Resident Foreign Corporation Corporation of Japan, the 10% final intercorporate dividend tax and the 15%

branch profit remittance tax paid thereon, is shown below:

G.R. No. 76573 September 14, 1989
1981 FIRST QUARTER THIRD QUARTER TOTAL OF FIRST
MARUBENI CORPORATION (formerly Marubeni — Iida, Co., Ltd.), petitioner, (three months (three months and THIRD quarters
vs. ended 3.31.81) (In ended 9.30.81)
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX Pesos)
APPEALS, respondents.
Cash Dividends Paid 849,720.44 849,720.00 1,699,440.00
Melquiades C. Gutierrez for petitioner.
10% Dividend Tax 84,972.00 84,972.00 169,944.00
Withheld
The Solicitor General for respondents.
Cash Dividend net of 764,748.00 764,748.00 1,529,496.00
10% Dividend Tax
Withheld
FERNAN, C.J.:
15% Branch Profit 114,712.20 114,712.20 229,424.40 3
Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly Remittance Tax
organized and existing under the laws of Japan and duly licensed to engage in Withheld
business under Philippine laws with branch office at the 4th Floor, FEEMI Building,
Aduana Street, Intramuros, Manila seeks the reversal of the decision of the Court Net Amount Remitted 650,035.80 650,035.80 1,300,071.60
of Tax Appeals 1dated February 12, 1986 denying its claim for refund or tax credit in to Petitioner
the amount of P229,424.40 representing alleged overpayment of branch profit
remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. of Manila The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of
(AG&P). P114,712.20 for the first quarter of 1981 were paid to the Bureau of Internal
Revenue by AG&P on April 20, 1981 under Central Bank Receipt No. 6757880.
The following facts are undisputed: Marubeni Corporation of Japan has equity Likewise, the 10% final dividend tax of P84,972 and the 15% branch profit
investments in AG&P of Manila. For the first quarter of 1981 ending March 31, remittance tax of P114,712 for the third quarter of 1981 were paid to the Bureau of
AG&P declared and paid cash dividends to petitioner in the amount of P849,720 Internal Revenue by AG&P on August 4, 1981 under Central Bank Confirmation
and withheld the corresponding 10% final dividend tax thereon. Similarly, for the Receipt No. 7905930. 4
third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as
cash dividends to petitioner and withheld the corresponding 10% final dividend tax Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15%
thereon. 2 branch profit remittance on cash dividends declared and remitted to petitioner at
its head office in Tokyo in the total amount of P229,424.40 on April 20 and August
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, 4, 1981. 5
Japan, net not only of the 10% final dividend tax in the amounts of P764,748 for the
first and third quarters of 1981, but also of the withheld 15% profit remittance tax In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip,
based on the remittable amount after deducting the final withholding tax of 10%. A Gorres, Velayo and Company, sought a ruling from the Bureau of Internal Revenue
schedule of dividends declared and paid by AG&P to its stockholder Marubeni on whether or not the dividends petitioner received from AG&P are effectively
connected with its conduct or business in the Philippines as to be considered
branch profits subject to the 15% profit remittance tax imposed under Section 24
(b) (2) of the National Internal Revenue Code as amended by Presidential Decrees
Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as amended,
only profits remitted abroad by a branch office to its head
office which are effectively connected with its trade or business
in the Philippines are subject to the 15% profit remittance tax.
To be effectively connected it is not necessary that the income
be derived from the actual operation of taxpayer-corporation's
trade or business; it is sufficient that the income arises from the
business activity in which the corporation is engaged. For
example, if a resident foreign corporation is engaged in the
buying and selling of machineries in the Philippines and invests
in some shares of stock on which dividends are subsequently
received, the dividends thus earned are not considered
'effectively connected' with its trade or business in this country.
(Revenue Memorandum Circular No. 55-80).
In the instant case, the dividends received by Marubeni from
AG&P are not income arising from the business activity in which
Marubeni is engaged. Accordingly, said dividends if remitted
abroad are not considered branch profits for purposes of the
15% profit remittance tax imposed by Section 24 (b) (2) of the
Tax Code, as amended . . . 6
Consequently, in a letter dated September 21, 1981 and filed with the
Commissioner of Internal Revenue on September 24, 1981, petitioner claimed for
the refund or issuance of a tax credit of P229,424.40 "representing profit tax
remittance erroneously paid on the dividends remitted by Atlantic Gulf and Pacific
Co. of Manila (AG&P) on April 20 and August 4, 1981 to ... head office in Tokyo. 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied
petitioner's claim for refund/credit of P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to
the 15% profit remittance tax as the same were not income
earned by a Philippine Branch of Marubeni Corporation of
Japan; and neither is it subject to the 10% intercorporate
dividend tax, the recipient of the dividends, being a non-
resident stockholder, nevertheless, said dividend income is
subject to the 25 % tax pursuant to Article 10 (2) (b) of the Tax
Treaty dated February 13, 1980 between the Philippines and
Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni
Corporation, Japan is subject to 25 % tax, and that the taxes
withheld of 10 % as intercorporate dividend tax and 15 % as
profit remittance tax totals (sic) 25 %, the amount refundable
offsets the liability, hence, nothing is left to be refunded. 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the
refund by the Commissioner of Internal Revenue in its assailed judgment of
February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court
explained:
Whatever the dialectics employed, no amount of sophistry can
ignore the fact that the dividends in question are income
taxable to the Marubeni Corporation of Tokyo, Japan. The said
dividends were distributions made by the Atlantic, Gulf and
Pacific Company of Manila to its shareholder out of its profits
on the investments of the Marubeni Corporation of Japan, a
non-resident foreign corporation. The investments in the
Atlantic Gulf & Pacific Company of the Marubeni Corporation of
Japan were directly made by it and the dividends on the
investments were likewise directly remitted to and received by
the Marubeni Corporation of Japan. Petitioner Marubeni
Corporation Philippine Branch has no participation or
intervention, directly or indirectly, in the investments and in
the receipt of the dividends. And it appears that the funds
invested in the Atlantic Gulf & Pacific Company did not come
out of the funds infused by the Marubeni Corporation of Japan
to the Marubeni Corporation Philippine Branch. As a matter of
fact, the Central Bank of the Philippines, in authorizing the
remittance of the foreign exchange equivalent of (sic) the
dividends in question, treated the Marubeni Corporation of
 Japan as a non-resident stockholder of the Atlantic Gulf &
Pacific Company based on the supporting documents submitted
to it.
Subject to certain exceptions not pertinent hereto, income is
taxable to the person who earned it. Admittedly, the dividends
under consideration were earned by the Marubeni Corporation
of Japan, and hence, taxable to the said corporation. While it is
true that the Marubeni Corporation Philippine Branch is duly
licensed to engage in business under Philippine laws, such
dividends are not the income of the Philippine Branch and are
not taxable to the said Philippine branch. We see no
significance thereto in the identity concept or principal-agent
relationship theory of petitioner because such dividends are
the income of and taxable to the Japanese corporation in Japan
and not to the Philippine branch. 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent
relationship theory, Marubeni Japan is likewise a resident foreign corporation
subject only to the 10 % intercorporate final tax on dividends received from a
domestic corporation in accordance with Section 24(c) (1) of the Tax Code of 1977
which states:
Dividends received by a domestic or resident foreign
corporation liable to tax under this Code — (1) Shall be subject
to a final tax of 10% on the total amount thereof, which shall be
collected and paid as provided in Sections 53 and 54 of this
Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan, being
a non-resident foreign corporation and not engaged in trade or business in the
Philippines, is subject to tax on income earned from Philippine sources at the rate
of 35 % of its gross income under Section 24 (b) (1) of the same Code which reads:
(b) Tax on foreign corporations — (1) Non-resident
corporations. — A foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to thirty-five
per cent of the gross income received during each taxable year
from all sources within the Philippines as ... dividends ....
but expressly made subject to the special rate of 25% under Article 10(2) (b) of the
Tax Treaty of 1980 concluded between the Philippines and Japan. 11 Thus:
Article 10 (1) Dividends paid by a company which is a resident
of a Contracting State to a resident of the other Contracting
State may be taxed in that other Contracting State.
(2) However, such dividends may also be taxed in the
Contracting State of which the company paying the dividends is
a resident, and according to the laws of that Contracting State,
but if the recipient is the beneficial owner of the dividends the
tax so charged shall not exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in all other
cases.
Central to the issue of Marubeni Japan's tax liability on its dividend income from
Philippine sources is therefore the determination of whether it is a resident or a
non-resident foreign corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in trade
or business" within the Philippines. Petitioner contends that precisely because it is
engaged in business in the Philippines through its Philippine branch that it must be
considered as a resident foreign corporation. Petitioner reasons that since the
Philippine branch and the Tokyo head office are one and the same entity, whoever
made the investment in AG&P, Manila does not matter at all. A single corporate
entity cannot be both a resident and a non-resident corporation depending on the
nature of the particular transaction involved. Accordingly, whether the dividends
are paid directly to the head office or coursed through its local branch is of no
moment for after all, the head office and the office branch constitute but one
corporate entity, the Marubeni Corporation, which, under both Philippine tax and
corporate laws, is a resident foreign corporation because it is transacting business
in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise:
 The general rule that a foreign corporation is the same juridical
entity as its branch office in the Philippines cannot apply here.
This rule is based on the premise that the business of the
foreign corporation is conducted through its branch office,
following the principal agent relationship theory. It is
understood that the branch becomes its agent here. So that
when the foreign corporation transacts business in the
Philippines independently of its branch, the principal-agent
relationship is set aside. The transaction becomes one of the
foreign corporation, not of the branch. Consequently, the
taxpayer is the foreign corporation, not the branch or the
resident foreign corporation.
Corollarily, if the business transaction is conducted through the
branch office, the latter becomes the taxpayer, and not the
foreign corporation. 12
In other words, the alleged overpaid taxes were incurred for the remittance of
dividend income to the head office in Japan which is a separate and distinct income
taxpayer from the branch in the Philippines. There can be no other logical
conclusion considering the undisputed fact that the investment (totalling 283.260
shares including that of nominee) was made for purposes peculiarly germane to
the conduct of the corporate affairs of Marubeni Japan, but certainly not of the
branch in the Philippines. It is thus clear that petitioner, having made this
independent investment attributable only to the head office, cannot now claim the
increments as ordinary consequences of its trade or business in the Philippines and
avail itself of the lower tax rate of 10 %.
But while public respondents correctly concluded that the dividends in dispute
were neither subject to the 15 % profit remittance tax nor to the 10 %
intercorporate dividend tax, the recipient being a non-resident stockholder, they
grossly erred in holding that no refund was forthcoming to the petitioner because
the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax
Convention pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule
in taxation that each tax has a different tax basis. While the tax on dividends is
directly levied on the dividends received, "the tax base upon which the 15 %
branch profit remittance tax is imposed is the profit actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate under
Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. A closer look at the
Treaty reveals that the tax rates fixed by Article 10 are the maximum rates as
reflected in the phrase "shall not exceed." This means that any tax imposable by
the contracting state concerned should not exceed the 25 % limitation and that
said rate would apply only if the tax imposed by our laws exceeds the same. In
other words, by reason of our bilateral negotiations with Japan, we have agreed to
have our right to tax limited to a certain extent to attain the goals set forth in the
Treaty.
Petitioner, being a non-resident foreign corporation with respect to the transaction
in question, the applicable provision of the Tax Code is Section 24 (b) (1) (iii) in
conjunction with the Philippine-Japan Treaty of 1980. Said section provides:
(b) Tax on foreign corporations. — (1) Non-resident
corporations — ... (iii) On dividends received from a domestic
corporation liable to tax under this Chapter, the tax shall be
15% of the dividends received, which shall be collected and
paid as provided in Section 53 (d) of this Code, subject to the
condition that the country in which the non-resident foreign
corporation is domiciled shall allow a credit against the tax due
from the non-resident foreign corporation, taxes deemed to
have been paid in the Philippines equivalent to 20 % which
represents the difference between the regular tax (35 %) on
corporations and the tax (15 %) on dividends as provided in this
Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a non-
resident foreign corporation, as a general rule, is taxed 35 % of its gross income
from all sources within the Philippines. [Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends received
from a domestic corporation (AG&P) on the condition that its domicile state
(Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the
dividends received. This 20 % represents the difference between the regular tax of
35 % on non-resident foreign corporations which petitioner would have ordinarily
paid, and the 15 % special rate on dividends received from a domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in question to be
computed as follows:
 Total cash dividend paid ................P1,699,440.00 Records show that petitioner received notice of the Court of Tax Appeals's decision
less 15% under Sec. 24 denying its claim for refund on April 15, 1986. On the 30th day, or on May 15, 1986
(b) (1) (iii ) .........................................254,916.00 (the last day for appeal), petitioner filed a motion for reconsideration which
------------------ respondent court subsequently denied on November 17, 1986, and notice of which
was received by petitioner on November 26, 1986. Two days later, or on November
Cash dividend net of 15 % tax 28, 1986, petitioner simultaneously filed a notice of appeal with the Court of Tax
due petitioner ...............................P1,444.524.00 Appeals and a petition for review with the Supreme Court. 14 From the foregoing, it
less net amount is evident that the instant appeal was perfected well within the 30-day period
actually remitted .............................1,300,071.60 provided under R.A. No. 1125, the whole 30-day period to appeal having begun to
------------------- run again from notice of the denial of petitioner's motion for reconsideration.

Amount to be refunded to petitioner WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated
representing overpayment of February 12, 1986 which affirmed the denial by respondent Commissioner of
taxes on dividends remitted ..............P 144 452.40 Internal Revenue of petitioner Marubeni Corporation's claim for refund is hereby
=========== REVERSED. The Commissioner of Internal Revenue is ordered to refund or grant as
tax credit in favor of petitioner the amount of P144,452.40 representing
overpayment of taxes on dividends received. No costs.
It is readily apparent that the 15 % tax rate imposed on the dividends received by a
foreign non-resident stockholder from a domestic corporation under Section 24 (b)
(1) (iii) is easily within the maximum ceiling of 25 % of the gross amount of the So ordered.
dividends as decreed in Article 10 (2) (b) of the Tax Treaty.

There is one final point that must be settled. Respondent Commissioner of Internal
Revenue is laboring under the impression that the Court of Tax Appeals is covered
by Batas Pambansa Blg. 129, otherwise known as the Judiciary Reorganization Act
of 1980. He alleges that the instant petition for review was not perfected in
accordance with Batas Pambansa Blg. 129 which provides that "the period of
appeal from final orders, resolutions, awards, judgments, or decisions of any court
Private Educational Institution
in all cases shall be fifteen (15) days counted from the notice of the final order,
resolution, award, judgment or decision appealed from ....
G.R. No. 195909 September 26, 2012
This is completely untenable. The cited BP Blg. 129 does not include the Court of
Tax Appeals which has been created by virtue of a special law, Republic Act No. COMMISSIONER OF INTERNAL REVENUE, PETITIONER,
1125. Respondent court is not among those courts specifically mentioned in vs.
Section 2 of BP Blg. 129 as falling within its scope. ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an x-----------------------x
order, ruling or decision of the Court of Tax Appeals is given thirty (30) days from
notice to appeal therefrom. Otherwise, said order, ruling, or decision shall become G.R. No. 195960
final.
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-à-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 to ₱76,063,116.06 for 1998, comprised of deficiency
income tax, value-added tax, withholding tax on compensation and expanded
withholding tax. The BIR reduced the amount to ₱63,935,351.57 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 ₱1,730,367,965 or approximately ₱1.73
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 was ₱218,187,498 or 65.20% of its 1998 operating income
(i.e., total revenues less operating expenses) of ₱334,642,615. 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 ₱57,659,981.19 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 ₱110,000.00 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 ₱5,496,963.54 and ₱778,406.84 or in the sum of
₱6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%)
delinquency interest on the total amount of ₱6,275,370.38 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 ₱5,496,963.54, 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 ₱63,113,952.79 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
₱6,275,370.38 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-à-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, 37this 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." 41A 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 45 and 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." 48 The test of exemption is
not strictly a requirement on the intrinsic nature or character of the institution. The
test requires that the institution use 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
Administrative 287,319,334.00
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 Household and Property 91,797,622.00
regardless of the disposition made of such income, shall be subject to tax imposed
under this Code. (Emphasis supplied) ₱1,395,725,350.00

In short, the last paragraph of Section 30 provides that if a tax exempt charitable
INCOME FROM OPERATIONS ₱334,642,615.00 100%
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 Free Services -218,187,498.00 -65.20%
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 INCOME FROM OPERATIONS, Net of FREE SERVICES ₱116,455,117.00 34.80%
x." It likewise qualifies the requirement in Section 30(G) that the civic organization
must be "operated exclusively" for the promotion of social welfare.
OTHER INCOME 17,482,304.00
Thus, even if the charitable institution must be "organized and operated
exclusively" for charitable purposes, it is nevertheless allowed to engage in EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00
"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 In Lung Center, this Court declared:
activities was the ordinary corporate rate under Section 27(A). With the
introduction of Section 27(B), the tax rate is now 10%. "[e]xclusive" is defined as possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and "exclusively" is defined, "in a
In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying manner to exclude; as enjoying a privilege exclusively." x x x The words "dominant
patients. It cannot be disputed that a hospital which receives approximately ₱1.73 use" or "principal use" cannot be substituted for the words "used exclusively"
billion from paying patients is not an institution "operated exclusively" for without doing violence to the Constitution and the law. Solely is synonymous with
charitable purposes. Clearly, revenues from paying patients are income received exclusively. 54
from "activities conducted for profit." 52 Indeed, St. Luke's admits that it derived
profits from its paying patients. St. Luke's declared ₱1,730,367,965 as "Revenues The Court cannot expand the meaning of the words "operated exclusively" without
from Services to Patients" in contrast to its "Free Services" expenditure of violating the NIRC. Services to paying patients are activities conducted for profit.
₱218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the following They cannot be considered any other way. There is a "purpose to make profit over
"calculation" to support its claim that 65.20% of its "income after expenses was and above the cost" of services. 55 The ₱1.73 billion total revenues from paying
allocated to free or charitable services" in 1998. 53 patients is not even incidental to St. Luke's charity expenditure of ₱218,187,498 for
non-paying patients.
REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00
St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its
operating income in 1998. However, if a part of the remaining 34.80% of the
OPERATING EXPENSES 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
Professional care of patients ₱1,016,608,394.00 "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 Tomás 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 contestación seria
afirmativa; pero considerando que el hospital tiene cuartos de pago, y a los mismos
generalmente van enfermos de buena posición social económica, 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.1âwphi1
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 non-stock, non-profit charitable and social welfare organization under Section
of the National Internal Revenue Code. All other parts of the Decision and 30(E) and (G)9 of the 1997 NIRC, as amended, it is exempt from paying income tax.
Resolution of the Court of Tax Appeals are AFFIRMED.
On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for Assessment10 dated April 9, 2008 increasing the deficiency income for the taxable
violating Section 1, Rule 45 of the Rules of Court. year 2005 tax to ₱82,419,522.21 and for the taxable year 2006 to ₱60,259,885.94,
computed as follows:
SO ORDERED.
For Taxable Year 2005:
G.R. No. 203514
ASSESSMENT NO. QA-07-000096
COMMISSIONER OF INTERNAL REVENUE, Petitioner
vs. PARTICULARS AMOUNT
ST. LUKE’S MEDICAL CENTER, INC., Respondent
Sales/Revenues/Receipts/Fees ?3,623,511,616.00
DECISION
Less: Cost of Sales/Services 2,643,049, 769.00

DEL CASTILLO, J.: Gross Income From Operation 980,461,847.00

Add: Non-Operating & Other Income -

The doctrine of stare decisis dictates that "absent any powerful countervailing
considerations, like cases ought to be decided alike."1 Total Gross Income 980,461,847.00

Less: Deductions 481,266,883 .00

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails
the May 9, 2012 Decision3 and the September 17, 2012 Resolution4 of the Net
Court of Subject to Tax
Income 499, 194,964.00
Tax Appeals (CTA) in CTA EB Case No. 716.
XTaxRate 10%
Factual Antecedents Tax Due 49,919,496.40

Less: Tax Credits -

On December 14, 2007, respondent St. Luke’s Medical Center, Inc. (SLMC) received
from the Large Taxpayers Service-Documents Processing and Quality Assurance
Deficiency Income Tax 49,919,496.40
Division of the Bureau of Internal Revenue (BIR) Audit Results/Assessment Notice
Add: Increments
Nos. QA-07-0000965 and QA-07-000097,6 assessing respondent SLMC deficiency
income tax under Section 27(B)7 of the 1997 National Internal Revenue Code
25% Surcharge 12,479,874.10
(NIRC), as amended, for taxable year 2005 in the amount of ₱78,617,434.54 and for
taxable year 2006 in the amount of ₱57,119,867.33. 20% Interest Per Annum (4115/06-4/15/08) 19,995,151.71

On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Compromise
Revenue Penalty for Late Payment 25,000.00
8
(CIR) an administrative protest assailing the assessments. SLMC claimed that
Totalasincrements
a 32,500,025.81
Total Amount Due ?82,419,522.21 Ruling of the Court of Tax Appeals Division

On August 26, 2010, the CTA Division rendered a Decision13 finding SLMC not liable
For Taxable Year 2006: for deficiency income tax under Section 27(B) of the 1997 NIRC, as amended, since
it is exempt from paying income tax under Section 30(E) and (G) of the same Code.
ASSESSMENT NO. QA-07-000097 Thus:

PARTICULARS [AMOUNT] WHEREFORE, premises considered, the Petition for Review is hereby GRANTED.
Accordingly, Audit Results/Assessment Notice Nos. QA-07-000096 and QA-07-
Sales/Revenues/Receipts/Fees ?3,8 l 5,922,240.00 000097, assessing petitioner for alleged deficiency income taxes for the taxable
years 2005 and 2006, respectively, are hereby CANCELLED and SET ASIDE.
Less: Cost of Sales/Services 2,760,518,437.00

Gross Income From Operation 1,055,403,803.00 SO ORDERED.14

Add: Non-Operating & Other Income -

CIR moved for reconsideration but the CTA Division denied the same in its
Total Gross Income 1,055,403,803.00 December 28, 2010 Resolution.15

Less: Deductions 640,147,719.00

This prompted CIR to file a Petition for Review16 before the CTA En Banc.
Net Income Subject to Tax 415,256,084.00
Ruling of the Court of Tax Appeals En Banc
XTaxRate 10%

Tax.Due 41,525,608.40 On May 9, 2012, the CTA En Banc affirmed the cancellation and setting aside of the
Audit Results/Assessment Notices issued against SLMC. It sustained the findings of
Less: Tax Credits - the CTA Division that SLMC complies with all the requisites under Section 30(E) and
(G) of the 1997 NIRC and thus, entitled to the tax exemption provided therein.17
Deficiency Income Tax 41,525,608.40

Add: Increments - On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.
25% Surcharge 10,381,402.10
Issue
20% Interest Per Annum (4/15/07-4/15/08) 8,327,875.44

Compromise Penalty for Late Payment
Total increments
Total Amount Due
Aggrieved, SLMC elevated the matter
Review,12 docketed as CTA Case No. 7789.
25,000.00 Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending
that the CTA erred in exempting SLMC from the payment of income tax.
18,734,277.54
Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos.
?60,259,885.9411
195909 and 195960, entitled Commissioner of Internal Revenue v. St. Luke's
Medical Center, Inc.,18 finding SLMC not entitled to the tax exemption under
to the CTA via a Petition for Section 30(E) and (G) of the NIRC of 1997 as it does not operate exclusively for
charitable or social welfare purposes insofar as its revenues from paying patients
are concerned. Thus, the Court disposed of the case in this manner:
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No.
195909is 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 I, Rule 45 of the Rules of Court.
SO ORDERED.19
Considering the foregoing, SLMC then filed a Manifestation and Motion20 informing
the Court that on April 30, 2013, it paid the BIR the amount of basic taxes due for
taxable years 1998, 2000-2002, and 2004-2007, as evidenced by the payment
confirmation21 from the BIR, and that it did not pay any surcharge, interest, and
compromise penalty in accordance with the above-mentioned Decision of the
Court. In view of the payment it made, SLMC moved for the dismissal of the instant
case on the ground of mootness.
CIR opposed the motion claiming that the payment confirmation submitted by
SLMC is not a competent proof of payment as it is a mere photocopy and does not
even indicate the quarter/sand/or year/s said payment covers.22
CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income
tax under Section 27(B) of the 1997 NIRC.29 It likewise asserts that SLMC is liable to
pay compromise penalty pursuant to Section 248(A)30 of the 1997 NIRC for failing
to file its quarterly income tax returns.31
As to the alleged payment of the basic tax, CIR contends that this does not render
the instant case moot as the payment confirmation submitted by SLMC is not a
competent proof of payment of its tax liabilities.32
SLMC's Arguments
SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in
G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's
Medical Center, Inc.)33 positing that earning a profit by a charitable, benevolent
hospital or educational institution does not result in the withdrawal of its tax
exempt privilege.34 SLMC further claims that the income it derives from operating a
hospital is not income from "activities conducted for profit."35 Also, it maintains
that in accordance with the ruling of the Court in G.R. Nos. 195909 and
195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.), 36 it is
not liable for compromise penalties.37
In any case, SLMC insists that the instant case should be dismissed in view of its
payment of the basic taxes due for taxable years 1998, 2000-2002, and 2004-2007
to the BIR on April 30, 2013.38
Our Ruling

In reply,23 SLMC submitted a copy of the Certification24 issued by the Large SLMC is liable for income tax under
Taxpayers Service of the BIR dated May 27, 2013, certifying that, "[a]s far as the Section 27(B) of the 1997 NIRC insofar
basic deficiency income tax for taxable years 2000, 2001, 2002, 2004, 2005, 2006, as its revenues from paying patients are
2007 are concen1ed, this Office considers the cases closed due to the payment concerned
made on April 30, 2013." SLMC likewise submitted a letter25 from the BIR dated
November 26, 2013 with attached Certification of Payment26and application for
The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997
abatement,27 which it earlier submitted to the Court in a related case, G.R. No.
NIRC insofar as its revenues from paying patients are concerned has been settled in
200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center,
G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's
Inc.28
Medical Center, Inc.),39 where the Court ruled that:

Thereafter, the parties submitted their respective memorandum.

