 120-day mandatory
and jurisdictional period, San Roques claim cannot prosper.
San Roque cannot also invoke Section 4.106-2(c), which expressly provides that the taxpayer can only file the judicial claim "after" the lapse of the 60-day period
from the filing of the administrative claim. San Roque filed its judicial claim just 13 days after filing its administrative claim. To recall, San Roque filed its
judicial claim on 10 April 2003, a mere 13 days after it filed its administrative claim.
Even if, contrary to all principles of statutory construction as well as plain common sense, we gratuitously apply now Section 4.106-2(c) of Revenue Regulations
No. 7-95, still San Roque cannot recover any refund or credit because San Roque did not wait for the 60-day period to lapse, contrary to the express
requirement in Section 4.106-2(c). In short, San Roque does not even comply with Section 4.106-2(c). A claim for tax refund or credit is strictly construed against
the taxpayer, who must prove that his claim clearly complies with all the conditions for granting the tax refund or credit. San Roque did not comply with the
express condition for such statutory grant.
A final word. Taxes are the lifeblood of the nation. The Philippines has been struggling to improve its tax efficiency collection for the longest time with minimal
success. Consequently, the Philippines has suffered the economic adversities arising from poor tax collections, forcing the government to continue borrowing to
fund the budget deficits. This Court cannot turn a blind eye to this economic malaise by being unduly liberal to taxpayers who do not comply with statutory
requirements for tax refunds or credits. The tax refund claims in the present cases are not a pittance. Many other companies stand to gain if this Court were to rule
otherwise. The dissenting opinions will turn on its head the well-settled doctrine that tax refunds are strictly construed against the taxpayer.
WHEREFORE, the Court hereby (1) GRANTS the petition of the Commissioner of Internal Revenue in G.R. No. 187485 to DENY the P483,797,599.65 tax
refund or credit claim of San Roque Power Corporation; (2) GRANTSthe petition of Taganito Mining Corporation in G.R. No. 196113 for a tax refund or credit of
P8,365,664.38; and (3)DENIES the petition of Philex Mining Corporation in G.R. No. 197156 for a tax refund or credit of P23,956,732.44.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 164152

January 21, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
JULIETA ARIETE, Respondent.
DECISION
CARPIO, J.:
The Case
The Commissioner of Internal Revenue (petitioner) filed this Petition for Review1 to reverse the Court of Appeals (CA) Decision2 dated 14 June 2004 in CAG.R. SP No. 70693. In the assailed decision, the CA affirmed the Court of Tax Appeals (CTA) Decision 3 and Resolution dated 15 January 2002 and 3 May 2002,
respectively. The CTA cancelled the assessments issued against Julieta Ariete (respondent) for deficiency income taxes of P191,463.04 for the years 1993, 1994,
1995, and 1996.
The Facts
On 21 May 1997, George P. Mercado filed an Affidavit with the Special Investigation Division, Revenue Region No. 19, Davao City. The affidavit attested that
respondent earned substantial income in 1994, 1995, and 1996 without paying income tax.4
The Chief of the Special Investigation Division (SID Chief) issued Mission Order No. 118-97 dated 23 May 1997, directing a Revenue Officer to conduct
preliminary verification of the denunciation made and submit a progress report. The SID Chief also sent a request to access the BIR records of Revenue District
No. 112, Tagum, Davao del Norte (RDO), inquiring if the income tax returns of respondent for the years 1993 to 1996 are available for examination. The RDO
replied that respondent had no records of income tax returns for the years 1993 to 1996.5
On 15 October 1997, the Revenue Officer submitted a report stating that respondent admitted her non-filing of income tax returns.6lawph!l

On 2 December 1997, respondent filed her income tax returns for the years 1993, 1994, 1995, and 1996 under Revenue Memorandum Order (RMO) No. 59-97 as
amended by RMO No. 60-97 and RMO No. 63-97, otherwise known as the Voluntary Assessment Program (VAP).7
On 28 July 1998, the Regional Director issued a Letter of Authority to investigate respondent for tax purposes covering the years 1993 to 1996.1avvphi1
On 14 October 1998, the Revenue Officer submitted a Memorandum to the SID Chief recommending that respondent be assessed with deficiency income taxes for
the years 1993 to 1996. On 22 January 1999, four assessment notices were issued against respondent. The total deficiency income taxes, inclusive of interests and
surcharges amounted to P191,463.04:
1993

P 6,462.188

1994

47,187.399

1995

24,729.6410

1996

113,083.8311

P 191,463.04
=============
On 22 February 1999, respondent filed an Assessment Protest with Prayer for Reinvestigation. On 30 March 1999, the assessment protest was denied.
On 16 April 1999, respondent offered a compromise settlement but the same was denied.
Respondent filed a petition for review with the CTA assailing the Bureau of Internal Revenues (BIR) decision denying with finality the request for reinvestigation
and disapproving her availment of the VAP. Respondent also contested the issuance of the four assessment notices.
On 15 January 2002, the CTA rendered a decision cancelling the deficiency assessments. Petitioner filed a motion for reconsideration but the CTA denied the same
in a Resolution dated 3 May 2002.
Petitioner appealed the CTAs decision to the CA. In a decision dated 14 June 2004, the CA affirmed the CTAs decision.
Aggrieved by the CAs decision affirming the cancellation of the tax deficiency assessments, petitioner elevated the case before this Court.
Ruling of the Court of Tax Appeals
The CTA stated that when respondent filed her income tax returns on 2 December 1997, she was not yet under investigation by the Special Investigation Division.
The Letter of Authority to investigate respondent for tax purposes was issued only on 28 July 1998. Further, respondents case was not duly recorded in the Official
Registry Book of the BIR before she availed of the VAP.
The CTA, quoting RMO Nos. 59-97, 60-97, and 63-97, ruled that the requirements before a person may be excluded from the coverage of the VAP are:
a. The person(s) must be under investigation by the Tax Fraud Division and/or the regional Special Investigation Division;
b. The investigation must be as a result of a verified information filed by an informer under Section 281 of the NIRC, as amended; and
c. The investigation must be duly registered in the Official Registry Book of the Bureau before the date of availment under the VAP.12
The CTA ruled that the conjunctive word "and" is used; therefore, all of the above requisites must be present before a person may be excluded from the coverage of
the VAP. The CTA explained that the word "and" is a conjunction connecting words or phrases expressing the idea that the latter is to be added or taken along with
the first.13
The CTA also stated that the rationale behind the VAP is to give taxpayers a final opportunity to come up with a clean slate before they will be dealt with strictly
for not paying their correct taxes. The CTA noted that under the RMOs, among the benefits that can be availed by the taxpayer-applicant are:
1) A bona fide rectification of filing errors and assessment of tax liabilities under the VAP shall relieve the taxpayer-applicant from any criminal or civil
liability incident to the misdeclaration of incomes, purchases, deductions, etc., and non-filing of a return.
2) The taxpayer who shall avail of the VAP shall be liable only for the payment of the basic tax due.14
The CTA ruled that even if respondent violated the National Internal Revenue Code (Tax Code), she was given the chance to rectify her fault and be absolved of
criminal and civil liabilities incident to her non-filing of income tax by virtue of the VAP. The CTA held that respondent is not disqualified to avail of the VAP.
Hence, respondent has no more liabilities after paying the corresponding taxes due.15
The CTA found the four assessments issued against respondent to be erroneous and ordered that the same be cancelled.16
Ruling of the Court of Appeals
The CA explained that the persons who may avail of the VAP are those who are "liable to pay any of the above-cited internal revenue taxes for the above specified
period who due to inadvertence or otherwise, has underdeclared his internal revenue tax liabilities or has not filed the required tax returns." The CA rationalized
that the BIR used a broad language to define the persons qualified to avail of the VAP because the BIR intended to reach as many taxpayers as possible subject
only to the exclusion of those cases specially enumerated.
The CA ruled that in applying the rules of statutory construction, the exceptions enumerated in paragraph 317 of RMO No. 59-97, as well as those added in RMO
No. 63-97, should be strictly construed and all doubts should be resolved in favor of the general provision stated under paragraph 218 rather than the said
exceptions.
The CA affirmed the CTAs findings of facts and ruled that neither the verified information nor the investigation was recorded in the Official Registry Book of the
BIR. The CA disagreed with petitioners contention that the recording in the Official Registry Book of the BIR is merely a procedural requirement which can be
dispensed with for the purpose of determining who are excluded from the coverage of RMO No. 59-97.
The CA explained that it is clear from the wordings of RMO No. 59-97 that the recording in the Official Registry Book of the BIR is a mandatory requirement
before a taxpayer-applicant under the VAP may be excluded from its coverage as this requirement was preceded by the word "and." The use of the conjunction

"and" in subparagraph 3.4 of RMO No. 59-97 must be understood in its usual and common meaning for the purpose of determining who are disqualified from
availing of the benefits under the VAP. This interpretation is more in faithful compliance with the mandate of the RMOs.
Aggrieved by the CA decision, petitioner elevated the case to this Court.
Issue
Petitioner submits this sole issue for our consideration: whether the CA erred in holding that the recording in the Official Registry Book of the BIR of the
information filed by the informer under Section 28119 of the Tax Code is a mandatory requirement before a taxpayer-applicant may be excluded from the coverage
of the VAP.
Ruling of the Court
Petitioner contends that the VAP, being in the nature of a tax amnesty, must be strictly construed against the taxpayer-applicant such that petitioners failure to
record the information in the Official Registry Book of the BIR does not affect respondents disqualification from availment of the benefits under the VAP.
Petitioner argues that taxpayers who are under investigation for non-filing of income tax returns before their availment of the VAP are not covered by the program
and are not entitiled to its benefits. Petitioner alleges that the underlying reason for the disqualification is that availment of the VAP by such taxpayer is no longer
voluntary. Petitioner asserts that voluntariness is the very essence of the Voluntary Assessment Program.20
Respondent claims that where the terms of a statute are clear and unambiguous, no interpretation is called for, and the law is applied as written, for application is
the first duty of the court, and interpretation, only where literal application is impossible or inadequate.
Verba Legis
It is well-settled that where the language of the law is clear and unequivocal, it must be given its literal application and applied without interpretation. 21 The
general rule of requiring adherence to the letter in construing statutes applies with particular strictness to tax laws and provisions of a taxing act are not to be
extended by implication.22A careful reading of the RMOs pertaining to the VAP shows that the recording of the information in the Official Registry Book of the
BIR is a mandatory requirement before a taxpayer may be excluded from the coverage of the VAP.
On 27 October 1997, the CIR, in implementing the VAP, issued RMO No. 59-97 to give erring taxpayers a final opportunity to come up with a clean slate. Any
person liable to pay income tax on business and compensation income, value-added tax and other percentage taxes under Titles II, IV and V, respectively, of the
Tax Code for the taxable years 1993 to 1996, who due to inadvertence or otherwise, has not filed the required tax return may avail of the benefits under the
VAP.23 RMO No. 59-97 also enumerates the persons or cases that are excluded from the coverage of the VAP.
3. Persons/Cases not covered
The following shall be excluded from the coverage of the VAP under this Order:
xxx
3.4. Persons under investigation as a result of verified information filed by an informer under Section 281 of the NIRC, as amended, and duly recorded in the
Official Registry Book of the Bureau before the date of availment under the VAP; x x x (Boldfacing supplied)
On 30 October 1997, the CIR issued RMO No. 60-97 which supplements RMO No. 59-97 and amended Item No. 3.4 to read as:
3. Persons/Cases not covered
The following shall be excluded from the coverage of the VAP under this Order:
xxx
3.4 Persons under investigation by the Tax Fraud Division and/or the Regional Special Investigation Divisions as a result of verified information filed by an
informer under Section 281 of the NIRC, as amended, and duly recorded in the Official Registry Book of the Bureau before the date of availment under VAP;
(Boldfacing supplied)
On 27 November 1997, the CIR issued RMO No. 63-97 and clarified issues related to the implementation of the VAP. RMO No. 63-97 provides:
3. Persons/cases not covered:
xxx
3.4 Persons under investigation by the Tax Fraud Division and/or the Regional Special Investigation Divisions as a result of verified information filed by an
informer under Section 281 of the NIRC, as amended, and duly recorded in the Official Registry Book of the Bureau before the date of availment under the VAP;
(Underscoring in the original, boldfacing supplied)
It is evident from these RMOs that the CIR was consistent in using the word "and" and has even underscored the word in RMO No. 63-97. This denotes that in
addition to the filing of the verified information, the same should also be duly recorded in the Official Registry Book of the BIR. The conjunctive word "and" is not
without legal significance. It means "in addition to." The word "and," whether it is used to connect words, phrases or full sentences, must be accepted as binding
together and as relating to one another.24 "And" in statutory construction implies conjunction or union.25
It is sufficiently clear that for a person to be excluded from the coverage of the VAP, the verified information must not only be filed under Section 281 26 of the Tax
Code, it must also be duly recorded in the Official Registry Book of the BIR before the date of availment under the VAP. This interpretation of Item 3.4 of RMO
Nos. 59-97, 60-97, and 63-97 is further bolstered by the fact that on 12 October 2005, the BIR issued Revenue Regulations (RR) No. 18-2005 and reiterated the
same provision in the implementation of the Enhanced Voluntary Assessment Program (EVAP). RR No. 18-2005 reads:
SECTION 1. COVERAGE. x x x
Any person, natural or juridical, including estates and trusts, liable to pay any of the above-cited internal revenue taxes for the above specified period/s who, due to
inadvertence or otherwise, erroneously paid his/its internal revenue tax liabilities or failed to file tax returns/pay taxes, may avail of the EVAP, except those falling
under any of the following instances:
xxx
b. Persons under investigation as a result of verified information filed by a Tax Informer under Section 282 of the NIRC, duly processed and recorded in the BIR
Official Registry Book on or before the effectivity of these regulations. (Boldfacing supplied)

When a tax provision speaks unequivocally, it is not the province of a Court to scan its wisdom or its policy. 27 The more correct course of dealing with a question
of construction is to take the words to mean exactly what they say. Where a provision of law expressly limits its application to certain transactions, it cannot be
extended to other transactions by interpretation.28
Findings of Fact
Generally, the findings of fact of the CTA, a court exercising expertise on the subject of tax, are regarded as final, binding, and conclusive upon this Court,
especially if these are similar to the findings of the Court of Appeals which is normally the final arbiter of questions of fact.29
In this case, the CA affirmed the CTAs findings of fact which states:
We will start with the question as to whether or not the respondent was already under investigation for violation of the Tax Code provisions at the time she applied
under VAP on December 2, 1997. The records show that she was indeed under investigation. Albeit, the Letter of Authority was issued only on 28 July 1998, there
is no question that on 23 May 1997, a Mission Order No. 118-97 had already been issued by the Chief of Special Investigation Division of the BIR, Revenue
Region No. 19 to Intelligence Officer Eustaquio M. Valdez authorizing the conduct of monitoring and surveillance activities on the respondent. This investigation
was preceded by the filing of a verified information by a certain George Mercado alleging respondents failure to pay her income taxes for the years 1994 to 1996.
xxx
We now proceed to the question as to whether or not the requirement of recording in the Official Registry Book of the BIR is present in the respondents case. At
this juncture, we affirm CTAs finding that neither the verified information nor the investigation was recorded in the Official Registry Book of the BIR. Petitioner
claims that this was merely a procedural omission which does not affect respondents exclusion from the coverage of the VAP.30(Boldfacing supplied)
Petitioners failure to effect compliance with the requirement of recording the verified information or investigation in the Official Registry Book of the BIR means
that respondent, even if under investigation, can avail of the benefits of the VAP. Consequently, respondent is relieved from any criminal or civil liability incident
to the non-filing of a return.
Wherefore, we DENY the petition. We AFFIRM the Court of Appeals Decision dated 14 June 2004 in CA-G.R. SP No. 70693.
SO ORDERED.
ANTONIO
Associate Justice

T.

CARPIO

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. 193007

July 19, 2011

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,


vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, Respondents.
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief 1 assailing the validity of the impending imposition of
value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular users of tollways in stopping the BIR action. Additionally,
Diaz claims that he sponsored the approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424 (the 1997 National Internal
Revenue Code or the NIRC) at the House of Representatives. Timbol, on the other hand, claims that she served as Assistant Secretary of the Department of Trade
and Industry and consultant of the Toll Regulatory Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred,
however, in view of the consistent opposition of Diaz and other sectors to such move. But, upon President Benigno C. Aquino IIIs assumption of office in 2010,
the BIR revived the idea and would impose the challenged tax on toll fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within the meaning of "sale of services" that are subject to
VAT; that a toll fee is a "users tax," not a sale of services; that to impose VAT on toll fees would amount to a tax on public service; and that, since VAT was never
factored into the formula for computing toll fees, its imposition would violate the non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the implementation of the VAT. The Court required the government,
represented by respondents Cesar V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to
comment on the petition within 10 days from notice.2 Later, the Court issued another resolution treating the petition as one for prohibition.3
On August 23, 2010 the Office of the Solicitor General filed the governments comment.4 The government avers that the NIRC imposes VAT on all kinds of
services of franchise grantees, including tollway operations, except where the law provides otherwise; that the Court should seek the meaning and intent of the law
from the words used in the statute; and that the imposition of VAT on tollway operations has been the subject as early as 2003 of several BIR rulings and
circulars.5
The government also argues that petitioners have no right to invoke the non-impairment of contracts clause since they clearly have no personal interest in existing
toll operating agreements (TOAs) between the government and tollway operators. At any rate, the non-impairment clause cannot limit the States sovereign taxing
power which is generally read into contracts.

Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing toll rates cannot exempt tollway operators from VAT. In
any event, it cannot be claimed that the rights of tollway operators to a reasonable rate of return will be impaired by the VAT since this is imposed on top of the toll
rate. Further, the imposition of VAT on toll fees would have very minimal effect on motorists using the tollways.
In their reply6 to the governments comment, petitioners point out that tollway operators cannot be regarded as franchise grantees under the NIRC since they do
not hold legislative franchises. Further, the BIR intends to collect the VAT by rounding off the toll rate and putting any excess collection in an escrow account. But
this would be illegal since only the Congress can modify VAT rates and authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR
RMC 63-2010), which directs toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010, contravenes Section 111 of
the NIRC which grants entities that first become liable to VAT a transitional input tax credit of 2% on beginning inventory. For this reason, the VAT on toll fees
cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by including tollway operators and tollway operations in the terms "franchise
grantees" and "sale of services" under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax on services; b) will impair the tollway operators
right to a reasonable return of investment under their TOAs; and c) is not administratively feasible and cannot be implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition rather than one for declaratory relief, the characterization that
petitioners Diaz and Timbol gave their action. The government has sought reconsideration of the Courts resolution,7 however, arguing that petitioners allegations
clearly made out a case for declaratory relief, an action over which the Court has no original jurisdiction. The government adds, moreover, that the petition does
not meet the requirements of Rule 65 for actions for prohibition since the BIR did not exercise judicial, quasi-judicial, or ministerial functions when it sought to
impose VAT on toll fees. Besides, petitioners Diaz and Timbol has a plain, speedy, and adequate remedy in the ordinary course of law against the BIR action in the
form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition if the case has far-reaching implications and raises questions that need to
be resolved for the public good.8 The Court has also held that a petition for prohibition is a proper remedy to prohibit or nullify acts of executive officials that
amount to usurpation of legislative authority.9
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact, not only on the more than half a million motorists who use the
tollways everyday, but more so on the governments effort to raise revenue for funding various projects and for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed, could cause more mischief both to the tax-paying public and the
government. A belated declaration of nullity of the BIR action would make any attempt to refund to the motorists what they paid an administrative nightmare with
no solution. Consequently, it is not only the right, but the duty of the Court to take cognizance of and resolve the issues that the petition raises.
Although the petition does not strictly comply with the requirements of Rule 65, the Court has ample power to waive such technical requirements when the legal
questions to be resolved are of great importance to the public. The same may be said of the requirement of locus standi which is a mere procedural requisite.10
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed, and collected, according to Section 108, on the gross receipts
derived from the sale or exchange of services as well as from the use or lease of properties. The third paragraph of Section 108 defines "sale or exchange of
services" as follows:
The phrase sale or exchange of services means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of
property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing
or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or
cargoes; common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the
Philippines; sales of electricity by generation companies, transmission, and distribution companies;services of franchise grantees of electric utilities, telephone and
telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code and non-life insurance companies (except
their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls
for the exercise or use of the physical or mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the Philippines for a fee, including those specified in the list. The
enumeration of affected services is not exclusive.11 By qualifying "services" with the words "all kinds," Congress has given the term "services" an allencompassing meaning. The listing of specific services are intended to illustrate how pervasive and broad is the VATs reach rather than establish concrete limits to
its application. Thus, every activity that can be imagined as a form of "service" rendered for a fee should be deemed included unless some provision of law
especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll Operation Decree establishes the legal basis for the services that
tollway operators render. Essentially, tollway operators construct, maintain, and operate expressways, also called tollways, at the operators expense. Tollways
serve as alternatives to regular public highways that meander through populated areas and branch out to local roads. Traffic in the regular public highways is for
this reason slow-moving. In consideration for constructing tollways at their expense, the operators are allowed to collect government-approved fees from motorists
using the tollways until such operators could fully recover their expenses and earn reasonable returns from their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use of the tollway facilities over which the operator enjoys private
proprietary rights12 that its contract and the law recognize. In this sense, the tollway operator is no different from the following service providers under Section
108 who allow others to use their properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic
common carriers by land relative to their transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the
Philippines.
It does not help petitioners cause that Section 108 subjects to VAT "all kinds of services" rendered for a fee "regardless of whether or not the performance thereof
calls for the exercise or use of the physical or mental faculties." This means that "services" to be subject to VAT need not fall under the traditional concept of
services, the personal or professional kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term "all kinds of services," they also come under the specific class described in Section 108 as "all other
franchise grantees" who are subject to VAT, "except those under Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio and/or television broadcasting companies with gross annual
incomes of less than P10 million and gas and water utilities) that Section 11913 spares from the payment of VAT. The word "franchise" broadly covers government
grants of a special right to do an act or series of acts of public concern.14
Petitioners of course contend that tollway operators cannot be considered "franchise grantees" under Section 108 since they do not hold legislative franchises. But
nothing in Section 108 indicates that the "franchise grantees" it speaks of are those who hold legislative franchises. Petitioners give no reason, and the Court cannot
surmise any, for making a distinction between franchises granted by Congress and franchises granted by some other government agency. The latter, properly
constituted, may grant franchises. Indeed, franchises conferred or granted by local authorities, as agents of the state, constitute as much a legislative franchise as
though the grant had been made by Congress itself.15 The term "franchise" has been broadly construed as referring, not only to authorizations that Congress
directly issues in the form of a special law, but also to those granted by administrative agencies to which the power to grant franchises has been delegated by
Congress.16
Tollway operators are, owing to the nature and object of their business, "franchise grantees." The construction, operation, and maintenance of toll facilities on
public improvements are activities of public consequence that necessarily require a special grant of authority from the state. Indeed, Congress granted special
franchise for the operation of tollways to the Philippine National Construction Company, the former tollway concessionaire for the North and South Luzon
Expressways. Apart from Congress, tollway franchises may also be granted by the TRB, pursuant to the exercise of its delegated powers under P.D. 1112. 17 The
franchise in this case is evidenced by a "Toll Operation Certificate."18
Petitioners contend that the public nature of the services rendered by tollway operators excludes such services from the term "sale of services" under Section 108 of
the Code. But, again, nothing in Section 108 supports this contention. The reverse is true. In specifically including by way of example electric utilities, telephone,
telegraph, and broadcasting companies in its list of VAT-covered businesses, Section 108 opens other companies rendering public service for a fee to the imposition
of VAT. Businesses of a public nature such as public utilities and the collection of tolls or charges for its use or service is a franchise.19
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course of congressional deliberations of the would-be law. As the
Court said in South African Airways v. Commissioner of Internal Revenue,20 "statements made by individual members of Congress in the consideration of a bill
do not necessarily reflect the sense of that body and are, consequently, not controlling in the interpretation of law." The congressional will is ultimately determined
by the language of the law that the lawmakers voted on. Consequently, the meaning and intention of the law must first be sought "in the words of the statute itself,
read and considered in their natural, ordinary, commonly accepted and most obvious significations, according to good and approved usage and without resorting to
forced or subtle construction."
Two. Petitioners argue that a toll fee is a "users tax" and to impose VAT on toll fees is tantamount to taxing a tax. 21 Actually, petitioners base this argument on the
following discussion in Manila International Airport Authority (MIAA) v. Court of Appeals:22
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like "roads, canals, rivers, torrents, ports and bridges constructed
by the State," are owned by the State. The term "ports" includes seaports and airports. The MIAA Airport Lands and Buildings constitute a "port" constructed by
the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus owned by the State or the
Republic of the Philippines.
x x x The operation by the government of a tollway does not change the character of the road as one for public use. Someone must pay for the maintenance of the
road, either the public indirectly through the taxes they pay the government, or only those among the public who actually use the road through the toll fees they pay
upon using the road. The tollway system is even a more efficient and equitable manner of taxing the public for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is for public dominion or not. Article 420 of the Civil Code defines
property of public dominion as "one intended for public use."Even if the government collects toll fees, the road is still "intended for public use" if anyone can use
the road under the same terms and conditions as the rest of the public. The charging of fees, the limitation on the kind of vehicles that can use the road, the speed
restrictions and other conditions for the use of the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines, constitute the bulk of the income that maintains the operations
of MIAA. The collection of such fees does not change the character of MIAA as an airport for public use. Such fees are often termed users tax. This means taxing
those among the public who actually use a public facility instead of taxing all the public including those who never use the particular public facility. A users tax is
more equitable a principle of taxation mandated in the 1987 Constitution."23 (Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal fees to a "users tax" must also pertain to tollway fees. But the main issue in the MIAA case
was whether or not Paraaque City could sell airport lands and buildings under MIAA administration at public auction to satisfy unpaid real estate taxes. Since
local governments have no power to tax the national government, the Court held that the City could not proceed with the auction sale. MIAA forms part of the

national government although not integrated in the department framework."24 Thus, its airport lands and buildings are properties of public dominion beyond the
commerce of man under Article 420(1)25 of the Civil Code and could not be sold at public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to establish a rule that tollway fees are users tax, but to make the point
that airport lands and buildings are properties of public dominion and that the collection of terminal fees for their use does not make them private properties.
Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a users tax, collectible from motorists, for the construction and maintenance of certain
roadways. The tax in such a case goes directly to the government for the replenishment of resources it spends for the roadways. This is not the case here. What the
government seeks to tax here are fees collected from tollways that are constructed, maintained, and operated by private tollway operators at their own expense
under the build, operate, and transfer scheme that the government has adopted for expressways.26 Except for a fraction given to the government, the toll fees
essentially end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is imposed under the taxing power of the government
principally for the purpose of raising revenues to fund public expenditures.27 Toll fees, on the other hand, are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of
income. Although toll fees are charged for the use of public facilities, therefore, they are not government exactions that can be properly treated as a tax. Taxes may
be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an
attribute of ownership.28
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax. In indirect taxation, a distinction is made
between the liability for the tax and burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or
services to the buyer. In such a case, what is transferred is not the sellers liability but merely the burden of the VAT.29
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden since the amount of VAT paid by the former is added to
the selling price. Once shifted, the VAT ceases to be a tax30 and simply becomes part of the cost that the buyer must pay in order to purchase the good, property or
service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway operator. Under Section 105 of the Code, 31 VAT is imposed on
any person who, in the course of trade or business, sells or renders services for a fee. In other words, the seller of services, who in this case is the tollway operator,
is the person liable for VAT. The latter merely shifts the burden of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a "users tax." VAT is assessed against the tollway operators
gross receipts and not necessarily on the toll fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not make the latter directly
liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that one has to pay in order to use the tollways.32
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on behalf of private investors in the tollway projects. She will neither
be prejudiced by nor be affected by the alleged diminution in return of investments that may result from the VAT imposition. She has no interest at all in the profits
to be earned under the TOAs. The interest in and right to recover investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will be adversely affected by imposing VAT on tollway operations is purely speculative. Equally
presumptuous is her assertion that a stipulation in the TOAs known as the Material Adverse Grantor Action will be activated if VAT is thus imposed. The Court
cannot rule on matters that are manifestly conjectural. Neither can it prohibit the State from exercising its sovereign taxing power based on uncertain, prophetic
grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make the VAT on tollway operations impractical and incapable of
implementation. They cite the fact that, in order to claim input VAT, the name, address and tax identification number of the tollway user must be indicated in the
VAT receipt or invoice. The manner by which the BIR intends to implement the VAT by rounding off the toll rate and putting any excess collection in an escrow
account is also illegal, while the alternative of giving "change" to thousands of motorists in order to meet the exact toll rate would be a logistical nightmare.
Thus, according to them, the VAT on tollway operations is not administratively feasible.33
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system should be capable of being effectively administered and
enforced with the least inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax imposition invalid "except to the extent that
specific constitutional or statutory limitations are impaired."34 Thus, even if the imposition of VAT on tollway operations may seem burdensome to implement, it
is not necessarily invalid unless some aspect of it is shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway operations. Any declaration by the Court that the manner of its
implementation is illegal or unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate hearing provides some clue as to how the
BIR intends to go about it,35 the facts pertaining to the matter are not sufficiently established for the Court to pass judgment on. Besides, any concern about how
the VAT on tollway operations will be enforced must first be addressed to the BIR on whom the task of implementing tax laws primarily and exclusively rests. The
Court cannot preempt the BIRs discretion on the matter, absent any clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which directs toll companies to record an accumulated input VAT of zero
balance in their books as of August 16, 2010, the date when the VAT imposition was supposed to take effect. The issuance allegedly violates Section 111(A)36 of
the Code which grants first time VAT payers a transitional input VAT of 2% on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations with tollway operators who have been assessed VAT as early
as 2005, but failed to charge VAT-inclusive toll fees which by now can no longer be collected. The tollway operators agreed to waive the 2% transitional input VAT,
in exchange for cancellation of their past due VAT liabilities. Notably, the right to claim the 2% transitional input VAT belongs to the tollway operators who have
not questioned the circulars validity. They are thus the ones who have a right to challenge the circular in a direct and proper action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the VAT laws coverage when she sought to impose VAT on tollway
operations. Section 108(A) of the Code clearly states that services of all other franchise grantees are subject to VAT, except as may be provided under Section 119
of the Code. Tollway operators are not among the franchise grantees subject to franchise tax under the latter provision. Neither are their services among the VATexempt transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege, then it would have been well for the law to clearly say so. Tax
exemptions must be justified by clear statutory grant and based on language in the law too plain to be mistaken.37 But as the law is written, no such exemption
obtains for tollway operators. The Court is thus duty-bound to simply apply the law as it is found.1avvphi1

Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive prerogative of Congress. The Courts role is to merely uphold this
legislative policy, as reflected first and foremost in the language of the tax statute. Thus, any unwarranted burden that may be perceived to result from enforcing
such policy must be properly referred to Congress. The Court has no discretion on the matter but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the Expanded Value-Added Tax law was passed. It is only now,
however, that the executive has earnestly pursued the VAT imposition against tollway operators. The executive exercises exclusive discretion in matters pertaining
to the implementation and execution of tax laws. Consequently, the executive is more properly suited to deal with the immediate and practical consequences of the
VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal Revenues motion for reconsideration of its August 24, 2010
resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F. Timbols petition for lack of merit, and SETS ASIDE the Courts temporary restraining
order dated August 13, 2010.
SO ORDERED.
ROBERTO A. ABAD
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. Nos. 197592 & 20262

November 27, 2013

THE PROVINCE OF AKLAN, Petitioner,


vs.
JODY KING CONSTRUCTION AND DEVELOPMENT CORP., Respondent.
DECISION
VILLARAMA, JR., J.:
These consolidated petitions for review on certiorari seek to reverse and set aside the following: (1) Decision 1dated October 18, 2010 and Resolution2 dated July
5, 2011 of the Court of Appeals (CA) in CA-G.R. SP No. 111754; and (2) Decision3 dated August 31, 2011 and Resolution4 dated June 27, 2012 in CA-G.R. SP
No. 114073.
The Facts
On January 12, 1998, the Province of Aklan (petitioner) and Jody King Construction and Development Corp. (respondent) entered into a contract for the design
and -construction of the Caticlan Jetty Port and Terminal (Phase I) in Malay, Aklan. The total project cost is P38,900,000: P 18,700,000 for the design and
construction of passenger terminal, and P20,200,000 for the design and construction of the jetty port facility.5 In the course of construction, petitioner issued
variation/change orders for additional works. The scope of work under these change orders were agreed upon by petitioner and respondent.6
On January 5, 2001, petitioner entered into a negotiated contract with respondent for the construction of Passenger Terminal Building (Phase II) also at Caticlan
Jetty Port in Malay, Aklan. The contract price for Phase II is P2,475,345.54.7
On October 22, 2001, respondent made a demand for the total amount of P22,419,112.96 covering the following items which petitioner allegedly failed to settle:
1. Unpaid accomplishments on additional works
undertaken - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Php 12,396,143.09
2. Refund of taxes levied despite it not being
covered by original contract- - - - - - - - - - - - - - - - - - - - - - Php 884,098.59
3. Price escalation (Consistent with Section 7.5,
Original Contract- - - - - - - - - - - - - - - - - - - - - - - - - - - - Php 1,291,714.98
4. Additional Labor Cost resulting [from]
numerous change orders issued sporadically - - - - - - - - Php 3,303,486.60
5. Additional Overhead Cost resulting [from]
numerous Orders issued sporadically - - - - - - - - - - - - - Php 1,101,162.60
6. Interest resulting [from] payment delays
consistent with Section 7.3.b of the Original
Contract - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Php 3,442,507.50.8
On July 13, 2006, respondent sued petitioner in the Regional Trial Court (RTC) of Marikina City (Civil Case No. 06-1122-MK) to collect the aforesaid
amounts.9 On August 17, 2006, the trial court issued a writ of preliminary attachment.10
Petitioner denied any unpaid balance and interest due to respondent. It asserted that the sums being claimed by respondent were not indicated in Change Order No.
3 as approved by the Office of Provincial Governor. Also cited was respondents June 10, 2003 letter absolving petitioner from liability for any cost in connection
with the Caticlan Passenger Terminal Project.11
After trial, the trial court rendered its Decision12 on August 14, 2009, the dispositive portion of which reads:
WHEREFORE, foregoing premises considered, judgment is hereby rendered in favor of plaintiff Jody King Construction And Development Corporation and
against defendant Province of Aklan, as follows:
1. ordering the defendant to pay to the plaintiff the amount of Php7,396,143.09 representing the unpaid accomplishment on additional works undertaken
by the plaintiff;

2. ordering the defendant to refund to the plaintiff the amount of Php884,098.59 representing additional 2% tax levied upon against the plaintiff;
3. ordering the defendant to pay to the plaintiff price escalation in the amount of Php1,291,714.98 pursuant to Section 7.5 of the original contract;
4. ordering the defendant to pay to the plaintiff the amount of Php3,303,486.60 representing additional labor cost resulting from change orders issued by
the defendant;
5. ordering the defendant to pay to the plaintiff the sum of Php1,101,162.00 overhead cost resulting from change orders issued by the defendant;
6. ordering the defendant to pay the sum of Php3,442,507.50 representing interest resulting from payment delays up to October 15, 2001 pursuant to
Section 7.3.b of the original contract;
7. ordering the defendant to pay interest of 3% per month from unpaid claims as of October 16, 2001 to date of actual payment pursuant to Section
7.3.b[;]
8. ordering the [defendant] to pay to the plaintiff the sum of Php500,000.00 as moral damages;
9. ordering the defendant to pay to the plaintiff the sum of Php300,000.00 as exemplary damages;
10. ordering the defendant to pay the plaintiff the sum of Php200,000.00, as and for attorneys fees; and
11. ordering the defendant to pay the cost of suit.
SO ORDERED.13
Petitioner filed its motion for reconsideration14 on October 9, 2009 stating that it received a copy of the decision on September 25, 2009. In its Order 15 dated
October 27, 2009, the trial court denied the motion for reconsideration upon verification from the records that as shown by the return card, copy of the decision
was actually received by both Assistant Provincial Prosecutor Ronaldo B. Ingente and Atty. Lee T. Manares on September 23, 2009. Since petitioner only had until
October 8, 2009 within which to file a motion for reconsideration, its motion filed on October 9, 2009 was filed one day after the finality of the decision. The trial
court further noted that there was a deliberate attempt on both Atty. Manares and Prosecutor Ingente to mislead the court and make it appear that their motion for
reconsideration was filed on time. Petitioner filed a Manifestation16 reiterating the explanation set forth in its Rejoinder to respondents comment/opposition and
motion to dismiss that the wrong date of receipt of the decision stated in the motion for reconsideration was due to pure inadvertence attributable to the staff of
petitioners counsel. It stressed that there was no intention to mislead the trial court nor cause undue prejudice to the case, as in fact its counsel immediately
corrected the error upon discovery by explaining the attendant circumstances in the Rejoinder dated October 29, 2009.
On November 24, 2009, the trial court issued a writ of execution ordering Sheriff IV Antonio E. Gamboa, Jr. to demand from petitioner the immediate payment
of P67,027,378.34 and tender the same to the respondent. Consequently, Sheriff Gamboa served notices of garnishment on Land Bank of the Philippines,
Philippine National Bank and Development Bank of the Philippines at their branches in Kalibo, Aklan for the satisfaction of the judgment debt from the funds
deposited under the account of petitioner. Said banks, however, refused to give due course to the court order, citing the relevant provisions of statutes, circulars and
jurisprudence on the determination of government monetary liabilities, their enforcement and satisfaction.17
Petitioner filed in the CA a petition for certiorari with application for temporary restraining order (TRO) and preliminary injunction assailing the Writ of Execution
dated November 24, 2009, docketed as CA-G.R. SP No. 111754.
On December 7, 2009, the trial court denied petitioners notice of appeal filed on December 1, 2009. Petitioners motion for reconsideration of the December 7,
2009 Order was likewise denied.18 On May 20, 2010, petitioner filed another petition for certiorari in the CA questioning the aforesaid orders denying due course
to its notice of appeal, docketed as CA-G.R. SP No. 114073.
By Decision dated October 18, 2010, the CAs First Division dismissed the petition in CA-G.R. SP No. 111754 as it found no grave abuse of discretion in the lower
courts issuance of the writ of execution. Petitioner filed a motion for reconsideration which was likewise denied by the CA. The CA stressed that even assuming as
true the alleged errors committed by the trial court, these were insufficient for a ruling that grave abuse of discretion had been committed. On the matter of
execution of the trial courts decision, the appellate court said that it was rendered moot by respondents filing of a petition before the Commission on Audit
(COA).
On August 31, 2011, the CAs Sixteenth Division rendered its Decision dismissing the petition in CA-G.R. SP No. 114073. The CA said that petitioner failed to
provide valid justification for its failure to file a timely motion for reconsideration; counsels explanation that he believed in good faith that the August 14, 2009
Decision of the trial court was received on September 25, 2009 because it was handed to him by his personnel only on that day is not a justifiable excuse that
would warrant the relaxation of the rule on reglementary period of appeal. The CA also held that petitioner is estopped from invoking the doctrine of primary
jurisdiction as it only raised the issue of COAs primary jurisdiction after its notice of appeal was denied and a writ of execution was issued against it.
The Cases
In G.R. No. 197592, petitioner submits the following issues:
I.
WHETHER OR NOT THE DECISION DATED 14 AUGUST 2009 RENDERED BY THE REGIONAL TRIAL COURT, BRANCH 273, MARIKINA
CITY AND THE WRIT OF EXECUTION DATED 24 NOVEMBER 2009 SHOULD BE RENDERED VOID FOR LACK OF JURISDICTION OVER
THE SUBJECT MATTER OF THE CASE.
II.
WHETHER OR NOT THE REGIONAL TRIAL COURT, BRANCH 273, MARIKINA CITY GRAVELY ABUSED ITS DISCRETION AMOUNTING
TO LACK OR IN EXCESS OF JURISDICTION IN RENDERING THE DECISION DATED 14 AUGUST 2009 AND ISSUING THE WRIT OF
EXECUTION DATED 24 NOVEMBER 2009 EVEN IT FAILED TO DISPOSE ALL THE ISSUES OF THE CASE BY NOT RESOLVING
PETITIONERS "URGENT MOTION TO DISCHARGE EX-PARTE WRIT OF PRELIMINARY ATTACHMENT" DATED 31 AUGUST 2006.
III.
WHETHER OR NOT THE WRIT OF EXECUTION DATED 24 NOVEMBER 2009 WHICH WAS HASTILY ISSUED IN VIOLATION OF
SUPREME COURT ADMINISTRATIVE CIRCULAR NO. 10-2000 SHOULD BE RENDERED VOID.19
The petition in G.R. No. 202623 sets forth the following arguments:
Petitioner is not estopped in questioning the jurisdiction of the Regional Trial Court, Branch 273, Marikina City over the subject matter of the case.20

The petition for certiorari filed before the CA due to the RTCs denial of petitioners Notice of Appeal was in accord with jurisprudence.21
The Issues
The controversy boils down to the following issues: (1) the applicability of the doctrine of primary jurisdiction to this case; and (2) the propriety of the issuance of
the writ of execution.
Our Ruling
The petitions are meritorious.
COA has primary jurisdiction over private respondents money claims Petitioner is not estopped from raising the issue of jurisdiction
The doctrine of primary jurisdiction holds that if a case is such that its determination requires the expertise, specialized training and knowledge of the proper
administrative bodies, relief must first be obtained in an administrative proceeding before a remedy is supplied by the courts even if the matter may well be within
their proper jurisdiction.22 It applies where a claim is originally cognizable in the courts, and comes into play whenever enforcement of the claim requires the
resolution of issues which, under a regulatory scheme, have been placed within the special competence of an administrative agency. In such a case, the court in
which the claim is sought to be enforced may suspend the judicial process pending referral of such issues to the administrative body for its view or, if the parties
would not be unfairly disadvantaged, dismiss the case without prejudice.23
The objective of the doctrine of primary jurisdiction is to guide the court in determining whether it should refrain from exercising its jurisdiction until after an
administrative agency has determined some question or some aspect of some question arising in the proceeding before the court.24
As can be gleaned, respondent seeks to enforce a claim for sums of money allegedly owed by petitioner, a local government unit.
Under Commonwealth Act No. 327,25 as amended by Section 26 of Presidential Decree No. 1445,26 it is the COA which has primary jurisdiction over money
claims against government agencies and instrumentalities.
Section 26. General jurisdiction. The authority and powers of the Commission shall extend to and comprehend all matters relating to auditing procedures, systems
and controls, the keeping of the general accounts of the Government, the preservation of vouchers pertaining thereto for a period of ten years, the examination and
inspection of the books, records, and papers relating to those accounts; and the audit and settlement of the accounts of all persons respecting funds or property
received or held by them in an accountable capacity, as well as the examination, audit, and settlement of all debts and claims of any sort due from or owing to the
Government or any of its subdivisions, agencies and instrumentalities. The said jurisdiction extends to all government-owned or controlled corporations, including
their subsidiaries, and other self-governing boards, commissions, or agencies of the Government, and as herein prescribed, including non-governmental entities
subsidized by the government, those funded by donations through the government, those required to pay levies or government share, and those for which the
government has put up a counterpart fund or those partly funded by the government. (Emphasis supplied.)
Pursuant to its rule-making authority conferred by the 1987 Constitution27 and existing laws, the COA promulgated the 2009 Revised Rules of Procedure of the
Commission on Audit. Rule II, Section 1 specifically enumerated those matters falling under COAs exclusive jurisdiction, which include "money claims due from
or owing to any government agency." Rule VIII, Section 1 further provides:
Section 1. Original Jurisdiction - The Commission Proper shall have original jurisdiction over:
a) money claim against the Government; b) request for concurrence in the hiring of legal retainers by government agency; c) write off of unliquidated cash
advances and dormant accounts receivable in amounts exceeding one million pesos (P1,000,000.00); d) request for relief from accountability for loses due to acts
of man, i.e. theft, robbery, arson, etc, in amounts in excess of Five Million pesos (P5,000,000.00).
In Euro-Med Laboratories Phil., Inc. v. Province of Batangas,28 we ruled that it is the COA and not the RTC which has primary jurisdiction to pass upon
petitioners money claim against respondent local government unit. Such jurisdiction may not be waived by the parties failure to argue the issue nor active
participation in the proceedings. Thus:
This case is one over which the doctrine of primary jurisdiction clearly held sway for although petitioners collection suit for P487,662.80 was within the
jurisdiction of the RTC, the circumstances surrounding petitioners claim brought it clearly within the ambit of the COAs jurisdiction.
First, petitioner was seeking the enforcement of a claim for a certain amount of money against a local government unit. This brought the case within the COAs
domain to pass upon money claims against the government or any subdivision thereof under Section 26 of the Government Auditing Code of the Philippines:
The authority and powers of the Commission [on Audit] shall extend to and comprehend all matters relating to x x x the examination, audit, and settlement of all
debts and claims of any sort due from or owing to the Government or any of its subdivisions, agencies, and instrumentalities. x x x.
The scope of the COAs authority to take cognizance of claims is circumscribed, however, by an unbroken line of cases holding statutes of similar import to mean
only liquidated claims, or those determined or readily determinable from vouchers, invoices, and such other papers within reach of accounting officers. Petitioners
claim was for a fixed amount and although respondent took issue with the accuracy of petitioners summation of its accountabilities, the amount thereof was
readily determinable from the receipts, invoices and other documents. Thus, the claim was well within the COAs jurisdiction under the Government Auditing Code
of the Philippines.
Second, petitioners money claim was founded on a series of purchases for the medical supplies of respondents public hospitals. Both parties agreed that these
transactions were governed by the Local Government Code provisions on supply and property management and their implementing rules and regulations
promulgated by the COA pursuant to Section 383 of said Code. Petitioners claim therefore involved compliance with applicable auditing laws and rules on
procurement. Such matters are not within the usual area of knowledge, experience and expertise of most judges but within the special competence of COA auditors
and accountants. Thus, it was but proper, out of fidelity to the doctrine of primary jurisdiction, for the RTC to dismiss petitioners complaint.
Petitioner argues, however, that respondent could no longer question the RTCs jurisdiction over the matter after it had filed its answer and participated in the
subsequent proceedings. To this, we need only state that the court may raise the issue of primary jurisdiction sua sponte and its invocation cannot be waived by the
failure of the parties to argue it as the doctrine exists for the proper distribution of power between judicial and administrative bodies and not for the convenience of
the parties.29 (Emphasis supplied.)
Respondents collection suit being directed against a local government unit, such money claim should have been first brought to the COA. 30 Hence, the RTC
should have suspended the proceedings and refer the filing of the claim before the COA. Moreover, petitioner is not estopped from raising the issue of jurisdiction
even after the denial of its notice of appeal and before the CA.
There are established exceptions to the doctrine of primary jurisdiction, such as: (a) where there is estoppel on the part of the party invoking the doctrine; (b) where
the challenged administrative act is patently illegal, amounting to lack of jurisdiction; (c) where there is unreasonable delay or official inaction that will
irretrievably prejudice the complainant; (d) where the amount involved is relatively small so as to make the rule impractical and oppressive; (e) where the question

involved is purely legal and will ultimately have to be decided by the courts of justice; (f) where judicial intervention is urgent; (g) when its application may cause
great and irreparable damage; (h) where the controverted acts violate due process; (i) when the issue of non-exhaustion of administrative remedies has been
rendered moot; (j) when there is no other plain, speedy and adequate remedy; (k) when strong public interest is involved; and, (l) in quo warranto
proceedings.31 However, none of the foregoing circumstances is applicable in the present case.
The doctrine of primary jurisdiction does not warrant a court to arrogate unto itself authority to resolve a controversy the jurisdiction over which is initially lodged
with an administrative body of special competence.32 All the proceedings of the court in violation of the doctrine and all orders and decisions rendered thereby are
null and void.33
Writ of Execution issued in violation of COAs primary jurisdiction is void
Since a judgment rendered by a body or tribunal that has no jurisdiction over the subject matter of the case is no judgment at all, it cannot be the source of any right
or the creator of any obligation.34 All acts pursuant to it and all claims emanating from it have no legal effect and the void judgment can never be final and any
writ of execution based on it is likewise void.35
Clearly, the CA erred in ruling that the RTC committed no grave abuse of discretion when it ordered the execution of its judgment against petitioner and
garnishment of the latters funds.
In its Supplement to the Motion for Reconsideration, petitioner argued that it is the COA and not the RTC which has original jurisdiction over money claim against
government agencies and subdivisions.1wphi1 The CA, in denying petitioner's motion for reconsideration, simply stated that the issue had become moot by
respondent's filing of the proper petition with the COA. However, respondent's belated compliance with the formal requirements of presenting its money claim
before the COA did not cure the serious errors committed by the RTC in implementing its void decision. The RTC's orders implementing its judgment rendered
without jurisdiction must be set aside because a void judgment can never be validly executed.
Finally, the RTC should have exercised utmost caution, prudence and judiciousness in issuing the writ of execution and notices of garnishment against petitioner.
The RTC had no authority to direct the immediate withdrawal of any portion of the garnished funds from petitioner's depositary banks.36 Such act violated the
express directives of this Court under Administrative Circular No. 10-2000,37 which was issued "precisely in order to prevent the circumvention of Presidential
Decree No. 1445, as well as of the rules and procedures of the COA." 38 WHEREFORE, both petitions in G.R. Nos. 197592 and 202623 are GRANTED. The
Decision dated October 18, 2010 and Resolution dated July 5 2011 of the Court of Appeals in CA-G.R. SP No. 111754, and Decision dated August 31, 2011 and
Resolution dated June 27, 2012 in CA- G.R. SP No. 114073 are hereby REVERSED and SET ASIDE. The Decision dated August 14 2009, Writ of Execution and
subsequent issuances implementing the said decision of the Regional Trial Court of Marikina City in Civil Case No. 06-1122-MK are all SET ASIDE. No
pronouncement as to costs.
SO ORDERED.
MARTIN S. VILLARAMA, JR.
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. Nos. 198729-30

January 15, 2014

CBK POWER COMPANY LIMITED, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
SERENO, CJ:
This is a Petition for Review on Certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure filed by CBK Power Company Limited (petitioner). The Petition
assails the Decision2 dated 27 June 2011 and Resolution3 dated 16 September 2011 of the Court of Tax Appeals En Banc (CTA En Banc in C.T.A. EB Nos. 658
and 659. The assailed Decision and Resolution reversed and set aside the Decision 4 dated 3 March 2010 and Resolution5 dated 6 July 2010 rendered by the CTA
Special Second Division in C.T.A. Case No. 7621, which partly granted the claim of petitioner for the issuance of a tax credit certificate representing the latter's
alleged unutilized input taxes on local purchases of goods and services attributable to effectively zero-rated sales to National Power Corporation (NPC) for the
second and third quarters of 2005.
The Facts
Petitioner is engaged, among others, in the operation, maintenance, and management of the Kalayaan II pumped-storage hydroelectric power plant, the new
Caliraya Spillway, Caliraya, Botocan; and the Kalayaan I hydroelectric power plants and their related facilities located in the Province of Laguna.6
On 29 December 2004, petitioner filed an Application for VAT Zero-Rate with the Bureau of Internal Revenue (BIR) in accordance with Section 108(B)(3) of the
National Internal Revenue Code (NIRC) of 1997, as amended. The application was duly approved by the BIR. Thus, petitioner s sale of electr icity to the NPC
from 1 January 2005 to 31 October 2005 was declared to be entitled to the benefit of effectively zero-rated value added tax (VAT).7
Petitioner filed its administrative claims for the issuance of tax credit certificates for its alleged unutilized input taxes on its purchase of capital goods and alleged
unutilized input taxes on its local purchases and/or importation of goods and services, other than capital goods, pursuant to Sections 112(A) and (B) of the NIRC of
1997, as amended, with BIR Revenue District Office (RDO) No. 55 of Laguna, as follows:8
Period Covered

Date Of Filing

1st quarter of 2005

30-Jun-05

2nd quarter of 2005

15-Sep-05

3rd quarter of 2005

28-Oct-05

Alleging inaction of the Commissioner of Internal Revenue (CIR), petitioner filed a Petition for Review with the CTA on 18 April 2007.
THE CTA SPECIAL SECOND DIVISION RULING
After trial on the merits, the CTA Special Second Division rendered a Decision on 3 March 2010. Applying Commissioner of Internal Revenue v. Mirant Pagbilao
Corporation (Mirant),9 the court
a quo ruled that petitioner had until the following dates within which to file both administrative and judicial claims:
Taxable Quarter
2005

Close of the quarter

Last Day to
File Claim for
Refund

1st quarter

31-Mar-05

31-Mar-07

2nd quarter

30-Jun-05

30-Jun-07

3rd quarter

30-Sep-05

30-Sep-07

Accordingly, petitioner timely filed its administrative claims for the three quarters of 2005. However, considering that the judicial claim was filed on 18 April
2007, the CTA Division denied the claim for the first quarter of 2005 for having been filed out of time.
After an evaluation of petitioners claim for the second and third quarters of 2005, the court a quo partly granted the claim and ordered the issuance of a tax credit
certificate in favor of petitioner in the reduced amount ofP27,170,123.36.
The parties filed their respective Motions for Partial Reconsideration, which were both denied by the CTA Division.
THE CTA EN BANC RULING
On appeal, relying on Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi),10 the CTA En Banc ruled that petitioners judicial claim
for the first, second, and third quarters of 2005 were belatedly filed.
The CTA Special Second Division Decision and Resolution were reversed and set aside, and the Petition for Review filed in CTA Case No. 7621 was dismissed.
Petitioners Motion for Reconsideration was likewise denied for lack of merit.
Hence, this Petition.ISSUE
Petitioners assigned errors boil down to the principal issue of the applicable prescriptive period on its claim for refund of unutilized input VAT for the first to third
quarters of 2005.11
THE COURTS RULING
The pertinent provision of the NIRC at the time when petitioner filed its claim for refund provides:
SEC. 112. Refunds or Tax Credits of Input Tax.
(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax
due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided,
however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1),(2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency
exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP):
Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or
properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall
be allocated proportionately on the basis of the volume of sales.
xxxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred
twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
Petitioners sales to NPC are effectively zero-rated
As aptly ruled by the CTA Special Second Division, petitioners sales to NPC are effectively subject to zero percent (0%) VAT. The NPC is an entity with a special
charter, which categorically exempts it from the payment of any tax, whether direct or indirect, including VAT. Thus, services rendered to NPC by a VAT-registered
entity are effectively zero-rated. In fact, the BIR itself approved the application for zero-rating on 29 December 2004, filed by petitioner for its sales to NPC
covering January to October 2005.12 As a consequence, petitioner claims for the refund of the alleged excess input tax attributable to its effectively zero-rated
sales to NPC.
In Panasonic Communications Imaging Corporation of the Philippines v. Commissioner of Internal Revenue,13 this Court ruled:
Under the 1997 NIRC, if at the end of a taxable quarter the seller charges output taxes equal to the input taxes that his suppliers passed on to him, no payment is
required of him. It is when his output taxes exceed his input taxes that he has to pay the excess to the BIR. If the input taxes exceed the output taxes, however, the
excess payment shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or
from the acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer.
The crux of the controversy arose from the proper application of the prescriptive periods set forth in Section 112 of the NIRC of 1997, as amended, and the
interpretation of the applicable jurisprudence.

