Commonwealth Act No.

120 was enacted creating the National Power Corporation, a public

corporation, to develop hydraulic power from all water sources in the Philippines.

The main source of funds for the NPC was the flotation of bonds in the capital markets4 and these
bonds

such bonds were exempt from payment of all taxes in order for the corporation to facilitate
payment of its indebtedness

Commonwealth Act 120 created NAPOCOR as a public corporation to undertake the

development of hydraulic power and the production of power from other sources. RA 358 granted
NAPOCOR tax and duty exemption privileges. RA 6395 revised the charter of the NAPOCOR,
tasking it to carry out the policy of the national electrification and provided in detail
NAPOCOR’s tax exceptions. PD 380 specified that NAPOCOR’s exemption includes all taxes,
etc. imposed “directly or indirectly.” PD 938 dated May 27, 1976 further amended the aforesaid
provision by integrating the tax exemption in general terms under one paragraph.

There was a series of withdrawal and restoration of NPC’s tax exemption

RA 358, RA 6395 and PD 380 expressly grant NPC exemptions from all taxes whether direct or
indirect. In 1984, however, PD 1931 and EO 93 withdrew all tax exemptions granted to all
GOCCs including the NPC but granted the President and/or the Secretary of Finance by
recommendation of the FIRB the power to restore certain tax exemptions.

Pursuant to the latter law, FIRB issued a resolution restoring the tax and duty exemption
privileges of the NPC. The actions of the respondents were thus questioned by the petitioner by
this petition

ISSUE: Whether NPC is exempted to pay Indirect Income Tax?

HELD: YES

Classifications or kinds of Taxes: According to Persons who pay or who bear the burden:

a. Direct Tax — that where the person supposed to pay the tax really pays it. WITHOUT
transferring the burden to someone else.
Examples: Individual income tax, corporate income tax, transfer taxes (estate tax, donor's tax),
residence tax, immigration tax

b. Indirect Tax — that where the tax is imposed upon goods BEFORE reaching the consumer
who ultimately pays for it, not as a tax, but as a part of the purchase price.

Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT) and the tariff
and customs indirect taxes (import duties, special import tax and other dues)

NAPOCOR is a non-profit public corporation created for the general good and welfare, and
wholly owned by the government of the Republic of the Philippines. From the very beginning of
the corporation’s existence, NAPOCOR enjoyed preferential tax treatment “to enable the
corporation to pay the indebtedness and obligation” and effective implementation of the policy
enunciated in Section 1 of RA 6395.
A chronological review of the NPC laws will show that it has been the lawmaker's intention that
the NPC was to be completely tax exempt from all forms of taxes — direct and indirect.

P.D. No. 380 added phrase "directly or indirectly,"

P.D. No. 938 amended into “exempt from the payment of ALL FORMS OF taxes”

President Marcos must have considered all the NPC statutes from C.A. No. 120 up to P.D. No.
938.

One common theme in all these laws is that the NPC must be enable to pay its indebtedness 56
which, as of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any one time, and
U$4 Billion in total foreign loans at any one time. The NPC must be and has to be exempt from
all forms of taxes if this goal is to be achieved.

The tax exemption stood as is — with the express mention of "direct and indirect" tax
exemptions. Lawmakers wanted the NPC to be exempt from ALL FORMS of taxes — direct and
indirect. Therefore, that NPC had been granted tax exemption privileges for both direct and
indirect taxes under P.D. No. 938.

The Court rules and declares that the oil companies which supply bunker fuel oil to NPC have to
pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of indirect
taxation, the economic burden of such taxation is expected to be passed on through the channels
of commerce to the user or consumer of the goods sold. Because, however, the NPC has been
exempted from both direct and indirect taxation, the NPC must be held exempted from absorbing
the economic burden of indirect taxation.
From the preamble of PD 938, it is evident that the provisions of PD 938 were not intended to be
interpreted liberally so as to enhance the tax exempt status of NAPOCOR.

It is recognized that the rule on strict interpretation does not apply in the case of exemptions in
favor of government political subdivision or instrumentality. In the case of property owned by the
state or a city or other public corporations, the express exception should not be construed with the
same degree of strictness that applies to exemptions contrary to the policy of the state, since as to
such property “exception is the rule and taxation the exception.”
CIR v. Gotamco

World Health Organization (WHO for short) is an international organization which has a regional
office in Manila.