x x x 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
CIR 's Arguments 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed
together without the removal of such tax exemption. The effect of the introduction
of Section 27(B) is to subject the taxable income of two specific institutions,
namely, proprietary non-profit educational institutions and proprietary non-profit
hospitals, among the institutions covered by Section 30, to the 10% preferential
rate under Section 27(B) instead of the ordinary 30% corporate rate under the last
paragraph of Section 30 in relation to Section 27(A)(l).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit
hospitals. The only qualifications for hospitals are that they must be proprietary
and non-profit. 'Proprietary' means private, following the definition of a
'proprietary educational institution' as 'any private school maintained and
administered by private individuals or groups' with a government permit. 'Non-
profit' means no net income or asset accrues to or benefits any member or specific
person, with all the net income or asset devoted to the institution's purposes and
all its activities conducted not for profit.
'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue
v. Club Filipino, Inc. de Cebu, this Court considered as non-profit a sports club
organized for recreation and entertainment of its stockholders and members. The
club was primarily funded by membership fees and dues. If it had profits, they were
used for overhead expenses and improving its golf course. The club was non-profit
because of its purpose and there was no evidence that it was engaged in a profit-
making enterprise.
The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not
charitable. Tue Court defined 'charity' in Lung Center of the Philippines v. Quezon
City as 'a gift, to be applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life
or [by] otherwise lessening the burden of government.' A nonprofit 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.
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that '[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the
Members of Congress.' The requirements for a tax exemption are strictly construed
against the taxpayer because an exemption restricts the collection of taxes
necessary for the existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a
charitable institution for the purpose of exemption from real property taxes. This
ruling uses the same premise as Hospital de San Juan and Jesus Sacred Heart
College which says that receiving income from paying patients does not destroy the
charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as such
and its exemption from taxes simply because it derives income from paying
patients, whether outpatient, or confined in the hospital, or receives subsidies from
the government, so long as the money received is devoted or used altogether to
the charitable object which it is intended to achieve; and no money inures to the
private benefit of the persons managing or operating the institution.
For real property taxes, the incidental generation of income is permissible because
the test of exemption is the use of the property. The Constitution provides that
'[c]haritable institutions, churches and personages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation.' The test of exemption is not
strictly a requirement on the intrinsic nature or character of the institution. The
test requires that the institution use property in a certain way, i.e., for a charitable
purpose. Thus, the Court held that the Lung Center of the Philippines did not lose
its charitable character when it used a portion of its lot for commercial purposes.
The effect of failing to meet the use requirement is simply to remove from the tax
exemption that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In
the NIRC, Congress decided to extend the exemption to income taxes. However,
the way Congress crafted Section 30(E) of the NIRC is materially different from
Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the
corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution,
but requires that the institution 'actually, directly and exclusively' use the property
for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(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' 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.' However,
under Lung Center, any profit by a charitable institution must not only be plowed
back 'whenever necessary or proper,' but must be 'devoted or used altogether to
the charitable object which it is intended to achieve.'
The operations of the charitable institution generally refer to its regular activities.
Section 30(E) of the NIRC requires that these operations be exclusive to charity.
There is also a specific requirement that 'no part of [the] net income or asset shall
belong to or inure to the benefit of any member, organizer, officer or any specific
person.' The use of lands, buildings and improvements of the institution is but a
part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit
charitable institution. However, this does not automatically exempt St. Luke's from
paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's
meets the test of charity, a charitable institution is not ipso facto tax exempt. To be
exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property 'actually, directly and
exclusively' for charitable purposes. To be exempt from income taxes, Section 30(E)
of the NIRC requires that a charitable institution must be 'organized and operated
exclusively' for charitable purposes. Likewise, to be exempt from income taxes,
Section 30(G) of the NIRC requires that the institution be 'operated exclusively' for
social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words
'organized and operated exclusively' by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed
under this Code.
In short, the last paragraph of Section 30 provides that if a tax exempt charitable
institution conducts 'any' activity for profit, such activity is not tax exempt even as
its not-for-profit activities remain tax exempt. This paragraph qualifies the
requirements in Section 30(E) that the '[n]on-stock corporation or association
[must be] organized and operated exclusively for . . . charitable . . . purposes . . . . '
It likewise qualifies the requirement in Section 30(G) that the civic organization
must be 'operated exclusively' for the promotion of social welfare.
Thus, even if the charitable institution must be 'organized and operated exclusively'
for charitable purposes, it is nevertheless allowed to engage in 'activities conducted
for profit' without losing its tax exempt status for its not-for-profit activities. The
only consequence is that the 'income of whatever kind and character' of a
charitable institution 'from any of its activities conducted for profit, regardless of
the disposition made of such income, shall be subject to tax.' Prior to the
introduction of Section 27(B), the tax rate on such income from for-profit activities
was the ordinary corporate rate under Section 27(A). With the introduction of
Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of ₱l,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately ₱l.73
billion from paying patients is not an institution 'operated exclusively' for charitable
purposes. Clearly, revenues from paying patients are income received from
'activities conducted for profit.' Indeed, St. Luke's admits that it derived profits
from its paying patients. St. Luke's declared ₱l,730,367,965 as 'Revenues from
Services to Patients' in contrast to its 'Free Services' expenditure of ₱218,187,498.
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.
x x xx
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.' . . . The words 'dominant use' or
'principal use' cannot be substituted for the words 'used exclusively' without doing
violence to the Constitution and thelaw. Solely is synonymous with exclusively.
The Court cannot expand the meaning of the words 'operated exclusively' without
violating the NIRC. Services to paying patients are activities conducted for profit.
They cannot be considered any other way. There is a 'purpose to make profit over
and above the cost' of services. The ₱l.73 billion total revenues from paying
patients is not even incidental to St. Luke's charity expenditure of ₱2l8,187,498 for
non-paying patients.
St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its
operating income in 1998. However, if a part of the remaining 34.80% of the
operating income is reinvested in property, equipment or facilities used for services
to paying and non-paying patients, then it cannot be said that the income is
'devoted or used altogether to the charitable object which it is intended to
achieve.' The income is plowed back to the corporation not entirely for charitable
purposes, but for profit as well. In any case, the last paragraph of Section 30 of the
NIRC expressly qualifies that income from activities for profit is taxable 'regardless
of the disposition made of such income.'
Jesus Sacred Heart College declared that there is no official legislative record
explaining the phrase 'any activity conducted for profit.' However, it quoted a
deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee
of Conference for the Senate, which introduced the phrase 'or from any activity
conducted for profit.'
P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no
cree V d que es una actividad esencial dicho hospital para el funcionamiento def
colegio de medicina
de dicha universidad?
x x x x x x xxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria
afirmativa; pero considerando que el hospital tiene cuartos de pago, y a los mismos
generalmente van enfermos de buena posicion social economica, 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.'
The question was whether having a hospital is essential to an educational
institution like the College of Medicine of the University of Santo
Tomas.1awp++i1 Senator Cuenco answered that if the hospital has paid rooms
generally occupied by people of good economic standing, then it should be subject
to income tax. He said that this was one of the reasons Congress inserted the
phrase 'or any activity conducted for profit.'
The question in Jesus Sacred Heart College involves an educational institution.
However, it is applicable to charitable institutions because Senator Cuenco's
response shows an intent to focus on the activities of charitable institutions.
Activities for profit should not escape the reach of taxation. Being a non-stock and
non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its
profitable activities from being taxed.
The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for
charitable or social welfare purposes insofar as its revenues from paying patients
are 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- subject to income tax at the preferential 10% rate pursuant to Section 27(B)
profit activities, under the last paragraph of Section 30, is merely subject to income thereof.
tax, previously at the ordinary corporate rate but now at the preferential 10% rate
pursuant to Section 27(B). SLMC is not liable for Compromise
Penalty.
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 As to whether SLMC is liable for compromise penalty under Section 248(A) of the
benefits from them. Tax exemptions for charitable institutions should therefore be 1997 NIRC for its alleged failure to file its quarterly income tax returns, this has also
lin1ited to institutions beneficial to the public and those which improve social been resolved in G.R Nos. 195909 and 195960 (Commissioner of Internal Revenue v.
welfare. A profit-making entity should not be allowed to exploit this subsidy to the St. Luke's Medical Center, Inc.),42 where the imposition of surcharges and interest
detriment of the government and other taxpayers. under Sections 24843 and 24944 of the 1997 NIRC were deleted on the basis of good
faith and honest belief on the part of SLMC that it is not subject to tax. Thus,
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to following the ruling of the Court in the said case, SLMC is not liable to pay
be completely tax exempt from all its income. However, it remains a proprietary compromise penalty under Section 248(A) of the 1997 NIRC.
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 The Petition is rendered moot by the
corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to payment made by SLMC on April 30,
the preferential tax rate of 10% on its net income from its for-profit activities. 2013.

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' and thus exempt from income tax. In Michael J
Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that 'good faith
and honest belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the tax law, are
sufficient justification to delete the imposition of surcharges and interest.'40
A careful review of the pleadings reveals that there is no countervailing
consideration for the Court to revisit its aforequoted ruling in G.R. Nos. 195909 and
195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.). Thus,
under the doctrine of stare decisis, which states that "[o]nce a case has been
decided in one way, any other case involving exactly the same point at issue x x x
should be decided in the same manner,"41 the Court finds that SLMC is subject to
10% income tax insofar as its revenues from paying patients are concerned.
To be clear, for an institution to be completely exempt from income tax, Section
30(E) and (G) of the 1997 NIRC requires said institution to operate exclusively for
charitable or social welfare purpose. But in case an exempt institution under
Section 30(E) or (G) of the said Code earns income from its for-profit activities, it
will not lose its tax exemption. However, its income from for-profit activities will be
However, in view of the payment of the basic taxes made by SLMC on April 30,
2013, the instant Petition has become moot.1avvphi1
While the Court agrees with the CIR that the payment confirmation from the BIR
presented by SLMC is not a competent proof of payment as it does not indicate the
specific taxable period the said payment covers, the Court finds that the
Certification issued by the Large Taxpayers Service of the BIR dated May 27, 2013,
and the letter from the BIR dated November 26, 2013 with attached Certification of
Payment and application for abatement are sufficient to prove payment especially
since CIR never questioned the authenticity of these documents. In fact, in a
related case, G.R. No. 200688, entitled Commissioner of Internal Revenue v. St.
Luke's Medical Center, lnc.,45 the Court dismissed the petition based on a letter
issued by CIR confirming SLMC's payment of taxes, which is the same letter
submitted by SLMC in the instant case.
In fine, the Court resolves to dismiss the instant Petition as the same has been
rendered moot by the payment made by SLMC of the basic taxes for the taxable
years 2005 and 2006, in the amounts of ₱49,919,496.40 and ₱4 l,525,608.40,
respectively.46
WHEREFORE, the Petition is hereby DISMISSED.
SO ORDERED. dated May 10, 2006[3] and Resolution dated August 11, 2006[4] rendered by the CTA
First Division.

International Carrier
The Facts

Petitioner South African Airways is a foreign corporation organized and existing

THIRD DIVISION under and by virtue of the laws of the Republic of South Africa. Its principal office is
located at Airways Park, Jones Road, Johannesburg International Airport, South
Africa. In the Philippines, it is an internal air carrier having no landing rights in the
SOUTH AFRICAN AIRWAYS, G.R. No. 180356 country. Petitioner has a general sales agent in the Philippines, Aerotel Limited
Petitioner,
Present: Corporation (Aerotel). Aerotel sells passage documents for compensation or
commission for petitioners off-line flights for the carriage of passengers and cargo
CORONA, J., Chairperson, between ports or points outside the territorial jurisdiction of the Philippines.
- versus - VELASCO, JR., Petitioner is not registered with the Securities and Exchange Commission as a
LEONARDO-DE CASTRO,*
PERALTA, and corporation, branch office, or partnership. It is not licensed to do business in
MENDOZA, JJ. the Philippines.
COMMISSIONER OF INTERNAL REVENUE,
Respondent. Promulgated:
For the taxable year 2000, petitioner filed separate quarterly and annual income
February 16, 2010
tax returns for its off-line flights, summarized as follows:
x-----------------------------------------------------------------------------------------x
2.5% Gross
Period Date Filed Phil. Billings
DECISION For Passenger 1st Quarter May 30, 2000 PhP 222,531.25
2nd Quarter August 29, 2000 424,046.95
VELASCO, JR., J.: 3rd Quarter November 29, 2000 422,466.00
4th Quarter April 16, 2000 453,182.91
The Case
Sub-total PhP 1,522,227.11
For Cargo 1st Quarter May 30, 2000 PhP 81,531.00
This Petition for Review on Certiorari under Rule 45 seeks the reversal of 2nd Quarter August 29, 2000 50,169.65
the July 19, 2007 Decision[1] and October 30, 2007 Resolution[2] of the Court of Tax 3rd Quarter November 29, 2000 36,383.74
Appeals (CTA) En Banc in CTA E.B. Case No. 210, entitled South African Airways v. 4th Quarter April 16, 2000 37,454.88
Sub-total PhP 205,539.27
Commissioner of Internal Revenue. The assailed decision affirmed the Decision
TOTAL 1,727,766.38
Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal
Revenue, Revenue District Office No. 47, a claim for the refund of the amount of
PhP 1,727,766.38 as erroneously paid tax on Gross Philippine Billings (GPB) for the
taxable year 2000. Such claim was unheeded. Thus, on April 14, 2003, petitioner
filed a Petition for Review with the CTA for the refund of the abovementioned
amount. The case was docketed as CTA Case No. 6656.
On May 10, 2006, the CTA First Division issued a Decision denying the petition for
lack of merit. The CTA ruled that petitioner is a resident foreign corporation
engaged in trade or business in the Philippines. It further ruled that petitioner was
not liable to pay tax on its GPB under Section 28(A)(3)(a) of the National Internal
Revenue Code (NIRC) of 1997. The CTA, however, stated that petitioner is liable to
pay a tax of 32% on its income derived from the sales of passage documents in
the Philippines. On this ground, the CTA denied petitioners claim for a refund.
Petitioners Motion for Reconsideration of the above decision was denied by the
CTA First Division in a Resolution dated August 11, 2006.
Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its
claim for a refund of its tax payment on its GPB. This was denied by the CTA in its
assailed decision. A subsequent Motion for Reconsideration by petitioner was also
denied in the assailed resolution of the CTA En Banc.
Hence, petitioner went to us.
The Issues
Whether or not petitioner, as an off-line international
carrier selling passage documents through an independent
sales agent in the Philippines, is engaged in trade or business in
the Philippines subject to the 32% income tax imposed by
Section 28 (A)(1) of the 1997 NIRC.
Whether or not the income derived by petitioner
from the sale of passage documents covering petitioners off-
line flights is Philippine-source income subject to Philippine
income tax.
Whether or not petitioner is entitled to a refund or a
tax credit of erroneously paid tax on Gross Philippine Billings for
the taxable year 2000 in the amount of P1,727,766.38.[5]
The Courts Ruling
This petition must be denied.
Petitioner Is Subject to Income Tax
at the Rate of 32% of Its Taxable Income
Preliminarily, we emphasize that petitioner is claiming that it is exempted
from being taxed for its sale of passage documents in the Philippines. Petitioner,
however, failed to sufficiently prove such contention.
In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel
Corporation,[6] we held, Since an action for a tax refund partakes of the nature of
an exemption, which cannot be allowed unless granted in the most explicit and
categorical language, it is strictly construed against the claimant who must
discharge such burden convincingly.
Petitioner has failed to overcome such burden.
In essence, petitioner calls upon this Court to determine the legal
implication of the amendment to Sec. 28(A)(3)(a) of the 1997 NIRC defining GPB. It
is petitioners contention that, with the new definition of GPB, it is no longer liable
under Sec. 28(A)(3)(a). Further, petitioner argues that because the 2 1/2% tax on
GPB is inapplicable to it, it is thereby excluded from the imposition of any income
tax.
 Sec. 28(b)(2) of the 1939 NIRC provided:
(2) Resident Corporations. A corporation organized,
authorized, or existing under the laws of a foreign country,
engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the
total net income received in the preceding taxable year from all
sources within the Philippines: Provided, however, that
international carriers shall pay a tax of two and one-half
percent on their gross Philippine billings.
This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC,
which defined GPB as follows:
Gross Philippine billings include gross revenue realized from
uplifts anywhere in the world by any international carrier doing
business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail, provided the
cargo or mail originates from the Philippines.
In the 1986 and 1993 NIRCs, the definition of GPB was further changed to
read:
Gross Philippine Billings means gross revenue realized from
uplifts of passengers anywhere in the world and excess
baggage, cargo and mail originating from the Philippines,
covered by passage documents sold in the Philippines.
Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts
anywhere in the world, provided that the passage documents were sold in
the Philippines. Legislature departed from such concept in the 1997 NIRC where
GPB is now defined under Sec. 28(A)(3)(a):
Gross Philippine Billings refers to the amount of gross
revenue derived from carriage of persons, excess baggage,
cargo and mail originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place of sale or
issue and the place of payment of the ticket or passage
document.
Now, it is the place of sale that is irrelevant; as long as the uplifts of
passengers and cargo occur to or from the Philippines, income is included in GPB.
As correctly pointed out by petitioner, inasmuch as it does not maintain
flights to or from the Philippines, it is not taxable under Sec. 28(A)(3)(a) of the 1997
NIRC. This much was also found by the CTA. But petitioner further posits the view
that due to the non-applicability of Sec. 28(A)(3)(a) to it, it is precluded from paying
any other income tax for its sale of passage documents in the Philippines.
Such position is untenable.
In Commissioner of Internal Revenue v. British Overseas Airways
Corporation (British Overseas Airways),[7] which was decided under similar factual
circumstances, this Court ruled that off-line air carriers having general sales agents
in the Philippines are engaged in or doing business in the Philippines and that their
income from sales of passage documents here is income from within the
Philippines. Thus, in that case, we held the off-line air carrier liable for the 32% tax
on its taxable income.
Petitioner argues, however, that because British Overseas Airways was
decided under the 1939 NIRC, it does not apply to the instant case, which must be
decided under the 1997 NIRC. Petitioner alleges that the 1939 NIRC taxes resident
foreign corporations, such as itself, on all income from sources within
the Philippines. Petitioners interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is
that, since it is an international carrier that does not maintain flights to or from the
Philippines, thereby having no GPB as defined, it is exempt from paying any income
tax at all. In other words, the existence of Sec. 28(A)(3)(a) according to petitioner
precludes the application of Sec. 28(A)(1) to it.
Its argument has no merit.
First, the difference cited by petitioner between the 1939 and 1997 NIRCs
with regard to the taxation of off-line air carriers is more apparent than real.
 We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any
categorical term, exempt all international air carriers from the coverage of Sec.
28(A)(1) of the 1997 NIRC. Certainly, had legislatures intentions been to completely
exclude all international air carriers from the application of the general rule under
show that petitioners interpretation of those provisions is erroneous.
Sec. 28(A)(1), it would have used the appropriate language to do so; but the
legislature did not. Thus, the logical interpretation of such provisions is that, if Sec.
28(A)(3)(a) is applicable to a taxpayer, then the general rule under Sec. 28(A)(1)
would not apply. If, however, Sec. 28(A)(3)(a) does not apply, a resident foreign
corporation, whether an international air carrier or not, would be liable for the tax
under Sec. 28(A)(1).
Clearly, no difference exists between British Overseas Airways and the
instant case, wherein petitioner claims that the former case does not apply.
Thus, British Overseas Airways applies to the instant case. The findings therein that
an off-line air carrier is doing business in the Philippines and that income from the
sale of passage documents here is Philippine-source income must be upheld.
Petitioner further reiterates its argument that the intention of Congress
in amending the definition of GPB is to exempt off-line air carriers from income tax
by citing the pronouncements made by Senator Juan Ponce Enrile during the
deliberations on the provisions of the 1997 NIRC. Such pronouncements, however,
are not controlling on this Court. We said in Espino v. Cleofe:[8]
A cardinal rule in the interpretation of statutes is that
the meaning and intention of the law-making body must be
sought, first of all, in the words of the statute itself, read and
considered in their natural, ordinary, commonly-accepted and
most obvious significations, according to good and approved
usage and without resorting to forced or subtle construction.
Courts, therefore, as a rule, cannot presume that the law-
making body does not know the meaning of words and rules of
grammar. Consequently, the grammatical reading of a statute
must be presumed to yield its correct sense. x x x It is also a
well-settled doctrine in this jurisdiction that statements made
by individual members of Congress in the consideration of a
bill do not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of
law. (Emphasis supplied.)
Moreover, an examination of the subject provisions of the law would
Sec. 28(A)(1) and (A)(3)(a) provides:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this
Code, a corporation organized, authorized, or existing under
the laws of any foreign country, engaged in trade or business
within the Philippines, shall be subject to an income tax
equivalent to thirty-five percent (35%) of the taxable income
derived in the preceding taxable year from all sources within
the Philippines: provided, That effective January 1, 1998, the
rate of income tax shall be thirty-four percent (34%); effective
January 1, 1999, the rate shall be thirty-three percent (33%),
and effective January 1, 2000 and thereafter, the rate shall be
thirty-two percent (32%).
xxxx
(3) International Carrier. - An international carrier
doing business in the Philippines shall pay a tax of two and one-
half percent (2 1/2%) on its Gross Philippine Billings as defined
hereunder:
(a) International Air Carrier. Gross
Philippine Billings refers to the amount of gross
revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place
of payment of the ticket or passage document:
Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of
the Gross Philippine Billings if the passenger boards a
 plane in a port or point in the Philippines: Provided,
further, That for a flight which originates from the
Philippines, but transshipment of passenger takes
place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the
ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form
part of Gross Philippine Billings.
Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign
corporations are liable for 32% tax on all income from sources within
the Philippines. Sec. 28(A)(3) is an exception to this general rule.
An exception is defined as that which would otherwise be included in the
provision from which it is excepted. It is a clause which exempts something from
the operation of a statue by express words.[9]Further, an exception need not be
introduced by the words except or unless. An exception will be construed as such if
it removes something from the operation of a provision of law.[10]
In the instant case, the general rule is that resident foreign corporations
shall be liable for a 32% income tax on their income from within the Philippines,
except for resident foreign corporations that are international carriers that derive
income from carriage of persons, excess baggage, cargo and mail originating from
the Philippines which shall be taxed at 2 1/2% of their Gross Philippine Billings.
Petitioner, being an international carrier with no flights originating from
the Philippines, does not fall under the exception. As such, petitioner must fall
under the general rule. This principle is embodied in the Latin maxim, exception
firmat regulam in casibus non exceptis, which means, a thing not being excepted
must be regarded as coming within the purview of the general rule.[11]
To reiterate, the correct interpretation of the above provisions is that, if
an international air carrier maintains flights to and from the Philippines, it shall be
taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air
carriers that do not have flights to and from the Philippines but nonetheless earn
income from other activities in the country will be taxed at the rate of 32% of such
income.
As to the denial of petitioners claim for refund, the CTA denied the claim
on the basis that petitioner is liable for income tax under Sec. 28(A)(1) of the 1997
NIRC. Thus, petitioner raises the issue of whether the existence of such liability
would preclude their claim for a refund of tax paid on the basis of Sec. 28(A)(3)(a).
In answer to petitioners motion for reconsideration, the CTA First Division ruled in
its Resolution dated August 11, 2006, thus:
On the fourth argument, petitioner avers that a
deficiency tax assessment does not, in any way, disqualify a
taxpayer from claiming a tax refund since a refund claim can
proceed independently of a tax assessment and that the
assessment cannot be offset by its claim for refund.
Petitioners argument is erroneous. Petitioner
premises its argument on the existence of an assessment. In
the assailed Decision, this Court did not, in any way, assess
petitioner of any deficiency corporate income tax. The power to
make assessments against taxpayers is lodged with the
respondent. For an assessment to be made, respondent must
observe the formalities provided in Revenue Regulations No.
12-99. This Court merely pointed out that petitioner is liable for
the regular corporate income tax by virtue of Section 28(A)(3)
of the Tax Code. Thus, there is no assessment to speak of.[12]
Precisely, petitioner questions the offsetting of its payment of the tax
under Sec. 28(A)(3)(a) with their liability under Sec. 28(A)(1), considering that there
has not yet been any assessment of their obligation under the latter provision.
Petitioner argues that such offsetting is in the nature of legal compensation, which
cannot be applied under the circumstances present in this case.
Article 1279 of the Civil Code contains the elements of legal
compensation, to wit:
 Art. 1279. In order that compensation may be proper, cannot await the results of a lawsuit against the
it is necessary: government.