Although the ponente in this case expressed a different view on the mandatory application of the 120+30 day period as prescribed in Section 112, with the finality
of the Courts pronouncement on the consolidated tax cases Commissioner of Internal Revenue v. San Roque Power Corporation, Taganito Mining Corporation v.
Commissioner of Internal Revenue, and Philex Mining Corporation v. Commissioner of Internal Revenue14 (hereby collectively referred as San Roque), we are
constrained to apply the dispositions therein to the facts herein which are similar.
Administrative Claim
Section 112(A) provides that after the close of the taxable quarter when the sales were made, there is a two-year prescriptive period within which a VAT-registered
person whose sales are zero-rated or effectively zero-rated may apply for the issuance of a tax credit certificate or refund of creditable input tax.
Our VAT Law provides for a mechanism that would allow VAT-registered persons to recover the excess input taxes over the output taxes they had paid in relation
to their sales. For the refund or credit of excess or unutilized input tax, Section 112 is the governing law. Given the distinctive nature of creditable input tax, the
law under Section 112 (A) provides for a different reckoning point for the two-year prescriptive period, specifically for the refund or credit of that tax only.
We agree with petitioner that Mirant was not yet in existence when their administrative claim was filed in 2005; thus, it should not retroactively be applied to the
instant case.
However, the fact remains that Section 112 is the controlling provision for the refund or credit of input tax during the time that petitioner filed its claim with which
they ought to comply. It must be emphasized that the Court merely clarified in Mirant that Sections 204 and 229, which prescribed a different starting point for the
two-year prescriptive limit for filing a claim for a refund or credit of excess input tax, were not applicable. Input tax is neither an erroneously paid nor an illegally
collected internal revenue tax.15
Section 112(A) is clear that for VAT-registered persons whose sales are zero-rated or effectively zero-rated, a claim for the refund or credit of creditable input tax
that is due or paid, and that is attributable to zero-rated or effectively zero-rated sales, must be filed within two years after the close of the taxable quarter when
such sales were made. The reckoning frame would always be the end of the quarter when the pertinent sale or transactions were made, regardless of when the input
VAT was paid.16
Pursuant to Section 112(A), petitioners administrative claims were filed well within the two-year period from the close of the taxable quarter when the effectively
zero-rated sales were made, to wit:
Period Covered

Close of the
Taxable
Quarter

Last day to File Administrative


Claim

Date of Filing

1st quarter 2005

31-Mar-05

31-Mar-07

30-Jun-05

2nd quarter 2005

30-Jun-05

30-Jun-07

15-Sep-05

3rd quarter 2005

30-Sep-05

30-Sep-07

28-Oct-05

Judicial Claim
Section 112(D) further provides that the CIR has to decide on an administrative claim within one hundred twenty (120) days from the date of submission of
complete documents in support thereof.
Bearing in mind that the burden to prove entitlement to a tax refund is on the taxpayer, it is presumed that in order to discharge its burden, petitioner had attached
complete supporting documents necessary to prove its entitlement to a refund in its application, absent any evidence to the contrary.
Thereafter, the taxpayer affected by the CIRs decision or inaction may appeal to the CTA within 30 days from the receipt of the decision or from the expiration of
the 120-day period within which the claim has not been acted upon.
Considering further that the 30-day period to appeal to the CTA is dependent on the 120-day period, compliance with both periods is jurisdictional. The period of
120 days is a prerequisite for the commencement of the 30-day period to appeal to the CTA.
Prescinding from San Roque in the consolidated case Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue and Mindanao I Geothermal
Partnership v. Commissioner of Internal Revenue,17 this Court has ruled thus:
Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in San Roque recognized that BIR Ruling No. DA-489-03 constitutes
equitable estoppel in favor of taxpayers. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-claimant need not wait for the lapse of the 120-day period
before it could seek judicial relief with the CTA by way of Petition for Review." This Court discussed BIR Ruling No. DA-489-03 and its effect on taxpayers, thus:
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a difficult question of law. The abandonment of the Atlas
doctrine by Mirant and Aichi is proof that the reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of law. The
abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit they received or could
have received under Atlas prior to its abandonment. This Court is applying Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the
reversal by this Court of a general interpretative rule issued by the Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply
prospectively. x x x.
xxxx
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all taxpayers or a specific ruling applicable only to a
particular taxpayer. BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not by a particular taxpayer, but by a
government agency asked with processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of
Finance. This government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in
its query to the Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the agency was in fact asking the Commissioner what to do in
cases like the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule.1wphi1 Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and
jurisdictional. (Emphasis supplied)
In applying the foregoing to the instant case, we consider the following pertinent dates:

1wphi1
Period Covered

Administrative Claim
Filed

Expiration of 120-days

Last day to file Judicial


Claim

Judicial Claim Filed

1st quarter 2005

30-Jun-05

28-Oct-05

27-Nov-05

18-Apr-07

2nd quarter 2005

15-Sep-05

13-Jan-06

13-Feb-06

3rd quarter 2005

28-Oct-05

26-Feb-06

28-Mar-06

It must be emphasized that this is not a case of premature filing of a judicial claim. Although petitioner did not file its judicial claim with the CTA prior to the
expiration of the 120-day waiting period, it failed to observe the 30-day prescriptive period to appeal to the CTA counted from the lapse of the 120-day period.
Petitioner is similarly situated as Philex in the same case, San Roque,18 in which this Court ruled:
Unlike San Roque and Taganito, Philexs case is not one of premature filing but of late filing. Philex did not file any petition with the CTA within the 120-day
period. Philex did not also file any petition with the CTA within 30 days after the expiration of the 120-day period. Philex filed its judicial claim long after the
expiration of the 120-day period, in fact 426 days after the lapse of the 120-day period. In any event, whether governed by jurisprudence before, during, or after the
Atlas case, Philexs judicial claim will have to be rejected because of late filing. Whether the two-year prescriptive period is counted from the date of payment of
the output VAT following the Atlas doctrine, or from the close of the taxable quarter when the sales attributable to the input VAT were made following the Mirant
and Aichi doctrines, Philexs judicial claim was indisputably filed late.
The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of the Commissioner on Philexs claim during the 120-day period is, by
express provision of law, "deemed a denial" of Philexs claim. Philex had 30 days from the expiration of the 120-day period to file its judicial claim with the CTA.
Philexs failure to do so rendered the "deemed a denial" decision of the Commissioner final and inappealable. The right to appeal to the CTA from a decision or
"deemed a denial" decision of the Commissioner is merely a statutory privilege, not a constitutional right. The exercise of such statutory privilege requires strict
compliance with the conditions attached by the statute for its exercise. Philex failed to comply with the statutory conditions and must thus bear the consequences.
(Emphases in the original)
Likewise, while petitioner filed its administrative and judicial claims during the period of applicability of BIR Ruling No. DA-489-03, it cannot claim the benefit
of the exception period as it did not file its judicial claim prematurely, but did so long after the lapse of the 30-day period following the expiration of the 120-day
period. Again, BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means non-exhaustion of the 120-day period for the Commissioner
to act on an administrative claim,19 but not its late filing.
As this Court enunciated in San Roque , petitioner cannot rely on Atlas either, since the latter case was promulgated only on 8 June 2007. Moreover, the doctrine in
Atlas which reckons the two-year period from the date of filing of the return and payment of the tax, does not interpret expressly or impliedly the 120+30 day
periods.20 Simply stated, Atlas referred only to the reckoning of the prescriptive period for filing an administrative claim.
For failure of petitioner to comply with the 120+30 day mandatory and jurisdictional period, petitioner lost its right to claim a refund or credit of its alleged excess
input VAT.
With regard to petitioners argument that Aichi should not be applied retroactively, we reiterate that even without that ruling, the law is explicit on the mandatory
and jurisdictional nature of the 120+30 day period.
Also devoid of merit is the applicability of the principle of solutio indebiti to the present case. According to this principle, if something is received when there is no
right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. In that situation, a creditor-debtor relationship is created under a
quasi-contract, whereby the payor becomes the creditor who then has the right to demand the return of payment made by mistake, and the person who has no right
to receive the payment becomes obligated to return it.21 The quasi-contract of solutio indebiti is based on the ancient principle that no one shall enrich oneself
unjustly at the expense of another.22
There is solutio indebiti when:
(1) Payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and
(2) Payment is made through mistake, and not through liberality or some other cause.23
Though the principle of solutio indebiti may be applicable to some instances of claims for a refund, the elements thereof are wanting in this case.
First, there exists a binding relation between petitioner and the CIR, the former being a taxpayer obligated to pay VAT.
Second, the payment of input tax was not made through mistake, since petitioner was legally obligated to pay for that liability. The entitlement to a refund or credit
of excess input tax is solely based on the distinctive nature of the VAT system. At the time of payment of the input VAT, the amount paid was correct and proper.24
Finally, equity, which has been aptly described as "a justice outside legality," is applied only in the absence of, and never against, statutory law or judicial rules of
procedure.25 Section 112 is a positive rule that should preempt and prevail over all abstract arguments based only on equity. Well-settled is the rule that tax
refunds or credits, just like tax exemptions, are strictly construed against the taxpayer.26 The burden is on the taxpayer to show strict compliance with the
conditions for the grant of the tax refund or credit.27
WHEREFORE, premises considered, the instant Petition is DENIED.
SO ORDERED.
MARIA LOURDES P. A. SERENO
Chief Justice, Chairperson
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 160756

March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,


vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE JUANITA D. AMATONG, and THE
HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondents.
DECISION
CORONA, J.:
In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders Associations, Inc. is questioning the constitutionality of
Section 27 (E) of Republic Act (RA) 84242 and the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and
those involving creditable withholding taxes.3
Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive Secretary Alberto Romulo, then acting Secretary
of Finance Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable withholding tax (CWT) on sales of real
properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner argues that the MCIT violates the due process
clause because it levies income tax even if there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which
prescribe the rules and procedures for the collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that these revenue
regulations are contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second, respondent
Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price or fair market value of the real properties classified as
ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause because, like the MCIT, the government
collects income tax even when the net income has not yet been determined. They contravene the equal protection clause as well because the CWT is being levied
upon real estate enterprises but not on other business enterprises, more particularly those in the manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets under RRs 2-98, 6-2001 and 7-2003, is
unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its gross income when such MCIT is greater than
the normal corporate income tax imposed under Section 27(A).4If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. Any
excess of the MCIT over the normal tax shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years.
Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. (1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its
business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal income tax as computed under Subsection (A) of this Section
shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby authorized to suspend the imposition of the [MCIT] on any
corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulations that shall
define the terms and conditions under which he may suspend the imposition of the [MCIT] in a meritorious case.
(4) Gross Income Defined. For purposes of applying the [MCIT] provided under Subsection (E) hereof, the term gross income shall mean gross sales
less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce
the merchandise to bring them to their present location and use.
For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to
the place where the goods are actually sold including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct
labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales returns, allowances, discounts and cost of services. "Cost of
services" shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and
employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies: Provided, however, that in the case of banks, "cost of services" shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of Internal Revenue (CIR), promulgated RR 9-98
implementing Section 27(E).5 The pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the
accounting period employed) is hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable year in

which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or
whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation.
For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at
32% effective January 1, 2000 and thereafter.
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xxx

(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal income tax as computed under Sec. 27(A) of the Code shall be carried forward
on an annual basis and credited against the normal income tax for the three (3) immediately succeeding taxable years.
xxx

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Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated RR 2-98 implementing certain provisions of RA 8424
involving the withholding of taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or transfer of real property, other than
capital assets, by persons residing in the Philippines and habitually engaged in the real estate business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
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(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of. Real property, other than
capital assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in
accordance with the following schedule
Those which are exempt from a withholding tax at
source as prescribed in Sec. 2.57.5 of these
regulations.

Exempt

With a selling price of five hundred thousand pesos


(P500,000.00) or less.

1.5%

With a selling price of more than five hundred


thousand pesos (P500,000.00) but not more than two
million pesos (P2,000,000.00).

3.0%

With selling price of more than two million pesos


(P2,000,000.00)

5.0%

xxx

xxx

xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Code, as
amended, whichever is higher. In an exchange, the fair market value of the property received in exchange, as determined in the Income Tax Regulations shall be
used.
Where the consideration or part thereof is payable on installment, no withholding tax is required to be made on the periodic installment payments where the buyer
is an individual not engaged in trade or business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld on the last installment
or installments to be paid to the seller.
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and withheld by the buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
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(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of real property classified as
ordinary asset. - A [CWT] based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the
Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the
withholding agent,/buyer, in accordance with the following schedule:
Where the seller/transferor is exempt from [CWT] in accordance with Sec. 2.57.5 of
these regulations.

Exempt

Upon the following values of real property, where the seller/transferor is habitually
engaged in the real estate business.
With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less.

1.5%

With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not
more than Two Million Pesos (P2,000,000.00).

3.0%

With a selling price of more than two Million Pesos (P2,000,000.00).

5.0%

xxx

xxx

xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Code, as
amended, whichever is higher. In an exchange, the fair market value of the property received in exchange shall be considered as the consideration.
xxx

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However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed 25% of the selling price), the tax shall be deducted and
withheld by the buyer on every installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment plan" (that is, payments in the year of sale exceed 25%
of the selling price), the buyer shall withhold the tax based on the gross selling price or fair market value of the property, whichever is higher, on the first
installment.
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT] due on the sale, transfer or exchange of real property
other than capital asset has been fully paid. (Underlined amendments in the original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or exchange subject to the CWT will not be recorded by the
Registry of Deeds until the CIR has certified that such transfers and conveyances have been reported and the taxes thereof have been duly paid:7
Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or land and building/improvement thereon arising from sales, barters, or
exchanges subject to the creditable expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly authorized representative
has certified that such transfers and conveyances have been reported and the expanded withholding tax, inclusive of the documentary stamp tax, due thereon have
been fully paid xxxx.
On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining whether a particular real property is a capital or an ordinary
asset for purposes of imposing the MCIT, among others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale, exchange, or other disposition of real
properties shall, unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether the subject properties are classified as
capital assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens engaged in trade or business in the Philippines;
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(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98],
as amended, based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.
xxx

xxx

xxx

xxx

xxx

xxx

c. In the case of domestic corporations.

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building treated as capital asset), regardless of the
classification thereof, all of which are located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject to
the [MCIT] under Sec. 27(E) of the Code, whichever is applicable.
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We shall now tackle the issues raised.


Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there must be an actual case calling for the
exercise of judicial review; (2) the question before the court must be ripe for adjudication; (3) the person challenging the validity of the act must have standing to
do so; (4) the question of constitutionality must have been raised at the earliest opportunity and (5) the issue of constitutionality must be the very lis mota of the
case.9
Respondents aver that the first three requisites are absent in this case. According to them, there is no actual case calling for the exercise of judicial power and it is
not yet ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the BIR for the payment of [MCIT] or [CWT] on sales of
real property. Neither did petitioner allege that its members have shut down their businesses as a result of the payment of the MCIT or CWT. Petitioner has raised
concerns in mere abstract and hypothetical form without any actual, specific and concrete instances cited that the assailed law and revenue regulations have
actually and adversely affected it. Lacking empirical data on which to base any conclusion, any discussion on the constitutionality of the MCIT or CWT on sales of
real property is essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not 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.10

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is susceptible of judicial resolution as distinguished
from a hypothetical or abstract difference or dispute.11 On the other hand, a question is considered ripe for adjudication when the act being challenged has a direct
adverse effect on the individual challenging it.12
Contrary to respondents assertion, we do not have to wait until petitioners members have shut down their operations as a result of the MCIT or CWT. The
assailed provisions are already being implemented. As we stated in Didipio Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to have ripened into a judicial controversy even without any
other overt act. Indeed, even a singular violation of the Constitution and/or the law is enough to awaken judicial duty.14
If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners did not allege that [it] itself is in the real estate business.
It did not allege any material interest or any wrong that it may suffer from the enforcement of [the assailed provisions].15
Legal standing or locus standi is a partys personal and substantial interest in a case such that it has sustained or will sustain direct injury as a result of the
governmental act being challenged.16 In Holy Spirit Homeowners Association, Inc. v. Defensor,17 we held that the association had legal standing because its
members stood to be injured by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the individual members of petitioner association are
residents of the NGC. As such they are covered and stand to be either benefited or injured by the enforcement of the IRR, particularly as regards the selection
process of beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner association may assail those provisions in the IRR which it believes to be
unfavorable to the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury arising from the enforcement of the IRR in that they
have been disqualified and eliminated from the selection process.18
In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an actual case, ripeness or legal standing when
paramount public interest is involved.19 The questioned MCIT and CWT affect not only petitioners but practically all domestic corporate taxpayers in our country.
The transcendental importance of the issues raised and their overreaching significance to society make it proper for us to take cognizance of this petition.20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system. It came about as a result of the perceived
inadequacy of the self-assessment system in capturing the true income of corporations. 21 It was devised as a relatively simple and effective revenue-raising
instrument compared to the normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum
contribution to the support of the public sector. The congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting constantly a loss in their operations to avoid the payment of
taxes, and thus avoid sharing in the cost of government. In this regard, the Tax Reform Act introduces for the first time a new concept called the [MCIT] so as to
minimize tax evasion, tax avoidance, tax manipulation in the country and for administrative convenience. This will go a long way in ensuring that corporations
will pay their just share in supporting our public life and our economic advancement.22
Domestic corporations owe their corporate existence and their privilege to do business to the government. They also benefit from the efforts of the government to
improve the financial market and to ensure a favorable business climate. It is therefore fair for the government to require them to make a reasonable contribution to
the public expenses.
Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal or negative net income resulting in minimal or
zero income taxes year in and year out, through under-declaration of income or over-deduction of expenses otherwise called tax shelters.23
Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the [MCIT]. Because from experience too, you have
corporations which have been losing year in and year out and paid no tax. So, if the corporation has been losing for the past five years to ten years, then that
corporation has no business to be in business. It is dead. Why continue if you are losing year in and year out? So, we have this provision to avoid this type of tax
shelters, Your Honor.24
The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a corporation or consistent reports of minimal
net income render its financial statements and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed in our
jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved
through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the imposition of the MCIT commences only
on the fourth taxable year immediately following the year in which the corporation commenced its operations.25 This grace period allows a new business to
stabilize first and make its ventures viable before it is subjected to the MCIT.26
Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be credited against the normal income tax for
the three immediately succeeding years.27
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to suspend the imposition of MCIT if a
corporation suffers losses due to prolonged labor dispute, force majeure and legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries already had their own system of minimum corporate
income taxation. Our lawmakers noted that most developing countries, particularly Latin American and Asian countries, have the same form of safeguards as we
do. As pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for underdeclaration of gross receipts have this same form of
safeguards.
In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a percent (0.5%) of gross assessable income. In Korea a 25% of taxable
income before deductions and exemptions. Of course the different countries have different basis for that minimum income tax.
The other thing youll notice is the preponderance of Latin American countries that employed this method. Okay, those are additional Latin American countries.29

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions of the MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive, arbitrary and confiscatory which amounts to
deprivation of property without due process of law. It explains that gross income as defined under said provision only considers the cost of goods sold and other
direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into
account.31 Thus, pegging the tax base of the MCIT to a corporations gross income is tantamount to a confiscation of capital because gross income, unlike net
income, is not "realized gain."32
We disagree.
Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of taxing power derives its source from the
very existence of the State whose social contract with its citizens obliges it to promote public interest and the common good.33
Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially, this means that in the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation.36 It has the authority to prescribe a
certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to define
what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is
to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to pay it. 37 Nevertheless, it is circumscribed by
constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property without due process of law." In Sison,
Jr. v. Ancheta, et al.,38 we held that the due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure 39 when it amounts to a
confiscation of property.40 But in the same case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the
due process clause) on the mere allegation of arbitrariness by the taxpayer.41 There must be a factual foundation to such an unconstitutional taint.42 This merely
adheres to the authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need
for proof of such persuasive character.43
Petitioner is correct in saying that income is distinct from capital.44 Income means all the wealth which flows into the taxpayer other than a mere return on capital.
Capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of time. 45 Income is gain derived
and severed from capital.46 For income to be taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.47
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not capital, which is subject to
income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods48 and
other direct expenses from gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously
low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the
corporations gross income.
Besides, 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.49
Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many jurisdictions. Tax thereon is generally held to be within
the power of a state to impose; or constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity of taxation.50
The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a lower tax rate but a broader tax base. 51 Since our
income tax laws are of American origin, interpretations by American courts of our parallel tax laws have persuasive effect on the interpretation of these
laws.52 Although our MCIT is not exactly the same as the AMT, the policy behind them and the procedure of their implementation are comparable. On the
question of the AMTs constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:53
In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing from large numbers of taxpayers with large incomes
who were yet paying no taxes.
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We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational means of obtaining a broad-based tax, and therefore is
constitutional.54
The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a minimum amount of taxes was a legitimate
governmental end to which the AMT bore a reasonable relation.55
American courts have also emphasized that Congress has the power to condition, limit or deny deductions from gross income in order to arrive at the net that it
chooses to tax.56 This is because deductions are a matter of legislative grace.57
Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the MCIT, taken with the reduction of the tax rate from
32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it present empirical data to show that the
implementation of the MCIT resulted in the confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and confiscatory. The Court cannot strike down a law as
unconstitutional simply because of its yokes.58 Taxation is necessarily burdensome because, by its nature, it adversely affects property rights. 59 The party
alleging the laws unconstitutionality has the burden to demonstrate the supposed violations in understandable terms.60

RR 9-98 Merely Clarifies Section 27(E) of RA 8424


Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is being imposed and collected even when there is
actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of
[MCIT] is greater than the normal income tax due from such corporation. (Emphasis supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income, merely defines the coverage of Section 27(E).
This means that even if a corporation incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of
2% of its gross income. This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income. But the law also
states that the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT would be less than the net
income of the corporation which posts a zero or negative taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes (including income taxes) are collected.61 Under Section 57 of RA 8424, the types of income
subject to withholding tax are divided into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at source and (c) taxfree covenant bonds. Petitioner is concerned with the second category (CWT) and maintains that the revenue regulations on the collection of CWT on sale of real
estate categorized as ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and
Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated "with grave abuse of discretion amounting to lack of jurisdiction" and "patently in contravention of
law"62 because they ignore such distinctions. Petitioners conclusion is based on the following premises: (a) the revenue regulations use gross selling price (GSP)
or fair market value (FMV) of the real estate as basis for determining the income tax for the sale of real estate classified as ordinary assets and (b) they mandate the
collection of income tax on a per transaction basis, i.e., upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net
income at the end of the taxable period.63
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot disregard the distinctions set by the legislators as
regards the tax base, modes of collection and payment of taxes on income from the sale of capital and ordinary assets.
Petitioners arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property Considered as Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and regulations for the effective enforcement of
the provisions of the law. Such authority is subject to the limitation that the rules and regulations must not override, but must remain consistent and in harmony
with, the law they seek to apply and implement.64 It is well-settled that an administrative agency cannot amend an act of Congress.65
We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is sanctioned by our tax laws. 66 The
withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second,
to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve
the governments cash flow.67 This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of
governmental effort to collect taxes through more complicated means and remedies.68
Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person, national or juridical, residing in the
Philippines. Such authority is derived from Section 57(B) of RA 8424 which provides:
SEC. 57. Withholding of Tax at Source.
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(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%)
but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is
between the 1%-32% range; the withholding tax is imposed on the income payable and the tax is creditable against the income tax liability of the taxpayer for the
taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business income tax from net income to GSP or FMV of the property
sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax obligation. 69 They are installments on the
annual tax which may be due at the end of the taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be the entitys net income imposed under
Section 24 (resident individuals) or Section 27 (domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT
is to be deducted from the net income tax payable by the taxpayer at the end of the taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that
the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income:
Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale, exchange, or other disposition of real
properties shall unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether the subject properties are classified as
capital assets or ordinary assets;
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xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens engaged in trade or business in the Philippines;

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(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as
amended, based on the [GSP] or current [FMV] as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently,
to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.
xxx

xxx

xxx

c. In the case of domestic corporations.


The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building treated as capital asset), regardless of the
classification thereof, all of which are located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject
to the [MCIT] under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld (by the withholding agent/buyer) against its tax
due. If the tax due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the
taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and convenience. Obviously, the withholding
agent/buyer who is obligated to withhold the tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the end of the
taxable year. Instead, said withholding agents knowledge and privity are limited only to the particular transaction in which he is a party. In such a case, his basis
can only be the GSP or FMV as these are the only factors reasonably known or knowable by him in connection with the performance of his duties as a withholding
agent.
No Blurring of Distinctions Between Ordinary Assets and Capital Assets
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary assets. On the other hand, Section 27(D)(5)
of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final tax is
also withheld at source.72
The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not treated in the same manner as capital assets.
Final withholding tax (FWT) and CWT are distinguished as follows:

FWT

CWT

a) The amount of income tax withheld by the withholding


agent is constituted as a full and final payment of the income
tax due from the payee on the said income.

a) Taxes withheld on certain income payments are intended


to equal or at least approximate the tax due of the payee on
said income.

b)The liability for payment of the tax rests primarily on the


payor as a withholding agent.

b) Payee of income is required to report the income and/or


pay the difference between the tax withheld and the tax due
on the income. The payee also has the right to ask for a
refund if the tax withheld is more than the tax due.

c) The payee is not required to file an income tax return for


the particular income.73

c) The income recipient is still required to file an income tax


return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as
amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale of ordinary assets. The inherent and substantial
differences between FWT and CWT disprove petitioners contention that ordinary assets are being lumped together with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the provisions of RA 8424 on the manner and time of filing
of the return, payment and assessment of income tax involving ordinary assets.75
The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital gains. As aforementioned, the mechanics of
the FWT are distinct from those of the CWT. The withholding agent/buyers act of collecting the tax at the time of the transaction by withholding the tax due from
the income payable is the essence of the withholding tax method of tax collection.
No Rule that Only Passive
Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable. According to petitioner, the whole of Section 57
governs the withholding of income tax on passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It follows that
Section 57(B) on CWT should also be limited to passive income:

SEC. 57. Withholding of Tax at Source.


(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the [Secretary] may promulgate, upon the recommendation of
the [CIR], requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)
(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be
withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR], require the withholding of a tax on the
items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate
of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the
taxpayer for the taxable year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive income. The BIR defines passive income
by stating what it is not:
if the income is generated in the active pursuit and performance of the corporations primary purposes, the same is not passive income76
It is income generated by the taxpayers assets. These assets can be in the form of real properties that return rental income, shares of stock in a corporation that earn
dividends or interest income received from savings.
On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to natural or juridical persons, residing in the Philippines."
There is no requirement that this income be passive income. If that were the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The former covers the kinds of passive income
enumerated therein and the latter encompasses any income other than those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and
57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section 57(B). RR 2-98 merely implements the law by
specifying what income is subject to CWT. It has been held that, where a statute does not require any particular procedure to be followed by an administrative
agency, the agency may adopt any reasonable method to carry out its functions.77 Similarly, considering that the law uses the general term "income," the Secretary
and CIR may specify the kinds of income the rules will apply to based on what is feasible. In addition, administrative rules and regulations ordinarily deserve to be
given weight and respect by the courts78 in view of the rule-making authority given to those who formulate them and their specific expertise in their respective
fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its members of their property without due process of
law because, in their line of business, gain is never assured by mere receipt of the selling price. As a result, the government is collecting tax from net income not
yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the taxable year. The seller will be able to claim a tax
refund if its net income is less than the taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the constitutional
guarantee of due process. More importantly, the due process requirement applies to the power to tax. 79 The CWT does not impose new taxes nor does it increase
taxes.80 It relates entirely to the method and time of payment.
Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to wait years and may even resort to litigation before
they are granted a refund.81 This argument is misleading. The practical problems encountered in claiming a tax refund do not affect the constitutionality and
validity of the CWT as a method of collecting the tax.1avvphi1
Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor wages, materials, cost of money and other expenses
which can then save the entity from having to obtain loans entailing considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which
add to the burden of the realty industry: huge investments and borrowings; long gestation period; sudden and unpredictable interest rate surges; continually
spiraling development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least 20 government agencies.82
Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners complaints are essentially matters of policy best addressed to
the executive and legislative branches of the government. Besides, the CWT is applied only on the amounts actually received or receivable by the real estate entity.
Sales on installment are taxed on a per-installment basis.83 Petitioners desire to utilize for its operational and capital expenses money earmarked for the payment
of taxes may be a practical business option but it is not a fundamental right which can be demanded from the court or from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being levied only on real estate enterprises.
Specifically, petitioner points out that manufacturing enterprises are not similarly imposed a CWT on their sales, even if their manner of doing business is not
much different from that of a real estate enterprise. Like a manufacturing concern, a real estate business is involved in a continuous process of production and it
incurs costs and expenditures on a regular basis. The only difference is that "goods" produced by the real estate business are house and lot units.84
Again, we disagree.
The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the same protection of laws which is enjoyed by
other persons or other classes in the same place and in like circumstances." 85 Stated differently, all persons belonging to the same class shall be taxed alike. It
follows that the guaranty of the equal protection of the laws is not violated by legislation based on a reasonable classification. Classification, to be valid, must (1)
rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing conditions only and (4) apply equally to all members of the
same class.86
The taxing power has the authority to make reasonable classifications for purposes of taxation.87 Inequalities which result from a singling out of one particular
class for taxation, or exemption, infringe no constitutional limitation.88 The real estate industry is, by itself, a class and can be validly treated differently from
other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what distinguishes the real estate business from
other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of

transactions involved. The income from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the parties to
comply with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal
and substantial amounts. To require the customers of manufacturing enterprises, at present, to withhold the taxes on each of their transactions with their tens or
hundreds of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other
capital goods yet these are not similarly subjected to the CWT.89 As already discussed, the Secretary may adopt any reasonable method to carry out its
functions.90Under Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate. The sales of manufacturers who have clients within the top
5,000 corporations, as specified by the BIR, are also subject to CWT for their transactions with said 5,000 corporations.91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not effect the regisration of any document transferring real
property unless a certification is issued by the CIR that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule except to
rely on its contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost exactly the same wording as Section
58(E) of RA 8424 and is unquestionably in accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source.
(E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds unless the
[CIR] or his duly authorized representative has certified that such transfer has been reported, and the capital gains or [CWT], if any, has been paid : xxxx
any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to understand is the income tax." 92 When a party questions the
constitutionality of an income tax measure, it has to contend not only with Einsteins observation but also with the vast and well-established jurisprudence in
support of the plenary powers of Congress to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the imposition of
MCIT and CWT is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
SO ORDERED.
RENATO C. CORONA
Associate Justice
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 196723

August 28, 2013

ASIAN CONSTRUCTION AND DEVELOPMENT CORPORATION, Petitioner,


vs.
SUMITOMO CORPORATION, Respondent.
x-----------------------x
G.R. No. 196728
SUMITOMO CORPORATION, Petitioner,
vs.
ASIAN CONSTRUCTION AND DEVELOPMENT CORPORATION, Respondent.
DECISION
PERLAS-BERNABE, J.:
Before the Court are consolidated petitions for review on certiorari which assail separate issuances of the Court of Appeals (C A) in relation to the partial and final
awards rendered by the Construction Industry Arbitration Commission's (CIAC) Arbitral Tribunal (Arbitral Tribunal) in CIAC Case No. 28-2008.
In particular, the petition in G.R. No. 1967231 filed by Asian Construction and Development Corporation (Asian Construction) seeks to annul and set aside the
CAs Resolutions dated July 23, 20102 and April 18, 20113 in CA-G.R. SP No. 112127 which dismissed its appeal from the Arbitral Tribunals Partial
Award4 dated December 15, 2009 (Partial Award) on the ground of forum shopping; while the petition in G.R. No. 1967285 filed by Sumitomo Corporation
(Sumitomo) seeks to annul and set aside the CAs Decision6 dated January 26, 2011 and Resolution7dated April 29, 2011 in CA-G.R. SP No. 113828 which
modified the Arbitral Tribunals Final Award8 dated March 17, 2010 (Final Award) by way of deleting the award of attorneys fees in Sumitomos favor.
The Facts
On March 15, 1996, Asian Construction entered into a Civil Work Agreement9 (Agreement) with Sumitomo for the construction of a portion of the Light Rail
Transit System along the Epifanio Delos Santos Avenue, specifically, from Shaw Boulevard, Mandaluyong City to Taft Avenue, Pasay City for a total cost of
US$19,982,000.00 (Project).10 The said Agreement provides that the "validity, interpretation, enforceability, and performance of the same shall be governed by
and construed in accordance with the law of the State of New York, U.S.A. (New York State Law), without regard to, or legal effect of, the conflicts of law
provisions thereof"11 and that any dispute, controversy or claim arising therefrom "shall be solely and finally settled by arbitration."12

In May 1996, Sumitomo paid Asian Construction the amount of US$2,997,300.00 as advance payment to be recovered in accordance with the terms of the
Agreement. Later, an additional advance payment of US$1,998,200.00 was made in October 1997.13 In all, Asian Construction received from Sumitomo the
amount of US$9,731,606.62, inclusive of the advance payments (before withholding tax of US$97,308.44).14
On September 1, 1998, Sumitomo informed Asian Construction that it was terminating the Agreement effective September 5, 1998 due to the following reasons:
(a) Asian Constructions failure "to perform and complete the civil work for Notice to Proceed issued construction areas within the duration of the Time Schedule
in the Contract Specification of Civil and Architectural Works (Station No. 8 to Station No. 13) x x x"; (b) Asian Constructions failure to "provide adequate
traffic management as required in the Scope of Works pursuant to subparagraph 5.2.4 of the Contract Specification of Civil and Architectural Work"; and (c) Asian
Constructions failure to "pay the suppliers of certain materials and equipment used in the construction of the Project in violation of paragraph 3.1.3, Article 3 of
the Agreement."15 In view of the foregoing, Sumitomo requested Asian Construction to "make the necessary arrangements for the proper turnover of the Project x
x x."16 Asian Construction, however, claimed that the accomplishments under Progress Billing No. (PB) 01817 dated June 10, 1998 and PB 01918 dated July 6,
1998, as well as other various claims, were still left unpaid.19 Hence, on December 22, 1998, it sent Sumitomo a letter,20 demanding payment of the total amount
of US$6,371,530.89. This was followed by several correspondences between the parties through 1999 to 2007 but no settlement was achieved.21
The Proceedings Before the Arbitral Tribunal
On September 2, 2008, Asian Construction filed a complaint22 with the CIAC, docketed as CIAC Case No. 28-2008, seeking payment for its alleged losses and
reimbursements amounting to US$9,501,413.13, plus attorneys fees in the amount of P2,000,000.00.23 As a matter of course, an Arbitral Tribunal was
constituted, with Alfredo F. Tadiar being designated as Chairman, and Salvador P. Castro and Jesse B. Grove as Members.24
For its part, Sumitomo filed a Motion to Dismiss,25 questioning the CIACs jurisdiction over the dispute on the ground that the arbitration should proceed in
accordance with the Commercial Arbitration Rules of Japan.26 However, the aforesaid motion was denied.27 As such, Sumitomo filed an Answer,28 reiterating
the CIACs alleged lack of jurisdiction and further asserting that the claim was already time-barred. It added that had Asian Construction discharged its obligations
under the Agreement to itemize and justify its claims, the same could have been amicably settled years ago. In this respect, it made a counterclaim for the
unutilized portion of the advance payments, attorneys fees and costs of litigation in the amount of at least P10,000,000.00.29
Subsequently, the parties signed a TOR,30 stipulating the admitted facts and defining the issues to be determined in the arbitration proceedings.
On December 15, 2009, the Arbitral Tribunal rendered the Partial Award31 which affirmed its jurisdiction over the dispute but held that the parties were bound by
their Agreement that the substantive New York State Law shall apply in the resolution of the issues.32 It proceeded to dismiss both the claims and counterclaims of
the parties on the ground that these had already prescribed under New York State Laws six-year statute of limitations 33 and ruled that, in any case, were it to
resolve the same on the merits, "it would not produce an affirmative recovery for the claimant."34
Aggrieved, Asian Construction filed before the CA, on January 5, 2010, a Rule 43 Petition for Review,35 docketed as CA-G.R. SP No. 112127 (First CA Petition),
seeking the reversal of the Partial Award.
Meanwhile, notwithstanding its dismissal of the claims and counterclaims, the Arbitral Tribunal further directed the parties to itemize their respective claims for
costs and attorneys fees and to submit factual proof and legal bases for their entitlement thereto.36 Pursuant to this directive, Sumitomo submitted evidence to
prove the costs it had incurred and paid as a result of the arbitration proceedings.37 Asian Construction, on the other hand, did not present any statement or
document to substantiate its claims but, instead, submitted an Opposition38 dated March 8, 2010 (opposition) to Sumitomos claim for costs. The Arbitral Tribunal
did not act upon the opposition because it was treated, in effect, as a motion for reconsideration which was prohibited under the CIAC Revised Rules of Procedure
Governing Construction Arbitration (CIAC Revised Rules).39
On March 17, 2010, the Arbitral Tribunal rendered the Final Award40 which granted Sumitomos claim for attorneys fees in the amount of US$200,000.00. It held
that while the filing of the arbitration suit cannot be regarded as "clearly unfounded" because of the two progress billings that were left unpaid, Asian
Constructions disregard of the Agreement to have the dispute resolved in accordance with New York State Law had forced Sumitomo to incur attorneys fees in
order to defend its interest.41 It further noted that if Asian Construction had accepted the settlement offered by Sumitomo, then, the arbitration proceedings would
have even been aborted.42On the other hand, a similar claim for attorneys fees made by Asian Construction was denied by reason of the latters failure to submit,
as directed, proof of its entitlement thereto.43 As to the matter of costs, the Arbitral Tribunal declared Sumitomo relieved from sharing pro-rata in the arbitration
costs and, consequently, directed Asian Construction to shoulder the same costs in full and reimburse Sumitomo the amount of P849,532.45. However, it ordered
Sumitomo to bear all the expenses related to the appointment of the foreign arbitrator considering that such service was secured upon its own initiative and without
the participation and consent of Asian Construction.44
Dissatisfied with the Arbitral Tribunals ruling, Asian Construction filed another Rule 43 Petition for Review45before the CA, on May 3, 2010, docketed as CAG.R. SP No. 113828 (Second CA Petition), this time, to set aside the Final Award. In this light, it claimed gross negligence and partiality on the part of the Arbitral
Tribunal and asserted, inter alia, that, apart from being a non-arbitrable issue, an award of attorneys fees would be premature since the prevailing party can only be
determined when the case is decided with finality. Moreover, it maintained that both claims of Asian Construction and the counterclaims of Sumitomo had already
been dismissed for being time-barred.46
The CA Ruling
On July 23, 2010, the CA rendered a Resolution47 (July 23, 2010 Resolution), dismissing Asian Constructions First CA Petition against the Partial Award on the
ground of forum-shopping, after it was shown that: (a) the aforesaid petition was filed while the arbitration case was still pending final resolution before the
Arbitral Tribunal; and (b) Asian Constructions opposition to Sumitomos claim for costs filed before the Arbitral Tribunal had, in fact, effectively sought for the
same relief and stated the same allegations as those in its First CA Petition. The CA also noted Asian Constructions premature resort to a petition for review
because what was sought to be nullified was not a final award, but only a partial one. The CA eventually denied Asian Constructions motion for reconsideration in
a Resolution48 dated April 18, 2011. Hence, Asian Constructions petition before the Court, docketed as G.R. No. 196723.
Meanwhile, the CA gave due course to Asian Constructions Second CA Petition assailing the Final Award and rendered a Decision 49 on January 26, 2011,
upholding the Arbitral Tribunals ruling except the award of attorneys fees in favor of Sumitomo. The CA held that the fact that Asian Construction initiated an
action or refused to compromise its claims cannot be considered unjustified or made in bad faith as to entitle Sumitomo to the aforesaid award. Consequently,
Sumitomo moved for reconsideration,50 asserting that Asian Constructions Second CA Petition should have instead been dismissed in its entirety considering
their Agreement that the Arbitral Tribunals decisions and awards would be final and non-appealable. However, in a Resolution 51 dated April 29, 2011, the CA
denied the motion for reconsideration. Thus, Sumitomos petition before the Court, docketed as G.R. No. 196728.
The Issues Before the Court
The essential issues for the Courts resolution are as follows: (a) in G.R. No. 196723, whether or not the CA erred in dismissing Asian Constructions First CA
Petition on the ground of forum shopping; and (b) in G.R. No. 196728, whether or not the CA erred in reviewing and modifying the Final Award which Sumitomo
insists to be final and unappealable.
The Courts Ruling

The petitions should be denied.


A. Dismissal of Asian
Constructions First CA
Petition; forum shopping.
Forum shopping is the act of a litigant who repetitively availed of several judicial remedies in different courts, simultaneously or successively, all substantially
founded on the same transactions and the same essential facts and circumstances, and all raising substantially the same issues, either pending in or already resolved
adversely by some other court, to increase his chances of obtaining a favorable decision if not in one court, then in another. More particularly, forum shopping can
be committed in three ways, namely: (a) by filing multiple cases based on the same cause of action and with the same prayer, the previous case not having been
resolved yet (where the ground for dismissal is litis pendentia); (b) by filing multiple cases based on the same cause of action and with the same prayer, the
previous case having been finally resolved (where the ground for dismissal is res judicata); and (c) by filing multiple cases based on the same cause of action but
with different prayers (splitting of causes of action, where the ground for dismissal is also either litis pendentia or res judicata). 52 Forum shopping is treated as an
act of malpractice and, in this accord, constitutes a ground for the summary dismissal of the actions involved. 53 To be sure, the rule against forum shopping seeks
to prevent the vexation brought upon the courts and the litigants by a party who asks different courts to rule on the same or related causes and grant the same or
substantially the same reliefs and in the process creates the possibility of conflicting decisions being rendered by the different fora upon the same issues.54
In this case, the Court finds that the CA committed no reversible error in dismissing Asian Constructions First CA Petition on the ground of forum shopping since
the relief sought (i.e., the reconsideration of the Partial Award) and the allegations stated therein are identical to its opposition to Sumitomos claim for costs filed
before the Arbitral Tribunal while CIAC Case No. 28-2008 was still pending. These circumstances clearly square with the first kind of forum shopping which
thereby impels the dismissal of the First CA Petition on the ground of litis pendentia.
On this score, it is apt to point out that Asian Constructions argument that it merely complied with the directive of the Arbitral Tribunal cannot be given any
credence since it (as well as Sumitomo) was only directed to submit evidence to prove the costs it had incurred and paid as a result of the arbitration proceedings.
However, at variance with the tribunals directive, Asian Construction, in its opposition to Sumitomos claim for costs, proceeded to seek the reversal of the Partial
Award in the same manner as its First CA Petition. It cannot, therefore, be doubted that it treaded the course of forum shopping, warranting the dismissal of the
aforesaid petition.
In any case, the Court observes that the First CA Petition remains dismissible since the CIAC Revised Rules provides for the resort to the remedy of a petition for
review only against a final arbitral award,55 and not a partial award, as in this case.
In fine, the Court upholds the CAs dismissal of Asian Constructions petition in CA-G.R. SP No. 112127 (First CA Petition) and based on this, denies its petition
in G.R. No. 196723.
B. Review and modification of the Final Award.
Sumitomo Corporation faults the CA for reviewing and modifying a final and non-appealable arbitral award and insists that the Asian Constructions Second CA
Petition should have been, instead, dismissed outright. It mainly argues that by entering into stipulations in the arbitration clause which provides that "the order
or award of the arbitrators will be the sole and exclusive remedy between the parties regarding any and all claims and counterclaims with respect to the matter of
the arbitrated dispute"56 and that "the order or award rendered in connection with an arbitration shall be final and binding upon the parties," 57 Asian Construction
effectively waived any and all appeals from the Arbitral Tribunals decision or award.
Sumitomos argument is untenable.
A brief exegesis on the development of the procedural rules governing CIAC cases clearly shows that a final award rendered by the Arbitral Tribunal is not
absolutely insulated from judicial review.
To begin, Executive Order No. (EO) 1008,58 which vests upon the CIAC original and exclusive jurisdiction over disputes arising from, or connected with,
contracts entered into by parties involved in construction in the Philippines, plainly states that the arbitral award "shall be final and inappealable except on
questions of law which shall be appealable to the Court."59 Later, however, the Court, in Revised Administrative Circular (RAC) No. 1-95,60 modified this rule,
directing that the appeals from the arbitral award of the CIAC be first brought to the CA on "questions of fact, law or mixed questions of fact and law." This
amendment was eventually transposed into the present CIAC Revised Rules which direct that "a petition for review from a final award may be taken by any of the
parties within fifteen (15) days from receipt thereof in accordance with the provisions of Rule 43 of the Rules of Court." 61 Notably, the current provision is in
harmony with the Courts pronouncement that "despite statutory provisions making the decisions of certain administrative agencies final, the Court still takes
cognizance of petitions showing want of jurisdiction, grave abuse of discretion, violation of due process, denial of substantial justice or erroneous interpretation of
the law" and that, in particular, "voluntary arbitrators, by the nature of their functions, act in a quasi-judicial capacity, such that their decisions are within the scope
of judicial review."62
In this case, the Court finds that the CA correctly reviewed and modified the Arbitral Tribunals Final Award insofar as the award of attorneys fees in favor of
Sumitomo is concerned since the same arose from an erroneous interpretation of the law.1wphi1
To elucidate, jurisprudence dictates that in the absence of a governing stipulation, attorneys fees may be awarded only in case the plaintiff's action or defendant's
stand is so untenable as to amount to gross and evident bad faith.63 This is embodied in Article 2208 of the Civil Code which states:
Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except:
xxxx
(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's64 plainly valid, just and demandable claim;
xxxx
In this case, the parties agreed that reasonable attorneys fees shall be paid by the defaulting party if it fails to perform any of its obligations under the Agreement
or by the party not prevailing, if any dispute concerning the meaning and interpretation thereto arises.65 However, since the parties respective claims under the
Agreement had already prescribed pursuant to New York State Law, considering as well that the dispute was not regarding the meaning or construction of any
provision under the Agreement,66 their stipulation on attorneys fees should remain inoperative. Therefore, discounting the application of the foregoing stipulation,
the Court proceeds to examine the matter under the lens of bad faith pursuant to the above-discussed rules on attorneys fees.
After a careful scrutiny of the records, the Court observes that there was no gross and evident bad faith on the part of Asian Construction in filing its complaint
against Sumitomo since it was merely seeking payment of its unpaid works done pursuant to the Agreement. Neither can its subsequent refusal to accept
Sumitomos offered compromise be classified as a badge of bad faith since it was within its right to either accept or reject the same owing to its contractual

nature.67 Verily, absent any other just or equitable reason to rule otherwise,68 these incidents are clearly off-tangent with a finding of gross and evident bad faith
which altogether negates Sumitomos entitlement to attorneys fees.
Hence, finding the CAs review of the Final Award and its consequent deletion of the award of attorneys fees to be proper, the Court similarly denies Sumitomos
petition in G.R. No. 196728.
WHEREFORE, the petitions are DENIED. The Resolutions dated July 23, 2010 and April 18, 2011 of the Court of Appeals in CA-G.R. SP No. 112127, as well as
its Decision dated January 26, 2011 and Resolution dated April 29, 2011 in CA-G.R. SP No. 113828 are hereby AFFIRMED.
SO ORDERED.
ESTELA
Associate Justice

M.

PERLAS-BERNABE

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 162175

June 28, 2010

MIGUEL J. OSSORIO PENSION FOUNDATION, INCORPORATED, Petitioner,


vs.
COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, Respondents.
DECISION
CARPIO, J.:
The Case
The Miguel J. Ossorio Pension Foundation, Incorporated (petitioner or MJOPFI) filed this Petition for Certiorari1with Prayer for the Issuance of a Temporary
Restraining Order and/or Writ of Preliminary Injunction to reverse the Court of Appeals (CA) Decision 2 dated 30 May 2003 in CA-G.R. SP No. 61829 as well as
the Resolution3 dated 7 November 2003 denying the Motion for Reconsideration. In the assailed decision, the CA affirmed the Court of Tax Appeals (CTA)
Decision4 dated 24 October 2000. The CTA denied petitioners claim for refund of withheld creditable tax of P3,037,500 arising from the sale of real property of
which petitioner claims to be a co-owner as trustee of the employees trust or retirement funds.
The Facts
Petitioner, a non-stock and non-profit corporation, was organized for the purpose of holding title to and administering the employees trust or retirement funds
(Employees Trust Fund) established for the benefit of the employees of Victorias Milling Company, Inc. (VMC). 5 Petitioner, as trustee, claims that the income
earned by the Employees Trust Fund is tax exempt under Section 53(b) of the National Internal Revenue Code (Tax Code).
Petitioner alleges that on 25 March 1992, petitioner decided to invest part of the Employees Trust Fund to purchase a lot6 in the Madrigal Business Park (MBP
lot) in Alabang, Muntinlupa. Petitioner bought the MBP lot through VMC.7 Petitioner alleges that its investment in the MBP lot came about upon the invitation of
VMC, which also purchased two lots. Petitioner claims that its share in the MBP lot is 49.59%. Petitioners investment manager, the Citytrust Banking Corporation
(Citytrust),8 in submitting its Portfolio Mix Analysis, regularly reported the Employees Trust Funds share in the MBP lot. 9 The MBP lot is covered by Transfer
Certificate of Title No. 183907 (TCT 183907) with VMC as the registered owner.10
Petitioner claims that since it needed funds to pay the retirement and pension benefits of VMC employees and to reimburse advances made by VMC, petitioners
Board of Trustees authorized the sale of its share in the MBP lot.11
On 14 March 1997, VMC negotiated the sale of the MBP lot with Metropolitan Bank and Trust Company, Inc. (Metrobank) for P81,675,000, but the
consummation of the sale was withheld.12 On 26 March 1997, VMC eventually sold the MBP lot to Metrobank. VMC, through its Vice President Rolando
Rodriguez and Assistant Vice President Teodorico Escober, signed the Deed of Absolute Sale as the sole vendor.
Metrobank, as withholding agent, paid the Bureau of Internal Revenue (BIR) P6,125,625 as withholding tax on the sale of real property.
Petitioner alleges that the parties who co-owned the MBP lot executed a notarized Memorandum of Agreement as to the proceeds of the sale, the pertinent
provisions of which state:13
2. The said parcels of land are actually co-owned by the following:
Block 4, Lot 1 Covered by TCT No. 183907
%

SQ.M.

AMOUNT

MJOPFI

49.59%

450.00

P 5,504,748.25

VMC

32.23%

351.02

3,578,294.70

VFC

18.18%

197.98

2,018,207.30

3. Since Lot 1 has been sold for P81,675,000.00 (gross of 7.5% withholding tax and 3% brokers commission, MJOPFIs share in the proceeds of the sale
is P40,500,000.00 (gross of 7.5% withholding tax and 3% brokers commission. However, MJO Pension Fund is indebted to VMC representing pension benefit
advances paid to retirees amounting to P21,425,141.54, thereby leaving a balance of P14,822,358.46 in favor of MJOPFI. Check for said amount
of P14,822,358.46 will therefore be issued to MJOPFI as its share in the proceeds of the sale of Lot 1. The check corresponding to said amount will be deposited
with MJOPFIs account with BPI Asset Management & Trust Group which will then be invested by it in the usual course of its administration of MJOPFI funds.
Petitioner claims that it is a co-owner of the MBP lot as trustee of the Employees Trust Fund, based on the notarized Memorandum of Agreement presented before
the appellate courts. Petitioner asserts that VMC has confirmed that petitioner, as trustee of the Employees Trust Fund, is VMCs co-owner of the MBP lot.
Petitioner maintains that its ownership of the MBP lot is supported by the excerpts of the minutes and the resolutions of petitioners Board Meetings. Petitioner
further contends that there is no dispute that the Employees Trust Fund is exempt from income tax. Since petitioner, as trustee, purchased 49.59% of the MBP lot

using funds of the Employees Trust Fund, petitioner asserts that the Employees Trust Fund's 49.59% share in the income tax paid (or P3,037,697.40 rounded off
to P3,037,500) should be refunded.14
Petitioner maintains that the tax exemption of the Employees Trust Fund rendered the payment of P3,037,500 as illegal or erroneous. On 5 May 1997, petitioner
filed a claim for tax refund.15
On 14 August 1997, the BIR, through its Revenue District Officer, wrote petitioner stating that under Section 26 of the Tax Code, petitioner is not exempt from tax
on its income from the sale of real property. The BIR asked petitioner to submit documents to prove its co-ownership of the MBP lot and its exemption from tax.16
On 2 September 1997, petitioner replied that the applicable provision granting its claim for tax exemption is not Section 26 but Section 53(b) of the Tax Code.
Petitioner claims that its co-ownership of the MBP lot is evidenced by Board Resolution Nos. 92-34 and 96-46 and the memoranda of agreement among petitioner,
VMC and its subsidiaries.17
Since the BIR failed to act on petitioners claim for refund, petitioner elevated its claim to the Commissioner of Internal Revenue (CIR) on 26 October 1998. The
CIR did not act on petitioners claim for refund. Hence, petitioner filed a petition for tax refund before the CTA. On 24 October 2000, the CTA rendered a decision
denying the petition.18
On 22 November 2000, petitioner filed its Petition for Review before the Court of Appeals. On 20 May 2003, the CA rendered a decision denying the appeal. The
CA also denied petitioners Motion for Reconsideration.19
Aggrieved by the appellate courts Decision, petitioner elevated the case before this Court.
The Ruling of the Court of Tax Appeals
The CTA held that under Section 53(b)20 [now Section 60(b)] of the Tax Code, it is not petitioner that is entitled to exemption from income tax but the income or
earnings of the Employees Trust Fund. The CTA stated that petitioner is not the pension trust itself but it is a separate and distinct entity whose function is to
administer the pension plan for some VMC employees.21 The CTA, after evaluating the evidence adduced by the parties, ruled that petitioner is not a party in
interest.
To prove its co-ownership over the MBP lot, petitioner presented the following documents:
a. Secretarys Certificate showing how the purchase and eventual sale of the MBP lot came about.
b. Memoranda of Agreement showing various details:
i. That the MBP lot was co-owned by VMC and petitioner on a 50/50 basis;
ii. That VMC held the property in trust for North Legaspi Land Development Corporation, North Negros Marketing Co., Inc., Victorias
Insurance Factors Corporation, Victorias Science and Technical Foundation, Inc. and Canetown Development Corporation.
iii. That the previous agreement (ii) was cancelled and it showed that the MBP lot was co-owned by petitioner, VMC and Victorias Insurance
Factors Corporation (VFC).22
The CTA ruled that these pieces of evidence are self-serving and cannot by themselves prove petitioners co-ownership of the MBP lot when the TCT, the Deed of
Absolute Sale, and the Monthly Remittance Return of Income Taxes Withheld (Remittance Return) disclose otherwise. The CTA further ruled that petitioner failed
to present any evidence to prove that the money used to purchase the MBP lot came from the Employees' Trust Fund.23
The CTA concluded that petitioner is estopped from claiming a tax exemption. The CTA pointed out that VMC has led the government to believe that it is the sole
owner of the MBP lot through its execution of the Deeds of Absolute Sale both during the purchase and subsequent sale of the MBP lot and through the registration
of the MBP lot in VMCs name. Consequently, the tax was also paid in VMCs name alone. The CTA stated that petitioner may not now claim a refund of a portion
of the tax paid by the mere expediency of presenting Secretarys Certificates and memoranda of agreement in order to prove its ownership. These documents are
self-serving; hence, these documents merit very little weight.24
The Ruling of the Court of Appeals
The CA declared that the findings of the CTA involved three types of documentary evidence that petitioner presented to prove its contention that it purchased
49.59% of the MBP lot with funds from the Employees Trust Fund: (1) the memoranda of agreement executed by petitioner and other VMC subsidiaries; (2)
Secretarys Certificates containing excerpts of the minutes of meetings conducted by the respective boards of directors or trustees of VMC and petitioner; (3)
Certified True Copies of the Portfolio Mix Analysis issued by Citytrust regarding the investment of P5,504,748.25 in Madrigal Business Park I for the years 1994
to 1997.25
The CA agreed with the CTA that these pieces of documentary evidence submitted by petitioner are largely self-serving and can be contrived easily. The CA ruled
that these documents failed to show that the funds used to purchase the MBP lot came from the Employees Trust Fund. The CA explained, thus:
We are constrained to echo the findings of the Court of Tax Appeals in regard to the failure of the petitioner to ensure that legal documents pertaining to its
investments, e.g. title to the subject property, were really in its name, considering its awareness of the resulting tax benefit that such foresight or providence would
produce; hence, genuine efforts towards that end should have been exerted, this notwithstanding the alleged difficulty of procuring a title under the names of all the
co-owners. Indeed, we are unable to understand why petitioner would allow the title of the property to be placed solely in the name of petitioner's alleged coowner, i.e. the VMC, although it allegedly owned a much bigger (nearly half), portion thereof. Withal, petitioner failed to ensure a "fix" so to speak, on its
investment, and we are not impressed by the documents which the petitioner presented, as the same apparently allowed "mobility" of the subject real estate assets
between or among the petitioner, the VMC and the latter's subsidiaries. Given the fact that the subject parcel of land was registered and sold under the name solely
of VMC, even as payment of taxes was also made only under its name, we cannot but concur with the finding of the Court of Tax Appeals that petitioner's claim for
refund of withheld creditable tax is bereft of solid juridical basis.26
The Issues
The issues presented are:
1. Whether petitioner or the Employees Trust Fund is estopped from claiming that the Employees Trust Fund is the beneficial owner of 49.59% of the
MBP lot and that VMC merely held 49.59% of the MBP lot in trust for the Employees Trust Fund.
2. If petitioner or the Employees Trust Fund is not estopped, whether they have sufficiently established that the Employees Trust Fund is the beneficial
owner of 49.59% of the MBP lot, and thus entitled to tax exemption for its share in the proceeds from the sale of the MBP lot.
The Ruling of the Court

We grant the petition.