As an international organization, it enjoys privileges and immunities which are defined more
specifically in the Host Agreement entered into between the Republic of the Philippines and the
said Organization on July 22, 1951.

Section 11 of that Agreement provides, inter alia, that it is exempt from all direct and indirect
taxes. It is understood, however, that the Organization will not claim exemption from taxes which
are, in fact, no more than charges for public utility services

WHO) decided to construct a building to house its offices, as well as the other United
Nations Offices in Manila. Inviting bids for the construction of the building, the WHO informed
the bidders of its tax exemptions.

The contract was awarded to John Gotamco and sons. The Commissioner of Internal Revenue
sent a letter of demand to Gotamco demanding payment of P 16,970.40, representing the 3%
contractor's tax plus surcharges on the gross receipts it received from the WHO in the
construction of the latter's building.

The WHO issued a certification that Gotamco should be exempted, but the Commissioner insisted
on the tax. Raised in the Court of Tax Appeals, the Court ruled in favor of Gotamco

ISSUE:
Is Gotamco liable for the tax?

Ruling:
No. Direct taxes are those that are demanded from the very person who, it is intended or desired,
should pay them; while indirect taxes are those that are demanded in the first instance from one
person in the expectation and intention that he can shift the burden to someone else.

Petitioner claims that under the authority of the Philippine Acetylene Company versus
Commissioner of Internal Revenue, et al., 3 the 3% contractor's tax fans directly on Gotamco and
cannot be shifted to the WHO. The Court of Tax Appeals, however, held that the said case is not
controlling in this case, since the Host Agreement specifically exempts the WHO from "indirect
taxes." We agree. The Philippine Acetylene case involved a tax on sales of goods which under the
law had to be paid by the manufacturer or producer; the fact that the manufacturer or producer
might have added the amount of the tax to the price of the goods did not make the sales tax "a tax
on the purchaser." The Court held that the sales tax must be paid by the manufacturer or producer
even if the sale is made to tax-exempt entities like the National Power Corporation, an agency of
the Philippine Government, and to the Voice of America, an agency of the United States
Government.

The Host Agreement, in specifically exempting the WHO from "indirect taxes," contemplates
taxes which, although not imposed upon or paid by the Organization directly, form part of the
price paid or to be paid by it. This is made clear in Section 12 of the Host Agreement which
provides:
 While the Organization will not, as a general rule, in the case of minor purchases,
claim exemption from excise duties, and from taxes on the sale of movable and
immovable property which form part of the price to be paid, nevertheless, when
the Organization is making important purchases for official use of property on
which such duties and taxes have been charged or are chargeable the Government
of the Republic of the Philippines shall make appropriate administrative
arrangements for the remission or return of the amount of duty or tax. (Emphasis
supplied).

The above-quoted provision, although referring only to purchases made by the WHO, elucidates
the clear intention of the Agreement to exempt the WHO from "indirect" taxation.

The certification issued by the WHO, dated January 20, 1960, sought exemption of the contractor,
Gotamco, from any taxes in connection with the construction of the WHO office building. The
3% contractor's tax would be within this category and should be viewed as a form of an "indirect
tax" On the Organization, as the payment thereof or its inclusion in the bid price would have
meant an increase in the construction cost of the building.

Accordingly, finding no reversible error committed by the respondent Court of Tax Appeals, the
appealed decision is hereby affirmed.

(Herein, the contractor’s tax is payable by the contractor but it is the owner of the building that
shoulders the burden of the tax because the same is shifted by the contractor to the owner as a
matter of self-preservation. Such tax is an “indirect tax” on the organization, as the payment
thereof or its inclusion in the bid price would have meant an increase in the construction cost of
the building.