(1) That each one of the obligors be bound
principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of
money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and
demandable;
(5) That over neither of them there be any
retention or controversy, commenced by third
persons and communicated in due time to the
debtor.
with its alleged tax deficiency is unavailing under Art. 1279 of the Civil Code.
The ruling in Francia has been applied to the
subsequent case of Caltex Philippines, Inc. v. Commission on
Audit, which reiterated that:
. . . a taxpayer may not offset taxes due
from the claims that he may have against the
government. Taxes cannot be the subject of
compensation because the government and taxpayer
are not mutually creditors and debtors of each other
and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.
Verily, petitioners argument is correct that the offsetting of its tax refund

And we ruled in Philex Mining Corporation v. Commissioner of Internal

Commissioner of Internal Revenue v. Court of Tax Appeals,[14] however,
Revenue,[13] thus:
granted the offsetting of a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax
In several instances prior to the instant case, we have
Appeals erred in denying petitioners supplemental motion for
already made the pronouncement that taxes cannot be subject
reconsideration alleging bringing to said courts attention the
to compensation for the simple reason that the government
existence of the deficiency income and business tax assessment
and the taxpayer are not creditors and debtors of each other.
against Citytrust. The fact of such deficiency assessment is
There is a material distinction between a tax and debt. Debts
intimately related to and inextricably intertwined with the right
are due to the Government in its corporate capacity, while
of respondent bank to claim for a tax refund for the same year.
taxes are due to the Government in its sovereign capacity. We
To award such refund despite the existence of that deficiency
find no cogent reason to deviate from the aforementioned
assessment is an absurdity and a polarity in conceptual effects.
distinction.
Herein private respondent cannot be entitled to refund and at
the same time be liable for a tax deficiency assessment for the
Prescinding from this premise, in Francia v.
same year.
Intermediate Appellate Court, we categorically held that taxes
cannot be subject to set-off or compensation, thus:
The grant of a refund is founded on the assumption
that the tax return is valid, that is, the facts stated therein are
We have consistently ruled that there can
true and correct. The deficiency assessment, although not yet
be no off-setting of taxes against the claims that the
final, created a doubt as to and constitutes a challenge against
taxpayer may have against the government. A person
the truth and accuracy of the facts stated in said return which,
cannot refuse to pay a tax on the ground that the
by itself and without unquestionable evidence, cannot be the
government owes him an amount equal to or greater
basis for the grant of the refund.
than the tax being collected. The collection of a tax
 Section 82, Chapter IX of the National Internal
Revenue Code of 1977, which was the applicable law when the
claim of Citytrust was filed, provides that (w)hen an assessment
is made in case of any list, statement, or return, which in the
opinion of the Commissioner of Internal Revenue was false or
fraudulent or contained any understatement or undervaluation,
no tax collected under such assessment shall be recovered by
any suits unless it is proved that the said list, statement, or
return was not false nor fraudulent and did not contain any
understatement or undervaluation; but this provision shall not
apply to statements or returns made or to be made in good
faith regarding annual depreciation of oil or gas wells and
mines.
Moreover, to grant the refund without determination
of the proper assessment and the tax due would inevitably
result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government
will be forced to institute anew a proceeding for the recovery of
erroneously refunded taxes which recourse must be filed within
the prescriptive period of ten years after discovery of the
falsity, fraud or omission in the false or fraudulent return
involved. This would necessarily require and entail additional
efforts and expenses on the part of the Government, impose a
burden on and a drain of government funds, and impede or
delay the collection of much-needed revenue for governmental
operations.
Thus, to avoid multiplicity of suits and unnecessary
difficulties or expenses, it is both logically necessary and legally
appropriate that the issue of the deficiency tax assessment
against Citytrust be resolved jointly with its claim for tax
refund, to determine once and for all in a single proceeding the
true and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has
heretofore conceded, it would be only just and fair that the
taxpayer and the Government alike be given equal
opportunities to avail of remedies under the law to defeat each
others claim and to determine all matters of dispute between
them in one single case. It is important to note that in
determining whether or not petitioner is entitled to the refund
of the amount paid, it would [be] necessary to determine how
much the Government is entitled to collect as taxes. This would
necessarily include the determination of the correct liability of
the taxpayer and, certainly, a determination of this case would
constitute res judicata on both parties as to all the matters
subject thereof or necessarily involved therein. (Emphasis
supplied.)
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the
1997 NIRC. The above pronouncements are, therefore, still applicable today.
Here, petitioners similar tax refund claim assumes that the tax return that
it filed was correct. Given, however, the finding of the CTA that petitioner, although
not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the
correctness of the return filed by petitioner is now put in doubt. As such, we
cannot grant the prayer for a refund.
Be that as it may, this Court is unable to affirm the assailed decision and
resolution of the CTA En Banc on the outright denial of petitioners claim for a
refund. Even though petitioner is not entitled to a refund due to the question on
the propriety of petitioners tax return subject of the instant controversy, it would
not be proper to deny such claim without making a determination of petitioners
liability under Sec. 28(A)(1).
It must be remembered that the tax under Sec. 28(A)(3)(a) is based on
GPB, while Sec. 28(A)(1) is based on taxable income, that is, gross income less
deductions and exemptions, if any. It cannot be assumed that petitioners liabilities
under the two provisions would be the same. There is a need to make a
determination of petitioners liability under Sec. 28(A)(1) to establish whether a tax
refund is forthcoming or that a tax deficiency exists. The assailed decision fails to
mention having computed for the tax due under Sec. 28(A)(1) and the records are
bereft of any evidence sufficient to establish petitioners taxable income. There is a
necessity to receive evidence to establish such amount vis--vis the claim for refund.
It is only after such amount is established that a tax refund or deficiency may be
correctly pronounced.
 WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 operate any airplane [in] the Philippines[.]"7
Resolution of the CTA En Banc in CTA E.B. Case No. 210 are SET ASIDE. The instant
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as
case is REMANDED to the CTA En Banc for further proceedings and appropriate its general sales agent in the Philippines.8 Aerotel "sells [Air Canada's] passage
action, more particularly, the reception of evidence for both parties and the documents in the Philippines."9
corresponding disposition of CTA E.B. Case No. 210 not otherwise inconsistent with
For the period ranging from the third quarter of 2000 to the second quarter of
our judgment in this Decision.
2002, Air Canada, through Aerotel, filed quarterly and annual income tax returns
and paid the income tax on Gross Philippine Billings in the total amount of
SO ORDERED. P5,185,676.77,10 detailed as follows:chanRoblesvirtualLawlibrary

Applicable Quarter[/]Year Date Filed/Paid Amount of Tax

SECOND DIVISION
3rd Qtr 2000 November 29,2000 P 395,165.00

G.R. No. 169507, January 11, 2016 Annual ITR 2000 April 16, 2001 381,893.59

AIR CANADA, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. 1st Qtr 2001 May 30,2001 522,465.39

DECISION 2nd Qtr 2001 August 29,2001 1,033,423.34

3rd Qtr 2001 November 29,2001 765,021.28

LEONEN, J.:
Annual ITR 2001 April 15, 2002 328,193.93
An offline international air carrier selling passage tickets in the Philippines, through
a general sales agent, is a resident foreign corporation doing business in the 1st Qtr 2002 May 30,2002 594,850.13
Philippines. As such, it is taxable under Section 28(A)(1), and not Section 28(A)(3) of
the 1997 National Internal Revenue Code, subject to any applicable tax treaty to 2nd Qtr 2002 August 29,2002 1,164,664.11
which the Philippines is a signatory. Pursuant to Article 8 of the Republic of the
Philippines-Canada Tax Treaty, Air Canada may only be imposed a maximum tax of TOTAL P 5,185,676.77"cralawlawlibrary
1 1/2% of its gross revenues earned from the sale of its tickets in the Philippines.

This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court
of Tax Appeals En Banc, which in turn affirmed the December 22, 2004 On November 28, 2002, Air Canada filed a written claim for refund of alleged
Decision3 and April 8, 2005 Resolution4 of the Court of Tax Appeals First Division erroneously paid income taxes amounting to P5,185,676.77 before the Bureau of
denying Air Canada's claim for refund. Internal Revenue,12 Revenue District Office No. 47-East Makati.13 It found basis
from the revised definition14 of Gross Philippine Billings under Section 28(A)(3)(a)
Air Canada is a "foreign corporation organized and existing under the laws of of the 1997 National Internal Revenue Code:chanRoblesvirtualLawlibrary
Canada[.]"5 On April 24, 2000, it was granted an authority to operate as an offline
carrier by the Civil Aeronautics Board, subject to certain conditions, which SEC. 28. Rates of Income Tax on Foreign Corporations. -
authority would expire on April 24, 2005.6 "As an off-line carrier, [Air Canada] does
not have flights originating from or coming to the Philippines [and does not] (A) Tax on Resident Foreign Corporations. -
. . . . appeal was docketed as CTAEB No. 86.25cralawred
(3) International Carrier. - An international carrier doing business in the Philippines
shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' In the Decision dated August 26, 2005, the Court of Tax Appeals En Bane affirmed
as defined hereunder:chanRoblesvirtualLawlibrary the findings of the First Division.26 The En Banc ruled that Air Canada is subject to
tax as a resident foreign corporation doing business in the Philippines since it sold
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount airline tickets in the Philippines.27 The Court of Tax Appeals En Bane disposed
of gross revenue derived from carriage of persons, excess baggage, cargo and thus:chanRoblesvirtualLawlibrary
mail originating from the Philippines in a continuous and uninterrupted
flight,irrespective of the place of sale or issue and the place of payment of the WHEREFORE, premises considered, the instant petition is hereby DENIED DUE
ticket or passage document: Provided, That tickets revalidated, exchanged and/or COURSE, and accordingly, DISMISSED for lack of merit.28cralawlawlibrary
indorsed to another international airline form part of the Gross Philippine Billings if
the passenger boards a plane in a port or point in the Philippines: Provided, further,
That for a flight which originates from the Philippines, but transshipment of Hence, this Petition for Review29 was filed. The issues for our consideration
passenger takes place at any port outside the Philippines on another airline, only- are:chanRoblesvirtualLawlibrary
the aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine First, whether petitioner Air Canada, as an offline international carrier selling
Billings. (Emphasis supplied)cralawlawlibrary passage documents through a general sales agent in the Philippines, is-a resident
foreign corporation within the meaning of Section 28(A)(1) of the 1997 National
Internal Revenue Code;
To prevent the running of the prescriptive period, Air Canada filed a Petition for
Review before the Court of Tax Appeals on November 29, 2002.15 The case was Second, whether petitioner Air Canada is subject to the 21/2% tax on Gross
docketed as C.T.A. Case No. 6572.16 Philippine Billings pursuant to Section 28(A)(3). If not, whether an offline
international carrier selling passage documents through a general sales agent can
On December 22, 2004, the Court of Tax Appeals First Division rendered its be subject to the regular corporate income tax of 32% on taxable income pursuant
Decision denying the Petition for Review and, hence, the claim for refund. 17 It to Section 28(A)(1);
found that Air Canada was engaged in business in the Philippines through a local
agent that sells airline tickets on its behalf. As such, it should be taxed as a resident Third, whether the Republic of the Philippines-Canada Tax Treaty applies,
foreign corporation at the regular rate of 32%.18 Further, according to the Court of specifically:chanRoblesvirtualLawlibrary
Tax Appeals First Division, Air Canada was deemed to have established a
"permanent establishment"19 in the Philippines under Article V(2)(i) of the Republic a. Whether the Republic of the Philippines-Canada Tax Treaty is
of the Philippines-Canada Tax Treaty20 by the appointment of the local sales agent, enforceable;
"in which [the] petitioner uses its premises as an outlet where sales of [airline]
tickets are made[.]"21
b. Whether the appointment of a local general sales agent in the Philippines
falls under the definition of "permanent establishment" under Article
Air Canada seasonably filed a Motion for Reconsideration, but the Motion was
V(2)(i) of the Republic of the Philippines-Canada Tax Treaty; and
denied in the Court of Tax Appeals First Division's Resolution dated April 8, 2005 for
lack of merit.22 The First Division held that while Air Canada was not liable for tax
on its Gross Philippine Billings under Section 28(A)(3), it was nevertheless liable to
pay the 32% corporate income tax on income derived from the sale of airline
tickets within the Philippines pursuant to Section 28(A)(1).23 Lastly, whether petitioner Air Canada is entitled to the refund of P5,185,676.77
pertaining allegedly to erroneously paid tax on Gross Philippine Billings from the
On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Bane.24 The third quarter of 2000 to the second quarter of 2002.
Petitioner claims that the general provision imposing the regular corporate income
tax on resident foreign corporations provided under Section 28(A)(1) of the 1997
National Internal Revenue Code does not apply to "international carriers,"31 which
are especially classified and taxed under Section 28(A)(3).32 It adds that the fact
that it is no longer subject to Gross Philippine Billings tax as ruled in the assailed
Court of Tax Appeals Decision "does not render it ipso facto subject to 32% income
tax on taxable income as a resident foreign corporation."33 Petitioner argues that
to impose the 32% regular corporate income tax on its income would violate the
Philippine government's covenant under Article VIII of the Republic of the
Philippines-Canada Tax Treaty not to impose a tax higher than 1 Vi% of the carrier's
gross revenue derived from sources within the Philippines.34 It would also allegedly
result in "inequitable tax treatment of on-line and off-line international air
carriers[.]"35
Also, petitioner states that the income it derived from the sale of airline tickets in
the Philippines was income from services and not income from sales of personal
property.36 Petitioner cites the deliberations of the Bicameral Conference
Committee on House Bill No. 9077 (which eventually became the 1997 National
Internal Revenue Code), particularly Senator Juan Ponce Enrile's statement,37 to
reveal the "legislative intent to treat the revenue derived from air carriage as
income from services, and that the carriage of passenger or cargo as the activity
that generates the income."38 Accordingly, applying the principle on the situs of
taxation in taxation of services, petitioner claims that its income derived "from
services rendered outside the Philippines [was] not subject to Philippine income
taxation."39
Petitioner further contends that by the appointment of Aerotel as its general sales
agent, petitioner cannot be considered to have a "permanent establishment"40 in
the Philippines pursuant to Article V(6) of the Republic of the Philippines-Canada
Tax Treaty.41 It points out that Aerotel is an "independent general sales agent that
acts as such for ... other international airline companies in the ordinary course of its
business."42 Aerotel sells passage tickets on behalf of petitioner and receives a
commission for its services.43 Petitioner states that even the Bureau of Internal
Revenue— through VAT Ruling No. 003-04 dated February 14, 2004—has conceded
that an offline international air carrier, having no flight operations to and from the
Philippines, is not deemed engaged in business in the Philippines by merely
appointing a general sales agent.44 Finally, petitioner maintains that its "claim for
refund of erroneously paid Gross Philippine Billings cannot be denied on the
ground that [it] is subject to income tax under Section 28 (A) (I)" 45 since it has not
been assessed at all by the Bureau of Internal Revenue for any income tax
liability.46
On the other hand, respondent maintains that petitioner is subject to the 32%
corporate income tax as a resident foreign corporation doing business in the
Philippines. Petitioner's total payment of P5,185,676.77 allegedly shows that
petitioner was earning a sizable income from the sale of its plane tickets within the
Philippines during the relevant period.47 Respondent further points out that this
court in Commissioner of Internal Revenue v. American Airlines, Inc.,48 which in turn
cited the cases involving the British Overseas Airways Corporation and Air India,
had already settled that "foreign airline companies which sold tickets in the
Philippines through their local agents . . . [are] considered resident foreign
corporations engaged in trade or business in the country." 49 It also cites Revenue
Regulations No. 6-78 dated April 25, 1978, which defined the phrase "doing
business in the Philippines" as including "regular sale of tickets in the Philippines by
offline international airlines either by themselves or through their agents."50
Respondent further contends that petitioner is not entitled to its claim for refund
because the amount of P5,185,676.77 it paid as tax from the third quarter of 2000
to the second quarter of 2001 was still short of the 32% income tax due for the
period.51 Petitioner cannot allegedly claim good faith in its failure to pay the right
amount of tax since the National Internal Revenue Code became operative on
January 1, 1998 and by 2000, petitioner should have already been aware of the
implications of Section 28(A)(3) and the decided cases of this court's ruling on the
taxability of offline international carriers selling passage tickets in the Philippines.52
I
At the outset, we affirm the Court of Tax Appeals' ruling that petitioner, as an
offline international carrier with no landing rights in the Philippines, is not liable to
tax on Gross Philippine Billings under Section 28(A)(3) of the 1997 National Internal
Revenue Code:chanRoblesvirtualLawlibrary
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
. . . .
(3) International Carrier. - An international carrier doing business in the Philippines
shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings'
as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated, exchanged and/or indorsed
to another international airline form part of the Gross Philippine Billings if the
passenger boards a plane in a port or point in the Philippines: Provided, further,
That for a flight which originates from the Philippines, but transshipment of
passenger takes place at any port outside the Philippines on another airline, only
the aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine
Billings. (Emphasis supplied)cralawlawlibrary
The definition of "resident foreign corporation" has not substantially changed
throughout the amendments of the National Internal Revenue Code. All versions
refer to "a foreign corporation engaged in trade or business within the Philippines."
Commonwealth Act No. 466, known as the National Internal Revenue Code and
approved on June 15, 1939, defined "resident foreign corporation" as applying to
"a foreign corporation engaged in trade or business within the Philippines or having
an office or place of business therein."55
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic
Act No. 6110, approved on August 4, 1969, reads:chanRoblesvirtualLawlibrary

Under the foregoing provision, the tax attaches only when the carriage of persons, Sec. 24. Rates of tax on corporations. — . . .
excess baggage, cargo, and mail originated from the Philippines in a continuous and
uninterrupted flight, regardless of where the passage documents were sold. (b) Tax on foreign corporations. — . . .

Not having flights to and from the Philippines, petitioner is clearly not liable for the (2) Resident corporations. — A corporation organized, authorized, or existing under
Gross Philippine Billings tax. the laws of any foreign country, except a foreign life insurance company, engaged
in trade or business within the Philippines, shall be taxable as provided in
II subsection (a) of this section upon the total net income received in the preceding
taxable year from all sources within the Philippines.56 (Emphasis
supplied)cralawlawlibrary
Petitioner, an offline carrier, is a resident foreign corporation for income tax
purposes. Petitioner falls within the definition of resident • foreign corporation
under Section 28(A)(1) of the 1997 National Internal Revenue Code, thus, it may be Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain
subject to 32%53 tax on its taxable income:chanRoblesvirtualLawlibrary sections of the 1939 National Internal Revenue Code. Section 24(b)(2) on foreign
resident corporations was amended, but it still provides that "[a] corporation
SEC. 28. Rates of Income Tax on Foreign Corporations. - organized, authorized, or existing under the laws of any foreign country, engaged
in trade or business within the Philippines, shall be taxable as provided in
(A) Tax on Resident Foreign Corporations. - subsection (a) of this section upon the total net income received in the preceding
taxable year from all sources within the Philippines[.]"57
(1) In General. - Except as otherwise provided in this Code, a corporation organized,
authorized, or existing under the laws of any foreign country, engaged in trade or As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas
business within the Philippines, shall be subject to an income tax equivalent to Airways Corporation58 declared British Overseas Airways Corporation, an
thirty-five percent (35%) of the taxable income derived in the preceding taxable international air carrier with no landing rights in the Philippines, as a resident
year from all sources within the Philippines: Provided, That effective January 1, foreign corporation engaged in business in the Philippines through its local sales
1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, agent that sold and issued tickets for the airline company.59 This court discussed
1999, the rate shall be thirty- three percent (33%); and effective January 1, 2000 that:chanRoblesvirtualLawlibrary
and thereafter, the rate shall be thirty-two percent (32%54). (Emphasis
supplied)cralawlawlibrary There is no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the performance of
acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the
business organization. "In order that a foreign corporation may be regarded as
doing business within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent, and not
one of a temporary character. ["]
BOAC, during the periods covered by the subject-assessments, maintained a
general sales agent in the Philippines. That general sales agent, from 1959 to 1971,
"was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip
into series of trips — each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4) consequently
allocating to the various airline companies on the basis of their participation in the
services rendered through the mode of interline settlement as prescribed by Article
VI of the Resolution No. 850 of the IATA Agreement." Those activities were in
exercise of the functions which are normally incident to, and are in progressive
pursuit of, the purpose and object of its organization as an international air carrier.
In fact, the regular sale of tickets, its main activity, is the very lifeWood of the
airline business, the generation of sales being the paramount objective. There
should be no doubt then that BOAC was "engaged in" business in the Philippines
through a local agent during the period covered by the assessments. Accordingly, it
is a resident foreign corporation subject to tax upon its total net income received in
the preceding taxable year from all sources within the Philippines.60 (Emphasis
supplied, citations omitted)cralawlawlibrary
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides
guidance with its definition of "doing business" with regard to foreign corporations.
Section 3(d) of the law enumerates the activities that constitute doing
business:chanRoblesvirtualLawlibrary
d. the phrase "doing business" shall include soliciting orders, service contracts,
opening offices, whether called "liaison" offices or branches; appointing
representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totalling one hundred eighty (180)
days or more; participating in the management, supervision or control of any
domestic business, firm, entity or corporation in the Philippines; and any other act
or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of
some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business
organization: Provided, however, That' the phrase "doing business" shall not be
deemed to include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the exercise of rights
as such investor; nor having a nominee director or officer to represent its interests
in such corporation; nor appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own
account[.]61 (Emphasis supplied)cralawlawlibrary
While Section 3(d) above states that "appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its
own account" is not considered as "doing business," the Implementing Rules and
Regulations of Republic Act No. 7042 clarifies that "doing business"
includes "appointing representatives or distributors, operating under full control of
the foreign corporation, domiciled in the Philippines or who in any calendar year
stay in the country for a period or periods totaling one hundred eighty (180) days
or more[.]"62
An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics]
Board, but who maintains office or who has designated or appointed agents or
employees in the Philippines, who sells or offers for sale any air transportation in
behalf of said foreign air carrier and/or others, or negotiate for, or holds itself out
by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or
arranges for such transportation."63
"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the
[Civil Aeronautics] Board for such authority."64 Each offline carrier must file with
the Civil Aeronautics Board a monthly report containing information on the tickets
sold, such as the origin and destination of the passengers, carriers involved, and
commissions received.65
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the
Philippines.
Aerotel performs acts or works or exercises functions that are incidental and
beneficial to the purpose of petitioner's business. The activities of Aerotel bring
direct receipts or profits to petitioner.66 There is nothing on record to show that
Aerotel solicited orders alone and for its own account and without interference
from, let alone direction of, petitioner. On the contrary, Aerotel cannot "enter into
any contract on behalf of [petitioner Air Canada] without the express written
consent of [the latter,]"67 and it must perform its functions according to the
standards required by petitioner.68 Through Aerotel, petitioner is able to engage in
an economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to
operate as an offline carrier in the Philippines for a period of five years, or from
April 24, 2000 until April 24, 2005.69
Petitioner is, therefore, a resident foreign corporation that is taxable on its income
derived from sources within the Philippines. Petitioner's income from sale of airline
tickets, through Aerotel, is income realized from the pursuit of its business
activities in the Philippines.
Ill
However, the application of the regular 32% tax rate under Section 28(A)(1) of the
1997 National Internal Revenue Code must consider the existence of an effective
tax treaty between the Philippines and the home country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal
Revenue,70 this court held that Section 28(A)(3)(a) does not categorically exempt all
international air carriers from the coverage of Section 28(A)(1). Thus, if Section
28(A)(3)(a) is applicable to a taxpayer, then the general rule under Section 28(A)(1)
does not apply. If, however, Section 28(A)(3)(a) does not apply, an international air
carrier would be liable for the tax under Section 28(A)(1).71
This court in South African Airways declared that the correct interpretation of these
provisions is that: "international air carrier[s] maintaining] flights to and from the
Philippines . . . shall be taxed at the rate of 21/2% of its Gross Philippine Billings[;]
while international air carriers that do not have flights to and from the Philippines
but nonetheless earn income from other activities in the country [like sale of airline
tickets] will be taxed at the rate of 32% of such [taxable] income." 72
In this case, there is a tax treaty that must be taken into consideration to
determine the proper tax rate.
A tax treaty is an agreement entered into between sovereign states "for purposes
of eliminating double taxation on income and capital, preventing fiscal evasion,
promoting mutual trade and investment, and according fair and equitable tax
treatment to foreign residents or nationals."73Commissioner of Internal Revenue v.
S.C. Johnson and Son, Inc.74 explained the purpose of a tax
treaty:chanRoblesvirtualLawlibrary
The purpose of these international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions. More precisely, the tax
conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable taxes in
two or more states on the same taxpayer in respect of the same subject matter and
for identical periods.
The apparent rationale for doing away with double taxation is to encourage the
free flow of goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust and
dynamic economies. Foreign investments will only thrive in a fairly predictable and
reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate.75(Emphasis in the original, citations
omitted)cralawlawlibrary
Observance of any treaty obligation binding upon the government of the
Philippines is anchored on the constitutional provision that the Philippines "adopts
the generally accepted principles of international law as part of the law of the
land[.]" 76Pacta sunt servanda is a fundamental international law principle that
requires agreeing parties to comply with their treaty obligations in good faith.77
Hence, the application of the provisions of the National Internal Revenue Code
must be subject to the provisions of tax treaties entered into by the Philippines
with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue, 78 this
court stressed the binding effects of tax treaties. It dealt with the issue of "whether
the failure to strictly comply with [Revenue Memorandum Order] RMO No. 1-
200079 will deprive persons or corporations of the benefit of a tax
treaty."80 Upholding the tax treaty over the administrative issuance, this court
reasoned thus:chanRoblesvirtualLawlibrary
Our Constitution provides for adherence to the general principles of international
law as part of the law of the land. The time-honored international principle of
pacta sunt servanda demands the performance in good faith of treaty obligations
on the part of the states that enter into the agreement. Every treaty in force is
binding upon the parties, and obligations under the treaty must be performed by
them in good faith. More importantly, treaties have the force and effect of law in
this jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in
two different jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies that
"tax conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable taxes in
two or more states on the same taxpayer in respect of the same subject matter and
for identical periods. The apparent rationale for doing away with double taxation is
to encourage the free flow of goods and services and the movement of capital,
technology and persons between countries, conditions deemed vital in creating
robust and dynamic economies. Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate." Simply put, tax
treaties are entered into to minimize, if not eliminate the harshness of
international juridical double taxation, which is why they are also known as double
tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its
legislations those modifications that may be necessary to ensure the fulfillment of
the obligations undertaken. " Thus, laws and issuances must ensure that the reliefs
granted under tax treaties are accorded to the parties entitled thereto. The BIR
must not impose additional requirements that would negate the availment of the
reliefs provided for under international agreements. More so, when the RP-
Germany Tax Treaty does not provide for any pre-requisite for the availment of the
benefits under said agreement.
. . . .
Bearing in mind the rationale of tax treaties, the period of application for the
availment of tax treaty relief as required by RMO No. 1 -2000 should not operate to
divest entitlement to the relief as it would constitute a violation of the duty
required by good faith in complying with a tax treaty. The denial of the availment
of tax relief for the failure of a taxpayer to apply within the prescribed period under
the administrative issuance would impair the value of the tax treaty. At most, the
application for a tax treaty relief from the BIR should merely operate to confirm the
entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective
of RMO No. 1-2000. Logically, noncompliance with tax treaties has negative
implications on international relations, and unduly discourages foreign investors.
While the consequences sought to be prevented by RMO No. 1-2000 involve an
administrative procedure, these may be remedied through other system
management processes, e.g., the imposition of a fine or penalty. But we cannot
totally deprive those who are entitled to the benefit of a treaty for failure to strictly
comply with an administrative issuance requiring prior application for tax treaty
relief.81 (Emphasis supplied, citations omitted)cralawlawlibrary
On March 11, 1976, the representatives82 for the government of the Republic of
the Philippines and for the government of Canada signed the Convention between
the Philippines and Canada for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income (Republic of the
Philippines-Canada Tax Treaty). This treaty entered into force on December 21,
1977.
Article V83 of the Republic of the Philippines-Canada Tax Treaty defines "permanent
establishment" as a "fixed place of business in which the business of the enterprise
is wholly or partly carried on."84
Even though there is no fixed place of business, an enterprise of a Contracting State
is deemed to have a permanent establishment in the other Contracting State if
under certain conditions there is a person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states
that "[a] person acting in a Contracting State on behalf of an enterprise of the other
Contracting State (other than an agent of independent status to whom paragraph 6
applies) shall be deemed to be a permanent establishment in the first-mentioned
State if . . . he has and habitually exercises in that State an authority to conclude
contracts on behalf of the enterprise, unless his activities are limited to the
purchase of goods or merchandise for that enterprise[.]" The provision seems to
refer to one who would be considered an agent under Article 186883 of the Civil
Code of the Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State
shall not be deemed to have a permanent establishment in the other Contracting
State merely because it carries on business in that other State through a broker,
general commission agent or any other agent of an independent status, where
such persons are acting in the ordinary course of their business."
Considering Article XV86 of the same Treaty, which covers dependent personal
services, the term "dependent" would imply a relationship between the principal
and the agent that is akin to an employer-employee relationship.
Thus, an agent may be considered to be dependent on the principal where the
latter exercises comprehensive control and detailed instructions over the means
and results of the activities of the agent.87
 reasonable requirements of AC;
Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics . . . .
Act of the Philippines, defines a general sales agent as "a person, not a bonafide
employee of an air carrier, who pursuant to an authority from an airline, by itself or j) Distribution of official press releases provided by AC to media and reference of
through an agent, sells or offers for sale any air transportation, or negotiates for, or any press or public relations inquiries to AC;
holds himself out by solicitation, advertisement or otherwise as one who sells, . . . .
provides, furnishes, contracts or arranges for, such air transportation."88 General
sales agents and their property, property rights, equipment, facilities, and franchise o) Submission for AC's approval, of an annual written sales plan on or before a date
are subject to the regulation and control of the Civil Aeronautics Board. 89 A permit to be determined by AC and in a form acceptable to AC;
or authorization issued by the Civil Aeronautics Board is required before a general . . . .
sales agent may engage in such an activity.90
q) Submission of proposals for AC's approval of passenger sales agent incentive
Through the appointment of Aerotel as its local sales agent, petitioner is deemed to plans at a reasonable time in advance of proposed implementation.
have created a "permanent"establishment" in the Philippines as defined under the . . . .
Republic of the Philippines-Canada Tax Treaty.
r) Provision of assistance on request, in its relations with Governmental and other
Petitioner appointed Aerotel as its passenger general sales agent to perform the authorities, offices and agencies in the Territory [Philippines].
sale of transportation on petitioner and handle reservations, appointment, and . . . .
supervision of International Air Transport Association-approved and petitioner-
approved sales agents, including the following services:chanRoblesvirtualLawlibrary u) Follow AC guidelines for the handling of baggage claims and customer
complaints and, unless otherwise stated in the guidelines, refer all such claims and
ARTICLE 7 complaints to AC.91cralawlawlibrary
GSA SERVICES