The law expressly allows a co-owner (first co-owner) of a parcel of land to register his proportionate share in the name of his co-owner (second co-owner) in
whose name the entire land is registered. The second co-owner serves as a legal trustee of the first co-owner insofar as the proportionate share of the first co-owner
is concerned. The first co-owner remains the owner of his proportionate share and not the second co-owner in whose name the entire land is registered. Article
1452 of the Civil Code provides:
Art. 1452. If two or more persons agree to purchase a property and by common consent the legal title is taken in the name of one of them for the benefit of all, a
trust is created by force of law in favor of the others in proportion to the interest of each. (Emphasis supplied)
For Article 1452 to apply, all that a co-owner needs to show is that there is "common consent" among the purchasing co-owners to put the legal title to the
purchased property in the name of one co-owner for the benefit of all. Once this "common consent" is shown, "a trust is created by force of law." The BIR has no
option but to recognize such legal trust as well as the beneficial ownership of the real owners because the trust is created by force of law. The fact that the title is
registered solely in the name of one person is not conclusive that he alone owns the property.
Thus, this case turns on whether petitioner can sufficiently establish that petitioner, as trustee of the Employees Trust Fund, has a common agreement with VMC
and VFC that petitioner, VMC and VFC shall jointly purchase the MBP lot and put the title to the MBP lot in the name of VMC for the benefit petitioner, VMC and
VFC.
We rule that petitioner, as trustee of the Employees Trust Fund, has more than sufficiently established that it has an agreement with VMC and VFC to purchase
jointly the MBP lot and to register the MBP lot solely in the name of VMC for the benefit of petitioner, VMC and VFC.
Factual findings of the CTA will be reviewed
when judgment is based on a misapprehension of facts.
Generally, the factual findings of the CTA, a special court exercising expertise on the subject of tax, are regarded as final, binding and conclusive upon this Court,
especially if these are substantially similar to the findings of the CA which is normally the final arbiter of questions of fact.27 However, there are recognized
exceptions to this rule,28 such as when the judgment is based on a misapprehension of facts.
Petitioner contends that the CA erred in evaluating the documents as self-serving instead of considering them as truthful and genuine because they are public
documents duly notarized by a Notary Public and presumed to be regular unless the contrary appears. Petitioner explains that the CA erred in doubting the
authenticity and genuineness of the three memoranda of agreement presented as evidence. Petitioner submits that there is nothing wrong in the execution of the
three memoranda of agreement by the parties. Petitioner points out that VMC authorized petitioner to administer its Employees Trust Fund which is basically
funded by donation from its founder, Miguel J. Ossorio, with his shares of stocks and share in VMC's profits.29
Petitioner argues that the Citytrust report reflecting petitioners investment in the MBP lot is concrete proof that money of the Employees Trust Funds was used to
purchase the MBP lot. In fact, the CIR did not dispute the authenticity and existence of this documentary evidence. Further, it would be unlikely for Citytrust to
issue a certified copy of the Portfolio Mix Analysis stating that petitioner invested in the MBP lot if it were not true.30
Petitioner claims that substantial evidence is all that is required to prove petitioners co-ownership and all the pieces of evidence have overwhelmingly proved that
petitioner is a co-owner of the MBP lot to the extent of 49.59% of the MBP lot. Petitioner explains:
Thus, how the parties became co-owners was shown by the excerpts of the minutes and the resolutions of the Board of Trustees of the petitioner and those of
VMC. All these documents showed that as far as March 1992, petitioner already expressed intention to be co-owner of the said property. It then decided to invest
the retirement funds to buy the said property and culminated in it owning 49.59% thereof. When it was sold to Metrobank, petitioner received its share in the
proceeds from the sale thereof. The excerpts and resolutions of the parties' respective Board of Directors were certified under oath by their respective Corporate
Secretaries at the time. The corporate certifications are accorded verity by law and accepted as prima facie evidence of what took place in the board meetings
because the corporate secretary is, for the time being, the board itself.31
Petitioner, citing Article 1452 of the Civil Code, claims that even if VMC registered the land solely in its name, it does not make VMC the absolute owner of the
whole property or deprive petitioner of its rights as a co-owner.32Petitioner argues that under the Torrens system, the issuance of a TCT does not create or vest a
title and it has never been recognized as a mode of acquiring ownership.33
The issues of whether petitioner or the Employees Trust Fund is estopped from claiming 49.59% ownership in the MBP lot, whether the documents presented by
petitioner are self-serving, and whether petitioner has proven its exemption from tax, are all questions of fact which could only be resolved after reviewing,
examining and evaluating the probative value of the evidence presented. The CTA ruled that the documents presented by petitioner cannot prove its co-ownership
over the MBP lot especially that the TCT, Deed of Absolute Sale and the Remittance Return disclosed that VMC is the sole owner and taxpayer.
However, the appellate courts failed to consider the genuineness and due execution of the notarized Memorandum of Agreement acknowledging petitioners
ownership of the MBP lot which provides:
2. The said parcels of land are actually co-owned by the following:
Block 4, Lot 1 Covered by TCT No. 183907
%

SQ.M.

AMOUNT

MJOPFI

49.59%

450.00

P 5,504,748.25

VMC

32.23%

351.02

3,578,294.70

VFC

18.18%

197.98

2,018,207.30

Thus, there is a "common consent" or agreement among petitioner, VMC and VFC to co-own the MBP lot in the proportion specified in the notarized
Memorandum of Agreement.
In Cuizon v. Remoto,34 we held:
Documents acknowledged before notaries public are public documents and public documents are admissible in evidence without necessity of preliminary proof as
to their authenticity and due execution. They have in their favor the presumption of regularity, and to contradict the same, there must be evidence that is clear,
convincing and more than merely preponderant.
The BIR failed to present any clear and convincing evidence to prove that the notarized Memorandum of Agreement is fictitious or has no legal effect. Likewise,
VMC, the registered owner, did not repudiate petitioners share in the MBP lot. Further, Citytrust, a reputable banking institution, has prepared a Portfolio Mix

Analysis for the years 1994 to 1997 showing that petitioner invested P5,504,748.25 in the MBP lot. Absent any proof that the Citytrust bank records have been
tampered or falsified, and the BIR has presented none, the Portfolio Mix Analysis should be given probative value.
The BIR argues that under the Torrens system, a third person dealing with registered property need not go beyond the TCT and since the registered owner is VMC,
petitioner is estopped from claiming ownership of the MBP lot. This argument is grossly erroneous. The trustor-beneficiary is not estopped from proving its
ownership over the property held in trust by the trustee when the purpose is not to contest the disposition or encumbrance of the property in favor of an innocent
third-party purchaser for value. The BIR, not being a buyer or claimant to any interest in the MBP lot, has not relied on the face of the title of the MBP lot to
acquire any interest in the lot. There is no basis for the BIR to claim that petitioner is estopped from proving that it co-owns, as trustee of the Employees Trust
Fund, the MBP lot. Article 1452 of the Civil Code recognizes the lawful ownership of the trustor-beneficiary over the property registered in the name of the trustee.
Certainly, the Torrens system was not established to foreclose a trustor or beneficiary from proving its ownership of a property titled in the name of another person
when the rights of an innocent purchaser or lien-holder are not involved. More so, when such other person, as in the present case, admits its being a mere trustee of
the trustor or beneficiary.
The registration of a land under the Torrens system does not create or vest title, because registration is not one of the modes of acquiring ownership. A TCT is
merely an evidence of ownership over a particular property and its issuance in favor of a particular person does not foreclose the possibility that the property may
be co-owned by persons not named in the certificate, or that it may be held in trust for another person by the registered owner.35
No particular words are required for the creation of a trust, it being sufficient that a trust is clearly intended.36 It is immaterial whether or not the trustor and the
trustee know that the relationship which they intend to create is called a trust, and whether or not the parties know the precise characteristic of the relationship
which is called a trust because what is important is whether the parties manifested an intention to create the kind of relationship which in law is known as a trust.37
The fact that the TCT, Deed of Absolute Sale and the Remittance Return were in VMCs name does not forestall the possibility that the property is owned by
another entity because Article 1452 of the Civil Code expressly authorizes a person to purchase a property with his own money and to take conveyance in
the name of another.
In Tigno v. Court of Appeals, the Court explained, thus:
An implied trust arises where a person purchases land with his own money and takes conveyance thereof in the name of another. In such a case, the property is held
on resulting trust in favor of the one furnishing the consideration for the transfer, unless a different intention or understanding appears. The trust which results
under such circumstances does not arise from a contract or an agreement of the parties, but from the facts and circumstances; that is to say, the trust results because
of equity and it arises by implication or operation of law. 38
In this case, the notarized Memorandum of Agreement and the certified true copies of the Portfolio Mix Analysis prepared by Citytrust clearly prove that petitioner
invested P5,504,748.25, using funds of the Employees' Trust Fund, to purchase the MBP lot. Since the MBP lot was registered in VMCs name only, a resulting
trust is created by operation of law. A resulting trust is based on the equitable doctrine that valuable consideration and not legal title determines the equitable
interest and is presumed to have been contemplated by the parties.39Based on this resulting trust, the Employees Trust Fund is considered the beneficial co-owner
of the MBP lot.
Petitioner has sufficiently proven that it had a "common consent" or agreement with VMC and VFC to jointly purchase the MBP lot. The absence of petitioners
name in the TCT does not prevent petitioner from claiming before the BIR that the Employees Trust Fund is the beneficial owner of 49.59% of the MBP lot and
that VMC merely holds 49.59% of the MBP lot in trust, through petitioner, for the benefit of the Employees Trust Fund.
The BIR has acknowledged that the owner of a land can validly place the title to the land in the name of another person. In BIR Ruling [DA-(I-012) 190-09] dated
16 April 2009, a certain Amelia Segarra purchased a parcel of land and registered it in the names of Armin Segarra and Amelito Segarra as trustees on the condition
that upon demand by Amelia Segarra, the trustees would transfer the land in favor of their sister, Arleen May Segarra-Guevara. The BIR ruled that an implied trust
is deemed created by law and the transfer of the land to the beneficiary is not subject to capital gains tax or creditable withholding tax.
Income from Employees Trust Fund is Exempt from Income Tax
Petitioner claims that the Employees Trust Fund is exempt from the payment of income tax. Petitioner further claims that as trustee, it acts for the Employees
Trust Fund, and can file the claim for refund. As trustee, petitioner considers itself as the entity that is entitled to file a claim for refund of taxes erroneously paid in
the sale of the MBP lot.40
The Office of the Solicitor General argues that the cardinal rule in taxation is that tax exemptions are highly disfavored and whoever claims a tax exemption must
justify his right by the clearest grant of law. Tax exemption cannot arise by implication and any doubt whether the exemption exists is strictly construed against the
taxpayer.41 Further, the findings of the CTA, which were affirmed by the CA, should be given respect and weight in the absence of abuse or improvident exercise
of authority.421avvphi1
Section 53(b) and now Section 60(b) of the Tax Code provides:
SEC. 60. Imposition of Tax. (A) Application of Tax. - x x x
(B) Exception. - The tax imposed by this Title shall not apply to employees trust which forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the
purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under
the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the
corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his
employees: Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to
the extent that it exceeds the amount contributed by such employee or distributee.
Petitioners Articles of Incorporation state the purpose for which the corporation was formed:
Primary Purpose
To hold legal title to, control, invest and administer in the manner provided, pursuant to applicable rules and conditions as established, and in the interest and for
the benefit of its beneficiaries and/or participants, the private pension plan as established for certain employees of Victorias Milling Company, Inc., and
other pension plans of Victorias Milling Company affiliates and/or subsidiaries, the pension funds and assets, as well as accruals, additions and increments
thereto, and such amounts as may be set aside or accumulated for the benefit of the participants of said pension plans; and in furtherance of the foregoing and as
may be incidental thereto.43 (Emphasis supplied)

Petitioner is a corporation that was formed to administer the Employees' Trust Fund. Petitioner invested P5,504,748.25 of the funds of the Employees' Trust Fund to
purchase the MBP lot. When the MBP lot was sold, the gross income of the Employees Trust Fund from the sale of the MBP lot was P40,500,000. The 7.5%
withholding tax of P3,037,500 and brokers commission were deducted from the proceeds. In Commissioner of Internal Revenue v. Court of Appeals,44 the Court
explained the rationale for the tax-exemption privilege of income derived from employees trusts:
It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those earnings would result in a diminution of
accumulated income and reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul of the very intendment of the law.
In Miguel J. Ossorio Pension Foundation, Inc. v. Commissioner of Internal Revenue,45 the CTA held that petitioner is entitled to a refund of withholding taxes
paid on interest income from direct loans made by the Employees' Trust Fund since such interest income is exempt from tax. The CTA, in recognizing petitioners
entitlement for tax exemption, explained:
In or about 1968, Victorias Milling Co., Inc. established a retirement or pension plan for its employees and those of its subsidiary companies pursuant to a 22-page
plan. Pursuant to said pension plan, Victorias Milling Co., Inc. makes a (sic) regular financial contributions to the employee trust for the purpose of distributing or
paying to said employees, the earnings and principal of the funds accumulated by the trust in accordance with said plan. Under the plan, it is imposable, at any time
prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be used for, or diverted to, purposes other
than for the exclusive benefit of said employees. Moreover, upon the termination of the plan, any remaining assets will be applied for the benefit of all employees
and their beneficiaries entitled thereto in proportion to the amount allocated for their respective benefits as provided in said plan.
The petitioner and Victorias Milling Co., Inc., on January 22, 1970, entered into a Memorandum of Understanding, whereby they agreed that petitioner would
administer the pension plan funds and assets, as assigned and transferred to it in trust, as well as all amounts that may from time to time be set aside by Victorias
Milling Co., Inc. "For the benefit of the Pension Plan, said administration is to be strictly adhered to pursuant to the rules and regulations of the Pension Plan and
of the Articles of Incorporation and By Laws" of petitioner.
The pension plan was thereafter submitted to the Bureau of Internal Revenue for registration and for a ruling as to whether its income or earnings are exempt from
income tax pursuant to Rep. Act 4917, in relation to Sec. 56(b), now Sec. 54(b), of the Tax Code.
In a letter dated January 18, 1974 addressed to Victorias Milling Co., Inc., the Bureau of Internal Revenue ruled that "the income of the trust fund of your
retirement benefit plan is exempt from income tax, pursuant to Rep. Act 4917 in relation to Section 56(b) of the Tax Code."
In accordance with petitioners Articles of Incorporation (Annex A), petitioner would "hold legal title to, control, invest and administer, in the manner provided,
pursuant to applicable rules and conditions as established, and in the interest and for the benefit of its beneficiaries and/or participants, the private pension
plan as established for certain employees of Victorias Milling Co., Inc. and other pension plans of Victorias Milling Co. affiliates and/or subsidiaries, the
pension funds and assets, as well as the accruals, additions and increments thereto, and such amounts as may be set aside or accumulated of said pension
plans. Moreover, pursuant to the same Articles of Incorporations, petitioner is empowered to "settle, compromise or submit to arbitration, any claims, debts or
damages due or owing to or from pension funds and assets and other funds and assets of the corporation, to commence or defend suits or legal proceedings
and to represent said funds and assets in all suits or legal proceedings."
Petitioner, through its investment manager, the City Trust Banking Corporation, has invested the funds of the employee trust in treasury bills, Central
Bank bills, direct lending, etc. so as to generate income or earnings for the benefit of the employees-beneficiaries of the pension plan. Prior to the effectivity
of Presidential Decree No. 1959 on October 15, 1984, respondent did not subject said income or earning of the employee trust to income tax because they were
exempt from income tax pursuant to Sec. 56(b), now Sec. 54(b) of the Tax Code and the BIR Ruling dated January 18, 1984 (Annex D) . (Boldfacing supplied;
italicization in the original)
xxx
It asserted that the pension plan in question was previously submitted to the Bureau of Internal Revenue for a ruling as to whether the income or earnings of the
retirement funds of said plan are exempt from income tax and in a letter dated January 18,1984, the Bureau ruled that the earnings of the trust funds of the
pension plan are exempt from income tax under Sec. 56(b) of the Tax Code. (Emphasis supplied)
"A close review of the provisions of the plan and trust instrument disclose that in reality the corpus and income of the trust fund are not at no time used for, or
diverted to, any purpose other than for the exclusive benefit of the plan beneficiaries. This fact was likewise confirmed after verification of the plan operations by
the Revenue District No. 63 of the Revenue Region No. 14, Bacolod City. Section X also confirms this fact by providing that if any assets remain after satisfaction
of the requirements of all the above clauses, such remaining assets will be applied for the benefits of all persons included in such classes in proportion to the
amounts allocated for their respective benefits pursuant to the foregoing priorities.
"In view of all the foregoing, this Office is of the opinion, as it hereby holds, that the income of the trust fund of your retirement benefit plan is exempt from
income tax pursuant to Republic Act 4917 in relation to Section 56(b) of the Tax Code. (Annex "D" of Petition)
This CTA decision, which was affirmed by the CA in a decision dated 20 January 1993, became final and executory on 3 August 1993.
The tax-exempt character of petitioners Employees' Trust Fund is not at issue in this case. The tax-exempt character of the Employees' Trust Fund has long been
settled. It is also settled that petitioner exists for the purpose of holding title to, and administering, the tax-exempt Employees Trust Fund established for the
benefit of VMCs employees. As such, petitioner has the personality to claim tax refunds due the Employees' Trust Fund.
In Citytrust Banking Corporation as Trustee and Investment Manager of Various Retirement Funds v. Commissioner of Internal Revenue,46 the CTA granted
Citytrusts claim for refund on withholding taxes paid on the investments made by Citytrust in behalf of the trust funds it manages, including petitioner.47 Thus:
In resolving the second issue, we note that the same is not a case of first impression. Indeed, the petitioner is correct in its adherence to the clear ruling laid by the
Supreme Court way back in 1992 in the case ofCommissioner of Internal Revenue vs. The Honorable Court of Appeals, The Court of Tax Appeals and GCL
Retirement Plan, 207 SCRA 487 at page 496, supra, wherein it was succinctly held:
xxx
There can be no denying either that the final withholding tax is collected from income in respect of which employees trusts are declared exempt (Sec. 56(b), now
53(b), Tax Code). The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite
the collection of income taxes by requiring its payment at the source. If an employees trust like the GCL enjoys a tax-exempt status from income, we see no logic
in withholding a certain percentage of that income which it is not supposed to pay in the first place.
xxx
Similarly, the income of the trust funds involved herein is exempt from the payment of final withholding taxes.

This CTA decision became final and executory when the CIR failed to file a Petition for Review within the extension granted by the CA.
Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a ruling exempting it from the payment of withholding tax on the sale of the land by
various BIR-approved trustees and tax-exempt private employees' retirement benefit trust funds48 represented by Citytrust. The BIR ruled that the private
employees benefit trust funds, which included petitioner, have met the requirements of the law and the regulations and therefore qualify as reasonable retirement
benefit plans within the contemplation of Republic Act No. 4917 (now Sec. 28(b)(7)(A), Tax Code). The income from the trust fund investments is therefore
exempt from the payment of income tax and consequently from the payment of the creditable withholding tax on the sale of their real property.49
Thus, the documents issued and certified by Citytrust showing that money from the Employees Trust Fund was invested in the MBP lot cannot simply be brushed
aside by the BIR as self-serving, in the light of previous cases holding that Citytrust was indeed handling the money of the Employees Trust Fund. These
documents, together with the notarized Memorandum of Agreement, clearly establish that petitioner, on behalf of the Employees Trust Fund, indeed invested in
the purchase of the MBP lot. Thus, the Employees' Trust Fund owns 49.59% of the MBP lot.1avvphi1
Since petitioner has proven that the income from the sale of the MBP lot came from an investment by the Employees' Trust Fund, petitioner, as trustee of the
Employees Trust Fund, is entitled to claim the tax refund ofP3,037,500 which was erroneously paid in the sale of the MBP lot.
Wherefore, we GRANT the petition and SET ASIDE the Decision of 30 May 2003 of the Court of Appeals in CA-G.R. SP No. 61829. Respondent Commissioner
of Internal Revenue is directed to refund petitioner Miguel J. Ossorio Pension Foundation, Incorporated, as trustee of the Employees Trust Fund, the amount
of P3,037,500, representing income tax erroneously paid.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
SPECIAL SECOND DIVISION
G.R. No. 171586

January 25, 2010

NATIONAL POWER CORPORATION, Petitioner,


vs.
PROVINCE OF QUEZON and MUNICIPALITY OF PAGBILAO, Respondent.
RESOLUTION
BRION, J.:
The petitioner National Power Corporation (Napocor) filed the present motion for reconsideration1 of the Courts Decision of July 15, 2009, in which we denied
Napocors claimed real property tax exemptions. For the resolution of the motion, we deem it proper to provide first a background of the case.
BACKGROUND FACTS
The Province of Quezon assessed Mirant Pagbilao Corporation (Mirant) for unpaid real property taxes in the amount of P1.5 Billion for the machineries located in
its power plant in Pagbilao, Quezon. Napocor, which entered into a Build-Operate-Transfer (BOT) Agreement (entitled Energy Conversion Agreement) with
Mirant, was furnished a copy of the tax assessment.
Napocor (nota bene, not Mirant) protested the assessment before the Local Board of Assessment Appeals (LBAA), claiming entitlement to the tax exemptions
provided under Section 234 of the Local Government Code (LGC), which states:
Section 234. Exemptions from Real Property Tax. The following are exempted from payment of the real property tax:
xxxx
(c) All machineries and equipment that are actually, directly, and exclusively used by local water districts and government-owned or controlled corporations
engaged in the supply and distribution of water and/or generation and transmission of electric power;
xxxx
(e) Machinery and equipment used for pollution control and environmental protection.
xxxx
Assuming that it cannot claim the above tax exemptions, Napocor argued that it is entitled to certain tax privileges, namely:
a. the lower assessment level of 10% under Section 218(d) of the LGC for government-owned and controlled corporations engaged in the generation and
transmission of electric power, instead of the 80% assessment level for commercial properties imposed in the assessment letter; and
b. an allowance for depreciation of the subject machineries under Section 225 of the LGC.
In the Courts Decision of July 15, 2009, we ruled that Napocor is not entitled to any of these claimed tax exemptions and privileges on the basis primarily of the
defective protest filed by the Napocor. We found that Napocor did not file a valid protest against the realty tax assessment because it did not possess the requisite
legal standing. When a taxpayer fails to question the assessment before the LBAA, the assessment becomes final, executory, and demandable, precluding the
taxpayer from questioning the correctness of the assessment or from invoking any defense that would reopen the question of its liability on the merits.2
Under Section 226 of the LGC,3 any owner or person having legal interest in the property may appeal an assessment for real property taxes to the LBAA. Since
Section 250 adopts the same language in enumerating who may pay the tax, we equated those who are liable to pay the tax to the same entities who may protest the
tax assessment. A person legally burdened with the obligation to pay for the tax imposed on the property has the legal interest in the property and the personality to
protest the tax assessment.

To prove that it had legal interest in the taxed machineries, Napocor relied on:.
1. the stipulation in the BOT Agreement that authorized the transfer of ownership to Napocor after 25 years;
2. its authority to control and supervise the construction and operation of the power plant; and
3. its obligation to pay for all taxes that may be incurred, as provided in the BOT Agreement.
Napocor posited that these indicated that Mirant only possessed naked title to the machineries.
We denied the first argument by ruling that legal interest should be one that is actual and material, direct and immediate, not simply contingent or expectant. 4 We
disproved Napocors claim of control and supervision under the second argument after reading the full terms of the BOT Agreement, which, contrary to Napocors
claims, granted Mirant substantial power in the control and supervision of the power plants construction and operation.5
For the third argument, we relied on the Courts rulings in Baguio v. Busuego6 and Lim v. Manila.7 In these cases, the Court essentially declared that contractual
assumption of tax liability alone is insufficient to make one liable for taxes. The contractual assumption of tax liability must be supplemented by an interest that the
party assuming the liability had on the property; the person from whom payment is sought must have also acquired the beneficial use of the property taxed. In other
words, he must have the use and possession of the property an element that was missing in Napocors case.
We further stated that the tax liability must be a liability that arises from law, which the local government unit can rightfully and successfully enforce, not the
contractual liability that is enforceable only between the parties to the contract. In the present case, the Province of Quezon is a third party to the BOT Agreement
and could thus not exact payment from Napocor without violating the principle of relativity of contracts. 8 Corollarily, for reasons of fairness, the local government
units cannot be compelled to recognize the protest of a tax assessment from Napocor, an entity against whom it cannot enforce the tax liability.
At any rate, even if the Court were to brush aside the issue of legal interest to protest, Napocor could still not successfully claim exemption under Section 234 (c)
of the LGC because to be entitled to the exemption under that provision, there must be actual, direct, and exclusive use of machineries. Napocor failed to satisfy
these requirements.
THE MOTION FOR RECONSIDERATION
Although Napocor insists that it is entitled to the tax exemptions and privileges claimed, the primary issue for the Court to resolve, however, is to determine
whether Napocor has sufficient legal interest to protest the tax assessment because without the requisite interest, the tax assessment stands, and no claim of
exemption or privilege can prevail.
Section 226 of the LGC, as mentioned, limits the right to appeal the local assessors action to the owner or the person having legal interest in the property. Napocor
posits that it is the beneficial owner of the subject machineries, with Mirant retaining merely a naked title to secure certain obligations. Thus, it argues that the BOT
Agreement is a mere financing agreement and is similar to the arrangement authorized under Article 1503 of the Civil Code, which declares:
Art. 1503. When there is a contract of sale of specific goods, the seller may, by the terms of the contract, reserve the right of possession or ownership in the goods
until certain conditions have been fulfilled. The right of possession or ownership may be thus reserved notwithstanding the delivery of the goods to the buyer or to
a carrier or other bailee for the purpose of transmission to the buyer.
Where goods are shipped, and by the bill of lading the goods are deliverable to the seller or his agent, or to the order of the seller or of his agent, the seller thereby
reserves the ownership in the goods. But, if except for the form of the bill of lading, the ownership would have passed to the buyer on shipment of the goods, the
seller's property in the goods shall be deemed to be only for the purpose of securing performance by the buyer of his obligations under the contract.
xxxx
Pursuant to this arrangement, Mirants ownership over the subject machineries is merely a security interest, given only for the purpose of ensuring the performance
of Napocors obligations.
Napocor additionally contends that its contractual assumption liability (through the BOT Agreement) for all taxes vests it with sufficient legal interest because it is
actually, directly, and materially affected by the assessment.
While its motion for reconsideration was pending, Napocor filed a Motion to Refer the Case to the Court En Banc considering that "the issues raised have farreaching consequences in the power industry, the countrys economy and the daily lives of the Filipino people, and since it involves the application of real property
tax provision of the LGC against Napocor, an exempt government instrumentality."9
Also, the Philippine Independent Power Producers Association, Inc. (PIPPA) filed a Motion for Leave to Intervene and a Motion for Reconsideration-inIntervention. PIPPA is a non-stock corporation comprising of privately-owned power generating companies which includes TeaM Energy Corporation (TeaM
Energy), successor of Mirant. PIPPA is claiming interest in the case since any decision here will affect the other members of PIPPA, all of which have executed
similar BOT agreements with Napocor.
THE COURTS RULING
At the outset, we resolve to deny the referral of the case to the Court en banc. We do not find the reasons raised by Napocor meritorious enough to warrant the
attention of the members of the Court en banc, as they are merely reiterations of the arguments it raised in the petition for review on certiorari that it earlier filed
with the Court.10
Who may appeal a real property tax assessment
Legal interest is defined as interest in property or a claim cognizable at law, equivalent to that of a legal owner who has legal title to the property. 11 Given this
definition, Napocor is clearly not vested with the requisite interest to protest the tax assessment, as it is not an entity having the legal title over the machineries. It
has absolutely no solid claim of ownership or even of use and possession of the machineries, as our July 15, 2009 Decision explained.
A BOT agreement is not a mere financing arrangement. In Napocor v. CBAA 12 a case strikingly similar to the one before us, we discussed the nature of BOT
agreements in the following manner:
The underlying concept behind a BOT agreement is defined and described in the BOT law as follows:
Build-operate-and-transfer A contractual arrangement whereby the project proponent undertakes the construction, including financing, of a given infrastructure
facility, and the operation and maintenance thereof. The project proponent operates the facility over a fixed term during which it is allowed to charge facility users
appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as negotiated and incorporated in the contract to enable the project proponent
to recover its investment, and operating and maintenance expenses in the project. The project proponent transfers the facility to the government agency or local
government unit concerned at the end of the fixed term which shall not exceed fifty (50) years x x x x.

Under this concept, it is the project proponent who constructs the project at its own cost and subsequently operates and manages it. The proponent secures the
return on its investments from those using the projects facilities through appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as
negotiated. At the end of the fixed term agreed upon, the project proponent transfers the ownership of the facility to the government agency. Thus, the government
is able to put up projects and provide immediate services without the burden of the heavy expenditures that a project start up requires.1avvphi1
A reading of the provisions of the parties BOT Agreement shows that it fully conforms to this concept. By its express terms, BPPC has complete ownership
both legal and beneficial of the project, including the machineries and equipment used, subject only to the transfer of these properties without cost to
NAPOCOR after the lapse of the period agreed upon. As agreed upon, BPPC provided the funds for the construction of the power plant, including the
machineries and equipment needed for power generation; thereafter, it actually operated and still operates the power plant, uses its machineries and equipment, and
receives payment for these activities and the electricity generated under a defined compensation scheme. Notably, BPPC as owner-user is responsible for any
defect in the machineries and equipment.
xxxx
That some kind of "financing" arrangement is contemplated in the sense that the private sector proponent shall initially shoulder the heavy cost of constructing
the projects buildings and structures and of purchasing the needed machineries and equipment is undeniable. The arrangement, however, goes beyond the simple
provision of funds, since the private sector proponent not only constructs and buys the necessary assets to put up the project, but operates and manages it as well
during an agreed period that would allow it to recover its basic costs and earn profits. In other words, the private sector proponent goes into business for itself,
assuming risks and incurring costs for its account. If it receives support from the government at all during the agreed period, these are pre-agreed items of
assistance geared to ensure that the BOT agreements objectives both for the project proponent and for the government are achieved. In this sense, a BOT
arrangement is sui generis and is different from the usual financing arrangements where funds are advanced to a borrower who uses the funds to establish a
project that it owns, subject only to a collateral security arrangement to guard against the nonpayment of the loan. It is different, too, from an arrangement where a
government agency borrows funds to put a project from a private sector-lender who is thereafter commissioned to run the project for the government agency. In the
latter case, the government agency is the owner of the project from the beginning, and the lender-operator is merely its agent in running the project.
If the BOT Agreement under consideration departs at all from the concept of a BOT project as defined by law, it is only in the way BPPCs cost recovery is
achieved; instead of selling to facility users or to the general public at large, the generated electricity is purchased by NAPOCOR which then resells it to power
distribution companies. This deviation, however, is dictated, more than anything else, by the structure and usages of the power industry and does not change the
BOT nature of the transaction between the parties.
Consistent with the BOT concept and as implemented, BPPC the owner-manager-operator of the project is the actual user of its machineries and
equipment. BPPCs ownership and use of the machineries and equipment are actual, direct, and immediate, while NAPOCORs is contingent and, at this
stage of the BOT Agreement, not sufficient to support its claim for tax exemption. Thus, the CTA committed no reversible error in denying NAPOCORs
claim for tax exemption. [Emphasis supplied.]
Given the special nature of a BOT agreement as discussed in the cited case, we find Article 1503 inapplicable to define the contract between Napocor and Mirant,
as it refers only to ordinary contracts of sale. We thus declared in Tatad v. Garcia 13 that under BOT agreements, the private corporations/investors are the owners
of the facility or machinery concerned. Apparently, even Napocor and Mirant recognize this principle; Article 2.12 of their BOT Agreement provides that "until the
Transfer Date, [Mirant] shall, directly or indirectly, own the Power Station and all the fixtures, fitting, machinery and equipment on the Site x x x. [Mirant] shall
operate, manage, and maintain the Power Station for the purpose of converting fuel of Napocor into electricity."
Moreover, if Napocor truly believed that it was the owner of the subject machineries, it should have complied with Sections 202 and 206 of the LGC which
obligates owners of real property to:
a. file a sworn statement declaring the true value of the real property, whether taxable or exempt;14 and
b. file sufficient documentary evidence supporting its claim for tax exemption.15
While a real property owners failure to comply with Sections 202 and 206 does not necessarily negate its tax obligation nor invalidate its legitimate claim for tax
exemption, Napocors omission to do so in this case can be construed as contradictory to its claim of ownership of the subject machineries. That it assumed
liability for the taxes that may be imposed on the subject machineries similarly does not clothe it with legal title over the same. We do not believe that the phrase
"person having legal interest in the property" in Section 226 of the LGC can include an entity that assumes another persons tax liability by contract.
A review of the provisions of the LGC on real property taxation shows that the phrase has been repeatedly adopted and used to define an entity:
a. in whose name the real property shall be listed, valued, and assessed;16
b. who may be summoned by the local assessor to gather information on which to base the market value of the real property;17
c. who may protest the tax assessment before the LBAA18 and may appeal the latters decision to the CBAA;19
d. who may be liable for the idle land tax,20 as well as who may be exempt from the same;21
e. who shall be notified of any proposed ordinance imposing a special levy,22 as well as who may object the proposed ordinance;23
f. who may pay the real property tax;24
g. who is entitled to be notified of the warrant of levy and against whom it may be enforced;25
h. who may stay the public auction upon payment of the delinquent tax, penalties and surcharge;26 and
i. who may redeem the property after it was sold at the public auction for delinquent taxes.27
For the Court to consider an entity assuming another persons tax liability by contract as a person having legal interest in the real property would extend to it the
privileges and responsibilities enumerated above. The framers of the LGC certainly did not contemplate that the listing, valuation, and assessment of real property
can be made in the name of such entity; nor did they intend to make the warrant of levy enforceable against it. Insofar as the provisions of the LGC are concerned,
this entity is a party foreign to the operation of real property tax laws and could not be clothed with any legal interest over the property apart from its assumed
liability for tax. The rights and obligations arising from the BOT Agreement between Napocor and Mirant were of no legal interest to the tax collector the
Province of Quezon which is charged with the performance of independent duties under the LGC.28
Some authorities consider a person whose pecuniary interests is or may be adversely affected by the tax assessment as one who has legal interest in the property
(hence, possessed of the requisite standing to protest it), citing Cooleys Law on Taxation. 29 The reference to this foreign material, however, is misplaced. The tax
laws of the United States deem it sufficient that a persons pecuniary interests are affected by the tax assessment to consider him as a person aggrieved and who
may thus avail of the judicial or administrative remedies against it. As opposed to our LGC, mere pecuniary interest is not sufficient; our law has required legal

interest in the property taxed before any administrative or judicial remedy can be availed. The right to appeal a tax assessment is a purely statutory right; whether a
person challenging an assessment bears such a relation to the real property being assessed as to entitle him the right to appeal is determined by the applicable
statute in this case, our own LGC, not US federal or state tax laws.
In light of our ruling above, PIPPAs motion to intervene and motion for reconsideration-in-intervention is already mooted. PIPPA as an organization of
independent power producers is not an interested party insofar as this case is concerned. Even if TeaM Energy, as Mirants successor, is included as one of its
members, the motion to intervene and motion for reconsideration-in-intervention can no longer be entertained, as it amounts to a protest against the tax assessment
that was filed without the complying with Section 252 of the LGC, a matter that we shall discuss below. Most importantly, our Decision has not touched or affected
at all the contractual stipulations between Napocor and its BOT partners for the formers assumption of the tax liabilities of the latter.
Payment under protest is required before an appeal to the LBAA can be made
Apart from Napocors failure to prove that it has sufficient legal interest, a further review of the records revealed another basis for disregarding Napocors protest
against the assessment.
The LBAA dismissed Napocors petition for exemption for its failure to comply with Section 252 of the LGC 30requiring payment of the assailed tax before any
protest can be made. Although the CBAA ultimately dismissed Napocors appeal for failure to meet the requirements for tax exemption, it agreed with Napocors
position that "the protest contemplated in Section 252 (a) is applicable only when the taxpayer is questioning the reasonableness or excessiveness of an assessment.
It presupposes that the taxpayer is subject to the tax but is disputing the correctness of the amount assessed. It does not apply where, as in this case, the legality of
the assessment is put in issue on account of the taxpayers claim that it is exempt from tax." The CTA en banc agreed with the CBAAs discussion, relying mainly
on the cases of Ty v. Trampe31 and Olivarez v. Marquez.32
We disagree. The cases of Ty and Olivarez must be placed in their proper perspective.
The petitioner in Ty v. Trampe questioned before the trial court the increased real estate taxes imposed by and being collected in Pasig City effective from the year
1994, premised on the legal question of whether or not Presidential Decree No. 921 (PD 921) was repealed by the LGC. PD 921 required that the schedule of
values of real properties in the Metropolitan Manila area shall be prepared jointly by the city assessors in the districts created therein; while Section 212 of the
LGC stated that the schedule shall be prepared by the provincial, city or municipal assessors of the municipalities within the Metropolitan Manila Area for the
different classes of real property situated in their respective local government units for enactment by ordinance of the Sanggunian concerned. The private
respondents assailed Tys act of filing a prohibition petition before the trial court contending that Ty should have availed first the administrative remedies provided
in the LGC, particularly Sections 252 (on payment under protest before the local treasurer) and 226 (on appeals to the LBAA).
The Court, through former Chief Justice Artemio Panganiban, declared that Ty correctly filed a petition for prohibition before the trial court against the assailed act
of the city assessor and treasurer. The administrative protest proceedings provided in Section 252 and 226 will not apply. The protest contemplated under Section
252 is required where there is a question as to the reasonableness or correctness of the amount assessed. Hence, if a taxpayer disputes the reasonableness of an
increase in a real property tax assessment, he is required to "first pay the tax" under protest. Otherwise, the city or municipal treasurer will not act on his protest. Ty
however was questioning the very authority and power of the assessor, acting solely and independently, to impose the assessment and of the treasurer to collect the
tax. These were not questions merely of amounts of the increase in the tax but attacks on the very validity of any increase. Moreover, Ty was raising a legal
question that is properly cognizable by the trial court; no issues of fact were involved. In enumerating the power of the LBAA, Section 229 declares that "the
proceedings of the Board shall be conducted solely for the purpose of ascertaining the facts x x x." Appeals to the LBAA (under Section 226) are therefore fruitful
only where questions of fact are involved.
Olivarez v. Marquez, on the other hand, involved a petition for certiorari, mandamus, and prohibition questioning the assessment and levy made by the City of
Paraaque. Olivarez was seeking the annulment of his realty tax delinquency assessment. Marquez assailed Olivarez failure to first exhaust administrative
remedies, particularly the requirement of payment under protest. Olivarez replied that his petition was filed to question the assessors authority to assess and collect
realty taxes and therefore, as held in Ty v. Trampe, the exhaustion of administrative remedies was not required. The Court however did not agree with Olivarezs
argument. It found that there was nothing in his petition that supported his claim regarding the assessors alleged lack of authority. What Olivarez raised were the
following grounds: "(1) some of the taxes being collected have already prescribed and may no longer be collected as provided in Section 194 of the Local
Government Code of 1991; (2) some properties have been doubly taxed/assessed; (3) some properties being taxed are no longer existent; (4) some properties are
exempt from taxation as they are being used exclusively for educational purposes; and (5) some errors are made in the assessment and collection of taxes due on
petitioners properties, and that respondents committed grave abuse of discretion in making the improper, excessive and unlawful the collection of taxes against the
petitioner." The Olivarez petition filed before the trial court primarily involved the correctness of the assessments, which is a question of fact that is not allowed in
a petition for certiorari, prohibition, and mandamus. Hence, we declared that the petition should have been brought, at the very first instance, to the LBAA, not the
trial court.
Like Olivarez, Napocor, by claiming exemption from realty taxation, is simply raising a question of the correctness of the assessment. A claim for tax exemption,
whether full or partial, does not question the authority of local assessor to assess real property tax. This may be inferred from Section 206 which states that:
SEC. 206. Proof of Exemption of Real Property from Taxation. - Every person by or for whom real property is declared, who shall claim tax exemption for such
property under this Title shall file with the provincial, city or municipal assessor within thirty (30) days from the date of the declaration of real property sufficient
documentary evidence in support of such claim including corporate charters, title of ownership, articles of incorporation, bylaws, contracts, affidavits, certifications
and mortgage deeds, and similar documents. If the required evidence is not submitted within the period herein prescribed, the property shall be listed as taxable in
the assessment roll. However, if the property shall be proven to be tax exempt, the same shall be dropped from the assessment roll. [Emphasis provided]
By providing that real property not declared and proved as tax-exempt shall be included in the assessment roll, the above-quoted provision implies that the local
assessor has the authority to assess the property for realty taxes, and any subsequent claim for exemption shall be allowed only when sufficient proof has been
adduced supporting the claim. Since Napocor was simply questioning the correctness of the assessment, it should have first complied with Section 252, particularly
the requirement of payment under protest. Napocors failure to prove that this requirement has been complied with thus renders its administrative protest under
Section 226 of the LGC without any effect. No protest shall be entertained unless the taxpayer first pays the tax.
It was an ill-advised move for Napocor to directly file an appeal with the LBAA under Section 226 without first paying the tax as required under Section 252.
Sections 252 and 226 provide successive administrative remedies to a taxpayer who questions the correctness of an assessment. Section 226, in declaring that "any
owner or person having legal interest in the property who is not satisfied with the action of the provincial, city, or municipal assessor in the assessment of his
property may x x x appeal to the Board of Assessment Appeals x x x," should be read in conjunction with Section 252 (d), which states that "in the event that the
protest is denied x x x, the taxpayer may avail of the remedies as provided for in Chapter 3, Title II, Book II of the LGC [Chapter 3 refers to Assessment Appeals,
which includes Sections 226 to 231]. The "action" referred to in Section 226 (in relation to a protest of real property tax assessment) thus refers to the local
assessors act of denying the protest filed pursuant to Section 252. Without the action of the local assessor, the appellate authority of the LBAA cannot be invoked.
Napocors action before the LBAA was thus prematurely filed.
For the foregoing reasons, we DENY the petitioners motion for reconsideration.

SO ORDERED.
ARTURO D. BRION
Associate Justice
WE CONCUR:

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 165641

August 25, 2010

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte Metropolitan Water District (LMWD), Tacloban City, Petitioner,
NAPOLEON G. ARANEZ, in his capacity as President and Chairman of "No Tax, No Impairment of Contracts Coalition, Inc.," Petitioner-inintervention,
vs.
HON. CORNELIO C. GISON, Undersecretary, Department of Finance, Respondent.
DECISION
BRION, J.:
Before this Court is the Petition for Review on Certiorari1 under Rule 45 of the Rules of Court filed by Leyte Metropolitan Water District (LMWD) through its
General Manager, Engr. Ranulfo C. Feliciano, which seeks to set aside the July 14, 2004 decision of the Court of Appeals (CA)2 that in turn affirmed the ruling of
the Court of Tax Appeals (CTA) in CTA Case No. 6165.3 The CTA dismissed LMWDs petition for lack of jurisdiction to try the case.
Joining the petitioner is the "No Tax, No Impairment of Contracts Coalition, Inc." (Coalition), a corporation represented by its President and Chairman, Napoleon
G. Aranez, which filed a motion for leave to admit complaint-petition in intervention on February 17, 2005.4 The Court granted said motion and required the
Coalition, together with LMWD, to submit their respective memoranda in a resolution dated July 5, 2006.5
BACKGROUND FACTS
The present petition arose from the tax case initiated by LMWD after it filed with the Department of Finance ( DOF) a petition requesting that certain water supply
equipment and a motor vehicle, particularly a Toyota Hi-Lux pick-up truck, be exempted from tax. These properties were given to LMWD through a grant by the
Japanese Government for the rehabilitation of its typhoon-damaged water supply system.
In an indorsement dated July 5, 1995, the DOF granted the tax exemption on the water supply equipment but assessed the corresponding tax and duty on the
Toyota Hi-Lux pick-up truck.6 On June 9, 2000, LMWD moved to reconsider the disallowance of the tax exemption on the subject vehicle. The DOF, through then
Undersecretary Cornelio C. Gison, denied LMWDs request for reconsideration because the tax exemption privileges of government agencies and government
owned and controlled corporations (GOCCs) had already been withdrawn by Executive Order No. 93.7 This prompted LMWD, through its General Manager Engr.
Ranulfo C. Feliciano, to appeal to the CTA.
After considering the evidence presented at the hearing, the CTA found LMWD to be a GOCC with an original charter. For this reason, the CTA resolved to
dismiss LMWDs appeal for lack of jurisdiction to take cognizance of the case.8 The CTAs resolution was without prejudice to the right of LMWD to refile the
case, if it so desires, in the appropriate forum. Likewise, the CTA denied LMWDs motion to reconsider the dismissal of its appeal.9
LMWD filed a petition for review10 with the CA raising the issues of whether the CTA decided the case in accord with the evidence presented and the applicable
law, and whether the LMWD is a GOCC with original charter. The CA found the petition to be unmeritorious and affirmed the CTAs ruling that the LMWD is a
GOCC with original charter, and not a private corporation or entity as LMWD argued. Hence, the present petition for review oncertiorari filed by LMWD with this
Court.
THE PETITION
LMWD appeals to us primarily to determine whether water districts are, by law, GOCCs with original charter. Citing the Constitution and Presidential Decree
(P.D.) No. 198,11 LMWD claims that water districts are private corporations and as such are entitled to certain tax exemptions under the law. LMWD argues
that P.D. No. 198 is a general law, similar to the Corporation Code and other general laws, and is not a special law. Because it is a general law, water districts
constituted under its terms are private corporations, not a government-owned or controlled corporation (GOCC) with original charter.
In support of its position, LMWD points out provisions in P.D. No. 198 that it claims implements the general policy of the decree as enunciated in its Section 2,
specifically, Section 512 (pertaining to the purpose of water districts), Section 6 (formation of a water district), as amended by P.D. No. 1479, 13 and Section 7
(filing of resolution forming a water district), as amended by P.D. No. 768,14 of Chapter II. LMWD concludes from this examination that P.D. No. 198 is not an
original charter but a general act authorizing the formation of water districts on a local option basis, similar to the Corporation Code (Batas Pambansa Blg. 68).
In drawing parallelism with the Corporation Code, LMWD cites (1) the Resolution of Formation passed by thesanggunian under PD 198 for the creation of a water
district as an equivalent to the Articles of Incorporation and By-laws under the Corporation Code, and (2) the filing of the Resolution of Formation of the water
district with the LWUA as the counterpart of the issuance of the Certificate of Filing of the Articles of Incorporation and By-laws to the private corporation by the
Securities and Exchange Commission (SEC). The juridical personality of a water district is acquired on the date of filing of the resolution in the same way that the
juridical personality of a private corporation is acquired on the date of issuance of the certificate of filing with the SEC.
LMWD further claims that the Constitution does not limit the meaning of the term "general law" to the Corporation Code, as there are other general laws such as
Republic Act (R.A.) No. 693815 (including R.A. No. 6939 -- An Act Creating the Cooperative Development Authority), and R.A. No. 6810.16 Under R.A. No.
6938 and R.A. No. 6810, any group of individuals can form a cooperative and a Countryside and Barangay Business Enterprise (CBBE), respectively, and acquire
a juridical personality separate and distinct from their creators, members or officers provided that they comply with all the requirements under said laws. In the
same manner, any group of individuals in a given local government unit can form and organize themselves into a water district provided that they comply with the
requirements under P.D. No. 198.
Part of LMWDs theory is that P.D. No. 198 is not the operative act that created the local water districts; they are created through compliance with the nine separate
and distinct operative acts found in the Procedural Formation of a Water District prescribed under Section 6 of P.D. No. 198 and its Implementing Rules and
Regulations. The last step of these operative acts is the filing of the Resolution of Formation of the sanggunian concerned with the LWUA after the latter has

determined that such resolution has conformed to the requirements of Section 6 and the policy objectives in Section 2 of P.D. No. 198, as amended. 17 According
to LMWD, no water district is formed by the enactment of P.D. No. 198. The decree merely authorized the formation of water districts by the sanggunian, in the
same manner that the Corporation Code authorizes the formation of private corporations.
LMWD theorizes that what is actually chartered, formed and created under P.D. No. 198 is the Local Water Utilities Administration ( LWUA), as provided in
Section 49 of the decree. This provision establishing LWUAs charter and the policy statement in Section 2 of P.D. No. 198, are in stark contrast to the decrees
failure to provide an express provision on what constitutes the water districts charter, leading to the inference that the decree is not the charter of the water districts
but merely authorizes their formation, on a local option basis.
THE PETITION-IN-INTERVENTION
On February 17, 2005, Napoleon G. Aranez (Aranez), acting in behalf of the "No Tax, No Impairment of Contracts Coalition, Inc." (Coalition) filed a motion for
leave to admit complaint-petition in intervention in connection with the petition for review on certiorari filed by LMWD with this Court. Aranez is the Coalitions
president and chairman. The Coalition claims to indirectly represent all the water district concessionaires of the entire country figuring to more or less four hundred
million, aside from the 26,000 concessionaires situated in the city of Tacloban and the municipalities of Dagami, Palo, Pastrana, Sta. Fe, Tabon-Tabon, Tanauan,
Tolosa -- all within the province of Leyte.
The petition in intervention raises three main arguments: (1) that the water districts are not GOCCs as they are quasi-public corporations or private corporations
exercising public functions, (2) that classifying the water districts as GOCCs will result in an unjust disregard of the "non-impairment of contracts" clause in the
Constitution, and (3) that the appealed CA decision, if not corrected or reversed, would result in a nationwide crisis and would create social unrest.
Interestingly, the Coalition sets forth the premise that P.D. No. 198 is not entirely a special law or a general law, but a composite law made up of both laws: Title II
Local Water District Law being the general law, and Title III Local Water Utilities Law being the special law or charter. For the rest of the petition in
intervention, the Coalition adopts supporting arguments similar, if not exactly the same, as those of LMWDs.
THE COURTS RULING
We find no merit in the petition and the petition in intervention, particularly in their core position that water districts are private corporations, not GOCCs. The
question is a long-settled matter that LMWD and the Coalition seek to revive and to re-litigate in their respective petitions.
The present petition is not the first instance that the petitioner LMWD, through Engr. Ranulfo C. Feliciano, has raised for determination by this Court the corporate
classification of local water districts.18 LMWD posed this exact same question in Feliciano v. Commission on Audit (COA).19 In ruling that local water districts,
such as the LMWD, are GOCCs with special charter, the Court even pointed to settled jurisprudence 20 culminating in Davao City Water District v. Civil Service
Commission21 and recently reiterated in De Jesus v. COA. 22
In Feliciano, LMWD likewise claimed that it is a private corporation and therefore, should not be subject to the audit jurisdiction of the COA. LMWD then argued
that P.D. No. 198 is not an "original charter" that would place the water districts within the audit jurisdiction of the COA as defined in Section 2 (1), Article IX-D
of the 1987 Constitution.23 Neither did P.D. No. 198 expressly direct the creation of the water districts. LMWD posited that the decree merely provided for their
formation on an optional or voluntary basis and what actually created the water districts is the approval of the Sanggunian Resolution.24 Significantly, these are
the very same positions that the LMWD and the Coalition (as petitioner-intervenor) submit in the present petition.
Our ruling in Feliciano squarely addressed the difference between a private corporation created under general law and a GOCC created by a special charter, and we
need only to quote what Feliciano said:
We begin by explaining the general framework under the fundamental law. The Constitution recognizes two classes of corporations. The first refers to private
corporations created under a general law. The second refers to government-owned or controlled corporations created by special charters. Section 16, Article XII of
the Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or
controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.
The Constitution emphatically prohibits the creation of private corporations except by a general law applicable to all citizens. The purpose of this constitutional
provision is to ban private corporations created by special charters, which historically gave certain individuals, families or groups special privileges denied to other
citizens.
In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be unconstitutional. Private corporations may
exist only under a general law. If the corporation is private, it must necessarily exist under a general law. Stated differently, only corporations created under a
general law can qualify as private corporations. Under existing laws, that general law is the Corporation Code, except that the Cooperative Code governs the
incorporation of cooperatives.
The Constitution authorizes Congress to create government-owned or controlled corporations through special charters. Since private corporations cannot have
special charters, it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled.
Obviously, LWDs [referring to local water districts] are not private corporations because they are not created under the Corporation Code. LWDs are not registered
with the Securities and Exchange Commission. Section 14 of the Corporation Code states that "[A]ll corporations organized under this code shall file with the
Securities and Exchange Commission articles of incorporation x x x." LWDs have no articles of incorporation, no incorporators and no stockholders or members.
There are no stockholders or members to elect the board directors of LWDs as in the case of all corporations registered with the Securities and Exchange
Commission. The local mayor or the provincial governor appoints the directors of LWDs for a fixed term of office. This Court has ruled that LWDs are not created
under the Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded from the coverage of the CSC are those corporations created pursuant to the
Corporation Code. Significantly, petitioners are not created under the said code, but on the contrary, they were created pursuant to a special law and are governed
primarily by its provision. (Emphasis supplied)" (Citations Omitted)25
Feliciano further categorically held that P.D. No. 198 constitutes the special charter by virtue of which local water districts exist. Unlike private corporations that
derive their legal existence and power from the Corporation Code, water districts derive their legal existence and power from P.D. No. 198. Section 6 of the decree
in fact provides that water districts "shall exercise the powers, rights and privileges given to private corporations under existing laws, in addition to the powers
granted in, and subject to such restrictions imposed under this Act." Therefore, water districts would not have corporate powers without P.D. No. 198.
As already mentioned above, the Court reiterated this ruling i.e. that a water district is a government-owned and controlled corporation with a special charter
since it is created pursuant to a special law, PD 198 albeit with respect to the authority of the COA to audit water districts, in De Jesus v. COA.26

In light of these settled rulings, specifically rendered conclusive on LMWD by Feliciano v. COA and the application of the principle of "conclusiveness of
judgment," we cannot but deny the present petition and petition in intervention.
The principle of doctrine of "conclusiveness of judgment" a branch of the rule on res judicata27 provides that issues actually and directly resolved in a former
suit cannot again be raised in any future case between the same parties involving a different cause of action. Where there has been a previous final judgment on the
merits between the same parties or substantially the same parties, rendered by a court of competent jurisdiction over the matter and the parties, the matters or issues
raised and adjudged in the previous final judgment shall be conclusive on the parties although they are now litigating a different cause of action 28 and shall
continue to be binding between the same parties for as long as the facts on which that judgment was predicated continue to be the facts of the case or incident
before the court.29
No doubt exists that the judgment in Feliciano v. COA was a final judgment rendered by a court with competent jurisdiction over the subject matter and the parties.
The decision was in fact a ruling of this Court on the same issue posed in the present case. The ruling was also on the merits as it squarely responded to the issues
the parties raised on the basis of their submitted arguments. There was, likewise, between Feliciano v. COA and the present case a substantial identity of parties and
issue presented.
In both cases, the main petitioner has been LMWD, represented by its General Manager Engr. Ranulfo C. Feliciano. While the respondents in these cases were
different government offices the Commission on Audit and the Department of Finance they nevertheless represented and spoke for the same government; thus, a
substantial identity of respondents obtained in resolving the same contentious issue of whether local water districts should be treated as private corporations and
not as GOCCs with special charter.
IN VIEW OF THE FOREGOING, we hereby DENY the petition and the petition for intervention for lack of merit and accordingly AFFIRM the decision of the
Court of Appeals dated July 14, 2004 affirming the ruling of the Court of Tax Appeals in CTA Case No. 6165. Costs against the petitioners.
SO ORDERED.
ARTURO D. BRION
Associate Justice
WE CONCUR:

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. 172087

March 15, 2011

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,


vs.
THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by HON. JOSE MARIO BUAG, in his official capacity as COMMISSIONER OF
INTERNAL REVENUE, Public Respondent,
JOHN DOE and JANE DOE, who are persons acting for, in behalf, or under the authority of Respondent.Public and Private Respondents.
DECISION
PERALTA, J.:
For resolution of this Court is the Petition for Certiorari and Prohibition1 with prayer for the issuance of a Temporary Restraining Order and/or Preliminary
Injunction, dated April 17, 2006, of petitioner Philippine Amusement and Gaming Corporation (PAGCOR), seeking the declaration of nullity of Section 1 of
Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal Revenue Code of 1997, by excluding petitioner from exemption from
corporate income tax for being repugnant to Sections 1 and 10 of Article III of the Constitution. Petitioner further seeks to prohibit the implementation of Bureau of
Internal Revenue (BIR) Revenue Regulations No. 16-2005 for being contrary to law.
The undisputed facts follow.
PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A2 on January 1, 1977. Simultaneous to its creation, P.D. No. 1067-B3 (supplementing P.D.
No. 1067-A) was issued exempting PAGCOR from the payment of any type of tax, except a franchise tax of five percent (5%) of the gross revenue. 4 Thereafter,
on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's exemption.5
To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 18696 was issued. Section 13 thereof reads as follows:
Sec. 13. Exemptions. x x x
(1) Customs Duties, taxes and other imposts on importations. - All importations of equipment, vehicles, automobiles, boats, ships,
barges, aircraft and such other gambling paraphernalia, including accessories or related facilities, for the sole and exclusive use of the
casinos, the proper and efficient management and administration thereof and such other clubs, recreation or amusement places to be
established under and by virtue of this Franchise shall be exempt from the payment of duties, taxes and other imposts, including all
kinds of fees, levies, or charges of any kind or nature.
Vessels and/or accessory ferry boats imported or to be imported by any corporation having existing contractual arrangements with the
Corporation, for the sole and exclusive use of the casino or to be used to service the operations and requirements of the casino, shall
likewise be totally exempt from the payment of all customs duties, taxes and other imposts, including all kinds of fees, levies,
assessments or charges of any kind or nature, whether National or Local.
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges, or levies
of whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall
any form of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five percent (5%)of the gross
revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to

the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied,
established, or collected by any municipal, provincial or national government authority.
(b) Others: The exemption herein granted for earnings derived from the operations conducted under the franchise,
specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to
the benefit of and extend to corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or
operator has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted
under this Franchise and to those receiving compensation or other remuneration from the Corporation as a result of
essential facilities furnished and/or technical services rendered to the Corporation or operator.
The fee or remuneration of foreign entertainers contracted by the Corporation or operator in pursuance of this provision shall be free
of any tax.
(3) Dividend Income. Notwithstanding any provision of law to the contrary, in the event the Corporation should declare a cash
dividend income corresponding to the participation of the private sector shall, as an incentive to the beneficiaries, be subject only to a
final flat income rate of ten percent (10%) of the regular income tax rates. The dividend income shall not in such case be considered as
part of the beneficiaries' taxable income; provided, however, that such dividend income shall be totally exempted from income or
other form of taxes if invested within six (6) months from the date the dividend income is received in the following:
(a) operation of the casino(s) or investments in any affiliate activity that will ultimately redound to the benefit of the
Corporation; or any other corporation with whom the Corporation has any existing arrangements in connection with or
related to the operations of the casino(s);
(b) Government bonds, securities, treasury notes, or government debentures; or
(c) BOI-registered or export-oriented corporation(s).7
PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by Letter of Instruction No. 1430, which was issued in
September 1984.
On January 1, 1998, R.A. No. 8424,8 otherwise known as the National Internal Revenue Code of 1997, took effect. Section 27 (c) of R.A. No. 8424 provides that
government-owned and controlled corporations (GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the Government Service and Insurance
Corporation, the Social Security System, the Philippine Health Insurance Corporation, and the Philippine Charity Sweepstakes Office, thus:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing special general laws to the contrary
notwithstanding, all corporations, agencies or instrumentalities owned and controlled by the Government, except the Government Service and Insurance
Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO),
and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon
corporations or associations engaged in similar business, industry, or activity.9
With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the National Internal Revenue Code of 1997 were amended. The particular
amendment that is at issue in this case is Section 1 of R.A. No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by excluding
PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income tax, thus:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing special general laws to the contrary
notwithstanding, all corporations, agencies, or instrumentalities owned and controlled by the Government, except the Government Service and Insurance
Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), and the Philippine Charity Sweepstakes Office
(PCSO), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in similar business,
industry, or activity.
Different groups came to this Court via petitions for certiorari and prohibition11 assailing the validity and constitutionality of R.A. No. 9337, in particular:
1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and properties; Section 5, which imposes a 10% VAT on importation of
goods; and Section 6, which imposes a 10% VAT on sale of services and use or lease of properties, all contain a uniform proviso authorizing the
President, upon the recommendation of the Secretary of Finance, to raise the VAT rate to 12%. The said provisions were alleged to be violative of
Section 28 (2), Article VI of the Constitution, which section vests in Congress the exclusive authority to fix the rate of taxes, and of Section 1, Article III
of the Constitution on due process, as well as of Section 26 (2), Article VI of the Constitution, which section provides for the "no amendment rule" upon
the last reading of a bill;
2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution, or the guarantee of equal protection of the laws, and
Section 28 (1), Article VI of the Constitution; and
3) other technical aspects of the passage of the law, questioning the manner it was passed.
On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality of R.A. No. 9337.12
On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,13 specifically identifying PAGCOR as one of the franchisees subject to 10%
VAT imposed under Section 108 of the National Internal Revenue Code of 1997, as amended by R.A. No. 9337. The said revenue regulation, in part, reads:
Sec. 4. 108-3. Definitions and Specific Rules on Selected Services.
xxxx
(h) x x x

Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code, regardless of how their franchisees may have been granted, shall be
subject to the 10% VAT imposed under Sec.108 of the Tax Code. This includes, among others, the Philippine Amusement and Gaming Corporation (PAGCOR),
and its licensees or franchisees.
Hence, the present petition for certiorari.
PAGCOR raises the following issues:
I
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE EQUAL
PROTECTION [CLAUSE] EMBODIED IN SECTION 1, ARTICLE III OF THE 1987 CONSTITUTION.
II
WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO THE NON-IMPAIRMENT
[CLAUSE] EMBODIED IN SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.
III
WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND VOID AB INITIO FOR BEING BEYOND THE
SCOPE OF THE BASIC LAW, RA 8424, SECTION 108, INSOFAR AS THE SAID REGULATION IMPOSED VAT ON THE SERVICES OF
THE PETITIONER AS WELL AS PETITIONERS LICENSEES OR FRANCHISEES WHEN THE BASIC LAW, AS INTERPRETED BY
APPLICABLE JURISPRUDENCE, DOES NOT IMPOSE VAT ON PETITIONER OR ON PETITIONERS LICENSEES OR
FRANCHISEES.14
The BIR, in its Comment15 dated December 29, 2006, counters:
I
SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH VALID AND CONSTITUTIONAL PROVISIONS OF LAWS
THAT SHOULD BE HARMONIOUSLY CONSTRUED TOGETHER SO AS TO GIVE EFFECT TO ALL OF THEIR PROVISIONS
WHENEVER POSSIBLE.
II
SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.
III
BIR REVENUE REGULATIONS ARE PRESUMED VALID AND CONSTITUTIONAL UNTIL STRICKEN DOWN BY LAWFUL
AUTHORITIES.
The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of Comment,16 concurred with the arguments of the petitioner. It added that although
the State is free to select the subjects of taxation and that the inequity resulting from singling out a particular class for taxation or exemption is not an infringement
of the constitutional limitation, a tax law must operate with the same force and effect to all persons, firms and corporations placed in a similar situation.
Furthermore, according to the OSG, public respondent BIR exceeded its statutory authority when it enacted RR No. 16-2005, because the latter's provisions are
contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337.
The main issue is whether or not PAGCOR is still exempt from corporate income tax and VAT with the enactment of R.A. No. 9337.
After a careful study of the positions presented by the parties, this Court finds the petition partly meritorious.
Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue Code of 1977, petitioner is no longer exempt from corporate income
tax as it has been effectively omitted from the list of GOCCs that are exempt from it. Petitioner argues that such omission is unconstitutional, as it is violative of its
right to equal protection of the laws under Section 1, Article III of the Constitution:
Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.
In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning and scope of equal protection, thus:
Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights conferred and responsibilities imposed. Similar
subjects, in other words, should not be treated differently, so as to give undue favor to some and unjustly discriminate against others. The guarantee means that no
person or class of persons shall be denied the same protection of laws which is enjoyed by other persons or other classes in like circumstances. The "equal
protection of the laws is a pledge of the protection of equal laws." It limits governmental discrimination. The equal protection clause extends to artificial persons
but only insofar as their property is concerned.
xxxx
Legislative bodies are allowed to classify the subjects of legislation. If the classification is reasonable, the law may operate only on some and not all of the people
without violating the equal protection clause. The classification must, as an indispensable requisite, not be arbitrary. To be valid, it must conform to the following
requirements:
1) It must be based on substantial distinctions.