Hence, WHO’s exemption from “indirect taxes” implies that Gotamco is exempt from
contractor’s tax. )
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
AMERICAN RUBBER COMPANY and COURT OF TAX APPEALS

Facts:

Petitioner, American Rubber Company, a domestic corporation, from January 1, 1955 to

December 1, 1958, was engaged in producing rubber which it owned and operated in Latuan,
Isabela, City of Basilan

After paying under protest, the petitioner claimed refund of the sales taxes paid by it on the
ground that under section 188, paragraph b, of the Internal Revenue Code, as amended,1 its
rubber products were agricultural products exempt from sales tax, and upon refusal of the
Commissioner of Internal Revenue, brought the case on appeal to the Court of Tax Appeals
(C.T.A. Nos. 356, 440,, 632).

The respondent Commissioner interposed defenses, denying that petitioner's products were
agricultural ones within the exemption; claiming that there had been no exhaustion of
administrative remedies; and argued that the sales tax having been passed to the buyers during the
period that elapsed from January 1, 1955 to August 2, 1957, the petitioner did not have
personality to demand, sue for and recover the aforesaid sales taxes, plus interest.

In its decision, now under appeal, the Tax Court held Preserved Latex, Flat Bark
Rubber, and 3X Brown Crepe to be agricultural products, "because the labor
employed in the processing thereof is agricultural labor", and hence, the sales of
such products were exempt from sales tax,

But declared Pale Crepe No. 1, Ribbed Smoked Sheets Nos. 1 and 3, as well as 2X
Brown Crepe (which is obtained from rolling excess pieces of Smoked Sheets) to be
manufactured products, sales of which were subject to the tax.

Issue:

(1) Whether the plaintiff's rubber products above described should be considered agricultural or
manufactured for purposes of their subjection to the sales tax;

(2) Whether plaintiff is or is not entitled to recover the sales tax paid by it, but passed on to and
paid by the buyers of its products; and

(3) Whether plaintiff is or is not entitled to interest on the sales tax paid by it under protest, in case
recovery thereof is allowed.

Ruling:

here is no proof that the tax paid by plaintiff is the very money paid by its customers. Where the tax money
paid by the plaintiff came from is really no concern of the Government. Anyway, once recovered, the plaintiff
must hold the refund taxes in trust for the individual purchasers who advanced payment thereof, and whose
names must appear in plaintiff’s records.
It would need to tend to perpetuate illegal taxation; for the individual customers to whom the tax is ultimately
shifted will ordinarily not care to sue for its recovery, in view of the small amount paid by each and the high
cost of litigation for the reclaiming of an illegal tax. Insofar, therefore, as it favors the imposition, collection
and retention of illegal taxes, and encourages a multiplicity of suits, the tax court’s ruling under appeal
violates morals and public policy.

The first issue, in our opinion, is governed by the principles laid down by this Court in Philippine
Packing Corporation vs. Collector of Internal Revenue, 100 Phil. 545 et seq. We there ruled that
the exemption from sales tax established in section 188 (b) of the Internal Revenue Tax Code in
favor of sales of agricultural products, whether in their original form or not, made by the producer
or owner of the land where produced is not taken away merely because the produce undergoes
processing at the hand of said producer or owner for the purpose of working his product into a
more convenient and valuable form suited to meet the demand of an expanded market; that the
exemption was not designed in favor of the small agricultural producer, already exempted by the
subsequent paragraphs of the same section 188, but that said exemption is not incompatible with
large scale agricultural production that incidentally required resort to preservative processes
designed to increase or prolong marketability of the product.

In the case before us, the parties have stipulated that fresh latex directly obtained from the rubber
tree, which is clearly an agricultural product, becomes spoiled after only two hours. It has,
therefore, a severely limited marketability. The addition of ammonia prevents its deterioration for
about a month, and we see no reason why this preservative process should wrest away from the
preserved latex the protective mantle of the tax exemption.

Taking also into account the great distance that separates the plaintiff's plantation from the main
rubber processing centers in Japan, the United States and Europe, and the difficulty in handling
products in liquid form, it can be discerned without difficulty that preserved, latex, with its 30-
day spoilage limit, is still severely handicapped for export and dollar earning purposes.