Under the terms of the Passenger General Sales Agency Agreement, Aerotel will
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the "provide at its own expense and acceptable to [petitioner Air Canada], adequate
following services:chanRoblesvirtualLawlibrary and suitable premises, qualified staff, equipment, documentation, facilities and
supervision and in consideration of the remuneration and expenses payable[,] [will]
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit defray all costs and expenses of and incidental to the Agency."92 "[I]t is the sole
of AC in every matter relating to this Agreement; employer of its employees and . . . is responsible for [their] actions ... or those of
. . . . any subcontractor."93 In remuneration for its services, Aerotel would be paid by
petitioner a commission on sales of transportation plus override commission on
c) Promotion of passenger transportation on AC; flown revenues.94 Aerotel would also be reimbursed "for all authorized expenses
. . . . supported by original supplier invoices."95

e) Without the need for endorsement by AC, arrange for the reissuance, in the Aerotel is required to keep "separate books and records of account, including
Territory of the GSA [Philippines], of traffic documents issued by AC outside the supporting documents, regarding all transactions at, through or in any way
said territory of the GSA [Philippines], as required by the passenger(s); connected with [petitioner Air Canada] business."96
. . . .
"If representing more than one carrier, [Aerotel must] represent all carriers in an
h) Distribution among passenger sales agents and display of timetables, fare unbiased way."97 Aerotel cannot "accept additional appointments as General Sales
sheets, tariffs and publicity material provided by AC in accordance with the Agent of any other carrier without the prior written consent of [petitioner Air
Canada]."98 General Sales Agency Agreement executed between the parties. It has the
authority or power to conclude contracts or bind petitioner to contracts entered
The Passenger General Sales Agency Agreement "may be terminated by either into in the Philippines. A third-party liability on contracts of Aerotei is to petitioner
party without cause upon [no] less than 60 days' prior notice in writing[.]"99 In case as the principal, and not to Aerotei, and liability to such third party is enforceable
of breach of any provisions of the Agreement, petitioner may require Aerotel "to against petitioner. While Aerotei maintains a certain independence and its
cure the breach in 30 days failing which [petitioner Air Canada] may terminate [the] activities may not be devoted wholly to petitioner, nonetheless, when representing
Agreement[.]"100 petitioner pursuant to the Agreement, it must carry out its functions solely for the
benefit of petitioner and according to the latter's Manual and written instructions.
The following terms are indicative of Aerotel's dependent Aerotei is required to submit its annual sales plan for petitioner's approval.
status:chanRoblesvirtualLawlibrary
In essence, Aerotei extends to the Philippines the transportation business of
First, Aerotel must give petitioner written notice "within 7 days of the date [it] petitioner. It is a conduit or outlet through which petitioner's airline tickets are
acquires or takes control of another entity or merges with or is acquired or sold.112
controlled by another person or entity[,]"101 Except with the written consent of
petitioner, Aerotel must not acquire a substantial interest in the ownership, Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax
management, or profits of a passenger sales agent affiliated with the International Treaty, the "business profits" of an enterprise of a Contracting State is "taxable
Air Transport Association or a non-affiliated passenger sales agent nor shall an only in that State[,] unless the enterprise carries on business in the other
affiliated passenger sales agent acquire a substantial interest in Aerotel as to Contracting State through a permanent establishment);.]"113 Thus, income
influence its commercial policy and/or management decisions.102Aerotel must also attributable to Aerotel or from business activities effected by petitioner through
provide petitioner "with a report on any interests held by [it], its owners, directors, Aerotel may be taxed in the Philippines. However, pursuant to the last
officers, employees and their immediate families in companies and other entities in paragraph114 of Article VII in relation to Article VIII115 (Shipping and Air Transport)
the aviation industry or ... industries related to it[.]"103 Petitioner may require that of the same Treaty, the tax imposed on income derived from the operation of ships
any interest be divested within a set period of time.104 or aircraft in international traffic should not exceed 1 1/2% of gross revenues
derived from Philippine sources.
Second, in carrying out the services, Aerotei cannot enter into any contract on
behalf of petitioner without the express written consent of the latter;105 it must act IV
according to the standards required by petitioner;106 "follow the terms and
provisions of the [petitioner Air Canada] GS A Manual [and all] written instructions
of [petitioner Air Canada;]"107 and "[i]n the absence of an applicable provision in While petitioner is taxable as a resident foreign corporation under Section 28(A)(1)
the Manual or instructions, [Aerotei must] carry out its functions in accordance of the 1997 National Internal Revenue Code on its taxable income116 from sale of
with [its own] standard practices and procedures[.]"108 airline tickets in the Philippines, it could only be taxed at a maximum of 1 1/2% of
gross revenues, pursuant to Article VIII of the Republic of the Philippines-Canada
Third, Aerotei must only "issue traffic documents approved by [petitioner Air Tax Treaty that applies to petitioner as a "foreign corporation organized and
Canada] for all transportation over [its] services[.]"109 All use of petitioner's name, existing under the laws of Canada[.]"117
logo, and marks must be with the written consent of petitioner and according to
petitioner's corporate standards and guidelines set out in the Manual.110 Tax treaties form part of the law of the land,118 and jurisprudence has applied the
statutory construction principle that specific laws prevail over general ones. 119
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with
the transportation sold by Aerotei are for the account of petitioner, except in the The Republic of the Philippines-Canada Tax Treaty was ratified on December 21,
case of negligence of Aerotei.111 1977 and became valid and effective on that date. On the other hand, the
applicable provisions120 relating to the taxability of resident foreign corporations
Aerotei is a dependent agent of petitioner pursuant to the terms of the Passenger and the rate of such tax found in the National Internal Revenue Code became
effective on January 1, 1998.121 Ordinarily, the later provision governs over the
earlier one.122 In this case, however, the provisions of the Republic of the
Philippines-Canada Tax Treaty are more specific than the provisions found in the
National Internal Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty and
not simply a statute.
Article VII, Section 21 of the Constitution provides:chanRoblesvirtualLawlibrary
SECTION 21. No treaty or international agreement shall be valid and effective
unless concurred in by at least two-thirds of all the Members of the
Senate.cralawlawlibrary
This provision states the second of two ways through which international
obligations become binding. Article II, Section 2 of the Constitution deals with
international obligations that are incorporated, while Article VII, Section 21 deals
with international obligations that become binding through ratification.
"Valid and effective" means that treaty provisions that define rights and duties as
well as definite prestations have effects equivalent to a statute. Thus, these specific
treaty provisions may amend statutory provisions. Statutory provisions may also
amend these types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not international
obligations erga omnes.We are also not required to rule in this case on the effect of
international customary norms especially those with jus cogens character.
The second paragraph of Article VIII states that "profits from sources within a
Contracting State derived by an enterprise of the other Contracting State from the
operation of ships or aircraft in international traffic may be taxed in the first-
mentioned State but the tax so charged shall not exceed the lesser of a) one and
one-half per cent of the gross revenues derived from sources in that State; and b)
the lowest rate of Philippine tax imposed on such profits derived by an enterprise
of a third State."
The Agreement between the government of the Republic of the Philippines and the
government of Canada on Air Transport, entered into on January 14, 1997,
reiterates the effectivity of Article VIII of the Republic of the Philippines-Canada Tax
Treaty:chanRoblesvirtualLawlibrary
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of
the Convention between the Philippines and Canada for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income,
signed at Manila on March 31, 1976 and entered into force on December 21, 1977,
and any amendments thereto, in respect of the operation of aircraft in
international traffic.123cralawlawlibrary
Petitioner's income from sale of ticket for international carriage of passenger is
income derived from international operation of aircraft. The sale of tickets is
closely related to the international operation of aircraft that it is considered
incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have
our right to tax limited to a certain extent[.]"124 Thus, we are bound to extend to a
Canadian air carrier doing business in the Philippines through a local sales agent
the benefit of a lower tax equivalent to 1 1/2% on business profits derived from
sale of international air transportation.
V
Finally, we reject petitioner's contention that the Court of Tax Appeals erred in
denying its claim for refund of erroneously paid Gross Philippine Billings tax on the
ground that it is subject to income tax under Section 28(A)(1) of the National
Internal Revenue Code because (a) it has not been assessed at all by the Bureau of
Internal Revenue for any income tax liability;125 and (b) internal revenue taxes
cannot be the subject of set-off or compensation,126 citing Republic v. Mambulao
Lumber Co., et al.127 and Francia v. Intermediate Appellate Court.128
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue, 129 we
have ruled that "[i]n an action for the refund of taxes allegedly erroneously paid,
the Court of Tax Appeals may determine whether there are taxes that should have
been paid in lieu of the taxes paid."130 The determination of the proper category of
tax that should have been paid is incidental and necessary to resolve the issue of
whether a refund should be granted.131 Thus:chanRoblesvirtualLawlibrary
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to Any liability in excess of the refundable amount, however, may not be collected in
6% capital gains tax or other taxes at the first instance. The Court of Tax Appeals a case involving solely the issue of the taxpayer's entitlement to refund. The
has no power to make an assessment. question of tax deficiency is distinct and unrelated to the question of petitioner's
entitlement to refund. Tax deficiencies should be subject to assessment procedures
As earlier established, the Court of Tax Appeals has no assessment powers. In and the rules of prescription. The court cannot be expected to perform the BIR's
stating that petitioner's transactions are subject to capital gains tax, however, the duties whenever it fails to do so either through neglect or oversight. Neither can
Court of Tax Appeals was not making an assessment. It was merely determining the court processes be used as a tool to circumvent laws protecting the rights of
proper category of tax that petitioner should have paid, in view of its claim that it taxpayers.132cralawlawlibrary
erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-
registered enterprises.
Hence, the Court of Tax Appeals properly denied petitioner's claim for refund of
The determination of the proper category of tax that petitioner should have paid is allegedly erroneously paid tax on its Gross Philippine Billings, on the ground that it
an incidental matter necessary for the resolution of the principal issue, which is was liable instead for the regular 32% tax on its taxable income received from
whether petitioner was entitled to a refund. sources within the Philippines. Its determination of petitioner's liability for the 32%
regular income tax was made merely for the purpose of ascertaining petitioner's
The issue of petitioner's claim for tax refund is intertwined with the issue of the entitlement to a tax refund and not for imposing any deficiency tax.
proper taxes that are due from petitioner. A claim for tax refund carries the
assumption that the tax returns filed were correct. If the tax return filed was not In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the
proper, the correctness of the amount paid and, therefore, the claim for refund cases cited are based on different circumstances. In both cited cases,133 the
become questionable. In that case, the court must determine if a taxpayer claiming taxpayer claimed that his (its) tax liability was off-set by his (its) claim against the
refund of erroneously paid taxes is more properly liable for taxes other than that government.
paid.
Specifically, in Republic v. Mambulao Lumber Co., et al, Mambulao Lumber
In South African Airways v. Commissioner of Internal Revenue, South African contended that the amounts it paid to the government as reforestation charges
Airways claimed for refund of its erroneously paid 2 1/2% taxes on its gross from 1947 to 1956, not having been used in the reforestation of the area covered
Philippine billings. This court did not immediately grant South African's claim for by its license, may be set off or applied to the payment of forest charges still due
refund. This is because although this court found that South African Airways was and owing from it.134 Rejecting Mambulao's claim of legal compensation, this court
not subject to the 2 1/2% tax on its gross Philippine billings, this court also found ruled:chanRoblesvirtualLawlibrary
that it was subject to 32% tax on its taxable income.
[A]ppellant and appellee are not mutually creditors and debtors of each other.
In this case, petitioner's claim that it erroneously paid the 5% final tax is an Consequently, the law on compensation is inapplicable. On this point, the trial
admission that the quarterly tax return it filed in 2000 was improper. Hence, to court correctly observed:chanRoblesvirtualLawlibrary
determine if petitioner was entitled to the refund being claimed, the Court of Tax
Appeals has the duty to determine if petitioner was indeed not liable for the 5% Under Article 1278, NCC, compensation should take place when two persons in
final tax and, instead, liable for taxes other than the 5% final tax. As in South their own right are creditors and debtors of each other. With respect to the forest
African Airways, petitioner's request for refund can neither be granted nor denied charges which the defendant Mambulao Lumber Company has paid to the
outright without such determination. government, they are in the coffers of the government as taxes collected, and the
government does not owe anything to defendant Mambulao Lumber Company. So,
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, it is crystal clear that the Republic of the Philippines and the Mambulao Lumber
the amount of the taxpayer's liability should be computed and deducted from the Company are not creditors and debtors of each other, because compensation refers
refundable amount. to mutual debts. * * *.cralawlawlibrary

And the weight of authority is to the effect that internal revenue taxes, such as the
forest charges in question, can not be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off under the statutes of set-off, which are construed uniformly, in the light
of public policy, to exclude the remedy in an action or any indebtedness of the
state or municipality to one who is liable to the state or municipality for taxes.
Neither are they a proper subject of recoupment since they do not arise out of the
contract or transaction sued on. * * *. (80 C.J.S. 73-74.)
The general rule, based on grounds of public policy is well-settled that no set-off is
admissible against demands for taxes levied for general or local governmental
purposes. The reason on which the general rule is based, is that taxes are not in the
nature of contracts between the party and party but grow out of a duty to, and are
the positive acts of the government, to the making and enforcing of which, the
personal consent of individual taxpayers is not required. * * * If the taxpayer can
properly refuse to pay his tax when called upon by the Collector, because he has a
claim against the governmental body which is not included in the tax levy, it is plain
that some legitimate and necessary expenditure must be curtailed. If the taxpayer's
claim is disputed, the collection of the tax must await and abide the result of a
lawsuit, and meanwhile the financial affairs of the government will be thrown into
great confusion. (47 Am. Jur. 766-767.)135 (Emphasis supplied)
cralawlawlibrary
In Francia, this court did not allow legal compensation since not all requisites of
legal compensation provided under Article 1279 were present.136 In that case, a
portion of Francia's property in Pasay was expropriated by the national
government,137 which did not immediately pay Francia. In the meantime, he failed
to pay the real property tax due on his remaining property to the local government
of Pasay, which later on would auction the property on account of such
delinquency. He then moved to set aside the auction sale and argued, among
others, that his real property tax delinquency was extinguished by legal
compensation on account of his unpaid claim against the national
government.139 This court ruled against Francia:chanRoblesvirtualLawlibrary
There is no legal basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors of each
other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do
not satisfy the requirements provided by Article 1279, to
wit:chanRoblesvirtualLawlibrary
(1) that each one of the obligors be bound principally and that he be at the same
time a principal creditor of the other;
xxx xxx xxx
cralawlawlibrary
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled
that there can be no off-setting of taxes against the claims that the taxpayer may
have against the government. A person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to or greater than the tax being
collected. The collection of a tax cannot await the results of a lawsuit against the
government.
. . . .
There are other factors which compel us to rule against the petitioner. The tax was
due to the city government while the expropriation was effected by the national
government.Moreover, the amount of P4,116.00 paid by the national government
for the 125 square meter portion of his lot was deposited with the Philippine
National Bank long before the sale at public auction of his remaining property.
Notice of the deposit dated September 28, 1977 was received by the petitioner on
September 30, 1977. The petitioner admitted in his testimony that he knew about
the P4,116.00 deposited with the bank but he did not withdraw it. It would have
been an easy matter to withdraw P2,400.00 from the deposit so that he could pay
the tax obligation thus aborting the sale at public auction.140cralawlawlibrary
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc.
v. Commission on Audit141 and Philex Mining Corporation v. Commissioner of
Internal Revenue.142 In Caltex, this court reiterated:chanRoblesvirtualLawlibrary
[A] taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and
a claim for taxes is not such a debt, demand, contract or judgment as is allowed to
beset-off.143 (Citations omitted)cralawlawlibrary
Philex Mining ruled that "[t]here is a material distinction between a tax and debt.
Debts are due to the Government in its corporate capacity, while taxes are due to
the Government in its sovereign capacity."144Rejecting Philex Mining's assertion
that the imposition of surcharge and interest was unjustified because it had no
obligation to pay the excise tax liabilities within the prescribed period since, after
all, it still had pending claims for VAT input credit/refund with the Bureau of
Internal Revenue, this court explained:chanRoblesvirtualLawlibrary
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the
ground that it has a pending tax claim for refund or credit against the government
which has not yet been granted. It must be noted that a distinguishing feature of a
tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not
depend upon the consent of the taxpayer. If any tax payer can defer the payment
of taxes by raising the defense that it still has a pending claim for refund or credit,
this would adversely affect the government revenue system. A taxpayer cannot
refuse to pay his taxes when they fall due simply because he has a claim against the
government or that the collection of the tax is contingent on the result of the
lawsuit it filed against the government. Moreover, Philex's theory that would
automatically apply its VAT input credit/refund against its tax liabilities can easily
give rise to confusion and abuse, depriving the government of authority over the
manner by which taxpayers credit and offset their tax liabilities.145 (Citations
omitted)
cralawlawlibrary
In sum, the rulings in those cases were to the effect that the taxpayer cannot
simply refuse to pay tax on the ground that the tax liabilities were off-set against
any alleged claim the taxpayer may have against the government. Such would
merely be in keeping with the basic policy on prompt collection of taxes as the
lifeblood of the government.
Here, what is involved is a denial of a taxpayer's refund claim on account of the
Court of Tax Appeals' finding of its liability for another tax in lieu of the Gross
Philippine Billings tax that was allegedly erroneously paid.
Squarely applicable is South African Airways where this court rejected similar
arguments on the denial of claim for tax refund:chanRoblesvirtualLawlibrary
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the
offsetting of a tax refund with a tax deficiency in this
wise:chanRoblesvirtualLawlibrary
Further, it is also worth noting that the Court of Tax Appeals erred in denying
petitioner's supplemental motion for reconsideration alleging bringing to said
court's attention the existence of the deficiency income and business tax
assessment against Citytrust. The fact of such deficiency assessment is intimately
related to and inextricably intertwined with the right of respondent bank to claim
for a tax refund for the same year. To award such refund despite the existence of
that deficiency assessment is an absurdity and a polarity in conceptual effects.
Herein private respondent cannot be entitled to refund and at the same time be
liable for a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that
is, the facts stated therein are true and correct. The deficiency assessment,
although not yet final, created a doubt as to and constitutes a challenge against the
truth and accuracy of the facts stated in said return which, by itself and without
unquestionable evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was
the applicable law when the claim of Citytrust was filed, provides that "(w)hen an
assessment is made in case of any list, statement, or return, which in the opinion of
the Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall
be recovered by any suits unless it is proved that the said list, statement, or return
was not false nor fraudulent and did not contain any understatement or
undervaluation; but this provision shall not apply to statements or returns made or
to be made in good faith regarding annual depreciation of oil or gas wells and
mines."
Moreover, to grant the refund without determination of the proper assessment
and the tax due would inevitably result in multiplicity of proceedings or suits. If the
deficiency assessment should subsequently be upheld, the Government will be
forced to institute anew a proceeding for the recovery of erroneously refunded
taxes which recourse must be filed within the prescriptive period of ten years after
discovery of the falsity, fraud or omission in the false or fraudulent return involved.
This would necessarily require and entail additional efforts and expenses on the
part of the Government, impose a burden on and a drain of government funds, and
impede or delay the collection of much-needed revenue for governmental
operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is deductions] will exceed the maximum ceiling of 1 1/2% of gross revenues as
both logically necessary and legally appropriate that the issue of the deficiency tax decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence,
assessment against Citytrust be resolved jointly with its claim for tax refund, to no refund is forthcoming.
determine once and for all in a single proceeding the true and correct amount of
tax due or refundable. WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and
Resolution dated April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only
just and fair that the taxpayer and the Government alike be given equal SO ORDERED.
opportunities to avail of remedies under the law to defeat each other's claim and
to determine all matters of dispute between them in one single case. It is
important to note that in determining whether or not petitioner is entitled to the Exempt Corporations
refund of the amount paid, it would [be] necessary to determine how much the
Government is entitled to collect as taxes. This would necessarily include the
G.R. No. 196596, November 09, 2016
determination of the correct liability of the taxpayer and, certainly, a determination
of this case would constitute res judicata on both parties as to all the matters
subject thereof or necessarily involved therein.cralawlawlibrary COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE UNIVERSITY,
INC., Respondent.

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 G.R. No. 198841
NIRC. The above pronouncements are, therefore, still applicable today.
DE LA SALLE UNIVERSITY INC., Petitioner, v. COMMISSIONER OF INTERNAL
Here, petitioner's similar tax refund claim assumes that the tax return that it filed REVENUE,Respondent.
was correct. Given, however, the finding of the CTA that petitioner, although not
liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the G.R. No. 198941
correctness of the return filed by petitioner is now put in doubt. As such, we
cannot grant the prayer for a refund.146 (Emphasis supplied, citation COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE UNIVERSITY,
omitted)cralawlawlibrary INC., Respondent.