2) It must be germane to the purposes of the law.


3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class.18
It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five GOCCs exempted from payment of corporate income tax as shown in
R.A. No. 8424, Section 27 (c) of which, reads:
(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The provisions of existing special or general laws to the contrary
notwithstanding, all corporations, agencies or instrumentalities owned and controlled by the Government, except the Government Service and Insurance
Corporation (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO),
and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon
corporations or associations engaged in similar business, industry, or activity.19
A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways on Means dated October 27, 1997 would show that the
exemption of PAGCOR from the payment of corporate income tax was due to the acquiescence of the Committee on Ways on Means to the request of PAGCOR
that it be exempt from such tax.20 The records of the Bicameral Conference Meeting reveal:
HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto winnings.
CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.
HON. R. DIAZ. Tinanggal na ba natin yon?
CHAIRMAN ENRILE. Oo.
HON. R. DIAZ. Because I was wondering whether we covered the tax on --- Whether on a universal basis, we included a tax on cockfighting winnings.
CHAIRMAN ENRILE. No, we removed the --HON. R. DIAZ. I . . . (inaudible) natin yong lotto?
CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.
CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.
CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang request ng Chairman, I will accept. (laughter) Pag-Pag-ibig yon, maliliit na sa tao yon.
HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we factored in an amount that would reflect the VAT and other sales taxes--CHAIRMAN ENRILE. No, were talking of this measure only. We will not --- (discontinued)
HON. ROXAS. No, no, no, no, from the --- arising from the exemption. Assuming that when we release the money into the hands of the public, they will not use
that to --- for wallpaper. They will spend that eh, Mr. Chairman. So when they spend that--CHAIRMAN ENRILE. Theres a VAT.
HON. ROXAS. There will be a VAT and there will be other sales taxes no. Is there a quantification? Is there an approximation?
CHAIRMAN JAVIER. Not anything.
HON. ROXAS. So, in effect, we have sterilized that entire seven billion. In effect, it is not circulating in the economy which is unrealistic.
CHAIRMAN ENRILE. It does, it does, because this is taken and spent by government, somebody receives it in the form of wages and supplies and other services
and other goods. They are not being taken from the public and stored in a vault.
CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will be extra income for the taxpayers.
HON. ROXAS. Precisely, so they will be spending it.21
The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from paying corporate income tax was not based on a classification showing
substantial distinctions which make for real differences, but to reiterate, the exemption was granted upon the request of PAGCOR that it be exempt from the
payment of corporate income tax.
With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has been excluded from the enumeration of GOCCs that are exempt from
paying corporate income tax. The records of the Bicameral Conference Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of Senate
Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent that PAGCOR be subject to the payment of corporate income tax, thus:
THE CHAIRMAN (SEN. RECTO). Yes, Osmea, the proponent of the amendment.
SEN. OSMEA. Yeah. Mr. Chairman, one of the reasons why we're even considering this VAT bill is we want to show the world who our creditors, that we are
increasing official revenues that go to the national budget. Unfortunately today, Pagcor is unofficial.
Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7 billion after paying some small taxes that they are subjected to. Of the 9.7 billion,
they claim they remitted to national government seven billion. Pagkatapos, there are other specific remittances like to the Philippine Sports Commission, etc., as
mandated by various laws, and then about 400 million to the President's Social Fund. But all in all, their net profit today should be about 12 billion. That's why I
am questioning this two billion. Because while essentially they claim that the money goes to government, and I will accept that just for the sake of
argument. It does not pass through the appropriation process. And I think that at least if we can capture 35 percent or 32 percent through the budgetary
process, first, it is reflected in our official income of government which is applied to the national budget, and secondly, it goes through what is
constitutionally mandated as Congress appropriating and defining where the money is spent and not through a board of directors that has absolutely no
accountability.
REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow up lang.
There is wisdom in the comments of my good friend from Cebu, Senator Osmea.
SEN. OSMEA. And Negros.

REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa. But I would not want to put my friends from the Department of Finance in a difficult
position, but may we know your comments on this knowing that as Senator Osmea just mentioned, he said, "I accept that that a lot of it is going to spending for
basic services," you know, going to most, I think, supposedly a lot or most of it should go to government spending, social services and the like. What is your
comment on this? This is going to affect a lot of services on the government side.
THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.
SEN. OSMEA. It goes from pocket to the other, Monico.
REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr. Senator, because you may have your own pre-judgment on this and I don't blame you. I don't
blame you. And I know you have your own research. But will this not affect a lot, the disbursements on social services and other?
REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that question also. Wouldn't it be easier for you to explain to, say, foreign creditors, how do you
explain to them that if there is a fiscal gap some of our richest corporations has [been] spared [from] taxation by the government which is one rich source of
revenues. Now, why do you save, why do you spare certain government corporations on that, like Pagcor? So, would it be easier for you to make an argument if
everything was exposed to taxation?
REP. TEVES. Mr. Chair, please.
THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to those before we call Congressman Teves?
MR. PURISIMA. Thank you, Mr. Chair.
Yes, from definitely improving the collection, it will help us because it will then enter as an official revenue although when dividends declare it also goes in
as other income. (sic)
xxxx
REP. TEVES. Mr. Chairman.
xxxx
THE CHAIRMAN (REP. LAPUS). Congressman Teves.
REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on income tax. Now, we are talking here on value-added tax. Do you mean to say we are
going to amend it from income tax to value-added tax, as far as Pagcor is concerned?
THE CHAIRMAN (SEN. RECTO). No. We are just amending that section with regard to the exemption from income tax of Pagcor.
xxxx
REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.
THE CHAIRMAN (REP. LAPUS). Congressman Nograles.
REP. NOGRALES. Just a point of inquiry from the Chair. What exactly are the functions of Pagcor that are VATable? What will we VAT in Pagcor?
THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is Pagcor income tax.
REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?
xxxx
REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATing Pagcor with, is it the . . .
REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way they craft their contract, which basis?
THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate version does not discuss a VAT on Pagcor but it just takes away their exemption
from non-payment of income tax.22
Taxation is the rule and exemption is the exception.23 The burden of proof rests upon the party claiming exemption to prove that it is, in fact, covered by the
exemption so claimed.24 As a rule, tax exemptions are construed strongly against the claimant.25 Exemptions must be shown to exist clearly and categorically,
and supported by clear legal provision.26
In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income tax, considering that Section 1 of R.A. No. 9337 amended
Section 27 (c) of the National Internal Revenue Code of 1997 by omitting PAGCOR from the exemption. The legislative intent, as shown by the discussions in the
Bicameral Conference Meeting, is to require PAGCOR to pay corporate income tax; hence, the omission or removal of PAGCOR from exemption from the
payment of corporate income tax. It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all
others as expressed in the familiar maxim expressio unius est exclusio alterius.27 Thus, the express mention of the GOCCs exempted from payment of corporate
income tax excludes all others. Not being excepted, petitioner PAGCOR must be regarded as coming within the purview of the general rule that GOCCs shall pay
corporate income tax, expressed in the maxim: exceptio firmat regulam in casibus non exceptis.28
PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records of the Bicameral Conference Meeting dated October 27,
1997, of the Committee on Ways and Means, show that PAGCORs exemption from payment of corporate income tax, as provided in Section 27 (c) of R.A. No.
8424, or the National Internal Revenue Code of 1997, was not made pursuant to a valid classification based on substantial distinctions and the other requirements
of a reasonable classification by legislative bodies, so that the law may operate only on some, and not all, without violating the equal protection clause. The
legislative records show that the basis of the grant of exemption to PAGCOR from corporate income tax was PAGCORs own request to be exempted.
Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the non-impairment clause of the Constitution. Petitioner
avers that laws form part of, and is read into, the contract even without the parties expressly saying so. Petitioner states that the private parties/investors transacting
with it considered the tax exemptions, which inure to their benefit, as the main consideration and inducement for their decision to transact/invest with it. Petitioner
argues that the withdrawal of its exemption from corporate income tax by R.A. No. 9337 has the effect of changing the main consideration and inducement for the
transactions of private parties with it; thus, the amendatory provision is violative of the non-impairment clause of the Constitution.
Petitioners contention lacks merit.

The non-impairment clause is contained in Section 10, Article III of the Constitution, which provides that no law impairing the obligation of contracts shall be
passed. The non-impairment clause is limited in application to laws that derogate from prior acts or contracts by enlarging, abridging or in any manner changing
the intention of the parties.29 There is impairment if a subsequent law changes the terms of a contract between the parties, imposes new conditions, dispenses with
those agreed upon or withdraws remedies for the enforcement of the rights of the parties.30
As regards franchises, Section 11, Article XII of the Constitution31 provides that no franchise or right shall be granted except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress when the common good so requires.32
In Manila Electric Company v. Province of Laguna,33 the Court held that a franchise partakes the nature of a grant, which is beyond the purview of the nonimpairment clause of the Constitution.34 The pertinent portion of the case states:
While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as being in the nature of contracts and a part of the inducement
for carrying on the franchise, these exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions, in the real sense of the
term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those
contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its
cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts.
These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which
is beyond the purview of the non-impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in
the 1935 and the 1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be granted except under the condition that such privilege
shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires.35
In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs and other recreation or amusement places, sports, gaming
pools, i.e., basketball, football, lotteries, etc., whether on land or sea, within the territorial jurisdiction of the Republic of the Philippines.36 Under Section 11,
Article XII of the Constitution, PAGCORs franchise is subject to amendment, alteration or repeal by Congress such as the amendment under Section 1 of R.A. No.
9377. Hence, the provision in Section 1 of R.A. No. 9337, amending Section 27 (c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from corporate
income tax, which may affect any benefits to PAGCORs transactions with private parties, is not violative of the non-impairment clause of the Constitution.
Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT is invalid for being contrary to R.A. No. 9337.
Nowhere in R.A. No. 9337 is it provided that petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption from the
payment of corporate income tax, which was already addressed above by this Court.
As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to Section 7 (k) thereof, which reads:
Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:
Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax:
xxxx
(k) Transactions which are exempt under international agreements to which the Philippines is a signatory orunder special laws, except Presidential Decree No.
529.37
Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D. No. 1869, is a special law that grants petitioner exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which retained Section 108 (B) (3) of R.A. No. 8424, thus:
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is hereby further amended to read as follows:
SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the
sale or exchange of services, including the use or lease of properties: x x x
xxxx
(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be subject to zero
percent (0%) rate;
xxxx
(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to zero percent (0%) rate;
x x x x38
As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No. 8424 by imposing VAT on other services not previously
covered, it did not amend the portion of Section 108 (B) (3) that subjects to zero percent rate services performed by VAT-registered persons to persons or entities
whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to 0% rate.
Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and extensively discussed in Commissioner of Internal Revenue
v. Acesite (Philippines) Hotel Corporation.39 Acesite was the owner and operator of the Holiday Inn Manila Pavilion Hotel. It leased a portion of the hotels
premises to PAGCOR. It incurred VAT amounting to P30,152,892.02 from its rental income and sale of food and beverages to PAGCOR from January 1996 to
April 1997. Acesite tried to shift the said taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR. However, PAGCOR refused to pay the taxes
because of its tax-exempt status. PAGCOR paid only the amount due to Acesite minus VAT in the sum of P30,152,892.02. Acesite paid VAT in the amount
of P30,152,892.02 to the Commissioner of Internal Revenue, fearing the legal consequences of its non-payment. In May 1998, Acesite sought the refund of the
amount it paid as VAT on the ground that its transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. The Court ruled that
PAGCOR and Acesite were both exempt from paying VAT, thus:
xxxx
PAGCOR is exempt from payment of indirect taxes
It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently
provides:

Sec. 13. Exemptions.


xxxx
(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature, whether
National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the earnings
of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the Corporation from its operation under this Franchise.
Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or
description, levied, established or collected by any municipal, provincial, or national government authority.
(b) Others: The exemptions herein granted for earnings derived from the operations conducted under the franchise specifically from the payment of any tax,
income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s), agency(ies), or
individual(s) with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted
under this Franchise and to those receiving compensation or other remuneration from the Corporation or operator as a result of essential facilities furnished and/or
technical services rendered to the Corporation or operator.
Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to indirect taxes, like the VAT.
We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction on whether the taxes are direct or indirect. We are
one with the CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to PAGCOR. Although the law does not specifically mention
PAGCOR's exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons or entities contracting
with PAGCOR in casino operations. Although, differently worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by
granting tax exempt status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that PAGCOR is not liable for the P30,
152,892.02 VAT and neither is Acesite as the latter is effectively subject to zero percent rate under Sec. 108 B (3), R.A. 8424. (Emphasis supplied.)
Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted exemption also from indirect taxes. It must be
noted that the indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to
VAT. Thus, by extending the tax exemption to entities or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR from being
liable to indirect taxes.
The manner of charging VAT does not make PAGCOR liable to said tax.
It is true that VAT can either be incorporated in the value of the goods, properties, or services sold or leased, in which case it is computed as 1/11 of such value, or
charged as an additional 10% to the value. Verily, the seller or lessor has the option to follow either way in charging its clients and customer. In the instant case,
Acesite followed the latter method, that is, charging an additional 10% of the gross sales and rentals. Be that as it may, the use of either method, and in particular,
the first method, does not denigrate the fact that PAGCOR is exempt from an indirect tax, like VAT.
VAT exemption extends to Acesite
Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for the payment of it as it is exempt in this particular
transaction by operation of law to pay the indirect tax. Such exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108
[b] [3] of R.A. 8424), which provides:
Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There shall be levied, assessed and collected, a value-added tax equivalent to 10% of
gross receipts derived by any person engaged in the sale of services x x x; Provided, that the following services performed in the Philippines by VAT registered
persons shall be subject to 0%.
xxxx
(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to zero (0%) rate (emphasis supplied).
The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such exemption to entities or individuals dealing with PAGCOR
in casino operations are best elucidated from the 1987 case ofCommissioner of Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax exemption
of the World Health Organization (WHO) upon an international agreement was upheld. We held in said case that the exemption of contractee WHO should be
implemented to mean that the entity or person exempt is the contractor itself who constructed the building owned by contractee WHO, and such does not violate
the rule that tax exemptions are personal because the manifest intention of the agreement is to exempt the contractor so that no contractor's tax may be shifted to
the contractee WHO. Thus, the proviso in P.D. 1869, extending the exemption to entities or individuals dealing with PAGCOR in casino operations, is clearly to
proscribe any indirect tax, like VAT, that may be shifted to PAGCOR.40
Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation was Section 102 (b) of the 1977 Tax Code, as amended, which section was retained as Section 108 (B) (3) in R.A. No. 8424, 41 it is still applicable to
this case, since the provision relied upon has been retained in R.A. No. 9337.421avvphi1
It is settled rule that in case of discrepancy between the basic law and a rule or regulation issued to implement said law, the basic law prevails, because the said rule
or regulation cannot go beyond the terms and provisions of the basic law.43 RR No. 16-2005, therefore, cannot go beyond the provisions of R.A. No. 9337. Since
PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded its authority in subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the said
regulatory provision is hereby nullified.
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 27 (c) of the National Internal Revenue Code of
1997, by excluding petitioner Philippine Amusement and Gaming Corporation from the enumeration of government-owned and controlled corporations exempted
from corporate income tax is valid and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for
being contrary to the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.
No costs.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice

WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 198756

January 13, 2015

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE
BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK AND PLANTERS DEVELOPMENT
BANK, Petitioners,
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners-Intervenors,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,
vs.
REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE, SECRETARY OF
FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL TREASURER AND BUREAU OF TREASURY, Respondent.
DECISION
LEONEN, J.:
The case involves the proper tax treatment of the discount or interest income arising from the P35 billion worth of 10-year zero-coupon treasury bonds issued by
the Bureau of Treasury on October 18, 2001 (denominated as the Poverty Eradication and Alleviation Certificates or the PEA Ce Bonds by the Caucus of
Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-20111 (2011 BIR Ruling), declaring that the PEACe Bonds being deposit
substitutes are subject to the 20% final withholding tax. Pursuant to this ruling, the Secretary of Finance directed the Bureau of Treasury to withhold a 20% final
tax from the face value of the PEACe Bonds upon their payment at maturity on October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus2 filed by petitioners under Rule 65 of the Rules of Court seeking to:
a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011 [and] other related rulings issued by BIR of similar tenor and import, for
being unconstitutional and for having been issued without jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction ... ;
b. PROHIBIT Respondents, particularly the BTr; from withholding or collecting the 20% FWT from the payment of the face value of the Government
Bonds upon their maturity;
c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of the Government Bonds upon maturity ... ; and
d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary injunction, enjoining Respondents, particularly the BIR and
the BTr, from withholding or collecting 20% FWT on the Government Bonds and the respondent BIR from enforcing the assailed 2011 BIR Ruling, as
well asother related rulings issued by the BIR of similar tenor and import, pending the resolution by [the court] of the merits of [the] Petition.3
Factual background
By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO) "with the assistance of its financial advisors, Rizal Commercial
Banking Corp. ("RCBC"), RCBC Capital Corp. ("RCBC Capital"), CAPEX Finance and Investment Corp. ("CAPEX") and SEED Capital Ventures, Inc.
(SEED),"5 requested an approval from the Department of Finance for the issuance by the Bureau of Treasury of 10-year zerocoupon Treasury Certificates (Tnotes).6 The T-notes would initially be purchased by a special purpose vehicle on behalf of CODE-NGO, repackaged and sold at a premium to investors as the
PEACe Bonds.7 The net proceeds from the sale of the Bonds"will be used to endow a permanent fund (Hanapbuhay Fund) to finance meritorious activities and
projects of accredited non-government organizations (NGOs) throughout the country."8
Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of zero-coupon bonds were also presented by banks and financial
institutions, such as First Metro Investment Corporation (proposal dated March 1, 2001),9 International Exchange Bank (proposal dated July 27, 2000),10 Security
Bank Corporation and SB Capital Investment Corporation (proposal dated July 25, 2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25,
1999).12 "[B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng Fixed Income indicate that the interest income or discount earned on the
proposed zerocoupon bonds would be subject to the prevailing withholding tax."13
A zero-coupon bondis a bond bought at a price substantially lower than its face value (or at a deep discount), with the face value repaid at the time of maturity. 14 It
does not make periodic interest payments, or have socalled "coupons," hence the term zero-coupon bond.15 However, the discount to face value constitutes the
return to the bondholder.16
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGOs letters dated May 10, 15, and 25, 2001, issued BIR Ruling No. 020-200117 on the tax
treatment of the proposed PEACe Bonds. BIR Ruling No. 020-2001, signed by then Commissioner ofInternal Revenue Ren G. Baez confirmed that the PEACe
Bonds would not be classified as deposit substitutes and would not be subject to the corresponding withholding tax:
Thus, to be classified as "deposit substitutes", the borrowing of funds must be obtained from twenty (20) or more individuals or corporate lenders at any one time.
In the light of your representation that the PEACe Bonds will be issued only to one entity, i.e., Code NGO, the same shall not be considered as "deposit substitutes"
falling within the purview of the above definition. Hence, the withholding tax on deposit substitutes will not apply.18 (Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently reiterated in BIR Ruling No. 035-2001 19 dated August 16, 2001
and BIR Ruling No. DA-175-0120 dated September 29, 2001 (collectively, the 2001 Rulings). In sum, these rulings pronounced that to be able to determine
whether the financial assets, i.e., debt instruments and securities are deposit substitutes, the "20 or more individual or corporate lenders" rule must apply. Moreover,
the determination of the phrase "at any one time" for purposes of determining the "20 or more lenders" is to be determined at the time of the original issuance. Such
being the case, the PEACe Bonds were not to be treated as deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza (Former Treasurer Edeza) questioned the propriety of issuing
the bonds directly to a special purpose vehicle considering that the latter was not a Government Securities Eligible Dealer (GSED). 22 Former Treasurer Edeza
recommended that the issuance of the Bonds "be done through the ADAPS"23 and that CODE-NGO "should get a GSED to bid in [sic] its behalf."24

Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds25 (Public Offering) dated October 9, 2001, the Bureau of Treasury announced
that "P30.0B worth of 10-year Zero[-] Coupon Bonds [would] be auctioned on October 16, 2001[.]"26 The notice stated that the Bonds "shall be issued to not
morethan 19 buyers/lenders hence, the necessity of a manual auction for this maiden issue."27 It also required the GSEDs to submit their bids not later than 12
noon on auction date and to disclose in their bid submissions the names of the institutions bidding through them to ensure strict compliance with the 19 lender
limit.28 Lastly, it stated that "the issue being limitedto 19 lenders and while taxable shall not be subject to the 20% final withholding [tax]."29
On October 12, 2001, the Bureau of Treasury released a memo30 on the "Formula for the Zero-Coupon Bond." The memo stated inpart that the formula (in
determining the purchase price and settlement amount) "is only applicable to the zeroes that are not subject to the 20% final withholding due to the 19 buyer/lender
limit."31
A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the "Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be
Issued on October 16, 2001" (Auction Guidelines).32 The Auction Guidelines reiterated that the Bonds to be auctioned are "[n]ot subject to 20% withholding tax
as the issue will be limited to a maximum of 19 lenders in the primary market (pursuant to BIR Revenue Regulation No. 020 2001)."33The Auction Guidelines, for
the first time, also stated that the Bonds are "[e]ligible as liquidity reserves (pursuant to MB Resolution No. 1545 dated 27 September 2001)[.]"34
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon bonds.35 Also on the same date, the Bureau of Treasury issued another
memorandum36 quoting excerpts of the ruling issued by the Bureau of Internal Revenue concerning the Bonds exemption from 20% final withholding tax and the
opinion of the Monetary Board on reserve eligibility.37
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was very wide, from as low as 12.248% to as high as 18.000%.39 Nonetheless, the
Bureau of Treasury accepted the auction results.40 The cut-off was at 12.75%.41
After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning bidder having tendered the lowest bids. 42 Accordingly, on
October 18, 2001, the Bureau of Treasury issued P35 billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for approximately P10.17 billion,43 resulting
in a discount of approximately P24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting Agreement44 with CODE-NGO, whereby RCBC Capital was appointed as the Issue
Manager and Lead Underwriter for the offering of the PEACe Bonds.45RCBC Capital agreed to underwrite46 on a firm basis the offering, distribution and sale of
the 35 billion Bonds at the price of P11,995,513,716.51.47 In Section 7(r) of the underwriting agreement, CODE-NGO represented that "[a]ll income derived from
the Bonds, inclusive of premium on redemption and gains on the trading of the same, are exempt from all forms of taxation as confirmed by Bureau of Internal
Revenue (BIR) letter rulings dated 31 May 2001 and 16 August 2001, respectively."48
RCBC Capital sold the Government Bonds in the secondary market for an issue price of P11,995,513,716.51. Petitioners purchased the PEACe Bonds on different
dates.49
BIR rulings
On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the Government Bonds and directing the BTr to withhold said final
tax at the maturity thereof, [allegedly without] consultation with Petitioners as bond holders, and without conducting any hearing."50
"It appears that the assailed 2011 BIR Ruling was issued in response to a query of the Secretary of Finance on the proper tax treatment of the discount or interest
income derived from the Government Bonds."51 The Bureau of Internal Revenue, citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling
No. 007-0452 dated July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13, 2004; and BIR Ruling No. 008-0554 dated July 28, 2005, declared the
following:
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20% Final Tax on interest income from deposit substitutes. It is now settled
that all treasury bonds (including PEACe Bonds), regardless of the number of purchasers/lenders at the time of origination/issuance are considered deposit
substitutes. In the case of zero-coupon bonds, the discount (i.e. difference between face value and purchase price/discounted value of the bond) is treated as interest
income of the purchaser/holder. Thus, the Php 24.3 interest income should have been properly subject to the 20% Final Tax as provided in Section 27(D)(1) of the
Tax Code of 1997. . . .
....
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able tocollect the final tax on the discount/interest income realized by RCBC as
a result of the 2001 Rulings. Subsequently, the issuance of BIR Ruling No. 007-04 dated July 16, 2004 effectively modifies and supersedes the 2001 Rulings by
stating that the [1997] Tax Code is clear that the "term public means borrowing from twenty (20) or more individual or corporate lenders at any one time." The
word "any" plainly indicates that the period contemplated is the entire term of the bond, and not merely the point of origination or issuance. . . . Thus, by taking the
PEACe bonds out of the ambit of deposits [sic] substitutes and exempting it from the 20% Final Tax, an exemption in favour of the PEACe Bonds was created
when no such exemption is found in the law.55
On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued by the Philippine Dealing System Holdings Corporation and Subsidiaries ("PDS
Group"). The Memo provides that in view of the pronouncement of the DOF and the BIR on the applicability of the 20% FWT on the Government Bonds, no
transferof the same shall be allowed to be recorded in the Registry of Scripless Securities ("ROSS") from 12 October 2011 until the redemption payment date on 18
October 2011. Thus, the bondholders of record appearing on the ROSS as of 18 October 2011, which include the Petitioners, shall be treated by the BTr asthe
beneficial owners of such securities for the relevant [tax] payments to be imposed thereon."56
On October 17, 2011, replying to anurgent query from the Bureau of Treasury, the Bureau of Internal Revenue issued BIR Ruling No. DA 378-2011 57 clarifying
that the final withholding tax due on the discount or interest earned on the PEACe Bonds should "be imposed and withheld not only on RCBC/CODE NGO but
also [on] all subsequent holders of the Bonds."58
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with urgent application for a temporary restraining order and/or writ
of preliminary injunction)59 before this court.
On October 18, 2011, this court issued a temporary restraining order (TRO) 60 "enjoining the implementation of BIR Ruling No. 370-2011 against the [PEACe
Bonds,] . . . subject to the condition that the 20% final withholding tax on interest income there from shall be withheld by the petitioner banks and placed in escrow
pending resolution of [the] petition."61
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to admit petition-in-intervention 62 dated October 27, 2011,
which was granted by this court on November 15, 2011.63
Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with Urgent Ex Parte Motion to Direct Respondents to Comply with the TRO." 64 They
alleged that on the same day that the temporary restraining order was issued, the Bureau of Treasury paid to petitioners and other bondholders the amounts
representing the face value of the Bonds, net however of the amounts corresponding to the 20% final withholding tax on interest income, and that the Bureau of

Treasury refused to release the amounts corresponding to the 20% final withholding tax.65 On November 15, 2011, this court directed respondents to: "(1) SHOW
CAUSE why they failed to comply with the October 18, 2011 resolution; and (2) COMPLY with the Courts resolution in order that petitioners may place the
corresponding funds in escrow pending resolution of the petition."66
On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-in-intervention with comment on the petitionin-intervention of
RCBC and RCBC Capital).67 The motion was granted by this court on November 22, 2011.68
On December 1, 2011, public respondents filed their compliance.69 They explained that: 1) "the implementation of [BIR Ruling No. 370-2011], which has already
been performed on October 18, 2011 with the withholding of the 20% final withholding tax on the face value of the PEACe bonds, is already fait accompli . . .
when the Resolution and TRO were served to and received by respondents BTr and National Treasurer [on October 19, 2011]"; 70 and 2) the withheld amount has
ipso facto become public funds and cannot be disbursed or released to petitioners without congressional appropriation.71 Respondents further aver that"[i]nasmuch
as the . . . TRO has already become moot . . . the condition attached to it, i.e., that the 20% final withholding tax on interest income therefrom shall be withheld by
the banks and placed in escrow . . .has also been rendered moot[.]"72
On December 6, 2011, this court noted respondents' compliance.73
On February 22, 2012, respondents filed their consolidated comment74 on the petitions-in-intervention filed by RCBC and RCBC Capital and On November 27,
2012, petitioners filed their "Manifestation with Urgent Reiterative Motion (To Direct Respondents to Comply with the Temporary Restraining Order)."75
On December 4, 2012, this court: (a) noted petitioners manifestation with urgent reiterative motion (to direct respondents to comply with the temporary restraining
order); and (b) required respondents to comment thereon.76
Respondents comment77 was filed on April 15,2013, and petitioners filed their reply78 on June 5, 2013.
Issues
The main issues to be resolved are:
I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final withholding tax under the 1997 National Internal Revenue Code.
Related to this question is the interpretation of the phrase "borrowing from twenty (20) or more individual or corporate lenders at any one time" under
Section 22(Y) of the 1997 National Internal Revenue Code, particularly on whether the reckoning of the 20 lenders includes trading of the bonds in the
secondary market; and
II. If the PEACe Bonds are considered "deposit substitutes," whether the government or the Bureau of Internal Revenue is estopped from imposing
and/or collecting the 20% final withholding tax from the face value of these Bonds
a. Will the imposition of the 20% final withholding tax violate the non-impairment clause of the Constitution?
b. Will it constitute a deprivation of property without due process of law?
c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-retroactivity of rulings?
Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO
Petitioners argue that "[a]s the issuer of the Government Bonds acting through the BTr, the Government is obligated . . . to pay the face value amount of Ph P35
Billion upon maturity without any deduction whatsoever."79They add that "the Government cannot impair the efficacy of the [Bonds] by arbitrarily, oppressively
and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a mere eleven (11) days before maturity and after several, consistent categorical
declarations that such bonds are exempt from the 20% FWT, without violating due process"80 and the constitutional principle on non-impairment of
contracts.81 Petitioners aver that at the time they purchased the Bonds, they had the right to expect that they would receive the full face value of the Bonds upon
maturity, in view of the 2001 BIR Rulings.82 "[R]egardless of whether or not the 2001 BIR Rulings are correct, the fact remains that [they] relied [on] good faith
thereon."83
At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined under Section 22(Y) of the 1997 National Internal Revenue Code
because there was only one lender (RCBC) to whom the Bureau of Treasury issued the Bonds. 84 They allege that the 2004, 2005, and 2011 BIR Rulings
"erroneously interpreted that the number of investors that participate in the secondary market is the determining factor in reckoning the existence or non-existence
of twenty (20) or more individual or corporate lenders."85 Furthermore, they contend that the Bureau of Internal Revenue unduly expanded the definition of
deposit substitutes under Section 22 of the 1997 National Internal Revenue Code in concluding that "the mere issuance of government debt instruments and
securities is deemed as falling within the coverage of deposit substitutes[.]"86 Thus, "[t]he 2011 BIR Ruling clearly amount[ed] to an unauthorized act of
administrative legislation[.]"87
Petitioners further argue that their income from the Bonds is a "trading gain," which is exempt from income tax.88They insist that "[t]hey are not lenders whose
income is considered as interest income or yield subject to the 20% FWT under Section 27 (D)(1) of the [1997 National Internal Revenue Code]"89 because they
"acquired the Government Bonds in the secondary or tertiary market."90
Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners argue that the collection of the final tax was barred by
prescription.91 They point out that under Section 7 of DOF Department Order No. 141-95,92 the final withholding tax "should have been withheld at the time of
their issuance[.]"93 Also, under Section 203 of the 1997 National Internal Revenue Code, "internal revenuetaxes, such as the final tax, [should] be assessed within
three (3) years after the last day prescribed by law for the filing of the return."94
Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior notice to them was in violation of their property rights, 95 their
constitutional right to due process96 as well as Section 246 of the 1997 National Internal Revenue Code on non-retroactivity of rulings. 97 Allegedly, it would also
have "an adverse effect of colossal magnitude on the investors, both localand foreign, the Philippine capital market, and most importantly, the countrys standing in
the international commercial community."98 Petitioners explained that "unless enjoined, the governments threatened refusal to pay the full value of the
Government Bonds will negatively impact on the image of the country in terms of protection for property rights (including financial assets), degree of legal
protection for lenders rights, and strength of investor protection."99 They cited the countrys ranking in the World Economic Forum: 75th in the world in its 2011
2012 Global Competitiveness Index, 111th out of 142 countries worldwide and 2nd to the last among ASEAN countries in terms of Strength of Investor Protection,
and 105th worldwide and last among ASEAN countries in terms of Property Rights Index and Legal Rights Index.100 It would also allegedly "send a
reverberating message to the whole world that there is no certainty, predictability, and stability of financial transactions in the capital markets[.]" 101 "[T]he
integrity of Government-issued bonds and notes will be greatly shattered and the credit of the Philippine Government will suffer" 102 if the sudden turnaround of
the government will be allowed,103 and it will reinforce "investors perception that the level of regulatory risk for contracts entered into by the Philippine
Government is high,"104 thus resulting in higher interestrate for government-issued debt instruments and lowered credit rating.105

Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of Internal Revenue "gravely and seriously abused her discretion in the
exercise of her rule-making power"106 when she issued the assailed 2011 BIR Ruling which ruled that "all treasury bonds are deposit substitutes regardless of
the number of lenders, in clear disregard of the requirement of twenty (20)or more lenders mandated under the NIRC." 107 They argue that "[b]y her blanket and
arbitrary classification of treasury bonds as deposit substitutes, respondent CIR not only amended and expanded the NIRC, but effectively imposed a new tax on
privately-placed treasury bonds."108 Petitioners-intervenors RCBC and RCBC Capital further argue that the 2011 BIR Ruling will cause substantial impairment of
their vested rights109 under the Bonds since the ruling imposes new conditions by "subjecting the PEACe Bonds to the twenty percent (20%) final withholding
tax notwithstanding the fact that the terms and conditions thereof as previously represented by the Government, through respondents BTr and BIR, expressly state
that it is not subject to final withholding tax upon their maturity."110 They added that "[t]he exemption from the twenty percent (20%) final withholding tax [was]
the primary inducement and principal consideration for [their] participat[ion] in the auction and underwriting of the PEACe Bonds."111
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent Commissioner of Internal Revenue violated their rights to due
process when she arbitrarily issued the 2011 BIR Ruling without prior notice and hearing, and the oppressive timing of such ruling deprived them of the
opportunity to challenge the same.112
Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-intervenors RCBC and RCBC Capital claim that respondents Bureau of
Treasury and CODE-NGO should be held liable "as [these] parties explicitly represented . . . that the said bonds are exempt from the final withholding tax."113
Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the implementation of the [2011 assailed BIR Ruling and BIR Ruling No. DA 378-2011] will
have pernicious effects on the integrity of existing securities, which is contrary to the State policies of stabilizing the financial system and of developing capital
markets."114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-2011 are "invalid because they contravene Section 22(Y) of the 1997
[NIRC] when the said rulings disregarded the applicability of the 20 or more lender rule to government debt instruments"[;]115 (b) "when [it] sold the PEACe
Bonds in the secondary market instead of holding them until maturity, [it] derived . . . long-term trading gain[s], not interest income, which [are] exempt . . . under
Section 32(B)(7)(g) of the 1997 NIRC"[;]116 (c) "the tax exemption privilege relating to the issuance of the PEACe Bonds . . . partakes of a contractual
commitment granted by the Government in exchange for a valid and material consideration [i.e., the issue price paid and savings in borrowing cost derived by the
Government,] thus protected by the non-impairment clause of the 1987 Constitution"[;]117 and (d) the 2004, 2005, and 2011 BIR Rulings "did not validly revoke
the 2001 BIR Rulings since no notice of revocation was issued to [it], RCBC and [RCBC Capital] and petitioners[-bondholders], nor was there any BIR
administrative guidance issued and published[.]"118 CODE-NGO additionally argues that impleading it in a Rule 65 petition was improper because: (a) it involves
determination of a factual question;119 and (b) it is premature and states no cause of action as it amounts to an anticipatory third-party claim.120
Arguments of respondents
Respondents argue that petitioners direct resort to this court to challenge the 2011 BIR Ruling violates the doctrines of exhaustion of administrative remedies and
hierarchy ofcourts, resulting in a lack of cause of action that justifies the dismissal of the petition. 121 According to them, "the jurisdiction to review the rulings of
the [Commissioner of Internal Revenue], after the aggrieved party exhausted the administrative remedies, pertains to the Court of Tax Appeals." 122 They point out
that "a case similar to the present Petition was [in fact] filed with the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351 [and] entitled, Rizal
Commercial Banking Corporation and RCBC Capital Corporation vs. Commissioner of Internal Revenue, et al."123
Respondents further take issue on the timeliness of the filing of the petition and petitions-in-intervention.124 They argue that under the guise of mainly assailing
the 2011 BIR Ruling, petitioners are indirectly attacking the 2004 and 2005 BIR Rulings, of which the attack is legally prohibited, and the petition insofar as it
seeks to nullify the 2004 and 2005 BIR Rulings was filed way out of time pursuant to Rule 65, Section 4.125
Respondents contend that the discount/interest income derived from the PEACe Bonds is not a trading gain but interest income subject to income tax. 126 They
explain that "[w]ith the payment of the PhP35 Billion proceeds on maturity of the PEACe Bonds, Petitioners receive an amount of money equivalent to about
PhP24.8 Billion as payment for interest. Such interest is clearly an income of the Petitioners considering that the same is a flow of wealth and not merely a return
of capital the capital initially invested in the Bonds being approximately PhP10.2 Billion[.]"127
Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not constitute an impairment of the obligations of contract,
respondents aver that: "The BTr has no power to contractually grant a tax exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be considered a
material term of the Bonds"[;]128 "[t]here has been no change in the laws governing the taxability of interest income from deposit substitutes and said laws are
read into every contract"[;]129 "[t]he assailed BIR Rulings merely interpret the term "deposit substitute" in accordance with the letter and spirit of the Tax
Code"[;]130 "[t]he withholding of the 20% FWT does not result in a default by the Government as the latter performed its obligations to the bondholders in
full"[;]131 and "[i]f there was a breach of contract or a misrepresentation it was between RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the
PEACe Bonds."132
Similarly, respondents counter that the withholding of "[t]he 20% final withholding tax on the PEACe Bonds does not amount to a deprivation of property without
due process of law."133 Their imposition of the 20% final withholding tax is not arbitrary because they were only performing a duty imposed by law; 134 "[t]he
2011 BIR Ruling is aninterpretative rule which merely interprets the meaning of deposit substitutes [and upheld] the earlier construction given to the termby the
2004 and 2005 BIR Rulings."135 Hence, respondents argue that "there was no need to observe the requirements of notice, hearing, and publication[.]"136
Nonetheless, respondents add that "there is every reason to believe that Petitioners all major financial institutions equipped with both internal and external
accounting and compliance departments as wellas access to both internal and external legal counsel; actively involved in industry organizations such as the
Bankers Association of the Philippines and the Capital Market Development Council; all actively taking part in the regular and special debt issuances of the BTr
and indeed regularly proposing products for issue by BTr had actual notice of the 2004 and 2005 BIR Rulings." 137 Allegedly, "the sudden and drastic drop
including virtually zero trading for extended periods of six months to almost a year in the trading volume of the PEACe Bonds after the release of BIR Ruling
No. 007-04 on July 16, 2004 tend to indicate that market participants, including the Petitioners herein, were aware of the ruling and its consequences for the
PEACe Bonds."138
Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the Commissioner of Internal Revenues rule-making power; 139 that it and the
2004 and 2005 BIR Rulings did not unduly expand the definition of deposit substitutes by creating an unwarranted exception to the requirement of having 20 or
more lenders/purchasers;140 and the word "any" in Section 22(Y) of the National Internal Revenue Code plainly indicates that the period contemplated is the
entire term of the bond and not merely the point of origination or issuance.141
Respondents further argue that a retroactive application of the 2011 BIR Ruling will not unjustifiably prejudice petitioners.142 "[W]ith or without the 2011 BIR
Ruling, Petitioners would be liable topay a 20% final withholding tax just the same because the PEACe Bonds in their possession are legally in the nature of
deposit substitutes subject to a 20% final withholding tax under the NIRC."143 Section 7 of DOF Department Order No. 141-95 also provides that incomederived
from Treasury bonds is subject to the 20% final withholding tax.144 "[W]hile revenue regulations as a general rule have no retroactive effect, if the revocation is
due to the fact that the regulation is erroneous or contrary to law, such revocation shall have retroactive operation as to affect past transactions, because a wrong
construction of the law cannot give rise to a vested right that can be invoked by a taxpayer."145

Finally, respondents submit that "there are a number of variables and factors affecting a capital market." 146 "[C]apital market itself is inherently
unstable."147 Thus, "[p]etitioners argument that the 20% final withholding tax . . . will wreak havoc on the financial stability of the country is a mere supposition
that is not a justiciable issue."148
On the prayer for the temporary restraining order, respondents argue that this order "could no longer be implemented [because] the acts sought to be enjoined are
already fait accompli."149 They add that "to disburse the funds withheld to the Petitioners at this time would violate Section 29[,] Article VI of the Constitution
prohibiting money being paid out of the Treasury except in pursuance of an appropriation made by law[.]" 150 "The remedy of petitioners is to claim a tax refund
under Section 204(c) of the Tax Code should their position be upheld by the Honorable Court."151
Respondents also argue that "the implementation of the TRO would violate Section 218 of the Tax Code in relation to Section 11 of Republic Act No. 1125 (as
amended by Section 9 of Republic Act No. 9282) which prohibits courts, except the Court of Tax Appeals, from issuing injunctions to restrain the collection of any
national internal revenue tax imposed by the Tax Code."152
Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO argue that:
1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal Revenue Code when it declared that all government debt
instruments are deposit substitutes regardless of the 20-lender rule; and
2. The 2011 BIR Ruling cannot be applied retroactively because:
a) It will violate the contract clause;
It constitutes a unilateral amendment of a material term (tax exempt status) in the Bonds, represented by the government as an inducement
and important consideration for the purchase of the Bonds;
b) It constitutes deprivation ofproperty without due process because there was no prior notice to bondholders and hearing and publication;
c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue Code;
d) It violates the constitutional provision on supporting activities of non-government organizations and development of the capital market;
and
e) The assessment had already prescribed.
Respondents counter that:
1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in issuing the challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the Commissioner of Internal Revenues power to interpret the provisions
of the 1997 National Internal Revenue Code and other tax laws;
b. Commissioner of Internal Revenue merely restates and confirms the interpretations contained in previously issued BIR Ruling Nos. 007-2004, DA491-04,and 008-05, which have already effectively abandoned or revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by his or her predecessors rulings especially when the latters rulings are not in harmony with the
law; and
d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give rise to a vested right. Therefore, the 2011 BIR Ruling can
be given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy in the ordinary course of law:
a. Petitioners had the basic remedy offiling a claim for refund of the 20% final withholding tax they allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of courts.
Courts ruling
Procedural Issues
Non-exhaustion of
administrative remedies proper
Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable by the Secretary of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -The power to interpret the provisions of this Code and other tax laws shall be
under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. (Emphasis supplied)
Thus, it was held that "[i]f superior administrative officers [can] grant the relief prayed for, [then] special civil actions are generally not entertained."153 The
remedy within the administrative machinery must be resorted to first and pursued to its appropriate conclusion before the courts judicial power can be sought.154
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative remedies:
[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called upon by the peculiarity and uniqueness of the factual and
circumstantial settings of a case. Hence, it is disregarded (1) when there is a violation of due process, (2) when the issue involved is purely a legal question,155 (3)
when the administrative action is patently illegal amounting to lack or excess of jurisdiction,(4) when there is estoppel on the part of the administrative agency
concerned,(5) when there is irreparable injury, (6) when the respondent is a department secretary whose acts as an alter ego of the President bears the implied and
assumed approval of the latter, (7) when to require exhaustion of administrative remedies would be unreasonable, (8) when it would amount to a nullification of a
claim, (9) when the subject matter is a private land in land case proceedings, (10) when the rule does not provide a plain, speedy and adequate remedy, (11) when
there are circumstances indicating the urgency of judicial intervention.156 (Emphasis supplied, citations omitted)
The exceptions under (2) and (11)are present in this case. The question involved is purely legal, namely: (a) the interpretation of the 20-lender rule in the definition
of the terms public and deposit substitutes under the 1997 National Internal Revenue Code; and (b) whether the imposition of the 20% final withholding tax on the
PEACe Bonds upon maturity violates the constitutional provisions on non-impairment of contracts and due process. Judicial intervention is likewise urgent with
the impending maturity of the PEACe Bonds on October 18, 2011.

The rule on exhaustion of administrative remedies also finds no application when the exhaustion will result in an exercise in futility.157
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a futile exercise because it was upon the request of the Secretary
of Finance that the 2011 BIR Ruling was issued by the Bureau of Internal Revenue. It appears that the Secretary of Finance adopted the Commissioner of Internal
Revenues opinions as his own.158 This position was in fact confirmed in the letter159 dated October 10, 2011 where he ordered the Bureau of Treasury to
withhold the amount corresponding to the 20% final withholding tax on the interest or discounts allegedly due from the bondholders on the strength of the 2011
BIR Ruling. Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals. The questioned
BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in connection with the implementation of the 1997 National Internal Revenue Code on the taxability of
the interest income from zero-coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No. 9282,160 such rulings of the Commissioner of
Internal Revenue are appealable to that court, thus:
SEC. 7.Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal
Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of
Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such decision or rulingor after the
expiration of the period fixed by law for action as referred toin Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising under the National Internal Revenue Code, the Tariff and
Customs Code or the Local Government Code shall be maintained, except as herein provided, until and unless an appeal has been previously filed with the CTA
and disposed of in accordance with the provisions of this Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162 this court emphasized the jurisdiction of the Court of Tax Appeals over rulings
of the Bureau of Internal Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be stressed that the jurisdiction to review the rulings of the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing the Tax Code on the taxability of
pawnshops.. . .
....
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. The Secretary of Finance, upon recommendation of the Commissioner,
shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate of sales tax under certain category enumerated in
Section 163 and 165 of this Code shall be without prejudice to the power of the Commissioner of Internal Revenue to make rulings or opinions in connection with
the implementation of the provisionsof internal revenue laws, including ruling on the classification of articles of sales and similar purposes." (Emphasis in the
original)
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely an attempt to nullify General Circular No. V-148, which
does not adjudicate or settle any controversy, and that, accordingly, this case is not within the jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the collection of taxes and license fees to adhere strictly to the
interpretation given by the defendant tothe statutory provisions abovementioned, as set forth in the Circular. The same incorporates, therefore, a decision of the
Collector of Internal Revenue (now Commissioner of Internal Revenue) on the manner of enforcement of the said statute, the administration of which is entrusted
by law to the Bureau of Internal Revenue. As such, it comes within the purview of Republic Act No. 1125, Section 7 of which provides that the Court of Tax
Appeals shall exercise exclusive appellate jurisdiction to review by appeal . . . decisions of the Collector of Internal Revenue in . . . matters arising under the
National Internal Revenue Code or other law or part of the law administered by the Bureau of Internal Revenue."163
In exceptional cases, however, this court entertained direct recourse to it when "dictated by public welfare and the advancement of public policy, or demanded by
the broader interest of justice, or the orders complained of were found to be patent nullities, or the appeal was considered as clearly an inappropriate remedy."164
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of Interior and Local Government,165 this court noted that
the petition for prohibition was filed directly before it "in disregard of the rule on hierarchy of courts. However, [this court] opt[ed] to take primary jurisdiction
over the . . . petition and decide the same on its merits in viewof the significant constitutional issues raised by the parties dealing with the tax treatment of
cooperatives under existing laws and in the interest of speedy justice and prompt disposition of the matter."166
Here, the nature and importance of the issues raised167 to the investment and banking industry with regard to a definitive declaration of whether government debt
instruments are deposit substitutes under existing laws, and the novelty thereof, constitute exceptional and compelling circumstances to justify resort to this court
in the first instance.
The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other financial instrument or product that may be issued and traded in the
market. Due to the changing positions of the Bureau of Internal Revenue on this issue, there isa need for a final ruling from this court to stabilize the expectations
in the financial market.

Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of courts had been rendered moot by this courts issuance of the
temporary restraining order enjoining the implementation of the 2011 BIR Ruling. The temporary restraining order effectively recognized the urgency and
necessity of direct resort to this court.
Substantive issues
Tax treatment of deposit
substitutes
Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal Revenue Code, a final withholdingtax at the rate of 20% is imposed on interest on
any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements. These provisions read:
SEC. 24. Income Tax Rates.
....
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest fromany
currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; . . . Provided, further, That
interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed
under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall
be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate
based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%. (Emphasis supplied)
SEC. 27. Rates of Income Tax on Domestic Corporations. ....
(D) Rates of Tax on Certain Passive Incomes. (1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A
final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines:
Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis supplied)
SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. ....
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. (a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from
any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived
from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest
income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax
at the rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis supplied)
This tax treatment of interest from bank deposits and yield from deposit substitutes was first introduced in the 1977 National Internal Revenue Code through
Presidential Decree No. 1739168 issued in 1980. Later, Presidential Decree No. 1959, effective on October 15, 1984, formally added the definition of deposit
substitutes, viz:
(y) Deposit substitutes shall mean an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of
debt instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or
the needs of their agent or dealer.These promissory notes, repurchase agreements, certificates of assignment or participation and similar instrument with recourse
as may be authorized by the Central Bank of the Philippines, for banks and non-bank financial intermediaries or by the Securities and Exchange Commission of the
Philippines for commercial, industrial, finance companies and either non-financial companies: Provided, however, that only debt instruments issued for inter-bank
call loans to cover deficiency in reserves against deposit liabilities including those between or among banks and quasi-banks shall not be considered as deposit
substitute debt instruments. (Emphasis supplied)
Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted verbatim the same definition and specifically identified the following
borrowings as "deposit substitutes":
SECTION 2. Definitions of Terms. . . .
(h) "Deposit substitutes" shall mean
....
(a) All interbank borrowings by or among banks and non-bank financial institutions authorized to engage in quasi-banking functions evidenced by
deposit substitutes instruments, except interbank call loans to cover deficiency in reserves against deposit liabilities as evidenced by interbank loan
advice or repayment transfer tickets.
(b) All borrowings of the national and local government and its instrumentalities including the Central Bank of the Philippines, evidenced by debt
instruments denoted as treasury bonds, bills, notes, certificates of indebtedness and similar instruments.