To overcome these shortcomings, and extend its useful life almost indefinitely, it becomes
necessary to separate and solidify the rubber granules diffused in the latex, and hence, according
to the stipulation of facts and the evidence, acetic acid is added to hasten coagulation. There is
nothing on record to show that the acetic acid in way produces anything that was not originally in
the source, the liquid latex. The coagulum is then rolled and compacted and afterwards air dried
to make Pale Crepe(1 and 2), or else cured and smoked to produce rubber sheets. Once again we
see nothing in this processing to alter the agricultural nature of the result; what takes place is
merely an accelerated coagulation and dessication that would naturally occur anyway, only within
a longer period of time, coupled with greater spoilage of the product.

Thus the operations carried out by plaintiff appear to be purely preservative in nature, made
necessary, by its production of fresh rubber latex in a large scale. they are purely incidental to the
latter, just as the canning of skinned and cored pineapples in syrup was held to be incidental to
the large-scale cultivation of the fruit in the Philippine Packing Corporation case (ante). Being
necessary to suit the product to the demands of the market, the operations in both cases should
lead to the same result, non-taxability of the sales of the respective agricultural products. In not so
holding, the Tax Court was in error.
Even less justifiable is the position taken by the Revenue Commissioner in his appeal against the
finding of the Tax Court that Flat Bark 3X Brown Crepe rubber are agricultural products.
According to the record, these sheets result from the drippings and waste rubber that have dried
naturally, that are rolled and compacted into the desired thickness, without any other processing.

As to 2X Brown Crepe which is compacted out of the trimmings and waste left over from the
production of ribbed smoked sheets, no reason is seen why it should be treated differently from
the ribbed smoked sheets themselves.

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

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

But, as pointed out in the Philippine Packing Corporation case, this definition is not applicable to
the exemption of agricultural products, "whether in their original form or not". The use of this last
phrase in the statute clearly indicates that the agricultural product may be altered in texture or
form without being divested of the exemption (cas cit. 100 Phil., p. 548).

The exception would be sales of agricultural products while Republic Act No. 1612 was in effect
because under this Act the freedom from sales tax became restricted to agricultural products "in
their original form" only. So that plaintiff's sales from August 24, 1956 (approval of Republic Act
1612) to June 22, 1957 (when Republic Act 1856 became effective and restored the exemption to
agricultural products "whether in their original form or not") became properly taxable. Under
paragraphs (A)2 and B(4) of the additional stipulation of facts (CTA Rec. pp. 261-262, G.R. L-
19801), the sales tax properly collected during this period of plaintiff's transactions amounted to
P18,187.19 from August 24 to December 31, 1956; and P18,888.28 from January 1 to June 21,
1957, or a total of P37,075.47. This last amount is, therefore non-recoverable.2

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

The basic ruling is that of Medina vs. City of Baguio, supra, where this Court affirmed the ruling
of the court of First Instance to the effect that —

"The amount collected from the theatergoers as additional price of admission tickets is
not the property of plaintiffs or any of them. It is paid by the public. If anybody has the
right to claim it, it is those who paid it. Only owners of property has the right to claim
said property. The cine owner acted as mere agents of the city in collecting additional
 price charged in the sale of admission tickets." (Medina vs. City of Baguio, 91 Phil. 854)
(Emphasis supplied)

We agree with the plaintiff-appellant that the Medina ruling is not applicable to the present case,
since the municipal taxes therein imposed were taxes on the admission tickets sold, so that, in
effect, they were levies upon the theatergoers who bought them; so much so that (as the decision
expressly ruled) the tax was collected by the theater owners as agents of the respective municipal
treasurers. This does not obtain in the case at bar. The Medina ruling was merely followed in
Rojas & Bros. vs. Cavite, supra; and in Mendoza, Santos & Co. vs. Municipality of Meycawayan,
94 Phil. 1047.

By contrast with the municipal taxes involved in the preceding cases, the sales tax is by law
imposed directly, not on the thing sold, but on the act (sale) of the manufacturer, producer or
importer (Op. of the Secretary of Justice, June 15, 1946; 47 C.J.S., p. 1141), who is exclusively
made liable for its timely payment. There is no proof that the tax paid by plaintiff is the very
money paid by its customers. Where the tax money paid by the plaintiff came from is really no
concern of the Government, but solely a matter between the plaintiff and its customers. Anyway,
once recovered, the plaintiff must hold the refund taxes in trust for the individual purchasers who
advanced payment thereof, and whose names must appear in plaintiff's records.