DECISION
In the subsequent case of United Airlines, Inc. v. Commissioner of Internal
Revenue,147 this court upheld the denial of the claim for refund based on the Court BRION, J.:
of Tax Appeals' finding that the taxpayer had, through erroneous deductions on its
gross income, underpaid its Gross Philippine Billing tax on cargo revenues for 1999,
Before the Court are consolidated petitions for review on certiorari:1
and the amount of underpayment was even greater than the refund sought for
erroneously paid Gross Philippine Billings tax on passenger revenues for the same
taxable period.148 1. G.R. No. 196596 filed by the Commissioner of Internal Revenue
(Commissioner) to assail the December 10, 2010 decision and March 29,
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was 2011 resolution of the Court of Tax Appeals (CTA) in En Banc Case No.
computed at the rate of 1 1/2% of its gross revenues amounting to 622;2
P345,711,806.08149 from the third quarter of 2000 to the second quarter of 2002. It
is quite apparent that the tax imposable under Section 28(A)(1) of the 1997
National Internal Revenue Code [32% of taxable income, that is, gross income less
 2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the On January 5, 2010, the CTA Division partially granted DLSU's petition for review.
June 8, 2011 decision and October 4, 2011 resolution in CTA En Banc Case The dispositive portion of the decision reads:
No. 671;3 and chanRoblesvirtualLawlibrary
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment
3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 on the loan transactions of [DLSU] in the amount of P1,1681,774.00 is
decision and October 4, 2011 resolution in CTA En Banc Case No. 671.4 hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income tax,
VAT and DST on its lease contracts, plus 25% surcharge for the fiscal years 2001,
G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division 2002 and 2003 in the total amount of P18,421,363.53...xxx.
(CTA Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En BancCase No.
622 filed by the Commissioner to challenge CTA Case No. 7303. G.R. No. 198841 In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the
and 198941 both stemmed from CTA En Banc Case No. 671 filed by DLSU to also total amount due computed from September 30, 2004 until full payment thereof
challenge CTA Case No. 7303.chanroblesvirtuallawlibrary pursuant to Section 249(C)(3) of the [National Internal Revenue Code]. Further, the
compromise penalties imposed by [the Commissioner] were excluded, there. being
no compromise agreement between the parties.
The Factual Antecedents
SO ORDERED.9ChanRoblesVirtualawlibrary
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of
Both the Commissioner and DLSU moved for the reconsideration of the January 5,
Authority (LOA) No. 2794 authorizing its revenue officers to examine the latter's
2010 decision.10 On April 6, 2010, the CTA Division denied the Commissioner's
books of accounts and other accounting records for all internal revenue taxes for
motion for reconsideration while it held in abeyance the resolution on DLSU's
the period Fiscal Year Ending 2003 and Unverified Prior Years.5
motion for reconsideration.11
On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6
On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En
Banc Case No. 622) arguing that DLSU's use of its revenues and assets for non-
Subsequently on August 18, 2004, the BIR through a Formal Letter of
educational or commercial purposes removed these items from the exemption
Demand assessed DLSU the following deficiency taxes: (1) income tax on rental
coverage under the Constitution.12
earnings from restaurants/canteens and bookstores operating within the campus;
(2) value-added tax (VAT) on business income; and (3) documentary stamp
On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of
tax (DST) on loans and lease contracts. The BIR demanded the payment
documentary evidence to prove that its rental income was used actually, directly
of P17,303,001.12, inclusive of surcharge, interest and penalty for taxable years
and exclusively for educational purposes.13The Commissioner did not promptly
2001, 2002 and 2003.7
object to the formal offer of supplemental evidence despite notice.14
DLSU protested the assessment. The Commissioner failed to act on the protest;
On July 29, 2010, the CTA Division, in view of the supplemental evidence
thus, DLSU filed on August 3, 2005 a petition for review with the CTA Division. 8
submitted, reduced the amount of DLSU's tax deficiencies. The dispositive portion
of the amended decision reads:
DLSU, a non-stock, non-profit educational institution, principally anchored its
chanRoblesvirtualLawlibrary
petition on Article XIV, Section 4 (3) of the Constitution, which reads:
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY
chanRoblesvirtualLawlibrary
GRANTED. [DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT and
(3) All revenues and assets of non-stock, non-profit educational institutions used DST plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total
actually, directly, and exclusively for educational purposes shall be exempt adjusted amount of P5,506,456.71...xxx.
from taxes and duties. xxx.
In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency
interest on the...basic deficiency taxes...until full payment thereof pursuant to
Section 249(B) of the [National Internal Revenue Code]...xxx. DST on loan and mortgage transactions

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on
the deficiency taxes, surcharge and deficiency interest which have accrued...from
September 30, 2004 until fully paid.15ChanRoblesVirtualawlibrary
Consequently, the Commissioner supplemented its petition with the CTA En
Banc and argued that the CTA Division erred in admitting DLSU's additional
evidence.16
Contrary to the Commissioner's contention, DLSU proved its remittance of the DST
due on its loan and mortgage documents.23 The CTA En Banc found that DLSU's DST
payments had been remitted to the BIR, evidenced by the stamp on the documents
made by a DST imprinting machine, which is allowed under Section 200 (D) of the
National Internal Revenue Code (Tax Code)24 and Section 2 of Revenue Regulations
(RR) No. 15-2001.25cralawred

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed Admissibility of DLSU's supplemental evidence
a separate petition for review with the CTA En Banc (CTA En Banc Case No. 671) on
the following grounds: (1) the entire assessment should have been cancelled The CTA En Banc held that the supplemental pieces of documentary evidence were
because it was based on an invalid LOA; (2) assuming the LOA was valid, the CTA admissible even if DLSU formally offered them only when it moved for
Division should still have cancelled the entire assessment because DLSU submitted reconsideration of the CTA Division's original decision. Notably, the law creating
evidence similar to those submitted by Ateneo De Manila University (Ateneo) in the CTA provides that proceedings before it shall not be governed strictly by the
a separate case where the CTA cancelled Ateneo's tax assessment;17 and (3) the technical rules of evidence.26
CTA Division erred in finding that a portion of DLSU's rental income was not proved
to have been used actually, directly and exclusively for educational The Commissioner moved but failed to obtain a reconsideration of the CTA En
purposes.18chanroblesvirtuallawlibrary Banc's December 10, 2010 decision.27 Thus, she came to this court for relief
through a petition for review on certiorari (G.R. No. 196596).
The CTA En Banc Rulings
CTA En Banc Case No. 671
CTA En Banc Case No. 622
The CTA En Banc partially granted DLSU's petition for review and further reduced
The CTA En Banc dismissed the Commissioner's petition for review and sustained its tax liabilities to P2,554,825.47 inclusive of surcharge.28
the findings of the CTA Division.19
On the validity of the Letter of Authority
Tax on rental income
The issue of the LOA's validity was raised during trial;29 hence, the issue was
Relying on the findings of the court-commissioned Independent Certified Public deemed properly submitted for decision and reviewable on appeal.
Accountant (Independent CPA), the CTA En Banc found that DLSU was able to
prove that a portion of the assessed rental income was used actually, directly and Citing jurisprudence, the CTA En Banc held that a LOA should cover only one
exclusively for educational purposes; hence, exempt from tax.20 The CTA En taxable period and that the practice of issuing a LOA covering audit of unverified
Banc was satisfied with DLSU's supporting evidence confirming that part of its prior years is prohibited.30 The prohibition is consistent with Revenue
rental income had indeed been used to pay the loan it obtained to build the Memorandum Order (RMO) No. 43-90, which provides that if the audit includes
university's Physical Education - Sports Complex.21 more than one taxable period, the other periods or years shall be specifically
indicated in the LOA.31
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its
income that was not shown by supporting documents to have been actually, In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
directly and exclusively used for educational purposes, must be subjected to Unverified Prior Years. Hence, the assessments for deficiency income tax, VAT and
income tax and VAT.22 DST for taxable years 2001 and 2002 are void, but the assessment for taxable
year 2003 is valid.32
On the applicability of the Ateneo case On the contrary, the Commissioner posits that a tax-exempt organization like DLSU
is exempt only from property tax but not from income tax on the rentals earned
The CTA En Banc held that the Ateneo case is not a valid precedent because it from property.40 Thus, DLSU's income from the leases of its real properties is not
involved different parties, factual settings, bases of assessments, sets of evidence, exempt from taxation even if the income would be used for educational
and defenses.33 purposes.41

On the CTA Division's appreciation of the evidence Second, the Commissioner insists that DLSU did not prove the fact of DST
payment42 and that it is not qualified to use the On-Line Electronic DST Imprinting
The CTA En Banc affirmed the CTA Division's appreciation of DLSU's evidence. It Machine, which is available only to certain classes of taxpayers under RR No. 9-
held that while DLSU successfully proved that a portion of its rental income was 2000.43
transmitted and used to pay the loan obtained to fund the construction of the
Sports Complex, the rental income from other sources were not shown to have Finally, the Commissioner objects to the admission of DLSU's supplemental offer of
been actually, directly and exclusively used for educational purposes. 34 evidence. The belated submission of supplemental evidence reopened the case for
trial, and worse, DLSU offered the supplemental evidence only after it received the
Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the unfavorable CTA Division's original decision.44 In any case, DLSU's submission of
Commissioner (G.R. No. 198941) came to this Court for supplemental documentary evidence was unnecessary since its rental income was
relief.chanroblesvirtuallawlibrary taxable regardless of its disposition.45

The Consolidated Petitions G.R. No. 198841

G.R. No. 196596 DLSU argues as that:

The Commissioner submits the following arguments: First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication
of unverified prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an
First, DLSU's rental income is taxable regardless of how such income is derived, assessment issued based on such defective LOA must also be void.46
used or disposed of.35 DLSU's operations of canteens and bookstores within its
campus even though exclusively serving the university community do not negate DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and
income tax liability.36 Unverified Prior Years. On the basis of this defective LOA, the Commissioner
assessed DLSU for deficiency income tax, VAT and DST for taxable years 2001, 2002
The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must and 2003.47 DLSU objects to the CTA En Banc's conclusion that the LOA is valid for
be harmonized with Section 30 (H) of the Tax Code, which states among others, taxable year 2003. According to DLSU, when RMO No. 43-90 provides that:
that the income of whatever kind and character of [a non-stock and non-profit chanRoblesvirtualLawlibrary
educational institution] from any of [its] properties, real or personal, or from any of The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby
(its] activities conducted for profit regardless of the disposition made of such prohibited.ChanRoblesVirtualawlibrary
income, shall be subject to tax imposed by this Code. 37 it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since
the LOA issued to DLSU follows this format, then any assessment arising from it
The Commissioner argues that the CTA En Banc misread and misapplied the case must be entirely voided.48
of Commissioner of Internal Revenue v. YMCA38 to support its conclusion that
revenues however generated are covered by the constitutional exemption, Second, DLSU invokes the principle of uniformity in taxation, which mandates that
provided that, the revenues will be used for educational purposes or will be held in for similarly situated parties, the same set of evidence should be appreciated and
reserve for such purposes.39 weighed in the same manner.49 The CTA En Banc erred when it did not similarly
appreciate DLSU's evidence as it did to the pieces of evidence submitted by for profit regardless of the disposition made of such income, should be
Ateneo, also a non-stock, non-profit educational institution.50 declared without force and effect in view of the constitutionally granted tax
exemption on "all revenues and assets of non-stock, non-profit educational
G.R. No. 198941 institutions used actually, directly, and exclusively for educational purposes." 57

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition
are exactly the same as those she raised in her: (1) petition docketed as G.R. No.
196596 and (2) comment on DLSU's petition docketed as G.R. No.
198841.51chanroblesvirtuallawlibrary
Counter-arguments
DLSU's Comment on G.R. No. 196596
First, DLSU questions the defective verification attached to the petition. 52
Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear
that all assets and revenues of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes are exempt from taxes
and duties.53
On this point, DLSU explains that: (1) the tax exemption of nonstock, non-profit
educational institutions is novel to the 1987 Constitution and that Section 30 (H) of
the 1997 Tax Code cannot amend the 1987 Constitution;54 (2) Section 30 of the
1997 Tax Code is almost an exact replica of Section 26 of the 1977 Tax Code - with
the addition of non-stock, non-profit educational institutions to the list of tax-
exempt entities; and (3) that the 1977 Tax Code was promulgated when the 1973
Constitution was still in place.
DLSU elaborates that the tax exemption granted to a private educational institution
under the 1973 Constitution was only for real property tax. Back then, the special
tax treatment on income of private educational institutions only emanates from
statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution that exemption
from tax of all the assets and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purposes, was
expressly and categorically enshrined.55
DLSU thus invokes the doctrine of constitutional supremacy, which renders any
subsequent law that is contrary to the Constitution void and without any force and
effect.56 Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income
of whatever kind and character of a nonstock and non-profit educational institution
from any of its properties, real or personal, or from any of its activities conducted
DLSU further submits that it complies with the requirements enunciated in
the YMCA case, that for an exemption to be granted under Article XIV, Section 4 (3)
of the Constitution, the taxpayer must prove that: (1) it falls under the classification
non-stock, non-profit educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly and exclusively for educational
purposes.58 Unlike YMCA, which is not an educational institution, DLSU is
undisputedly a non-stock, non-profit educational institution. It had also submitted
evidence to prove that it actually, directly and exclusively used its income for
educational purposes.59
DLSU also cites the deliberations of the 1986 Constitutional Commission where
they recognized that the tax exemption was granted "to incentivize private
educational institutions to share with the State the responsibility of educating the
youth."60
Third, DLSU highlights that both the CTA En Banc and Division found that the bank
that handled DLSU's loan and mortgage transactions had remitted to the BIR the
DST through an imprinting machine, a method allowed under RR No. 15-2001.61 In
any case, DLSU argues that it cannot be held liable for DST owmg to the exemption
granted under the Constitution.62
Finally, DLSU underscores that the Commissioner, despite notice, did not oppose
the formal offer of supplemental evidence. Because of the Commissioner's failure
to timely object, she became bound by the results of the submission of such
supplemental evidence.63
The CIR's Comment on G.R. No. 198841
The Commissioner submits that DLSU is estopped from questioning the LOA's
validity because it failed to raise this issue in both the administrative and judicial
proceedings.64 That it was asked on crossexamination during the trial does not
make it an issue that the CTA could resolve.65 The Commissioner also maintains
that DLSU's rental income is not tax-exempt because an educational institution is
only exempt from property tax but not from tax on the income earned from the
property.66
DLSU's Comment on G.R. No. 198941
 parties and which, if properly considered, would justify a different
DLSU puts forward the same counter-arguments discussed above.67 conclusion.

In addition, DLSU prays that the Court award attorney's fees in its favor because it
was constrained to unnecessarily retain the services of counsel in this separate
petition.68chanroblesvirtuallawlibrary
Issues
The parties failed to convince the Court that the CTA overlooked or failed
to consider relevant facts. We thus sustain the CTA En Banc's findings
that:
a. DLSU proved that a portion of its rental income was used
actually, directly and exclusively for educational purposes; and

Although the parties raised a number of issues, the Court shall decide only the b. DLSU proved the payment of the DST through its bank's on-line
pivotal issues, which we summarize as follows: imprinting machine.

I. Whether DLSU's income and revenues proved to have been used actually, I. The revenues and assets of non-stock, non-profit educational institutions
directly and exclusively for educational purposes are exempt from duties proved to have been used actually, directly, and exclusively for educational
and taxes;chanrobleslaw purposes are exempt from duties and taxes.

II. Whether the entire assessment should be voided because of the DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which
defective LOA;chanrobleslaw reads:
chanRoblesvirtualLawlibrary
III. Whether the CTA correctly admitted DLSU's supplemental pieces of
(3) All revenues and assets of non-stock, non-profit educational
evidence; and
institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. Upon the dissolution or
IV. Whether the CTA's appreciation of the sufficiency ofDLSU's evidence may cessation of the corporate existence of such institutions, their assets shall be
be disturbed by the Court. disposed of in the manner provided by law. Proprietary educational
institutions, including those cooperatively owned, may likewise be entitled
Our Ruling to such exemptions subject to the limitations provided by law including
restrictions on dividends and provisions for reinvestment [underscoring and
As we explain in full below, we rule that: emphasis supplied]

Before fully discussing the merits of the case, we observe that:

I. The income, revenues and assets of non-stock, non-profit educational
institutions proved to have been used actually, directly and exclusively
First, the constitutional provision refers to two kinds of educational institutions: (1)
for educational purposes are exempt from duties and taxes.
non-stock, non-profit educational institutions and (2) proprietary educational
institutions.69
II. The LOA issued to DLSU is not entirely void. The assessment for taxable
year 2003 is valid.
Second, DLSU falls under the first category. Even the Commissioner admits the
status of DLSU as a non-stock, non-profit educational institution.70
III. The CTA correctly admitted DLSU's formal offer of supplemental
evidence; and Third, while DLSU's claim for tax exemption arises from and is based on the
Constitution, the Constitution, in the same provision, also imposes certain
IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown conditions to avail of the exemption. We discuss below the import of the
to have manifestly overlooked certain relevant facts not disputed by the
constitutional text vis-a-vis the Commissioner's counter-arguments.
While the present petition appears to be a case of first impression, 71 the Court in
Fourth, there is a marked distinction between the treatment of nonstock, non- the YMCA case had in fact already analyzed and explained the meaning of Article
profit educational institutions and proprietary educational institutions. The tax XIV, Section 4 (3) of the Constitution. The Court in that case made doctrinal
exemption granted to non-stock, non-profit educational institutions is conditioned pronouncements that are relevant to the present case.
only on the actual, direct and exclusive use of their revenues and assets for
educational purposes. While tax exemptions may also be granted to proprietary The issue in YMCA was whether the income derived from rentals of real property
educational institutions, these exemptions may be subject to limitations imposed owned by the YMCA, established as a "welfare, educational and charitable non-
by Congress. profit corporation," was subject to income tax under the Tax Code and the
Constitution.72
As we explain below, the marked distinction between a non-stock, non-profit and a
proprietary educational institution is crucial in determining the nature and extent The Court denied YMCA's claim for exemption on the ground that as a charitable
of the tax exemption granted to non-stock, non-profit educational institutions. institution falling under Article VI, Section 28 (3) of the Constitution,73 the YMCA is
not tax-exempt per se; "what is exempted is not the institution itself...those
The Commissioner opposes DLSU's claim for tax exemption on the basis of Section exempted from real estate taxes are lands, buildings and improvements actually,
30 (H) of the Tax Code. The relevant text reads: directly and exclusively used for religious, charitable or educational purposes."74
chanRoblesvirtualLawlibrary
The following organizations shall not be taxed under this Title [Tax on Income] in The Court held that the exemption claimed by the YMCA is expressly disallowed by
respect to income received by them as such: the last paragraph of then Section 27 (now Section 30) of the Tax Code, which
mandates that the income of exempt organizations from any of their properties,
xxxx real or personal, are subject to the same tax imposed by the Tax Code, regardless
of how that income is used. The Court ruled that the last paragraph of Section 27
(H) A non-stock and non-profit educational institution unequivocally subjects to tax the rent income of the YMCA from its property. 75

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

Notwithstanding the provisions in the preceding paragraphs, the income of As a last ditch effort to avoid paying the taxes on its rental income, the YMCA
whatever kind and character of the foregoing organizations from any of their invoked the tax privilege granted under Article XIV, Section 4 (3) of the
properties, real or personal, or from any of their activities conducted for Constitution.
profit regardless of the disposition made of such income shall be subject to tax
imposed under this Code. [underscoring and emphasis The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the
supplied]ChanRoblesVirtualawlibrary Constitution holding that the term educational institution, when used in laws
The Commissioner posits that the 1997 Tax Code qualified the tax exemption granting tax exemptions, refers to the school system (synonymous with formal
granted to non-stock, non-profit educational institutions such that the revenues education); it includes a college or an educational establishment; it refers to the
and income they derived from their assets, or from any of their activities conducted hierarchically structured and chronologically graded learnings organized and
for profit, are taxable even if these revenues and income are used for educational provided by the formal school system.76
purposes.
The Court then significantly laid down the requisites for availing the tax exemption
Did the 1997 Tax Code qualifY the tax exemption constitutionally-granted to non- under Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the
stock, non-profit educational institutions? classification non-stock, non-profit educational institution; and (2) the income it
seeks to be exempted from taxation is used actually, directly and exclusively for
We answer in the negative. educational purposes.77
 exempt from taxes and duties.81
We now adopt YMCA as precedent and hold that:
We find it helpful to discuss at this point the taxation of revenues versus the
1. The last paragraph of Section 30 of the Tax Code is without force and taxation of assets.
effect with respect to non-stock, non-profit educational
institutions, provided, that the non-stock, non-profit educational Revenues consist of the amounts earned by a person or entity from the conduct of
institutions prove that its assets and revenues are used actually, directly business operations.82 It may refer to the sale of goods, rendition of services, or the
and exclusively for educational purposes. return of an investment. Revenue is a component of the tax base in income
tax,83 VAT,84 and local business tax (LBT).85
2. The tax-exemption constitutionally-granted to non-stock, non profit
educational institutions, is not subject to limitations imposed by law. Assets, on the other hand, are the tangible and intangible properties owned by a
person or entity.86 It may refer to real estate, cash deposit in a bank, investment in
the stocks of a corporation, inventory of goods, or any property from which the
The tax exemption granted by the Constitution to non-stock, non-profit person or entity may derive income or use to generate the same. In Philippine
educational institutions is conditioned only on the actual, direct and exclusive use taxation, the fair market value of real property is a component of the tax base in
of their assets, revenues and income 78for educational purposes. real property tax (RPT).87 Also, the landed cost of imported goods is a component
of the tax base in VAT on importation88 and tariff duties.89
We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to
charitable institutions, churches, parsonages or convents, mosques, and non-profit Thus, when a non-stock, non-profit educational institution proves that it uses
cemeteries), which exempts from tax only the assets, i.e., "all lands, buildings, and its revenues actually, directly, and exclusively for educational purposes, it shall be
improvements, actually, directly, and exclusively used for religious, charitable, or exempted from income tax, VAT, and LBT. On the other hand, when it also shows
educational purposes...," Article XIV, Section 4 (3) categorically states that that it uses its assets in the form of real property for educational purposes, it shall
"[a]ll revenues and assets... used actually, directly, and exclusively for educational be exempted from RPT.
purposes shall be exempt from taxes and duties."
To be clear, proving the actual use of the taxable item will result in an exemption,
The addition and express use of the word revenues in Article XIV, Section 4 (3) of but the specific tax from which the entity shall be exempted from shall depend on
the Constitution is not without significance. whether the item is an item of revenue or asset.

We find that the text demonstrates the policy of the 1987 Constitution, discernible
from the records of the 1986 Constitutional Commission79 to provide broader tax
privilege to non-stock, non-profit educational institutions as recognition of their
role in assisting the State provide a public good. The tax exemption was seen as
beneficial to students who may otherwise be charged unreasonable tuition fees if
not for the tax exemption extended to all revenues and assets of non-stock, non-
profit educational institutions.80
Further, a plain reading of the Constitution would show that Article XIV, Section 4
(3) does not require that the revenues and income must have also been sourced
from educational activities or activities related to the purposes of an educational
institution. The phrase all revenues is unqualified by any reference to the source of
revenues. Thus, so long as the revenues and income are used actually, directly and
exclusively for educational purposes, then said revenues and income shall be
To illustrate, if a university leases a portion of its school building to a bookstore or
cafeteria, the leased portion is not actually, directly and exclusively used for
educational purposes, even if the bookstore or canteen caters only to university
students, faculty and staff.
The leased portion of the building may be subject to real property tax, as held
in Abra Valley College, Inc. v. Aquino.90 We ruled in that case that the test of
exemption from taxation is the use of the property for purposes mentioned in the
Constitution. We also held that the exemption extends to facilities which are
incidental to and reasonably necessary for the accomplishment of the main
purposes.
In concrete terms, the lease of a portion of a school building for commercial
purposes, removes such asset from the property tax exemption granted under the
Constitution.91 There is no exemption because the asset is not used actually, To be specific, Section 30 provides that exempt organizations like non-stock, non-
directly and exclusively for educational purposes. The commercial use of the profit educational institutions shall not be taxed on income received by them as
property is also not incidental to and reasonably necessary for the accomplishment such.
of the main purpose of a university, which is to educate its students.
Section 27 (B), on the other hand, states that [p]roprietary educational
However, if the university actually, directly and exclusively uses for educational institutions...which are nonprofit shall pay a tax of ten percent (10%) on their
purposes the revenues earned from the lease of its school building, such revenues taxable income...Provided, that if the gross income from unrelated trade, business
shall be exempt from taxes and duties. The tax exemption no longer hinges on the or other activity exceeds fifty percent (50%) of the total gross income derived by
use of the asset from which the revenues were earned, but on the actual, direct such educational institutions...[the regular corporate income tax of 30%] shall be
and exclusive use of the revenues for educational purposes. imposed on the entire taxable income...92

Parenthetically, income and revenues of non-stock, non-profit educational By the Tax Code's clear terms, a proprietary educational institution is entitled only
institution not used actually, directly and exclusively for educational purposes are to the reduced rate of 10% corporate income tax. The reduced rate is applicable
not exempt from duties and taxes. To avail of the exemption, the taxpayer only if: (1) the proprietary educational institution is non profit and (2) its gross
must factually prove that it used actually, directly and exclusively for educational income from unrelated trade, business or activity does not exceed 50% of its total
purposes the revenues or income sought to be exempted. gross income.

The crucial point of inquiry then is on the use of the assets or on the use of the Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do
revenues. These are two things that must be viewed and treated separately. But so not apply to non-stock, non-profit educational institutions.
long as the assets or revenues are used actually, directly and exclusively for
educational purposes, they are exempt from duties and taxes. Thus, we declare the last paragraph of Section 30 of the Tax Code without force
and effect for being contrary to the Constitution insofar as it subjects to tax the
The tax exemption granted by the Constitution to non-stock, non-profit income and revenues of non-stock, non-profit educational institutions used
educational institutions, unlike the exemption that may be availed of by actually, directly and exclusively for educational purpose. We make this declaration
proprietary educational institutions, is not subject to limitations imposed by law. in the exercise of and consistent with our duty93 to uphold the primacy of the
Constitution.94
That the Constitution treats non-stock, non-profit educational institutions
differently from proprietary educational institutions cannot be doubted. As Finally, we stress that our holding here pertains only to non-stock, non-profit
discussed, the privilege granted to the former is conditioned only on the actual, educational institutions and does not cover the other exempt organizations under
direct and exclusive use of their revenues and assets for educational purposes. In Section 30 of the Tax Code.
clear contrast, the tax privilege granted to the latter may be subject to limitations
imposed by law. For all these reasons, we hold that the income and revenues of DLSU proven to
have been used actually, directly and exclusively for educational purposes are
We spell out below the difference in treatment if only to highlight the privileged exempt from duties and taxes.
status of non-stock, non-profit educational institutions compared with their
proprietary counterparts. II. The LOA issued to DLSU is not entirely void. The assessment for taxable
year 2003 is valid.
While a non-stock, non-profit educational institution is classified as a tax-exempt
entity under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year
proprietary educational institution is covered by Section 27 (Rates of Income Tax on 2003 and insists that the entire LOA should be voided for being contrary to RMO
Domestic Corporations). No. 43-90, which provides that if tax audit includes more than one taxable period,
the other periods or years shall be specifically indicated in the LOA.

A LOA is the authority given to the appropriate revenue officer to examine the
books of account and other accounting records of the taxpayer in order to
determine the taxpayer's correct internal revenue liabilities 95 and for the purpose
of collecting the correct amount oftax,96 in accordance with Section 5 of the Tax
Code, which gives the CIR the power to obtain information, to summon/examine,
and take testimony of persons. The LOA commences the audit process97 and
informs the taxpayer that it is under audit for possible deficiency tax assessment.
includes unverified prior years. This does not mean, however, that the entire LOA is
void.
As the CTA correctly held, the assessment for taxable year 2003 is valid because
this taxable period is specified in the LOA. DLSU was fully apprised that it was being
audited for taxable year 2003. Corollarily, the assessments for taxable years 2001
and 2002 are void for having been unspecified on separate LOAs as required under
RMO No. 43-90.

Given the purposes of a LOA, is there basis to completely nullify the LOA issued to Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA's
DLSU, and consequently, disregard the BIR and the CTA's findings of tax deficiency validity at the CTA Division, and thus, should not have been entertained on appeal,
for taxable year 2003? is not accurate.