(c) All borrowings of banks, non-bank financial intermediaries, finance companies, investment companies, trust companies, including the trust
department of banks and investment houses, evidenced by deposit substitutes instruments. (Emphasis supplied)
The definition of deposit substitutes was amended under the 1997 National Internal Revenue Code with the addition of the qualifying phrase for public
borrowing from 20 or more individual or corporate lenders at any one time. Under Section 22(Y), deposit substitute is defined thus: SEC. 22. Definitions- When
used in this Title:
....
(Y) The term deposit substitutes shall mean an alternative form of obtaining funds from the public(the term 'public' means borrowing from twenty (20) or more
individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own
account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These
instruments may include, but need not be limited to, bankers acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements
entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar
instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover
deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt
instruments. (Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined "public" to mean "twenty (20) or more individual or corporate lenders at any one
time." Hence, the number of lenders is determinative of whether a debt instrument should be considered a deposit substitute and consequently subject to the 20%
final withholding tax.
20-lender rule
Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the BTr issued the Government Bonds."169 On the other hand, respondents theorize
that the word "any" "indicates that the period contemplated is the entire term of the bond and not merely the point of origination or issuance[,]" 170 such that if the
debt instruments "were subsequently sold in secondary markets and so on, insuch a way that twenty (20) or more buyers eventually own the instruments, then it
becomes indubitable that funds would be obtained from the "public" as defined in Section 22(Y) of the NIRC."171 Indeed, in the context of the financial market,
the words "at any one time" create an ambiguity.
Financial markets
Financial markets provide the channel through which funds from the surplus units (households and business firms that have savings or excess funds) flow to the
deficit units (mainly business firms and government that need funds to finance their operations or growth). They bring suppliers and users of funds together and
provide the means by which the lenders transform their funds into financial assets, and the borrowers receive these funds now considered as their financial
liabilities. The transfer of funds is represented by a security, such as stocks and bonds. Fund suppliers earn a return on their investment; the return is necessary to
ensure that funds are supplied to the financial markets.172
"The financial markets that facilitate the transfer of debt securities are commonly classified by the maturity of the securities[,]"173 namely: (1) the money market,
which facilitates the flow of short-term funds (with maturities of one year or less); and (2) the capital market, which facilitates the flow of long-term funds (with
maturities of more than one year).174
Whether referring to money marketsecurities or capital market securities, transactions occur either in the primary market or in the secondary market. 175 "Primary
markets facilitate the issuance of new securities. Secondary markets facilitate the trading of existing securities, which allows for a change in the ownership of the
securities."176The transactions in primary markets exist between issuers and investors, while secondary market transactions exist among investors.177
"Over time, the system of financial markets has evolved from simple to more complex ways of carrying out financial transactions." 178 Still, all systems perform
one basic function: the quick mobilization of money from the lenders/investors to the borrowers.179
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3) indirect finance.180
With direct financing, the "borrower and lender meet each other and exchange funds in returnfor financial assets"181 (e.g., purchasing bonds directly from the
company issuing them). This method provides certain limitations such as: (a) "both borrower and lender must desire to exchange the same amount of funds at the
same time"[;]182 and (b) "both lender and borrower must frequently incur substantial information costs simply to find each other."183
In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby reducing information costs.184 A Broker185 is "an
individual or financial institution who provides information concerning possible purchases and sales of securities. Either a buyer or a seller of securities may
contact a broker, whose job is simply to bring buyers and sellers together." 186 A dealer187 "also serves as a middleman between buyers and sellers, but the dealer
actually acquires the sellers securities in the hope of selling them at a later time at a more favorable price."188 Frequently, "a dealer will split up a large issue of
primary securities into smaller units affordable by . . . buyers . . . and thereby expand the flow of savings into investment." 189 In semi direct financing, "[t]he
ultimate lender still winds up holding the borrowers securities, and therefore the lender must be willing to accept the risk, liquidity, and maturity characteristics of
the borrowers [debt security]. There still must be a fundamental coincidence of wants and needs between [lenders and borrowers] for semidirect financial
transactions to take place."190
"The limitations of both direct and semidirect finance stimulated the development of indirect financial transactions, carried out with the help of financial
intermediaries"191 or financial institutions, like banks, investment banks, finance companies, insurance companies, and mutual funds.192 Financial intermediaries
accept funds from surplus units and channel the funds to deficit units.193 "Depository institutions [such as banks] accept deposits from surplus units and provide
credit to deficit units through loans and purchase of [debt] securities."194Nondepository institutions, like mutual funds, issue securities of their own (usually in
smaller and affordable denominations) to surplus units and at the same time purchase debt securities of deficit units. 195 "By pooling the resources of[small savers,
a financial intermediary] can service the credit needs of large firms simultaneously."196
The financial market, therefore, is an agglomeration of financial transactions in securities performed by market participants that works to transfer the funds from
the surplus units (or investors/lenders) to those who need them (deficit units or borrowers).
Meaning of "at any one time"
Thus, from the point of view of the financial market, the phrase "at any one time" for purposes of determining the "20 or more lenders" would mean every
transaction executed in the primary or secondary market in connection with the purchase or sale of securities.
For example, where the financial assets involved are government securities like bonds, the reckoning of "20 or more lenders/investors" is made at any transaction
in connection with the purchase or sale of the Government Bonds, such as:
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;

2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;


3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary market usually through a broker or dealer; or
4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to individual or corporate lenders in the secondary market.
When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or morelenders/investors, there is deemed to be a public borrowing
and the bonds at that point intime are deemed deposit substitutes. Consequently, the seller is required to withhold the 20% final withholding tax on the imputed
interest income from the bonds.
For debt instruments that are
not deposit substitutes, regular
income tax applies
It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes under the 1997 National Internal Revenue Code are subject to the
regular income tax.
The phrase "all income derived from whatever source" in Chapter VI, Computation of Gross Income, Section 32(A) of the 1997 National Internal Revenue Code
discloses a legislative policy to include all income not expressly exempted as within the class of taxable income under our laws.
"The definition of gross income isbroad enough to include all passive incomes subject to specific tax rates or final taxes." 197 Hence, interest income from deposit
substitutes are necessarily part of taxable income. "However, since these passive incomes are already subject to different rates and taxed finally at source, they are
no longer included in the computation of gross income, which determines taxable income."198 "Stated otherwise . . . if there were no withholding tax system in
place in this country, this 20 percent portion of the passive income of [creditors/lenders] would actually be paid to the [creditors/lenders] and then remitted by
them to the government in payment of their income tax."199
This court, in Chamber of Real Estate and Builders Associations, Inc. v. Romulo,200 explained the rationale behind the withholding tax system:
The withholding [of tax at source] was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns[;] and
third, to improve the governments cash flow. This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and
reduction of governmental effort to collect taxes through more complicated means and remedies.201 (Citations omitted)
"The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is essentially to maximize and expedite the collection of
income taxes by requiring its payment at the source."202
Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the seller isrequired to withhold the 20% final income tax on the
imputed interest income from the bonds.
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with the "gains" contemplated under Section 32(B)(7)(g)203 of the 1997 National Internal Revenue
Code, which exempts gains derived from trading, redemption, or retirement of long-term securities from ordinary income tax.
The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents forbearance for the use of money. Gains from sale or exchange or
retirement of bonds orother certificate of indebtedness fall within the general category of "gainsderived from dealings in property" under Section 32(A)(3), while
interest from bonds or other certificate of indebtedness falls within the category of "interests" under Section 32(A)(4).204 The use of the term "gains from sale" in
Section 32(B)(7)(g) shows the intent of Congress not toinclude interest as referred under Sections 24, 25, 27, and 28 in the exemption.205
Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading of the bonds before their maturity date, which is the difference
between the selling price of the bonds in the secondary market and the price at which the bonds were purchased by the seller; and (2) gain realized by the last
holder of the bonds when the bonds are redeemed at maturity, which is the difference between the proceeds from the retirement of the bonds and the price atwhich
such last holder acquired the bonds. For discounted instruments,like the zero-coupon bonds, the trading gain shall be the excess of the selling price over the book
value or accreted value (original issue price plus accumulated discount from the time of purchase up to the time of sale) of the instruments.206
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenues interpretation as expressed in the three 2001 BIR Rulings is not consistent with law. 207 Its interpretation of "at any one time" to
mean at the point of origination alone is unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005 BIR Rulings) that "all treasury bonds . . . regardlessof the number
of purchasers/lenders at the time of origination/issuance are considered deposit substitutes."208 Being the subject of this petition, it is, thus, declared void because
it completely disregarded the 20 or more lender rule added by Congress in the 1997 National Internal Revenue Code. It also created a distinction for government
debt instruments as against those issued by private corporations when there was none in the law.
Tax statutes must be reasonably construed as to give effect to the whole act. Their constituent provisions must be read together, endeavoring to make every part
effective, harmonious, and sensible.209 That construction which will leave every word operative will be favored over one that leaves some word, clause, or
sentence meaningless and insignificant.210
It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of executing the 1997 National Internal Revenue Code is an
authoritative construction ofgreat weight, but the principle is not absolute and may be overcome by strong reasons to the contrary. If through a misapprehension of
law an officer has issued an erroneous interpretation, the error must be corrected when the true construction is ascertained.
In Philippine Bank of Communications v. Commissioner of Internal Revenue,211 this court upheld the nullification of Revenue Memorandum Circular (RMC) No.
7-85 issued by the Acting Commissioner of Internal Revenue because it was contrary to the express provision of Section 230 of the 1977 National Internal
Revenue Codeand, hence, "[cannot] be given weight for to do so would, in effect, amend the statute."212 Thus:
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. 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.213 (Citations omitted)
This court further held that "[a] memorandum-circular of a bureau head could not operate to vest a taxpayer with a shield against judicial action [because] 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."214 In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,215 this court nullified
Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending investor's tax on pawnshops. 216 It was held that "the
[Commissioner] cannot, in the exercise of [its interpretative] power, issue administrative rulings or circulars not consistent with the law sought to be applied.
Indeed, administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out. Only Congress
can repeal or amend the law."217
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary,218 this court stated that the Commissioner of Internal Revenue is not
bound by the ruling of his predecessors,219 but, to the contrary, the overruling of decisions is inherent in the interpretation of laws:
[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule is within the delegated authority of the administrative agency; (ii)
whether itis reasonable; and (iii) whether it was issued pursuant to proper procedure. But the court is not free to substitute its judgment as to the desirability or
wisdom of the rule for the legislative body, by its delegation of administrative judgment, has committed those questions to administrative judgments and not to
judicial judgments. In the case of an interpretative rule, the inquiry is not into the validity but into the correctness or propriety of the rule. As a matter of power a
court, when confronted with an interpretative rule, is free to (i) give the force of law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii)
give some intermediate degree of authoritative weight to the interpretative rule.
In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering copra as an "agricultural food product" within the meaning
of 103(b) of the NIRC. As the Solicitor General contends, "copra per se is not food, that is, it is not intended for human consumption. Simply stated, nobody eats
copra for food." That previous Commissioners considered it so, is not reason for holding that the present interpretation is wrong. The Commissioner of Internal
Revenue is not bound by the ruling of his predecessors. To the contrary, the overruling of decisions is inherent in the interpretation of laws.220 (Emphasis
supplied, citations omitted)
Tax treatment of income
derived from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at 10.2 billion; and
2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the PEACe Bonds to undisclosed investors at P11.996 billion.
It may seem that there was only one lender RCBC on behalf of CODE-NGO to whom the PEACe Bonds were issued at the time of origination. However, a
reading of the underwriting agreement221 and RCBC term sheet222 reveals that the settlement dates for the sale and distribution by RCBC Capital (as
underwriter for CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of approximately P11.996 would fall on the same day,
October 18, 2001, when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality, therefore, the entire P10.2 billion borrowing received by the
Bureau of Treasury in exchange for the P35 billion worth of PEACe Bonds was sourced directly from the undisclosed number of investors to whom RCBC
Capital/CODE-NGO distributed the PEACe Bonds all at the time of origination or issuance. At this point, however, we do not know as to how many investors
the PEACe Bonds were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed deposit substitutes within the meaning of Section 22(Y)
of the 1997 National Internal Revenue Code and RCBC Capital/CODE-NGO would have been obliged to pay the 20% final withholding tax on the interest or
discount from the PEACe Bonds. Further, the obligation to withhold the 20% final tax on the corresponding interest from the PEACe Bonds would likewise be
required of any lender/investor had the latter turnedaround and sold said PEACe Bonds, whether in whole or part, simultaneously to 20 or more lenders or
investors.
We note, however, that under Section 24223 of the 1997 National Internal Revenue Code, interest income received by individuals from longterm deposits or
investments with a holding period of not less than five (5) years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper procedure was for the Bureau of Treasury to pay the face
value of the PEACe Bonds to the bondholders and for the Bureau of Internal Revenue to collect the unpaid final withholding tax directly from RCBC
Capital/CODE-NGO, orany lender or investor if such be the case, as the withholding agents.
The collection of tax is not
barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue Code to assess and collect internal revenue taxes is extended to 10
years in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failureto file a return, to be computed from the time of discovery of the
falsity, fraud, or omission. Section 203 states:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed within three (3)
years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun
after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted
from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed
on such last day. (Emphasis supplied)
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection
of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more lenders/investors, the Bureau of Internal Revenue may still collect
the unpaid tax from RCBC Capital/CODE-NGO within 10 years after the discovery of the omission.
In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and petitioners-intervenors.

Reiterative motion on the temporary restraining order


Respondents withholding of the
20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be "served upon the parties affected."224 Moreover, service may be made personally or by mail.225 And,
"[p]ersonal service is complete upon actual delivery [of the order.]"226This courts temporary restraining order was received only on October 19, 2011, or a day
after the PEACe Bonds had matured and the 20% final withholding tax on the interest income from the same was withheld.
Publication of news reports in the print and broadcast media, as well as on the internet, is not a recognized mode of service of pleadings, court orders, or processes.
Moreover, the news reports227 cited by petitioners were posted minutes before the close of office hours or late in the evening of October 18, 2011, and they did
not givethe exact contents of the temporary restraining order.
"[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is shown that suchinjunction or order was served on him personally or
that he had notice of the issuance or making of such injunction or order."228
At any rate, "[i]n case of doubt, a withholding agent may always protect himself or herself by withholding the tax due" 229 and return the amount of the tax
withheld should it be finally determined that the income paid is not subject to withholding.230 Hence, respondent Bureau of Treasury was justified in withholding
the amount corresponding to the 20% final withholding tax from the proceeds of the PEACe Bonds, as it received this courts temporary restraining order only on
October 19, 2011, or the day after this tax had been withheld.
Respondents retention of the
amounts withheld is a defiance
of the temporary restraining
order
Nonetheless, respondents continued failure to release to petitioners the amount corresponding to the 20% final withholding tax in order that it may be placed in
escrow as directed by this court constitutes a defiance of this courts temporary restraining order.231
The temporary restraining order is not moot. The acts sought to be enjoined are not fait accompli. For an act to be considered fait accompli, the act must have
already been fully accomplished and consummated.232 It must be irreversible, e.g., demolition of properties,233 service of the penalty of imprisonment,234 and
hearings on cases.235When the act sought to be enjoined has not yet been fully satisfied, and/or is still continuing in nature,236 the defense of fait accomplicannot
prosper.
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes both the withholding and remittance of the 20% final
withholding tax to the Bureau of Internal Revenue. Even though the Bureau of Treasury had already withheld the 20% final withholding tax237 when it received
the temporary restraining order, it had yet to remit the monies it withheld to the Bureau of Internal Revenue, a remittance which was due only on November 10,
2011.238 The act enjoined by the temporary restraining order had not yet been fully satisfied and was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to national government agencies such as the Bureau of Treasury the
procedure for the remittance of all taxes it withheld to the Bureau of Internal Revenue, a national agency shall file before the Bureau of Internal Revenue a Tax
Remittance Advice (TRA) supported by withholding tax returns on or before the 10th day of the following month after the said taxes had been withheld. 240 The
Bureau of Internal Revenue shall transmit an original copy of the TRA to the Bureau of Treasury,241 which shall be the basis for recording the remittance of the
tax collection.242 The Bureau of Internal Revenue will then record the amount of taxes reflected in the TRA as tax collection in the Journal ofTax Remittance by
government agencies based on its copies of the TRA.243 Respondents did not submit any withholding tax return or TRA to provethat the 20% final withholding
tax was indeed remitted by the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011.
Respondent Bureau of Treasurys Journal Entry Voucher No. 11-10-10395244 dated October 18, 2011 submitted to this court shows:
Account Code
Bonds Payable-L/T, Dom-Zero
Coupon T/Bonds

Debit Amount

442-360

35,000,000,000.00

Sinking Fund-Cash (BSF)

198-001

30,033,792,203.59

Due to BIR

412-002

4,966,207,796.41

Credit Amount

(Peace Bonds) 10 yr

To record redemption of 10yr Zero


coupon (Peace Bond) net of the 20% final
withholding tax pursuant to BIR Ruling No.
378-2011, value date, October 18, 2011 per
BTr letter authority and BSP Bank
Statements.
The foregoing journal entry, however, does not prove that the amount of P4,966,207,796.41, representing the 20% final withholding tax on the PEACe Bonds, was
disbursed by it and remitted to the Bureau of Internal Revenue on October 18, 2011. The entries merely show that the monies corresponding to 20% final
withholding tax was set aside for remittance to the Bureau of Internal Revenue.
We recall the November 15, 2011 resolution issued by this court directing respondents to "show cause why they failed to comply with the [TRO]; and [to] comply
with the [TRO] in order that petitioners may place the corresponding funds in escrow pending resolution of the petition."245 The 20% final withholding tax was
effectively placed in custodia legiswhen this court ordered the deposit of the amount in escrow. The Bureau of Treasury could still release the money withheld to
petitioners for the latter to place in escrow pursuant to this courts directive. There was no legal obstacle to the release of the 20% final withholding tax to
petitioners. Congressional appropriation is not required for the servicing of public debts in view of the automatic appropriations clause embodied in Presidential
Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:

Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement premiums, government service insurance, and other similar fixed expenditures,
(b) principal and interest on public debt, (c) national government guarantees of obligations which are drawn upon, are automatically appropriated: provided, that no
obligations shall be incurred or payments made from funds thus automatically appropriated except as issued in the form of regular budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise appropriated, such amounts as may be necessary to effect
payments on foreign or domestic loans, or foreign or domestic loans whereon creditors make a call on the direct and indirect guarantee of the Republic of the
Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent to government-owned or controlled corporations and/or government financial
institutions;
b. government-owned or controlled corporations and/or government financial institutions the proceeds of which were relent to public or private
institutions;
c. government-owned or controlled corporations and/or financial institutions and guaranteed by the Republic of the Philippines;
d. other public or private institutions and guaranteed by government owned or controlled corporations and/or government financial institutions.
The amount of P35 billion that includes the monies corresponding to 20% final withholding tax is a lawfuland valid obligation of the Republic under the
Government Bonds. Since said obligation represents a public debt, the release of the monies requires no legislative appropriation.
Section 2 of Republic Act No. 245 likewise provides that the money to be used for the payment of Government Bonds may be lawfully taken from the continuing
appropriation out of any monies in the National Treasury and is not required to be the subject of another appropriation legislation: SEC. 2. The Secretary of
Finance shall cause to be paid out of any moneys in the National Treasury not otherwise appropriated, or from any sinking funds provided for the purpose by law,
any interest falling due, or accruing, on any portion of the public debt authorized by law. He shall also cause to be paid out of any such money, or from any such
sinking funds the principal amount of any obligations which have matured, or which have been called for redemption or for which redemption has been demanded
in accordance with terms prescribed by him prior to date of issue. . . In the case of interest-bearing obligations, he shall pay not less than their face value; in the
case of obligations issued at a discount he shall pay the face value at maturity; or if redeemed prior to maturity, such portion of the face value as is prescribed by
the terms and conditions under which such obligations were originally issued. There are hereby appropriated as a continuing appropriation out of any moneys in
the National Treasury not otherwise appropriated, such sums as may be necessary from time to time to carry out the provisions of this section. The Secretary of
Finance shall transmit to Congress during the first month of each regular session a detailed statement of all expenditures made under this section during the
calendar year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and bonds shall be made through the National Treasurys account
with the Bangko Sentral ng Pilipinas, to wit:
Section 38. Demand Deposit Account. The Treasurer of the Philippines maintains a Demand Deposit Account with the Bangko Sentral ng Pilipinas to which all
proceeds from the sale of Treasury Bills and Bonds under R.A. No. 245, as amended, shall be credited and all payments for redemption of Treasury Bills and
Bonds shall be charged.1wphi1
Regarding these legislative enactments ordaining an automatic appropriations provision for debt servicing, this court has held:
Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the exercise of its own judgment and wisdom formulates an
appropriation act precisely following the process established by the Constitution, which specifies that no money may be paid from the Treasury except in
accordance with an appropriation made by law.
Debt service is not included inthe General Appropriation Act, since authorization therefor already exists under RA Nos. 4860 and 245, as amended, and PD 1967.
Precisely in the light of this subsisting authorization as embodied in said Republic Acts and PD for debt service, Congress does not concern itself with details for
implementation by the Executive, butlargely with annual levels and approval thereof upon due deliberations as part of the whole obligation program for the year.
Upon such approval, Congress has spoken and cannot be said to havedelegated its wisdom to the Executive, on whose part lies the implementation or execution of
the legislative wisdom.246(Citation omitted)
Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by this court, which remained in full force and effect, until set aside,
vacated, or modified. Its conduct finds no justification and is reprehensible.247
WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount corresponding to the 20% final withholding tax despite
this court's directive in the temporary restraining order and in the resolution dated November 15, 2011 to deliver the amounts to the banks to be placed in escrow
pending resolution of this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay to the bondholders the amount corresponding-to the 20% final withholding
tax that it withheld on October 18, 2011.
MARVIC M.V.F. LEONEN
Associate Justice

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 197760

January 13, 2014

TEAM ENERGY CORPORATION (Formerly MIRANT PAGBILAO CORPORATION), Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION

PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court which seeks to reverse and set aside the May 2, 2011 1 and the July 15,
20112 Resolutions of the Court of Tax Appeals (CTA) En Banc in CTA EB Case No. 706. The assailed resolutions affirmed the November 26, 2010 Amended
Decision3 of the CTA Special First Division in CTA Case No. 7617, which dismissed petitioner's claim for tax refund or issuance of a tax_ credit certificate for
failure to comply with the 120-day period provided under Section 112 (C) of the National Internal Revenue Code (NIRC).
The facts, as found by the CTA follow:
Petitioner is principally engaged in the business of power generation and subsequent sale thereof to the National Power Corporation (NPC) under a Build, Operate,
Transfer (BOT) scheme. As such, it is registered with the BIR as a VAT taxpayer in accordance with Section 107 of the National Internal Revenue Code (NIRC) of
1977 (now Section 236 of the NIRC of 1997), with Tax Identification No. 001-726-870-000, as shown on its BIR Certificate of Registration No.
OCN8RC0000017854.
On December 17, 2004, petitioner filed with the BIR Audit Information, Tax Exemption and Incentives Division an Application for VAT Zero-Rate for the supply
of electricity to the NPC from January 1, 2005 to December 31, 2005, which was subsequently approved.
Petitioner filed with the BIR its Quarterly VAT Returns for the first three quarters of 2005 on April 25, 2005, July 26, 2005, and October 25, 2005, respectively.
Likewise, petitioner filed its Monthly VAT Declaration for the month of October 2005 on November 21, 2005, which was subsequently amended on May 24, 2006.
These VAT Returns reflected, among others, the following entries:
Exhibit

Period
Covered

"C"

1st Qtr-2005

P3,044,160,148.16

P1,397,107.80

P139,710.78

P16,803,760.82

"D"

2nd Qtr-2005

3,038,281,557.57

1,241,576.30

124,157.63

32,097,482.29

"E"

3rd Qtr-2005

3,125,371,667.08

452,411.64

45,241.16

16,937,644.73

"G"
(amended)

October 2005

910,949.50

91,094.95

14,297,363.76

Total

Zero-Rated
Sales/Receipts

P9,207,813,372.81

Taxable Sales

P4,002,045.24

Output VAT

P400,204.52

Input VAT

P80,136,251.60

On December 20, 2006, petitioner filed an administrative claim for cash refund or issuance of tax credit certificate corresponding to the input VAT reported in its
Quarterly VAT Returns for the first three quarters of 2005 and Monthly VAT Declaration for October 2005 in the amount of P80,136,251.60, citing as legal bases
Section 112 (A), in relation to Section 108 (B)(3) of the NIRC of 1997, Section 4.106-2(c) of Revenue Regulations No. 7-95, Revenue Memorandum Circular No.
61-2005, and the case of Maceda v. Macaraig.
Due to respondents inaction on its claim, petitioner filed the instant Petition for Review before this Court on April 18, 2007.
In his Answer filed on May 27, 2007, respondent interposed the following Special and Affirmative Defenses:
5. He reiterates and pleads the preceding paragraphs of this answer as part of his Special and Affirmative Defenses.
6. Petitioners alleged claim for refund is subject to administrative investigation/examination by respondent.
7. Taxes remitted to the BIR are presumed to have been made in the regular course of business and in accordance with the provision of law.
8. To support its claim for refund, it is imperative for petitioner to prove the following, viz.:
a. The registration requirements of a value-added taxpayer in compliance with the pertinent provision of the Tax Code, of 1997, as amended,
and its implementing revenue regulations;
b. The invoicing and accounting requirements for VAT-registered persons, as well as the filing and payment of VAT in compliance with the
provisions of Sections 113 and 114 of the Tax Code of 1997, as amended;
c. Proof of compliance with the submission of complete documents in support of the administrative claim for refund pursuant to Section 112
(D) of the Tax Code of 1997, as amended, otherwise there would be no sufficient compliance with the filing of administrative claim for
refund which is a condition sine qua non prior to the filing of judicial claim in accordance with the provision of Section 229 of the Tax Code,
as amended;
d. That the input taxes of P80,136,261.60 allegedly representing unutilized input VAT from its domestic purchases of capital goods, domestic
purchases of goods other than capital goods, domestic purchases of services, services rendered by nonresidents, importation of capital goods
and importation of goods other than capital goods were:
d.i paid by petitioner;
d.ii attributable to its zero-rated sales;
d.iii used in the course of its trade or business; and
d.iv such have not been applied against any output tax;
e. That petitioners claim for tax credit or refund of the unutilized input tax (VAT) was filed within two (2) years after the close of the taxable
quarter when the sales were made in accordance with Section 112 (A) of the Tax Code of 1997, as amended;
f. That petitioner has complied with the governing rules and regulations with reference to recovery of tax erroneously or illegally collected as
explicitly found in Sections 112 (A) and 229 of the Tax Code, as amended.
g. Petitioner failed to prove compliance with the aforementioned requirements.
9. Furthermore, in action for refund the burden of proof is on the taxpayer to establish its right to refund and failure to sustain the burden is fatal to the
claim for refund/credit. This is so because exemptions from taxation are highly disfavored in law and he who claims exemption must be able to justify

his claim by the clearest grant of organic or statutory law. An exemption from common burden cannot be permitted to exist upon vague implications.
(Asiatic Petroleum Co. [P.I.] v. Llanes, 49 Phil 446, cited in Collector of Internal Revenue v. Manila Jockey Club, 98 Phil. 670); 10. Claims for refund
are construed strictly against the claimant for the same partake the nature of exemption from taxation.
During trial, petitioner presented documentary and testimonial evidence. Respondent, on the other hand, waived his right to present evidence.
This case was submitted for decision on July 13, 2009, after the parties filed their respective Memorandum.4
In a Decision5 dated July 13, 2010, the CTA Special First Division partially granted petitioners claim for refund or issuance of tax credit certificate. It held as
follows:
WHEREFORE, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, respondent is hereby ORDERED TO REFUND or in the
alternative, ISSUE A TAX CREDIT CERTIFICATE in the amount of SEVENTY-NINE MILLION ONE HUNDRED EIGHTY-FIVE THOUSAND SIX
HUNDRED SEVENTEEN AND 33/100 PESOS (P79,185,617.33) in favor of petitioner, representing unutilized input VAT, attributable to its effectively zero-rated
sales of power generation services to NPC for the period covering January 1, 2005 to October 31, 2005. SO ORDERED.
Disgruntled, respondent filed a Motion for Reconsideration against said decision.
On November 26, 2010, the CTA Special First Division rendered an Amended Decision granting respondents Motion for Reconsideration. In light of this Courts
ruling in Commissioner of Internal Revenue v. Aichi Forging Company, Inc.6 (Aichi), it reversed and set aside the earlier decision of the CTA Special First
Division. Thus:
In the case at bench, petitioners administrative claim was filed on December 20, 2006 which is well within the two-year [prescriptive] period prescribed under
Section 112 (A) of the NIRC. Observing the 120-day period for the Commissioner to render a decision on the administrative claim, as required under Section 112
(D) of the NIRC, petitioners judicial claim should have been filed not earlier than April 19, 2007. Petitioner, however, filed its judicial claim on April 18, 2007 or
only 199 days from December 20, 2006, thus, prematurely filed.
Accordingly, petitioners claim for refund/credit of excess input VAT, covering the period January 1 to October 31, 2005, warrants a dismissal for having been
prematurely filed.
WHEREFORE, the Motion for Reconsideration (Re: Decision promulgated 13 July 2010) of the respondents is hereby GRANTED. The assailed July 13, 2010
Decision is hereby REVERSED and SET ASIDE and CTA Case No. 7617 is hereby considered DISMISSED for having been prematurely filed.
SO ORDERED.7
Petitioner then filed a Petition for Review with the CTA En Banc arguing that the requirement to exhaust the 120-day period for respondent to act on its
administrative claim for input VAT refund/credit under Section 112 (C) of the NIRC is merely a species of the doctrine of exhaustion of administrative remedies
and is, therefore, not jurisdictional.
In a Resolution dated May 2, 2011, the CTA En Banc denied the petition for lack of merit. Its fallo reads:
WHEREFORE, premises considered, the Petition for Review is hereby DENIED DUE COURSE for lack of merit.
Attys. Rachel P. Follosco and Froilyn P. Doyaoen-Pagayatan are hereby ADMONISHED to be more careful in the discharge of their duty to the court as a lawyer
under the Code of Professional Responsibility.
SO ORDERED.8
Unfazed, petitioner filed a Motion for Reconsideration. However, the same was denied in a Resolution dated July 15, 2011.
Hence, the present petition.
Petitioner invokes the following grounds to support its petition:
I.
THE CTA ACQUIRED JURISDICTION OVER THE PETITION FOR REVIEW FILED WITH AND TRIED BY THE SPECIAL FIRST
DIVISION OF THE CTA DUE TO FAILURE OF THE RESPONDENT CIR TO INVOKE THE RULE OF NON-EXHAUSTION OF
ADMINISTRATIVE REMEDIES.
II.
THE CTA EN BANCS APPLICATION OF THE RECENT JUDICIAL INTERPRETATION OF THE SUPREME COURT IN THE AICHI
CASE TO THE INSTANT PETITION FOR REVIEW IS ERRONEOUS BECAUSE:
A) IT VIOLATES ESTABLISHED RULES PROHIBITING RETROACTIVE APPLICATION OF JUDICIAL DECISIONS;
B) IT WILL BE UNJUST AND INEQUITABLE TO THE PETITIONER WHO RELIED IN GOOD FAITH ON PREVAILING
JURISPRUDENCE AT THE TIME OF INSTITUTING THE ADMINISTRATIVE AND JUDICIAL CLAIMS; AND,
C) IT WILL UNJUSTLY ENRICH THE GOVERNMENT AT THE EXPENSE OF THE PETITIONER.9
In essence, the issue is whether or not the CTA has jurisdiction to take cognizance of the instant case.
Prefatorily, to address the issue of lack of jurisdiction, there is a need to discuss Section 112 (A) and (C) which states:
SEC. 112. Refunds or Tax Credits of Input Tax.

(A) Zero-Rated or Effectively Zero-Rated Sales. Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax
due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: x x x.
xxxx
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred
twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.
From the foregoing, it is clear that a VAT-registered taxpayer claiming for refund or tax credit of their excess and unutilized input VAT must file their
administrative claim within two years from the close of the taxable quarter when the sales were made. After that, the taxpayer must await the decision or ruling of
denial of its claim, whether full or partial, or the expiration of the 120-day period from the submission of complete documents in support of such claim. Once the
taxpayer receives the decision or ruling of denial or expiration of the 120-day period, it may file its petition for review with the CTA within thirty (30) days.
In the Aichi case, this Court ruled that the 120-30-day period in Section 112 (C) of the NIRC is mandatory and its non-observance is fatal to the filing of a judicial
claim with the CTA. In this case, the Court explained that if after the 120-day mandatory period, the Commissioner of Internal Revenue (CIR) fails to act on the
application for tax refund or credit, the remedy of the taxpayer is to appeal the inaction of the CIR to the CTA within thirty (30) days. The judicial claim, therefore,
need not be filed within the two-year prescriptive period but has to be filed within the required 30-day period after the expiration of the 120 days. Thus:
Section 112 (D) of the NIRC clearly provides that the CIR has "120 days, from the date of the submission of the complete documents in support of the application
[for tax refund/credit]," within which to grant or deny the claim. In case of full or partial denial by the CIR, the taxpayers recourse is to file an appeal before the
CTA within 30 days from receipt of the decision of the CIR. However, if after the 120-day period the CIR fails to act on the application for tax refund/credit, the
remedy of the taxpayer is to appeal the inaction of the CIR to [the] CTA within 30 days.
xxxx
There is nothing in Section 112 of the NIRC to support respondents view. Subsection (A) of the said provision states that "any VAT-registered person, whose sales
are zero-rated or effectively zero-rated may, within two years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales." The phrase "within two years x x x apply for the issuance of a tax credit
certificate or refund" refers to applications for refund/credit filed with the CIR and not to appeals made to the CTA. This is apparent in the first paragraph of
subsection (D) of the same provision, which states that the CIR has "120 days from the submission of complete documents in support of the application filed in
accordance with Subsections (A) and (B)" within which to decide on the claim.
In fact, applying the two-year period to judicial claims would render nugatory Section 112 (D) of the NIRC, which already provides for a specific period within
which a taxpayer should appeal the decision or inaction of the CIR. The second paragraph of Section 112 (D) of the NIRC envisions two scenarios: (1) when a
decision is issued by the CIR before the lapse of the 120-day period; and (2) when no decision is made after the 120-day period. In both instances, the taxpayer has
30 days within which to file an appeal with the CTA. As we see it then, the 120-day period is crucial in filing an appeal with the CTA.10 (Emphasis supplied)
Recently, however, in the case of Commissioner of Internal Revenue v. San Roque Power Corporation11 (San Roque), the Court clarified that the mandatory and
jurisdictional nature of the 120-30-day rule does not apply on claims for refund that were prematurely filed during the interim period from the issuance of Bureau
of Internal Revenue (BIR) Ruling No. DA-489-03 on December 10, 2003 to October 6, 2010 when the Aichi doctrine was adopted. The exemption was premised
on the fact that prior to the promulgation of the Aichi decision, there was an existing interpretation laid down in BIR Ruling No. DA-489-03 where the BIR
expressly ruled that the taxpayer need not wait for the expiration of the 120-day period before it could seek judicial relief with the CTA. It expounded on the matter
in this wise:
BIR Ruling No. DA-489-03 does provide a valid claim for equitable estoppel under Section 246 of the Tax Code. 1wphi1BIR Ruling No. DA-489-03 expressly
states that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review."
Prior to this ruling, the BIR held, as shown by its position in the Court of Appeals, that the expiration of the 120-day period is mandatory and jurisdictional before a
judicial claim can be filed.
There is no dispute that the 120-day period is mandatory and jurisdictional, and that the CTA does not acquire jurisdiction over a judicial claim that is filed before
the expiration of the 120-day period. There are, however, two exceptions to this rule. The first exception is if the Commissioner, through a specific ruling, misleads
a particular taxpayer to prematurely file a judicial claim with the CTA. Such specific ruling is applicable only to such particular taxpayer. The second exception is
where the Commissioner, through a general interpretative rule issued under Section 4 of the Tax Code, misleads all taxpayers into filing prematurely judicial claims
with the CTA. In these cases, the Commissioner cannot be allowed to later on question the CTAs assumption of jurisdiction over such claim since equitable
estoppel has set in as expressly authorized under Section 246 of the Tax Code.
xxxx
Since the Commissioner has exclusive and original jurisdiction to interpret tax laws, taxpayers acting in good faith should not be made to suffer for adhering to
general interpretative rules of the Commissioner interpreting tax laws, should such interpretation later turn out to be erroneous and be reversed by the
Commissioner or this Court. Indeed, Section 246 of the Tax Code expressly provides that a reversal of a BIR regulation or ruling cannot adversely prejudice a
taxpayer who, in good faith, relied on the BIR regulation or ruling prior to its reversal. Section 246 provides as follows:
Section 246. Non-retroactivity of Rulings. Any modification or reversal of any of the rules and regulations promulgated in accordance with the preceding
Sections 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 any document required of him by the Bureau of Internal
Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis supplied)
Thus, a general interpretative rule issued by the Commissioner may be relied upon by the taxpayers from the time the rule is issued up to its reversal by the
Commissioner or this Court. Section 246 is not limited to a reversal only by the Commissioner because this Section expressly states, "Any revocation, modification
or reversal" without specifying who made the revocation, modification or reversal. Hence, a reversal by this Court is covered by Section 246.

xxxx
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all taxpayers or a specific ruling applicable only to a
particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it is a response to a query made, not by a particular taxpayer, but by a government agency
tasked with processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance. This
government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in its query to
the Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the agency was, in fact, asking the Commissioner what to do in cases like
the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule.1wphi1 Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120-130 day periods are mandatory and
jurisdictional.12
In the present case, petitioner filed its judicial claim on April 18, 2007 or after the issuance of BIR Ruling No. DA-489-03 on December 10, 2003 but before
October 6, 2010, the date when the Aichi case was promulgated. Thus, even though petitioner s judicial claim was prematurely filed without waiting for the
expiration of the 120-day mandatory period, the CT A may still take cognizance of the instant case as it was filed within the period exempted from the 120-30-day
mandatory period.
WHEREFORE, the foregoing considered, the instant Petition for Review on Certiorari is hereby GRANTED. The May 2, 2011 and the July 15, 2011 Resolutions
of the Court of Tax Appeals En Banc in CTA EB Case No. 706 are REVERSED and SET ASIDE. Let this case be remanded to the Court of Tax Appeals for the
proper determination of the refundable amount.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 215427

December 10, 2014

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,


vs.
THE BUREAU OF INTERNAL REVENUE, represented by JOSE MARIO BUNAG, in his capacity as Commissioner of the Bureau of Internal Revenue,
and JOHN DOE and JANE DOE, who are Promulgated: persons acting for, in behalf or under the authority of respondent, Respondents.
DECISION
PERALTA, J.:
The present petition stems from the Motion for Clarification filed by petitioner Philippine Amusement and Gaming Corporation (PAGCOR) on September 13,
2013 in the case entitled Philippine Amusement and Gaming Corporation (PAGCOR) v. The Bureau of Internal Revenue, et al.,1 which was promulgated on March
15, 2011. The Motion for Clarification essentially prays for the clarification of our Decision in the aforesaid case, as well the issuance of a Temporary Restraining
Order and/or Writ of Preliminary Injunction against the Bureau of Internal Revenue (BIR), their employees, agents and any other persons or entities acting or
claiming any right on BIRs behalf, in the implementation of BIR Revenue Memorandum Circular (RMC) No. 33-2013 dated April 17, 2013.
At the onset, it bears stressing that while the instant motion was denominated as a "Motion for Clarification," in the session of the Court En Bancheld on November
25, 2014, the members thereof ruled to treat the same as a new petition for certiorari under Rule 65 of the Rules of Court, given that petitioner essentially alleges
grave abuse of discretion on the part of the BIR amounting to lack or excess of jurisdiction in issuing RMC No. 33-2013. Consequently, a new docket number has
been assigned thereto, while petitioner has been ordered to pay the appropriate docket fees pursuant to the Resolution dated November 25,2014, the pertinent
portion of which reads:
G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue, et al.). The Court Resolved to
(a) TREAT as a new petition the Motion for Clarification with Temporary Restraining Order and/or Preliminary Injunction Application dated September
6, 2013 filed by PAGCOR;
(b) DIRECT the Judicial Records Office to RE-DOCKET the aforesaid Motion for Clarification, subject to payment of the appropriate docket fees; and
(c) REQUIRE petitioner PAGCOR to PAY the filing fees for the subject Motion for Clarification within five (5) days from notice hereof. Brion, J., no
part and on leave. Perlas-Bernabe, J., on official leave.
Considering that the parties havefiled their respective pleadings relative to the instant petition, and the appropriate docket fees have been duly paid by petitioner,
this Court considers the instant petition submitted for resolution.
The facts are briefly summarized as follows:
On April 17, 2006, petitioner filed before this Court a Petition for Review on Certiorari and Prohibition (With Prayer for the Issuance of a Temporary Restraining
Order and/or Preliminary Injunction) seeking the declaration of nullity of Section 12 of Republic Act (R.A.)No. 93373 insofar as it amends Section 27(C)4 of R.A.
No. 8424,5 otherwise known as the National Internal Revenue Code (NIRC) by excluding petitioner from the enumeration of government-owned or controlled
corporations (GOCCs) exempted from liability for corporate income tax.
On March 15, 2011, this Court rendered a Decision6 granting in part the petition filed by petitioner. Its fallo reads:
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337, amending Section 27(c) of the National Internal Revenue Code of 1997,
by excluding petitioner Philippine Amusement and Gaming Corporation from the enumeration of government-owned and controlled corporations exempted from

corporate income tax is valid and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for
being contrary to the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337.
No costs.
SO ORDERED.7
Both petitioner and respondent filed their respective motions for partial reconsideration, but the samewere denied by this Court in a Resolution 8 dated May 31,
2011.
Resultantly, respondent issued RMC No. 33-2013 on April 17, 2013 pursuant to the Decision dated March 15, 2011 and the Resolution dated May 31, 2011, which
clarifies the "Income Tax and Franchise Tax Due from the Philippine Amusement and Gaming Corporation (PAGCOR), its Contractees and Licensees." Relevant
portions thereof state:
II. INCOME TAX
Pursuant to Section 1 of R.A.9337, amending Section 27(C) of the NIRC, as amended, PAGCOR is no longer exempt from corporate income tax as it has been
effectively omitted from the list of government-owned or controlled corporations (GOCCs) that are exempt from income tax. Accordingly, PAGCORs income
from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools, and other related operations,
are subject to corporate income tax under the NIRC, as amended. This includes, among others:
a) Income from its casino operations;
b) Income from dollar pit operations;
c) Income from regular bingo operations; and
d) Income from mobile bingo operations operated by it, with agents on commission basis. Provided, however, that the agents commission income shall
be subject to regular income tax, and consequently, to withholding tax under existing regulations.
Income from "other related operations" includes, butis not limited to:
a) Income from licensed private casinos covered by authorities to operate issued to private operators;
b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to operate issued to private operators;
c) Income from private internet casino gaming, internet sports betting and private mobile gaming operations;
d) Income from private poker operations;
e) Income from junket operations;
f) Income from SM demo units; and
g) Income from other necessary and related services, shows and entertainment.
PAGCORs other income that is not connected with the foregoing operations are likewise subject to corporate income tax under the NIRC, as amended.
PAGCORs contractees and licensees are entities duly authorized and licensed by PAGCOR to perform gambling casinos, gaming clubs and other similar
recreation or amusement places, and gaming pools. These contractees and licensees are subject to income tax under the NIRC, as amended.
III. FRANCHISE TAX
Pursuant to Section 13(2) (a) of P.D. No. 1869,9 PAGCOR is subject to a franchise tax of five percent (5%) of the gross revenue or earnings it derives from its
operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools, and other related operations as
described above.
On May 20, 2011, petitioner wrote the BIR Commissioner requesting for reconsideration of the tax treatment of its income from gaming operations and other
related operations under RMC No. 33-2013. The request was, however, denied by the BIR Commissioner.
On August 4, 2011, the Decision dated March 15, 2011 became final and executory and was, accordingly, recorded in the Book of Entries of Judgment.10
Consequently, petitioner filed a Motion for Clarification alleging that RMC No. 33-2013 is an erroneous interpretation and application of the aforesaid Decision,
and seeking clarification with respect to the following:
1. Whether PAGCORs tax privilege of paying 5% franchise tax in lieu of all other taxes with respect toits gaming income, pursuant to its Charter P.D.
1869, as amended by R.A. 9487, is deemed repealed or amended by Section 1 (c) of R.A. 9337.
2. If it is deemed repealed or amended, whether PAGCORs gaming income is subject to both 5% franchise tax and income tax.
3. Whether PAGCORs income from operation of related services is subject to both income tax and 5% franchise tax.
4. Whether PAGCORs tax privilege of paying 5% franchise tax inures to the benefit of third parties with contractual relationship with PAGCOR in
connection with the operation of casinos.11
In our Decision dated March 15, 2011, we have already declared petitioners income tax liability in view of the withdrawal of its tax privilege under R.A. No.
9337. However, we made no distinction as to which income is subject to corporate income tax, considering that the issue raised therein was only the
constitutionality of Section 1 of R.A. No. 9337, which excluded petitioner from the enumeration of GOCCs exempted from corporate income tax.
For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCORs income is classified into two: (1) income from its operations conducted under its
Franchise, pursuant to Section 13(2) (b) thereof (income from gaming operations); and (2) income from its operation of necessary and related services under
Section 14(5) thereof (income from other related services). In RMC No. 33-2013, respondent further classified the aforesaid income as follows:
1. PAGCORs income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools,
includes, among others:
(a) Income from its casino operations;

(b) Income from dollar pit operations;


(c) Income from regular bingo operations; and
(d) Income from mobile bingo operations operated by it, with agents on commission basis. Provided, however, that the agents
commission income shall be subject to regular income tax, and consequently, to withholding tax under existing regulations.
2. Income from "other related operations"includes, but is not limited to:
(a) Income from licensed private casinos covered by authorities to operate issued to private operators;
(b) Income from traditional bingo, electronic bingo and other bingo variations covered by authorities to operate issued to private
operators;
(c) Income from private internet casino gaming, internet sports betting and private mobile gaming operations;
(d) Income from private poker operations;
(e) Income from junket operations;
(f) Income from SM demo units; and
(g) Income from other necessary and related services, shows and entertainment.12
After a thorough study of the arguments and points raised by the parties, and in accordance with our Decision dated March 15, 2011, we sustain
petitioners contention that its income from gaming operations is subject only to five percent (5%) franchise tax under P.D. 1869, as amended,
while its income from other related services is subject to corporate income tax pursuant to P.D. 1869, as amended, as well as R.A. No. 9337. This
is demonstrable.
First. Under P.D. 1869, as amended, petitioner is subject to income tax only with respect to its operation of related services. Accordingly, the
income tax exemption ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to petitionersincome from operation of related
services. Such income tax exemption could not have been applicable to petitioners income from gaming operations as it is already exempt
therefrom under P.D. 1869, as amended, to wit: SECTION 13. Exemptions.
xxxx
(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature,
whether National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the
earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the Corporation from its operation under this
Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind,
nature or description, levied, established or collected by any municipal, provincial, or national government authority.13
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person or entity involved is subject to tax. This is the most sound and logical
interpretation because petitioner could not have been exempted from paying taxes which it was not liable to pay in the first place. This is clear from the wordings
of P.D. 1869, as amended, imposing a franchise tax of five percent (5%) on its gross revenue or earnings derived by petitioner from its operation under the
Franchise in lieuof all taxes of any kind or form, as well as fees, charges or leviesof whatever nature, which necessarily include corporate income tax.
In other words, there was no need for Congress to grant tax exemption to petitioner with respect to its income from gaming operations as the same is already
exempted from all taxes of any kind or form, income or otherwise, whether national or local, under its Charter, save only for the five percent (5%) franchise tax.
The exemption attached to the income from gaming operations exists independently from the enactment of R.A. No. 8424. To adopt an assumption otherwise
would be downright ridiculous, if not deleterious, since petitioner would be in a worse position if the exemption was granted (then withdrawn) than when it was
not granted at all in the first place.
Moreover, as may be gathered from the legislative records of the Bicameral Conference Meeting of the Committee on Ways and Means dated October 27, 1997,
the exemption of petitioner from the payment of corporate income tax was due to the acquiescence of the Committee on Ways and Means to the request of
petitioner that it be exempt from such tax. Based on the foregoing, it would be absurd for petitioner to seek exemption from income tax on its gaming operations
when under its Charter, it is already exempted from paying the same.
Second. Every effort must be exerted to avoid a conflict between statutes; so that if reasonable construction is possible, the laws must be reconciled in that
manner.14
As we see it, there is no conflict between P.D. 1869, as amended, and R.A. No. 9337. The former lays down the taxes imposable upon petitioner, as follows: (1) a
five percent (5%) franchise tax of the gross revenues or earnings derived from its operations conducted under the Franchise, which shall be due and payable in lieu
of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected by any municipal, provincial or national
government authority;15 (2) income tax for income realized from other necessary and related services, shows and entertainment of petitioner. 16 With the
enactment of R.A. No. 9337, which withdrew the income tax exemption under R.A. No. 8424, petitioners tax liability on income from other related services was
merely reinstated.
It cannot be gain said, therefore, that the nature of taxes imposable is well defined for each kind of activity oroperation. There is no inconsistency between the
statutes; and in fact, they complement each other.

Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which expressly provides the tax treatment of petitioners income prevails over R.A.
No. 9337, which is a general law. It is a canon of statutory construction that a special law prevails over a general law regardless of their dates of passage and
the special is to be considered as remaining an exception to the general.17 The rationale is:
Why a special law prevails over a general law has been put by the Court as follows: x x x x
x x x The Legislature consider and make provision for all the circumstances of the particular case. The Legislature having specially considered all of the facts and
circumstances in the particular case in granting a special charter, it will not be considered that the Legislature, by adopting a general law containing provisions
repugnant to the provisions of the charter, and without making any mention of its intention to amend or modify the charter, intended to amend, repeal, or modify
the special act. (Lewis vs. Cook County, 74 I11. App., 151; Philippine Railway Co. vs. Nolting 34 Phil., 401.)18
Where a general law is enacted to regulate an industry, it is common for individual franchises subsequently granted to restate the rights and privileges already
mentioned in the general law, or to amend the later law, as may be needed, to conform to the general law.19 However, if no provision or amendment is stated in the
franchise to effect the provisions of the general law, it cannot be said that the same is the intent of the lawmakers, for repeal of laws by implication is not
favored.20
In this regard, we agree with petitioner that if the lawmakers had intended to withdraw petitioners tax exemption of its gaming income, then Section 13(2)(a) of
P.D. 1869 should have been amended expressly in R.A. No. 9487, or the same, at the very least, should have been mentioned in the repealing clause of R.A. No.
9337.21 However, the repealing clause never mentioned petitioners Charter as one of the laws being repealed. On the other hand, the repeal of other special laws,
namely, Section 13 of R.A. No. 6395 as well as Section 6, fifth paragraph of R.A. No. 9136, is categorically provided under Section 24 (a) (b) of R.A. No. 9337, to
wit:
SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the persons and/or transactions affected herein are made subject to
the value-added tax subject to the provisions of Title IV of the National Internal Revenue Code of 1997, as amended:
(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of the National Power Corporation (NPC);
(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sales of generated power by generation companies; and
(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations or parts thereof which are contrary to and inconsistent with any
provisions of this Act are hereby repealed, amended or modified accordingly.22
When petitioners franchise was extended on June 20, 2007 without revoking or withdrawing itstax exemption, it effectively reinstated and reiterated all of
petitioners rights, privileges and authority granted under its Charter. Otherwise, Congress would have painstakingly enumerated the rights and privileges that it
wants to withdraw, given that a franchise is a legislative grant of a special privilege to a person. Thus, the extension of petitioners franchise under the sameterms
and conditions means a continuation of its tax exempt status with respect to its income from gaming operations. Moreover, all laws, rules and regulations, or parts
thereof, which are inconsistent with the provisions ofP.D. 1869, as amended, a special law, are considered repealed, amended and modified, consistent with Section
2 of R.A. No. 9487, thus:
SECTION 2. Repealing Clause. All laws, decrees, executive orders, proclamations, rules and regulations and other issuances, or parts thereof, which are
inconsistent with the provisions of this Act, are hereby repealed, amended and modified.
It is settled that where a statute is susceptible of more than one interpretation, the court should adopt such reasonable and beneficial construction which will render
the provision thereof operative and effective, as well as harmonious with each other.23
Given that petitioners Charter is notdeemed repealed or amended by R.A. No. 9337, petitioners income derived from gaming operations is subject only to the five
percent (5%)franchise tax, in accordance with P.D. 1869, as amended. With respect to petitioners income from operation of other related services, the same is
subject to income tax only. The five percent (5%) franchise tax finds no application with respect to petitioners income from other related services, inview of the
express provision of Section 14(5) of P.D. 1869, as amended, to wit:
Section 14. Other Conditions.
xxxx
(5) Operation of related services. The Corporation is authorized to operate such necessary and related services, shows and entertainment. Any income that may
be realized from these related services shall not be included as part of the income of the Corporation for the purpose of applying the franchise tax, but the same
shall be considered as a separate income of the Corporation and shall be subject to income tax.24
Thus, it would be the height of injustice to impose franchise tax upon petitioner for its income from other related services without basis therefor.
For proper guidance, the first classification of PAGCORs income under RMC No. 33-2013 (i.e., income from its operations and licensing of gambling casinos,
gaming clubs and other similar recreation or amusement places, gambling pools) should be interpreted in relation to Section 13(2) of P.D. 1869, which pertains to
the income derived from issuing and/or granting the license to operate casinos to PAGCORs contractees and licensees, as well as earnings derived by PAGCOR
from its own operations under the Franchise. On the other hand, the second classification of PAGCORs income under RMC No. 33-2013 (i.e., income from other
related operations) should be interpreted in relation to Section 14(5) of P.D. 1869, which pertains to income received by PAGCOR from its contractees and
licensees in the latters operation of casinos, as well as PAGCORs own income from operating necessary and related services, shows and entertainment.
As to whether petitioners tax privilege of paying five percent (5%) franchise tax inures to the benefit of third parties with contractual relationship with petitioner
in connection with the operation of casinos, we find no reason to rule upon the same. The resolution of the instant petition is limited to clarifying the tax treatment
of petitioners income vis--visour Decision dated March 15, 2011. This Decision is not meant to expand our original Decision by delving into new issues
involving petitioners contractees and licensees. For one, the latter are not parties to the instant case, and may not therefore stand to benefit or bear the
consequences of this resolution. For another, to answer the fourth issue raised by petitioner relative to its contractees and licensees would be downright premature
and iniquitous as the same would effectively countenance sidesteps to judicial process.
In view of the foregoing disquisition, respondent, therefore, committed grave abuse of discretion amounting to lack of jurisdiction when it issued RMC No. 332013 subjecting both income from gaming operations and other related services to corporate income tax and five percent (5%) franchise tax. 1wphi1 This unduly
expands our Decision dated March 15, 2011 without due process since the imposition creates additional burden upon petitioner. Such act constitutes an overreach
on the part of the respondent, which should be immediately struck down, lest grave injustice results. More, it is settled that in case of discrepancy between the
basic law and a rule or regulation issued to implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the terms and
provisions of the basic law.
In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending Section 27(c) of R.A. No. 8424, by excluding petitioner from the enumeration of
GOCCs exempted from corporate income tax, is valid and constitutional. In addition, we hold that:

1. Petitioners tax privilege of paying five percent (5%) franchise tax in lieu of all other taxes with respect to its income from gaming operations,
pursuant to P.D. 1869, as amended, is not repealed or amended by Section l(c) ofR.A. No. 9337;
2. Petitioner's income from gaming operations is subject to the five percent (5%) franchise tax only; and
3. Petitioner's income from other related services is subject to corporate income tax only.
In view of the above-discussed findings, this Court ORDERS the respondent to cease and desist the implementation of RMC No. 33-2013 insofar as it imposes: (1)
corporate income tax on petitioner's income derived from its gaming operations; and (2) franchise tax on petitioner's income from other related services.
WHEREFORE, the Petition is hereby GRANTED. Accordingly, respondent is ORDERED to cease and desist the implementation of RMC No. 33-2013 insofar as
it imposes: (1) corporate income tax on petitioner's income derived from its gaming operations; and (2) franchise tax on petitioner's income from other related
services.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
WE CONCUR:

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 198759

July 1, 2013

PHILIPPINE AIRLINES, INC., PETITIONER,


vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
PERLAS-BERNABE, J.:
Before the Court is a petition for review on certiorari[1] assailing the May 9, 2011 Decision2 and September 16, 2011 Resolution3 of the Court of Tax Appeals
(CTA) En Banc in CTA EB Case No. 588 which denied petitioner Philippine Airlines, Inc.s (PAL) claim for refund of the excise taxes imposed on its purchase of
petroleum products from Caltex Philippines, Inc. (Caltex).
The Facts
For the period July 24 to 28, 2004, Caltex sold 804,370 liters of imported Jet A-1 fuel to PAL for the latters domestic operations. 4 Consequently, on July 26, 27,
28 and 29, 2004, Caltex electronically filed with the Bureau of Internal Revenue (BIR) its Excise Tax Returns for Petroleum Products, declaring the amounts
ofP1,232,798.80, P686,767.10, P623,422.90 and P433,904.10, respectively, or a total amount of P2,975,892.90, as excise taxes due thereon. 5
On August 3, 2004, PAL received from Caltex an Aviation Billing Invoice for the purchased aviation fuel in the amount of US$313,949.54, reflecting the amount
of US$52,669.33 as the related excise taxes on the transaction. This was confirmed by Caltex in a Certification dated August 20, 2004 where it indicated that: (a)
the excise taxes it paid on the imported petroleum products amounted to P2,952,037.90, i.e., the peso equivalent of the abovementioned dollar amount; (b) the
foregoing excise tax payment was passed on by it to PAL; and (c) it did not file any claim for the refund of the said excise tax with the BIR.6
On October 29, 2004, PAL, through a letter-request dated October 15, 2004 addressed to respondent Commissioner of Internal Revenue (CIR), sought a refund of
the excise taxes passed on to it by Caltex. It hinged its tax refund claim on its operating franchise, i.e., Presidential Decree No. 1590 7 issued on June 11, 1978
(PALs franchise), which conferred upon it certain tax exemption privileges on its purchase and/or importation of aviation gas, fuel and oil, including those which
are passed on to it by the seller and/or importer thereof. Further, PAL asserted that it had the legal personality to file the aforesaid tax refund claim.8
Due to the CIRs inaction, PAL filed a Petition for Review with the CTA on July 25, 2006.9 In its Answer, the CIR averred that since the excise taxes were paid by
Caltex, PAL had no cause of action.10
The CTA Division Ruling
Relying on Silkair (Singapore) Pte. Ltd. v. CIR11 (Silkair), the CTA Second Division denied PALs petition on the ground that only a statutory taxpayer (referring
to Caltex in this case) may seek a refund of the excise taxes it paid.12 It added that even if the tax burden was shifted to PAL, the latter cannot be deemed a
statutory taxpayer.
It further ruled that PALs claim for refund should be denied altogether on account of Letter of Instruction No. 1483 (LOI 1483) which already withdrew the tax
exemption privileges previously granted to PAL on its purchase of domestic petroleum products, of which the transaction between PAL and Caltex was
characterized. 13
PAL moved for reconsideration, but the same was denied in a Resolution14 dated January 14, 2010, prompting it to elevate the matter to the CTA En Banc.
The CTA En Banc Ruling
In a Decision dated May 9, 2011,15 the CTA En Banc affirmed the ruling of the CTA Second Division, reiterating that it was Caltex, the statutory taxpayer, which
had the personality to file the subject refund claim. It explained that the payment of the subject excise taxes, being in the nature of indirect taxes, remained to be
the direct liability of Caltex. While the tax burden may have been shifted to PAL, the liability passed on to it should not be treated as a tax but a part of the
purchase price which PAL had to pay to obtain the goods.16 Further, it held that PALs exemption privileges on the said excise taxes, which it claimed through its
franchise, had already been withdrawn by LOI 1483.17
Aggrieved, PAL filed a motion for reconsideration which was, however, denied in a Resolution dated September 16, 2011.18
Hence, the instant petition.