Moreover, the separate billing of the sales tax in appellant's invoices was a direct result of the
respondent Commissioner's General Circular No. 440, providing that —

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

In other words, the separate itemization of the sales tax in the invoices was permitted to avoid the
taxpayer being compelled to pay a sales tax on the tax itself. It does not seem either just or proper
that a step suggested by the Internal Revenue authorities themselves to protect the taxpayer from
paying a double tax should now be used to block his action to recover taxes collected without
legal sanction.

Finally, a more important reason that militates against extensive and indiscriminate application of
the Medina vs. City of Baguio ruling is that it would tend to perpetuate illegal taxation; for the
individual customers to whom the tax is ultimately shifted will ordinarily not care to sue for its
recovery, in view of the small amount paid by each and the high cost of litigation for the
reclaiming of an illegal tax. In so far, therefore, as it favors the imposition, collection and
retention of illegal taxes, and encourages a multiplicity of suits, the Tax Court's ruling under
appeal violates morals and public policy.

The plaintiff Company also urges that the refund of the taxes should include interest thereon.
While this Court has allowed recovery of interest in some cases, it has done so only in cases of
patent arbitrariness on the part of the Revenue authorities; and in this instance we agree with the
Tax Court that no such patent arbitrariness has been shown.

THEREFORE, REFUND IS PROPER

PHILIPPINE ACETYLENE CO., INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS

FACTS:

Petitioner is a corporation engaged in the manufacture and sale of oxygen and

acetylene gases.

it made various sales of its products to the National Power Corporation, an agency of
the Philippine Government, and to the Voice of America

sales to the NPC amounted to P145,866.70, while those to the VOA amounted to
P1,683

on account of which the respondent Commission of Internal Revenue assessed

against, and demanded from, the petitioner the payment of P12,910.60 as deficiency
sales tax and surcharge

petitioner denied liability for the payment of the tax on the ground that both the
NPC and the VOA are exempt from taxation

CTA ruled:

tax on the sale of articles or goods in section 186 of the Code is a tax on the
manufacturer and not on the buyer with the result that the "petitioner
Philippine Acetylene Company, the manufacturer or producer of oxygen and
acetylene gases sold to the National Power Corporation, cannot claim
exemption from the payment of sales tax simply because its buyer — the
National Power Corporation — is exempt from the payment of all taxes.

“With respect to the sales made to the VOA, the court held that goods purchased by
the American Government or its agencies from manufacturers or producers
are exempt from the payment of the sales tax under the agreement between the
Government of the Philippines and that of the United States, provided the purchases
are supported by certificates of exemption, and since purchases amounting to only
P558, out of a total of P1,683, were not covered by certificates of exemption, only
the sales in the sum of P558 were subject to the payment of tax. Accordingly, the
assessment was revised and the petitioner's liability was reduced from P12,910.60,
as assessed by the respondent commission, to P12,812.16.1
petitioner appealed to this Court

ISSUE:
Is Philippine Acetylene Co. liable for tax?

Ruling:

Yes. Sales tax are paid by the manufacturer or producer who must make a true and complete return of the
amount of his, her or its gross monthly sales, receipts or earnings or gross value of output actually removed
from the factory or mill, warehouse and to pay the tax due thereon. The tax imposed by Section 186 of the
Tax Code is a tax on the manufacturer or producer and not a tax on the purchaser except probably in a very
remote and inconsequential sense. Accordingly, its levy on the sales made to tax- exempt entities like the
Napocor is permissible.

The NPC enjoys tax exemption by virtue of an act2 of Congress which provides as follows:

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

It is contended that the immunity thus given to the NPC would be impaired by the imposition of a tax on
sales made to it because while the tax is paid by the manufacturer or producer, the tax is ultimately shifted
by the latter (producer) to the former (manufacturer). The petitioner invokes in support of its position a
1954 opinion of the Secretary of Justice which ruled that the NPC is exempt from the payment of all taxes
"whether direct or indirect."