We answer in the negative. On the contrary, the CTA En Banc found that the issue of the LOA's validity came up
during the trial.100 DLSU then raised the issue in its memorandum and motion for
The relevant provision is Section C of RMO No. 43-90, the pertinent portion of partial reconsideration with the CTA Division. DLSU raised it again on appeal to the
which reads: CTA En Banc. Thus, the CTA En Banc could, as it did, pass upon the validity of the
chanRoblesvirtualLawlibrary LOA.101 Besides, the Commissioner had the opportunity to argue for the validity of
the LOA at the CTA En Banc but she chose not to file her comment and
3. A Letter of Authority [LOA] should cover a taxable period not exceeding memorandum despite notice.102
one taxable year. The practice of issuing [LOAs] covering audit of
unverified prior years is hereby prohibited. If the audit of a taxpayer shall III. The CTA correctly admitted the supplemental evidence formally offered by
include more than one taxable period, the other periods or years shall be DLSU.
specifically indicated in the [LOA].98
The Commissioner objects to the CTA Division's admission of DLSU's supplemental
pieces of documentary evidence.
What this provision clearly prohibits is the practice of issuing LOAs covering audit
of unverified prior years. RMO 43-90 does not say that a LOA which contains
To recall, DLSU formally offered its supplemental evidence upon filing its motion
unverified prior years is void. It merely prescribes that if the audit includes more
for reconsideration with the CTA Division. 103 The CTA Division admitted the
than one taxable period, the other periods or years must be specified. The
supplemental evidence, which proved that a portion of DLSU's rental income was
provision read as a whole requires that if a taxpayer is audited for more than one
used actually, directly and exclusively for educational purposes. Consequently, the
taxable year, the BIR must specify each taxable year or taxable period on separate
CTA Division reduced DLSU's tax liabilities.
LOAs.
We uphold the CTA Division's admission of the supplemental evidence on distinct
Read in this light, the requirement to specify the taxable period covered by the LOA
but mutually reinforcing grounds, to wit: (1) the Commissioner failed to timely
is simply to inform the taxpayer of the extent of the audit and the scope of the
object to the formal offer of supplemental evidence; and (2) the CTA is not governed
revenue officer's authority. Without this rule, a revenue officer can unduly burden
strictly by the technical rules of evidence.
the taxpayer by demanding random accounting records from random unverified
years, which may include documents from as far back as ten years in cases
First, the failure to object to the offered evidence renders it admissible, and the
of fraud audit.99
court cannot, on its own, disregard such evidence.104
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
The Court has held that if a party desires the court to reject the evidence offered, it
Unverified Prior Years. The LOA does not strictly comply with RMO 43-90 because it
must so state in the form of a timely objection and it cannot raise the objection to
the evidence for the first time on appeal. 105
Because of a party's failure to timely object, the evidence offered becomes part of
the evidence in the case. As a consequence, all the parties are considered bound by
any outcome arising from the offer of evidence properly presented. 106
As disclosed by DLSU, the Commissioner did not oppose the supplemental formal
offer of evidence despite notice.107 The Commissioner objected to the admission of
the supplemental evidence only when the case was on appeal to the CTA En Banc.
By the time the Commissioner raised her objection, it was too late; the formal
offer, admission and evaluation of the supplemental evidence were all fait
accompli.
We clarify that while the Commissioner's failure to promptly object had no bearing
on the materiality or sufficiency of the supplemental evidence admitted, she was
bound by the outcome of the CTA Division's assessment of the evidence. 108
Second, the CTA is not governed strictly by the technical rules of evidence. The CTA
Division's admission of the formal offer of supplemental evidence, without prompt
objection from the Commissioner, was thus justified.
Notably, this Court had in the past admitted and considered evidence attached to
the taxpayers' motion for reconsideration.
In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund
claimant attached to its motion for reconsideration with the CTA its Final
Adjustment Return. The Commissioner, as in the present case, did not oppose the
taxpayer's motion for reconsideration and the admission of the Final Adjustment
Return.110 We thus admitted and gave weight to the Final Adjustment
Return although it was only submitted upon motion for reconsideration.
We held that while it is true that strict procedural rules generally frown upon the
submission of documents after the trial, the law creating the CTA specifically
provides that proceedings before it shall not be governed strictly by the technical
rules of evidence111 and that the paramount consideration remains the
ascertainment of truth. We ruled that procedural rules should not bar courts from
considering undisputed facts to arrive at a just determination of a controversy.112
We applied the same reasoning in the subsequent cases of Filinvest Development
Corporation v. Commissioner of Internal Revenue113 and Commissioner of Internal
Revenue v. PERF Realty Corporation,114 where the taxpayers also submitted the
supplemental supporting document only upon filing their motions for
reconsideration.
Although the cited cases involved claims for tax refunds, we also dispense with the
strict application of the technical rules of evidence in the present tax
assessmentcase. If anything, the liberal application of the rules assumes greater
force and significance in the case of a taxpayer who claims a constitutionally
granted tax exemption. While the taxpayers in the cited cases claimed refund of
excess tax payments based on the Tax Code,115 DLSU is claiming tax
exemption based on the Constitution. If liberality is afforded to taxpayers who paid
more than they should have under a statute, then with more reason that we should
allow a taxpayer to prove its exemption from tax based on the Constitution.
Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence
not only because the Commissioner failed to promptly object, but more so because
the strict application of the technical tules of evidence may defeat the intent of the
Constitution.
IV. The CTA's appreciation of evidence is generally binding on the Court unless
compelling reasons justify otherwise.
It is doctrinal that the Court will not lightly set aside the conclusions reached by the
CTA which, by the very nature of its function of being dedicated exclusively to the
resolution of tax problems, has developed an expertise on the subject, unless there
has been an abuse or improvident exercise of authority.116 We thus accord
the findings of fact by the CTA with the highest respect. These findings of facts can
only be disturbed on appeal if they are not supported by substantial evidence or
there is a showing of gross error or abuse on the part of the CTA. In the absence of
any clear and convincing proof to the contrary, this Court must presume that the
CTA rendered a decision which is valid in every respect.117
We sustain the factual findings of the CTA.
The parties failed to raise credible basis for us to disturb the CTA's findings that
DLSU had used actually, directly and exclusively for educational purposes
a portion of its assessed income and that it had remitted the DST payments though
an online imprinting machine.
a. DLSU used actually, directly, and exclusively for educational purposes
a portion of its assessed income.
To see how the CTA arrived at its factual findings, we review the process Based on the Independent CPA's report and on its own appreciation of the
undertaken, from which it deduced that DLSU successfully proved that it used evidence, the CTA held that only the portion of the rental income pertaining to
actually, directly and exclusively for educational purposes a portion of its rental the substantiated disbursements (i.e., proved by receipts, vouchers, etc.) from the
income. CF-CPA Account was considered as used actually, directly and exclusively for
educational purposes. Consequently, the unaccounted and unsubstantiated
The CTA reduced DLSU's deficiency income tax and VAT liabilities in view of the disbursements must be subjected to income tax and VAT.123
submission of the supplemental evidence, which consisted of statement of receipts,
statement of disbursement and fund balance and statement of fund changes.118 The CTA then further reduced DLSU's tax liabilities by cancelling the assessments
for taxable years 2001 and 2002 due to the defective LOA.124
These documents showed that DLSU borrowed P93.86 Million, 119 which was used
to build the university's Sports Complex. Based on these pieces of evidence, the The Court finds that the above fact-finding process undertaken by the CTA shows
CTA found that DLSU's rental income from its concessionaires were indeed that it based its ruling on the evidence on record, which we reiterate, were
transmitted and used for the payment of this loan. The CTA held that the degree of examined and verified by the Independent CPA. Thus, we see no persuasive reason
preponderance of evidence was sufficiently met to prove actual, direct and to deviate from these factual findings.
exclusive use for educational purposes.
However, while we generally respect the factual findings of the CTA, it does not
The CTA also found that DLSU's rental income from other concessionaires, which mean that we are bound by its conclusions. In the present case, we do not agree
were allegedly deposited to a fund (CF-CPA Account),120 intended for the with the method used by the CTA to arrive at DLSU's unsubstantiated rental income
university's capital projects, was not proved to have been used actually, directly (i.e., income not proved to have been actually, directly and exclusively used for
and exclusively for educational purposes. The CTA observed that "[DLSU]...failed to educational purposes).
fully account for and substantiate all the disbursements from the [fund]." Thus, the
CTA "cannot ascertain whether rental income from the [other] concessionaires was To recall, the CTA found that DLSU earned a rental income of P10,610,379.00 in
indeed used for educational purposes."121 taxable year 2003.125 DLSU earned this income from leasing a portion of its
premises to: 1) MTO-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food
To stress, the CTA's factual findings were based on and supported by the report of Corp., 5) Capri International, and 6) MTO Bookstore.126
the Independent CPA who reviewed, audited and examined the voluminous
documents submitted by DLSU. To prove that its rental income was used for educational purposes, DLSU identified
the transactions where the rental income was expended, viz.:
Under the CTA Revised Rules, an Independent CPA's functions include: (a) 1) P4,007,724.00127 used to pay the loan obtained by DLSU to build the Sports
examination and verification of receipts, invoices, vouchers and other long Complex; and 2) P6,602,655.00 transferred to the CF-CPA Account.128
accounts; (b) reproduction of, and comparison of such reproduction with, and
certification that the same are faithful copies of original documents, and pre- DLSU also submitted documents to the Independent CPA to prove that the
marking of documentary exhibits consisting of voluminous documents; (c) P6,602,655.00 transferred to the CF-CPA Account was used actually, directly and
preparation of schedules or summaries containing a chronological listing of the exclusively for educational purposes. According to the Independent CPA' findings,
numbers, dates and amounts covered by receipts or invoices or other relevant DLSU was able to substantiate disbursements from the CF-CPA Account amounting
documents and the amount(s) of taxes paid; (d) making findings as to compliance to P6,259,078.30.
with substantiation requirements under pertinent tax laws, regulations and
jurisprudence; (e) submission of a formal report with certification of authenticity Contradicting the findings of the Independent CPA, the CTA concluded that out of
and veracity of findings and conclusions in the performance of the audit; (f) the P10,610,379.00 rental income, P4,841,066.65 was unsubstantiated, and thus,
testifying on such formal report; and (g) performing such other functions as the subject to income tax and VAT.129
CTA may direct.122
The CTA then concluded that the ratio of substantiated disbursements to the total
disbursements from the CF-CPA Account for taxable year 2003 is only
26.68%.130The CTA held as follows:
chanRoblesvirtualLawlibrary
However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp.,
Capri International and MTO Bookstore, which were transmitted to the CF-CPA
Account, petitioner again failed to fully account for and substantiate all the
disbursements from the CF-CPA Account; thus failing to prove that the rental
income derived therein were actually, directly and exclusively used for educational
purposes. Likewise, the findings of the Court-Commissioned Independent CPA
show that the disbursements from the CF-CPA Account for fiscal year 2003
amounts to P-6,259,078.30 only. Hence, this portion of the rental income, being
the substantiated disbursements of the CF-CPA Account, was considered by the
Special First Division as used actually, directly and exclusively for educational
purposes. Since for fiscal year 2003, the total disbursements per voucher is
P6,259,078.3 (Exhibit "LL-25-C"), and the total disbursements per subsidiary ledger
amounts to P23,463,543.02 (Exhibit "LL-29-C"), the ratio of substantiated
disbursements for fiscal year 2003 is 26.68%
(P6,259,078.30/P23,463,543.02). Thus, the substantiated portion of CF-CPA
Disbursements for fiscal year 2003, arrived at by multiplying the ratio of 26.68%
with the total rent income added to and used in the CF-CPA Account in the amount
of P6,602,655.00 ts P1,761,588.35.131 (emphasis
supplied)ChanRoblesVirtualawlibrary
For better understanding, we summarize the CTA's computation as follows:
4. The 26.68% ratio134 was the result of dividing the substantiated
disbursements from the CF-CPA Account as found by the Independent
CPA (P6,259,078.30) by the total disbursements (P23,463,543.02) from
the same account.
We find that this system of calculation is incorrect and does not truly give effect to
the constitutional grant of tax exemption to non-stock, nonprofit educational
institutions. The CTA's reasoning is flawed because it required DLSU to substantiate
an amount that is greater than the rental income deposited in the CF-CPA Account
in 2003.
To reiterate, to be exempt from tax, DLSU has the burden of proving that the
proceeds of its rental income (which amounted to a total of P10.61 million) 135 were
used for educational purposes. This amount was divided into two parts: (a) the
P4.01 million, which was used to pay the loan obtained for the construction of the
Sports Complex; and (b) the P6.60 million,136 which was transferred to the CF-CPA
account.
For year 2003, the total disbursement from the CF-CPA account amounted to
P23.46 million.137 These figures, read in light of the constitutional exemption, raises
the question: does DLSU claim that the whole total CF-CPA disbursement of
P23.46 million is tax-exempt so that it is required to prove that all these
disbursements had been made for educational purposes?

1. The CTA subtracted the rent income used in the construction of the We answer in the negative.
Sports Complex (P4,007,724.00) from the rental income (P10,610,379.00)
earned from the abovementioned concessionaries. The difference The records show that DLSU never claimed that the total CF-CPA disbursements of
(P6,602,655.00) was the portion claimed to have been deposited to the P23.46 million had been for educational purposes and should thus be tax-exempt;
CF-CPA Account. DLSU only claimed P10.61 million for taxexemption and should thus be required to
prove that this amount had been used as claimed.
2. The CTA then subtracted the supposed substantiated portion of CF-CPA
disbursements (P1,761,308.37) from the P6,602,655.00 to arrive at Of this amount, P4.01 had been proven to have been used for educational
the supposed unsubstantiated portion of the rental income purposes, as confirmed by the Independent CPA. The amount in issue is therefore
(P4,841,066.65).132 the balance of P6.60 million which was transferred to the CF-CPA which in turn
made disbursements of P23.46 million for various general purposes, among them
3. The substantiated portion of CF-CPA disbursements the P6.60 million transferred by DLSU.
(P1,761,308.37)133 was derived by multiplying the rental income claimed
to have been added to the CF-CPA Account (P6,602,655.00) by 26.68% or Significantly, the Independent CPA confirmed that the CF-CPA made disbursements
the ratio of substantiated disbursements to total for educational purposes in year 2003 in the amount P6.26 million. Based on these
disbursements (P23,463,543.02). given figures, the CTA concluded that the expenses for educational purposes that
had been coursed through the CF-CPA should be prorated so that only the portion
that P6.26 million bears to the total CF-CPA disbursements should be credited to
DLSU for tax exemption.
of the Sports Complex
This approach, in our view, is flawed given the constitutional requirement that
revenues actually and directly used for educational purposes should be tax-exempt.
As already mentioned above, DLSU is not claiming that the whole P23.46 million
Rental income deposited to the CF-CPA
CF-CPA disbursement had been used for educational purposes; it only claims that 6,602,655.00 6,602.655.00
Account
P6.60 million transferred to CF-CPA had been used for educational purposes. This
was what DLSU needed to prove to have actually and directly used for educational
purposes.
Less: Substantiated portion of CF-CPA
That this fund had been first deposited into a separate fund (the CF-CPA 1,761,588.35 6,259,078.30
disbursements
established to fund capital projects) lends peculiarity to the facts of this case, but
does not detract from the fact that the deposited funds were DLSU revenue funds
that had been confirmed and proven to have been actually and directly used for
educational purposes via the CF-CPA. That the CF-CPA might have had other
sources of funding is irrelevant because the assessment in the present case Tax base for deficiency income tax and
4,841,066.65 343,576.70
pertains only to the rental income which DLSU indisputably earned as revenue in VAT
2003. That the proven CF-CPA funds used for educational purposes should not be On DLSU's argument that the CTA should have appreciated its evidence in the same
prorated as part of its total CF-CPA disbursements for purposes of crediting to way as it did with the evidence submitted by Ateneo in another separate case, the
DLSU is also logical because no claim whatsoever had been made that the totality CTA explained that the issue in the Ateneo case was not the same as the issue in
of the CF-CPA disbursements had been for educational purposes. No prorating is the present case.
necessary; to state the obvious, exemption is based on actual and direct use and
this DLSU has indisputably proven. The issue in the Ateneo case was whether or not Ateneo could be held liable to pay
income taxes and VAT under certain BIR and Department of Finance
Based on these considerations, DLSU should therefore be liable only for the issuances139that required the educational institution to own and operate the
difference between what it claimed and what it has proven. In more concrete canteens, or other commercial enterprises within its campus, as condition for tax
terms, DLSU only had to prove that its rental income for taxable year 2003 exemption. The CTA held that the Constitution does not require the educational
(P10,610,379.00) was used for educational purposes. Hence, while the total institution to own or operate these commercial establishments to avail of the
disbursements from the CF-CPA Account amounted to P23,463,543.02, DLSU only exemption.140
had to substantiate its P10.6 million rental income, part of which was the
P6,602,655.00 transferred to the CF-CPA account. Of this latter amount, P6.259 Given the lack of complete identity of the issues involved, the CTA held that it had
million was substantiated to have been used for educational purposes. to evaluate the separate sets of evidence differently. The CTA likewise stressed that
DLSU and Ateneo gave distinct defenses and that its wisdom "cannot be equated
To summarize, we thus revise the tax base for deficiency income tax and VAT for on its decision on two different cases with two different issues."141
taxable year 2003 as follows:
chanRoblesvirtualLawlibrary DLSU disagrees with the CTA and argues that the entire assessment must be
CTA Decision138 Revised cancelled because it submitted similar, if not stronger sets of evidence, as Ateneo.
We reject DLSU's argument for being non sequitur. Its reliance on the concept of
Rental income 10,610,379.00 10,610,379.00 uniformity of taxation is also incorrect.

First, even granting that Ateneo and DLSU submitted similar evidence,
Less: Rent income used in construction 4,007,724.00 4,007,724.00
the sufficiency and materiality of the evidence supporting their respective claims
for tax exemption would necessarily differ because their attendant issues and facts same class shall be taxed at the same rate.147 A tax is uniform when it operates
differ. with the same force and effect in every place where the subject of it is
found.148 The concept requires that all subjects of taxation similarly situated should
To state the obvious, the amount of income received by DLSU and by Ateneo be treated alike and placed in equal footing.149
during the taxable years they were assessed varied. The amount of tax assessment
also varied. The amount of income proven to have been used for educational In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated
purposes also varied because the amount substantiated varied.142 Thus, the them alike because their income proved to have been used actually, directly and
amount of tax assessment cancelled by the CTA varied. exclusively for educational purposes were exempted from taxes. The CTA equally
applied the requirements in the YMCA case to test if they indeed used their
On the one hand, the BIR assessed DLSU a total tax deficiency revenues for educational purposes.
of P17,303,001.12 for taxable years 2001, 2002 and 2003. On the other hand, the
BIR assessed Ateneo a total deficiency tax of P8,864,042.35 for the same period. DLSU can only assert that the CTA violated the rule on uniformity if it can show
Notably, DLSU was assessed deficiency DST, while Ateneo was not. 143 that, despite proving that it used actually, directly and exclusively for educational
purposes its income and revenues, the CTA still affirmed the imposition of taxes.
Thus, although both Ateneo and DLSU claimed that they used their rental income That the DLSU secured a different result happened because it failed to fully prove
actually, directly and exclusively for educational purposes by submitting similar that it used actually, directly and exclusively for educational purposes its revenues
evidence, e.g., the testimony of their employees on the use of university revenues, and income.
the report of the Independent CPA, their income summaries, financial statements,
vouchers, etc., the fact remains that DLSU failed to prove that a portion of its On this point, we remind DLSU that the rule on uniformity of taxation
income and revenues had indeed been used for educational purposes. does not mean that subjects of taxation similarly situated are treated in literally the
same way in all and every occasion. The fact that the Ateneo and DLSU are both
The CTA significantly found that some documents that could have fully supported non-stock, non-profit educational institutions, does not mean that the CTA or this
DLSU's claim were not produced in court. Indeed, the Independent CPA testified Court would similarly decide every case for (or against) both universities. Success in
that some disbursements had not been proven to have been used actually, directly tax litigation, like in any other litigation, depends to a large extent on the
and exclusively for educational purposes.144 sufficiency of evidence. DLSU's evidence was wanting, thus, the CTA was correct in
not fully cancelling its tax liabilities.
The final nail on the question of evidence is DLSU's own admission that the original
of these documents had not in fact been produced before the CTA although it b. DLSU proved its payment of the DST
claimed that there was no bad faith on its part. 145 To our mind, this admission is a
good indicator of how the Ateneo and the DLSU cases varied, resulting in DLSU's The CTA affirmed DLSU's claim that the DST due on its mortgage and loan
failure to substantiate a portion of its claimed exemption. transactions were paid and remitted through its bank's On-Line Electronic DST
Imprinting Machine. The Commissioner argues that DLSU is not allowed to use this
Further, DLSU's invocation of Section 5, Rule 130 of the Revised Rules on Evidence, method of payment because an educational institution is excluded from the class
that the contents of the missing supporting documents were proven by its recital in of taxpayers who can use the On-Line Electronic DST Imprinting Machine.
some other authentic documents on record,146 can no longer be entertained at this
late stage of the proceeding. The CTA did not rule on this particular claim. The CTA We sustain the findings of the CTA. The Commissioner's argument lacks basis in
also made no finding on DLSU's assertion of lack of bad faith. Besides, it is not our both the Tax Code and the relevant revenue regulations.
duty to go over these documents to test the truthfulness of their contents, this
Court not being a trier of facts. DST on documents, loan agreements, and papers shall be levied, collected and paid
for by the person making, signing, issuing, accepting, or transferring the
Second, DLSU misunderstands the concept of uniformity oftaxation. Equality and same.150The Tax Code provides that whenever one party to the document enjoys
uniformity of taxation means that all taxable articles or kinds of property of the exemption from DST, the other party not exempt from DST shall be directly liable
for the tax. Thus, it is clear that DST shall be payable by any party to the document, CHAMBER OF REAL G.R. No. 160756
such that the payment and compliance by one shall mean the full settlement of the ESTATE AND BUILDERS
DST due on the document. ASSOCIATIONS, INC.,
Petitioner, Present:
In the present case, DLSU entered into mortgage and loan agreements with banks. PUNO, C.J.,
These agreements are subject to DST.151 For the purpose of showing that the DST CARPIO,
on the loan agreement has been paid, DLSU presented its agreements bearing the CORONA,
imprint showing that DST on the document has been paid by the bank, its CARPIO
counterparty. The imprint should be sufficient proof that DST has been paid. Thus, MORALES,
DLSU cannot be further assessed for deficiency DST on the said documents. VELASCO, JR.,
NACHURA,
Finally, it is true that educational institutions are not included in the class of - v e r s u s - LEONARDO-DE CASTRO,
taxpayers who can pay and remit DST through the On-Line Electronic DST BRION,
Imprinting Machine under RR No. 9-2000. As correctly held by the CTA, this is PERALTA,
irrelevant because it was not DLSU who used the On-Line Electronic DST Imprinting BERSAMIN,
Machine but the bank that handled its mortgage and loan transactions. RR No. 9- DEL CASTILLO,
2000 expressly includes banks in the class of taxpayers that can use the On-Line ABAD,
Electronic DST Imprinting Machine. VILLARAMA, JR.,
PEREZ and
Thus, the Court sustains the finding of the CTA that DLSU proved the payment of MENDOZA, JJ.
the assessed DST deficiency, except for the unpaid balance of P13,265.48.152
THE HON. EXECUTIVE
WHEREFORE, premises considered, we DENY the petition of the Commissioner of SECRETARY ALBERTO ROMULO,
Internal Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision THE HON. ACTING SECRETARY OF
and March 29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En FINANCE JUANITA D. AMATONG,
Banc Case No. 622, except for the total amount of deficiency tax liabilities of De La and THE HON. COMMISSIONER OF
Salle University, Inc., which had been reduced. INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 Respondents. Promulgated:
and the petition of the Commissioner of Internal Revenue in G.R. No. 198941 and
thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the Court March 9, 2010
of Tax Appeals En Banc in CTA En Banc Case No. 671, with the MODIFICATIONthat
the base for the deficiency income tax and VAT for taxable year 2003
is P343,576.70.

SO ORDERED.cralawlawlibrary

Income Tax Applicable to Corporations x-------------------------------------------------x

MCIT DECISION
CORONA, J.:
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.
In this original petition for certiorari and mandamus,[1] petitioner Chamber of Real

Estate and Builders Associations, Inc. is questioning the constitutionality of Section Petitioner also asserts that the enumerated provisions of the subject revenue

27 (E) of Republic Act (RA) 8424[2]and the revenue regulations (RRs) issued by the regulations violate the due process clause because, like the MCIT, the government

Bureau of Internal Revenue (BIR) to implement said provision and those involving collects income tax even when the net income has not yet been determined. They

creditable withholding taxes.[3] contravene the equal protection clause as well because the CWT is being levied

upon real estate enterprises but not on other business enterprises, more
Petitioner is an association of real estate developers and builders in the particularly those in the manufacturing sector.
Philippines. It impleaded former Executive Secretary Alberto Romulo, then acting

Secretary of Finance Juanita D. Amatong and then Commissioner of Internal The issues to be resolved are as follows:

Revenue Guillermo Parayno, Jr. as respondents. (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

Petitioner assails the validity of the imposition of minimum corporate income tax is unconstitutional and
(MCIT) on corporations and creditable withholding tax (CWT) on sales of real (3) whether or not the imposition of CWT on income from sales of real
properties classified as ordinary assets. properties classified as ordinary assets under RRs 2-98, 6-2001

and 7-2003, is unconstitutional.

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. OVERVIEW OF THE
ASSAILED PROVISIONS

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 Under the MCIT scheme, a corporation, beginning on its fourth year of

the rules and procedures for the collection of CWT on the sale of real properties operation, is assessed an MCIT of 2% of its gross income when such MCIT is greater

categorized as ordinary assets. Petitioner contends that these revenue regulations than the normal corporate income tax imposed under Section 27(A). [4] If the

are contrary to law for two reasons: first, they ignore the different treatment by RA regular income tax is higher than the MCIT, the corporation does not pay the

8424 of ordinary assets and capital assets and second, respondent Secretary of MCIT. Any excess of the MCIT over the normal tax shall be carried forward and
 (4)
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.
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

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of
9-98 implementing Section 27(E).[5] The pertinent portions thereof read:
respondent CIR, promulgated RR 2-98 implementing certain provisions of RA 8424
Sec. 2.27(E) [MCIT] on Domestic Corporations.
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
(1) Imposition of the Tax. A [MCIT] of two percent
(2%) of the gross income as of the end of the assets, by persons residing in the Philippines and habitually engaged in the real
taxable year (whether calendar or fiscal year,
depending on the accounting period employed) estate business were subjected to CWT:
is hereby imposed upon any domestic
corporation beginning the fourth (4th) taxable Sec. 2.57.2. Income payment subject to [CWT] and
year immediately following the taxable year in rates prescribed thereon:
which such corporation commenced its
business operations. The MCIT shall be xxx xxx xxx
imposed whenever such corporation has zero
or negative taxable income or whenever the (J) Gross selling price or total amount of consideration
amount of minimum corporate income tax is or its equivalent paid to the seller/owner for the sale, exchange
greater than the normal income tax due from or transfer of. Real property, other than capital assets, sold by
such corporation. 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
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

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:
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. 7-2003[8] 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
c. In the case of domestic corporations.
xxx xxx xxx
(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
goods[48] 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 Petitioner theorizes that since RA 8424 treats capital assets and ordinary

income. Obviously, it may well be the case that the MCIT would be less than the assets differently, respondents cannot disregard the distinctions set by the

net income of the corporation which posts a zero or negative taxable income. legislators as regards the tax base, modes of collection and payment of taxes on

income from the sale of capital and ordinary assets.

We now proceed to the issues involving the CWT.
Petitioners arguments have no merit.

The withholding tax system is a procedure through which taxes (including

AUTHORITY OF
income taxes) are collected.[61] Under Section 57 of RA 8424, the types of income
THE SECRETARY OF
subject to withholding tax are divided into three categories: (a) withholding of final FINANCE TO
ORDER THE
tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free COLLECTION OF
CWT ON SALES OF
covenant bonds. Petitioner is concerned with the second category (CWT) and
REAL PROPERTY
maintains that the revenue regulations on the collection of CWT on sale of real CONSIDERED AS
ORDINARY ASSETS
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]
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
EFFECT OF RRS ON
governments cash flow.[67] This results in administrative savings, prompt and THE TAX BASE FOR
efficient collection of taxes, prevention of delinquencies and reduction of THE INCOME TAX
OF INDIVIDUALS
governmental effort to collect taxes through more complicated means and OR
CORPORATIONS
remedies.[68] ENGAGED IN THE
Respondent Secretary has the authority to require the withholding of a REAL ESTATE
BUSINESS
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: Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a

SEC. 57. Withholding of Tax at Source. real estate business income tax from net income to GSP or FMV of the property

xxx xxx xxx sold.

Petitioner is wrong.
(B) Withholding of Creditable Tax at Source. The
[Secretary] may, upon the recommendation of
the [CIR], require the withholding of a tax on The taxes withheld are in the nature of advance tax payments by a taxpayer in
the items of income payable to natural or
juridical persons, residing in the Philippines, by order to extinguish its possible tax obligation. [69] They are installments on the
payor-corporation/persons as provided for by annual tax which may be due at the end of the taxable year.[70]
law, at the rate of not less than one percent
(1%) but not more than thirty-two percent Under RR 2-98, the tax base of the income tax from the sale of real
(32%) thereof, which shall be credited against
the income tax liability of the taxpayer for the property classified as ordinary assets remains to be the entitys net income imposed
taxable year. 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

The questioned provisions of RR 2-98, as amended, are well within the CWT is to be deducted from the net income tax payable by the taxpayer at the end

authority given by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%- of the taxable year.[71] Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate

5% is between the 1%-32% range; the withholding tax is imposed on the income that the tax base for the sale of real property classified as ordinary assets remains

payable and the tax is creditable against the income tax liability of the taxpayer for to be the net taxable income:

the taxable year.

 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;
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,

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.
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

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 RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real
thereof, all of which are located in the Philippines, shall
property categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA
be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR
2-98], as amended, and consequently, to the ordinary income 8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized
tax under Sec. 27(A) of the Code. In lieu of the ordinary
income tax, however, domestic corporations may become from the sale of a capital asset based on its GSP or FMV. This final tax is also
subject to the [MCIT] under Sec. 27(E) of the same Code,
withheld at source.[72]
whichever is applicable. (Emphasis supplied)
The differences between the two forms of withholding tax, i.e., creditable
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax and final, show that ordinary assets are not treated in the same manner as capital
return and credit the taxes withheld (by the withholding agent/buyer) against its assets. Final withholding tax (FWT) and CWT are distinguished as follows:
 time of filing of the return, payment and assessment of income tax involving

FWT CWT ordinary assets.[75]

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.
b)The liability for payment
of the tax rests primarily on
the payor as a withholding
agent.
c) The payee is not required
to file an income tax return
for the particular income.[73]
a) Taxes withheld on certain The fact that the tax is withheld at source does not automatically mean
income payments are
intended to equal or at least that it is treated exactly the same way as capital gains. As aforementioned, the
approximate the tax due of
the payee on said income. 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
b) Payee of income is
required to report the of tax collection.
income and/or pay the
difference between the tax
NO RULE THAT ONLY P
withheld and the tax due on
ASSIVE
the income. The payee also
INCOMES CAN BE
has the right to ask for a
SUBJECT TO CWT
refund if the tax withheld is
more than the tax due.
c) The income recipient is still Petitioner submits that only passive income can be subjected to
required to file an income tax
withholding tax, whether final or creditable. According to petitioner, the whole of
return, as prescribed in Sec.
51 and Sec. 52 of the NIRC, as Section 57 governs the withholding of income tax on passive income. The
amended.[74]
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:
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
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 income[76]
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 courts[78] 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 PROCES
S
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.
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 and substantial amounts. To require the customers of manufacturing enterprises,

or class of persons shall be deprived of the same protection of laws which is at present, to withhold the taxes on each of their transactions with their tens or

enjoyed by other persons or other classes in the same place and in like hundreds of suppliers may result in an inefficient and unmanageable system of

circumstances.[85] Stated differently, all persons belonging to the same class shall taxation and may well defeat the purpose of the withholding tax system.

be taxed alike. It follows that the guaranty of the equal protection of the laws is not Petitioner counters that there are other businesses wherein expensive items are

violated by legislation based on a reasonable classification. Classification, to be also sold infrequently, e.g. heavy equipment, jewelry, furniture, appliance and

valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of other capital goods yet these are not similarly subjected to the CWT. [89] As already

the law; (3) not be limited to existing conditions only and (4) apply equally to all discussed, the Secretary may adopt any reasonable method to carry out its

members of the same class.[86] functions.[90] Under 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
The taxing power has the authority to make reasonable classifications for purposes
is not accurate. The sales of manufacturers who have clients within the top 5,000
of taxation.[87] Inequalities which result from a singling out of one particular class
corporations, as specified by the BIR, are also subject to CWT for their transactions
for taxation, or exemption, infringe no constitutional limitation. [88] The real estate
with said 5,000 corporations.[91]
industry is, by itself, a class and can be validly treated differently from other

business enterprises.
SECTION
Petitioner, in insisting that its industry should be treated similarly as manufacturing 2.58.2 OF
RR NO. 2-
enterprises, fails to realize that what distinguishes the real estate business from 98 MERELY
IMPLEMEN
other manufacturing enterprises, for purposes of the imposition of the CWT, is not TS SECTION
their production processes but the prices of their goods sold and the number of 58 OF RA
8424
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

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that
comply with the withholding tax scheme.
the Registry of Deeds should not effect the regisration of any document

On the other hand, each manufacturing enterprise may have tens of thousands of transferring real property unless a certification is issued by the CIR that the

transactions with several thousand customers every month involving both minimal withholding tax has been paid. Petitioner proffers hardly any reason to strike down
 THE MANILA BANKING G.R. No. 168118
this rule except to rely on its contention that the CWT is unconstitutional. We have
CORPORATION,
ruled that it is not. Furthermore, this provision uses almost exactly the same
Petitioner,
wording as Section 58(E) of RA 8424 and is unquestionably in accordance with it: Present:

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 PUNO, J., Chairperson,
representative has certified that such transfer has been
reported, and the capital gains or [CWT], if any, has been SANDOVAL-GUTIERREZ,
paid: xxxx any violation of this provision by the Register of
- versus -
Deeds shall be subject to the penalties imposed under Section CORONA,
269 of this Code. (Emphasis supplied)
AZCUNA, and

GARCIA, JJ.
CONCLUSION

The renowned genius Albert Einstein was once quoted as saying [the] hardest thing
COMMISSIONER OF
in the world to understand is the income tax.[92] When a party questions the Promulgated:
INTERNAL REVENUE,
constitutionality of an income tax measure, it has to contend not only with
Respondent.
Einsteins observation but also with the vast and well-established jurisprudence in
August 28, 2006
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.

x-----------------------------------------------------------------------------------------x
WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

DECISION

SO ORDERED.

SANDOVAL-GUTIERREZ, J.:
Before us is a Petition for Review on Certiorari[1] assailing the
Decision[2] of the Court of Appeals dated May 11, 2005 in CA-G.R. SP No. 77177,
entitled The Manila Banking Corporation, petitioner, versus Commissioner of
Internal Revenue, respondent.
The Manila Banking Corporation, petitioner, was incorporated in 1961 and since
then had engaged in the commercial banking industry until 1987. On May 22, 1987,
the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) issued Resolution No.
505, pursuant to Section 29 of Republic Act (R.A.) No. 265 (the Central Bank
Act),[3] prohibiting petitioner from engaging in business by reason
insolvency. Thus, petitioner ceased operations that year and its assets and
liabilities were placed under the charge of a government-appointed receiver.
Meanwhile, R.A. No. 8424,[4] otherwise known as the Comprehensive Tax Reform
Act of 1997, became effective on January 1, 1998. One of the changes introduced
by this law is the imposition of the minimum corporate income tax on domestic
and resident foreign corporations. Implementing this law is Revenue Regulations
No. 9-98 stating that the law allows a four (4) year period from the time the
corporations were registered with the Bureau of Internal Revenue (BIR) during
which the minimum corporate income tax should not be imposed.
On June 23, 1999, after 12 years since petitioner stopped its business operations,
the BSP authorized it to operate as a thrift bank. The following year, specifically
on April 7, 2000, it filed with the BIR its annual corporate income tax return and
paid P33,816,164.00 for taxable year 1999.
Prior to the filing of its income tax return, or on December 28, 1999, petitioner sent
a letter to the BIR requesting a ruling on whether it is entitled to the four (4)-year
grace period reckoned from 1999. In other words, petitioners position is that since
it resumed operations in 1999, it will pay its minimum corporate income tax only
after four (4) years thereafter.
of
On February 22, 2001, the BIR issued BIR Ruling No. 007-2001[5] stating that
petitioner is entitled to the four (4)-year grace period. Since it reopened in 1999,
the minimum corporate income tax may be imposed not earlier than 2002, i.e. the
fourth taxable year beginning 1999. The relevant portions of the BIR Ruling state:
In reply, we hereby confirm that the law and regulations allow
new corporations as well as existing corporations a leeway or
adjustment period of four years counted from the year of
commencement of business operations (reckoned at the time
of registration by the corporation with the BIR) during which
the MCIT (minimum corporate income tax) does not apply. If
new corporations, as well as existing corporations such as those
registered with the BIR in 1994 or earlier, are granted a 4-year
grace period, we see no reason why TMBC, a corporation that
has ceased business activities due to involuntary closure for
more than a decade and is now only starting again to place its
business back in order, may not be given the same concerned, begins in the year 1999 when TMBC reopened such
opportunity. It should be stressed that although TMBC had that it will be only subject to MCIT beginning the year 2002.
been registered with the BIR before 1994, yet it did not have
any business from 1987 to June 1999 due to its involuntary
closure. This Office is therefore of an opinion, that for purposes
of justice, equity and consistent with the intent of the law, Pursuant to the above Ruling, petitioner filed with the BIR a claim for
TMBC's reopening last July 1999 is akin to the commencement refund of the sum of P33,816,164.00 erroneously paid as minimum corporate
of business operations of a new corporation, in consideration of income tax for taxable year 1999.
which the law allows a 4-year period during which MCIT is not
to be applied. Hence, MCIT may be imposed upon TMBC not
earlier than 2002, i.e., the fourth taxable year beginning 1999
which is the year when TMBC reopened.

Likewise, we find merit in your position that for having just
come out of receivership proceedings, which not only resulted
in substantial losses but actually brought about a complete
cessation of all businesses, TMBC may be qualified to ask for
suspension of the MCIT. The law provides that the Secretary of
Finance, upon the recommendation of the Commissioner, may
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. [NIRC, Sec. 27(E)(3)] Revenue Regulations 9-98 defines
the term legitimate business reverses to include substantial
losses sustained due to fire, robbery, theft or embezzlement,
or for other economic reasons as determined by the Secretary
of Finance. Cessation of business activities as a result of being
placed under involuntary receivership may be one such
economic reason. But to be a basis for the recognition of the
suspension of MCIT, such a situation should be properly defined
and included in the regulations, which this Office intends to
do. Pending such inclusion, the same cannot yet be
invoked. Nevertheless, it is the position of this Office that the
counting of the fourth taxable year, insofar as TMBC is
Due to the inaction of the BIR on its claim, petitioner filed with the Court of Tax
Appeals (CTA) a petition for review.
On April 21, 2003, the CTA denied the petition, finding that petitioners payment of
the amount of P33,816,164.00 corresponding to its minimum corporate income
tax for taxable year 1999 is in order. The CTA held that petitioner is not entitled to
the four (4)-year grace period because it is not a new corporation. It has continued
to be the same corporation, registered with the Securities and Exchange
Commission (SEC) and the BIR, despite being placed under receivership, thus:
Moreover, it must be emphasized that when herein
petitioner was placed under receivership, there was merely an
interruption of its business operations. However, its corporate
existence was never affected. The general rule is that the
appointment of the receiver does not terminate the charter or
work a dissolution of the corporation, even though the
receivership is a permanent one. In other words, the
corporation continues to exist as a legal entity, clothed with its
 franchises (65 Am. Jur. 2d, pp. 973-974). Petitioner, for all
intents and purposes, remained to be the same corporation,
registered with the SEC and with the BIR. While it may continue
to perform its corporate functions, all its properties and assets
were under the control and custody of a receiver, and its
dealings with the public is somehow limited, if not momentarily
suspended. x x x
On June 11, 2003, petitioner filed with the Court of Appeals a petition for
review. On May 11, 2005, the appellate court rendered a Decision affirming the
assailed judgment of the CTA.
Thus, this petition for review on certiorari.
The main issue for our resolution is whether petitioner is entitled to a refund of its
minimum corporate income tax paid to the BIR for taxable year 1999.
Petitioner contends that the Court of Tax Appeals erred in holding that it is not
entitled to the four (4)-year grace period provided by law suspending the payment
of its minimum corporate income tax since it is not a newly created corporation,
having been registered as early as 1961.
For his part, the Commissioner of Internal Revenue (CIR), respondent, maintains
that pursuant to R.A. No. 8424, petitioner should pay its minimum corporate
income tax beginning January 1, 1998 as it did not close its business operations in
1987 but merely suspended the same. Even if placed under receivership, its
corporate existence was never affected. Thus, it falls under the category of an
existing corporation recommencing its banking business operations.
Section 27(E) of the Tax Code provides:
Sec. 27. Rates of Income Tax on Domestic Corporations. x x x
(E) Minimum Corporate Income Tax on Domestic Corporations.
-
(1) Imposition of Tax. - A minimum corporate income tax 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
corporate 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 corporations. Corporations still starting their business operations have to stabilize
minimum corporate income tax over the normal income tax as their venture in order to obtain a stronghold in the industry. It does not come as a
computed under Subsection (A) of this Section shall be carried
surprise then when many companies reported losses in their initial years of
forward and credited against the normal income tax for the
operations. The following are excerpts from the Senate deliberations:
three (3) immediately succeeding taxable years.

xxx
Upon the other hand, Revenue Regulation No. 9-98 specifies the period
when a corporation becomes subject to the minimum corporate income tax, thus:
(5) Specific Rules for Determining the Period When a
Corporation Becomes Subject to the MCIT (minimum corporate
income tax) -
Senator Romulo: x x x Let me go now to the minimum corporate
income tax, which is on page 45 of the Journal, which is to
minimize tax evasion on those corporations which have been
declaring losses year in and year out. Here, the tax rate is three-
fourths, three quarter of a percent or .75% applied to
corporations that do not report any taxable income on the
fourth year of their business operation. Therefore, those that
do not report income on the first, second and third year are not
included here.

Senator Enrile: We assume that this is the period of stabilization

of new company that is starting in business.
For purposes of the MCIT, the taxable year in which business
operations commenced shall be the year in which the domestic
corporation registered with the Bureau of Internal Revenue
(BIR).
Senator Romulo: That is right.

Firms which were registered with BIR in 1994 and earlier years
shall be covered by the MCIT beginning January 1, 1998.

Thus, in order to allow new corporations to grow and develop at the

initial stages of their operations, the lawmaking body saw the need to provide a
xxx grace period of four years from their registration before they pay their minimum
corporate income tax.

The intent of Congress relative to the minimum corporate income tax is to grant a
four (4)-year suspension of tax payment to newly formed
Significantly, on February 23, 1995, Congress enacted R.A. No. 7906, otherwise xxx
known as the Thrift Banks Act of 1995. It took effect on March 18, 1995. This law
provides for the regulation of the organization and operations of thrift
banks. Under Section 3, thrift banks include savings and mortgage banks, private
development banks, and stock savings and loans associations organized under
existing laws. As mentioned earlier, petitioner bank was registered with the BIR in
1961. However, in 1987, it was found insolvent by the Monetary Board of the BSP
and was placed under receivership. After twelve (12) years, or on June 23, 1999,
the BSP issued to it a Certificate of Authority to Operate as a thrift bank. Earlier, or
On June 15, 1999, the BIR issued Revenue Regulation No. 4-95
on January 21, 1999, it registered with the BIR. Then it filed with the SEC its Articles
implementing certain provisions of the said R.A. No. 7906. Section 6 provides:
of Incorporation which was approved on June 22, 1999.

Sec. 6. Period of exemption. All thrift banks created

and organized under the provisions of the Act shall be exempt
from the payment of all taxes, fees, and charges of whatever
nature and description, except the corporate income It is clear from the above-quoted provision of Revenue Regulations No. 4-
tax imposed under Title II of the NIRC and as specified in 95 that the date of commencement of operations of a thrift bank is the date it
Section 2(A) of these regulations, for a period of five (5) years was registered with the SEC or the date when the Certificate of Authority to
from the date of commencement of operations; while for thrift Operate was issued to it by the Monetary Board of the BSP, whichever comes later.
banks which are already existing and operating as of the date of
effectivity of the Act (March 18, 1995), the tax exemption shall
be for a period of five (5) years reckoned from the date of such
effectivity. Let it be stressed that Revenue Regulations No. 9-98, implementing R.A. No. 8424
imposing the minimum corporate income tax on corporations, provides that for
purposes of this tax, the date when business operations commence is the year in
which the domestic corporation registered with the BIR. However, under Revenue
For purposes of these regulations, date of
Regulations No. 4-95, the date of commencement of operations of thrift banks,
commencement of operations shall be understood to mean the
such as herein petitioner, is the date the particular thrift bank was registered with
date when the thrift bank was registered with the Securities
and Exchange Commission or the date when the Certificate of the SEC or the date when the Certificate of Authority to Operate was issued to it by
Authority to Operate was issued by the Monetary Board of the the Monetary Board of the BSP, whichever comes later.
Bangko Sentral ng Pilipinas, whichever comes later.
 Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. A "fiasco," involving an irrevocable letter of credit, has found the distressed parties
coming to court as adversaries in seeking a definition of their respective rights or
9-98, applies to petitioner, being a thrift bank. It is, therefore, entitled to a grace
liabilities thereunder.
period of four (4) years counted from June 23, 1999 when it was authorized by the
BSP to operate as a thrift bank. Consequently, it should only pay its minimum On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by
corporate income tax after four (4) years from 1999. registered mail an Irrevocable Letter of Credit No. 20272/81 purportedly issued by
Bank of Ayudhya, Samyaek Branch, for the account of General Chemicals, Ltd., of
Thailand in the amount of US$2,782,000.00 to cover the sale of plastic ropes and
"agricultural files," with the petitioner as advising bank and private respondent
Inter-Resin Industrial Corporation as beneficiary.
WHEREFORE, we GRANT the petition. The assailed Decision of the Court of Appeals
in CA-G.R. SP No. 77177 is hereby REVERSED. Respondent Commissioner of On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the
Internal Revenue is directed to refund to petitioner bank the sum foregoing and transmitting, along with the bank's communication,
of P33,816,164.00 prematurely paid as minimum corporate income tax. the latter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-
Resin sent Atty. Emiliano Tanay to Bank of America to have the letter of credit
confirmed. The bank did not. Reynaldo Dueñas, bank employee in charge of letters
of credit, however, explained to Atty. Tanay that there was no need for
confirmation because the letter of credit would not have been transmitted if it
were not genuine.
SO ORDERED.
Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment
under the letter of credit by submitting to Bank of America invoices, covering the
Branch Profits Remittance Tax
shipment of 24,000 bales of polyethylene rope to General Chemicals valued at
US$1,320,600.00, the corresponding packing list, export declaration and bill of
G.R. No. 105395 December 10, 1993 lading. Finally, after being satisfied that Inter-Resin's documents conformed with
the conditions expressed in the letter of credit, Bank of America issued in favor of
BANK OF AMERICA, NT & SA, petitioners, Inter-Resin a Cashier's Check for P10,219,093.20, "the Peso equivalent of the draft
vs. (for) US$1,320,600.00 drawn by Inter-Resin, after deducting the costs for
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO documentary stamps, postage and mail issuance." 1 The check was picked up by
TRAJANO, JOHN DOE AND JANE DOE, respondents. Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of
America wrote Bank of Ayudhya advising the latter of the availment under the
letter of credit and sought the corresponding reimbursement therefor.
Agcaoili & Associates for petitioner.

Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the

Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for private
documents for the second availment under the same letter of credit consisting of a
respondents.
packing list, bill of lading, invoices, export declaration and bills in set, evidencing
the second shipment of goods. Immediately upon receipt of a telex from the Bank
of Ayudhya declaring the letter of credit fraudulent, 2 Bank of America stopped the
processing of Inter-Resin's documents and sent a telex to its branch office in
VITUG, J.: Bangkok, Thailand, requesting assistance in determining the authenticity of the
letter of credit. 3 Bank of America kept Inter-Resin informed of the developments.
Sensing a fraud, Bank of America sought the assistance of the National Bureau of
Investigation (NBI). With the help of the staff of the Philippine Embassy at Bangkok,
as well as the police and customs personnel of Thailand, the NBI agents, who were
sent to Thailand, discovered that the vans exported by Inter-Resin did not contain
ropes but plastic strips, wrappers, rags and waste materials. Here at home, the NBI
also investigated Inter-Resin's President Francisco Trajano and Executive Vice
President Barcelina Tio, who, thereafter, were criminally charged for estafa
through falsification of commercial documents. The case, however, was eventually
dismissed by the Rizal Provincial Fiscal who found no prima facieevidence to
warrant prosecution.
Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso
equivalent of the draft for US$1,320,600.00 on the partial availment of the now
disowned letter of credit. On the other hand, Inter-Resin claimed that not only was
it entitled to retain P10,219,093.20 on its first shipment but also to the balance
US$1,461,400.00 covering the second shipment.
On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
(a) Bank of America made assurances that enticed Inter-Resin to send the
merchandise to Thailand; (b) the telex declaring the letter of credit fraudulent was
unverified and self-serving, hence, hearsay, but even assuming that the letter of
credit was fake, "the fault should be borne by the BA which was careless and
negligent" 5 for failing to utilize its modern means of communication to verify with
Bank of Ayudhya in Thailand the authenticity of the letter of credit before sending
the same to Inter-Resin; (c) the loading of plastic products into the vans were under
strict supervision, inspection and verification of government officers who have in
their favor the presumption of regularity in the performance of official functions;
and (d) Bank of America failed to prove the participation of Inter-Resin or its
employees in the alleged fraud as, in fact, the complaint for estafa through
falsification of documents was dismissed by the Provincial Fiscal of Rizal.6
On appeal, the Court of Appeals 7 sustained the trial court; hence, this present
recourse by petitioner Bank of America.
The following issues are raised by Bank of America: (a) whether it has warranted
the genuineness and authenticity of the letter of credit and, corollarily, whether it
has acted merely as an advising bank or as a confirming bank; (b) whether Inter-
Resin has actually shipped the ropes specified by the letter of credit; and (c)
following the dishonor of the letter of credit by Bank of Ayudhya, whether Bank of
America may recover against Inter-Resin under the draft executed in its partial
availment of the letter of credit.8
In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly
raise the issue of being only an advising bank; (b) the findings of the trial court that
the ropes have actually been shipped is binding on the Court; and, (c) Bank of
America cannot recover from Inter-Resin because the drawer of the letter of credit
is the Bank of Ayudhya and not Inter-Resin.
If only to understand how the parties, in the first place, got themselves into the
mess, it may be well to start by recalling how, in its modern use, a letter of credit is
employed in trade transactions.
A letter of credit is a financial device developed by merchants as a convenient and
relatively safe mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his goods before he is
paid, and a buyer, who wants to have control of the goods before paying. 9 To
break the impasse, the buyer may be required to contract a bank to issue a letter of
credit in favor of the seller so that, by virtue of the latter of credit, the issuing bank
can authorize the seller to draw drafts and engage to pay them upon their
presentment simultaneously with the tender of documents required by the letter
of credit. 10 The buyer and the seller agree on what documents are to be presented
for payment, but ordinarily they are documents of title evidencing or attesting to
the shipment of the goods to the buyer.
Once the credit is established, the seller ships the goods to the buyer and in the
process secures the required shipping documents or documents of title. To get
paid, the seller executes a draft and presents it together with the required
documents to the issuing bank. The issuing bank redeems the draft and pays cash
to the seller if it finds that the documents submitted by the seller conform with
what the letter of credit requires. The bank then obtains possession of the
documents upon paying the seller. The transaction is completed when the buyer
reimburses the issuing bank and acquires the documents entitling him to the
goods. Under this arrangement, the seller gets paid only if he delivers the
documents of title over the goods, while the buyer acquires said documents and
control over the goods only after reimbursing the bank.
What characterizes letters of credit, as distinguished from other accessory
contracts, is the engagement of the issuing bank to pay the seller of the draft and
the required shipping documents are presented to it. In turn, this arrangement
assures the seller of prompt payment, independent of any breach of the main sales
contract. By this so-called "independence principle," the bank determines
compliance with the letter of credit only by examining the shipping documents
presented; it is precluded from determining whether the main contract is actually
accomplished or not. 11
There would at least be three (3) parties: (a) the buyer, 12 who procures the letter
of credit and obliges himself to reimburse the issuing bank upon receipts of the
documents of title; (b) the bank issuing the letter of credit, 13 which undertakes to
pay the seller upon receipt of the draft and proper document of titles and to
surrender the documents to the buyer upon reimbursement; and, (c)
the seller, 14 who in compliance with the contract of sale ships the goods to the
buyer and delivers the documents of title and draft to the issuing bank to recover
payment.
The number of the parties, not infrequently and almost invariably in international
trade practice, may be increased. Thus, the services of an advising (notifying)
bank 15 may be utilized to convey to the seller the existence of the credit; or, of
a confirming bank 16 which will lend credence to the letter of credit issued by a
lesser known issuing bank; or, of a paying bank, 17 which undertakes to encash the
drafts drawn by the exporter. Further, instead of going to the place of the issuing
bank to claim payment, the buyer may approach another bank, termed
the negotiating bank, 18 to have the draft discounted.
Being a product of international commerce, the impact of this commercial
instrument transcends national boundaries, and it is thus not uncommon to find a
dearth of national law that can adequately provide for its governance. This country
is no exception. Our own Code of Commerce basically introduces only its concept
under Articles 567-572, inclusive, thereof. It is no wonder then why great reliance
has been placed on commercial usage and practice, which, in any case, can be
justified by the universal acceptance of the autonomy of contract rules. The rules
were later developed into what is now known as the Uniform Customs and Practice
for Documentary Credits ("U.C.P.") issued by the International Chamber of
Commerce. It is by no means a complete text by itself, for, to be sure, there are
other principles, which, although part of lex mercatoria, are not dealt with the
U.C.P.
In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the
extent of their pertinency, the application in our jurisdiction of this international
commercial credit regulatory set of rules. 20 In Bank of Phil. Islands v. De Nery, 21 we
have said that the observances of the U.C.P. is justified by Article 2 of the Code of
Commerce which expresses that, in the absence of any particular provision in the
Code of Commerce, commercial transactions shall be governed by usages and
customs generally observed. We have further observed that there being no specific
provisions which govern the legal complexities arising from transactions involving
letters of credit not only between or among banks themselves but also between
banks and the seller or the buyer, as the case may be, the applicability of the U.C.P.
is undeniable.
The first issue raised with the petitioner, i.e., that it has in this instance merely
been advising bank, is outrightly rejected by Inter-Resin and is thus sought to be
discarded for having been raised only on appeal. We cannot agree. The crucial
point of dispute in this case is whether under the "letter of credit," Bank of America
has incurred any liability to the "beneficiary" thereof, an issue that largely is
dependent on the bank's participation in that transaction; as a mere advising or
notifying bank, it would not be liable, but as a confirming bank, had this been the
case, it could be considered as having incurred that liability. 22
In Insular Life Assurance Co. Ltd. Employees Association — Natu vs. Insular Life
Assurance Co., Ltd., 23 the Court said: Where the issues already raised also rest on
other issues not specifically presented, as long as the latter issues bear relevance
and close relation to the former and as long as they arise from the matters on
record, the court has the authority to include them in its discussion of the
controversy and to pass upon them just as well. In brief, in those cases where
questions not particularly raised by the parties surface as necessary for the
complete adjudication of the rights and obligations of the parties, the interests of
justice dictate that the court should consider and resolve them. The rule that only
issues or theories raised in the initial proceedings may be taken up by a party
thereto on appeal should only refer to independent, not concomitant matters, to
support or oppose the cause of action or defense. The evil that is sought to be
avoided, i.e., surprise to the adverse party, is in reality not existent on matters that
are properly litigated in the lower court and appear on record.
It cannot seriously be disputed, looking at this case, that Bank of America has, in
fact, only been an advising, not confirming, bank, and this much is clearly evident,
among other things, by the provisions of the letter of credit itself, the petitioner
bank's letter of advice, its request for payment of advising fee, and the admission
of Inter-Resin that it has paid the same. That Bank of America has asked Inter-Resin
to submit documents required by the letter of credit and eventually has paid the
proceeds thereof, did not obviously make it a confirming bank. The fact, too, that
the draft required by the letter of credit is to be drawn under the account of
General Chemicals (buyer) only means the same had to be presented to Bank of
Ayudhya (issuing bank) for payment. It may be significant to recall that the letter of
credit is an engagement of the issuing bank, not the advising bank, to pay the draft.
No less important is that Bank of America's letter of 11 March 1981 has expressly
stated that "[t]he enclosure is solely an advise of credit opened by the
abovementioned correspondent and conveys no engagement by us." 24This written
reservation by Bank of America in limiting its obligation only to being an advising
bank is in consonance with the provisions of U.C.P.
As an advising or notifying bank, Bank of America did not incur any obligation more
than just notifying Inter-Resin of the letter of credit issued in its favor, let alone to
confirm the letter of credit. 25 The bare statement of the bank employees,
aforementioned, in responding to the inquiry made by Atty. Tanay, Inter-Resin's
representative, on the authenticity of the letter of credit certainly did not have the
effect of novating the letter of credit and Bank of America's letter of advise, 26 nor
can it justify the conclusion that the bank must now assume total liability on the
letter of credit. Indeed, Inter-Resin itself cannot claim to have been all that free
from fault. As the seller, the issuance of the letter of credit should have obviously
been a great concern to it. 27 It would have, in fact, been strange if it did not, prior
to the letter of credit, enter into a contract, or negotiated at the every least, with
General Chemicals. 28 In the ordinary course of business, the perfection of contract
precedes the issuance of a letter of credit.
Bringing the letter of credit to the attention of the seller is the primordial obligation
of an advising bank. The view that Bank of America should have first checked the
authenticity of the letter of credit with bank of Ayudhya, by using advanced mode
of business communications, before dispatching the same to Inter-Resin finds no
real support in U.C.P. Article 18 of the U.C.P. states that: "Banks assume no liability
or responsibility for the consequences arising out of the delay and/or loss in transit
of any messages, letters or documents, or for delay, mutilation or other errors
arising in the transmission of any telecommunication . . ." As advising bank, Bank of
America is bound only to check the "apparent authenticity" of the letter of credit,
which it did. 29 Clarifying its meaning, Webster's Ninth New Collegiate
Dictionary 30 explains that the word "APPARENT suggests appearance to unaided
senses that is not or may not be borne out by more rigorous examination or
greater knowledge."
May Bank of America then recover what it has paid under the letter of credit when
the corresponding draft for partial availment thereunder and the required
documents were later negotiated with it by Inter-Resin? The answer is yes. This
kind of transaction is what is commonly referred to as a discounting arrangement.
This time, Bank of America has acted independently as a negotiating bank, thus
saving Inter-Resin from the hardship of presenting the documents directly to Bank
of Ayudhya to recover payment. (Inter-Resin, of course, could have chosen other
banks with which to negotiate the draft and the documents.) As a negotiating bank,
Bank of America has a right to recourse against the issuer bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to
assume a contingent liability thereon. 31
While bank of America has indeed failed to allege material facts in its complaint
that might have likewise warranted the application of the Negotiable Instruments
Law and possible then allowed it to even go after the indorsers of the draft, this
failure, 32/ nonetheless, does not preclude petitioner bank's right (as negotiating
bank) of recovery from Inter-Resin itself. Inter-Resin admits having received
P10,219,093.20 from bank of America on the letter of credit and in having executed
the corresponding draft. The payment to Inter-Resin has given, as aforesaid, Bank
of America the right of reimbursement from the issuing bank, Bank of Ayudhya
which, in turn, would then seek indemnification from the buyer (the General
Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit,
however, Bank of America may now turn to Inter-Resin for restitution.
Between the seller and the negotiating bank there is the usual
relationship existing between a drawer and purchaser of drafts.
Unless drafts drawn in pursuance of the credit are indicated to
be without recourse therefore, the negotiating bank has the
ordinary right of recourse against the seller in the event of
dishonor by the issuing bank . . . The fact that the
correspondent and the negotiating bank may be one and the
same does not affect its rights and obligations in either
capacity, although a special agreement is always a possibility . .
. 33
The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste
instead of its products, is really of no consequence. In the operation of a letter of
credit, the involved banks deal only with documents and not on goods described in
those documents. 34
The other issues raised in then instant petition, for instance, whether or not Bank
of Ayudhya did issue the letter of credit and whether or not the main contract of
sale that has given rise to the letter of credit has been breached, are not relevant
to this controversy. They are matters, instead, that can only be of concern to the
herein parties in an appropriate recourse against those, who, unfortunately, are
not impleaded in these proceedings.
In fine, we hold that —
First, given the factual findings of the courts below, we conclude that petitioner
Bank of America has acted merely as a notifying bank and did not assume the
responsibility of a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-
Resin's partial availment as beneficiary of the letter of credit which has been
disowned by the alleged issuer bank.
No judgment of civil liability against the other defendants, Francisco Trajano and
other unidentified parties, can be made, in this instance, there being no sufficient
evidence to warrant any such finding.
Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine
laws, is a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA.
It is engaged in the manufacture of pharmaceutical products and chemicals, a
wholesaler of imported finished goods, and an importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded
the payment of deficiency income tax of one hundred nineteen thousand eight
hundred seventeen (P119,817.00) pesos for taxable year 1981, as follows:
"Net income disclosed by the
return as audited

WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Add: Discrepancies:
Industrial Corporation is ordered to refund to petitioner Bank of America NT & SA
the amount of P10,219,093.20 with legal interest from the filing of the complaint Professional
until fully paid. fees/yr.
per 262,877.00
No costs. investigation 17018 110,399.37

Total Adjustment
SO ORDERED.
Net income per Investigation
CYANAMID PHILIPPINES, INC., petitioner, vs. THE COURT OF APPEALS, THE COURT
OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents. Less: Personal and additional exemptions

DECISION Amount subject to tax

Income tax due thereon .25% Surtax 2,385,231.50

QUISUMBING, J.:
Less: Amount already assessed .
Petitioner disputes the decision[1] of the Court of Appeals which affirmed the
decision[2] of the Court of Tax Appeals, ordering petitioner to pay respondent BALANCE .
Commissioner of Internal Revenue the amount of three million, seven hundred
seventy-four thousand, eight hundred sixty seven pesos and fifty centavos _______ monthly interest from ..1,389,636.00
(P3,774,867.50) as 25% surtax on improper accumulation of profits for 1981, plus
10% surcharge and 20% annual interest from January 30, 1985 to January 30, 1987, _________
under Sec. 25 of the National Internal Revenue Code.
Compromise penalties ...
The Court of Tax Appeals made the following factual findings:
TOTAL AMOUNT DUE ..3,774,867.50

Sc-lex
On March 4, 1985, petitioner protested the assessments particularly, (1) the 25%
Surtax Assessment of P3,774,867.50; (2) 1981 Deficiency Income Assessment of
P119,817.00; and 1981 Deficiency Percentage Assessment of
P8,846.72.[4]Petitioner, through its external accountant, Sycip, Gorres, Velayo &
Co., claimed, among others, that the surtax for the undue accumulation of earnings
was not proper because the said profits were retained to increase petitioners
working capital and it would be used for reasonable business needs of the
company. Petitioner contended that it availed of the tax amnesty under Executive
Order No. 41, hence enjoyed amnesty from civil and criminal prosecution granted
by the law.
On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow
the cancellation of the assessment notices and rendered its resolution, as follows:
"It appears that your client availed of Executive Order No. 41
under File No. 32A-F-000455-41B as certified and confirmed by
our Tax Amnesty Implementation Office on October 6, 1987.
In reply thereto, I have the honor to inform you that the
availment of the tax amnesty under Executive Order No. 41, as
amended is sufficient basis, in appropriate cases, for the
cancellation of the assessment issued after August 21, 1986.
(Revenue Memorandum Order No. 4-87) Said availment does
not, therefore, result in cancellation of assessments issued
before August 21, 1986, as in the instant case. In other words,
the assessments in this case issued on January 30, 1985 despite
your clients availment of the tax amnesty under Executive
Order No. 41, as amended still subsist.
Such being the case, you are therefore, requested to urge your
client to pay this Office the aforementioned deficiency income
tax and surtax on undue accumulation of surplus in the
respective amounts of P119,817.00 and P3,774,867.50 inclusive
of interest thereon for the year 1981, within thirty (30) days
from receipt hereof, otherwise this office will be constrained to
enforce collection thereof thru summary remedies prescribed
by law.
This constitutes the final decision of this Office on this
matter."[5]
Petitioner appealed to the Court of Tax Appeals. During the pendency of the case,
however, both parties agreed to compromise the 1981 deficiency income tax
assessment of P119,817.00. Petitioner paid a reduced amount --twenty-six
thousand, five hundred seventy-seven pesos (P26,577.00) -- as compromise
settlement. However, the surtax on improperly accumulated profits remained
unresolved.
Petitioner claimed that CIRs assessment representing the 25% surtax on its
accumulated earnings for the year 1981 had no legal basis for the following
reasons: (a) petitioner accumulated its earnings and profits for reasonable business
requirements to meet working capital needs and retirement of indebtedness; (b)
petitioner is a wholly owned subsidiary of American Cyanamid Company, a
corporation organized under the laws of the State of Maine, in the United States of
America, whose shares of stock are listed and traded in New York Stock Exchange.
This being the case, no individual shareholder of petitioner could have evaded or
prevented the imposition of individual income taxes by petitioners accumulation of
earnings and profits, instead of distribution of the same. Scl-aw
In denying the petition, the Court of Tax Appeals made the following
pronouncements:
"Petitioner contends that it did not declare dividends for the
year 1981 in order to use the accumulated earnings as working
capital reserve to meet its "reasonable business needs". The
law permits a stock corporation to set aside a portion of its
retained earnings for specified purposes (citing Section 43,
paragraph 2 of the Corporation Code of the Philippines). In the
case at bar, however, petitioners purpose for accumulating its
earnings does not fall within the ambit of any of these specified
purposes.
More compelling is the finding that there was no need for
petitioner to set aside a portion of its retained earnings as
working capital reserve as it claims since it had considerable
liquid funds. A thorough review of petitioners financial
statement (particularly the Balance Sheet, p. 127, BIR Records)
reveals that the corporation had considerable liquid funds
consisting of cash accounts receivable, inventory and even its
sales for the period is adequate to meet the normal needs of
the business. This can be determined by computing the current
asset to liability ratio of the company:
current
ratio = current assets / current liabilities
= P 47,052,535.00 / P21,275,544.00
= 2.21: 1
The significance of this ratio is to serve as a primary test of a
companys solvency to meet current obligations from current
assets as a going concern or a measure of adequacy of working
capital.
xxx
We further reject petitioners argument that "the accumulated
earnings tax does not apply to a publicly-held corporation"
citing American jurisprudence to support its position. The
reference finds no application in the case at bar because under
Section 25 of the NIRC as amended by Section 5 of P.D. No.
1379 [1739] (dated September 17, 1980), the exceptions to the
accumulated earnings tax are expressly enumerated, to wit:
Bank, non-bank financial intermediaries, corporations
organized primarily, and authorized by the Central Bank of the
Philippines to hold shares of stock of banks, insurance
companies, or personal holding companies, whether domestic
or foreign. The law on the matter is clear and specific. Hence,
there is no need to resort to applicable cases decided by the
American Federal Courts for guidance and enlightenment as to
whether the provision of Section 25 of the NIRC should apply to
petitioner. Rtc-spped
Equally clear and specific are the provisions of E.O. 41
particularly with respect to its effectivity and coverage...
... Said availment does not result in cancellation of assessments
issued before August 21, 1986 as petitioner seeks to do in the
case at bar. Therefore, the assessments in this case, issued on
January 30, 1985 despite petitioners availment of the tax
amnesty under E.O. 41 as amended, still subsist."
xxx
WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered
to pay respondent Commissioner of Internal Revenue the sum
of P3,774,867.50 representing 25% surtax on improper
accumulation of profits for 1981, plus 10% surcharge and 20%
annual interest from January 30, 1985 to January 30, 1987."[6]
Petitioner appealed the Court of Tax Appeals decision to the Court of Appeals.
Affirming the CTA decision, the appellate court said:
"In reviewing the instant petition and the arguments raised
herein, We find no compelling reason to reverse the findings of
the respondent Court. The respondent Courts decision is
supported by evidence, such as petitioner corporations
financial statement and balance sheets (p. 127, BIR Records).
On the other hand the petitioner corporation could only come
up with an alternative formula lifted from a decision rendered
by a foreign court (Bardahl Mfg. Corp. vs. Commissioner, 24
T.C.M. [CCH] 1030). Applying said formula to its particular
financial position, the petitioner corporation attempts to justify
its accumulated surplus earnings. To Our mind, the petitioner
corporations alternative formula cannot overturn the
persuasive findings and conclusion of the respondent Court
based, as it is, on the applicable laws and jurisprudence, as well
as standards in the computation of taxes and penalties
practiced in this jurisdiction.
WHEREFORE, in view of the foregoing, the instant petition is
hereby DISMISSED and the decision of the Court of Tax Appeals
dated August 6, 1992 in C.T.A. Case No. 4250 is AFFIRMED in
toto."[7]
Hence, petitioner now comes before us and assigns as sole issue:
 WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT
THE PETITIONER IS LIABLE FOR THE ACCUMULATED EARNINGS
TAX FOR THE YEAR 1981.[8]
Section 25[9] of the old National Internal Revenue Code of 1977 states: Sd-aad-sc
"Sec. 25. Additional tax on corporation improperly
accumulating profits or surplus -
"(a) Imposition of tax. -- If any corporation is formed or availed
of for the purpose of preventing the imposition of the tax upon
its shareholders or members or the shareholders or members
of another corporation, through the medium of permitting its
gains and profits to accumulate instead of being divided or
distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-
five per-centum of the undistributed portion of its accumulated
profits or surplus which shall be in addition to the tax imposed
by section twenty-four, and shall be computed, collected and
paid in the same manner and subject to the same provisions of
law, including penalties, as that tax.
"(b) Prima facie evidence. -- The fact that any corporation is
mere holding company shall be prima facie evidence of a
purpose to avoid the tax upon its shareholders or members.
Similar presumption will lie in the case of an investment
company where at any time during the taxable year more than
fifty per centum in value of its outstanding stock is owned,
directly or indirectly, by one person.
"(c) Evidence determinative of purpose. -- The fact that the
earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business shall
be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear
preponderance of evidence, shall prove the contrary. M-issdaa
"(d) Exception -- The provisions of this sections shall not apply
to banks, non-bank financial intermediaries, corporation
organized primarily, and authorized by the Central Bank of the
Philippines to hold shares of stock of banks, insurance
companies, whether domestic or foreign.
The provision discouraged tax avoidance through corporate surplus accumulation.
When corporations do not declare dividends, income taxes are not paid on the
undeclared dividends received by the shareholders. The tax on improper
accumulation of surplus is essentially a penalty tax designed to compel
corporations to distribute earnings so that the said earnings by shareholders could,
in turn, be taxed.
Relying on decisions of the American Federal Courts, petitioner stresses that the
accumulated earnings tax does not apply to Cyanamid, a wholly owned subsidiary
of a publicly owned company.[10] Specifically, petitioner cites Golconda Mining
Corp. vs. Commissioner, 507 F.2d 594, whereby the U.S. Ninth Circuit Court of
Appeals had taken the position that the accumulated earnings tax could only apply
to a closely held corporation.
A review of American taxation history on accumulated earnings tax will show that
the application of the accumulated earnings tax to publicly held corporations has
been problematic. Initially, the Tax Court and the Court of Claims held that the
accumulated earnings tax applies to publicly held corporations. Then, the Ninth
Circuit Court of Appeals ruled in Golconda that the accumulated earnings tax could
only apply to closely held corporations. Despite Golconda, the Internal Revenue
Service asserted that the tax could be imposed on widely held corporations
including those not controlled by a few shareholders or groups of shareholders.
The Service indicated it would not follow the Ninth Circuit regarding publicly held
corporations.[11] In 1984, American legislation nullified the Ninth
Circuits Golconda ruling and made it clear that the accumulated earnings tax is not
limited to closely held corporations.[12] Clearly, Golconda is no longer a reliable
precedent. Sl-xm-is
The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739,
enumerated the corporations exempt from the imposition of improperly
accumulated tax: (a) banks; (b) non-bank financial intermediaries; (c) insurance
companies; and (d) corporations organized primarily and authorized by the Central
Bank of the Philippines to hold shares of stocks of banks. Petitioner does not fall
among those exempt classes. Besides, the rule on enumeration is that the express
mention of one person, thing, act, or consequence is construed to exclude all
others.[13] Laws granting exemption from tax are construed strictissimi juris against
the taxpayer and liberally in favor of the taxing power.[14] Taxation is the rule and
exemption is the exception.[15] The burden of proof rests upon the party claiming
exemption to prove that it is, in fact, covered by the exemption so claimed, [16] a
burden which petitioner here has failed to discharge.
Another point raised by the petitioner in objecting to the assessment, is that
increase of working capital by a corporation justifies accumulating income.
Petitioner asserts that respondent court erred in concluding that Cyanamid need
not infuse additional working capital reserve because it had considerable liquid
funds based on the 2.21:1 ratio of current assets to current liabilities. Petitioner
relies on the so-called "Bardahl" formula, which allowed retention, as working
capital reserve, sufficient amounts of liquid assets to carry the company through
one operating cycle. The "Bardahl"[17] formula was developed to measure
corporate liquidity. The formula requires an examination of whether the taxpayer
has sufficient liquid assets to pay all of its current liabilities and any extraordinary
expenses reasonably anticipated, plus enough to operate the business during one
operating cycle. Operating cycle is the period of time it takes to convert cash into
raw materials, raw materials into inventory, and inventory into sales, including the
time it takes to collect payment for the sales.[18]
Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00
pesos as working capital. As of 1981, its liquid asset was only P25,776,991.00. Thus,
petitioner asserts that Cyanamid had a working capital deficit of
P7,986,633.00.[19] Therefore, the P9,540,926.00 accumulated income as of 1981
may be validly accumulated to increase the petitioners working capital for the
succeeding year.
We note, however, that the companies where the "Bardahl" formula was applied,
had operating cycles much shorter than that of petitioner. In Atlas Tool Co., Inc. vs.
CIR,[20] the companys operating cycle was only 3.33 months or 27.75% of the year.
In Cataphote Corp. of Mississippi vs. United States,[21] the corporations operating
cycle was only 56.87 days, or 15.58% of the year. In the case of Cyanamid, the
operating cycle was 288.35 days, or 78.55% of a year, reflecting that petitioner will
need sufficient liquid funds, of at least three quarters of the year, to cover the
operating costs of the business. There are variations in the application of the
"Bardahl" formula, such as average operating cycle or peak operating cycle. In
times when there is no recurrence of a business cycle, the working capital needs
cannot be predicted with accuracy. As stressed by American authorities, although
the "Bardahl" formula is well-established and routinely applied by the courts, it is
not a precise rule. It is used only for administrative convenience.[22] Petitioners
application of the "Bardahl" formula merely creates a false illusion of exactitude. Sl-
xsc
Other formulas are also used, e.g. the ratio of current assets to current liabilities
and the adoption of the industry standard.[23] The ratio of current assets to current
liabilities is used to determine the sufficiency of working capital. Ideally, the
working capital should equal the current liabilities and there must be 2 units of
current assets for every unit of current liability, hence the so-called "2 to 1" rule.[24]
As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than
twice its current liabilities. That current ratio of Cyanamid, therefore, projects
adequacy in working capital. Said working capital was expected to increase further
when more funds were generated from the succeeding years sales. Available
income covered expenses or indebtedness for that year, and there appeared no
reason to expect an impending working capital deficit which could have
necessitated an increase in working capital, as rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal Revenue,[25] we held that:
"...[T]here is no need to have such a large amount at the
beginning of the following year because during the year,
current assets are converted into cash and with the income
realized from the business as the year goes, these expenses
may well be taken care of. [citation omitted]. Thus, it is
erroneous to say that the taxpayer is entitled to retain enough
liquid net assets in amounts approximately equal to current
operating needs for the year to cover cost of goods sold and
operating expenses: for it excludes proper consideration of
funds generated by the collection of notes receivable as trade
accounts during the course of the year."[26]
If the CIR determined that the corporation avoided the tax on shareholders by
permitting earnings or profits to accumulate, and the taxpayer contested such a
determination, the burden of proving the determination wrong, together with the
corresponding burden of first going forward with evidence, is on the taxpayer. This
applies even if the corporation is not a mere holding or investment company and
does not have an unreasonable accumulation of earnings or profits.[27]
In order to determine whether profits are accumulated for the reasonable needs of
the business to avoid the surtax upon shareholders, it must be shown that the
controlling intention of the taxpayer is manifested at the time of accumulation, not
intentions declared subsequently, which are mere afterthoughts.[28] Furthermore,
the accumulated profits must be used within a reasonable time after the close of
the taxable year. In the instant case, petitioner did not establish, by clear and
convincing evidence, that such accumulation of profit was for the immediate needs
of the business.

In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, [29] we

ruled: xl-aw

"To determine the reasonable needs of the business in order to

justify an accumulation of earnings, the Courts of the United
States have invented the so-called Immediacy Test which
construed the words reasonable needs of the business to mean
the immediate needs of the business, and it was generally held
that if the corporation did not prove an immediate need for the
accumulation of the earnings and profits, the accumulation was
not for the reasonable needs of the business, and the penalty
tax would apply. (Mertens, Law of Federal Income
Taxation, Vol. 7, Chapter 39, p. 103).[30]

In the present case, the Tax Court opted to determine the working capital
sufficiency by using the ratio between current assets to current liabilities. The
working capital needs of a business depend upon the nature of the business, its
credit policies, the amount of inventories, the rate of turnover, the amount of
accounts receivable, the collection rate, the availability of credit to the business,
and similar factors. Petitioner, by adhering to the "Bardahl" formula, failed to
impress the tax court with the required definiteness envisioned by the statute. We
agree with the tax court that the burden of proof to establish that the profits
accumulated were not beyond the reasonable needs of the company, remained on
the taxpayer. This Court will not set aside lightly the conclusion reached by the
Court of Tax Appeals which, by the very nature of its function, is dedicated
exclusively to the consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of
authority.[31] Unless rebutted, all presumptions generally are indulged in favor of
the correctness of the CIRs assessment against the taxpayer. With petitioners
failure to prove the CIR incorrect, clearly and conclusively, this Court is constrained
to uphold the correctness of tax courts ruling as affirmed by the Court of Appeals.

WHEREFORE, the instant petition is DENIED, and the decision of the Court of
Appeals, sustaining that of the Court of Tax Appeals, is hereby AFFIRMED. Costs
against petitioner.

SO ORDERED.