The Issues Before the Court


The following issues have been presented for the Courts resolution: (a) whether PAL has the legal personality to file a claim for refund of the passed on excise
taxes; (b) whether the sale of imported aviation fuel by Caltex to PAL is covered by LOI 1483 which withdrew the tax exemption privileges of PAL on its
purchases of domestic petroleum products for use in its domestic operations; and (c) whether PAL has sufficiently proved its entitlement to refund.
The Ruling of the Court
The petition is meritorious.
A. PALs legal personality to file a claim for refund of excise taxes.
The CIR argues that PAL has no personality to file the subject tax refund claim because it is not the statutory taxpayer. As basis, it relies on the Silkair ruling which
enunciates that the proper party to question, or to seek a refund of an indirect tax, is the statutory taxpayer, or the person on whom the tax is imposed by law and
who paid the same, even if the burden to pay such was shifted to another.19
PAL counters that the doctrine laid down in Silkair is inapplicable, asserting that it has the legal personality to file the subject tax refund claim on account of its tax
exemption privileges under its legislative franchise which covers both direct and indirect taxes. In support thereof, it cites the case of Maceda v. Macaraig,
Jr.20 (Maceda).
The Court agrees with PAL.
Under Section 129 of the National Internal Revenue Code (NIRC),21 as amended, excise taxes are imposed on two (2) kinds of goods, namely: (a) goods
manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition; and (b) things imported.22
With respect to the first kind of goods, Section 130 of the NIRC states that, unless otherwise specifically allowed, the taxpayer obligated to file the return and pay
the excise taxes due thereon is the manufacturer/producer.23
On the other hand, with respect to the second kind of goods, Section 131 of the NIRC states that the taxpayer obligated to file the return and pay the excise taxes
due thereon is the owner or importer, unless the imported articles are exempt from excise taxes and the person found to be in possession of the same is other than
those legally entitled to such tax exemption.24
While the NIRC mandates the foregoing persons to pay the applicable excise taxes directly to the government, they may, however, shift the economic burden of
such payments to someone else usually the purchaser of the goods since excise taxes are considered as a kind of indirect tax.
Jurisprudence states that indirect taxes are those which are demanded in the first instance from one person with the expectation and intention that he can shift the
economic burden to someone else.25 In this regard, the statutory taxpayer can transfer to its customers the value of the excise taxes it paid or would be liable to
pay to the government by treating it as part of the cost of the goods and tacking it on to the selling price. 26 Notably, this shifting process, otherwise known as
"passing on," is largely a contractual affair between the parties. Meaning, even if the purchaser effectively pays the value of the tax, the manufacturer/producer (in
case of goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition) or the owner or importer (in case of
imported goods) are still regarded as the statutory taxpayers under the law. To this end, the purchaser does not really pay the tax; rather, he only pays the seller
more for the goods because of the latters obligation to the government as the statutory taxpayer.27
In this relation, Section 204(c)28 of the NIRC states that it is the statutory taxpayer which has the legal personality to file a claim for refund. Accordingly, in cases
involving excise tax exemptions on petroleum products under Section 13529 of the NIRC, the Court has consistently held that it is the statutory taxpayer who is
entitled to claim a tax refund based thereon and not the party who merely bears its economic burden.30
For instance, in the Silkair case, Silkair (Singapore) Pte. Ltd. (Silkair Singapore) filed a claim for tax refund based on Section 135(b) of the NIRC as well as Article
4(2)31 of the Air Transport Agreement between the Government of the Republic of the Philippines and the Government of the Republic of Singapore. The Court
denied Silkair Singapores refund claim since the tax exemptions under both provisions were conferred on the statutory taxpayer, and not the party who merely
bears its economic burden. As such, it was the Petron Corporation (the statutory taxpayer in that case) which was entitled to invoke the applicable tax exemptions
and not Silkair Singapore which merely shouldered the economic burden of the tax. As explained in Silkair:
The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same
even if he shifts the burden thereof to another. Section 130(A)(2) of the NIRC provides that "[u]nless otherwise specifically allowed, the return shall be filed and
the excise tax paid by the manufacturer or producer before removal of domestic products from place of production." Thus, Petron Corporation, not Silkair, is the
statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and
Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which
Silkair had to pay as a purchaser.32 (Emphasis supplied)
However, the abovementioned rule should not apply to instances where the law clearly grants the party to which the economic burden of the tax is shifted an
exemption from both direct and indirect taxes.1wphi1 In which case, the latter must be allowed to claim a tax refund even if it is not considered as the statutory
taxpayer under the law. Precisely, this is the peculiar circumstance which differentiates the Maceda case from Silkair.
To elucidate, in Maceda, the Court upheld the National Power Corporations (NPC) claim for a tax refund since its own charter specifically granted it an exemption
from both direct and indirect taxes, viz:
x x x [T]he Court rules and declares that the oil companies which supply bunker fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to
NPC. By the very nature of indirect taxation, the economic burden of such taxation is expected to be passed on through the channels of commerce to the user or
consumer of the goods sold. Because, however, the NPC has been exempted from both direct and indirect taxation, the NPC must be held exempted from
absorbing the economic burden of indirect taxation. This means, on the one hand, that the oil companies which wish to sell to NPC absorb all or part of the
economic burden of the taxes previously paid to BIR, which they could shift to NPC if NPC did not enjoy exemption from indirect taxes. This means also, on the
other hand, that the NPC may refuse to pay the part of the "normal" purchase price of bunker fuel oil which represents all or part of the taxes previously paid by the
oil companies to BIR. If NPC nonetheless purchases such oil from the oil companies because to do so may be more convenient and ultimately less costly for
NPC than NPC itself importing and hauling and storing the oil from overseas NPC is entitled to be reimbursed by the BIR for that part of the buying price of
NPC which verifiably represents the tax already paid by the oil company-vendor to the BIR.33 (Emphasis and underscoring supplied)
Notably, the Court even discussed the Maceda ruling in Silkair, highlighting the relevance of the exemptions in NPCs charter to its claim for tax refund:

Silkair nevertheless argues that it is exempt from indirect taxes because the Air Transport Agreement between RP and Singapore grants exemption "from the same
customs duties, inspection fees and other duties or taxes imposed in the territory of the first Contracting Party." It invokes Maceda v. Macaraig, Jr. which upheld
the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes.
Silkairs argument does not persuade. In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company, this Court clarified the ruling in
Maceda v. Macaraig, Jr., viz:
It may be so that in Maceda vs. Macaraig, Jr., the Court held that an exemption from "all taxes" granted to the National Power Corporation (NPC) under its charter
includes both direct and indirect taxes. But far from providing PLDT comfort, Maceda in fact supports the case of herein petitioner, the correct lesson of Maceda
being that an exemption from "all taxes" excludes indirect taxes, unless the exempting statute, like NPCs charter, is so couched as to include indirect tax from the
exemption. Wrote the Court:
x x x However, the amendment under Republic Act No. 6395 enumerated the details covered by the exemption. Subsequently, P.D. 380, made even more specific
the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree No.
938 [NPCs amended charter] amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from "all forms of taxes,
duties[,] fees"
The use of the phrase "all forms" of taxes demonstrates the intention of the law to give NPC all the tax exemptions it has been enjoying before. . .
xxxx
It is evident from the provisions of P.D. No. 938 that its purpose is to maintain the tax exemption of NPC from all forms of taxes including indirect taxes as
provided under R.A. No. 6395 and P.D. 380 if it is to attain its goals.
The exemption granted under Section 135(b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot, without a
clear showing of legislative intent, be construed as including indirect taxes. Statutes granting tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority, and if an exemption is found to exist, it must not be enlarged by construction. 34(Emphasis and underscoring
supplied)
Based on these rulings, it may be observed that the propriety of a tax refund claim is hinged on the kind of exemption which forms its basis. If the law confers an
exemption from both direct or indirect taxes, a claimant is entitled to a tax refund even if it only bears the economic burden of the applicable tax. On the other
hand, if the exemption conferred only applies to direct taxes, then the statutory taxpayer is regarded as the proper party to file the refund claim.
In this case, PALs franchise grants it an exemption from both direct and indirect taxes on its purchase of petroleum products. Section 13 thereof reads:
SEC. 13. In consideration of the franchise and rights hereby granted, the grantee [PAL] shall pay to the Philippine Government during the life of this franchise
whichever of subsections (a) and (b) hereunder will result in a lower tax:
(a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the National
Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from all sources, without distinction as to transport or nontransport
operations; provided, that with respect to international air-transport service, only the gross passenger, mail, and freight revenues from its outgoing
flights shall be subject to this tax.
The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges
of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government
agency, now or in the future, including but not limited to the following:
1. All taxes, duties, charges, royalties, or fees due on local purchases by the grantee of aviation gas, fuel, and oil, whether refined or in crude form, and
whether such taxes, duties, charges, royalties, or fees are directly due from or imposable upon the purchaser or the seller, producer, manufacturer, or
importer of said petroleum products but are billed or passed on the grantee either as part of the price or cost thereof or by mutual agreement or other
arrangement; provided, that all such purchases by, sales or deliveries of aviation gas, fuel, and oil to the grantee shall be for exclusive use in its transport
and nontransport operations and other activities incidental thereto;
2. All taxes, including compensating taxes, duties, charges, royalties, or fees due on all importations by the grantee of aircraft, engines, equipment,
machinery, spare parts, accessories, commissary and catering supplies, aviation gas, fuel, and oil, whether refined or in crude form and other articles,
supplies, or materials; provided, that such articles or supplies or materials are imported for the use of the grantee in its transport and transport operations
and other activities incidental thereto and are not locally available in reasonable quantity, quality, or price; (Emphasis and underscoring supplied)
xxxx
Based on the above-cited provision, PALs payment of either the basic corporate income tax or franchise tax, whichever is lower, shall be in lieu of all other taxes,
duties, royalties, registration, license, and other fees and charges, except only real property tax.35 The phrase "in lieu of all other taxes" includes but is not limited
to taxes that are "directly due from or imposable upon the purchaser or the seller, producer, manufacturer, or importer of said petroleum products but are billed or
passed on the grantee either as part of the price or cost thereof or by mutual agreement or other arrangement." 36 In other words, in view of PALs payment of
either the basic corporate income tax or franchise tax, whichever is lower, PAL is exempt from paying: (a) taxes directly due from or imposable upon it as the
purchaser of the subject petroleum products; and (b) the cost of the taxes billed or passed on to it by the seller, producer, manufacturer, or importer of the said
products either as part of the purchase price or by mutual agreement or other arrangement. Therefore, given the foregoing direct and indirect tax exemptions under
its franchise, and applying the principles as above-discussed, PAL is endowed with the legal standing to file the subject tax refund claim, notwithstanding the fact
that it is not the statutory taxpayer as contemplated by law.
B. Coverage of LOI 1483.
LOI 1483 amended PALs franchise by withdrawing the tax exemption privilege granted to PAL on its purchase of domestic petroleum products for use in its
domestic operations. It pertinently provides:
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution, do hereby order and
direct that the tax-exemption privilege granted to PAL on its purchase of domestic petroleum products for use in its domestic operations is hereby withdrawn.
(Emphasis and underscoring supplied)
On this score, the CIR contends that the purchase of the aviation fuel imported by Caltex is a "purchase of domestic petroleum products" because the same was not
purchased abroad by PAL.

The Court disagrees.


Based on Section 13 of PALs franchise, PALs tax exemption privileges on all taxes on aviation gas, fuel and oil may be classified into three (3) kinds, namely: (a)
all taxes due on PALs local purchase of aviation gas, fuel and oil;37 (b) all taxes directly due from or imposable upon the purchaser or the seller, producer,
manufacturer, or importer of aviation gas, fuel and oil but are billed or passed on to PAL; 38 and (c), all taxes due on all importations by PAL of aviation gas, fuel,
and oil.39
Viewed within the context of excise taxes, it may be observed that the first kind of tax privilege would be irrelevant to PAL since it is not liable for excise taxes on
locally manufactured/produced goods for domestic sale or other disposition; based on Section 130 of the NIRC, it is the manufacturer or producer, i.e., the local
refinery, which is regarded as the statutory taxpayer of the excise taxes due on the same. On the contrary, when the economic burden of the applicable excise taxes
is passed on to PAL, it may assert two (2) tax exemptions under the second kind of tax privilege namely, PALs exemptions on (a) passed on excise tax costs due
from the seller, manufacturer/producer in case of locally manufactured/ produced goods for domestic sale (first tax exemption under the second kind of tax
privilege); and (b) passed on excise tax costs due from the importer in case of imported aviation gas, fuel and oil (second tax exemption under the second kind of
tax privilege). The second kind of tax privilege should, in turn, be distinguished from the third kind of tax privilege which applies when PAL itself acts as the
importer of the foregoing petroleum products. In the latter instance, PAL is not merely regarded as the party to whom the economic burden of the excise taxes is
shifted to but rather, it stands as the statutory taxpayer directly liable to the government for the same.40
In view of the foregoing, the Court observes that the phrase "purchase of domestic petroleum products for use in its domestic operations" which characterizes the
tax privilege LOI 1483 withdrew refers only to PALs tax exemptions on passed on excise tax costs due from the seller, manufacturer/producer of locally
manufactured/ produced goods for domestic sale41 and does not, in any way, pertain to any of PALs tax privileges concerning imported goods, 42 may it be (a)
PALs tax exemption on excise tax costs which are merely passed on to it by the importer when it buys imported goods from the latter (the second tax exemption
under the second kind of tax privilege); or (b) PALs tax exemption on its direct excise tax liability when it imports the goods itself (the third kind of tax privilege).
Both textual and contextual analyses lead to this conclusion:
First, examining its phraseology, the word "domestic," which means "of or relating to ones own country" 43 or "an article of domestic manufacture,"44 clearly
pertains to goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition 45 as opposed to things
imported.46 In other words, by sheer divergence of meaning, the term "domestic petroleum products" could not refer to goods which are imported.
Second, examining its context, certain "whereas clauses"47 in LOI 1483 disclose that the said law was intended to lift the tax privilege discussed in Department of
Finance (DOF) Ruling dated November 17, 1969 (Subject DOF Ruling) which, based on a reading of the same, clarified that PALs franchise included tax
exemptions on aviation gas, fuel and oil which are manufactured or produced in the Philippines for domestic sales (and not only to those imported).48 In other
words, LOI 1483 was meant to divest PAL from the tax privilege which was tackled in the Subject DOF Ruling, namely, its tax exemption on aviation gas, fuel and
oil which are manufactured or produced in the Philippines for domestic sales. Consequently, if LOI 1483 was intended to withdraw the foregoing tax exemption,
then the term "purchase of domestic petroleum products for use in its domestic operations" as used in LOI 1483 could only refer to "goods manufactured or
produced in the Philippines for domestic sales or consumption or for any other disposition," and not to "things imported." In this respect, it cannot be gainsaid that
PALs tax exemption privileges concerning imported goods remain beyond the scope of LOI 1483 and thus, continue to subsist.
In this case, records disclose that Caltex imported aviation fuel from abroad and merely re-sold the same to PAL, tacking the amount of excise taxes it paid or
would be liable to pay to the government on to the purchase price. Evidently, the said petroleum products are in the nature of "things imported" and thus, beyond
the coverage of LOI 1483 as previously discussed. As such, considering the subsistence of PALs tax exemption privileges over the imported goods subject of this
case, PAL is allowed to claim a tax refund on the excise taxes imposed and due thereon.
C. PALs entitlement to refund.
It is hornbook principle that the Court is not a trier of facts and often, remands cases to the lower courts for the determination of questions of such character.
However, when the trial court had already received all the evidence of the parties, the Court may resolve the case on the merits instead of remanding them in the
interest of expediency and to better serve the ends of justice.49
Applying these principles, the Court finds that the evidence on record shows that PAL was able to sufficiently prove its entitlement to the subject tax refund. The
following incidents attest to the same:
First, PAL timely filed its claim for refund.
Section 22950 of the NIRC provides that the claim for refund should be filed within two (2) years from the date of payment of the tax.
Shortly after imported aviation fuel was delivered to PAL, Caltex electronically filed the requisite excise tax returns and paid the corresponding amount of excise
taxes, as follows:
DATE OF FILING
AND PAYMENT

FILING REFERENCE NO.

July 26, 2004

074400000178825

July 27, 2004

070400000179115

July 28, 2004

070400000179294

July 29, 2004

070400000179586

PAL filed its administrative claim for refund on October 29, 200451 and its judicial claim with the CTA on July 25, 2006.52 In this regard, PALs claims for refund
were filed on time in accordance with the 2-year prescriptive period.
Second, PAL paid the lower of the basic corporate income tax or the franchise tax as provided for in the afore-quoted Section 13 of its franchise.
In its income tax return for FY 2004-2005,53 PAL reported no net taxable income for the period resulting in zero basic corporate income tax, which would
necessarily be lower than any franchise tax due from PAL for the same period.
Third, the subject excise taxes were duly declared and remitted to the BIR.
Contrary to the findings of the CTA that the excise taxes sought to be refunded were not the very same taxes that were declared in the Excise Tax Returns filed by
Caltex54 (underscoring the discrepancy of P23,855.00 between the amount of P2,975,892.90 declared in the said returns and the amount
of P2,952.037.9055 sought to be refunded), an examination of the records shows a sufficient explanation for the difference.

In the Certification56 of Caltex on the volume of aviation fuel sold to PAL and its Summary of Local Sales 57 (see table below), Caltex sold 810,870 liters during
the subject period out of which 804,370 liters were sold to PAL, while the difference of 6,500 liters58 were sold to its other client, LBOrendain.
1wphi1
DATE OF SALE
DOCUMENT

July 24,
2004

July 25,
2004

July 26,
2004

July 27,
2004

July 28,
2004

TOTAL

Certification

174,070

158,570

187,130

166,370

118,230

804,370

Summary of Local
Sales

177,070

158,570

187,130

166,370

121,730

810,870

3,000

DIFFERENCE

3,500 6,500

Per Summary of Removals and Excise Tax Due on Mineral Products Chargeable Against Payments attached to the Excise Tax Returns, 59 the excise tax rate
is P3.67 per liter, which, if multiplied with 6,500 liters sold by Caltex to LBOrendain, would equal the discrepancy amount of P23,855.00.
Further examination of the records also reveals that the amount reflected in Caltexs Certification is consistent with the amount indicated in Caltexs Aviation
Receipts and Invoices60 and Aviation Billing Invoice.61
Thus, finding that PAL has sufficiently proved its entitlement to a tax refund of the excise taxes subject of this case, the Court hereby grants its petition and
consequently, annuls the assailed CTA resolutions.
WHEREFORE, the petition is hereby GRANTED.1wphi1 The May 9, 2011 Decision and September 16, 2011 Resolution of the Court of Tax Appeals En Banc in
CTA EB Case No. 588 are ANNULLED and SET ASIDE. Respondent Commissioner of Internal Revenue is hereby ORDERED to refund or issue a tax credit
certificate in favor of the petitioner Philippine Airlines, Inc. in the amount of P2,952,037.90.
SO ORDERED.
Carpio, (Chairperson), Brion, Del Castillo, and Perez, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 195909

September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,


vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
x-----------------------x
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
CARPIO, J.:
The Case
These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court assailing the Decision of 19 November 2010 of the Court of Tax
Appeals (CTA) En Banc and its Resolution 2 of 1 March 2011 in CTA Case No. 6746. This Court resolves this case on a pure question of law, which involves the
interpretation of Section 27(B) vis--vis Section 30(E) and (G) of the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit corporation. Under its articles of incorporation, among its
corporate purposes are:
(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, charitable and scientific hospital which shall give curative,
rehabilitative and spiritual care to the sick, diseased and disabled persons; provided that purely medical and surgical services shall be performed by duly
licensed physicians and surgeons who may be freely and individually contracted by patients;
(b) To provide a career of health science education and provide medical services to the community through organized clinics in such specialties as the
facilities and resources of the corporation make possible;
(c) To carry on educational activities related to the maintenance and promotion of health as well as provide facilities for scientific and medical
researches which, in the opinion of the Board of Trustees, may be justified by the facilities, personnel, funds, or other requirements that are available;
(d) To cooperate with organized medical societies, agencies of both government and private sector; establish rules and regulations consistent with the
highest professional ethics;

xxxx3
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes amounting toP76,063,116.06 for 1998, comprised of deficiency
income tax, value-added tax, withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to P63,935,351.57 during trial in the
First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax assessments. The BIR did not act on the protest within the
180-day period under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax rate on the income of proprietary non-profit hospitals,
should be applicable to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the exemption on non-profit
hospitals that were previously categorized as non-stock, non-profit corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which
prevails over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, non-profit charitable institutions and civic organizations
promoting social welfare. 6
The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its revenues came from charitable purposes. Moreover, the
hospital's board of trustees, officers and employees directly benefit from its profits and assets. St. Luke's had total revenues of P1,730,367,965 or
approximately P1.73 billion from patient services in 1998. 7
St. Luke's contended that the BIR should not consider its total revenues, because its free services to patients wasP218,187,498 or 65.20% of its 1998 operating
income (i.e., total revenues less operating expenses) ofP334,642,615. 8 St. Luke's also claimed that its income does not inure to the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes under Section 30(E) and (G) of the NIRC. It argued
that the making of profit per se does not destroy its income tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA that Section 27(B) applies to St. Luke's. The petition raises
the sole issue of whether the enactment of Section 27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section 30 of the NIRC and
instead, imposes a preferential rate of 10% on their taxable income. The BIR prays that St. Luke's be ordered to pay P57,659,981.19 as deficiency income and
expanded withholding tax for 1998 with surcharges and interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding of a part of its income, 9 as well as the payment of surcharge
and delinquency interest. There is no ground for this Court to undertake such a factual review. Under the Constitution 10 and the Rules of Court, 11 this Court's
review power is generally limited to "cases in which only an error or question of law is involved." 12 This Court cannot depart from this limitation if a party fails
to invoke a recognized exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision dated 23 February 2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED. Accordingly, the 1998 deficiency VAT assessment issued by
respondent against petitioner in the amount of P110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby ORDERED to PAY
deficiency income tax and deficiency expanded withholding tax for the taxable year 1998 in the respective amounts of P5,496,963.54 andP778,406.84 or in the
sum of P6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total amount of P6,275,370.38 counted from October 15,
2003 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997.
SO ORDERED. 13
The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose from the failure of St. Luke's to prove that part of its income in 1998
(declared as "Other Income-Net") 14 came from charitable activities. The CTA cancelled the remainder of the P63,113,952.79 deficiency assessed by the BIR
based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was not applicable to St. Luke's. 15
The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section 30(E) and (G) of the NIRC. This ruling would exempt all
income derived by St. Luke's from services to its patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's Medical Center, Inc.
v. Commissioner of Internal Revenue, 16 which examined the primary purposes of St. Luke's under its articles of incorporation and various
documents 17 identifying St. Luke's as a charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a charitable institution does not lose its charitable character and
its consequent exemption from taxation merely because recipients of its benefits who are able to pay are required to do so, where funds derived in this manner are
devoted to the charitable purposes of the institution x x x." 19 The generation of income from paying patients does not per se destroy the charitable nature of St.
Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which ruled that the old NIRC (Commonwealth Act No. 466, as
amended) 21 "positively exempts from taxation those corporations or associations which, otherwise, would be subject thereto, because of the existence of x x x net
income." 22 The NIRC of 1997 substantially reproduces the provision on charitable institutions of the old NIRC. Thus, in rejecting the argument that tax
exemption is lost whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very responsible organization must be run to at least insure
its existence, by operating within the limits of its own resources, especially its regular income. In other words, it should always strive, whenever possible, to have a
surplus." 23
The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA explained that to apply the 10% preferential rate, Section 27(B)
requires a hospital to be "non-profit." On the other hand, Congress specifically used the word "non-stock" to qualify a charitable "corporation or association" in
Section 30(E) of the NIRC. According to the CTA, this is unique in the present tax code, indicating an intent to exempt this type of charitable organization from
income tax. Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is clear that non-stock, non-profit hospitals operated exclusively
for charitable purpose are exempt from income tax on income received by them as such, applying the provision of Section 30(E) of the NIRC of 1997, as
amended." 25
The Issue
The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on
the income of proprietary non-profit hospitals.

The Ruling of the Court


St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the petition raises factual issues. Under Section 1, Rule 45 of the
Rules of Court, "[t]he petition shall raise only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits
factual review "when the Court of Appeals [in this case, the CTA] manifestly overlooked certain relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA "disregarded the testimony of [its] witness, Romeo B. Mary,
being allegedly self-serving, to show the nature of the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to consider relevant evidence. The
CTA obviously considered the evidence and concluded that it is self-serving. The CTA declared that it has "gone through the records of this case and found no
other evidence aside from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to
pay the deficiency tax within the time prescribed for its payment in the notice of assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under
Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the amount of P6,275,370.38 in the dispositive portion of the CTA First Division Decision
includes only deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest. 32
The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B) in the NIRC of 1997 vis--vis Section 30(E) and (G) on
the income tax exemption of charitable and social welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to proprietary
educational institutions and proprietary non-profit hospitals. The BIR argues that Congress intended to remove the exemption that non-profit hospitals previously
enjoyed under Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the NIRC of 1997. 33 Section 27(B) of the present
NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are non-profit shall pay a tax of ten percent (10%)
on their taxable income except those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade, business or other activity exceeds
fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall
be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other
activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or
function. A 'proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate
from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills
Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. (Emphasis supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a charitable institution and an organization promoting social
welfare. The arguments of St. Luke's focus on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable institutions. 34 St. Luke's
asserts that the legislative intent of introducing Section 27(B) was only to remove the exemption for "proprietary non-profit" hospitals. 35 The relevant provisions
of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person;
xxxx
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this
Code. (Emphasis supplied)
The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the NIRC does not remove the income tax exemption of
proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption. The effect of the introduction of Section 27(B) is to subject the taxable income of two specific institutions, namely,
proprietary non-profit educational institutions 36 and proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10% preferential rate
under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit
hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the definition of a
"proprietary educational institution" as "any private school maintained and administered by private individuals or groups" with a government permit. "Non-profit"
means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its
activities conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino Inc. de Cebu,37 this Court considered as non-profit a sports
club organized for recreation and entertainment of its stockholders and members. The club was primarily funded by membership fees and dues. If it had profits,
they were used for overhead expenses and improving its golf course. 38 The club was non-profit because of its purpose and there was no evidence that it was
engaged in a profit-making enterprise. 39
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court defined "charity" in Lung Center of the Philippines v. Quezon
City 40 as "a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under
the influence of education or religion, by assisting them to establish themselves in life or [by] otherwise lessening the burden of government." 41 A non-profit club
for the benefit of its members fails this test. An organization may be considered as non-profit if it does not distribute any part of its income to stockholders or

members. However, despite its being a tax exempt institution, any income such institution earns from activities conducted for profit is taxable, as expressly
provided in the last paragraph of Section 30.
To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The issue in Lung Center concerns exemption
from real property tax and not income tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of
persons which lessens the burden of government. In other words, charitable institutions provide for free goods and services to the public which would otherwise
fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because
certain private entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works which would have been funded by appropriations from the Treasury. 42
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax exemption are specified by the law granting it. The
power of Congress to tax implies the power to exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that "[n]o law granting
any tax exemption shall be passed without the concurrence of a majority of all the Members of Congress." 43 The requirements for a tax exemption are strictly
construed against the taxpayer 44 because an exemption restricts the collection of taxes necessary for the existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the purpose of exemption from real property taxes. This
ruling uses the same premise as Hospital de San Juan 45and Jesus Sacred Heart College 46 which says that receiving income from paying patients does not
destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying
patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to
the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution. 47
For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of the property. The Constitution provides that
"[c]haritable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation." 48The test of exemption is not strictly a
requirement on the intrinsic nature or character of the institution. The test requires that the institution use the property in a certain way, i.e. for a charitable purpose.
Thus, the Court held that the Lung Center of the Philippines did not lose its charitable character when it used a portion of its lot for commercial purposes. The
effect of failing to meet the use requirement is simply to remove from the tax exemption that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided to extend the exemption to income taxes. However,
the way Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines
the corporation or association that is exempt from income tax. On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable
institution, but requires that the institution "actually, directly and exclusively" use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for charitable purposes. The organization of the institution
refers to its corporate form, as shown by its articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC specifically requires
that the corporation or association be non-stock, which is defined by the Corporation Code as "one where no part of its income is distributable as dividends to its
members, trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of
the purpose or purposes for which the corporation was organized." 50 However, under Lung Center, any profit by a charitable institution must not only be plowed
back "whenever necessary or proper," but must be "devoted or used altogether to the charitable object which it is intended to achieve." 51
The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC requires that these operations be exclusive to charity.
There is also a specific requirement that "no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific
person." The use of lands, buildings and improvements of the institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution. However, this does not automatically exempt St. Luke's from
paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not ipso facto tax exempt. To
be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution use the property "actually, directly and
exclusively" for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be "organized and
operated exclusively" for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated exclusively" by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this
Code. (Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts "any" activity for profit, such activity is not tax exempt even
as its not-for-profit activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation or association [must
be] organized and operated exclusively for x x x charitable x x x purposes x x x." It likewise qualifies the requirement in Section 30(G) that the civic organization
must be "operated exclusively" for the promotion of social welfare.
Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it is nevertheless allowed to engage in "activities
conducted for profit" without losing its tax exempt status for its not-for-profit activities. The only consequence is that the "income of whatever kind and character"
of a charitable institution "from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax." Prior to the
introduction of Section 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate under Section 27(A). With the introduction of
Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be disputed that a hospital which receives approximately P1.73
billion from paying patients is not an institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are income received from
"activities conducted for profit." 52 Indeed, St. Luke's admits that it derived profits from its paying patients. St. Luke's declared P1,730,367,965 as "Revenues from

Services to Patients" in contrast to its "Free Services" expenditure ofP218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the following
"calculation" to support its claim that 65.20% of its "income after expenses was allocated to free or charitable services" in 1998. 53
REVENUES FROM SERVICES TO PATIENTS

P1,730,367,965.00

OPERATING EXPENSES
Professional care of patients

P1,016,608,394.00

Administrative

287,319,334.00

Household and Property

91,797,622.00
P1,395,725,350.00

INCOME FROM OPERATIONS

P334,642,615.00

100%

Free Services

-218,187,498.00

-65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES

P116,455,117.00

34.80%

OTHER INCOME

17,482,304.00

EXCESS OF REVENUES OVER EXPENSES

P133,937,421.00

In Lung Center, this Court declared:


"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner
to exclude; as enjoying a privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without
doing violence to the Constitution and the law. Solely is synonymous with exclusively. 54
The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC. Services to paying patients are activities conducted for
profit. They cannot be considered any other way. There is a "purpose to make profit over and above the cost" of services. 55 The P1.73 billion total revenues from
paying patients is not even incidental to St. Luke's charity expenditure of P218,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in 1998. However, if a part of the remaining 34.80% of the
operating income is reinvested in property, equipment or facilities used for services to paying and non-paying patients, then it cannot be said that the income is
"devoted or used altogether to the charitable object which it is intended to achieve." 56 The income is plowed back to the corporation not entirely for charitable
purposes, but for profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that income from activities for profit is taxable
"regardless of the disposition made of such income."
Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase "any activity conducted for profit." However, it quoted a
deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee of Conference for the Senate, which introduced the phrase "or from any
activity conducted for profit."
P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree Vd. que es una actividad esencial dicho hospital para el funcionamiento del
colegio de medicina de dicha universidad?
xxxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero considerando que el hospital tiene cuartos de pago, y a los mismos
generalmente van enfermos de buena posicin social econmica, lo que se paga por estos enfermos debe estar sujeto a 'income tax', y es una de las razones que
hemos tenido para insertar las palabras o frase 'or from any activity conducted for profit.' 57
The question was whether having a hospital is essential to an educational institution like the College of Medicine of the University of Santo Tomas. Senator
Cuenco answered that if the hospital has paid rooms generally occupied by people of good economic standing, then it should be subject to income tax. He said that
this was one of the reasons Congress inserted the phrase "or any activity conducted for profit."
The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is applicable to charitable institutions because Senator Cuenco's
response shows an intent to focus on the activities of charitable institutions. Activities for profit should not escape the reach of taxation. Being a non-stock and
non-profit corporation does not, by this reason alone, completely exempt an institution from tax. An institution cannot use its corporate form to prevent its
profitable activities from being taxed.
The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare purposes insofar as its revenues from paying
patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section
30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income
from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing in the expenses of government and yet
benefits from them. Tax exemptions for charitable institutions should therefore be limited to institutions beneficial to the public and those which improve social
welfare. A profit-making entity should not be allowed to exploit this subsidy to the detriment of the government and other taxpayers.1wphi1
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income. However, it remains a
proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested
pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit
activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6
June 1990 by the BIR, which opined that St. Luke's is "a corporation for purely charitable and social welfare purposes"59 and thus exempt from income tax. 60 In
Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the Court said that "good faith and honest belief that one is not subject to tax on the basis of
previous interpretation of government agencies tasked to implement the tax law, are sufficient justification to delete the imposition of surcharges and interest." 62
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY GRANTED. The Decision of the Court of Tax Appeals En
Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO
PAY the deficiency income tax in 1998 based on the 10% preferential income tax rate under Section 27(B) of the National Internal Revenue Code. However, it is
not liable for surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National Internal Revenue Code. All other parts of the
Decision and Resolution of the Court of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule 45 of the Rules of Court.
SO ORDERED.
Leonardo-De Castro*, Brion, Perez, and Perlas-Bernabe, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 197192

June 4, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
THE INSULAR LIFE ASSURANCE CO. LTD., Respondent.
DECISION
REYES, J.:
"Time and again, the Court has held that it is a very desirable and necessary judicial practice that when a court has laid down a principle of law as applicable to a
certain state of facts, it will adhere to that principle and apply it to all future cases in which the facts are substantially the same. Stare decisis et non quieta movere.
Stand by the decisions and disturb not what is settled. Stare decisis simply means that for the sake of certainty, a conclusion reached in one case should be applied
to those that follow if the facts are substantially the same, even though the parties may be different. It proceeds from the first principle of justice that, absent any
powerful countervailing considerations, like cases ought to be decided alike. Thus, where the same questions relating to the same event have been put forward by
the parties similarly situated as in a previous case litigated and decided by a competent court, the rule of stare decisisis a bar to any attempt to relitigate the same
issue."1
The Case
This is a Petition for Review on Certiorari2 under Rule 45 of the Rules of Court filed by the Commissioner of Internal Revenue (petitioner) against The Insular
Life Assurance Co., Ltd. (respondent),challenging the Decision3dated March 14, 2011 and Resolution4 dated June 13, 2011 of the Court of Tax Appeals (CTA) en
banc in CTA EB Case No. 585 (CTA Case No. 7292).
Antecedent Facts
Petitioner Commissioner of Internal Revenue is the official duly authorized under Section 4 of the National Internal Revenue Code (NIRC) of 1997, as amended,
to assess and collect internal revenue taxes, as well as the power to decide disputed assessments, subject to the exclusive appellate jurisdiction of this Court.
Respondent The Insular Life Assurance, Co., Ltd. is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines,
with principal office located at IL Corporate Center, Insular Life Drive, FilinvestCorporate City, Alabang, Muntinlupa City. It is registered as a non-stock mutual
life insurer with the Securities and Exchange Commission.
On October 7, 2004, respondent received an Assessment Notice with Formal Letter of Demand both dated July 29, 2004, assessing respondent for deficiency DST
on its premiums on direct business/sums assured for calendar year 2002, computed as follows:
Documentary Stamp Tax
Deficiency Documentary Stamp
Tax-Basic
Add: Increments (Interest and
Compromise Penalty)
Total Amount Due

P70,732,389.83
23,201,969.38
P93,934,359.21

Thereafter, respondent filed its Protest Letter on November 4, 2004, which was subsequently denied by petitioner in a Final Decision, on Disputed Assessment
dated April 15, 2005 for lack of factual and legal bases. Apparently, respondent received the aforesaid Final Decision on Disputed Assessment only on June 23,
2005.
On July 15, 2005, respondent filed a Petition for Review before [the CTA].

On April 21, 2009, the former Second Division of the [CTA] rendered a Decision in favor of respondent, thus, granting the Petition for Review and held, among
others, that respondent sufficiently established that it is a cooperative company and therefore, it is exempt from the DST on the insurance policies it grants to its
members.
Consequently, on May 13, 2009, petitioner filed a Motion for Reconsideration.
On January 11, 2010, petitioner received a Resolution dated January 4, 2010 of the former Second Division of [the CTA] denying [its] Motion for Reconsideration
for lack of merit. It held, among others, that the Supreme Court in Republic of the Philippines vs. Sunlife Assurance Company of Canada already laid down the
rule that registration with the Cooperative Development Authority is not essential before respondent may avail of the exemptions granted under Section 199 of the
1997 NIRC, as amended.
Undaunted, petitioner filed a Petition for Review before the [CTA] en banc on January 26, 2010.5 (Citations omitted)
On March 14, 2011, the CTA en banc denied the petition and rendered the assailed decision, with the dispositive portion as follows:
WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit. The assailed Decision dated April 21, 2009 and Resolution dated January 4,
2010 are AFFIRMED.
SO ORDERED.6
It is the petitioners contention that since the respondent is not registered with the Cooperative Development Authority (CDA), it should not be considered as a
cooperative company that is entitled to the exemption provided under Section 199(a) of the National Internal Revenue Code (NIRC) of 1997.7 Thus, the instant
petition.
Issue
WHETHER OR NOT THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS A COOPERATIVE AND [IS] THUS[,] EXEMPT FROM
DOCUMENTARY STAMP TAX.8
Ruling
The Court has pronounced in Republic of the Philippines v. Sunlife Assurance Company of Canada 9 that "[u]nder the Tax Code although respondent is a
cooperative, registration with the CDA is not necessary in order for it to be exempt from the payment of both percentage taxes on insurance premiums, under
Section 121; and documentary stamp taxes on policies of insurance or annuities it grants, under Section 199."10
Section 199 of the NIRC of 1997 provides:
Sec. 199. Documents and Papers Not Subject to Stamp Tax. The provisions of Section 173 to the contrary notwithstanding, the following instruments, documents
and papers shall be exempt from the documentary stamp tax:
(a) Policies of insurance or annuities made or granted by a fraternal or beneficiary society, order, association or cooperative company, operated on the lodge system
or local cooperation plan and organized and conducted solely by the members thereof for the exclusive benefit of each member and not for profit.
x x x x (Emphasis ours)
As regards the applicability of Sunlife to the case at bar, the CTA, through records, has established the following similarities between the two which call for the
application of the doctrine of stare decisis:
1. Sunlife Assurance Company of Canada and the respondent are both engaged in mutual life insurance business in the Philippines;
2. The structures of both corporations were converted from stock life insurance corporation to non-stock mutual life insurance for the benefit of its
policyholders pursuant to Section 266, Title 17 of the Insurance Code of 1978 and they were made prior to the effectivity of Republic Act (R.A.) No.
6938, otherwise known as the "Cooperative Code of the Philippines";
3. Both corporations claim to bea purely cooperative corporation duly licensed to engage in mutual life insurance business;
4. Both corporations claim exemption from payment of the documentary stamp taxes (DST) under Section 199(1) of the Tax Code (now Section 199[a]
of the NIRC of 1997, as amended); and
5. Petitioner CIR requires registration with the CDA before it grants tax exemptions under the Tax Code.11
The CTA observed that the factual circumstances obtaining in Sunlife and the present case are substantially the same. Hence, the CTA based its assailed decision
on the doctrine enunciated by the Court in the said case. On the other hand, the petitioner submitted that the doctrine in Sunlife should be reconsidered and not be
applied because the same failed to consider Section 3(e) of R.A No. 6939,12 which provides that CDA has the power to register all cooperatives,13 to wit:
Section 3. Powers, Functions and Responsibilities. The Authority shall have the following powers, functions and responsibilities:
xxxx
(e) Register all cooperatives and their federations and unions, including their division, merger, consolidation, dissolution or liquidation. It shall also register the
transfer of all or substantially all of their assets and liabilities and such other matters as may be required by the Authority;
xxxx
The petitioner proposed that considering the foregoing provision, registration with the CDA is necessary for an association to be deemed as a cooperative and to
enjoy the tax privileges appurtenant thereto.14
A perusal of Section 3(e) of R.A. No. 6939 evidently shows that it is merely a statement of one of the powers exercised by CDA. Neither Section 3(e) of R.A. No.
6939 nor any other provision in the aforementioned statute imposes registration with the CDA as a condition precedent to claiming DST exemption. Even then,
R.A. No. 6939 is inapplicable to the case at bar, as will be discussed shortly.
The NIRC of 1997 defined a cooperative company or association as "conducted by the members thereof with the money collected from among themselves and
solely for their own protection and not for profit."15 Consequently, as long as these requisites are satisfied, a company or association is deemed a cooperative
insofar as taxation is concerned. In this case, the respondent has sufficiently established that it conforms with the elements of a cooperative as defined in the NIRC
of 1997 in that it is managed by members, operated with money collected from the members and has for its main purpose the mutual protection of members for
profit.16

The Court presented three justifications in Sunlife why registration with the CDA is not necessary for cooperatives to claim exemption from DST.
First, the NIRC of 1997 does not require registration with the CDA. No tax provision requires a mutual life insurance company to register with that agency in order
to enjoy exemption from both percentage and DST. Although a provision of Section 8 of the Revenue Memorandum Circular (RMC) No. 48-91 requires the
submission of the Certificate of Registration with the CDA before the issuance of a tax exemption certificate, that provision cannot prevail over the clear absence
of an equivalent requirement under the Tax Code.17
The respondent correctly pointed out that in other provisions of the NIRC, registration with the CDA is expressly required in order to avail of certain tax
exemptions or preferential tax treatment18 a requirement which is noticeably absent in Section 199 of the NIRC. Quoted below are examples of cooperatives
which are expressly mandated by law to be registered with the CDA before their transactions could be considered as exempted from value added tax:
Sec. 109. Exempt Transactions. The following shall be exempt from the value-added tax:
xxxx
(r) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce,
whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare
parts thereof, to be used directly and exclusively in the production and/or processing of their produce;
(s) Sales by electric cooperatives duly registered with the Cooperative Development Authority or National Electrification Administration, relative to the
generation and distribution of electricity as well as their importation of machineries and equipment, including spare parts, which shall be directly used
in the generation and distribution of electricity;
(t) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority whose
lending operation is limited to their members;
(u) Sales by non-agricultural, non-electric and noncredit cooperatives duly registered with the Cooperative Development Authority: Provided, That the
share capital contribution of each member does not exceed Fifteen thousand pesos ( P15,000) and regardless of the aggregate capital and net surplus
ratably distributed among the members;
x x x x (Emphasis ours)
This absence of the registration requirement under Section 199 clearly manifests the intention of the Legislative branch of the government to do away with
registration before the CDA for a cooperative to benefit from the DST exemption under this particular section.
Second, the provisions of the Cooperative Code of the Philippines do not apply.19 The history of the Cooperative Code was amply discussed in Sunlife where it
was noted that cooperatives under the old law, Presidential Decree (P.D.) No. 17520 "referred only to an organization composed primarily of small producers and
consumers who voluntarily joined to form a business enterprise that they themselves owned, controlled, and patronized. The Bureau of Cooperatives Development
under the Department of Local Government and Community Development (later Ministry of Agriculture) had the authority to register, regulate and supervise
only the following cooperatives: (1) barrio associations involved in the issuance of certificates of land transfer; (2) local or primary cooperatives composed of
natural persons and/or barrio associations; (3) federations composed of cooperatives that may or may not perform business activities; and (4) unions of
cooperatives that did not perform any business activities. Respondent does not fall under any of the abovementioned types of cooperatives required to be registered
under [P.D. No.] 175."21
Thus, when the subsequent law, R.A. No. 6939, concerning cooperatives was enacted, the respondent was not covered by said law and was not required to be
registered, viz:
When the Cooperative Code was enacted years later, all cooperatives that were registered under PD 175 and previous laws were also deemed registered with the
CDA. Since respondent was not required to be registered under the old law on cooperatives, it followed that it was not required to be registered even under the new
law.
x x x Only cooperatives to be formed or organized under the Cooperative Code needed registration with the CDA. x x x.22 (Emphasis ours)
"The distinguishing feature of a cooperative enterprise is the mutuality of cooperation among its member-policyholders united for that purpose. So long as
respondent meets this essential feature, it does not even have to use and carry the name of a cooperative to operate its mutual life insurance business. Gratia
argumenti that registration is mandatory, it cannot deprive respondent of its tax exemption privilege merely because it failed to register. The nature of its operations
is clear; its purpose well-defined. Exemption when granted cannot prevail over administrative convenience."23
Third, the Insurance Code does not require registration with the CDA.1wphi1 "The provisions of this Code primarily govern insurance contracts; only if a
particular matter in question is not specifically provided for shall the provisions of the Civil Code on contracts and special laws govern."24
There being no cogent reason for the Court to deviate from its ruling in Sunlife, the Court holds that the respondent, being a cooperative company not mandated by
law to be registered with the CDA, cannot be required under RMC No. 48-91, a mere circular, to be registered prior to availing of DST exemption.
"While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement statutes, they are without authority to limit the scope
of the statute to less than what it provides, or extend or expand the statute beyond its terms, or in any way modify explicit provisions of the law. Indeed, a quasijudicial body or an administrative agency for that matter cannot amend an act of Congress. Hence, in case of a discrepancy between the basic law and an
interpretative or administrative ruling, the basic law prevails. "25
WHEREFORE, premises considered, the petition is DENIED. Accordingly, the Decision dated March 14, 2011 and Resolution dated June 13, 2011 of the Court of
Tax Appeals en bane in CTA EB Case No. 585 (CTA Case No. 7292) are hereby AFFIRMED.
SO ORDERED.
BIENVENIDO L. REYES
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
SPECIAL THIRD DIVISION

G.R. No. 183891

October 19, 2011

ROMARICO J. MENDOZA, Petitioner,


vs.
PEOPLE OF THE PHILIPPINES, Respondent.
R E SO L U T I O N
BRION, J.:
We resolve the motion for reconsideration filed by petitioner Romarico J. Mendoza seeking the reversal of ourDecision dated August 3, 2010.
The Decision affirmed the petitioners conviction for his failure to remit the Social Security Service (SSS) contributions of his employees. The petitioner anchors
the present motion on his supposed inclusion within the coverage of Republic Act (RA) No. 9903 or the Social Security Condonation Law of 2009, whose passage
the petitioner claims to be a supervening event in his case. He further invokes the equal protection clause in support of his motion.
In our Decision dated August 3, 2010, we AFFIRMED, with modification, the decree of conviction issued by both the trial and appellate courts for the
petitioners violation of Section 22(a) and (d), in relation to Section 28 of RA No. 8282 or the Social Security Act of 1997. To recall its highlights,
our Decision emphasized that the petitioner readily admitted during trial that he did not remit the SSS premium contributions of his employees at Summa Alta
Tierra Industries, Inc. from August 1998 to July 1999, in the amount of P239,756.80; inclusive of penalties, this unremitted amount totaled to P421,151.09. The
petitioners explanation for his failure to remit, which the trial court disbelieved, was that during this period, Summa Alta Tierra Industries, Inc. shut down as a
result of the general decline in the economy. The petitioner pleaded good faith and lack of criminal intent as his defenses.
We ruled that the decree of conviction was founded on proof beyond reasonable doubt, based on the following considerations: first, the remittance of employee
contributions to the SSS is mandatory under RA No. 8282; and second, the failure to comply with a special law being malum prohibitum, the defenses of good faith
and lack of criminal intent are immaterial.
The petitioner further argued that since he was designated in the Information as a "proprietor," he was without criminal liability since "proprietors" are not among
the corporate officers specifically enumerated in Section 28(f) of RA No. 8282 to be criminally liable for the violation of its provisions. We rejected this argument
based on our ruling in Garcia v. Social Security Commission Legal and Collection.1 We ruled that to sustain the petitioners argument would be to allow the
unscrupulous to conveniently escape liability merely through the creative use of managerial titles.
After taking into account the Indeterminate Penalty Law and Article 315 of the Revised Penal Code, we MODIFIED the penalty originally imposed by the trial
court2 and, instead, decreed the penalty of four (4) years and two (2) months of prision correccional, as minimum, to twenty (20) years of reclusion temporal, as
maximum.
In the present motion for reconsideration, the petitioner points out that pending his appeal with the Court of Appeals (CA), he voluntarily paid the SSS the amount
of P239,756.80 to settle his delinquency.3 Note that the petitioner also gave notice of this payment to the CA via a Motion for Reconsideration and a Motion for
New Trial.Although the People did not contest the fact of voluntary payment, the CA nevertheless denied the said motions.
The present motion for reconsideration rests on the following points:
First. On January 7, 2010, during the pendency of the petitioners case before the Court, then President Gloria Macapagal-Arroyo signed RA No. 9903
into law. RA No. 9903 mandates the effective withdrawal ofall pending cases against employers who would remit their delinquent contributions to the
SSS within a specified period, viz., within six months after the laws effectivity.4 The petitioner claims that in view of RA No. 9903 and its
implementing rules, the settlement of his delinquent contributions in 2007 entitles him to an acquittal. He invokes the equal protection clause in support
of his plea.
Second. The petitioner alternatively prays that should the Court find his above argument wanting, he should still be acquitted since the prosecution
failed to prove all the elements of the crime charged.
Third. The petitioner prays that a fine be imposed, not imprisonment, should he be found guilty.
The Solicitor General filed a Manifestation In Lieu of Comment and claims that the passage of RA No. 9903 constituted a supervening event in the petitioners case
that supports the petitioners acquittal "[a]fter a conscientious review of the case."5
THE COURTS RULING
The petitioners arguments supporting his prayer for acquittal fail to convince us. However, we find basis to allow waiver of the petitioners liability for accrued
penalties.
The petitioners liability for the crime is a settled matter
Upfront, we reject the petitioners claim that the prosecution failed to prove all the elements of the crime charged. This is a matter that has been resolved in our
Decision, and the petitioner did not raise anything substantial to merit the reversal of our finding of guilt. To reiterate, the petitioners conviction was based on his
admission that he failed to remit his employees contribution to the SSS.
The petitioner cannot benefit from the terms of RA No. 9903, which condone only employers who pay their delinquencies within six months from the laws
effectivity
We note that the petitioner does not ask for the reversal of his conviction based on the authority of RA No. 9903; he avoids making a straightforward claim because
this law plainly does not apply to him or to others in the same situation. The clear intent of the law is to grant condonation only to employers with delinquent
contributions or pending cases for their delinquencies and who pay their delinquencies within the six (6)-month period set by the law. Mere payment of unpaid
contributions does not suffice; it is payment within, and only within, the six (6)-month availment period that triggers the applicability of RA No. 9903.
True, the petitioners case was pending with us when RA No. 9903 was passed. Unfortunately for him, he paid his delinquent SSS contributions in 2007. By paying
outside of the availment period, the petitioner effectively placed himself outside the benevolent sphere of RA No. 9903. This is how the law is written: it condones
employers and only those employers with unpaid SSS contributions or with pending cases who pay within the six (6)-month period following the laws date
of effectivity. Dura lex, sed lex.
The petitioners awareness that RA No. 9903 operates as discussed above is apparent in his plea for equal protection. In his motion, he states that
[he] is entitled under the equal protection clause to the dismissal of the case against him since he had already paid the subject delinquent contributions due to the
SSS which accepted the payment as borne by the official receipt it issued (please see Annex "A"). The equal protection clause requires that similar subjects, [ sic]
should not be treated differently, so as to give undue favor to some and unjustly discriminate against others. The petitioner is no more no less in the same situation

as the employer who would enjoy freedom from criminal prosecution upon payment in full of the delinquent contributions due and payable to the SSS within six
months from the effectivity of Republic Act No. 9903.6
The Court cannot amplify the scope of RA No. 9903 on the ground of equal protection, and acquit the petitioner and other delinquent employers like him; it would
in essence be an amendment of RA No. 9903, an act of judicial legislation abjured by the trias politica principle.7
RA No. 9903 creates two classifications of employers delinquent in remitting the SSS contributions of their employees: (1) those delinquent employers who
pay within the six (6)-month period (the former group), and (2) those delinquent employers who pay outside of this availment period (the latter group). The
creation of these two classes is obvious and unavoidable when Section 2 and the last proviso of Section 48 of the law are read together. The same provisions show
the laws intent to limit the benefit of condonation to the former group only; had RA No. 9903 likewise intended to benefit the latter group, which includes the
petitioner, it would have expressly declared so. Laws granting condonation constitute an act of benevolence on the governments part, similar to tax amnesty laws;
their terms are strictly construed against the applicants. Since the law itself excludes the class of employers to which the petitioner belongs, no ground exists to
justify his acquittal. An implementing rule or regulation must conform to and be consistent with the provisions of the enabling statute; it cannot amend the law
either by abridging or expanding its scope.9
For the same reason, we cannot grant the petitioners prayer to impose a fine in lieu of imprisonment; neither RA No. 8282 nor RA No. 9903 authorizes the Court
to exercise this option.
On the matter of equal protection, we stated in Tolentino v. Board of Accountancy, et al.10 that the guarantee simply means "that no person or class of persons shall
be denied the same protection of the laws which is enjoyed by other persons or other classes in the same place and in like circumstances." In People v. Cayat,11 we
further summarized the jurisprudence on equal protection in this wise:
It is an established principle of constitutional law that the guaranty of the equal protection of the laws is not violated by a legislation based on reasonable
classification. And the classification, to be reasonable, (1) must rest on substantial distinctions; (2) must be germane to the purposes of the law; (3) must not be
limited to existing conditions only; and (4) must apply equally to all members of the same class.
The difference in the dates of payment of delinquent contributions provides a substantial distinction between the two classes of employers. In limiting the benefits
of RA No. 9903 to delinquent employers who pay within the six (6)-month period, the legislature refused to allow a sweeping, non-discriminatory condonation to
all delinquent employers, lest the policy behind RA No. 8282 be undermined.1avvphi1
The petitioner is entitled to a waiver of his accrued penalties
Despite our discussion above, the petitioners move to have our Decision reconsidered is not entirely futile. The one benefit the petitioner can obtain from RA No.
9903 is the waiver of his accrued penalties, which remain unpaid in the amount of P181,394.29. This waiver is derived from the last proviso of Section 4 of RA
No. 9903:
Provided, further, That for reason of equity, employers who settled arrears in contributions before the effectivity of this Act shall likewise have their accrued
penalties waived.
This proviso is applicable to the petitioner who settled his contributions long before the passage of the law. Applied to the petitioner, therefore, RA No. 9903 only
works to allow a waiver of his accrued penalties, but not the reversal of his conviction.1avvphi1
Referral to the Chief Executive for possible exercise of executive clemency
We realize that with the affirmation of the petitioners conviction for violation of RA No. 8282, he stands to suffer imprisonment for four (4) years and two (2)
months of prision correccional, as minimum, to twenty (20) years ofreclusion temporal, as maximum, notwithstanding the payment of his delinquent contribution.
Under Article 5 of the Revised Penal Code,12 the courts are bound to apply the law as it is and impose the proper penalty, no matter how harsh it might be. The
same provision, however, gives the Court the discretion to recommend to the President actions it deems appropriate but are beyond its power when it considers the
penalty imposed as excessive. Although the petitioner was convicted under a special penal law, the Court is not precluded from giving the Revised Penal Code
suppletory application in light of Article 1013 of the same Code and our ruling in People v. Simon.14
WHEREFORE, the Court PARTIALLY GRANTS petitioner Romarico J. Mendozas motion for reconsideration. The Court AFFIRMS the petitioners conviction
for violation of Section 22(a) and (d), in relation to Section 28 of Republic Act No. 8282, and the petitioner is thus sentenced to an indeterminate prison term of
four (4) years and two (2) months of prision correccional, as minimum, to twenty (20) years of reclusion temporal, as maximum. In light of Section 4 of Republic
Act No. 9903, the petitioners liability for accrued penalties is considered WAIVED. Considering the circumstances of the case, the Court transmits the case to the
Chief Executive, through the Department of Justice, and RECOMMENDS the grant of executive clemency to the petitioner.
SO ORDERED.
ARTURO D. BRION
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 172394

October 13, 2010

H. TAMBUNTING PAWNSHOP, INC., Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
BERSAMIN, J.:
The issue herein is whether the petitioner, a pawnshop operator, was liable for VAT and the compromise penalty for taxable year 2000.

On August 29, 2003, petitioner H. Tambunting Pawnshop, Inc. (Tambunting), a domestic corporation duly licensed to engage in the pawnshop business, received
an assessment notice dated August 27, 2003 from the Bureau of Internal Revenue (BIR), demanding the payment of deficiency Value-Added Tax (VAT) and
compromise penalty for taxable year 2000 in the amounts of P5,212,404.52 and P25,000, respectively.
On September 15, 2003, Tambunting, disclaiming its liability, protested the assessment with the respondent Commissioner of Internal Revenue (CIR), arguing that
a pawnshop business was not subject to VAT and the compromise penalty.1
Due to the inaction of the CIR on the protest, Tambunting filed on April 2, 2004 its petition for review with the Court of Tax Appeals (CTA) pursuant to Section
228 of Republic Act No. 8424 (National Internal Revenue Code or Tax Reform Act of 1997).2
In a decision dated April 11, 2005,3 the CTA Second Division denied the petition for review, to wit:
WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED. Accordingly, petitioner is hereby ORDERED to pay
respondent Commissioner of Internal Revenue the deficiency VAT for taxable year 2000 in the amount of PhP 5,212,404.52, plus 25% surcharge and 20%
delinquency interest per annum from September 29, 2003 until fully paid, pursuant to Section 248 and 249 of the NIRC of 1997, as amended.
The amount of PhP25,000 imposed by way of compromise penalty is hereby DELETED.
SO ORDERED.
On April 29, 2005, Tambunting filed a motion for partial reconsideration.4 Later on, on May 26, 2005, Tambunting submitted a written manifestation, attaching a
copy of Bureau of Internal Revenue (BIR) tax payment deposit slip (BIR Form No. 0605) and the corresponding schedule evidencing its payment of P828,809.67
for the years from 2000 to 2002 pursuant to a settlement agreement with BIR allowing Tambunting to pay 25% of its VAT due.5
On July 14, 2005, however, the CTA Second Division denied Tambuntings motion for partial reconsideration in a resolution dated July 14, 2005.6
On August 22, 2005, Tambunting appealed by petition for review to the CTA en banc.7
On March 21, 2006, the CTA en banc rendered its assailed decision,8 disposing thus:
WHEREFORE, the Court en banc finds no reversible error to warrant the reversal of the assailed Decision promulgated on April 11, 2005 and the Resolution dated
July 14, 2005, respectively.
Accordingly, the instant Petition for Review is hereby DENIED and the assailed Decision and Resolution are AFFIRMED in toto.
SO ORDERED.
The CTA en banc denied Tambuntings motion for reconsideration on April 18, 2006.9
Hence, Tambunting has appealed, insisting that:
THE CTA EN BANCS DECISION OF 21 MARCH 2006 AND RESOLUTION DATED 18 APRIL 2006 ARE NOT IN ACCORDANCE WITH LAW AND
SETTLED JURISPRUDENCE ON THE MATTER.
Tambuntings main argument is that pawnshops are not within the concept of "all services" and "similar services" as provided in Section 108 (A) of the National
Internal Revenue Code.10 Tambunting also argues that the enumeration under Section 108(A) of the National Internal Revenue Code of services subject to VAT is
exclusive.
The petition has merit.
It is now settled that for purposes of determining their tax liability, pawnshops are treated as non-bank financial intermediaries.11
The VAT on non-bank financial intermediaries was first levied under R.A. No. 7716 (Expanded Value-Added Tax Law), where Sections 3 and 17 thereof provide:
Section 3. Section 102 of the National Internal Revenue, as amended is hereby further amended to read as follows:
Section 102. Value-added tax on sale of services and use or lease of properties.- There shall be levied, assessed and collected, a value-added tax equivalent to 10%
of gross receipts derived from the sale or exchange of services, including the use or lease of properties.
The phrase sale or exchange of services means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration x x x
x x x services of banks, non-bank financial intermediaries and finance companies; x x x
Section 17. Effectivity of the Imposition of VAT on Certain Goods, Properties and Services.- The value-added tax shall be levied assessed and collected on the
following transactions, two (2) years after the effectivity of this Act:
xxx
(b) Services rendered by banks, nonbank financial intermediaries, finance companies and other financial companies and other financial intermediaries not
performing quasi-banking functions; x x x
However, Section 11 of R.A. No. 8241 amended Section 17 of R.A. No. 7716 to move the effectivity of the VAT on non-bank financial intermediaries to January 1,
1998, viz:
Section 11. Section 17 of Republic Act No. 7716 is hereby amended to read as follows:
Section 17. Effectivity of the Imposition of VAT on Certain Goods, Properties and Services.- The value-added tax shall be levied assessed and collected on the
following transactions starting January 1, 1998:
xxx
(b) Services rendered by banks, nonbank financial intermediaries, finance companies and other financial intermediaries not performing quasi-banking functions; x
xx
Later, R.A. No. 8424 (National Internal Revenue Code or Tax Reform Act of 1997) again moved the effectivity of the imposition of the VAT to December 31,
1999, to wit:

Section 5. Transitory Provisions- Deferment of the Effectivity of the Imposition of VAT on Certain Services.- The effectivity of the imposition of the value-added tax
on services as prescribed in Section 17(a) and (b) of Republic Act No. 7716, as amended by Republic Act No. 8241, is hereby further deferred until December 31,
1999, unless Congress deems otherwise: Provided, That the said services shall continue to pay the applicable tax prescribed under the present provisions of the
National Internal Revenue Code, as amended.
Still later, R.A. No. 8761 retarded the effectivity of the VAT on non-bank financial intermediaries to January 1, 2001, thus:
Section 1. Section 5 of Republic Act No. 8424 is hereby amended to read as follows:
Section 5. Transitory Provisions- Effectivity of the Imposition of VAT on Certain Services.- The imposition of the value-added tax on the following services shall
take effect on January 1, 2001:
xxx
(b) Services rendered by banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions; x
xx
Lastly, R.A. No. 9010 revised the effectivity of the VAT on non-bank financial intermediaries by making it start on January 1, 2003:
Section 1. Section 5 of Republic Act No. 8424 as amended by Republic Act No. 8761 is hereby further amended to read as follows:
Section 5. Transitory Provisions- Effectivity of the Imposition of VAT on Certain Services.- The imposition of the value-added tax on the following services shall
take effect on January 1, 2003:
xxx
(b) Services rendered by banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions; x
xx
Accordingly, the consecutive deferments of the effectivity date of the application of VAT on non-bank financial intermediaries like pawnshops resulted in their
non-liability for VAT during the affected taxable years. Specifically, in First Planters Pawnshop, supra, the Court ruled on the VAT liability of pawnshops for
taxable years from 1996 to 2002, holding:
xxx Since petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the tax years 1996 to 2002; however, with the levy, assessment and
collection of VAT from non-bank financial intermediaries being specificallydeferred by law, then petitioner is not liable for VAT during these tax years. But with
the full implementation of the VAT system on non-bank financial intermediaries starting January 1, 2003, petitioner is liable for 10% VAT for said tax year. And
beginning 2004 up to the present, by virtue of R.A. No. 9238, Petitioner is no longer liable for VAT but it is subject to percentage tax on gross receipts from 0% to
5%, as the case may be.
The aforequoted pronouncement in First Planters Pawnshop has been reiterated in Tambunting Pawnshop, Inc. v. Commissioner of Internal Revenue12 and in
TFS, Incorporated v. Commissioner of Internal Revenue,13 thereby affirming the non-liability for VAT of pawnshops in taxable years 1996-2002 by virtue of the
deferment of its imposition. Consequently, the VAT deficiency assessment and the surcharge served on Tambunting by the BIR lacked legal basis and must be
canceled.
As earlier mentioned, however, Tambunting paid to the BIR 25% of its VAT liability for the years 2000 to 2002 pursuant to a settlement agreement. The tax
liability in question herein includes taxable year 2000 only. To align with the result herein, therefore, Tambunting is entitled to a refund of any amount paid
pursuant to the settlement agreement corresponding to taxable year 2000 only.
WHEREFORE, we grant the petition for review on certiorari, and reverse and set aside the decision dated March 21, 2006 and the resolution dated April 18, 2006
of the Court of Tax Appeals en banc. We declare that the petitioner was not liable for the Value-Added Tax in taxable year 2000; and order the Commissioner of
Internal Revenue to refund to H. Tambunting Pawnshop, Inc. any amount paid pursuant to the settlement agreement corresponding to taxable year 2000 only.
No pronouncement on cost of suit.
SO ORDERED.
LUCAS P. BERSAMIN
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 197525

June 4, 2014

VISAYAS GEOTHERMAL POWER COMPANY, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
MENDOZA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the February 7, 2011 Decision 1 and the June 27, 2011
Resolution2 of the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB Case Nos. 561 and 562, which reversed and set aside the April 17, 2009 Decision of
the CT A Second Division in CTA Case No. 7559.
The Facts:
Petitioner Visayas Geothermal Power Company (VGPC) is a special limited partnership duly organized and existing under Philippine Laws with its principal office
at Milagro, Ormoc City, Province of Leyte. It is principally engaged in the business of power generation through geothermal energy and the sale of generated
power to the Philippine National Oil Company (PNOC),pursuant to the Energy Conversion Agreement.

VGPC filed with the Bureau of Internal Revenue (BIR)its Original Quarterly VAT Returns for the first to fourth quarters of taxable year 2005 on April 25, 2005,
July 25, 2005, October 25, 2006, and January 20, 2006, respectively.
On December 6, 2006, it filed an administrative claim for refund for the amount of 14,160,807.95 with the BIR District Office No. 89 of Ormoc City on the ground
that it was entitled to recover excess and unutilized input VAT payments for the four quarters of taxable year 2005, pursuant to Republic Act (R.A.) No.
9136,3 which treated sales of generated power subject to VAT to a zero percent (0%) rate starting June 26, 2001.
Nearly one month later, on January3, 2007, while its administrative claim was pending, VGPC filed its judicial claim via a petition for review with the CTA
praying for a refund or the issuance of a tax credit certificate in the amount of 14,160,807.95, covering the four quarters of taxable year 2005.
In its April 17, 2009 Decision, the CTA Second Division partially granted the petition as follows:
WHEREFORE, in view of the foregoing considerations, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, respondent is ORDERED TO
REFUND or, in the alternative, TO ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner the reduced amount of SEVEN MILLION SIX HUNDRED
NINENTY NINE THOUSAND THREE HUNDRED SIXTY SIX PESOS AND 37/100 (P7,699,366.37) representing unutilized input VAT paid on domestic
purchases of non-capital goods and services, services rendered by non-residents, and importations of non-capital goods for the first to fourth quarters of taxable
year 2005.
SO ORDERED.4
The CTA Second Division found that only the amount of 7,699,366.37 was duly substantiated by the required evidence. As to the timeliness of the filing of the
judicial claim, the Court ruled that following the case of Commissioner of Internal Revenue (CIR) v. Mirant Pagbilao Corporation (Mirant),5 both the
administrative and judicial claims were filed within the two-year prescriptive period provided in Section 112(A) of the National Internal Revenue Code of 1997
(NIRC),the reckoning point of the period being the close of the taxable quarter when the sales were made.
In its October 29, 2009 Resolution,6 the CTA Second Division denied the separate motions for partial reconsideration filed by VGPC and the CIR. Thus, both
VGPC and the CIR appealed to the CTA En Banc.
In the assailed February 7, 2011 Decision,7 the CTA En Banc reversed and set aside the decision and resolution of the CTA Second Division, and dismissed the
original petition for review for having been filed prematurely, to wit:
WHEREFORE, premises considered:
i. As regards CTA EB Case No. 562, the Petition for Review is hereby DISMISSED; and
ii. As regards CTA EB Case No. 561, the Petition for Review is hereby GRANTED.
Accordingly, the Decision, dated April 17, 2009, and the Resolution, dated October 29, 2009, of the CTA Former Second Division are hereby REVERSED and
SET ASIDE, and another one is hereby entered DISMISSING the Petition for Review filed in CTA Case No. 7559 for having been filed prematurely.
SO ORDERED.8
The CTA En Banc explained that although VGPC seasonably filed its administrative claim within the two-year prescriptive period, its judicial claim filed with the
CTA Second Division was prematurely filed under Section 112(D) of the National Internal Revenue Code (NIRC).Citing the case of CIR v. Aichi Forging
Company of Asia, Inc. (Aichi),9 the CTA En Banc held that the judicial claim filed 28 days after the petitioner filed its administrative claim, without waiting for
the expiration of the 120-day period, was premature and, thus, the CTA acquired no jurisdiction over the case.
The VGPC filed a motion for reconsideration, but the CTA En Banc denied it in the assailed June 27, 2011 Resolution for lack of merit. It stated that the case of
Atlas Consolidated Mining v. CIR (Atlas)10 relied upon by the petitioner had long been abandoned.
Hence, this petition.
ASSIGNMENT OF ERRORS
I
The CTA En Banc erred in finding that the 120-day and 30-day periods prescribed under Section 112(D) of the 1997 Tax Code are jurisdictional
and mandatory in the filing of the judicial claim for refund. The CTA-Division should take cognizance of the judicial appeal as long as it is filed
with the two-year prescriptive period under Section 229 of the 1997 Tax Code.
II
The CTA En Banc erred in finding that Aichi prevails over and/or overturned the doctrine in Atlas, which upheld the primacy of the two-year
period under Section 229 of the Tax Code. The law and jurisprudence have long established the doctrine that the taxpayer is duty-bound to
observe the two-year period under Section 229 of the Tax Code when filing its claim for refund of excess and unutilized VAT.
III
The CTA En Banc erred in finding that Respondent CIR is not estopped from questioning the jurisdiction of the CTA. Respondent CIR, by her
actions and pronouncements, should have been precluded from questioning the jurisdiction of the CTA-Division.
IV
The CTA En Banc erred in applying Aichi to Petitioner VGPCs claim for refund. The novel interpretation of the law in Aichi should not be made
to apply to the present case for being contrary to existing jurisprudence at the time Petitioner VGPC filed its administrative and judicial claims
for refund.11

Petitioner VGPC argues that (1) the law and jurisprudence have long established the rule regarding compliance with the two-year prescriptive period under Section
112(D) in relation to Section 229 of the 1997 Tax Code; (2) Aichi did not overturn the doctrine in Atlas, which upheld the primacy of the two-year period under
Section 229; (3) respondent CIR is estopped from questioning the jurisdiction of the CTA and Aichi cannot be indiscriminately applied to all VAT refund cases; (4)
applying Aichi invariably to all VAT refund cases would effectively grant respondent CIR unbridled discretion to deprive a taxpayer of the right to effectively seek
judicial recourse, which clearly violates the standards of fairness and equity; and (5) the novel interpretation of the law in Aichi should not be made to apply to the
present case for being contrary to existing jurisprudence at the time VGPC filed its administrative and judicial claims for refund. Aichi should be applied
prospectively.
Ruling of the Court
Judicial claim not premature
The assignment of errors is rooted in the core issue of whether the petitioners judicial claim for refund was prematurely filed.
Two sections of the NIRC are pertinent to the issue at hand, namely Section 112 (A) and (D) and Section 229, to wit:
SEC. 112. Refunds or Tax Credits of Input Tax.
(A) Zero-rated or Effectively Zero-rated Sales.- Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax
due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided,
however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency
exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP):
Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of
properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall
be allocated proportionately on the basis of the volume of sales.
xxx
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made.- In proper cases, the Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred
twenty day period, appeal the decision or the unacted claim with the Court of Tax Appeals.
SEC. 229. 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, of any
sum alleged to have been excessively or in any manner wrongfully collected without authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not
such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) 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.
[Emphases supplied]
It has been definitively settled in the recent En Banc case of CIR v. San Roque Power Corporation (San Roque),12that it is Section 112 of the NIRC which applies
to claims for tax credit certificates and tax refunds arising from sales of VAT-registered persons that are zero-rated or effectively zero-rated, which are, simply put,
claims for unutilized creditable input VAT.
Thus, under Section 112(A), the taxpayer may, within 2 years after the close of the taxable quarter when the sales were made, via an administrative claim with the
CIR, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales. Under Section 112(D), the CIR must
then act on the claim within 120 days from the submission of the taxpayers complete documents. In case of (a) a full or partial denial by the CIR of the claim, or
(b) the CIRs failure to act on the claim within 120 days, the taxpayer may file a judicial claim via an appeal with the CTA of the CIR decision or unacted claim,
within 30 days (a) from receipt of the decision; or (b) after the expiration of the 120-day period.
The 2-year period under Section 229 does not apply to appeals before the CTA in relation to claims for a refund or tax credit for unutilized creditable input
VAT.Section 229 pertains to the recovery of taxes erroneously, illegally, or excessively collected. 13 San Roque stressed that "input VAT is not excessively
collected as understood under Section 229 because, at the time the input VAT is collected, the amount paid is correct and proper." 14 It is, therefore, Section 112
which applies specifically with regard to claiming a refund or tax credit for unutilized creditable input VAT.15
Upholding the ruling in Aichi,16 San Roque held that the 120+30 day period prescribed under Section 112(D) mandatory and jurisdictional. 17 The jurisdiction of
the CTA over decisions or inaction of the CIR is only appellate in nature and, thus, necessarily requires the prior filing of an administrative case before the CIR
under Section 112.18 The CTA can only acquire jurisdiction over a case after the CIR has rendered its decision, or after the lapse of the period for the CIR to act,
in which case such inaction is considered a denial.19 A petition filed prior to the lapse of the 120-day period prescribed under said Section would be premature for
violating the doctrine on the exhaustion of administrative remedies.20
There is, however, an exception to the mandatory and jurisdictional nature of the 120+30 day period. The Court in San Roque noted that BIR Ruling No. DA-48903, dated December 10, 2003, expressly stated that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with
the CTA by way of Petition for Review."21 This BIR Ruling was recognized as a general interpretative rule issued by the CIR under Section 422 of the NIRC and,
thus, applicable to all taxpayers. Since the CIR has exclusive and original jurisdiction to interpret tax laws, it was held that taxpayers acting in good faith should
not be made to suffer for adhering to such interpretations. Section 24623 of the Tax Code, in consonance with equitable estoppel, expressly provides that a reversal
of a BIR regulation or ruling cannot adversely prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior to its reversal. Hence, taxpayers
can rely on BIR Ruling No. DA-489-03 from the time of its issuance on December 10, 2003 up to its reversal by this Court in Aichion October 6, 2010, where it
was held that the 120+30 day period was mandatory and jurisdictional.
Accordingly, the general rule is that the 120+30 day period is mandatory and jurisdictional from the effectivity of the 1997 NIRC on January 1, 1998, up to the
present. As an exception, judicial claims filed from December 10, 2003 to October 6, 201024 need not wait for the exhaustion of the 120-day period.

A review of the facts of the present case reveals that petitioner VGPC timely filed its administrative claim with the CIR on December 6, 2006, and later, its judicial
claim with the CTA on January 3, 2007. The judicial claim was clearly filed within the period of exception and was, therefore, not premature and should not have
been dismissed by the CTA En Banc.
In the present petition, VGPC prays that the Court grant its claim for refund or the issuance of a tax credit certificate for its unutilized input VAT in the amount
of P14,160,807.95. The CTA Second Division, however, only awarded the amount of P7,699,366.37. The petitioner has failed to present any argument to support
its entitlement to the former amount.
In any case, the Court would have been precluded from considering the same as such would require a review of the evidence, which would constitute a question of
fact outside the Courts purview under Rule 45 of the Rules of Court. The Court, thus, finds that the petitioner is entitled to the refund awarded to it by the CTA
Second Division in the amount of P7,699,366.37.
Atlas doctrine has no relevance
to the 120+30 day period for
filing judicial claim
Although the core issue of prematurity of filing has already been resolved, the Court deems it proper to discuss the petitioners argument that the doctrine in Atlas,
which allegedly upheld the primacy of the 2-year prescriptive period under Section 229,should prevail over the ruling in Aichi regarding the mandatory and
jurisdictional nature of the 120+30 day period in Section 112.
In this regard, it was thoroughly explained in San Roque that the Atlas doctrine only pertains to the reckoning point of the 2-year prescriptive period from the date
of payment of the output VAT under Section 229, and has no relevance to the 120+30 day period under Section 112, to wit:
The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the two-year prescriptive period under Section 229, should be
effective only from its promulgation on 8 June 2007 until its abandonment on 12 September 2008 in Mirant. The Atlas doctrine was limited to the reckoning of the
two-year prescriptive period from the date of payment of the output VAT. Prior to the Atlas doctrine, the two-year prescriptive period for claiming refund or credit
of input VAT should be governed by Section 112(A) following the verba legis rule. The Mirant ruling, which abandoned the Atlas doctrine, adopted the verba legis
rule, thus applying Section 112(A) in computing the two year prescriptive period in claiming refund or credit of input VAT.
The Atlas doctrine has no relevance to the 120+30 day periods under Section 112(C) because the application of the 120+30 day periods was not in issue in Atlas.
The application of the 120+30 day periods was first raised in Aichi, which adopted the verba legis rule in holding that the 120+30 day periods are mandatory and
jurisdictional. The language of Section 112(C) is plain, clear, and unambiguous. When Section 112(C) states that "the Commissioner shall grant a refund or issue
the tax credit within one hundred twenty (120) days from the date of submission of complete documents," the law clearly gives the Commissioner 120 days within
which to decide the taxpayers claim. Resort to the courts prior to the expiration of the 120-day period is a patent violation of the doctrine of exhaustion of
administrative remedies, a ground for dismissing the judicial suit due to prematurity. Philippine jurisprudence is awash with cases affirming and reiterating the
doctrine of exhaustion of administrative remedies. Such doctrine is basic and elementary.25
[Underscoring supplied]
Thus, Atlas is only relevant in determining when to file an administrative claim with the CIR for refund or credit of unutilized creditable input VAT, and not for
determining when to file a judicial claim with the CTA. From June 8, 2007 to September 12, 2008, the 2-year prescriptive period to file administrative claims
should be counted from the date of payment of the output VAT tax. Before and after said period, the 2-year prescriptive period is counted from the close of the
taxable quarter when the sales were made, in accordance with Section 112(A). In either case, the mandatory and jurisdictional 120+30 day period must be
complied with for the filing of the judicial claim with the CTA, except for the period provided under BIR Ruling No. DA-489-03, as previously discussed.
The Court further noted that Atlas was decided in relation to the 1977 Tax Code which had not yet provided for the 30-day period for the taxpayer to appeal to the
CTA from the decision or inaction of the CIR over claims for unutilized input VAT. Clearly then, the Atlas doctrine cannot be invoked to disregard compliance with
the 120+30 day mandatory and jurisdictional period.26 In San Roque, it was written:
The old rule that the taxpayer may file the judicial claim, without waiting for the Commissioners decision if the two-year prescriptive period is about to expire,
cannot apply because that rule was adopted before the enactment of the 30-day period. The 30-day period was adopted precisely to do away with the old rule, so
that under the VAT System the taxpayer will always have 30 days to file the judicial claim even if the Commissioner acts only on the 120th day, or does not act at
all during the 120-day period. With the 30-day period always available to the taxpayer, the taxpayer can no longer file a judicial claim for refund or credit of input
VAT without waiting for the Commissioner to decide until the expiration of the 120-day period.27
At any rate, even assuming that the Atlas doctrine was relevant to the present case, it could not be applied since it was held to be effective only from its
promulgation on June 8, 2007 until its abandonment on September 12, 2008 when Mirant was promulgated. The petitioner in this case filed both its administrative
and judicial claims outside the said period of effectivity.
Aichi not applied prospectively
Petitioner VGPC also argues that Aichi should be applied prospectively and, therefore, should not be applied to the present case. This position cannot be given
consideration.
Article 8 of the Civil Code provides that judicial decisions applying or interpreting the law shall form part of the legal system of the Philippines and shall have the
force of law. The interpretation placed upon a law by a competent court establishes the contemporaneous legislative intent of the law. Thus, such interpretation
constitutes a part of the law as of the date the statute is enacted. It is only when a prior ruling of the Court is overruled, and a different view adopted, that the new
doctrine may have to be applied prospectively in favor of parties who have relied on the old doctrine and have acted in good faith.28
Considering that the nature of the 120+30 day period was first settled in Aichi, the interpretation by the Court of its being mandatory and jurisdictional in nature
retro acts to the date the NIRC was enacted. It cannot be applied prospectively as no old doctrine was overturned.
The petitioner cannot rely either on the alleged jurisprudence prevailing at the time it filed its judicial claim. The Court notes that the jurisprudence relied upon by
the petitioner consists of CTA cases. It is elementary that CTA decisions do not constitute precedent and do not bind this Court or the public. Only decisions of this
Court constitute binding precedents, forming part of the Philippine legal system.29
As regards the cases30 which were later decided allegedly in contravention of Aichi, it is of note that all of them were decided by Divisions of this Court, and not
by the Court En Banc.1wphi1 Any doctrine or principle of law laid down by the Court, either rendered En Bancor in Division, may be overturned or reversed only
by the Court sitting En Banc.31 Thus, the cases cited by the petitioner could not have overturned the doctrine laid down in Aichi.
CIR not estopped

The petitioners argument that the CIR should have been estopped from questioning the jurisdiction of the CTA after actively participating in the proceedings
before the CTA Second Division deserves scant consideration.
It is a well-settled rule that the government cannot be estopped by the mistakes, errors or omissions of its agents.32 It has been specifically held that estoppel does
not apply to the government, especially on matters of taxation. Taxes are the nations lifeblood through which government agencies continue to operate and with
which the State discharges its functions for the welfare of its constituents.33 Thus, the government cannot be estopped from collecting taxes by the mistake,
negligence, or omission of its agents. Upon taxation depends the ability of the government to serve the people for whose benefit taxes are collected. To safeguard
such interest, neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people.34
Rules on claims for refund or tax credit of unutilized input VAT
For clarity and guidance, the Court deems it proper to outline the rules laid down in San Roque with regard to claims for refund or tax credit of unutilized
creditable input VAT. They are as follows:
1. When to file an administrative claim with the CIR:
a. General rule Section 112(A) and Mirant Within 2 years from the close of the taxable quarter when the sales were made.
b. Exception Atlas
Within 2 years from the date of payment of the output VAT, if the administrative claim was filed from June 8, 2007 (promulgation of Atlas) to
September 12, 2008 (promulgation of Mirant).
2. When to file a judicial claim with the CTA:
a. General rule Section 112(D); not Section 229
i. Within 30 days from the full or partial denial of the administrative claim by the CIR; or
ii. Within 30 days from the expiration of the 120-day period provided to the CIR to decide on the claim. This is mandatory
and jurisdictional beginning January L 1998 ( effectivity of 1997 NI RC).
b. Exception - BIR Ruling No. DA-489-03
The judicial claim need not await the expiration of the 120-day period, if such was filed from December 10, 2003 (issuance of BIR Ruling No. DA-489-03) to
October 6, 2010 (promulgation of Aichi).
WHEREFORE, the petition is PARTIALLY GRANTED. The February 7, 2011 Decision and the June 27, 2011 Resolution of the Court of Tax Appeals En Banc, in
CT A EB Case Nos. 561 and 562 are REVERSED and SET ASIDE. The April 17, 2009 Decision and the October 29, 2009 Resolution of the CTA Former Second
Division in CTA Case No. 7559 are REINSTATED.
Public respondent is hereby ORDERED TO REFUND or, in the alternative, TO ISSUE A TAX CREDIT CERTIFICATE, in favor or the petitioner the amount of
SEVEN MILLION SIX HUNDRED NINETY NINE THOUSAND THREE HUNDRED SIXTY SIX PESOS AND 37/100 (P7,699,366.37) representing unutilized
input VAT paid on domestic purchases of non-capital goods and services, services rendered by nonresidents, and importations of non-capital goods for the first to
fourth quarters of taxable year 2005.
SO ORDERED.
JOSE CATRAL MENDOZA
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 168129

April 24, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
PHILIPPINE HEALTH CARE PROVIDERS, INC., Respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, seeking to reverse the
Decision1 dated February 18, 2005 and Resolution dated May 9, 2005 of the Court of Appeals (Fifteenth Division) in CA-G.R. SP No. 76449.
The factual antecedents of this case, as culled from the records, are:
The Philippine Health Care Providers, Inc., herein respondent, is a corporation organized and existing under the laws of the Republic of the Philippines. Pursuant
to its Articles of Incorporation,2 its primary purpose is "To establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health

maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial
responsibilities of the organization."1^vvphi1.net
On July 25, 1987, President Corazon C. Aquino issued Executive Order (E.O.) No. 273, amending the National Internal Revenue Code of 1977 (Presidential
Decree No. 1158) by imposing Value-Added Tax (VAT) on the sale of goods and services. This E.O. took effect on January 1, 1988.
Before the effectivity of E.O. No. 273, or on December 10, 1987, respondent wrote the Commissioner of Internal Revenue (CIR), petitioner, inquiring whether the
services it provides to the participants in its health care program are exempt from the payment of the VAT.
On June 8, 1988, petitioner CIR, through the VAT Review Committee of the Bureau of Internal Revenue (BIR), issued VAT Ruling No. 231-88 stating that
respondent, as a provider of medical services, is exempt from the VAT coverage. This Ruling was subsequently confirmed by Regional Director Osmundo G.
Umali of Revenue Region No. 8 in a letter dated April 22, 1994.
Meanwhile, on January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT or E-VAT Law) took effect, amending further the National Internal Revenue Code
of 1977. Then on January 1, 1998, R.A. No. 8424 (National Internal Revenue Code of 1997) became effective. This new Tax Code substantially adopted and
reproduced the provisions of E.O. No. 273 on VAT and R.A. No. 7716 on E-VAT.
In the interim, on October 1, 1999, the BIR sent respondent a Preliminary Assessment Notice for deficiency in its payment of the VAT and documentary stamp
taxes (DST) for taxable years 1996 and 1997.
On October 20, 1999, respondent filed a protest with the BIR.
On January 27, 2000, petitioner CIR sent respondent a letter demanding payment of "deficiency VAT" in the amount of P100,505,030.26 and DST in the amount
of P124,196,610.92, or a total of P224,702,641.18 for taxable years 1996 and 1997. Attached to the demand letter were four (4) assessment notices.
On February 23, 2000, respondent filed another protest questioning the assessment notices.
Petitioner CIR did not take any action on respondent's protests. Hence, on September 21, 2000, respondent filed with the Court of Tax Appeals (CTA) a petition for
review, docketed as CTA Case No. 6166.
On April 5, 2002, the CTA rendered its Decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED TO PAY the deficiency VAT
amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency
and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until paid for the 1997 VAT deficiency. 1awphi1.nt Accordingly, VAT
Ruling No. 231-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND
SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.
SO ORDERED.
Respondent filed a motion for partial reconsideration of the above judgment concerning its liability to pay the deficiency VAT.
In its Resolution3 dated March 23, 2003, the CTA granted respondent's motion, thus:
WHEREFORE, in view of the foregoing, the instant Motion for Partial Reconsideration is GRANTED. Accordingly, the VAT assessment issued by herein
respondent against petitioner for the taxable years 1996 and 1997 is hereby WITHDRAWN and SET ASIDE.
SO ORDERED.
The CTA held:
Moreover, this court adheres to its conclusion that petitioner is a service contractor subject to VAT since it does not actually render medical service but merely
acts as a conduit between the members and petitioner's accredited and recognized hospitals and clinics.
However, after a careful review of the facts of the case as well as the Law and jurisprudence applicable, this court resolves to grant petitioner's "Motion for Partial
Reconsideration." We are in accord with the view of petitioner that it is entitled to the benefit of non-retroactivity of rulings guaranteed under Section 246 of the
Tax Code, in the absence of showing of bad faith on its part. Section 246 of the Tax Code provides:
Sec. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the
preceding Sections 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, x x x.
Clearly, undue prejudice will be caused to petitioner if the revocation of VAT Ruling No. 231-88 will be retroactively applied to its case. VAT Ruling No. 231-88
issued by no less than the respondent itself has confirmed petitioner's entitlement to VAT exemption under Section 103 of the Tax Code. In saying so, respondent
has actually broadened the scope of "medical services" to include the case of the petitioner. This VAT ruling was even confirmed subsequently by Regional
Director Ormundo G. Umali in his letter dated April 22, 1994 (Exhibit M). Exhibit P, which served as basis for the issuance of the said VAT ruling in favor of the
petitioner sufficiently described the business of petitioner and there is no way BIR could be misled by the said representation as to the real nature of petitioner's
business. Such being the case, this court is convinced that petitioner's reliance on the said ruling is premised on good faith. The facts of the case do not show that
petitioner deliberately committed mistakes or omitted material facts when it obtained the said ruling from the Bureau of Internal Revenue. Thus, in the absence of
such proof, this court upholds the application of Section 246 of the Tax Code. Consequently, the pronouncement made by the BIR in VAT Ruling No. 231-88 as to
the VAT exemption of petitioner should be upheld.
Petitioner seasonably filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No. 76449.
In its Decision dated February 18, 2005, the Court of Appeals affirmed the CTA Resolution.
Petitioner CIR filed a motion for reconsideration, but it was denied by the appellate court in its Resolution4 dated May 9, 2005.
Hence, the instant petition for review on certiorari raising these two issues: (1) whether respondent's services are subject to VAT; and (2) whether VAT Ruling No.
231-88 exempting respondent from payment of VAT has retroactive application.
On the first issue, respondent is contesting petitioner's assessment of its VAT liabilities for taxable years 1996 and 1997.
Section 1025 of the National Internal Revenue Code of 1977, as amended by E.O. No. 273 (VAT Law) and R.A. No. 7716 (E-VAT Law), provides:

SEC. 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base of tax. - There shall be levied, assessed and collected, a valueadded tax equivalent to 10% of gross receipts derived from the sale or exchange of services, including the use or lease of properties.
The phrase "sale or exchange of service" means the performance of all kinds of services in the Philippines for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors x x x.
Section 1036 of the same Code specifies the exempt transactions from the provision of Section 102, thus:
SEC. 103. Exempt Transactions. - The following shall be exempt from the value-added tax:
xxx
(l) Medical, dental, hospital and veterinary services except those rendered by professionals
xxx
The import of the above provision is plain. It requires no interpretation. It contemplates the exemption from VAT of taxpayers engaged in the performance of
medical, dental, hospital, and veterinary services. In Commissioner of International Revenue v. Seagate Technology (Philippines),7 we defined an exempt
transaction as one involving goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT, under the Tax Code, without
regard to the tax status of the party in the transaction. In Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.) Inc.,8 we reiterated this
definition.
In its letter to the BIR requesting confirmation of its VAT-exempt status, respondent described its services as follows:
Under the prepaid group practice health care delivery system adopted by Health Care, individuals enrolled in Health Care's health care program are entitled to
preventive, diagnostic, and corrective medical services to be dispensed by Health Care's duly licensed physicians, specialists, and other professional technical staff
participating in said group practice health care delivery system established and operated by Health Care. Such medical services will be dispensed in a hospital or
clinic owned, operated, or accredited by Health Care. To be entitled to receive such medical services from Health Care, an individual must enroll in Health Care's
health care program and pay an annual fee. Enrollment in Health Care's health care program is on a year-to-year basis and enrollees are issued identification cards.
From the foregoing, the CTA made the following conclusions:
a) Respondent "is not actually rendering medical service but merely acting as a conduit between the members and their accredited and
recognized hospitals and clinics."
b) It merely "provides and arranges for the provision of pre-need health care services to its members for a fixed prepaid fee for a specified
period of time."
c) It then "contracts the services of physicians, medical and dental practitioners, clinics and hospitals to perform such services to its enrolled
members;" and
d) Respondent "also enters into contract with clinics, hospitals, medical professionals and then negotiates with them regarding payment
schemes, financing and other procedures in the delivery of health services."
We note that these factual findings of the CTA were neither modified nor reversed by the Court of Appeals. It is a doctrine that findings of fact of the CTA, a
special court exercising particular expertise on the subject of tax, are generally regarded as final, binding, and conclusive upon this Court, more so where these do
not conflict with the findings of the Court of Appeals.9 Perforce, as respondent does not actually provide medical and/or hospital services, as provided under
Section 103 on exempt transactions, but merely arranges for the same, its services are not VAT-exempt.
Relative to the second issue, Section 246 of the 1997 Tax Code, as amended, provides that rulings, circulars, rules and regulations promulgated by the
Commissioner of Internal Revenue have no retroactive application if to apply them would prejudice the taxpayer. The exceptions to this rule are: (1) 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; (2) where the facts
subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (3) where the taxpayer acted in bad
faith.
We must now determine whether VAT Ruling No. 231-88 exempting respondent from paying its VAT liabilities has retroactive application.
In its Resolution dated March 23, 2003, the CTA found that there is no showing that respondent "deliberately committed mistakes or omitted material facts" when
it obtained VAT Ruling No. 231-88 from the BIR. The CTA held that respondent's letter which served as the basis for the VAT ruling "sufficiently described" its
business and "there is no way the BIR could be misled by the said representation as to the real nature" of said business.
In sustaining the CTA, the Court of Appeals found that "the failure of respondent to refer to itself as a health maintenance organization is not an indication of bad
faith or a deliberate attempt to make false representations." As "the term health maintenance organization did not as yet have any particular significance for tax
purposes," respondent's failure "to include a term that has yet to acquire its present definition and significance cannot be equated with bad faith."
We agree with both the Tax Court and the Court of Appeals that respondent acted in good faith. In Civil Service Commission v. Maala,10 we described good faith
as "that state of mind denoting honesty of intention and freedom from knowledge of circumstances which ought to put the holder upon inquiry; an honest intention
to abstain from taking any unconscientious advantage of another, even through technicalities of law, together with absence of all information, notice, or benefit or
belief of facts which render transaction unconscientious."
According to the Court of Appeals, respondent's failure to describe itself as a "health maintenance organization," which is subject to VAT, is not tantamount to bad
faith. We note that the term "health maintenance organization" was first recorded in the Philippine statute books only upon the passage of "The National Health
Insurance Act of 1995" (Republic Act No. 7875). Section 4 (o) (3) thereof defines a health maintenance organization as "an entity that provides, offers, or arranges
for coverage of designated health services needed by plan members for a fixed prepaid premium." Under this law, a health maintenance organization is one of the
classes of a "health care provider."
It is thus apparent that when VAT Ruling No. 231-88 was issued in respondent's favor, the term "health maintenance organization" was yet unknown or had no
significance for taxation purposes. Respondent, therefore, believed in good faith that it was VAT exempt for the taxable years 1996 and 1997 on the basis of VAT
Ruling No. 231-88.
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals,11 this Court held that under Section 246 of the 1997 Tax Code, the Commissioner of Internal Revenue
is precluded from adopting a position contrary to one previously taken where injustice would result to the taxpayer. Hence, where an assessment for
deficiency withholding income taxes was made, three years after a new BIR Circular reversed a previous one upon which the taxpayer had relied upon, such an
assessment was prejudicial to the taxpayer. To rule otherwise, opined the Court, would be contrary to the tenets of good faith, equity, and fair play.

This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp. in the later cases ofCommissioner of Internal Revenue v. Borroughs,
Ltd.,12 Commissioner of Internal Revenue v. Mega Gen. Mdsg. Corp.13 Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.)
Inc.,14 and Commissioner of Internal Revenue v. Court of Appeals.15 The rule is that the BIR rulings have no retroactive effect where a grossly unfair deal would
result to the prejudice of the taxpayer, as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet Corporation,16 wherein the taxpayer was entitled to tax refunds or credits based on the BIR's own
issuances but later was suddenly saddled with deficiency taxes due to its subsequent ruling changing the category of the taxpayer's transactions for the purpose of
paying its VAT, this Court ruled that applying such ruling retroactively would be prejudicial to the taxpayer.
WHEREFORE, we DENY the petition and AFFIRM the assailed Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 76449. No costs.
SO ORDERED.
ANGELINA SANDOVAL GUTIERREZ
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 192945

September 5, 2012

CITY OF IRIGA, Petitioner,


vs.
CAMARINES SUR III ELECTRIC COOPERATIVE, INC. (CASURECO III), Respondent.
DECISION
PERLAS-BERNABE, J.:
The Court reiterates that a franchise tax is a tax levied on the exercise by an entity of the rights or privileges granted to it by the government. 1 In the absence of a
clear and subsisting legal provision granting it tax exemption, a franchise holder, though non-profit in nature, may validly be assessed franchise tax by a local
government unit.
Before the Court is a petition filed under Rule 45 of the Revised Rules of Court seeking to set aside the February 11, 2010 Decision 2 and July 12, 2010
Resolution3 of the Court of Appeals (CA), which reversed the February 7, 2005 Decision of the Regional Trial Court (RTC) of Iriga City, Branch 36 and ruled that
respondent Camarines Sur III Electric Cooperative, Inc. (CASURECO III) is exempt from payment of local franchise tax.
The Facts
CASURECO III is an electric cooperative duly organized and existing by virtue of Presidential Decree (PD) 269,4as amended, and registered with the National
Electrification Administration (NEA). It is engaged in the business of electric power distribution to various end-users and consumers within the City of Iriga and
the municipalities of Nabua, Bato, Baao, Buhi, Bula and Balatan of the Province of Camarines Sur, otherwise known as the "Rinconada area."5
Sometime in 2003, petitioner City of Iriga required CASURECO III to submit a report of its gross receipts for the period 1997-2002 to serve as the basis for the
computation of franchise taxes, fees and other charges.6 The latter complied7 and was subsequently assessed taxes.
On January 7, 2004, petitioner made a final demand on CASURECO III to pay the franchise taxes due for the period 1998-2003 and real property taxes due for the
period 1995-2003.8 CASURECO III, however, refused to pay said taxes on the ground that it is an electric cooperative provisionally registered with the
Cooperative Development Authority (CDA),9 and therefore exempt from the payment of local taxes.10
On March 15, 2004, petitioner filed a complaint for collection of local taxes against CASURECO III before the RTC, citing its power to tax under the Local
Government Code (LGC) and the Revenue Code of Iriga City.11
It alleged that as of December 31, 2003, CASURECO IIIs franchise and real property taxes liability, inclusive of penalties, surcharges and interest, amounted to
Seventeen Million Thirty-Seven Thousand Nine Hundred Thirty-Six Pesos and Eighty-Nine Centavos (P 17,037,936.89) and Nine Hundred Sixteen Thousand Five
Hundred Thirty-Six Pesos and Fifty Centavos (P 916,536.50), respectively.12
In its Answer, CASURECO III denied liability for the assessed taxes, asserting that the computation of the petitioner was erroneous because it included 1) gross
receipts from service areas beyond the latters territorial jurisdiction; 2) taxes that had already prescribed; and 3) taxes during the period when it was still exempt
from local government tax by virtue of its then subsisting registration with the CDA.13
Ruling of the Trial Court
In its Decision dated February 7, 2005, the RTC ruled that the real property taxes due for the years 1995-1999 had already prescribed in accordance with Section
19414 of the LGC. However, it found CASURECO III liable for franchise taxes for the years 2000-2003 based on its gross receipts from Iriga City and the
Rinconada area on the ground that the "situs of taxation is the place where the privilege is exercised."15 The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing, defendant is hereby made liable to pay plaintiff real property taxes and franchise taxes on its receipts, including those
from service area covering Nabua, Bato, Baao and Buhi for the years 2000 up to the present. The realty taxes for the years 1995 and 1999 is hereby declared
prescribed. The City Assessor is hereby directed to make the proper classification of defendant s real property in accordance with Ordinance issued by the City
Council.
SO ORDERED.16
Only CASURECO III appealed from the RTC Decision, questioning its liability for franchise taxes.
Ruling of the Court of Appeals

In its assailed Decision, the CA found CASURECO III to be a non-profit entity, not falling within the purview of "businesses enjoying a franchise" pursuant to
Section 137 of the LGC. It explained that CASURECO IIIs non-profit nature is diametrically opposed to the concept of a "business," which, as defined under
Section 131 of the LGC, is a "trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit." Consequently, it relieved
CASURECO III from liability to pay franchise taxes.
Petitioner moved for reconsideration, which the CA denied in its July 12, 2010 Resolution for being filed a day late, hence, the instant petition.
Issues Before the Court
Petitioner raises two issues for resolution, which the Court restates as follows: (1) whether or not an electric cooperative registered under PD 269 but not under RA
693817 is liable for the payment of local franchise taxes; and (2) whether or not the situs of taxation is the place where the franchise holder exercises its franchise
regardless of the place where its services or products are delivered.
CASURECO III, on the other hand, raises the procedural issue that since the motion for reconsideration of the CA Decision was filed out of time, the same had
attained finality.
The Courts Ruling
The petition is meritorious.
Before delving into the substantive issues, the Court notes the procedural lapses extant in the present case.
Proper Mode of Appeal from the
Decision of the Regional Trial
Court involving local taxes
RA 9282,18 which took effect on April 23, 2004, expanded the jurisdiction of the Court of Tax Appeals (CTA) to include, among others, the power to review by
appeal decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or
appellate jurisdiction.19
Considering that RA 9282 was already in effect when the RTC rendered its decision on February 7, 2005, CASURECO III should have filed its appeal, not with the
CA, but with the CTA Division in accordance with the applicable law and the rules of the CTA. Resort to the CA was, therefore, improper, rendering its decision
null and void for want of jurisdiction over the subject matter. A void judgment has no legal or binding force or efficacy for any purpose or at any place. 20 Hence,
the fact that petitioner's motion for reconsideration from the CA Decision was belatedly filed is inconsequential, because a void and non-existent decision would
never have acquired finality.21
The foregoing procedural lapses would have been sufficient to dismiss the instant petition outright and declare the decision of the RTC final. However, the
substantial merits of the case compel us to dispense with these lapses and instead, exercise the Court s power of judicial review.
CASURECO
payment of franchise tax

III

is

not

exempt

from

PD 269, which took effect on August 6, 1973, granted electric cooperatives registered with the NEA, like CASURECO III, several tax privileges, one of which is
exemption from the payment of "all national government, local government and municipal taxes and fees, including franchise, filing, recordation, license or permit
fees or taxes."22
On March 10, 1990, Congress enacted into law RA 6938,23 otherwise known as the "Cooperative Code of the Philippines," and RA 693924 creating the CDA.
The latter law vested the power to register cooperatives solely on the CDA, while the former provides that electric cooperatives registered with the NEA under PD
269 which opt not to register with the CDA shall not be entitled to the benefits and privileges under the said law.
On January 1, 1992, the LGC took effect, and Section 193 thereof withdrew tax exemptions or incentives previously enjoyed by "all persons, whether natural or
juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and
non-profit hospitals and educational institutions."25
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of Interior and Local Government,26 the Court held that
the tax privileges granted to electric cooperatives registered with NEA under PD 269 were validly withdrawn and only those registered with the CDA under RA
6938 may continue to enjoy the tax privileges under the Cooperative Code.
Therefore, CASURECO III can no longer invoke PD 269 to evade payment of local taxes. Moreover, its provisional registration with the CDA which granted it
exemption for the payment of local taxes was extended only until May 4, 1992. Thereafter, it can no longer claim any exemption from the payment of local taxes,
including the subject franchise tax.1wphi1
Indisputably, petitioner has the power to impose local taxes. The power of the local government units to impose and collect taxes is derived from the Constitution
itself which grants them "the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitation as the
Congress may provide."27 This explicit constitutional grant of power to tax is consistent with the basic policy of local autonomy and decentralization of
governance. With this power, local government units have the fiscal mechanisms to raise the funds needed to deliver basic services to their constituents and break
the culture of dependence on the national government. Thus, consistent with these objectives, the LGC was enacted granting the local government units, like
petitioner, the power to impose and collect franchise tax, to wit:
SEC. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a
franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction. xxx
SEC. 151. Scope of Taxing Powers. - Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the
province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and
independent component cities shall accrue to them and distributed in accordance with the provisions of this Code. The rates of taxes that the city
may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of
professional and amusement taxes.
Taking a different tack, CASURECO III maintains that it is exempt from payment of franchise tax because of its nature as a non-profit cooperative, as
contemplated in PD 269,28 and insists that only entities engaged in business, and not non-profit entities like itself, are subject to the said franchise tax.

The Court is not persuaded.


In National Power Corporation v. City of Cabanatuan,29 the Court declared that "a franchise tax is a tax on the privilege of transacting business in the state and
exercising corporate franchises granted by the state."30 It is not levied on the corporation simply for existing as a corporation, upon its property or its income, but
on its exercise of the rights or privileges granted to it by the government.31 "It is within this context that the phrase tax on businesses enjoying a franchise in
Section 137 of the LGC should be interpreted and understood."32
Thus, to be liable for local franchise tax, the following requisites should concur: (1) that one has a "franchise" in the sense of a secondary or special franchise; and
(2) that it is exercising its rights or privileges under this franchise within the territory of the pertinent local government unit.33
There is a confluence of these requirements in the case at bar. By virtue of PD 269, NEA granted CASURECO III a franchise to operate an electric light and power
service for a period of fifty (50) years from June 6, 1979,34 and it is undisputed that CASURECO III operates within Iriga City and the Rinconada area. It is,
therefore, liable to pay franchise tax notwithstanding its non-profit nature.
CASURECO III is liable for
franchise tax on gross receipts
within Iriga City and
Rinconada area
CASURECO III further argued that its liability to pay franchise tax, if any, should be limited to gross receipts received from the supply of the electricity within the
City of Iriga and not those from the Rinconada area.
Again, the Court is not convinced.
It should be stressed that what the petitioner seeks to collect from CASURECO III is a franchise tax, which as defined, is a tax on the exercise of a privilege. As
Section 13735 of the LGC provides, franchise tax shall be based on gross receipts precisely because it is a tax on business, rather than on persons or
property.36 Since it partakes of the nature of an excise tax/37 the situs of taxation is the place where the privilege is exercised, in this case in the City of Iriga,
where CASURECO III has its principal office and from where it operates, regardless of the place where its services or products are delivered. Hence, franchise tax
covers all gross receipts from Iriga City and the Rinconada area.
WHEREFORE, the petition is GRANTED. The assailed Decision dated February 11, 2010 and Resolution dated July 12, 2010 of the Court of Appeals are
hereby SET ASIDE and the Decision of the Regional Trial Court oflriga City, Branch 36, is REINSTATED.
SO ORDERED.
ESTELA M. PERLAS-BERNABE
Associate Justice
WE CONCUR:

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. 160756

March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,


vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE JUANITA D. AMATONG, and THE
HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondents.
DECISION
CORONA, J.:
In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders Associations, Inc. is questioning the constitutionality of
Section 27 (E) of Republic Act (RA) 84242 and the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and
those involving creditable withholding taxes.3
Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive Secretary Alberto Romulo, then acting Secretary
of Finance Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable withholding tax (CWT) on sales of real
properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner argues that the MCIT violates the due process
clause because it levies income tax even if there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which
prescribe the rules and procedures for the collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that these revenue
regulations are contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second, respondent
Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price or fair market value of the real properties classified as
ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause because, like the MCIT, the government
collects income tax even when the net income has not yet been determined. They contravene the equal protection clause as well because the CWT is being levied
upon real estate enterprises but not on other business enterprises, more particularly those in the manufacturing sector.
The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets under RRs 2-98, 6-2001 and 7-2003, is
unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its gross income when such MCIT is greater than
the normal corporate income tax imposed under Section 27(A).4If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. Any
excess of the MCIT over the normal tax shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years.
Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. (1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its
business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal income tax as computed under Subsection (A) of this Section
shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby authorized to suspend the imposition of the [MCIT] on any
corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulations that shall
define the terms and conditions under which he may suspend the imposition of the [MCIT] in a meritorious case.
(4) Gross Income Defined. For purposes of applying the [MCIT] provided under Subsection (E) hereof, the term gross income shall mean gross sales
less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce
the merchandise to bring them to their present location and use.
For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to
the place where the goods are actually sold including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct
labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales returns, allowances, discounts and cost of services. "Cost of
services" shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and
employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies: Provided, however, that in the case of banks, "cost of services" shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of Internal Revenue (CIR), promulgated RR 9-98
implementing Section 27(E).5 The pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the
accounting period employed) is hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable year in
which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or
whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation.
For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at
32% effective January 1, 2000 and thereafter.
xxx

xxx

xxx

(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal income tax as computed under Sec. 27(A) of the Code shall be carried forward
on an annual basis and credited against the normal income tax for the three (3) immediately succeeding taxable years.
xxx

xxx

xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated RR 2-98 implementing certain provisions of RA 8424
involving the withholding of taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or transfer of real property, other than
capital assets, by persons residing in the Philippines and habitually engaged in the real estate business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx

xxx

xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of. Real property, other than
capital assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in
accordance with the following schedule
Those which are exempt from a withholding tax at
source as prescribed in Sec. 2.57.5 of these
regulations.

Exempt

With a selling price of five hundred thousand pesos

1.5%

(P500,000.00) or less.

With a selling price of more than five hundred


thousand pesos (P500,000.00) but not more than two
million pesos (P2,000,000.00).

3.0%

With selling price of more than two million pesos


(P2,000,000.00)

5.0%

xxx

xxx

xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Code, as
amended, whichever is higher. In an exchange, the fair market value of the property received in exchange, as determined in the Income Tax Regulations shall be
used.
Where the consideration or part thereof is payable on installment, no withholding tax is required to be made on the periodic installment payments where the buyer
is an individual not engaged in trade or business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld on the last installment
or installments to be paid to the seller.
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and withheld by the buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx

xxx

xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of real property classified as
ordinary asset. - A [CWT] based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the
Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the
withholding agent,/buyer, in accordance with the following schedule:
Where the seller/transferor is exempt from [CWT] in accordance with Sec. 2.57.5 of
these regulations.

Exempt

Upon the following values of real property, where the seller/transferor is habitually
engaged in the real estate business.
With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less.

1.5%

With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not
more than Two Million Pesos (P2,000,000.00).

3.0%

With a selling price of more than two Million Pesos (P2,000,000.00).

5.0%

xxx

xxx

xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Code, as
amended, whichever is higher. In an exchange, the fair market value of the property received in exchange shall be considered as the consideration.
xxx

xxx

xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed 25% of the selling price), the tax shall be deducted and
withheld by the buyer on every installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment plan" (that is, payments in the year of sale exceed 25%
of the selling price), the buyer shall withhold the tax based on the gross selling price or fair market value of the property, whichever is higher, on the first
installment.
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT] due on the sale, transfer or exchange of real property
other than capital asset has been fully paid. (Underlined amendments in the original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or exchange subject to the CWT will not be recorded by the
Registry of Deeds until the CIR has certified that such transfers and conveyances have been reported and the taxes thereof have been duly paid:7
Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or land and building/improvement thereon arising from sales, barters, or
exchanges subject to the creditable expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly authorized representative
has certified that such transfers and conveyances have been reported and the expanded withholding tax, inclusive of the documentary stamp tax, due thereon have
been fully paid xxxx.

On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining whether a particular real property is a capital or an ordinary
asset for purposes of imposing the MCIT, among others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale, exchange, or other disposition of real
properties shall, unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether the subject properties are classified as
capital assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens engaged in trade or business in the Philippines;
xxx

xxx

xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98],
as amended, based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.
xxx

xxx

xxx

xxx

xxx

xxx

c. In the case of domestic corporations.

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building treated as capital asset), regardless of the
classification thereof, all of which are located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject to
the [MCIT] under Sec. 27(E) of the Code, whichever is applicable.
xxx

xxx

xxx

We shall now tackle the issues raised.


Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there must be an actual case calling for the
exercise of judicial review; (2) the question before the court must be ripe for adjudication; (3) the person challenging the validity of the act must have standing to
do so; (4) the question of constitutionality must have been raised at the earliest opportunity and (5) the issue of constitutionality must be the very lis mota of the
case.9
Respondents aver that the first three requisites are absent in this case. According to them, there is no actual case calling for the exercise of judicial power and it is
not yet ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the BIR for the payment of [MCIT] or [CWT] on sales of
real property. Neither did petitioner allege that its members have shut down their businesses as a result of the payment of the MCIT or CWT. Petitioner has raised
concerns in mere abstract and hypothetical form without any actual, specific and concrete instances cited that the assailed law and revenue regulations have
actually and adversely affected it. Lacking empirical data on which to base any conclusion, any discussion on the constitutionality of the MCIT or CWT on sales of
real property is essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not 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.10
An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is susceptible of judicial resolution as distinguished
from a hypothetical or abstract difference or dispute.11 On the other hand, a question is considered ripe for adjudication when the act being challenged has a direct
adverse effect on the individual challenging it.12
Contrary to respondents assertion, we do not have to wait until petitioners members have shut down their operations as a result of the MCIT or CWT. The
assailed provisions are already being implemented. As we stated in Didipio Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to have ripened into a judicial controversy even without any
other overt act. Indeed, even a singular violation of the Constitution and/or the law is enough to awaken judicial duty.14
If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners did not allege that [it] itself is in the real estate business.
It did not allege any material interest or any wrong that it may suffer from the enforcement of [the assailed provisions].15
Legal standing or locus standi is a partys personal and substantial interest in a case such that it has sustained or will sustain direct injury as a result of the
governmental act being challenged.16 In Holy Spirit Homeowners Association, Inc. v. Defensor,17 we held that the association had legal standing because its
members stood to be injured by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the individual members of petitioner association are
residents of the NGC. As such they are covered and stand to be either benefited or injured by the enforcement of the IRR, particularly as regards the selection
process of beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner association may assail those provisions in the IRR which it believes to be
unfavorable to the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury arising from the enforcement of the IRR in that they
have been disqualified and eliminated from the selection process.18
In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an actual case, ripeness or legal standing when
paramount public interest is involved.19 The questioned MCIT and CWT affect not only petitioners but practically all domestic corporate taxpayers in our country.
The transcendental importance of the issues raised and their overreaching significance to society make it proper for us to take cognizance of this petition.20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system. It came about as a result of the perceived
inadequacy of the self-assessment system in capturing the true income of corporations. 21 It was devised as a relatively simple and effective revenue-raising

instrument compared to the normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum
contribution to the support of the public sector. The congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting constantly a loss in their operations to avoid the payment of
taxes, and thus avoid sharing in the cost of government. In this regard, the Tax Reform Act introduces for the first time a new concept called the [MCIT] so as to
minimize tax evasion, tax avoidance, tax manipulation in the country and for administrative convenience. This will go a long way in ensuring that corporations
will pay their just share in supporting our public life and our economic advancement.22
Domestic corporations owe their corporate existence and their privilege to do business to the government. They also benefit from the efforts of the government to
improve the financial market and to ensure a favorable business climate. It is therefore fair for the government to require them to make a reasonable contribution to
the public expenses.
Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal or negative net income resulting in minimal or
zero income taxes year in and year out, through under-declaration of income or over-deduction of expenses otherwise called tax shelters.23
Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the [MCIT]. Because from experience too, you have
corporations which have been losing year in and year out and paid no tax. So, if the corporation has been losing for the past five years to ten years, then that
corporation has no business to be in business. It is dead. Why continue if you are losing year in and year out? So, we have this provision to avoid this type of tax
shelters, Your Honor.24
The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a corporation or consistent reports of minimal
net income render its financial statements and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed in our
jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved
through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the imposition of the MCIT commences only
on the fourth taxable year immediately following the year in which the corporation commenced its operations.25 This grace period allows a new business to
stabilize first and make its ventures viable before it is subjected to the MCIT.26
Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be credited against the normal income tax for
the three immediately succeeding years.27
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to suspend the imposition of MCIT if a
corporation suffers losses due to prolonged labor dispute, force majeure and legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries already had their own system of minimum corporate
income taxation. Our lawmakers noted that most developing countries, particularly Latin American and Asian countries, have the same form of safeguards as we
do. As pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for underdeclaration of gross receipts have this same form of
safeguards.
In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a percent (0.5%) of gross assessable income. In Korea a 25% of taxable
income before deductions and exemptions. Of course the different countries have different basis for that minimum income tax.
The other thing youll notice is the preponderance of Latin American countries that employed this method. Okay, those are additional Latin American countries.29
At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions of the MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive, arbitrary and confiscatory which amounts to
deprivation of property without due process of law. It explains that gross income as defined under said provision only considers the cost of goods sold and other
direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into
account.31 Thus, pegging the tax base of the MCIT to a corporations gross income is tantamount to a confiscation of capital because gross income, unlike net
income, is not "realized gain."32
We disagree.
Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of taxing power derives its source from the
very existence of the State whose social contract with its citizens obliges it to promote public interest and the common good.33
Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially, this means that in the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation.36 It has the authority to prescribe a
certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to define
what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is
to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to pay it. 37 Nevertheless, it is circumscribed by
constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property without due process of law." In Sison,
Jr. v. Ancheta, et al.,38 we held that the due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure 39 when it amounts to a
confiscation of property.40 But in the same case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the
due process clause) on the mere allegation of arbitrariness by the taxpayer.41 There must be a factual foundation to such an unconstitutional taint.42 This merely
adheres to the authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need
for proof of such persuasive character.43
Petitioner is correct in saying that income is distinct from capital.44 Income means all the wealth which flows into the taxpayer other than a mere return on capital.
Capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of time. 45 Income is gain derived
and severed from capital.46 For income to be taxable, the following requisites must exist:

(1) there must be gain;


(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.47
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not capital, which is subject to
income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods48 and
other direct expenses from gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously
low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the
corporations gross income.
Besides, 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.49
Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many jurisdictions. Tax thereon is generally held to be within
the power of a state to impose; or constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity of taxation.50
The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a lower tax rate but a broader tax base. 51 Since our
income tax laws are of American origin, interpretations by American courts of our parallel tax laws have persuasive effect on the interpretation of these
laws.52 Although our MCIT is not exactly the same as the AMT, the policy behind them and the procedure of their implementation are comparable. On the
question of the AMTs constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:53
In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing from large numbers of taxpayers with large incomes
who were yet paying no taxes.
xxx

xxx

xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational means of obtaining a broad-based tax, and therefore is
constitutional.54
The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a minimum amount of taxes was a legitimate
governmental end to which the AMT bore a reasonable relation.55
American courts have also emphasized that Congress has the power to condition, limit or deny deductions from gross income in order to arrive at the net that it
chooses to tax.56 This is because deductions are a matter of legislative grace.57
Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the MCIT, taken with the reduction of the tax rate from
32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it present empirical data to show that the
implementation of the MCIT resulted in the confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and confiscatory. The Court cannot strike down a law as
unconstitutional simply because of its yokes.58 Taxation is necessarily burdensome because, by its nature, it adversely affects property rights. 59 The party
alleging the laws unconstitutionality has the burden to demonstrate the supposed violations in understandable terms.60
RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is being imposed and collected even when there is
actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of
[MCIT] is greater than the normal income tax due from such corporation. (Emphasis supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income, merely defines the coverage of Section 27(E).
This means that even if a corporation incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of
2% of its gross income. This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income. But the law also
states that the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT would be less than the net
income of the corporation which posts a zero or negative taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes (including income taxes) are collected.61 Under Section 57 of RA 8424, the types of income
subject to withholding tax are divided into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at source and (c) taxfree covenant bonds. Petitioner is concerned with the second category (CWT) and maintains that the revenue regulations on the collection of CWT on sale of real
estate categorized as ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and
Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated "with grave abuse of discretion amounting to lack of jurisdiction" and "patently in contravention of
law"62 because they ignore such distinctions. Petitioners conclusion is based on the following premises: (a) the revenue regulations use gross selling price (GSP)
or fair market value (FMV) of the real estate as basis for determining the income tax for the sale of real estate classified as ordinary assets and (b) they mandate the
collection of income tax on a per transaction basis, i.e., upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net
income at the end of the taxable period.63
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot disregard the distinctions set by the legislators as
regards the tax base, modes of collection and payment of taxes on income from the sale of capital and ordinary assets.
Petitioners arguments have no merit.

Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property Considered as Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and regulations for the effective enforcement of
the provisions of the law. Such authority is subject to the limitation that the rules and regulations must not override, but must remain consistent and in harmony
with, the law they seek to apply and implement.64 It is well-settled that an administrative agency cannot amend an act of Congress.65
We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is sanctioned by our tax laws. 66 The
withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second,
to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve
the governments cash flow.67 This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of
governmental effort to collect taxes through more complicated means and remedies.68
Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person, national or juridical, residing in the
Philippines. Such authority is derived from Section 57(B) of RA 8424 which provides:
SEC. 57. Withholding of Tax at Source.
xxx

xxx

xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%)
but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is
between the 1%-32% range; the withholding tax is imposed on the income payable and the tax is creditable against the income tax liability of the taxpayer for the
taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business income tax from net income to GSP or FMV of the property
sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax obligation. 69 They are installments on the
annual tax which may be due at the end of the taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be the entitys net income imposed under
Section 24 (resident individuals) or Section 27 (domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT
is to be deducted from the net income tax payable by the taxpayer at the end of the taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that
the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income:
Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale, exchange, or other disposition of real
properties shall unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether the subject properties are classified as
capital assets or ordinary assets;
xxx

xxx

xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens engaged in trade or business in the Philippines;
xxx

xxx

xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as
amended, based on the [GSP] or current [FMV] as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently,
to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.
xxx

xxx

xxx

c. In the case of domestic corporations.


The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building treated as capital asset), regardless of the
classification thereof, all of which are located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject
to the [MCIT] under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld (by the withholding agent/buyer) against its tax
due. If the tax due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the
taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and convenience. Obviously, the withholding
agent/buyer who is obligated to withhold the tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the end of the
taxable year. Instead, said withholding agents knowledge and privity are limited only to the particular transaction in which he is a party. In such a case, his basis
can only be the GSP or FMV as these are the only factors reasonably known or knowable by him in connection with the performance of his duties as a withholding
agent.
No Blurring of Distinctions Between Ordinary Assets and Capital Assets
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary assets. On the other hand, Section 27(D)(5)
of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final tax is
also withheld at source.72
The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not treated in the same manner as capital assets.
Final withholding tax (FWT) and CWT are distinguished as follows:

FWT

CWT

a) The amount of income tax withheld by the withholding


agent is constituted as a full and final payment of the income
tax due from the payee on the said income.

a) Taxes withheld on certain income payments are intended


to equal or at least approximate the tax due of the payee on
said income.

b)The liability for payment of the tax rests primarily on the


payor as a withholding agent.

b) Payee of income is required to report the income and/or


pay the difference between the tax withheld and the tax due
on the income. The payee also has the right to ask for a
refund if the tax withheld is more than the tax due.

c) The payee is not required to file an income tax return for


the particular income.73

c) The income recipient is still required to file an income tax


return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as
amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale of ordinary assets. The inherent and substantial
differences between FWT and CWT disprove petitioners contention that ordinary assets are being lumped together with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the provisions of RA 8424 on the manner and time of filing
of the return, payment and assessment of income tax involving ordinary assets.75
The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital gains. As aforementioned, the mechanics of
the FWT are distinct from those of the CWT. The withholding agent/buyers act of collecting the tax at the time of the transaction by withholding the tax due from
the income payable is the essence of the withholding tax method of tax collection.
No Rule that Only Passive
Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable. According to petitioner, the whole of Section 57
governs the withholding of income tax on passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It follows that
Section 57(B) on CWT should also be limited to passive income:
SEC. 57. Withholding of Tax at Source.
(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the [Secretary] may promulgate, upon the recommendation of
the [CIR], requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)
(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be
withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR], require the withholding of a tax on the
items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate
of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the
taxpayer for the taxable year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive income. The BIR defines passive income
by stating what it is not:
if the income is generated in the active pursuit and performance of the corporations primary purposes, the same is not passive income76
It is income generated by the taxpayers assets. These assets can be in the form of real properties that return rental income, shares of stock in a corporation that earn
dividends or interest income received from savings.
On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to natural or juridical persons, residing in the Philippines."
There is no requirement that this income be passive income. If that were the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The former covers the kinds of passive income
enumerated therein and the latter encompasses any income other than those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and
57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section 57(B). RR 2-98 merely implements the law by
specifying what income is subject to CWT. It has been held that, where a statute does not require any particular procedure to be followed by an administrative
agency, the agency may adopt any reasonable method to carry out its functions.77 Similarly, considering that the law uses the general term "income," the Secretary
and CIR may specify the kinds of income the rules will apply to based on what is feasible. In addition, administrative rules and regulations ordinarily deserve to be

given weight and respect by the courts78 in view of the rule-making authority given to those who formulate them and their specific expertise in their respective
fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its members of their property without due process of
law because, in their line of business, gain is never assured by mere receipt of the selling price. As a result, the government is collecting tax from net income not
yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the taxable year. The seller will be able to claim a tax
refund if its net income is less than the taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the constitutional
guarantee of due process. More importantly, the due process requirement applies to the power to tax. 79 The CWT does not impose new taxes nor does it increase
taxes.80 It relates entirely to the method and time of payment.
Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to wait years and may even resort to litigation before
they are granted a refund.81 This argument is misleading. The practical problems encountered in claiming a tax refund do not affect the constitutionality and
validity of the CWT as a method of collecting the tax.1avvphi1
Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor wages, materials, cost of money and other expenses
which can then save the entity from having to obtain loans entailing considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which
add to the burden of the realty industry: huge investments and borrowings; long gestation period; sudden and unpredictable interest rate surges; continually
spiraling development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least 20 government agencies.82
Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners complaints are essentially matters of policy best addressed to
the executive and legislative branches of the government. Besides, the CWT is applied only on the amounts actually received or receivable by the real estate entity.
Sales on installment are taxed on a per-installment basis.83 Petitioners desire to utilize for its operational and capital expenses money earmarked for the payment
of taxes may be a practical business option but it is not a fundamental right which can be demanded from the court or from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being levied only on real estate enterprises.
Specifically, petitioner points out that manufacturing enterprises are not similarly imposed a CWT on their sales, even if their manner of doing business is not
much different from that of a real estate enterprise. Like a manufacturing concern, a real estate business is involved in a continuous process of production and it
incurs costs and expenditures on a regular basis. The only difference is that "goods" produced by the real estate business are house and lot units.84
Again, we disagree.
The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the same protection of laws which is enjoyed by
other persons or other classes in the same place and in like circumstances." 85 Stated differently, all persons belonging to the same class shall be taxed alike. It
follows that the guaranty of the equal protection of the laws is not violated by legislation based on a reasonable classification. Classification, to be valid, must (1)
rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing conditions only and (4) apply equally to all members of the
same class.86
The taxing power has the authority to make reasonable classifications for purposes of taxation.87 Inequalities which result from a singling out of one particular
class for taxation, or exemption, infringe no constitutional limitation.88 The real estate industry is, by itself, a class and can be validly treated differently from
other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what distinguishes the real estate business from
other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of
transactions involved. The income from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the parties to
comply with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal
and substantial amounts. To require the customers of manufacturing enterprises, at present, to withhold the taxes on each of their transactions with their tens or
hundreds of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other
capital goods yet these are not similarly subjected to the CWT.89 As already discussed, the Secretary may adopt any reasonable method to carry out its
functions.90Under Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate. The sales of manufacturers who have clients within the top
5,000 corporations, as specified by the BIR, are also subject to CWT for their transactions with said 5,000 corporations.91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not effect the regisration of any document transferring real
property unless a certification is issued by the CIR that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule except to
rely on its contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost exactly the same wording as Section
58(E) of RA 8424 and is unquestionably in accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source.
(E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds unless the
[CIR] or his duly authorized representative has certified that such transfer has been reported, and the capital gains or [CWT], if any, has been paid : xxxx
any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to understand is the income tax." 92 When a party questions the
constitutionality of an income tax measure, it has to contend not only with Einsteins observation but also with the vast and well-established jurisprudence in
support of the plenary powers of Congress to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the imposition of
MCIT and CWT is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.


SO ORDERED.
RENATO C. CORONA
Associate Justice
WE CONCUR:

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 191761

November 14, 2012

CAGAYAN ELECTRIC POWER AND LIGHT CO., INC., Petitioner,


vs.
CITY OF CAGAYAN DE ORO, Respondent.
DECISION
CARPIO, J.:
The Case
G.R. No. 191761 is a petition for review1 assailing the Decision2 promulgated on 28 May 2009 as well as the Resolution3 promulgated on 24 March 2010 by the
Court of Appeals (appellate court) in CA-G.R. CV No. 01105-Min. The appellate court affirmed the 8 January 2007 Decision 4 of Branch 18 of the Regional Trial
Court of Misamis Oriental (trial court) in Civil Case No. 2005-207.
The trial court upheld the validity of the City of Cagayan de Oros Ordinance No. 9503-2005 and denied Cagayan Electric Power and Light Co., Inc.s
(CEPALCO) claim of exemption from the said ordinance.
The Facts
The appellate court narrated the facts as follows:
On January 10, 2005, the Sangguniang Panlungsod of Cagayan de Oro (City Council) passed Ordinance No. 9503-2005 imposing a tax on the lease or rental of
electric and/or telecommunication posts, poles or towers by pole owners to other pole users at ten percent (10%) of the annual rental income derived from such
lease or rental.
The City Council, in a letter dated 15 March 2005, informed appellant Cagayan Electric Power and Light Company, Inc. (CEPALCO), through its President and
Chief Operation Manager, Ms. Consuelo G. Tion, of the passage of the subject ordinance.
On September 30, 2005, appellant CEPALCO, purportedly on pure question of law, filed a petition for declaratory relief assailing the validity of Ordinance No.
9503-2005 before the Regional Trial Court of Cagayan de Oro City, Branch 18, on the ground that the tax imposed by the disputed ordinance is in reality a tax on
income which appellee City of Cagayan de Oro may not impose, the same being expressly prohibited by Section 133(a) of Republic Act No. 7160 (R.A. 7160)
otherwise known as the Local Government Code (LGC) of 1991. CEPALCO argues that, assuming the City Council can enact the assailed ordinance, it is
nevertheless exempt from the imposition by virtue of Republic Act No. 9284 (R.A. 9284) providing for its franchise. CEPALCO further claims exemplary damages
of PhP200,000.00 alleging that the passage of the ordinance manifests malice and bad faith of the respondent-appellee towards it.
In its Answer, appellee raised the following affirmative defenses: (a) the enactment and implementation of the subject ordinance was a valid and lawful exercise of
its powers pursuant to the 1987 Constitution, the Local Government Code, other applicable provisions of law, and pertinent jurisprudence; (b) non-exemption of
CEPALCO because of the express withdrawal of the exemption provided by Section 193 of the LGC; (c) the subject ordinance is legally presumed valid and
constitutional; (d) prescription of respondent-appellees action pursuant to Section 187 of the LGC; (e) failure of respondent-appellee to exhaust administrative
remedies under the Local Government Code; (f) CEPALCOs action for declaratory relief cannot prosper since no breach or violation of the subject ordinance was
yet committed by the City.5
Ordinance No. 9503-2005 reads:
ORDINANCE IMPOSING A TAX ON THE LEASE OR RENTAL OF ELECTRIC AND/OR TELECOMMUNICATION POSTS, POLES OR TOWERS BY
POLE OWNERS TO OTHER POLE USERS AT THE RATE OF TEN (10) PERCENT OF THE ANNUAL RENTAL INCOME DERIVED THEREFROM AND
FOR OTHER PURPOSES BE IT ORDAINED by the City Council (Sangguniang Panlungsod) of the City of Cagayan de Oro in session assembled that:
SECTION 1. - Whenever used in this Ordinance, the following terms shall be construed as:
a. Electric companies include all public utility companies whether corporation or cooperative engaged in the distribution and sale of electricity;
b. Telecommunication companies refer to establishments or entities that are holders of franchise through an Act of Congress to engage, maintain, and
operate telecommunications, voice and data services, under existing Philippine laws, rules and regulations;
c. Pole User includes any person, natural or juridical, including government agencies and entities that use and rent poles and towers for the installation
of any cable, wires, service drops and other attachments;
d. Pole Owner includes electric and telecommunication company or corporation that owns poles, towers and other accessories thereof.
SECTION 2. - There shall be imposed a tax on the lease or rental of electric and/or telecommunication posts, poles or towers by pole owners to other pole users at
the rate of ten (10) percent of the annual rental income derived therefrom.
SECTION 3. - The tax imposed herein shall not be passed on by pole owners to the bills of pole users in the form of added rental rates.
SECTION 4. (a) Pole owners herein defined engaged in the business of renting their posts, poles and/or towers shall secure a separate business permit therefor as
provided under Article (P), Section 62(a) of Ordinance No. 8847-2003, otherwise known as the Cagayan de Oro City Revenue Code of 2003.

(b) Pertinent provisions of Ordinance No. 8847-2003, covering situs of the tax, payment of taxes and administrative provisions shall apply in the imposition of the
tax under this Ordinance.
SECTION 5. - This Ordinance shall take effect after 15 days following its publication in a local newspaper of general circulation for at least three (3) consecutive
issues.
UNANIMOUSLY APPROVED.6
Ordinance No. 9503-2005 was unanimously approved by the City Council of Cagayan de Oro on 10 January 2005.
The Trial Courts Ruling
On 8 January 2007, the trial court rendered its Decision7 in favor of the City of Cagayan de Oro. The trial court identified three issues for its resolution: (1)
whether Ordinance No. 9503-2005 is valid; (2) whether CEPALCO should be exempted from tax; and (3) whether CEPALCOs action is barred for non-exhaustion
of administrative remedies and for prescription.
In ruling for the validity of Ordinance No. 9503-2005, the trial court rejected CEPALCOs claim that the ordinance is an imposition of income tax prohibited by
Section 133(a) of the Local Government Code.8 The trial court reasoned that since CEPALCOs business of leasing its posts to pole users is what is directly taxed,
the tax is not upon the income but upon the privilege to engage in business. Moreover, Section 143(h), in relation to Section 151, of the Local Government Code
authorizes a city to impose taxes, fees and charges on any business which is not specified as prohibited under Section 143(a) to (g) and which the city council may
deem proper to tax.
The trial court also rejected CEPALCOs claim of exemption from tax. The trial court noted that Republic Act (R.A.) Nos. 3247, 9 357010 and 6020,11 which
previously granted CEPALCOs franchise, expressly stated that CEPALCO would pay a three percent franchise tax in lieu of all assessments of whatever authority.
However, there is no similar provision in R.A. No. 9284, which gave CEPALCO its current franchise.
Finally, the trial court found that CEPALCOs action is barred by prescription as it failed to raise an appeal to the Secretary of Justice within the thirty-day period
provided in Section 187 of the Local Government Code.
The dispositive portion of the trial courts decision reads:
WHEREFORE, it is crystal clear that Petitioner CEPALCO failed not only in proving its allegations that City Ordinance 9503-2005 is illegal and contrary to law,
and that [it] is exempted from the imposition of tax, but also in convincing the Court that its action is not barred for non-exhaustion of administrative remedy [sic]
and by prescription. Hence, the instant petition is DENIED.
SO ORDERED.12
CEPALCO filed a brief with the appellate court and raised the following errors of the trial court:
A. The lower court manifestly erred in concluding that the instant action is barred for non-exhaustion of administrative remedies and by prescription.
B. The lower court gravely erred in finding that Ordinance No. 9503-2005 of the City of Cagayan de Oro does not partake of the nature of an income
tax.
C. The lower court gravely erred in finding that Ordinance No. 9503-2005 of the City of Cagayan de Oro is valid.
D. The lower court seriously erred in finding that herein appellant is not exempted from payment of said tax.13
The Appellate Courts Ruling
On 28 May 2009, the appellate court rendered its Decision14 and affirmed the trial courts decision.
The appellate court stated that CEPALCO failed to file a timely appeal to the Secretary of Justice, and did not exhaust its administrative remedies. The appellate
court agreed with the trial courts ruling that the assailed ordinance is valid and declared that the subject tax is a license tax for the regulation of business in which
CEPALCO is engaged. Finally, the appellate court found that CEPALCOs claim of tax exemption rests on a strained interpretation of R.A. No. 9284.
In a Resolution15 dated 24 March 2010, the appellate court denied CEPALCOs motion for reconsideration for lack of merit. The resolution also denied
CEPALCOs 3 August 2009 supplemental motion for reconsideration for being filed out of time.
CEPALCO filed the present petition for review before this Court on 27 May 2010.
The Issues
CEPALCO enumerated the following reasons for warranting review:
1. In spite of its patent illegality, a City Ordinance passed in violation or in excess of the citys delegated power to tax was upheld;
2. In a case involving pure questions of law, the Court of Appeals still insisted on a useless administrative remedy before resort to the court may be
made; and
3. Recent legislation affirming CEPALCOs tax exemptions was disregarded.16
In a Resolution dated 6 July 2011,17 this Court required both parties to discuss whether the amount of tax imposed by Section 2 of Ordinance No. 9503-2005
complies with or violates, as the case may be, the limitation set by Section 151, in relation to Sections 137 and 143(h), of the Local Government Code.
The Courts Ruling
Failure to Exhaust Administrative Remedies
Ordinance No. 9503-2005 is a local revenue measure. As such, the Local Government Code applies.
SEC. 187. Procedure for Approval and Effectivity of Tax Ordinances and Revenue Measures; Mandatory Public Hearings. The procedure for approval of local
tax ordinances and revenue measures shall be in accordance with the provisions of this Code: Provided, That public hearings shall be conducted for the purpose
prior to the enactment thereof: Provided, further, That any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on
appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render a decision within sixty (60) days from the date of receipt of
the appeal: Provided, however, That such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax, fee,

or charge levied therein: Provided, finally, That within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary of
Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction.
SEC. 188. Publication of Tax Ordinances and Revenue Measures. Within ten (10) days after their approval, certified true copies of all provincial, city, and
municipal tax ordinances or revenue measures shall be published in full for three (3) consecutive days in a newspaper of local circulation: Provided, however, That
in provinces, cities and municipalities where there are no newspapers of local circulation, the same may be posted in at least two (2) conspicuous and publicly
accessible places.
The Sangguniang Panlungsod of Cagayan de Oro approved Ordinance No. 9503-2005 on 10 January 2005. Section 5 of said ordinance provided that the
"Ordinance shall take effect after 15 days following its publication in a local newspaper of general circulation for at least three (3) consecutive issues." Gold Star
Daily published Ordinance No. 9503-2005 on 1 to 3 February 2005. Ordinance No. 9503-2005 thus took effect on 19 February 2005. CEPALCO filed its petition
for declaratory relief before the Regional Trial Court on 30 September 2005, clearly beyond the 30-day period provided in Section 187. CEPALCO did not file
anything before the Secretary of Justice. CEPALCO ignored our ruling in Reyes v. Court of Appeals18 on the mandatory nature of the statutory periods:
Clearly, the law requires that the dissatisfied taxpayer who questions the validity or legality of a tax ordinance must file his appeal to the Secretary of Justice,
within 30 days from effectivity thereof. In case the Secretary decides the appeal, a period also of 30 days is allowed for an aggrieved party to go to court. But if the
Secretary does not act thereon, after the lapse of 60 days, a party could already proceed to seek relief in court. These three separate periods are clearly given for
compliance as a prerequisite before seeking redress in a competent court. Such statutory periods are set to prevent delays as well as enhance the orderly and speedy
discharge of judicial functions. For this reason the courts construe these provisions of statutes as mandatory.
A municipal tax ordinance empowers a local government unit to impose taxes. The power to tax is the most effective instrument to raise needed revenues to
finance and support the myriad activities of local government units for the delivery of basic services essential to the promotion of the general welfare and
enhancement of peace, progress, and prosperity of the people. Consequently, any delay in implementing tax measures would be to the detriment of the public. It is
for this reason that protests over tax ordinances are required to be done within certain time frames. In the instant case, it is our view that the failure of petitioners to
appeal to the Secretary of Justice within 30 days as required by Sec. 187 of R.A. 7160 is fatal to their cause.
As in Reyes, CEPALCOs failure to appeal to the Secretary of Justice within the statutory period of 30 days from the effectivity of the ordinance should have been
fatal to its cause. However, we relax the application of the rules in view of the more substantive matters.
City
of
Cagayan
vis-a-vis CEPALCOs Claim of Exemption

de

Oros

Power

to

Create

Sources

of

Revenue

Section 5, Article X of the 1987 Constitution provides that "each local government unit shall have the power to create its own sources of revenues and to levy
taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes,
fees, and charges shall accrue exclusively to the local government." The Local Government Code supplements the Constitution with Sections 151 and 186:
SEC. 151. Scope of Taxing Powers. Except as otherwise provided in this Code, the city may levy the taxes, fees and charges which the province or municipality
may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them
and distributed in accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the
rates of professional and amusement taxes.
SEC. 186. Power to Levy Other Taxes, Fees or Charges. Local government units may exercise the power to levy taxes, fees or charges on any base or subject not
otherwise specifically enumerated herein or taxed under the provisions of the National Internal Revenue Code, as amended, or other applicable laws: Provided,
That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy: Provided, further, That the ordinance
levying such taxes, fees, or charges shall not be enacted without any prior public hearing conducted for the purpose.
Although CEPALCO does not question the authority of the Sangguniang Panlungsod of Cagayan de Oro to impose a tax or to enact a revenue measure, CEPALCO
insists that Ordinance No. 9503-2005 is an imposition of an income tax which is prohibited by Section 133(a)19 of the Local Government Code. Unfortunately for
CEPALCO, we agree with the ruling of the trial and appellate courts that Ordinance No. 9503-2005 is a tax on business. CEPALCOs act of leasing for a
consideration the use of its posts, poles or towers to other pole users falls under the Local Government Codes definition of business. Business is defined by
Section 131(d) of the Local Government Code as "trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit." In relation
to Section 131(d),20 Section 143(h)21 of the Local Government Code provides that the city may impose taxes, fees, and charges on any business which is not
specified in Section 143(a) to (g)22 and which the sanggunian concerned may deem proper to tax.
In contrast to the express statutory provisions on the City of Cagayan de Oros power to tax, CEPALCOs claim of tax exemption of the income from its poles
relies on a strained interpretation.23 Section 1 of R.A. No. 9284 added Section 9 to R.A. No. 3247, CEPALCOs franchise:
SEC. 9. Tax Provisions. The grantee, its successors or assigns, shall be subject to the payment of all taxes, duties, fees or charges and other impositions
applicable to private electric utilities under the National Internal Revenue Code (NIRC) of 1997, as amended, the Local Government Code and other applicable
laws: Provided, That nothing herein shall be construed as repealing any specific tax exemptions, incentives, or privileges granted under any relevant law: Provided,
further, That all rights, privileges, benefits and exemptions accorded to existing and future private electric utilities by their respective franchises shall likewise be
extended to the grantee.
The grantee shall file the return with the city or province where its facility is located and pay the taxes due thereon to the Commissioner of Internal Revenue or his
duly authorized representative in accordance with the NIRC and the return shall be subject to audit by the Bureau of Internal Revenue.
The Local Government Code withdrew tax exemption privileges previously given to natural or juridical persons, and granted local government units the power to
impose franchise tax,24 thus:
SEC. 137. Franchise Tax. Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a
franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction.
xxxx
SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A.
No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code.
SEC. 534. Repealing Clause. x x x.

(f) All general and special laws, acts, city charters, decrees, executive orders, proclamations and administrative regulations, or part or parts thereof which are
inconsistent with any of the provisions of this Code are hereby repealed or modified accordingly.
It is hornbook doctrine that tax exemptions are strictly construed against the claimant. For this reason, tax exemptions must be based on clear legal provisions. The
separate opinion in PLDT v. City of Davao25 is applicable to the present case, thus:
Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax exemption must point to a specific provision of law conferring on the taxpayer, in clear
and plain terms, exemption from a common burden. Any doubt whether a tax exemption exists is resolved against the taxpayer. Tax exemptions cannot arise by
mere implication, much less by an implied re-enactment of a repealed tax exemption clause.
CEPALCOs claim of exemption under the "in lieu of all taxes" clause must fail in light of Section 193 of the Local Government Code as well as Section 9 of its
own franchise.
Ordinance No. 9503-2005s Compliance with
the Local Government Code
In our Resolution dated 6 July 2011,26 we asked both parties to discuss whether the amount of tax imposed by Section 2 of Ordinance No. 9503-2005 complies
with or violates, as the case may be, the limitation set by Section 151, in relation to Sections 137 and 143(h), of the Local Government Code.
CEPALCO argues that Ordinance No. 9503-2005 should be invalidated because the City of Cagayan de Oro exceeded its authority in enacting it. CEPALCO
argued thus:
5. Thus, the taxes imposable under either Section 137 or Section 143(h) are not unbridled but are restricted as to the amount which may be imposed.
This is the first limitation. Furthermore, if it is a city which imposes the same, it can impose only up to one-half of what the province or municipality
may impose. This is the second limitation.
6. Let us now examine Ordinance No. 9503-2005 of the respondent City of Cagayan de Oro in the light of the twin limitations mentioned above.
7. Ordinance No. 9503-2005 of the respondent City of Cagayan de Oro imposes a tax on the lease or rental of electric and/or telecommunication posts,
poles or towers by pole owners to other pole users "at the rate of ten (10) percent of the annual rental income derived therefrom."
8. With respect to Section 137, considering that the tax allowed provinces "shall not exceed fifty percent (50%) of one percent (1%) of the gross annual
receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction," the tax imposed by Ordinance No.
9503-2005 "at the rate of ten (10) percent of the annual rental income derived therefrom" is too much. There is a whale of a difference between the
allowable 50% of 1% and the 10% tax imposed by the respondent. To illustrate: assuming that the gross annual receipt is Php100, the maximum tax that
a province may impose under Section 137 (50% of 1%) shall be Php0.5 or only fifty centavos. Therefore, the maximum tax that the City may impose
shall only be one-half of this, which is Php0.25 or only twenty-five centavos. But the questioned Ordinance imposes a tax amounting to 10% of the
gross annual receipt of Php100, which is Php10, or Ten Pesos. This a whooping [sic] 40 times more than that allowed for the province! The violation
made by respondent city of its delegated taxing authority is all too patent.
9. With respect to Section 143(h), the rate of tax which the municipality may impose "shall not exceed two percent (2%) of gross sales or receipts of the
preceding calendar year." On the other hand, the tax imposed by Ordinance No. 9503-2005 is "at the rate of ten (10) percent of the annual rental income
derived therefrom." Again, it is obvious that the respondent Citys questioned tax ordinance is way too much. Using the same tax base of Php100 to
illustrate, let us compute:
Under Section 143(h), the maximum tax that a municipality may impose is 2% of Php100, which is Php2 or Two Pesos. Therefore, the maximum tax that the City
may impose shall be one-half of this, which is Php1 or One Peso. But the tax under Ordinance No. 9503-2005 is Php10, or Ten Pesos. This is a whooping [sic] 10
times more than that allowed for the municipality! As in the earlier instance discussed above, the violation made by the respondent city of its delegated taxing
authority is all too patent.27 (Boldfacing and underscoring in the original)
The interpretation of the City of Cagayan de Oro is diametrically opposed to that of CEPALCO. The City of Cagayan de Oro points out that under Section 151 of
the Local Government Code, cities not only have the power to levy taxes, fees and charges which the provinces or municipalities may impose, but the maximum
rate of taxes imposable by cities may exceed the maximum rate of taxes imposable by provinces or municipalities by as much as 50%. The City of Cagayan de Oro
goes on to state:
6. Thus, Section 30 of City of Cagayan de Oros Ordinance No. 8847-2003, otherwise known as the Revenue Code of Cagayan de Oro, imposes a
franchise tax on the gross receipts realized from the preceding year by a business enjoying a franchise, at the rate of 75% of 1%. The increase of 25%
over that which is prescribed under Section 137 of the LGC is in accordance with Section 151 thereof prescribing the allowable increase on the rate of
tax on the businesses duly identified and enumerated under Section 143 of the LGC or those defined and categorized in the preceding sections thereof;
7. Section 143 of the LGC prescribes the rate of taxes on the identified categories of business enumerated therein which were determined to be existing
at the time of its enactment. On the other hand, Section 151 of the LGC prescribes the allowable rate of increase over the rate of taxes imposed on
businesses identified under Section 143 and the preceding sections thereof. It is [City of Cagayan de Oros humble opinion that the allowable rate of
increase provided under Section 151 of the LGC applies only to those businesses identified and enumerated under Section 143 thereof. Thus, it is
respectfully submitted by City of Cagayan de Oro that the 2% limitation prescribed under Section 143(h) applies only to the tax rates on the businesses
identified thereunder and does not apply to those that may thereafter be deemed taxable under Section 186 of the LGC, such as the herein assailed
Ordinance No. 9503-2005. On the same vein, it is the respectful submission of City of Cagayan de Oro that the limitation under Section 151 of the LGC
likewise does not apply in our particular instance, otherwise it will run counter to the intent and purpose of Section 186 of the LGC;
8. Be it strongly emphasized here that CEPALCO is differently situated vis--vis the rest of the businesses identified under Section 143 of the LGC. The
imposition of a tax "xxx on the lease or rental of electric and/or telecommunications posts, poles or towers by pole owners to other pole users at the rate
of ten (10%) of the annual rental income derived therefrom" as provided under Section 2 of the questioned Ordinance No. 9503-2005 is based on a
reasonable classification, to wit: (a) It is based on substantial distinctions which make a real difference; (b) these are germane to the purpose of the law;
(c) the classification applies not only to the present conditions but also to future conditions which are substantially identical to those of the present; and
(d) the classification applies only to those belonging to the same class;
9. Furthermore, Section 186 of the LGC allow [sic] local government units to exercise their taxing power to levy taxes, fees or charges on any base or
subject not otherwise specifically enumerated in the preceding sections, more particularly Section 143 thereof, or under the provisions of the National
Internal Revenue Code, as long as they are not unjust, excessive, oppressive, confiscatory or contrary to declared national policy. Moreover, a public
hearing is required before the Ordinance levying such taxes, fees or charges can be enacted;

10. It is respectfully submitted by City of Cagayan de Oro that the tax rate imposed under Section 2 of the herein assailed Ordinance is not unjust,
excessive, oppressive, confiscatory or contrary to a declared national policy;
11. A reading of Section 143 of the LGC reveals that it has neither identified the operation of a business engaged in leasing nor prescribed its tax rate.
Moreover, a Lessor, in any manner, is not included among those defined as Contractor under Section 131(h) of the LGC. However, a Lessor, in its
intended general application in City of Cagayan de Oro (one who rents out real estate properties), was identified, categorized and included as one of the
existing businesses operating in the city, and thus falling under the provisions of Ordinance No. 8847-2003 (the Revenue Code of Cagayan de Oro) and,
therefore, imposed only a tax rate of 2% on their gross annual receipts;
12. While the herein assailed Ordinance similarly identifies that the base of the tax imposed therein are receipts and/or revenue derived from rentals of
poles and posts, CEPALCO cannot be considered under the definition of Lessor under the spirit, essence and intent of Section 58(h) of the Revenue
Code of Cagayan de Oro, because the same refers only to "Real Estate Lessors, Real Estate Dealers and Real Estate Developers." Thus, CEPALCO
should be, as it has been, categorized as a (Distinct) Lessor where it enjoys not only a tremendous and substantial edge but also an absolute advantage in
the rental of poles, posts and/or towers to other telecommunication and cable TV companies and the like over and above all others in view of its
apparent monopoly by allowing the use of their poles, posts and/or towers by, leasing them out to, telecommunication and cable TV companies
operating within the city and suburbs. Furthermore, CEPALCO has neither competition in this field nor does it expect one since there are no other
persons or entities who are engaged in this particular business activity;
x x x x28
CEPALCO is mistaken when it states that a city can impose a tax up to only one-half of what the province or city may impose. A more circumspect reading of the
Local Government Code could have prevented this error. Section 151 of the Local Government Code states that, subject to certain exceptions, a city may exceed by
"not more than 50%" the tax rates allowed to provinces and municipalities.29 A province may impose a franchise tax at a rate "not exceeding 50% of 1% of the
gross annual receipts."30 Following Section 151, a city may impose a franchise tax of up to 0.0075 (or 0.75%) of a business gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. A municipality may impose a business tax at a rate not
exceeding "two percent of gross sales or receipts."31 Following Section 151, a city may impose a business tax of up to 0.03 (or 3%) of a business gross sales or
receipts of the preceding calendar year.
CEPALCO also erred when it equates Section 137s "gross annual receipts" with Ordinance No. 9503-2005s "annual rental income." Section 2 of Ordinance No.
9503-2005 imposes "a tax on the lease or rental of electric and/or telecommunication posts, poles or towers by pole owners to other pole users at the rate of ten
(10) percent of the annual rental income derived therefrom," and not on CEPALCOs gross annual receipts. Thus, although the tax rate of 10% is definitely higher
than that imposable by cities as franchise or business tax, the tax base of annual rental income of "electric and/or telecommunication posts, poles or towers by pole
owners to other pole users" is definitely smaller than that used by cities in the computation of franchise or business tax. In effect, Ordinance No. 9503-2005 wants
a slice of a smaller pie.
However, we disagree with the City of Cagayan de Oros submission that Ordinance No. 9503-2005 is not subject to the limits imposed by Sections 143 and 151 of
the Local Government Code. On the contrary, Ordinance No. 9503-2005 is subject to the limitation set by Section 143(h). Section 143 recognizes separate lines of
business and imposes different tax rates for different lines of business. Let us suppose that one is a brewer of liquor and, at the same time, a distributor of articles of
commerce. The brewery business is subject to the rates established in Section 143(a) while the distribution business is subject to the rates established in Section
143(b). The City of Cagayan de Oros imposition of a tax on the lease of poles falls under Section 143(h), as the lease of poles is CEPALCOs separate line of
business which is not covered by paragraphs (a) to (g) of Section 143. The treatment of the lease of poles as a separate line of business is evident in Section 4(a) of
Ordinance No. 9503-2005. The City of Cagayan de Oro required CEPALCO to apply for a separate business permit.1wphi1
More importantly, because "any person, who in the course of trade or business x x x leases goods or properties x x x shall be subject to the value-added tax," 32 the
imposable tax rate should not exceed two percent of gross receipts of the lease of poles of the preceding calendar year. Section 143(h) states that "on any business
subject to x x x value-added x x x tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or
receipts of the preceding calendar year" from the lease of goods or properties. Hence, the 10% tax rate imposed by Ordinance No. 9503-2005 clearly violates
Section 143(h) of the Local Government Code.
Finally, in view of the lack of a separability clause, we declare void the entirety of Ordinance No. 9503-2005. Any payment made by reason of the tax imposed by
Ordinance No. 9503-2005 should, therefore, be refunded to CEPALCO. Our ruling, however, is made without prejudice to the enactment by the City of Cagayan
de Oro of a tax ordinance that complies with the limits set by the Local Government Code.
WHEREFORE, we GRANT the petition. The Decision of the Court of Appeals in CA-G.R. CV No. 01105-Min promulgated on 28 May 2009 and the Resolution
promulgated on 24 March 2010 are REVERSED and SET ASIDE Ordinance No. 9503-2005 is declared void.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. 176579

October 9, 2012

HEIRS
OF
WILSON
P.
GAMBOA,* Petitioners,
vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P. SEVILLA, AND COMMISSIONER RICARDO
ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS,
RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS
DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L.
NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES AND EXCHANGE
COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE, Respondents.

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.


RESOLUTION
CARPIO, J.:
This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V.
Pangilinan (Pangilinan),2 (3) Napoleon L. Nazareno (Nazareno ),3and ( 4) the Securities and Exchange Commission (SEC)4 (collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalfofthe SEC, 5 assailing the 28 June 2011 Decision. However, it
subsequently filed a Consolidated Comment on behalf of the State,6declaring expressly that it agrees with the Court's definition of the term "capital" in Section 11,
Article XII of the Constitution. During the Oral Arguments on 26 June 2012, the OSG reiterated its position consistent with the Court's 28 June 2011 Decision.
We deny the motions for reconsideration.
I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.
As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term "capital" in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy. In fact, a resolution of this issue will determine whether Filipinos are masters, or second-class citizens, in their own country.
What is at stake here is whether Filipinos or foreigners will have effective control of the Philippine national economy. Indeed, if ever there is a legal issue that has
far-reaching implications to the entire nation, and to future generations of Filipinos, it is the threshold legal issue presented in this case.
Contrary to Pangilinans narrow view, the serious economic consequences resulting in the interpretation of the term "capital" in Section 11, Article XII of the
Constitution undoubtedly demand an immediate adjudication of this issue. Simply put, the far-reaching implications of this issue justify the treatment of the
petition as one for mandamus.7
In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and expedient to resolve the case although the petition for declaratory relief could be
outrightly dismissed for being procedurally defective. There, appellant admittedly had already committed a breach of the Public Service Act in relation to the AntiDummy Law since it had been employing non- American aliens long before the decision in a prior similar case. However, the main issue in Luzon Stevedoring was
of transcendental importance, involving the exercise or enjoyment of rights, franchises, privileges, properties and businesses which only Filipinos and qualified
corporations could exercise or enjoy under the Constitution and the statutes. Moreover, the same issue could be raised by appellant in an appropriate action. Thus,
in Luzon Stevedoring the Court deemed it necessary to finally dispose of the case for the guidance of all concerned, despite the apparent procedural flaw in the
petition.
The circumstances surrounding the present case, such as the supposed procedural defect of the petition and the pivotal legal issue involved, resemble those
in Luzon Stevedoring. Consequently, in the interest of substantial justice and faithful adherence to the Constitution, we opted to resolve this case for the guidance
of the public and all concerned parties.
II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."
Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long been settled and defined to refer to the total outstanding shares of
stock, whether voting or non-voting. In fact, movants claim that the SEC, which is the administrative agency tasked to enforce the 60-40 ownership requirement in
favor of Filipino citizens in the Constitution and various statutes, has consistently adopted this particular definition in its numerous opinions. Movants point out
that with the 28 June 2011 Decision, the Court in effect introduced a "new" definition or "midstream redefinition" 9 of the term "capital" in Section 11, Article XII
of the Constitution.
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the term "capital" found in various economic provisions of the 1935,
1973 and 1987 Constitutions. There has never been a judicial precedent interpreting the term "capital" in the 1935, 1973 and 1987 Constitutions, until now. Hence,
it is patently wrong and utterly baseless to claim that the Court in defining the term "capital" in its 28 June 2011 Decision modified, reversed, or set aside the
purported long-standing definition of the term "capital," which supposedly refers to the total outstanding shares of stock, whether voting or non-voting. To repeat,
until the present case there has never been a Court ruling categorically defining the term "capital" found in the various economic provisions of the 1935, 1973 and
1987 Philippine Constitutions.
The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term "capital" as referring to both voting and non-voting shares
(combined total of common and preferred shares) are, in the first place, conflicting and inconsistent. There is no basis whatsoever to the claim that the SEC and the
DOJ have consistently and uniformly adopted a definition of the term "capital" contrary to the definition that this Court adopted in its 28 June 2011 Decision.
In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in Section 9, Article XIV of the 1973 Constitution was raised, that is,
whether the term "capital" includes "both preferred and common stocks." The issue was raised in relation to a stock-swap transaction between a Filipino and a
Japanese corporation, both stockholders of a domestic corporation that owned lands in the Philippines. Then Minister of Justice Estelito P. Mendoza ruled that the
resulting ownership structure of the corporation would beunconstitutional because 60% of the voting stock would be owned by Japanese while Filipinos would
own only 40% of the voting stock, although when the non-voting stock is added, Filipinos would own 60% of the combined voting and non-voting stock. This
ownership structure is remarkably similar to the current ownership structure of PLDT. Minister Mendoza ruled:
xxxx
Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common and preferred) while the Japanese investors control
sixty percent (60%) of the common (voting) shares.
It is your position that x x x since Section 9, Article XIV of the Constitution uses the word "capital," which is construed "to include both
preferred and common shares" and "that where the law does not distinguish, the courts shall not distinguish."
xxxx

In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in question may not be constitutionally upheld .
While it may be ordinary corporate practice to classify corporate shares into common voting shares and preferred non-voting shares, any
arrangement which attempts to defeat the constitutional purpose should be eschewed. Thus, the resultant equity arrangement which would
place ownership of 60%11 of the common (voting) shares in the Japanese group, while retaining 60% of the total percentage of common
and preferred shares in Filipino hands would amount to circumvention of the principle of control by Philippine stockholders that is
implicit in the 60% Philippine nationality requirement in the Constitution. (Emphasis supplied)
In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9, Article XIV of the 1973 Constitution includes "both preferred and
common stocks" treated as the same class of shares regardless of differences in voting rights and privileges. Minister Mendoza stressed that the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution is not complied with unless the corporation "satisfies the criterion of beneficial ownership" and that
in applying the same "the primordial consideration is situs of control."
On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan Pantaleon & San Jose, then SEC General Counsel Vernette G.
Umali-Paco applied the Voting Control Test, that is, using only the voting stock to determine whether a corporation is a Philippine national. The Opinion states:
Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine national because: (1) sixty percent (60%) of its outstanding capital
stock entitled to vote is owned by a Philippine national, the Trustee; and (2) at least sixty percent (60%) of the ERF will accrue to the benefit of Philippine
nationals. Still pursuant to the Control Test, MLRCs investment in 60% of BFDCs outstanding capital stock entitled to vote shall be deemed as of
Philippine nationality, thereby qualifying BFDC to own private land.
Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals, considering that: (1) sixty percent (60%) of their
respective outstanding capital stock entitled to vote is owned by a Philippine national (i.e., by the Trustee, in the case of MLRC; and by MLRC,
in the case of BFDC); and (2) at least 60% of their respective board of directors are Filipino citizens. (Boldfacing and italicization supplied)
Clearly, these DOJ and SEC opinions are compatible with the Courts interpretation of the 60-40 ownership requirement in favor of Filipino citizens mandated by
the Constitution for certain economic activities. At the same time, these opinions highlight the conflicting, contradictory, and inconsistent positions taken by the
DOJ and the SEC on the definition of the term "capital" found in the economic provisions of the Constitution.
The opinions issued by SEC legal officers do not have the force and effect of SEC rules and regulations because only the SEC en banc can adopt rules and
regulations. As expressly provided in Section 4.6 of the Securities Regulation Code,12 the SEC cannot delegate to any of its individual Commissioner or staff the
power to adopt any rule or regulation. Further, under Section 5.1 of the same Code, it is the SEC as a collegial body, and not any of its legal officers, that is
empowered to issue opinions and approve rules and regulations. Thus:
4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any department or office of the Commission, an individual Commissioner or
staff member of the Commission exceptits review or appellate authority and its power to adopt, alter and supplement any rule or regulation.
The Commission may review upon its own initiative or upon the petition of any interested party any action of any department or office,
individual Commissioner, or staff member of the Commission.
SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency and shall have the powers and functions
provided by this Code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law, the Financing Company Act and other
existing laws. Pursuant thereto the Commission shall have, among others, the following powers and functions:
xxxx
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise
compliance with such rules, regulations and orders;
x x x x (Emphasis supplied)
Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions that have the effect of SEC rules or regulations is ultra vires. Under
Sections 4.6 and 5.1(g) of the Code, only the SEC en banc can "issue opinions" that have the force and effect of rules or regulations. Section 4.6 of the Code bars
the SEC en banc from delegating to any individual Commissioner or staff the power to adopt rules or regulations. In short, any opinion of individual
Commissioners or SEC legal officers does not constitute a rule or regulation of the SEC.
The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its individual commissioners or legal staff, is empowered to issue opinions
which have the same binding effect as SEC rules and regulations, thus:
JUSTICE CARPIO:
So, under the law, it is the Commission En Banc that can issue an
SEC Opinion, correct?
COMMISSIONER GAITE:13
Thats correct, Your Honor.
JUSTICE CARPIO:

Can the Commission En Banc delegate this function to an SEC officer?


COMMISSIONER GAITE:
Yes, Your Honor, we have delegated it to the General Counsel.
JUSTICE CARPIO:
It can be delegated. What cannot be delegated by the Commission En Banc to a commissioner or an individual employee of the
Commission?
COMMISSIONER GAITE:
Novel opinions that [have] to be decided by the En Banc...
JUSTICE CARPIO:
What cannot be delegated, among others, is the power to adopt or amend rules and regulations, correct?
COMMISSIONER GAITE:
Thats correct, Your Honor.
JUSTICE CARPIO:
So, you combine the two (2), the SEC officer, if delegated that power, can issue an opinion but that opinion does not constitute
a rule or regulation, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, all of these opinions that you mentioned they are not rules and regulations, correct?
COMMISSIONER GAITE:
They are not rules and regulations.
JUSTICE CARPIO:
If they are not rules and regulations, they apply only to that particular situation and will not constitute a precedent, correct?
COMMISSIONER GAITE:
Yes, Your Honor.14 (Emphasis supplied)
Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf of the SEC, has adopted even the
Grandfather Rule in determining compliance with the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic
activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any circumvention of the required Filipino "ownership and control," is laid
down in the 25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural resources. Necessarily, therefore, the Rule
interpreting the constitutional provision should not diminish that right through the legal fiction of corporate ownership and control. But the constitutional
provision, as interpreted and practiced via the 1967 SEC Rules, has favored foreigners contrary to the command of the Constitution. Hence, the Grandfather Rule
must be applied to accurately determine the actual participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or
business.
Compliance with the constitutional limitation(s) on engaging in nationalized activities must be determined by ascertaining if 60% of the investing
corporations outstanding capital stock is owned by "Filipino citizens", or as interpreted, by natural or individual Filipino citizens. If such
investing corporation is in turn owned to some extent by another investing corporation, the same process must be observed. One must not stop

until the citizenships of the individual or natural stockholders of layer after layer of investing corporations have been established, the very
essence of the Grandfather Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule. In one of the discussions on what is now
Article XII of the present Constitution, the framers made the following exchange:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in
Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with the question: Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation? Will the Committee
please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who provided us a
draft. The phrase that is contained here which we adopted from the UP draft is 60 percent of voting stock.
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock
shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another corporation, say, a corporation with
60-40 percent equity invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the
grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)
This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership requirement in favor of Filipino citizens in the Constitution to engage in
certain economic activities applies not only to voting control of the corporation, but also to the beneficial ownership of the corporation. Thus, in our 28 June
2011 Decision we stated:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the Constitution. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is required . The legal and beneficial ownership of 60 percent of the outstanding capital
stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate. Otherwise, the corporation is "considered as non-Philippine
national[s]." (Emphasis supplied)
Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a corporation is a "Philippine national."
The interpretation by legal officers of the SEC of the term "capital," embodied in various opinions which respondents relied upon, is merely preliminary and an
opinion only of such officers. To repeat, any such opinion does not constitute an SEC rule or regulation. In fact, many of these opinions contain a disclaimer which
expressly states: "x x x the foregoing opinion is based solely on facts disclosed in your query and relevant only to the particular issue raised therein and shall not
be used in the nature of a standing rule binding upon the Commission in other cases whether of similar or dissimilar circumstances ."16 Thus, the opinions
clearly make a caveat that they do not constitute binding precedents on any one, not even on the SEC itself.
Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are neither conclusive nor controlling and thus, do not bind the Court. It is
hornbook doctrine that any interpretation of the law that administrative or quasi-judicial agencies make is only preliminary, never conclusive on the Court. The
power to make a final interpretation of the law, in this case the term "capital" in Section 11, Article XII of the 1987 Constitution, lies with this Court, not with any
other government entity.
In his motion for reconsideration, the PSE President cites the cases of National Telecommunications Commission v. Court of Appeals17 and Philippine Long
Distance Telephone Company v. National Telecommunications Commission18 in arguing that the Court has already defined the term "capital" in Section 11, Article
XII of the 1987 Constitution.19
The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court of Appeals20 andPhilippine Long Distance Telephone Company v.
National Telecommunications Commission,21 the Court did not define the term "capital" as found in Section 11, Article XII of the 1987 Constitution. In fact,
these two cases never mentioned, discussed or cited Section 11, Article XII of the Constitution or any of its economic provisions , and thus cannot serve as
precedent in the interpretation of Section 11, Article XII of the Constitution. These two cases dealt solely with the determination of the correct regulatory fees
under Section 40(e) and (f) of the Public Service Act, to wit:
(e) For annual reimbursement of the expenses incurred by the Commission in the supervision of other public services and/or in the regulation or fixing of their
rates, twenty centavos for each one hundred pesos or fraction thereof, of the capital stock subscribed or paid, or if no shares have been issued, of the capital
invested, or of the property and equipment whichever is higher.
(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos or fraction thereof, of the increased capital. (Emphasis
supplied)

The Courts interpretation in these two cases of the terms "capital stock subscribed or paid," "capital stock" and "capital" does not pertain to, and cannot control,
the definition of the term "capital" as used in Section 11, Article XII of the Constitution, or any of the economic provisions of the Constitution where the term
"capital" is found. The definition of the term "capital" found in the Constitution must not be taken out of context. A careful reading of these two cases reveals that
the terms "capital stock subscribed or paid," "capital stock" and "capital" were defined solely to determine the basis for computing the supervision and regulation
fees under Section 40(e) and (f) of the Public Service Act.
III.
Filipinization of Public Utilities
The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land, embodies the ideals that the Constitution intends to achieve.22 The
Preamble reads:
We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just and humane society, and establish a Government that shall embody
our ideals and aspirations, promote the common good, conserve and develop our patrimony, and secure to ourselves and our posterity, the blessings of
independence and democracy under the rule of law and a regime of truth, justice, freedom, love, equality, and peace, do ordain and promulgate this Constitution.
(Emphasis supplied)
Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policy the development of a national economy " effectively controlled"
by Filipinos:
Section 19. The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.
Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:
Section 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates, reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may
prescribe, certain areas of investments. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly
owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified
Filipinos.
The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals
and priorities.23
Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the Philippines or to corporations or associations at least sixty per
centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments." Thus, in numerous laws
Congress has reserved certain areas of investments to Filipino citizens or to corporations at least sixty percent of the "capital" of which is owned by Filipino
citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850;
(3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic
Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D.
No. 1521.
With respect to public utilities, the 1987 Constitution specifically ordains:
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such
citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens
of the Philippines. (Emphasis supplied)
This provision, which mandates the Filipinization of public utilities, requires that any form of authorization for the operation of public utilities shall be granted
only to "citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is
owned by such citizens." "The provision is [an express] recognition of the sensitive and vital position of public utilities both in the national economy and for
national security."24
The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1) Filipino citizens, or (2) corporations or associations at least 60
percent of whose "capital" is owned by Filipino citizens. Hence, in the case of individuals, only Filipino citizens can validly own and operate a public utility. In the
case of corporations or associations, at least 60 percent of their "capital" must be owned by Filipino citizens. In other words, under Section 11, Article XII of the
1987 Constitution, to own and operate a public utility a corporations capital must at least be 60 percent owned by Philippine nationals.
IV.
Definition of "Philippine National"
Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress enacted Republic Act No. 7042 or the Foreign Investments Act of
1991 (FIA), as amended, which defined a "Philippine national" as follows:
SEC. 3. Definitions. - As used in this Act:
a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock outstanding and entitled to vote
is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a

Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty
percent (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors of each of both corporations must be citizens of the
Philippines, in order that the corporation, shall be considered a "Philippine national." (Boldfacing, italicization and underscoring supplied)
Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen, or a domestic corporation at least "60% of the capital stock
outstanding and entitled to vote" is owned by Philippine citizens.
The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided in its predecessor statute, Executive Order No. 226 or
the Omnibus Investments Code of 1987,25 which was issued by then President Corazon C. Aquino. Article 15 of this Code states:
Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership or association wholly-owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled to vote is owned
and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino
stockholders own stock in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be
owned and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of both corporations must be citizens
of the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing, italicization and underscoring supplied)
Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is not a Philippine national x x x shall do business
x x x in the Philippines x x x without first securing from the Board of Investments a written certificate to the effect that such business or economic activity x x x
would not conflict with the Constitution or laws of the Philippines."27Thus, a "non-Philippine national" cannot own and operate a reserved economic activity like
a public utility. This means, of course, that only a "Philippine national" can own and operate a public utility.
In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code of 1987 was a reiteration of the meaning of such term as
provided in Article 14 of the Omnibus Investments Code of 1981,28 to wit:
Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled to vote is owned
and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino
stockholders own stock in a registered enterprise, at least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be
owned and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of Directors of both corporations must be citizens
of the Philippines in order that the corporation shall be considered a Philippine national. (Boldfacing, italicization and underscoring supplied)
Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not a Philippine national x x x shall do business x x x in the
Philippines x x x without first securing a w