We begin with an analysis of the nature of the percentage (sales) tax imposed by section 186 of the Code. Is
it a tax on the producer or on the purchaser? Statutes of the type under consideration, which impose a tax
on sales, have been described as "act[s] with schizophrenic symptoms," 3 as they apparently have two faces
— one that of a vendor tax, the other, a vendee tax. Fortunately for us the provisions of the Code throw
some light on the problem. The Code states that the sales tax "shall be paid by the manufacturer or
producer,"4 who must "make a true and complete return of the amount of his, her or its gross monthly sales,
receipts or earnings or gross value of output actually removed from the factory or mill warehouse and
within twenty days after the end of each month, pay the tax due thereon." 5

But it is argued that a sales tax is ultimately passed on to the purchaser, and that, so far as the purchaser is
an entity like the NPC which is exempt from the payment of "all taxes, except real property tax," the tax
cannot be collected from sales.

But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the
tax is largely a matter of economics.15 Then it can no longer be contended that a sales tax is a tax on the
purchaser.

We therefore hold that the tax imposed by section 186 of the National Internal Revenue Code is a tax on
the manufacturer or producer and not a tax on the purchaser except probably in a very remote and
inconsequential sense. Accordingly its levy on the sales made to tax-exempt entities like the NPC is
permissible.

II
On the other hand, there is nothing in the language of the Military Bases Agreement to warrant the general
exemption granted by General Circular V-41 (1947). Thus, the expansive construction of the tax exemption
is void; and the sales to the VOA are subject to the payment of percentage taxes under Section 186 of the
Tax Code. Therefore, tax exemption is strictly construed and exemption will not be held to conferred unless
the terms under which it is granted clearly and distinctly show that such was the intention.

This conclusion should dispose of the same issue with respect to sales made to the VOA, except that a
claim is here made that the exemption of such sales from taxation rests on stronger grounds. Even the Court
of Tax Appeals appears to share this view as is evident from the following portion of its decision:

With regard to petitioner's sales to the Voice of America, it appears that the petitioner and the
respondent are in agreement that the Voice of America is an agency of the United States
Government and as such, all goods purchased locally by it directly from manufacturers or
producers are exempt from the payment of the sales tax under the provisions of the agreement
between the Government of the Philippines and the Government of the United States, (See
Commonwealth Act No. 733) provided such purchases are supported by serially numbered
Certificates of Tax Exemption issued by the vendee-agency, as required by General Circular No.
V-41, dated October 16, 1947. . . .

The circular referred to reads:

Goods purchased locally by U.S. civilian agencies directly from manufacturers, producers or
importers shall be exempt from the sales tax.

It was issued purportedly to implement the Agreement between the Republic of the Philippines and the
United States of America Concerning Military Bases,16 but we find nothing in the language of the
Agreement to warrant the general exemption granted by that circular.

The pertinent provisions of the Agreement read:

ARTICLE V. — Exemption from Customs and Other Duties

No import, excise, consumption or other tax, duty or impost shall be charged on material,
equipment, supplies or goods, including food stores and clothing, for exclusive use in the
construction, maintenance, operation or defense of the bases, consigned to, or destined for, the
United States authorities and certified by them to be for such purposes.

ARTICLE XVIII.—Sales and Services Within the Bases

1. It is mutually agreed that the United States Shall have the right to establish on bases, free of all
licenses; fees; sales, excise or other taxes, or imposts; Government agencies, including
concessions, such as sales commissaries and post exchanges, messes and social clubs, for the
exclusive use of the United States military forces and authorized civilian personnel and their
families. The merchandise or services sold or dispensed by such agencies shall be free of all taxes,
duties and inspection by the Philippine authorities. . . .

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

It is a familiar learning in the American law of taxation that tax exemption must be strictly construed and
that the exemption will not be held to be conferred unless the terms under which it is granted clearly and
distinctly show that such was the intention of the parties.17 Hence, in so far as the circular of the Bureau of
Internal Revenue would give the tax exemptions in the Agreement an expansive construction it is void.

We hold, therefore, that sales to the VOA are subject to the payment of percentage taxes under section 186
of the Code. The petitioner is thus liable for P12,910.60, computed as follows: