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FOREWORD

“Where there is an income tax, the just man will

pay more than the unjust on the same income.”

- Plato

!This is a loose compilation of several digested cases in

Taxation One, most of which were assigned and reported. The
purpose of this compilation is to enable the student to have a
ready reference material jurisprudential pronouncements in
connection with principles of taxation.

It is hoped that future students would add more digested

cases in this compilation for the benefit of those who will study
after them.

Thank you.

DRCA
October 2011

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CONTENTS

General Principles of Taxation

CIR vs. Cebu Portland Cement!!!!!!!

!Municipality of Makati vs. CA

CIR vs. Algue

!BPI-Family Savings Bank, Inc., vs. CA

CIR vs Tokyo Shipping

!CIR vs Mitsubishi Metal Corporation

!Philippine Bank of Communications vs CIR

!Sison vs. Ancheta

Tolentino vs. Secretary of Finance

!Abakada Guro vs. Purisima

Procter & Gamble vs. Municipality of Jagna

!CIR vs. Ateneo De Manila University

Hydro Resources vs. CTA

Pepsi-Cola Bottling Co vs. Municipality of Tanauan

!CIR vs. S.C. Johnson and CA!

!CIR vs. Estate of Toda

!Republic of the Philippines vs. Sampaguita!!!!!!

Domingo vs. Garlitos!!!!!

The National Internal Revenue Code

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 !CIR vs. Pascor Realty and Development
Marcos II vs. CA!!!!!!!

!Meralco Securities Corp vs. Savellano!!!!!!

Republic of the Philippines vs. CTA and AGFHA

CIR vs. R.O.H Auto Products

!!CIR vs. Fortune Tobacco Corporation!!!!!!!!

!CIR vs. Benguet Corporation!!!!!!

Income Taxation

Madrigal vs Rafferty

Conwi vs CTA!!!!!!!
!CIR vs Javier!!!!!!!!

!Eisner vs Macomber!!!!!!!
CIR vs Lednicky!!!!!!!

!CIR vs. Isabela Cultural Corp.!!!!

!CIR vs Arthur Henderson!!!!!!

CIR vs CA, CTA and A. Soriano Corp!!!!!

!CIR vs. Manning!!!!!!!

!Sison vs. Ancheta!!!!!

Pascual vs. CIR!!!!!!!!

!Obillosvs CIR and CTA!!!!!!

!Philex Mining Corporation vs. CIR!!!!!

Abra Valley C. vs Hon. Juan Aquino!!!!!

Royal Interocean Lines vs CIR!!

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 CIR vs Solidbank Corporation!!!!!!

CIR vs Tokyo Shipping Co. Ltd., and CTA!!!!

Marubeni Corporation vs. CIR and CTA!!!!

!CIR vs. Johnson and Son, Inc., and CA!!!!

!CIR vs Procter & Gamble and CTA!!!!!

!Cyanamid Philippines, Inc vs CA, CTA and CIR!!!!!

!CIR vs Young Men's Christian Association

!!PLDT vs.. CIR!!!!!!!

Aguinaldo Industries Co., vs. CTA!!!!

!Esso Standard Eastern, Inc. vs. CIR!!!!!

!FEBTC vs. CA, CTA, BIR!!!!!!

PNB vs. Savellano

CIR vs. Isabela Cultural Corporation!!!!!

!CIR vs. Central Luzon Drug Corporation!!!!

!Philex Mining Corporation vs. CIR!!!!

Ericsson vs. City of Pasig!!!!!!

Philam Asset Management vs. CIR!!!!!

!Collector of Internal Revenue vs. Meralco!!!!

!State Land Investment Corporation vs. CIR!!!!

Tax One Class

First Semester 2011

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GENERAL PRINCIPLES

“What shall I say of these save that they too stand

in the sunlight, but with their backs to the sun? They see
only their shadows, and their shadows are their laws.

And what is the sun to them but a caster of

shadows? And what is to acknowledge the laws but to
stoop down and trace their shadows upon the earth?”

- Kahlil Gibran
The Prophet

Cebu Portland vs. CTA

!The Court of Tax Appeals rendered a decision against the

Commissioner of Internal Revenue to refund Cebu Portland
Cement for their Overpayment of Ad Valorem Taxes on cement
that the latter was producing and distributing here in the
Philippines in the period after October 1957. Cebu Portland
Cement receiving favorable judgment moved for a Writ of
Execution against the Commissioner of Internal Revenue that
said refund may be released in their favor. The Commissioner in
response challenge the Writ of Execution alleging that Cebu
Portland Cement had an outstanding Tax Sales Liability and he
had credited the amount to be refund to the account of Cebu
Portland Cement. The Court of tax appeals held that the final
sales tax liability is still undetermined thus it cannot be subject to
set-off in favor of Cebu Portland Cement.

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 !Whether the assessment of sales tax liability may be enforced,
i.e. to set off against the refund.

!The High Court ruled in favor of the Commissioner of

Internal Revenue. The Taxes imposed against the Cebu Portland
Cement is Part of the Life Blood of the Government to effectively
administer its functions, an urgency to collect taxes for
undisrupted Governmental Administration. As for the present
case CPCC had Php 4 million tax due after applying the Refund.

Makati vs. Court of Appeals

A petition for review in relation to the Eminent Domain

Powers exercised by the Municipality of Makati against Arceli P.
Jo. The RTC after proper hearing of all appraisal
recommendations has set the amount to be paid to the
respondent in the amount of Php 5291,666.00 and ordering
petitioner to pay this amount minus the advanced payment of
P338,160.00 which was earlier released to private respondent.

The Respondent after filling a writ of execution but later

did he found out that a garnishment was served to PNB,
however the sheriff was told that there was a hold code on said
account. Petitioner filed a motion to lift the garnishment, on the
ground that the manner of payment of the expropriation amount
should be done in installments which the respondent RTC judge
failed to state in his decision. Private respondent filed its
opposition to the motion.

Respondent trial judge subsequently issued an order

dated September 8, 1988 which: (1) approved the compromise
agreement; (2) ordered PNB Buendia Branch to immediately
release to PSB the sum of P4,953,50645 which corresponds to the
balance of the appraised value of the subject property under the
RTC decision dated June 4, 1987, from the garnished account of
petitioner; and, (3) ordered PSB and private respondent to

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execute the necessary deed of conveyance over the subject
property in favor of petitioner. Petitioner's motion to lift the
garnishment was denied.

Petitioner filed a motion for reconsideration, which was

duly opposed by private respondent. On the other hand, for
failure of the manager of the PNB Buendia Branch to comply
with the order dated September 8, 1988, private respondent filed
two succeeding motions to require the bank manager to show
cause why he should not be held in contempt of court. During
the hearings conducted for the above motions, the general
manager of the PNB Buendia Branch, a Mr. Antonio Bautista,
informed the court that he was still waiting for proper
authorization from the PNB head office enabling him to make a
disbursement for the amount so ordered. For its part, petitioner
contended that its funds at the PNB Buendia Branch could
neither be garnished nor levied upon execution, for to do so
would result in the disbursement of public funds without the
proper appropriation required under the law.

Whether or not public funds may be compelled to be used for

payment in expropriation proceedings notwithstanding a city
ordinance on the contrary

Nevertheless, this is not to say that private respondent

and PSB are left with no legal recourse. Where a municipality
fails or refuses, without justifiable reason, to effect payment of a
final money judgment rendered against it, the claimant may
avail of the remedy of mandamus in order to compel the
enactment and approval of the necessary appropriation
ordinance, and the corresponding disbursement of municipal
fund.

The State's power of eminent domain should be exercised

within the bounds of fair play and justice. In the case at bar,
considering that valuable property has been taken, the
compensation to be paid fixed and the municipality is in full

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possession and utilizing the property for public purpose, for
three (3) years, the Court finds that the municipality has had
more than reasonable time to pay full compensation.

CIR vs. ALGUE

The private respondent, a domestic corporation engaged

in engineering, construction and other allied activities, received a
letter from the petitioner assessing it in the total amount of P
83,183.85 as delinquency income taxes for the years 1958 and
1959. The petitioner contends that the claimed deduction of P
75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. The
petitioner claims that these payments are fictitious because most
of the payees are members of the same family in control of
Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is
not enough substantiation of such payments. In short, the
petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.

Thereafter, Algue flied a letter of protest or request for

reconsideration, which letter was stamp received on the same
day in the office of the petitioner. The payment was in the form
of promotional fees. These were collected by the Payees for their
work in the creation of the Vegetable Oil Investment Corporation
of the Philippines and its subsequent purchase of the properties
of the Philippine Sugar Estate Development Company. For this
sale, Algue received as agent a commission of P 126,000.00, and it
was from this commission that the P 75,000.00 promotional fees
were paid to the aforenamed individuals. The amount was
earned through the joint efforts of the persons among whom it
was distributed It has been established that the Philippine Sugar
Estate Development Company had earlier appointed Algue as its
agent, authorizing it to sell its land, factories and oil
manufacturing process.

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 Subsequently a warrant of distraint and levy was
presented to the private respondent, through its counsel, Atty.
Alberto Guevara, Jr., who refused to receive it on the ground of
the pending protest.

Later on, Atty. Guevara was finally informed that the BIR
was not taking any action on the protest and it was only then
that he accepted the warrant of distraint and levy earlier sought
to be served. Sixteen days later, on April 23, 1965, Algue filed a
petition for review of the decision of the Commissioner of
Internal Revenue with the Court of Tax Appeals.

The main issue in this case is whether or not the Collector of

Internal Revenue correctly disallowed the P 75,000.00 deduction
claimed by private respondent Algue as legitimate business expenses in
its income tax returns.

The corollary issue is whether or not the appeal of the private

respondent from the decision of the Collector of Internal Revenue was
made on time and in accordance with law.

The Court held that the appeal of the private respondent

from the decision of the petitioner was filed on time with the
respondent court and it also found that the claimed deduction by
the private respondent was permitted under the Internal
Revenue Code and should therefore not have been disallowed
by the petitioner. ACCORDINGLY, the appealed decision of the
Court of Tax Appeals is AFFIRMED in toto, without costs.

The petition was filed seasonably. According to Rep. Act

No. 1125, the appeal may be made within thirty days after
receipt of the decision or ruling challenged.It is true that as a rule
the warrant of distraint and levy is "proof of the finality of the
assessment and renders hopeless a request for reconsideration,"
being "tantamount to an outright denial thereof and makes the
said request deemed rejected."

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 The proven fact is that four days after the private
respondent received the petitioner's notice of assessment; it filed
its letter of protest. This was apparently not taken into account
before the warrant of distraint and levy was issued; indeed, such
protest could not be located in the office of the petitioner. It was
only after Atty. Guevara gave the BIR a copy of the protest that it
was, if at all, considered by the tax authorities. During the
intervening period, the warrant was premature and could
therefore not be served.

It thus had the effect of suspending on January 18, 1965,

when it was filed, the reglementary period which started on the
date the assessment was received, viz., January 14, 1965· The
period started running again only on April 7, 1965, when the
private respondent was definitely informed of the implied
rejection of the said protest and the warrant was finally served
on it. Hence, when the appeal was filed on April 23, 1965, only
20 days of the reglementary period had been consumed.

It also agreed with the respondent court that the amount

of the promotional fees was not excessive. This finding of the
respondent court is in accord with the following provision of the
Tax Code:

SEC. 30. Deductionsfrom gross income.--ln

computing net income there shall beallowed as
deductions? (a) Expenses: (1) In general.--A1l the
ordinary and necessaryexpenses paid or incurred during
the taxable year in carrying on any trade or
business,including a reasonable allowance for salaries or
other compensation for personal servicesactually
rendered;

Revenue Regulations NO.2, Section 70 (1),

reading as follows: SEC. 70. Compensationfor personal
services.--Among the ordinary and necessary expenses

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 paidor incurred in carrying on any trade or business may
be included a reasonable allowancefor salaries or other
compensation for personal services actually rendered. The
test ofdeductibility in the case of compensation payments
is whether they are reasonable andare, in fact, payments
purely for service. This test and deductibility in the case
ofcompensation payments is whether they are reasonable
and are, in fact, payments purelyfor service. This test and
its practical application may be further stated and
illustrated asfollows:

Any amount paid in the form of compensation,

but not in fact as the purchase price of services, is not
deductible. (a) An ostensible salary paid by a corporation
may be a distribution of a dividend on stock. This is likely
to occur in the case of a corporation having few
stockholders, practically all of whom draw salaries. If in
such a case the salaries are in excess of those ordinarily
paid for similar services, and the excessive payment
correspond or bear a close relationship to the
stockholdings of the officers of employees, it would seem
likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of
earnings upon the stock. ... (Promulgated Feb. 11,
1931,30 O.G. No. 18,325.)

The Court found that these suspicions were adequately

met by the private respondent when it’s President, Alberto
Guevara, and the accountant, Cecilia V. de Jesus, testified that
the payments were not made in one lump sum but periodically
and in different amounts as each payee's need arose. 19 It should
be remembered that this was a family corporation where strict
business procedures were not applied and immediate issuance of
receipts was not required. Even so, at the end of the year, when
the books were to be closed, each payee made an accounting of
all of the fees received by him or her, to make up the total of P
75,000.00. 20 Admittedly, everything seemed to be informal. This

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arrangement was understandable, however, in view of the close
relationship among the persons in the family corporation. It is
worth noting at this point that most of the payees were not in the
regular employ of Algue nor were they its controlling
stockholders.

There is no dispute that the payees duly reported their

respective shares of the fees in their income tax returns and paid
the corresponding taxes thereon.'? The Court of Tax Appeals also
found, after examining the evidence, that no distribution of
dividends was involved.

BPI Family Savings Bank vs. CA

This case involves a claim for tax refund in the amount of

P112,491.00 representing petitioner's tax withheld for the year
1989. In its Corporate Annual Income Tax Return for the year
1989, the following items are reflected: Income P1,017,931,831.00;
Deductions P1,026,218,791.00; Net Income (Loss) (P8,286,960.00)
Taxable Income (Loss) (P8,286,960.00); Less the following
amount: 1988 Tax Credit P18S,00l.00 and 1989 Tax Credit
PU2.491.00, for the total amount of P297.492.00 - Refundable. It
appears from the foregoing 1989 Income Tax Return that
petitioner had a total refundable amount ofP297,492 inclusive of
the P112.491.00 being claimed as tax refund in the present case.
However, petitioner declared in the same 1989 Income Tax
Return that the said total refundable amount of P297.492.00 will
be applied as tax credit to the succeeding taxable year. On
October u, 1990, petitioner filed a written claim for refund in the
amount of P112,491.00 with the respondent Commissioner of
Internal Revenue alleging that it did not apply the 1989
refundable amount of P297.492.00 (including P112,491.00) to its
1990 Annual Income Tax Return or other tax liabilities due to the
alleged business losses it incurred for the same year. petitioner
filed a petition for review with respondent Court of Tax Appeals,
seeking the refund of the amount of P112A91.00. The respondent

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Court of Tax Appeals dismissed petitioner's petition on the
ground that petitioner failed to present as evidence its corporate
Annual Income Tax Return for 1990. Petitioner filed a motion for
reconsideration, however, the same was denied by respondent
court in its Resolution dated May 6, 1994. The CA affirmed the
decision of CTA by requiring petitioner to show proof that it has
not credited to its 1990 Annual income Tax Return, the amount
of P297.492.00 (including P112.491.00), so as to refute its previous
declaration in the 1989 Income Tax Return that the said amount
will be applied as a tax credit in the succeeding year of 1990.
Having failed to submit such requirement, there is no basis to
grant the claim for refund.

Whether or not petitioner is entitled to the refund of

P112,491.90, representing excess creditable withholding tax paid for
the taxable year 1989.

It is undisputed that petitioner had excess withholding

taxes for the year 1989 and was thus entitled to a refund
amounting to Pl12,491. Pursuant to Section 69 of the 1986 Tax
Code which states that a corporation entitled to a refund may
opt either (1) to obtain such refund or (2) to credit said amount
for the succeeding taxable year, petitioner indicated in its 1989
Income Tax Return that it would apply the said amount as a tax
credit for the succeeding taxable year, 1990. Subsequently,
petitioner informed the Bureau of Internal Revenue (BIR) that it
would claim the amount as a tax refund, instead of applying it as
a tax credit. When no action from the BIR was forthcoming,
petitioner filed its claim with the Court of Tax Appeals. The
Bureau of Internal Revenue, failed to controvert petitioner's
claim. In fact, it presented no evidence at all. Because it ought to
know the tax records of all taxpayers, the CIR could have easily
disproved petitioner's claim.

A copy of the Final Adjustment Return for 1990 was

attached to petitioner's Motion for Reconsideration filed before
the CTA. A final adjustment return shows whether a corporation

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incurred a loss or gained a profit during the taxable year. In this
case, that Return clearly showed that petitioner incurred
P52,480,173 as net loss in 1990. Clearly, it could not have applied
the amount in dispute as a tax credit. Petitioner also calls the
attention of this Court, as it had done before the CTA, to a
Decision rendered by the Tax Court in CTA Case No. 4897,
involving its claim for refund for the year 1990. In that case, the
Tax Court held that "petitioner suffered a net loss for the taxable
year 1990.... " Respondent, however, urges this Court not to take
judicial notice of the said case. The Court believes respondents'
reasoning underscores the weakness of their case. For if they had
really believed that petitioner is not entitled to a tax refund, they
could have easily proved that it did not suffer any loss in 1990.
Indeed, it is noteworthy that respondents opted not to assail the
fact appearing therein - that petitioner suffered a net loss in 1990
- in the same way that it refused to controvert the same fact
established by petitioner's other documentary exhibits.

Substantial justice, equity and fair play are on the side of

petitioner. Technicalities and legalisms, however exalted, should
not be misused by the government to keep money not belonging
to it and thereby enrich itself at the expense of its law abiding
citizens. If the State expects its taxpayers to observe fairness and
honesty in paying their taxes, so must it apply the same standard
against itself in refunding excess payments of such taxes. Indeed,
the State must lead by its own example of honor, dignity and
uprightness. Petition was granted and the assailed decision and
resolution of the Court ofAppeals was reversed and set aside.
The Commissioner of Internal Revenue was ordered to refund to
petitioner the amount of Php 112,491 as excess creditable taxes
paid in 1989.

CIR vs Tokyo Shipping Co., Ltd

Private respondent is a foreign corporation represented in

the Philippines by Soriamont Steamship Agencies, Incorporated.
It owns and operates tramper vessel M/V Gardenia. In

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December 1980, NASUTRA 2 chartered M/V Gardenia to load
16,500 metric tons of raw sugar in the Philippines. 3 On
December 23, 1980, Mr. Edilberto Lising, the operations
supervisor of Soriamont Agency, 4 paid the required income and
common carrier's taxes in the respective sums of FIFTY-NINE
THOUSAND FIVE HUNDRED TWENTY-THREE PESOS and
SEVENTY FIVE CENTAVOS (PS9,S23.75) and FORTY-SEVEN
THOUSAND SIX HUNDRED NINETEEN PESOS (P47,619.00),
or a total of ONE HUNDRED SEVEN THOUSAND ONE
HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE
CENTAVOS (P107,142.7S) based on the expected gross receipts
of the vessel. 5 Upon arriving, however, at Guimaras Port of
Iloilo, the vessel found no sugar for loading. On January 10,
1981, NASUTRA and private respondent's agent mutually
agreed to have the vessel sail for Japan without any cargo. Due
to this situation, private respondent filed for refund, contending
that it did not generate income from such transaction and they
are entitled to such refund or tax credit. The CIR contends to the
contrary and such case was elevated to the CTA.The Tax court
ruled in favor of the private respondent, hence this petition for
certiorari.

Whether or not the private respondent is entitled to tax refund?

The Supreme Court said - Yes. Private respondent is

entitled to tax refund paid in advance because it is very evident
that it did not gain any income from such transaction, therefore,
there is no basis for tax assessment and the advance payment
paid must be refunded. There is no dispute as to the applicable
provision,sec.24 (b) (2) of the NIRC, Pursuant to this provision, a
resident foreign corporation engaged in the transport of cargo is
liable for taxes depending on the amount of income it derives
from sources within the Philippines. Thus, before such a tax
liability can be enforced the taxpayer must be shown to have
earned income sourced from the Philippines. Since no income
was realized, there is no basis for such tax liability. The court
further stressed that the power of taxation is also the power to

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destroy. It must be exercised with caution because, if not, it can
cause injury to taxpayers and in turn "kill the hen that lays the
golden eggs".

CIR vs Mitsubishi Metal Corporation

Atlas Consolidated Mining and Development Corporation

(hereinafter, Atlas) entered into a Loan and Sales Contract with
Mitsubishi Metal Corporation (Mitsubishi, for brevity), a
Japanese corporation licensed to engage in business in the
Philippines, for purposes of the projected expansion of the
productive capacity of the former's mines in Toledo, Cebu.
Under said contract, Mitsubishi agreed to extend a loan to Atlas
'in the amount of $20,000,000.00, United States currency, for the
installation of a new concentrator for copper production. Atlas,
in turn undertook to sell to Mitsubishi all the copper
concentrates produced from said machine for a period of fifteen
(15) years. It was contemplated that $9,000,000.00 of said loan
was to be used for the purchase of the concentrator machinery
from Japan.

Mitsubishi thereafter applied for a loan with the Export-

Import Bank of Japan (Eximbank for short) obviously for
purposes of its obligation under said contract. Its loan
application was approved on May 26, 1970 in the sum of
¥4,320,000,000.00, at about the same time as the approval of its
loan for ¥2,880,000,000.00 from a consortium of Japanese banks.
The total amount of both loans is equivalent to $20,000,000.00 in
United States currency at the then prevailing exchange rate. The
records in the Bureau of Internal Revenue show that the
approval of the loan by Eximbank to Mitsubishi was subject to
the condition that Mitsubishi would use the amount as a loan to
Atlas and as a consideration for importing copper concentrates
from Atlas, and that Mitsubishi had to pay back the total amount
of loan by September 30,
1981.

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 Pursuant to the contract between Atlas and Mitsubishi,
interest payments were made by the former to the latter totalling
P13,143,966.79 for the years 1974 and 1975. The corresponding
15% tax thereon in the amount of Pl,971,595.01 was withheld
pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the
National Internal Revenue Code, as amended by Presidential
Decree No. 131, and duly remitted to the Government.

On March 5, 1976, private respondents filed a claim for tax

credit requesting that the sum of P1,971,595.01 be applied
against their existing and future tax liabilities.Parenthetically, it
was later noted by respondent Court of Tax Appeals in its
decision that on August 27, 1976, Mitsubishi executed a waiver
and disclaimer of its interest in the claim for tax credit in favor of
Atlas.

Whether or not private respondents are entitled to such tax

credit? Whether or not Mitsubishi acted only as a conduit for Atlas for
it to obtain a loan from Eximbank?

On the first issue, the High Court held - No. They are not
entitled to the tax credit because Mitsubishi and Atlas were not
one of the companies contemplated in Section 29 (b) (7) (A)
which states, (A) Income received from their investments in the
Philippines in loans, stocks, bonds or other domestic securities,
or from interest on their deposits in banks in the Philippines by
(1) foreign governments, (2) financing institutions owned,
controlled, or enjoying refinancing from them, and (3)
international or regional financing institutions established by
governments. Both Atlas and Mitsubishi were not financing
institutions financed by a particular government,therefore, they
are not entitled to tax credit from income derived from interest
earned.

Regarding the second issue, Mitsubishi was a mere

conduit for Atlas, the latter used the former to avail the tax credit

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from such interest and then later on, such tax credit was waived
and a disclaimer was filed in favor Atlas. From this action, it
became clear to the court that the provision of the law was used
as a cloak to escape the tax imposed, therefore in order to
prevent bad precedent in the future, the Court reversed the
decision of the CTA.

Philippine Bank of Communications

vs CIR, CTA and CA

Petitioner, Philippine Bank of Communications (PBCom),

a commercial banking corporation duly organized under
Philippine laws, filed its quarterly income tax returns for the first
and second quarters of 1985, reported profits, and paid the total
income tax of P5,016,954.00. The taxes due were settled by
applying PBCom's tax credit memos and accordingly, the Bureau
ofInternal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85
and 0747-85 for P3.401,701.00 and P1,615,253.00, respectively.

Subsequently, however, PBCom suffered losses so that

when it filed its Annual Income Tax Returns for the year-ended
December 31, 1985, it declared a net loss of P25,317,228.00,
thereby showing no income tax liability. For the succeeding year,
ending December 31, 1986, the petitioner likewise reported a net
loss of P14,129,602.00, and thus declared no tax payable for the
year.

But during these two years, PBCom earned rental income

from leased properties. The lessees withheld and remitted to the
BIR withholding creditable taxes of P282,795.50in 1985 and
P234,077.69 in 1986. Petitioner, then on August 7, 1987, requested
the Commissioner of Internal Revenue (CIR) for a tax credit of
P5,016,954.00 representing the overpayment of taxes in the first
and second quarters of 1985. On July 25, 1988, it filed a claim for
refund of creditable taxes withheld by their lessees from
property rentals in 1985 for P282,795.50 and in 1986 for
P234,077.69. Pending investigation by the CIR, petitioner

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instituted a petition for review on Nov. 18, 1988 before the Court
of Tax Appeals (CTA). In 1993, the CTA rendered a decision
denying the request for a tax refund or credit in the amount of
P5,299,749.95 on the ground that it was filed beyond the two-
year reglementary period. The petitioner's claim for refund in
1986 was likewise denied on the assumption that it was
automatically credited by PBCom against its tax payment in the
succeeding year. These pronouncements by the CTA were
affirmed in toto by the CA.

Petitioner argues that its claim for refund tax credits are
not yet barred by prescription relying on the applicability of
Revenue Memorandum Circular No. 7-85 stating that overpaid
income taxes are not covered by the two-year prescriptive period
under the Tax Code and that taxpayers may claim refund or tax
credits within (ten) 10 years under Art. 1414 of the Civil Code.

Petitioner argues that the government is barred from

asserting a position contrary to its declared circular if it would
result to injustice to taxpayers. Citing ABS-CBNBroadcasting
Corporation us.Court of Tax Appeals petitioner claims that rulings
or circulars promulgated by the Commissioner of Internal
Revenue have no retroactive effect if it would be prejudicial to
taxpayers. In ABS-CBN case, the Court held that the government
is precluded from adopting a position inconsistent with one
previously taken where injustice would result therefrom or
where there has been a misrepresentation to the taxpayer.

Whether or not taxpayer, which relied in good faith on the

formal assurances ofBIR in RMC No. 7-85, can be prejudiced by the
subsequent BIR rejection, applied retroactively, of its assurances in
RMC No. 7-85 that the prescriptive period for the refund/tax credit of
excess quarterly income tax payments is not two years but ten (10).

The Court ruled that when the Acting Commissioner of

Internal Revenue issued RMC 7-85, changing the prescriptive
period of two years to ten years on claims of excess quarterly

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income tax payments, such circular created a clear inconsistency
with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR
did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress.

It is widely accepted that the interpretation placed upon a

statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts.Nevertheless, such
interpretation is not conclusive and will be ignored if judicially
found to be erroneous.

Basic is the principle that "taxes are the lifeblood of the

nation." The primary purpose is to generate funds for the State to
finance the needs of the citizenry and to advance the common
weal. Due process of law under the Constitution does not require
judicial proceedings in tax cases. This must necessarily be so
because it is upon taxation that the government chiefly relies to
obtain the means to carry on its operations and it is of utmost
importance that the modes adopted to enforce the collection of
taxes levied should be summary and interfered with as little as
possible.

Sison vs. Ancheta

Petitioner files this suit for declaratory relief or prohibition

proceeding on the validity of Section 1 of Batas Pambansa BIg.
135 depends upon a showing of its constitutional infirmity. The
assailed provision further amends Section 21 of the National
Internal Revenue Code of 1977, which provides for rates of tax
on citizens or residents on (a) taxable compensation income, (b)
taxable net income, (c) royalties, prizes, and other winnings, (d)
interest from bank deposits and yield or any other monetary
benefit from deposit substitutes and from trust fund and similar
arrangements, (e) dividends and share of individual partner in
the net profits of taxable partnership, (f) adjusted gross income.
Petitioner, as taxpayer alleges that by virtue thereof, he would be

21
unduly discriminated against by the imposition of higher rates
of tax upon his income arising from the exercise of his profession
vis-a-vis those which are imposed upon fixed income or salaried
individual taxpayers. He characterizes the above section as
arbitrary amounting to class legislation, oppressive and
capricious in character. For petitioner, therefore, there is a
transgression of both the equal protection and due process
clauses of the Constitution as well as of the rule requiring
uniformity in taxation.

Whether or not Petitioner will be unduly discriminated against

by the imposition of higher tax rates upon his income as against those
which are imposed upon fixed income or salaried individual taxpayers.

No. The Court said that classification, if rational in

character, is allowable. In a leading case, Lutz v. Araneta, 98 Phil.
143 (1955), the Court went so far as to hold at any rate, it is
inherent in the power to tax that a state be free to select the
subject of taxation, and it has been repeatedly held that
inequalities which result from a singling out of one particular
class for taxation, or exemption infringe no constitutional
limitation. Petitioner likewise invoked the kindred concept of
uniformity. According to the Constitution, the rule of taxation
shall be uniform and equitable. This requirement is met
according to Justice Laurel in Philippine Trust Company v: Yatco,
69 Phil. 420 (1940) that when the tax operates with the same force
and effect in every place where the subject may be found. The
rule of uniformity does not call for perfect uniformity or perfect
equality, because this is hardly attainable.

In the case of the gross income taxation, the discernible

basis of classification is the susceptibility of the income to the
application of generalized rules removing all deductible items
for all taxpayers within the class and fixing a set of reduced tax
rates tobe applied to all of them. Taxpayers who are recipients of
compensation income are set apart as a class. As there is
practically no overhead expense, these taxpayers are not entitled

22
to make deductions for income tax purposes because they are in
the same situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businessmen,
there is no uniformity in the costs or expenses necessary to
produce their income. It would not be just then to disregard the
disparities by giving all of them zero deduction and
indiscriminately impose on all alike the same tax rates on the
basis of gross income. There is ample justification for the
adoption of the gross system of income taxation to compensation
income, while continuing the system of net income taxation as
regards professional and business income.

Arturo Tolentino vs. Sec of Finance & CIR

The Case is about challenging the Constitutionality of RA

7716 otherwise known as Expanded Value Added Tax (EVAT). A
lot of issues were thrown like: (1) it did not originate exclusively
in the House of Representatives; (2) The Growing Budget deficit
is not an Emergency, especially Philippines where budget deficit
is a chronic condition.

These are motions directly filed to the Supreme Court

seeking reconsideration to dismiss the case.

The enactment of RA 7716 otherwise known as EVAT was

brought about by the enormous budget deficit of the Philippines.
It is an amendment which seeks to restructure the VAT by
widening its tax base.

Arturo Tolentino together with other petitioners like the

CREBA and other Civil Society riding on the popularity of the
issue on EV AT to gain political grounds, assents that EV AT
violates the rules that taxes should be uniform and equitable and
that Congress shall evolve a progressive system of Taxation.
CREBA claims that VAT is regressive because the law imposes a

23
flat rate of 10% and thus places the Tax Burden on all taxpayers
without regard to their ability to pay.

The mandate of Congress is to evolve a progressive tax

system.

Whether or not EVAT violates the rule that Taxes evolve a

progressive system of
Taxation?

Motion Denied. The Constitution does not really prohibit

imposition of Indirect Taxes. It has been interpreted to mean
simply that Direct Taxes are to be preferred as much as possible
whereas Indirect Taxes should be minimized.

Sales Taxes are the oldest form of Indirect Taxes. The issue
of VAT was already provided long before RA 7716. It merely
expands the base of the Tax. Resort to indirect taxes should be
minimized but not avoid entirely because it is difficult, if not
IMPOSSIBLE, to avoid them by imposing such taxes according
to the Taxpayers ability to pay. Where VAT imposes regressive
taxation, the Law on VAT minimizes the regressive effects of this
imposition by providing for ZERO Rating of certain transactions
like Goods in its Original State (Palay, Corn), Educational
Services, Work of Art, Export sales by person not VAT registered.
Transactions which involves VAT are goods and services used or
availed mainly by higher income group. Real Property for Sale,
Patent, copyright, films, radio, 1V, Hotels, Restaurants, Common
Carriers &Lending Investments.

Abakada Guro Partylist vs. Purisirna

This petition for prohibition seeks to prevent respondents

from implementing and enforcing Republic Act (RA) 9335
(Attrition Act of 2005)

24
 RA 9335 was enacted to optimize the revenue-generation
capability and collection of the Bureau of Internal Revenue (BIR)
and the Bureau of Customs (BOC). The law intends to encourage
BIR and BOC officials and employees to exceed their revenue
targets by providing a system of rewards and sanctions through
the creation of a Reward and Incentives Fund (Fund) and a
Revenue Performance Evaluation Board (Board).

Petitioners, invoking their right as taxpayers they contend

that, by establishing a system of rewards and incentives, the law
"transform[s] the officials and employees of the BIR and the BOC
into mercenaries and bounty hunters" as they will do their best
only in consideration of such rewards. Thus, the system of
rewards and incentives invites corruption and undermines the
constitutionally mandated duty of these officials and employees
to serve the people with utmost responsibility, integrity, loyalty
and efficiency.

In their comment, respondents, through the Office of the

Solicitor General, acknowledge that public policy requires the
resolution of the constitutional issues involved in this case. They
assert that the allegation that the reward system will breed
mercenaries is mere speculation and does not suffice to
invalidate the law. Seen in conjunction with the declared
objective of RA 9335, the law validly classifies the BIR and the
BOC because the functions they perform are distinct from those
of the other government agencies and instrumentalities.

Whether or not RA 9335 is unconstitutional?

SC finds that petitioners have failed to overcome the

presumption of constitutionality in favor of RA 9335.

Public officers enjoy the presumption of regularity in the

performance of their duties. The presumption is disputable but
proof to the contrary is required to rebut it. It cannot be
overturned by mere conjecture or denied in advance (as

25
petitioners would have the Court do) especially in this case
where it is an underlying principle to advance a declared public
policy.

A law enacted by Congress enjoys the strong presumption

of constitutionality. To justify its nullification, there must be a
clear and unequivocal breach of the Constitution, not a doubtful
and equivocal one. To invalidate RA 9335 based on petitioners'
baseless supposition is an affront to the wisdom not only of the
legislature that passed it but also of the executive which
approved it.

Procter & Gamble vs Municipality of Jagna, Bohol

A direct appeal by plaintiff company from the judgment of

the Court of First Instance of Manila, Branch VI, upholding the
validity of Ordinance NO.4, Series of 1957, enacted by defendant
Municipality, which imposed "storage fees on all exportable
copra deposited in the bodega within the jurisdiction of the
Municipality of Jagna Bohol.

Plaintiff-appellant is a domestic corporation with principal

offices in Manila. It is a consolidated corporation of Procter &
Gamble Trading Company and Philippine Manufacturing
Company, which later became Procter &Gamble Trading
Company, Philippines. It is engaged in the manufacture of soap,
edible oil, margarine and other similar products, and for this
purpose maintains a "bodega" in defendant Municipality where
it stores copra purchased in the municipality and therefrom
ships the same for its manufacturing and other operations.

On December 13, 1957, the Municipal Council of Jagna

enacted Municipal Ordinance NO.4, Series of 1957, quoted
herein below:

26
 AN ORDINANCE IMPOSING STORAGE
FEES OF ALL EXPORTABLE COPRA
DEPOSITED IN THE BODEGA WITHIN THE
JURISDICTION OF THE MUNICIPALITY OF
JAGNA BOHOL

SECTION 1. Any person, firm or corporation

having a deposit of exportable copra in the bodega,
within the jurisdiction of the Municipality of Jagna
Bohol, shall pay to the Municipal Treasury a storage
fee of TEN (PO.10) CENTAVOS FOR EVERY
HUNDRED (100) kilos;

!For a period of six years, from 1958 to 1963, plaintiff paid

defendant Municipality, allegedly under protest, storage fees in
the total sum of 1142,265.13.

For its part, defendant Municipality upheld its power to

enact the Ordinance in question; questioned the jurisdiction of
the trial Court to take cognizance of the action under section 44
(h) of the Judiciary Act in that it seeks to enjoin the enforcement
of a Municipal Ordinance; and pleaded prescription and laches
for plaintiffs failure to timely question the validity of the said
Ordinance.

After the parties had agreed to submit the case for

judgment on the pleadings, the trial Court upheld its jurisdiction
as well as defendant Municipality's power to enact the
Ordinance in question under section 2238 of the Revised
Administrative Code, otherwise known as the general welfare
clause, and declared that plaintiffs right of action had prescribed
under the 5-year period provided for by Article 1149 of the Civil
Code.

In this appeal, plaintiff interposes the following

Assignments of Error:

27
 THE TRIAL COURT ERRED IN HOLDING
THAT ORDINANCE NO.4, SERIES OF 1957,
ENACTED BY THE DEFENDANT MUNICIPALITY
OF JAGNA BOHOL, IS A VALID, LEGAL AND
ENFORCEABLE ORDINANCE AGAINST THE
PLAINTIFF.

THE TRIAL COURT ERRED IN HOLDING

THAT PAYMENT OF THE TAX UNDER
ORDINANCE NO.4, SERIES OF 1957 WAS NOT
DONE UNDER PROTEST.

THE TRIAL COURT ERRED IN HOLDING

THAT THE ACTION OF THE PLAINTIFF TO
ANNUL AND TO DECLARE ORDINANCE NO.4,
SERIES OF 1957 OF THE DEFENDANT HAS
ALREADY PRESCRIBED.

AND, FINALLY, THE TRIAL COURT ERRED

IN NOT HOLDING ORDINANCE NO.4. SERIES OF
1957 ULTRA-VIRES AND VOID AND IN NOT
ORDERING THE REFUND OF TAXES PAID
THEREUNDER.

It is plaintiffs submission that the subject Ordinance is

inapplicable to it as it is not engaged in the business or trade of
storing copra for others for compensation or profit and that the
only copra it stores is for its exclusive use in connection with its
business as manufacturer of soap, edible oil, margarine and
other similar products; that the levy is intended as an "export
tax" as it is collected on "exportable copra' , and, therefore,
beyond the power of the Municipality to enact; and that the fee
of PO.10 for every 100 kilos of copra stored in the bodega is
excessive, unreasonable and oppressive and is imposed more for
revenue than as a regulatory fee.

28
 The main question to determine is whether defendant
Municipality was authorized to impose and collect the storage fee
provided for in the challenged Ordinance under the laws then
prevailing.

The validity of the Ordinance must be upheld pursuant to

the broad authority conferred upon municipalities by
Commonwealth Act No. 472, approved on June 16, 1939, which
was the prevailing law when the Ordinance was enacted (Procter
&Gamble Trading Co. vs. Municipality of Medina, 43 SCRA 130
11972]). Section 1 thereof reads:

Section 1. A municipal council or municipal district

council shall have the authority to impose municipal license
taxes upon persons engaged in any occupation or business, or
exercising privileges in the municipality or municipal district, by
requiring them to secure licenses at rates fixed by the municipal
council, or municipal district council, and to collect fees and
charges for services rendered by the municipality or municipal
district and shall otherwise have power to levy for public local
purposes, and for school purposes, including teachers' salaries,
just and uniform taxes other than percentage taxes and taxes on
specified articles.

Under the foregoing provision, a municipality is

authorized to impose three kinds of licenses: (1) a license for
regulation of useful occupation or enterprises; (2) license for
restriction or regulation of non-useful occupations or enterprises;
and (3) license for revenue. 4 It is thus unnecessary, as plaintiff
would have us do, to determine whether the subject storage fee
is a tax for revenue purposes or a license fee to reimburse
defendant Municipality for service of supervision because
defendant Municipality is authorized not only to impose a
license fee but also to tax for revenue purposes.

The storage fee imposed under the question Ordinance is

actually a municipal license tax or fee on persons, firms and

29
corporations, like plaintiff, exercising the privilege of storing
copra in a bodega within the Municipality's territorial
jurisdiction. For the term "license tax" has not acquired a fixed
meaning. It is often used indiscriminately to designate
impositions exacted for the exercise of various privileges. In
many instances, it refers to revenue-raising exactions on
privileges or activities. 5

Not only is the imposition of the storage fee authorized by

the general grant of authority under section 1 of CA No. 472.
Neither is the storage fee in question prohibited nor beyond the
power of the municipal councils and municipal district councils
to impose, as listed in section 3 of said CA No. 472. 6 Moreover,
the business of buying and selling and storing copra is property
the subject of regulation within the police power granted to
municipalities under section 2238 of the Revised Administrative
Code or the "general welfare clause", which we quote hereunder:

Section 2238. General power of council to enact ordinances and

make regulations.- The municipal council shall enact such
ordinances and make such regulations, not repugnant to law, as
may be necessary to carry into effect and discharge the powers
and duties conferred upon it by law and such as shall seem
necessary and proper to provide for the health and safety,
promote the prosperity, improve the morals, peace, good
order,comfort, and convenience of the municipality and the
inhabitants thereof,and for the protection of property therein.
For it has been held that a warehouse used for keeping or storing
copra is an establishment likely to endanger the public safety or
likely to give rise to conflagration because the oil content of the
copra when ignited is difficult to put under control by water and
the use of chemicals is necessary to put out the fire. 7 And as the
Ordinance itself states, all exportable copra deposited within the
municipality is "part of the surveillance and lookout of
municipal authorities. Plaintiffs argument that the imposition of
PO.IO per 100 kilos of copra stored in a bodega within
defendant's territory is beyond the cost of regulation and

30
surveillance is not well taken. As enunciated in the case of
Victorias Milling Co. vs. Municipality of Victorias, supra

The cost of regulation cannot be taken as a gauge, if the

municipality really intended to enact a revenue ordinance. For, 'if
the charge exceeds the expense of issuance of a license and costs
of regulation, it is a tax'. And if it is, and it is validly imposed,
'the rule that license fees for regulation must bear a reasonable
relation to the expense of the regulation has no application’.

Municipal corporations are allowed wide discretion in

determining the rates of imposable license fees even in cases of
purely police power measures. In the absence of proof as to
municipal conditions and the nature of the business being taxed
as well as other factors relevant to the issue of arbitrariness or
unreasonableness of the questioned rates, Courts will go slow in
writing off an Ordinance. 8 In the case at bar, appellant has not
sufficiently shown that the rate imposed by the questioned
Ordinance is oppressive, excessive and prohibitive.

!Plaintiffs averment that the Ordinance, even if presumed

valid, is inapplicable to it because it is not engaged in the
business or occupation of buying or selling of copra but is only
storing copra in connection with its main business of
manufacturing soap and other similar products, and that to be
compelled to pay the storage fees would amount to double
taxation, does not inspire assent. The question of whether
appellant is engaged in that business or not is irrelevant because
the storage fee, as previously mentioned, is an imposition on the
privilege of storing copra in a bodega within defendant
municipality by persons, firms or corporations. Section I of the
Ordinance in question does not state that said persons, firms or
corporations should be engaged in the business or occupation of
buying or selling copra. Moreover, by plaintiffs own admission
that it is a consolidated corporation with its trading company; it
will be hard to segregate the copra it uses for trading from that it
utilizes for manufacturing.

31
 Thus, it can be said that plaintiffs payment of storage fees
imposed by the Ordinance in question does not amount to
double taxation. For double taxation to exist,the same property
must be taxed twice, when it should be taxed but once. Double
taxation has also been defined as taxing the same person twice
by the same jurisdiction for the same thing. 9 Surely, a tax on
plaintiffs products is different from a tax on the privilege of
storing copra in a bodega situated within the territorial
boundary of defendant municipality.

Plaintiffs further contention that the storage fee imposed

by the Ordinance is actually intended to be an export tax, which
is expressly prohibited by section 2287 of the Revised
Administrative Code, is without merit. Said provision reads as
follows: Section 2287 ... It shall not be in the power of the
municipal council to impose a tax in any form whatever upon
goods and merchandise carried into the municipality, or out of
the same, and any attempt to impose an import or export tax
upon such goods in the guise of an unreasonable charge for
wharf age use of bridges or otherwise, shall be void.

We have held that only where there is a clear showing that

what is being taxed is an export to any foreign country would
the prohibition come into play. 10 When the Ordinance itself
speaks of "exportable" copra, the meaning conveyed is not
exclusively export to a foreign country but shipment out of the
municipality. The storage fee impugned is not a tax on export
because it is imposed not only upon copra to be exported but
also upon copra sold and to be used for domestic purposes if
stored in any warehouse in the Municipality and the weight
thereof is 100 kilos or more. 11

Thus finding the Ordinance in question to be valid, legal

and enforceable, we find it unnecessary to discuss the ascribed
error that the Court a quo erred in declaring that appellant had
not paid the taxes under protest.

32
 However, we find merit in plaintiffs contention that the
lower Court erred in ruling that its action has prescribed under
Article 1149 of the Civil Code, which provides for a period of
five years for all actions whose periods are not fixed in that
Code. The case of Municipality of Opon vs. Caltex Phi/" 12 is
authority for the view that the period for prescription of actions
to recover municipal license taxes is six years under Article 1145
(2) of the Civil Code. Thus, plaintiff’s action brought within six
years from the time the right of action first accrued in 1958 has
not yet prescribed.

CIR vs CA, CTA and Ateneo De Manila University

Private respondent is a non-stock, non-profit educational

institution with auxiliary units and branches all over the
Philippines. One such auxiliary unit is theInstitute of Philippine
Culture (IPC), which has no legal personality separate and
distinct from that of private respondent. The IPC is a Philippine
unit engaged in social science studies of Philippine society and
culture. Occasionally, it accepts sponsorships for its research
activities from international organizations, private foundations
and government agencies.

On July 8, 1983, private respondent received from

petitioner CIR a demand letter , assessing private respondent the
sum of P174,043.97 for alleged deficiency contractor's tax, and an
assessment dated June 27, 1983 in the sum of P1,141,837 for
alleged deficiency income tax, both for the fiscal year ended
March 31, 1978. Denying said tax liabilities, private respondent
sent petitioner a letter-protest and subsequently filed with the
latter a memorandum contesting the validity of the assessments.

On March 17, 1988, petitioner rendered a letter-decision

canceling the assessment for deficiency income tax but
modifying the assessment for deficiency contractor's tax by

33
increasing the amount due to P193,475.55. Unsatisfied, private
respondent requested for a reconsideration or reinvestigation of
the modified assessment. At the same time, it filed in the
respondent court a petition for review of the said letter-decision
of the petitioner. While the petition was pending before the
respondent court, petitioner issued a final decision dated August
3, 1988 reducing the assessment for deficiency contractor's tax
from P193,475.55 to P46,516.41, exclusive of surcharge and
interest.

On July 12, 1993, the respondent court rendered the

questioned decision which sets aside the decision of the CIR.

Petitioner contends that the respondent court erred in

holding that private respondent is not an "independent
contractor" within the purview of Section 205 of the Tax Code. To
petitioner, the term "independent contractor", as defined by the
Code, encompasses all kinds of services rendered for a fee and
that the only exceptions are the following:

a. Persons, association and corporations under contract for

embroidery and apparel for export and gross receipts of or from
pioneer industry registered with the Board of Investment under
R.A. No. 5186;

b. Individuals occupation tax under Section 12 of the Local

Tax Code (under the old Section 182 [b] of the Tax Code); and

c. Regional or area headquarters established in the

Philippines by multinational corporations, including their alien
executives, and which headquarters do not earn or derive
income from the Philippines and which act as supervisory,
communication and coordinating centers for their affiliates,
subsidiaries or branches in the Asia Pacific Region (Section 205
of the Tax Code)

34
 Whether or not Ateneo de Manila University, through its
auxiliary unit or branch (the Institute of Philippine Culture)
performing the work of an independent contractor and, thus, subject to
the three percent contractor's tax levied by then Section 205 of the
National Internal Revenue Code?

The petition is unmeritorious. Petitioner Commissioner of

Internal Revenue erred in applying the principles of tax
exemption without first applying the well-settled doctrine of
strict interpretation in the imposition of taxes. It is obviously
both illogical and impractical to determine who are exempted
without first determining who are covered by the aforesaid
provision. The Commissioner should have determined first if
private respondent was covered by Section 205, applying the
rule of strict interpretation of laws imposing taxes and other
burdens on the populace, before asking Ateneo to prove its
exemption therefrom. The Court takes this occasion to reiterate
the hornbook doctrine in the interpretation of tax laws that "(a)
statute will not be construed as imposing a tax unless it does so
clearly, expressly, and unambiguously. A tax cannot be imposed
without clear and express words for that purpose. Accordingly,
the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by implication."
Parenthetically, in answering the question of who is subject to
tax statutes, it is basic that "in case of doubt, such statutes are to
be construed most strongly against the government and in favor
of the subjects or citizens because burdens are not to be imposed
nor presumed to be imposed beyond what statutes expressly and
clearly import."

Hydro Resources Contractors Corporation

vs. CTA and the Provincial Government of Isabela

Public respondent "NIA" and petitioner Hydro entered

into a contract whereby the latter undertook to construct for the

35
former the Magat River Multi-Purpose Project situated at
Ramon, Isabela. In June 1982, the Provincial Government of
Isabela, its provincial treasurer, the Municipality of Ramon,
Isabela, and its assistant treasurer filed a civil case against Hydro
with the RTC of Echague, Isabela, for collection of taxes over
certain real properties which Hydro allegedly acquired,
possessed and used III connection with the construction of the
said Magat River Multi-Purpose Project.

After hearing, the court on 6 August 1983, issued an order

finding defendant Hydro liable to pay realty taxes over the
properties it had constructed in connection with Magat River
Multi-Purpose Project, but that the amount thereof was to be
determined infurther proceedings of the court a quo.
,
On 4 November 1983, now before the RTC of Santiago,
Isabela, Hydro filed a motion for leave to file third-party
complaint, dated 21 October 1983, against NIA, attaching to the
motion the proposed third-party complaint (for reimbursement
from the NIA); and a motion to admit amended answer,
accompanying the same with the proposed amended answer. On
the same date the RTC Santiago, Isabela admitted Hydro's third-
party complaint; however, as to its motion for leave to file
amended answer, plaintiffs were given ten (10) days to file their
opposition and Hydro was also given ten (10) days from receipt
of such opposition to file its reply.

On 12 December 1983, before the court a quo could resolve

Hydro's motion for leave to file amended answer, plaintiffs filed
their reply to Hydro's amended answer. NIA also filed its answer
to Hydro's third-party complaint. In an order of 7 February 1983,
the court a quo then ordered the parties to file their respective
memorandum. The parties did not file their memoranda except
Hydro which complied. On 20 May 1985, the court a quo ruled
that the order dated 6 August 1983.

36
 On 15 January 1986, Hydro filed with the Supreme Court a
Petition, which was referred by this Court (First Division) to the
Court of Appeals for proper action and disposition. In a
resolution dated 21 May 1986 said petition was re-docketed in
the Court of Appeals.

On 30 October 1987, the Court of Appeals rendered a

decision denying the petition. Hence, the present petition for
review.

Whether or not the appellate court has acted without or in

excess of its jurisdiction or with grave abuse of discretion in not finding
that the order issued by the court a quo on August 6, 1983 is merely
interlocutory and/or provisional in character and could not be
considered as a final determination of the merits of Civil Case No.
0093·

Whether or not the appellate court has acted without or in

excess of its jurisdiction or with grave abuse of discretion in not finding
that the said order of August 6, 1983 was abandoned or set aside
through the issuance of the order of November 4, 1983 which admitted
herein petitioner's third-party complaint against respondent NIA.

Whether or not the appellate court has acted without or in

excess of its jurisdiction or with grave abuse of discretion in not finding
that the court a quo, in issuing the order of May 20,1985 went beyond
the issues presented by the parties, which act is legally impermissible,
irregular and invalid.

Petition was granted. Both the petitioner and the

respondents agree that the main issue in the case at bar is
whether or not the assailed order of the court a quo is
interlocutory in nature or a final judgment. It is to be observed
that while the complaint in the case at bar is admittedly one for
collection of realty taxes over certain real properties, the
complaint however, does not allege the amount of taxes which
the plaintiffs seek to collect from petitioner. There is thus a need

37
to determine the effect of such failure of the complaint to state
the aforesaid amount vis-a-visplaintiffs cause of action. Although
this issue is not raised in the present petition, it is basic that the
Court can review matters not assigned as an error in the appeal.

Court held that the complaint at bar has failed to state the
ultimate facts, which failure is violative of Section 3, Rule 17 of
the Rules of Court.

The amount of taxes sought to be collected is therefore

determinable, yet the complaint at bar did not plead the same. In
the order of the court a quo; one of the issues submitted was
whether it’s proper for the plaintiffs to amend their complaint
and plead therein the amount of tax sought to be collected.

As in any case for collection of a sum of money, stating the

amount of tax sought to be collected in a complaint for collection
of realty taxes is part of the ultimate facts constituting the
plaintiff cause of action, as provided under Section 3, Rule 6 of
the Rules of Court, supra. In the instant case, there is failure to
state in the complaint the ultimate facts because the amount of
tax sought to be collected is not pleaded or alleged.

It can be overlooked that the subject matter of the

complaint filed before the court a quo is the amount of the real
estate taxes to be collected. Section 82 of P.D. 464 provides that
the collection of delinquent real property taxes may be enforced
in any court of competent jurisdiction. In the present case, as the
complaint did not plead the amount of tax intended to be
collected, how could the court a quo ascertain, in the first place,
in relation to the amount of the demand, whether it was the
proper forum to try the case. The fact that the third party
complaint filed by petitioner-defendant against the National
Irrigation Administration pleaded the amount P338,750.00 as
reimbursable to it by the latter, is of no moment now, as the said
third-party complaint was also ordered dismissed in the order of

38
20 May 1985. Hence, it can be said that the complaint (in chief)
was never amended.

Clearly, the order of 6 August 1983 is interlocutory. We fail

to see how it could or did put an end to the controversy when
the court a quo still had to determine the amount of realty taxes
to be collected by plaintiffs from petitioner-defendant, and to
make findings of fact on certain issues, which could still affect
the very liability to pay such taxes.

Pepsi-Cola Bottling Co
vs. Municipality of Tanauan

This is an appeal from the decision of the Court of First

Instance of Leyte in its Civil Case No. 3294, which was certified
to Us by the Court of Appeals on October 6,1969, as involving
only pure questions of law, challenging the power of taxation
delegated to municipalities under the Local Autonomy Act
(Republic Act No. 2264, as amended, June 19, 1959).

On February 14, 1963, the plaintiff-appellant, Pepsi-Cola

Bottling Company of the Philippines, Inc., commenced a
complaint with preliminary injunction before the Court of First
Instance of Leyte for that court to declare Section 2 of Republic
Act No. 2264. • otherwise known as the Local Autonomy Act,
unconstitutional as an undue delegation of taxing authority as
well as to declare Ordinances Nos. 23 and 27, series of 1962, of
the municipality of Tanauan, Leyte, null and void.

On July 23, 1963, the parties entered into a Stipulation of

Facts, the material portions of which state that, first, both
Ordinances Nos. 23 and 27 embrace or cover thesame subject
matter and the production tax rates imposed therein are
practically thesame, and second, that on January 17,1963, the
acting Municipal Treasurer of Tanauan,Leyte, as per his letter
addressed to the Manager of the Pepsi-Cola Bottling Plant in

39
saidmunicipality, sought to enforce compliance by the latter of
the provisions of saidOrdinance No. 27, series of 1962.

Municipal Ordinance No. 23, of Tanauan, Leyte, which

was approved on September 25, 1962, levies and collects "from
soft drinks producers and manufacturers a tax of one-sixteenth
(1/16) of a centavo for every bottle of soft drink corked." 2 For
the purpose of computing the taxes due, the person, firm,
company or corporation producing soft drinks shall submit to
the Municipal Treasurer a monthly report, of the total number of
bottles produced and corked during
the month.

On the other hand, Municipal Ordinance No. 27, which

was approved on October 28, 1962, levies and collects "on soft
drinks produced or manufactured within the territorial
jurisdiction of this municipality a tax of ONE CENTAVO (PO.01)
on each gallon (128 fluid ounces, U.S.) of volume capacity." For
the purpose of computing the taxes due, the person, firm,
company, partnership, corporation or plant producing soft
drinks shall submit to the Municipal Treasurer a monthly report
of the total number of gallons produced or manufactured during
the month.

On October 7, 1963, the Court of First Instance of Leyte

rendered judgment "dismissing the complaint and upholding the
constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the
plaintiff to pay the taxes due under the oft the said Ordinances;
and to pay the costs."

!From this judgment, the plaintiff Pepsi-Cola Bottling

Company appealed to the Court of Appeals, which, in turn,
elevated the case to Us pursuant to Section 31 of the Judiciary
Act of 1948, as amended.

!There are three capital questions raised in this appeal:

40
 Is Section 2, Republic Act No. 2264 an undue delegation of
power, confiscatory and oppressive?

Do Ordinances Nos. 23 and 27 constitute double taxation

and impose percentage or specific taxes?

Are Ordinances Nos. 23 and 27 unjust and unfair?

!1. The power of taxation is an essential and inherent

attribute of sovereignty, belonging\ as a matter of right to every
independent government, without being expressly conferred by
the people. It is a power that is purely legislative and which the
central legislative body cannot delegate either to the executive or
judicial department of the government without infringing upon
the theory of separation of powers. The exception, however, lies
in the case of municipal corporations, to which, said theory does
not apply. Legislative powers may be delegated to local
governments in respect of matters of local concern. This is
sanctioned by immemorial practice. By necessary implication,
the legislative power to create political corporations for purposes
of local self-government carries with it the power to confer on
such local governmental agencies the power to tax. 9 Under the
1973 Constitution, local governments are granted the
autonomous authority to create their own sources of revenue
and to levy taxes. Section 5, Article XI provides: "Each local
government unit shall have the power to create its sources of
revenue and to levy taxes, subject to such limitations as may be
provided by law." Withal, it cannot be said that Section 2 of
Republic Act No. 2264 emanated from beyond the sphere of the
legislative power to enact and vest in local governments the
power of local taxation.

The plenary nature of the taxing power thus delegated,

contrary to plaintiff appellant's pretense, would, not suffice to
invalidate the said law as confiscatory and oppressive. In
delegating the authority, the State is not limited to the exact

41
measure of that which is exercised by itself. When it is said that
the taxing power may be delegated to municipalities and the
like, it is meant that there may be delegated such measure of
power to impose and collect taxes as the legislature may deem
expedient. Thus, municipalities may be permitted to tax subjects
which for reasons of public policy theState has not deemed wise
to tax for more general purposes. 10 This is not to say though
that the constitutional injunction against deprivation of property
without due process of law may be passed over under the guise
of the taxing power, except when the taking of the property is in
the lawful exercise of the taxing power, as when (1) the tax is for
a public purpose; (2) the rule on uniformity of taxation is
observed; (3) either the person or property taxed is within the
jurisdiction of the government levying the tax; and (4) in the
assessment and collection of certain kinds of taxes notice and
opportunity for hearing are provided.

There is no validity to the assertion that the delegated

authority can be declared unconstitutional on the theory of
double taxation. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes over
which local taxation may not be exercised. The reason is that the
State has exclusively reserved the same for its own prerogative.
Moreover, double taxation, in general, is not forbidden by our
fundamental law, since We have not adopted as part thereof the
injunction against double taxation found in the Constitution of
the United States and some states of the Union. '4 Double
taxation becomes obnoxious only where the taxpayer is taxed
twice for the benefit of the same governmental entity '5 or by the
same jurisdiction for the same purpose, ,6but not in a case where
one tax is imposed by the State and the other by the city or
municipality.

2. The plaintiff-appellant submits that Ordinance No. 23

and 27 constitute double taxation, because these two ordinances
cover the same subject matter and impose practically the same
tax rate. The thesis proceeds from its assumption that both

42
ordinances are valid and legally enforceable. This is not so. As
earlier quoted, Ordinance No. 23, which was approved on
September 25, 1962, levies or collects from soft drinks producers
or manufacturers a tax of one-sixteen (1/16) of a centavo
for .every bottle corked, irrespective of the volume contents of
the bottle used. When it was discovered that the producer or
manufacturer could increase the volume contents of the bottle
and still pay the same tax rate, the Municipality of Tanauan
enacted Ordinance No. 27, approved on October 28, 1962,
imposing a tax of one centavo (P0.0l) on each gallon (128 fluid
ounces, U.S.) of volume capacity. The difference between the two
ordinances clearly lies in the tax rate of the soft drinks produced:
in Ordinance No. 23, it was 1/16 of a centavo for every bottle
corked; in Ordinance No. 27, it is one centavo (P0.0l) on each
gallon (128 fluid ounces, U.S.) of volume capacity.

The intention of the Municipal Council of Tanauan in

enacting Ordinance No. 27 is thus clear: it was intended as a
plain substitute for the prior Ordinance No. 23, and operates as a
repeal of the latter, even without words to that effect. ,8 Plaintiff-
appellant in its brief admitted that defendants appellees are only
seeking to enforce Ordinance No. 27, series of 1962. Even the
stipulation of facts confirms the fact that the Acting Municipal
Treasurer of Tanauan, Leyte sought to compel compliance by the
plaintiff-appellant of the provisions of said Ordinance No. 27,
series of 1962. The aforementioned admission shows that only
Ordinance No. 27, series of 1962 is being enforced by defendants-
appellees.

That brings Us to the question of whether the remaining

Ordinance No. 27 imposes a percentage or a specific tax.
Undoubtedly, the taxing authority conferred on local
governments under Section 2, Republic Act No. 2264, is broad
enough as to extend to almost "everything, accepting those
which are mentioned therein." As long as the text levied under
the authority of a city or municipal ordinance is not within the
exceptions and limitations in the law, the same comes within the

43
ambit of the general rule, pursuant to the rules of
exclucionattehusand exceptio ./innatregulum in cabisus non exceptio

The tax is levied on the produce (whether sold or not) and

not on the sales. The volume capacity of the taxpayer's
production of soft drinks is considered solely for purposes of
determining the tax rate on the products, but there is not set ratio
between the volume of sales and the amount of the tax.

!Nor can the tax levied be treated as a specific tax. Specific

taxes are those imposed on specified articles, such as distilled
spirits, wines, fermented liquors, products of tobacco other than
cigars and cigarettes, matches firecrackers, manufactured oils
and other fuels, coal, bunker fuel oil, diesel fuel oil,
cinematographic films, playing cards, saccharine, opium and
other habit-forming drugs. Soft drink is not one of those
specified.

3. The tax of one on each gallon (128 fluid ounces, U.S.) of

volume capacity on all soft drinks, produced or manufactured,
or an equivalent of 1-1f2 centavos per case, 23 cannot be
considered unjust and unfair. 24 an increase in the tax alone
would not support the claim that the tax is oppressive, unjust
and confiscatory. Municipal corporations are allowed much
discretion in determining the rates of imposable taxes. 25 This is
in line with the constitutional policy of according the widest
possible autonomy to local governments in matters of local
taxation, an aspect that is given expression in the Local Tax Code
(PD No. 231, July 1, 1973).26 Unless the amount is so excessive as
to be prohibitive, courts will go slow in writing off an ordinance
as unreasonable. 27 Reluctance should not deter compliance
with an ordinance such as Ordinance No. 27 if the purpose of the
law to further strengthen local autonomy were to be realized.

44
 CIR vs.
S.C. JOHNSON AND SON, INC., and CA

This is a petition for review on certiorari under Rule 45 of

the Rules of Court seeking to set aside the decision of the Court
of Appeals dated November 7, 1996 in CAGR SP No. 40802
affirming the decision of the Court of Tax Appeals in CTA Case
No. 5136.

Facts as found by the Court of Tax Appeals are not

disputed, to wit: Domestic corporation organized and operating
under the Philippine laws, entered into a license agreement with
SC Johnson and Son, United States of America (USA), a non-
resident foreign corporation based in the U.S.A. pursuant to
which the [respondent] was granted the right to use the
trademark, patents and technology owned by the latter
including the right to manufacture, package and distribute the
products covered by the Agreement and secure assistance in
management, marketing and production from SC Johnson and
Son, U. S. A.

The said License Agreement was duly registered with the

Technology Transfer Board of the Bureau of Patents, Trade Marks
and Technology Transfer under Certificate of Registration No.
8064.

For the use of the trademark or technology, respondent

was obliged to pay SC Johnson and Son, USA royalties based on
a percentage of net sales and subjected the same to 25%
withholding tax on royalty payments which [respondent] paid
for the period covering July 1992 to May 1993 in the total amount
of P1,603443.00.

On October 29, 1993, respondent filed with the

International Tax Affairs Division (ITAD) of the BIR a claim for
refund of overpaid withholding tax on royalties arguing that,

45
"the antecedent facts attending [respondent's] case fall squarely
within the same circumstances under which said MacGeorge and
Gillete rulings were issued. Since the agreement was approved
by the Technology Transfer Board, the preferential tax rate of
10% should apply to the respondent. We therefore submit that
royalties paid by the [respondent] to SC Johnson and Son, USA is
only subject to 10% withholding tax pursuant to the most-
favored nation clause of the RP-US Tax Treaty [Article 13
Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax
Treaty [Article 12 (2) (b)]" (petition for Review [filed with the
Court of Appeals], par. 12).

The Commissioner did not act on said claim for refund.

Private respondent S.C. Johnson &Son, Inc. (S.C. Johnson) then
filed a petition for review before the Court of Tax Appeals (CTA)
where the case was docketed as CTA Case No. 5136, to claim a
refund of the overpaid withholding tax on royalty payments
from July 1992 to May 1993. On May 7, 1996, the Court of Tax
Appeals rendered its decision in favor of S.C. Johnson and
ordered the Commissioner of Internal Revenue to issue a tax
credit certificate in the amount of P963, 266.00 representing
overpaid withholding tax on royalty payments, beginning July,
1992 to May, 1993.

The Commissioner of Internal Revenue thus filed a

petition for review with the Court of Appeals which rendered
the decision subject of this appeal on November 7, 1996 finding
no merit in the petition and affirming in toto the CTA ruling.
With respect to the merits of this petition, the main point of
contention in this appeal is the interpretation of Article 13 (2) (b)
(iii) of the RP-US Tax Treaty regarding the rate of tax to be
imposed by the Philippines upon royalties received by a non-
resident foreign corporation. Respondent S. C. Johnson and Son,
Inc. claims that on the basis of the quoted provision, it is entitled
to the concessional tax rate of 10 percent on royalties based on
Article 12 (2) (b) of the RP-Germany Tax Treaty. For as long as
the transfer of technology, under Philippine law, is subject to

46
approval, the limitation of the tax rate mentioned under b) shall,
in the case of royalties arising in the Republic of the Philippines,
only apply if the contract giving rise to such royalties has been
approved by the Philippine competent authorities. Unlike the
RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit
of 20 percent of the gross amount of such royalties against
German income and corporation tax for the taxes payable in the
Philippines on such royalties where the tax rate is reduced to 10
or 15 percent under such treaty. According to petitioner, the taxes
upon royalties under the RP-US Tax Treaty are not paid under
circumstances similar to those in the RP-West Germany Tax
Treaty since there is no provision for a 20 percent matching credit
in the former convention and private respondent cannot invoke
the concessional tax rate on the strength of the most favored
nation clause in the RP-US Tax Treaty. Petitioner's position is
explained thus:

Under the foregoing provision of the RP-West Germany

Tax Treaty, the Philippine tax paid on income from sources
within the Philippines is allowed as a credit against German
income and corporation tax on the same income. In the case of
royalties for which the tax is reduced to 10 or 15 percent
according to paragraph 2 of Article 12 of the RP-West Germany
Tax Treaty, the credit shall be 20% of the gross amount of such
royalty. To illustrate, the royalty income of a German resident
from sources within the Philippines arising from the use of, or
the right to use, any patent, trade mark, design or model, plan,
secret formula or process, is taxed at 10% of the gross amount of
said royalty under certain conditions. The rate of 10% is imposed
if credit against the German income and corporation tax on said
royalty is allowed in favor of the German resident. That means
the rate of 10% is granted to the German taxpayer if he is
similarly granted a credit against the income and corporation tax
of West Germany. The clear intent of the "matching credit" is to
soften the impact of double taxation by different jurisdictions.

47
 The RP-US Tax Treaty contains no similar "matching
credit" as that provided under the RP-West Germany Tax Treaty.
Hence, the tax on royalties under the RP-US Tax Treaty is not
paid under similar circumstances as those obtaining in the RP-
West Germany Tax Treaty. Therefore, the "most favored nation"
clause in the RP-West Germany Tax Treaty cannot be availed of
in interpreting the provisions of the RP-US Tax Treaty’s

The petition is meritorious.

!We are unable to sustain the position of the Court of Tax

Appeals, which was upheld by the Court of Appeals, that the
phrase "paid under similar circumstances in Article 13 (2) (b),
(iii) of the RP-US Tax Treaty should be interpreted to refer to
payment of royalty, and not to tile payment of the tax, for the
reason that the phrase "paid under similar circumstances" is
followed by the phrase "to a resident of a third state". The
respondent court held that ''Words are to be understood in the
context in which they are used", and since what is paid to a
resident of a third state is not a tax but a royalty "logic instructs"
that the treaty provision in question should refer to royalties of
the same kind paid under similar circumstances.

The above construction is based principally on syntax or

sentence structure but fails to take into account the purpose
animating the treaty provisions in point. To begin with, we are
not aware of any law or rule pertinent to the payment of
royalties, and none has been brought to our attention, which
provides for the payment of royalties under dissimilar
circumstances. The tax rates on royalties and the circumstances
of payment thereof are the same for all the recipients of such
royalties and there is no disparity based on nationality in the
circumstances of such payment. 6 On the other hand, a cursory
reading of the various tax treaties will show that there is no
similarity in the provisions on relief from or avoidance of double
taxation 7 as this is a matter of negotiation between the
contracting parties. 8 As will be shown later, this dissimilarity is

48
true particularly in the treaties between the Philippines and the
United States and between the Philippines and West Germany.

The RP-US Tax Treaty is just one of a number of bilateral

treaties which the Philippines has entered into for the avoidance
of double taxation. 9 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. 10 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. 11 The apparent rationale for doing
away with double taxation is of 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. 12 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.

Double taxation usually takes place when a person is

resident of a contracting state and derives income from, or owns
capital in, the other contracting state and both states impose tax
on that income or capital. In order to eliminate double taxation, a
tax treaty resorts to several methods. First, it sets out the
respective rights to tax of the state of source or situs and of the
state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on
one of the contracting states; however, for other items of income
or capital, both states are given the right to tax, although the
amount of tax that may be imposed by the state of source is
limited.

The second method for the elimination of double taxation

applies whenever the state of source is given a full or limited

49
right to tax together with the state of residence. In this case, the
treaties make it incumbent upon the state of residence to allow
relief in order to avoid double taxation. There are two methods
of relief - the exemption method and the credit method. In the
exemption method, the income or capital which is taxable in the
state of source or situs is exempted in the state of residence,
although in some instances it may be taken into account in
determining the rate of tax applicable to the taxpayer's
remaining income or capital. On the other hand, in the credit
method, although the income or capital which is taxed in the
state of source is still taxable in the state of residence, the tax
paid in the former is credited against the tax levied in the latter.
The basic difference between the two methods is that in the
exemption method,the focus is on the income or capital itself,
whereas the credit method focuses upon the tax.

In negotiating tax treaties, the underlying rationale for

reducing the tax rate is that the Philippines will give up a part of
the tax in the expectation that the tax given up for this particular
investment is not taxed by the other country. Thus the petitioner
correctly opined that the phrase "royalties paid under similar
circumstances" in the most favored nation clause of the US-RP
Tax Treaty necessarily contemplated "circumstances that are tax-
related".

In the case at bar, the state of source is the Philippines

because the royalties are paid for the right to use property or
rights, i.e. trademarks, patents and technology, located within
the Philippines. 17 The United States is the state of residence
since the taxpayer, S. C. Johnson and Son, U. S. A., is based there.
Under the RP-US Tax Treaty, the state of residence and the state
of source are both permitted to tax the royalties, with a restraint
on the tax that may be collected by the state of source.
Furthermore, the method employed to give relief from double
taxation is the allowance of a tax credit to citizens or residents of
the United States (in an appropriate amount based upon the
taxes paid or accrued to the Philippines) against the United

50
States tax, but such amount shall not exceed the limitations
provided by United States law for the taxable year. Under Article
13 thereof, the Philippines may impose one of three rates - 25
percent of the gross amount of the royalties; 15 percent when the
royalties are paid by a corporation registered with the Philippine
Board of Investments and engaged in preferred areas of
activities; or the lowest rate of Philippine tax that may be
imposed on royalties of the same kind paid under similar
circumstances to a resident of a third state.

Given the purpose underlying tax treaties and the

rationale for the most favored nation clause, the concessional tax
rate of 10 percent provided for in the RP-Germany Tax Treaty
should apply only if the taxes imposed upon royalties in the RP-
US Tax Treaty and in the RP-Germany Tax Treaty are paid under
similar circumstances. This would mean that private respondent
must prove that the RP-US Tax Treaty grants similar tax reliefs to
residents of the United States in respect of the taxes imposable
upon royalties earned from sources within the Philippines as
those allowed to their German counterparts under the RP-
Germany Tax Treaty.

The RP-US and the RP-West Germany Tax Treaties do not

contain similar provisions on tax crediting. Article 24 of the RP-
Germany Tax Treaty, supra, expressly allows crediting against
German income and corporation tax of 20% of the gross amount
of royalties paid under the law of the Philippines. On the other
hand, Article 23 of the RP-US Tax Treaty, which is the
counterpart provision with respect to relief for double taxation,
does not provide for similar crediting of 20% of the gross amount
of royalties paid.

The reason for construing the phrase "paid under similar

circumstances" as used in Article 13 (2) (b) (iii) of the RP-US Tax
Treaty as referring to taxes is anchored upon a logical reading of
the text in the light of the fundamental purpose of such treaty
which is to grant an incentive to the foreign investor by lowering

51
the tax and at the same time crediting against the domestic tax
abroad a figure higher than what was collected in the
Philippines.

As stated earlier, the ultimate reason for avoiding double

taxation is to encourage foreign investors to invest in the
Philippines - a crucial economic goal for developing countries.
23 The goal of double taxation conventions would be thwarted if
such treaties did not provide for effective measures to minimize,
if not completely eliminate, the tax burden laid upon the income
or capital of the investor.

The purpose of a most favored nation clause is to grant to

the contracting party treatment not less favorable than that
which has been or may be granted to the "most favored" among
other countries. The most favored nation clause is intended to
establish the principle of equality of international treatment by
providing that the citizens or subjects of the contracting nations
may enjoy the privileges accorded by either party to those of the
most favored nation. 26 The essence of the principle is to allow
the taxpayer in one state to avail of more liberal provisions
granted in another tax treaty to which the country of residence of
such taxpayer is also a party provided that the subject matter of
taxation, in this case royalty income, is the same as that in the tax
treaty under which the taxpayer is liable. Both Article 13 of the
RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany
Tax Treaty, above-quoted, speaks of tax on royalties for the use of
trademark, patent, and technology. The entitlement of the 10%
rate by U.S. firms despite the absence of a matching credit (20%
for royalties) would derogate from the design behind the most
grant equality of international treatment since the tax burden
laid upon the income of the investor is not the same in the two
countries. The similarity in the circumstances of payment of
taxes is a condition for the enjoyment of most favored nation
treatment precisely to underscore the need for equality of
treatment.

52
 We accordingly agree with petitioner that since the RP-US
Tax Treaty does not give a matching tax credit of 20 percent for
the taxes paid to the Philippines on royalties as allowed under
the RP-West Germany Tax Treaty, private respondent cannot be
deemed entitled to the 10 percent rate granted under the latter
treaty for the reason that there is no payment of taxes on
royalties under similar circumstances. It bears stress that tax
refunds are in the nature of tax exemptions. As such they are
regarded as in derogation of sovereign authority and to be
construed strictissimi juris against the person or entity claiming
the exemption. 27 The burden of proof is upon him who claims
the exemption in his favor and he must be able to justify his
claim by the clearest grant of organic or statute law. 28 Private
respondent is claiming for a refund of the alleged overpayment
of tax on royalties; however, there is nothing on record to
support a claim that the tax on royalties under the RP-US Tax
Treaty is paid under similar circumstances as the tax on royalties
under the RP-West Germany Tax Treaty.

CIR
vs Estate of Benigno P. Toda, Jr.

In an alleged simulated sale of a 16 storey commercial

building on 2 March 1989. Cibeles insurance Corp (CIC)
authorized Benigno Toda, Jr. President and owner of99.99% of its
issued and outstanding capital stock, to sell the Cibeles building
and the two parcels of land to Rafael A. Altonaga for P 100
million, who in turn sold the same property to Royal Match Inc,
on the same day for P200 million. On the contention that it was a
tax planning scheme of CIC in order to avoid payment of higher
corporate income tax of 35%, the transaction was reported
instead as one entitled to a capital gains tax of only 5%. On the
16th of January, 1994, Toda died and on 291h of March 1994, the
BIR sent an assessment notice and demand letter to the CIC for
deficiency income tax for the year 1989 in the amount of P79,
099,999.22. Petitioner insisted that since the 2transactions

53
actually constituted a single sale of the property by CIC to RMI,
the taxable income of CIC is deficient with respect to the gain on
sale of real property which is commercial building.

Whether or not that CIC committed tax evasion or merely a tax

avoidance scheme

CIC committed tax evasion.

Tax avoidance and Tax evasion are the two most common
ways used by taxpayers in escaping from taxation. Tax
avoidance is the tax saving device within the means sanctioned
by law. This method should be used by the taxpayer in good
faith and at arm’s length. Tax evasion, on the other hand, is a
scheme used outside of those lawful means and when availed of,
it usually subjects the taxpayer to further or additional civil of
criminal liabilities.

Tax evasion connotes the integration of three factors; (I)

the end to be achieved, i.e, the payment of less than that known
by the taxpayer to be legally due, or the non payment of tax
when it is shown that a tax is due; (2) an accompanying state of
mind which is described as being "evil" in "bad faith", "willful" or
"deliberate and not accidental" and (3)a course of action or
failure of action which is unlawful. All these factors are present
in the instant case. The investigation conducted by the BIR
disclosed that Altonaga was a close business associate and one of
the many trusted corporate executives of Toda.

Tax planning is by definition, to reduce, if not eliminate

altogether, a tax. Surely petitioner cannot be faulted for wanting
to reduce the tax from 35% to 5%. However, the scheme resorted
by CIC in making it appear that there were two sales of the
subject properties cannot be considered as legitimate tax
planning. Such scheme is tainted with fraud.

54
 Republic vs. Sampaguita

In the aftermath of Pacific War, the Philippine

Government issued back pay certificates in payment of salaries,
wages, emoluments, per diems, not received by persons who at
the outbreak of the war were employed in the classified and
unclassified civil service as well as in government -owned or
controlled corporations, and those who had served in the free
local civil governments organized for purposes of resistance
against the invaders by reason of the war. When respondent
Sampaguita Pictures incurred an obligation for percentage
withholding and amusement taxes in the amount of Pl0, 268.41
in favor of the Republic of the Philippines, in tendered and
delivered said certificates to the office of Municipal Treasurer of
Bocaue, Bulacan on June 9, 1961. Thirteen (13) days later, the
Assistant Regional Director of the BIR advised that the
acceptance of the Negotiable certificate of indebtedness in
payment of amusement, percentage and withholding taxes was
erroneous and that the payment was invalid, because actually
said certificates were "not acceptable as payments of internal
revenue taxes". The Solicitor General brought suit in behalf of
the Republic of the Philippines in relation thereto while the
respondent set up a counterclaim on the allegation that since the
certificate have already matured, then the plaintiff is also liable
to pay the amount of it to respondent. The trial judge dismissed
both complaint and counterclaim.

Whether or not back pay certificates are acceptable as payment

for tax liabilities.

The Court ruled in affirmative.

The Trial Court ruled that the taxes sought to be collected

by the Republic from Sampaguita were still unpaid, its tender of
the certificates of indebtedness in question not constituting
payment; hence, it ought properly to be sentenced to pay the
taxes. It also ruled that even assuming the contrary, legal

55
compensation as a mode of extinguishing an obligation to pay
taxes was nonetheless unavailing against the government,
conformably with de Borja v. Gella.

On the other hand, according to the Trial Court, at least as

of date of judgment, more than 10 years from June 18, 1958, the
date when, as expressly stated in the certificates of indebtedness,
the same were redeemable, the obligation thereby evidenced was
unquestionably already due and payable; hence, Sampaguita
was entitled to a judgment against the Republic for the payment
of the face value of the certificates, the same having already been
presented and surrendered within the said period of ten years
(on June 9, 1961) to the Treasurer of the Philippines (thru the
Municipal Treasurer of Bocaue, Bulacan ) 11 This is correct. In
other words, even if as the Solicitor General points out, "there is
no certainty when the certificates are actually redeemable"
because the law say "that they are redeemable .. within ten years
from the date of issuance" 12 there can be no question that after
the lapse of ten (10) years from the declared date of
redeemability, payment of the indebtedness was already exigible
The Trial Court was saying in effect that while judgment should
be rendered in favor of the Republic against Sampaguita for
unpaid taxes in the amount of P10,268.41, judgment ought at the
same time to issue for Sampaguita commanding payment to it
by the Republic of the same sum, representing the face value of
the certificates of indebtedness assigned to it and for recovery of
which it had specifically prayed in its counterclaim.

What has just been said confutes the petitioner's second

argument that redemption of the certificates of indebtedness was
not yet demandable of it because "there is no certainty when the
certificates are actually redeemable, within the meaning of the
law." It is true that, as the Solicitor General contends, "the law
does not say that they are redeemable from its approval on June
18, 1958 but 'within ten years from the date of issuance' of the
certificates, " 13 the ineludible ineluctable fact is that more than
ten (10) years have already elapsed since their issuance and

56
demand for payment had been made within said 10-year period.
It is useless to quibble about the precise time "within ten years"
when an obligation becomes demandable, when that period of
ten years has already expired. Whatever inexactitude might
inhere in the phrase, "within ten years," as fixing the time of
exibility of the obligation in question, there can be no debate
about the proposition that the obligation became due and
demandable after ten years. It would be absurd and unfair to
sanction the theory subsumed in the Republic's petition that its
obligation was not demandable within ten years because of
inexactitude yet became time-barred upon the lapse of that self-
same period.

Domingo vs. Garlitos

The Supreme Court, in Melecio R. Domingo vs. Hon.

Judge S. C. Moscoso (106 Phil. 1138), declared as final and
executory the order for the payment by the estate of the estate
and inheritance taxes, charges and penalties amounting to P40,
058.55, issued by the CFI Leyte in special proceedings 14 entitled
"In the Matter of the Intestate Estate of the Late Walter Scott
Price." In order to enforce the claims against the estate, the fiscal
presented a petition dated 21 June 1961 to the CFI for the
execution of the judgment. The petition was, however, denied by
the court which held that the execution is not justifiable as the
Government is indebted to the estate under administration in the
amount of P262, 200.00. The lower court ordered on 20 August
1960 that the payment of inheritance taxes in the sum of P40,
058.55 be deducted from the amount of P262,200.00 due and
payable to the estate. The lower court ordered further that the
payment of the claim of the Collector of Internal Revenue be
deferred until the Government shall have made the payment.
The court ruled that it is only fair for the Government, as a
debtor, to pay its accounts to its citizens-creditors before it can
insist in the prompt payment of the latter's account to it,
specially taking into consideration that the amount due the

57
Government draws interests while the credit due to the present
estate does not accrue any interest. Melecio R. Domingo, as
Commissioner of Internal Revenue, filed a petition for certiorari
and madamus seeking to annul the orders of the court and for an
order in the Supreme Court directing the lower court to execute
the judgment in favor of the Government against the estate of
Walter Scott Price for internal revenue taxes.

Whether or not the taxes should be paid by the estate?

The court having jurisdiction of the estate had found that

the claim of the estate against the Government has been
recognized and an amount of P262, 200.00 has already been
appropriated for the purpose by a corresponding law (RA 2700).
Under the circumstances, both the claim of the Government for
inheritance taxes and the claim of the intestate for services
rendered have already become overdue and demandable as well
as fully liquidated. Compensation, therefore, takes place by
operation of law, in accordance with the provisions of Articles
1279 and 1290 of the Civil Code, and both debts are extinguished
to the concurrent amount. Article 1200 provides that "when all
the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguishes
both debts to the concurrent amount, even though the creditors
and debtors are not aware of the compensation."

58
THE NATIONAL INTERNAL REVENUE CODE

“The dogmas of the quiet past are inadequate to

the stormy present. The occasion is piled high with
difficulty, and we must rise with the occasion. As our
case is new, so we must think anew and act anew. We
must disenthrall ourselves.”

- Abraham Lincoln

CIR vs Pascor Realty and Development

!!The Commissioner of Internal Revenue (CIR) filed a

criminal complaint before the Department of Justice against
Pascor Realty and Development Corporation (PRDC), its
President Rogelio A. Dio, and it’s Treasurer Virginia S. Dio,
alleging evasion of taxes in the total amount of Pl0, 513,671.00.

Private respondents PRDC, et. al. filed an Urgent Request

for Reconsideration/Reinvestigation disputing the tax
assessment and tax liability. The CIR denied the urgent request
for reconsideration/ reinvestigation of the private respondents
on the ground that no formal assessment has as yet been issued
by the Commissioner.

Private respondents then filed a petition for review with

the Court of Tax Appeals. Subsequently, the CIR filed a Motion
to Dismiss the petition on the ground that the CTA has no
jurisdiction over the subject matter of the petition, as there was
no formal assessment issued against the petitioners. The CTA

59
denied the said motion to dismiss, citing that the criminal
complaint for tax evasion is the assessment issued.

At the Court of Appeals, the decision of the CTA was

sustained.

Whether or not the criminal complaint for tax evasion can be

construed as an assessment.

Whether or not an assessment is necessary before criminal

charges for tax evasion may be instituted.

Not all documents coming from the BIR containing a

computation of the tax liability can be deemed assessments. To
be considered an assessment, the document must be sent to and
received by a taxpayer, and must demand payment of the taxes
described therein within a specific period.

In the present case, the revenue officers' Affidavit merely

contained a computation of respondents' tax liability. It did not
state a demand or a period for payment. Moreover, the fact that
the Complaint itself was specifically directed and sent to the
Department of Justice and not to private respondents shows that
the intent of the commissioner was to file a criminal complaint
for tax evasion, not to issue an assessment.

Section 222 of the NIRC specifically states that in cases

where a false or fraudulent return is submitted or in cases of
failure to file a return such as this case, proceedings in court may
be commenced without an assessment. Furthermore, Section 205 of
the same Code clearly mandates that the civil and criminal
aspects of the case may be pursued simultaneously. The
commissioner of internal revenue, therefore, has the discretion
on whether to issue an assessment or to file a criminal case
against the taxpayer or to do both.

60
 Marcos II vs CA

This is a Petition for Review on Certiorari assailing the

decision of the Court of Appeals (CA) dated November 29,1994
where the said court held:

In view of all the foregoing, we rule that the deficiency

income tax assessments and estate tax assessment, are already
final and not subject to appeal. Thus, the subsequent levy of real
properties is a tax remedy resorted to by the government,
sanctioned by Section 213 and 218 of the National Internal
Revenue Code. This summary tax remedy is distinct and
separate from the other tax remedies (such as Judicial Civil
actions and Criminal actions), and is not affected or precluded
by the pendency of any other tax remedies instituted by the
government.

Seven (7) years after the death of former President

Ferdinand E. Marcos, the matter of the settlement of his estate,
and its dues to the government in estate taxes, are still
unresolved, the latter issue being now before this Court for
resolution. Ferdinand R. Marcos II, the eldest son of the
decedent, questions the actuations of the respondent
Commissioner of Internal Revenue in assessing, and collecting
through the summary remedy of Levy on Real Properties, estate
and income tax delinquencies upon the estate and properties of
his father, despite the pendency of the proceedings on probate of
the will of the late president, which is docketed as Sp. Proc. No.
10279 in the Regional Trial Court of Pasig, Branch 156.

Criminal charges were filed against Mrs. Imelda R. Marcos

before the Regional Trial of Quezon City for violations of
Sections 82, 83 and 84 (has penalized under Sections 253 and 254
in relation to Section 252 - a &b) of the National Internal
Revenue Code (NIRC).

61
 The Commissioner of Internal Revenue thereby caused the
preparation and filing of the Estate Tax Return for the estate of
the late president, the Income Tax Returns of the Spouses Marcos
for the years 1985 to 1986, and the Income Tax Returns of
petitioner Ferdinand "Bongbong" Marcos II for the years 1982 to
1985.

On July 26, 1991, the BIR issued the following: (1)

Deficiency estate tax assessment against the estate of the late
president Ferdinand Marcos in the amount of P23, 293,607,638.00
Pesos; (2) Deficiency income tax assessments against the Spouses
Ferdinand and Imelda Marcos in the amounts of PI49, 551.70 and
P184,009,737.40representing deficiency income tax for the years
1985 and 1986); (3) Deficiency income tax assessment against
petitioner Ferdinand "Bongbong" Marcos II in the amounts
ofP258. 70 pesos; P9, 386-40 Pesos; P 4,388.30 Pesos; and P6,
376.60 Pesos representing his deficiency income taxes for the
years 1982 to 1985).

Copies of the deficiency estate and income tax

assessments were all personally and constructively but to no
avail. The deficiency tax assessments were not protested
administratively, by Mrs. Marcos and the other heirs of the late
president, within 30 days from service of said assessments.

Subsequently, a total of twenty-six notices of levy on real

property against certain parcels of land owned by the Marcoses
to satisfy the alleged estate tax and deficiency income taxes of
Spouses Marcos.

Petitioner had filed with the respondent Court of Appeals

a Petition for Certiorari and Prohibition with an application for
writ of preliminary injunction and/or temporary restraining
order on June 28,1993, seeking to annul and set aside the Notices
of Levy on real property dated February 22, 1993 and May 20,
1993, issued by respondent Commissioner of Internal Revenue;
annul and set aside the Notices of Sale dated May 26, 1993; and,

62
enjoin the Head Revenue Executive Assistant Director II
(Collection Service), from proceeding with the Auction of the
real properties covered by Notices of Sale.

Whether or not BIR has the authority to collect by the summary

remedy of levying upon, and sale of real properties of the decedent,
estate tax deficiencies, without the cognition and authority of the court
sitting in probate over the supposed will of the deceased?

Whether or not BIR's Notices of Levy are null and void for
having been issued beyond the allowed period? and

Whether or not BIR's Notices of Levy are null and void for
having been issued without valid service upon the petitioner?

There is nothing in the Tax Code, and in the pertinent

remedial laws that implies the necessity of the probate or estate
settlement court's approval of the state's claim for estate taxes,
before the same can be enforced and collected. On the contrary,
under Section 87 of the NIRC, it is the probate or settlement
court which is bidden not to authorize the executor or judicial
administrator of the decedent's estate to deliver any distributive
share to any party interested in the estate, unless it is shown a
Certification by the Commissioner of Internal Revenue that the
estate taxes have been paid.

The omission to file an estate tax return, and the

subsequent failure to contest or appeal the assessment made by
the BIR is fatal to the petitioner's cause, as under the provision of
Article 223 of the NIRC, in case of failure to file a return, the tax
may be assessed at any time within ten years after the omission,
and any tax so assessed may be collected by levy upon real
property within three years following the assessment of the tax.
Since the estate tax assessment had become final and
unappealable by the petitioner's default as regards protesting the
validity of the said assessment, there is now no reason why the
BIR cannot continue with the collection of the said tax. Any

63
objection against the assessment should have been pursued
following the avenue paved in Section 229 of the NIRC on
protests on assessments of internal revenue taxes.

Under Section 213 of the NIRC, in the case of notices of

levy issued to satisfy the delinquent estate tax, the delinquent
taxpayer is the Estate of the decedent, and not necessarily, and
exclusively, the petitioner as heir of the deceased. In the same
vein, in the matter of income tax delinquency of the late
president and his spouse, petitioner is not the taxpayer liable.
Thus, it follows that service of notices of levy in satisfaction of
these tax delinquencies upon the petitioner is not required by
law. The foregoing notwithstanding, the record shows that
notices of warrants of distrait and levy of sale were furnished the
counsel of petitioner on April 7, 1993, and June 10, 1993, and the
petitioner himself on April 12, 1993 at his office at the Batasang
Pambansa. We cannot therefore, countenance petitioner's
insistence that he was denied due process.

Meralco Securities Corp vs. Savellano

These are original actions for certiorari to set aside and

annul the writ of mandamus issued by Judge Victorino A.
Savellano of the Court of First Instance of Manila in Civil Case
No. 80830 ordering petitioner Meralco Securities Corporation
(now First Philippine Holdings Corporation) to pay, and
petitioner Commissioner of Internal Revenue (CIR) to collect
from the former, the amount of P51,840,612.00, by way of alleged
deficiency corporate income tax, plus interests and surcharges
due thereon and to pay private respondents 25% of the total
amount collectible as informer's reward.

On May 22, 1967, the late Juan G. Maniago (substituted in

these proceedings by his wife and children) submitted to
petitioner CIR confidential denunciation against the Meraleo
Securities Corporation for tax evasion for having paid income

64
tax only on 25 % of the dividends it received from the Manila
Electric Co. for the years 1962-1966, thereby allegedly
shortchanging the government of income tax due from 75% of
the said dividends. After conduct of investigation however, CIR
found and held that no deficiency corporate income tax was due
from Meralco Securities Corp. on the dividends it received from
the Manila Electric Co. (MERALCO) and subsequently denied
Maniago's claim for informer's reward.

On August 28, 1970, Maniago filed a petition for

mandamus, and subsequently an amended petition for
mandamus, in the Court of First Instance of Manila against CIR
and the Meraleo Securities to compel the former to impose tax
deficiency assessment on the latter and to award to him the
corresponding informer's reward.

On January 10, 1973, the respondent judge rendered a

decision granting the writ prayed for and ordering the
Commissioner of Internal Revenue to assess and collect from the
Meraleo Securities Corporation the sum of P51, 840,612.00 as
deficiency corporate income tax for the period 1962 to 1969 plus
interests and surcharges due thereon and to pay 25% thereof to
Maniago as informer's reward. Hence this petitions.

Whether or not the respondent court can compel the CIR by

mandamus to issue an assessment?

Since the office of the Commissioner of Internal Revenue

is charged with the administration of revenue laws, which is the
primary responsibility of the executive branch of the
government, mandamus may not lie against the Commissioner
to compel him to impose a tax assessment not found by him to
be due or proper for that would be tantamount to a usurpation
of executive functions. A valid exercise of discretion in the
performance of official duty cannot be controlled much less
reversed by mandamus.

65
 Republic of the Philippines vs CTA

A shipment of bales of textile gray cloth, under Bill of

Lading No. HKT - 138899,arrived at the manila International
Container Port (MICP) aboard the vessel "SIS AC Daisy." The
shipment Inward Foreign Manifest stated that the bales of cloth
were consigned to GQ GARMENTS, Inc., of 244 EscoIta Street,
Binondo, Manila. The Clean Report of Findings (CRF)issued by
the Societe Generate de Surveilance (SGS), however mentioned
AGFHA Incorporated, to be the consignee of the shipment.
Forthwith, the shipping agent, FIL - JAPAN, requested for an
amendment of the Inward Foreign Manifest so as to correct the
name of the consignee from that of GQ GARMENTS, Inc., to that
of AGFHA, Inc.

FIL - JAPAN forwarded top AGFHA, Inc., the amended

Inward Foreign Manifest which the latter, in turn, submitted to
the MICP Law Division. The MICP indorsed the document to the
Customs Intelligence Investigation Services (CllS). The CISS
placed the subject shipment under Hold Order No.
HlCII01/2293/0I ,on the ground that GQ GARMENTS, Inc., could
not be located in its given address at 244 Escolta Street, Binondo,
Manila, and was thus suspected to be a fictitious firm. Forfeiture
proceedings under Section 2530 (f) and (I) (3-5) of the Tariff and
Customs Code were initiated.

AGFHA, Inc., through its president Wilson Kho, filed a

motion for intervention contending that AGFHA, Inc.,is the
lawful owner and actual consignee of the subject shipment. The
motion for intervention was granted on 2 March 1993. Following
a hearing, the Collector of Customs came up with a draft
decision ordering the lifting of the warrant of seizure and
detention on the basis of its finding that GQ GARMENTS, Inc.,
was not a fictitious corporation and that there was a valid waiver
of rights over the bales of cloth by GQ GARMENTS, Inc., in
favor of AGFHA, Inc. The draft decision was submitted to the
Deputy Commissioner for clearance and approval, who in turn,

66
transmitted it for comment. The CIIS opposed the draft decision,
insisting that GQ GARMENTS, Inc.,was a fictitious corporation
and that even if it did exist, its president, John Barlin, had no
authority to waive the right over the subject shipment in favor of
AGFHA, Inc.

Whether or not the forfeiture of goods is valid.

The requisites for the forfeiture of goods under Section

2520 (f), in relation to (I) (3-5), of the Tariff and Customs Code
are: (a) the wrongful making by the owner, importer, exporter or
consignee of any declaration or affidavit or wrongful making or
delivery by the same person of any invoice, letter or paper all
touching on the importation or exportation of merchandise; (b)
the falsity of such declaration, affidavit, invoice, letter or paper;
and (c) an intention on the part of the importer I consignee to
evade the payment or the duties due.

Fraud must be proved to justify forfeiture. It must be

actual, amounting to intentional wrong - doing with the clear
purpose of avoiding the tax. Forfeiture is not favored in law.
What is here involved is an honest mistake, not even directly
attributable to private respondent, which will not deprive the
government of its right to collect the proper tax. The conclusion
of the appellate court, being consistent with the evidence on
record and not contrary to law and jurisprudence, hardly can be
overturned by this Court.

CIR vs CA, R.O.H Auto Products

On 22 August 1986, during the period when the President

of the Republic still wielding legislative power, Executive Order
NO.41 was promulgated declaring a one time tax amnesty on
unpaid income e taxes, later amended estate and donor's taxes
and taxes on business, for the taxable years 1981 to 1985.

67
 Availing itself of the amnesty, respondent R.O.H. Auto
Products Philippines, Inc., field, in October 1986 and November
1986, it’s Tax Amnesty Return No. 34 - F - 00146-41 and
Supplemental Tax Amnesty Return No. 34 - F - 00146 - 64 - B,
respectively, and paid the corresponding amnesty taxes due.

Prior to this availment, petitioner Commissioner of

Internal Revenue, in a communication received by private
respondent on 13 August 1986, assessed the latter deficiency
income and business taxes for its fiscal years ended 30
September 1981 and 30 September 1982 in an aggregate amount
of P1A10.1S7.71. The taxpayer wrote back to state that since it
had been able to avail itself of the tax amnesty, the deficiency tax
notice should forthwith be cancelled and withdrawn. The
request was denied by the Commissioner, in his letter of 22
November 1988, on the ground that revenue Memorandum
Order No. 4087, dated 09 February 1987, implementing
Executive Order No. 41, had construed the amnesty coverage to
include only assessment issued by the Bureau of Internal
Revenue after the promulgation of the executive order on 22
August 1986 and not to assessments therefore made.

Whether or not revenue memorandum Order No ..4-87,

Promulgated to implement E.O. No. 41, is valid;

Whether or not said deficiency assessment in question

were extinguished by reason or private respondents availment of
Executive Order No. 64;

Whether or not privet respondents has overcome the

presumption of validity of assessments.

The Supreme Court agree with both the court of Appeals

and court of tax Appeals that Executive Order No. 41 is quite
explicit and requires hardly anything beyond a simple of its
provision. It reads

68
 Sec. 1.Scope of Amnesty. A one - time amnesty covering
unpaid income taxes for the years 1981 to 1985 is hereby
declared.

Sec. 2.Conditions of the Amnesty. A taxpayer who wishes

to avail himself of the tax amnesty shall, on or before October 31,
1986;

a) file a sworn statement declaring his net worth as of

December 31,1985;

b) file a certified true copy statement declaring his net

worth as of December 31, 1980 on record with the Bureau of
Internal revenue, or if no such record exists, file a statement of
said net worth therewith, subject to verification by the Bureau of
Internal Revenue;

c) file a return and pay a tax equivalent to ten per cent

(10%) of the increase in net worth from December 31, 1980 to
December 31, 1985; Provided, That in no case shall the tax be less
than P5,000.00 for individuals and PlO, 000.00 for judicial
persons.

Sec. 3.Computation of Net Worth. In computing the net

worth referred to in Section 2 hereof, the following niles shall
govern:

a. Non-cash assets shall be valued at acquisition cost.

b. Foreign currencies shall be valued at the rate of

exchange prevailing as of the date of the net worth statement.

c. Those that have withholding tax liabilities under the

National Internal Revenue Code, as amended, insofar as the said
liabilities are concerned;

69
 d. Those with tax cases pending investigation by the
Bureau of Internal Revenue as of the affectively hereof as a result
of information furnished under Section 3 16 of the National
Internal Revenue Code, as amended;

e. Those with pending cases involving unexplained or

unlawfully acquired wealth before the Sandiganbayan;

f. Those liable under Title Seven, Chapter Three (Frauds,

Illegal Exactions and Transaction) and Chapter Four
(Malversation of Public Funds and Property) of the Revised
Penal Code, as amended.

CIR vs CA, CTA and Fortune Tobacco Corporation

The Commissioner of Internal Revenue ("CIR") disputes

the decision, dated 31 March 1995, of respondent Court of
Appeals affirming the 10th August 1994 decision and the 11th
October 1994 resolution of the Court of Tax Appeals ("CTA") in
C.T.A. Case No. 5015, entitled "Fortune Tobacco Corporation vs.
Liwayway Vinzons-Chato in her capacity as Commissioner of
Internal Revenue."

Fortune Tobacco Corporation ("Fortune Tobacco") is

engaged in the manufacture of different brands of cigarettes.

On various dates, the Philippine Patent Office issued to

the corporation separate certificates of trademark registration
over "Champion," "Hope," and "More" cigarettes. In a letter,
dated 06 January 1987, of then Commissioner of Internal
Revenue Bienvenido A. Tan, Jr., to Deputy Minister Ramon Diaz
of the Presidential Commission on Good Government, "the
initial position of the Commission was to classify 'Champion;
'Hope; and 'More' as foreign brands since they were listed in the
World Tobacco Directory as belonging to foreign companies.
However, Fortune Tobacco changed the names of 'Hope' to Hope

70
Luxury' and 'More' to 'Premium More; thereby removing the said
brands from the foreign brand category. Proof was also
submitted to the Bureau (of Internal Revenue ['BIR']) that
'Champion' was an original Fortune Tobacco Corporation
register and therefore a local brand." Ad Valorem taxes were
imposed on these brands.

The Commissioner of BIR, however, through RMC37-93

reclassified the aforementioned brands of cigarette as locally
manufactured cigarettes bearing a foreign brand subject to 55%
ad valorem tax on cigarettes.

Whether or not BIR erred in its RMC3793 reclassifying Fortune

cigarette brands Hope, More and Champion as brands subject to 55%
ad valorem tax instead of 45% or 20% tax for locally manufactured
cigarettes.

The Supreme Court upheld the decision of CTA and CA

enjoining the Commissioner of internal Revenue from collecting
deficiency taxes against petitioner in its implementation
ofRMC37-93.

It should be understandable that when an administrative

rule is merely interpretative in nature, its applicability needs
nothing further than its bare issuance for it gives no real
consequence more than what the law itself has already
prescribed. When, upon the other hand, the administrative rule
goes beyond merely providing for the means that can facilitate
or render least cumbersome the implementation of the law but
substantially adds to or increases the burden of those governed,
it behooves the agency to accord at least to those directly affected
a chance to be heard, and thereafter to be duly informed, before
that new issuance is given the force and effect of law.

A reading of RMC 37-93, particularly considering the

circumstances under which it has been issued, convinces us that
the circular cannot be viewed simply as a corrective measure

71
(revoking in the process the previous holdings of past
Commissioners) or merely as construing Section 142(C)(1) of the
NIRC, as amended, but has, in fact and most importantly, been
made in order to place "Hope Luxury," "Premium More" and
"Champion" within the classification of locally manufactured
cigarettes bearing foreign brands and to thereby have them
covered by RA 7654. Specifically, the new law would have its
amendatory provisions applied to locally manufactured
cigarettes which at the time of its effectivity were not so
classified as bearing foreign brands. Prior to the issuance of the
questioned circular, "Hope Luxury," "Premium More," and
"Champion" cigarettes were in the category of locally
manufactured cigarettes not bearing foreign brand subject to 45%
ad valorem tax. Hence, without RMC 37-93, the enactment of RA
7654, would have had no new tax rate consequence on private
respondent's products.

!Evidently, in order to place "Hope Luxury," "Premium

More," and "Champion" cigarettes within the scope of the
amendatory law and subject them to an increased tax rate, the
now disputed RMC 37-93 had to be issued. In so doing, the BIR
not simply interpreted the law; verily, it legislated under its
quasi-legislative authority. The due observance of the
requirements of notice, of hearing, and of publication should not
have been then ignored.

CIR vs Benguet Corporation

Respondent Benguet Corporation is a domestic

corporation organized and existing by virtue of Philippine laws,
engaged in the exploration, development and operation of
mineral resources, and the sale or marketing thereof to various
entities. Respondent is a value added tax (VAT) registered
enterprise.

72
 The transaction in question occurred during the period
between 1988 and 1991. In January of 1988, respondent applied
for and was granted by the BIR zero-rated status on its sale of
gold to Central Bank. On 28 August 1988, Deputy Commissioner
of Internal Revenue Eufracio D. Santos issued VAT Ruling No.
3788-88, which declared that "[t]h sale of gold to Central Bank is
considered as export sale subject to zero-rate pursuant to Section
100[[10]] of the Tax Code, as amended by Executive Order No.
273." The BIR came out with at least six (6) other issuances[ll]
reiterating the zero-rating of sale of gold to the Central Bank, the
latest of which is VAT Ruling No. 036-90 dated 14 February1990.

Relying on its zero-rated status and the above issuances,

respondent sold gold to the Central Bank during the period of 1
August 1989 to 31 July 1991 and entered into transactions that
resulted in input VAT incurred in relation to the subject sales of
gold. It then filed applications for tax refunds/credits
corresponding to input VAT for the amounts of P46,177,861.12,
P19,218,738.44, and P84,909,247.96. Respondent's applications
were either unacted upon or expressly disallowed by petitioner.
In addition, petitioner issued a deficiency assessment against
respondent when, after applying respondent's creditable input
VAT costs against the retroactive 10% VAT levy, there resulted a
balance of excess output VAT.

The express disallowance of respondent's application for

refunds/credits and the issuance of deficiency assessments
against it were based on a BIR ruling-BIR VAT Ruling No. 008-92
dated 23 January 1992-that was issued subsequent to the
consummation of the subject sales of gold to the Central Bank
which provides that sales of gold to the Central Bank shall not be
considered as export sales and thus, shall be subject to 10% VAT.
In addition, BIR VAT Ruling No. 008-92 withdrew, modified, and
superseded all inconsistent BIR issuances.

Whether respondent's sale of gold to the Central Bank during

the period when such was classified by BIR issuances as zero-rated

73
could be taxed validly at 10% rate after the consummation of the
transactions involved.

The Supreme Court upheld the decision of the Court of

Appeals favoring respondent's position. In long line of cases the
Court affirmed that the rulings, circular, rules and regulations
promulgated by the Commissioner of Internal Revenue would
have no retroactive application if to so apply them would be
prejudicial to the taxpayers.

In transactions taxed at a 10% rate, when at the end of any

given taxable quarter the output VAT exceeds the input VAT, the
excess shall be paid to the government; when the input VAT
exceeds the output VAT, the excess would be carried over to VAT
liabilities for the succeeding quarter or quarters. On the other
hand, transactions which are taxed at zero-rate do not result in
any output tax. Input VAT attributable to zero rated sales could
be refunded or credited against other internal revenue taxes at
the option of the taxpayer.

Respondent, in this case, has similarly been put on the

receiving end of a grossly unfair deal. Before respondent was
entitled to tax refunds or credits based on petitioner's own
issuances. Then suddenly, it found itself instead being made to
pay deficiency taxes with petitioner's retroactive change in the
VAT categorization of respondent's transactions with the Central
Bank. Tills is the sort of unjust treatment of a taxpayer which the
law in Sec. 246 of the NIRC abhors and forbids.

74
INCOME TAXATION

“The dogmas of the quiet past are inadequate to the stormy present.
The occasion is piled high with difficulty, and we must rise with the
occasion. As our case is new, so we must think anew and act anew. We
must disenthrall ourselves.”

- Abraham Lincoln

Madrigal vs Rafferty

Vicente Madrigal and Susana Paterno, married under

conjugal partnership filed a sworn declaration with the Collector
of Internal Revenue showing that his net income for the year
being Php 296,302.73. Subsequently, Madrigal submitted a claim
that the indicated income was in fact the income of the conjugal
partnership existing between him and his wife. He further
argued that the income should be divided into two parts; one to
his wife and one on his wife, Susana. The General Questions was
then submitted to the Attorney General of the Philippine Islands
which decided in favor of Madrigal, in which case, the Collector
of Internal Revenue forwarded the case to the United States
Treasury Department where it was made to find that;

Php 362,407.67- profits made by Vicente Madrigal in

his coal and shipping business;

Php 4,086.50 were profits made by Susana Paterno

in her embroidery business;

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 Php16,687.80 were profits made by Vicente
Madrigal in a pawnshop business;

This in sum is Php 383,181.97- representing the

Gross Income of Vicente and Susana Paterno.

General deductions - Php 86,879.24, resulting to an

income of Php 296,302·73

As a result, other specific deductions were included; (1)

Php 16,687.80 the tax to be made at source and (2) Php 8,000
exemption granted to Vicente Madrigal and SusanaPaterno,
husband and wife with then a remainder of Php 271,614.93.The
dispute was then found to be in favor of the defendants.

Whether or not the argument of the plaintiff as to whether the

income tax of husband and wife should be divided into two equal parts,
because of the conjugal partnership existing between them (sociedad de
gananciales) thus having separate income tax returns

As provided in a regulation of the US Treasury

Department states that; "If a wife has a separate estate managed
by herself as her own property, and receives an income of more
than $3,000, she may make return of her own income, and if the
husband has other net income, making the aggregate of both
incomes more than $4,000, the wife's return should be attached
to the return of her husband, or his income should be included in
her return, in order that a deduction of $4,000 may be ,made
from the aggregate of both incomes. In the present case, Vicente
and Susana is governed by the conjugal partnership of marriage,
therefore the regulation stated above is not applicable. Susana
Paterno has no absolute right to one half of the income of
conjugal partnership. Not being seized of a separate estate, she
cannot make a separate return in order to receive benefit of the
exemption which would give rise to a benefit of exemption. By
law, husband and wives are only entitled to Php 8,000

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exemption, therefore, there can be no additional claim for
Vicente Madrigal and Susana Paterno.

Conwi vs. CTA

Petitioners are Filipino Citizens and employees of Procter

and Gamble Philippines who were assigned for certain periods
in other subsidiaries of Procter and Gamble outside the
Philippines and were therefore, paid in US dollars as
compensation for their services in their foreign assignments.
When petitioners filed their income tax returns, they computed
their returns applying the dollar-to-peso conversion provided in
BIR ruling no. 70-027 as follows; (1) From January 1- February
20,1970 at the conversation rate of Php 3.90 to US $ 1.00 and (2)
From February 21 to December 31, 1970 at the conversation rate
of Php 6.25 to US $ 1.00. However, upon the release of their
returns, the Commissioner based his computation of Section 48
of RA No. 265 in relation to Section 6 of Commonwealth Act No.
699 as basis for converting their dollar income into Philippine
Peso which resulted to overpayments, refunds, and/or tax
credit. Arising from this, petitioners filed their claims before the
CTA, which denied their petitions therefore giving rise to this
case.

Whether or not the petitioner's dollar earnings are receipts

derived from foreign exchange transactions;

Whether or not the proper rate of conversion of petitioner's

dollar earnings for tax purposes in the prevailing free market rate of
exchange and not the par value of the peso;

Whether or not the par value of the peso to convert petitioner's

dollar earnings for tax purposes into Philippine Pesos is "unrealistic"
and therefore, the prevailing free market rate should be the rate used.

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 The Supreme Court held that CTA erred in deciding that
the petitioner's dollar earnings are derived from foreign
exchange transactions, being that the petitioners were "assigned"
to the foreign subsidiaries of Procter and Gamble, they were
earning in their assigned nation's currency and were also
spending their currency, therefore, there was no conversion from
one currency to another.

The petitioners argued that Circular No. 289 shall be

applied to them which provides for the specific instances when
the par value of the peso shall not be the conversion rate used.
The Supreme Court decided that the petitioners erred in such
claim, being that Circular No. 289 shall only be applied to export
products, invisibles, receipts of foreign exchange, foreign
exchange payments, new foreign borrowing and investments,
nothing by way of income tax payments.

Petitioners also claimed that conversion is unrealistic and

that there were no remittances and acceptances of their salaries
and wages in US dollar into the Philippines, therefore they are
exempted. The Supreme Court held that pursuant to RMC No.
7-71 and 41-71 providing that a uniform exchange rate for
internal revenue tax purpose, is valid and therefore is applicable
to them, being citizens of the Philippines, and as provided for in
Sec 21 of the NIRC. Thus, the petitioner's claim are denied for
lack of merit.

CIR vs Javier

In 1977, Victoria L. Javier, the wife of the petitioner

(private respondent herein), received from the Prudential Bank
and Trust Company in Pasay City the amount of US$999,973.70
remitted by her sister, Mrs. Dolores Ventosa, through some banks
in the US, among which is Mellon Bank, N.A. Later, Mellon
Bank, N.A. filed a complaint with the CFI against the petitioner
(private respondent herein), his wife and other defendants,

78
claiming that its remittance of US$lM was a clerical error and
should have been US$1,000 only, and praying that the excess
amount of US$999,000.00 be returned on the ground that the
defendants are trustees of an implied trust for the benefit of
Mellon Bank with the clear, immediate, and continuing duty to
return the said amount from the moment it was received.

Later, the CFI filed an information with the then Circuit

Criminal Court charging the petitioner (private respondent
herein) and his wife with the crime of estafa, alleging that they
misappropriated, misapplied, and converted to their own
personal use and benefit the amount of US $999,000.00 which
they received under an implied trust for the benefit of Mellon
Bank and as a result of the mistake in the remittance by the latter.

In 1978, the petitioner (private respondent herein) filed his

Income Tax Return(ITR) for the taxable year 1977 showing a
gross income of P53, 053.38 and a net income of P48, 053.88 and
stating in the footnote of the return that 'Taxpayer was recipient
of some money received from abroad which he presumed to be a
gift but turned out to be an error and is now subject of
litigation."

In 1980, the petitioner (private respondent herein)

received a letter from the acting CIR, together with income
assessment notices for the years 1976 and 1977,demanding that
petitioner (private respondent herein) pay on or before
December 15,1980 the amount of Pl,61S.96 and P9,287,297.S1 as
deficiency assessments for the years1976 and 1977 respectively ...

The petitioner (private respondent herein) wrote the BIR

that he was paying the deficiency income assessment for the year
1976 but denying that he had any undeclared income for the
year 1977 and requested that the assessment for 1977 be made to
await final court decision on the case filed against him for filing
an allegedly fraudulent return.

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 In 1981, the petitioner (private respondent herein)
received from Acting CIR a letter stating in reply to his letter-
protest that "the amount of Mellon Bank's erroneous remittance
which you were able to dispose, is definitely taxable." ...

The CIR also imposed a 50% fraud penalty against Javier.

Disagreeing, Javier filed an appeal before the respondent

CTA. The respondent CTA, after the proper proceedings,
rendered the challenged decision, that ... since petitioner (private
respondent) filed his income tax return for taxable year 1977, the
50% surcharge was imposed, in all probability, by respondent
(petitioner) because he considered the return filed false or
fraudulent. This additional requirement, is much less called for
because petitioner (private respondent), reflected in his 1977
return as footnote that ''Taxpayer was recipient of some money
received from abroad which he presumed to be gift but turned
out to be an error and is now subject of litigation."

Section 29 is not too plain and simple to understand. Since

the question involved in this case is of first impression in this
jurisdiction, under the circumstances, the 50% surcharge
imposed in the deficiency assessment should be deleted.

The CIR, not satisfied with the respondent CTA's ruling,

elevated the matter to the SC, by the present petition.

Whether or not income received by mistake is income

Whether or not a taxpayer who merely states as a footnote in his

income tax return that a sum of money that he erroneously received
and already spent is the subject of a pending litigation and there did
not declare it as income is liable to pay the 50% penalty for filing a
fraudulent return

First, the Honorable Court took judicial notice of the fact

that so-called "million dollar case" was given very, very wide

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publicity by media; and only one who is not in his right mind
would have entertained the idea that the BIR would not make an
assessment if the amount in question was indeed subject to the
income tax. Second, as the respondent Court ruled, "the question
involved in this case is of first impression in this jurisdiction".
Even in the United States, the authorities are not unanimous in
holding that similar receipts are subject to the income tax. It
should be noted that the decision in the Rutkin case is a five-to-
four decision; and in the very case before this Honorable Court,
one out of three Judges of the respondent Court was of the
opinion that the amount in question is not taxable.

Thus, even without the footnote, the failure to declare the

"mistaken remittance" is not fraudulent. Third, when the private
respondent filed his income tax return on March 15, 1978 he was
being sued by the Mellon Bank for the return of the money, and
was being prosecuted by the Government for estafa committed
allegedly by his failure to return the money and by converting it
to his personal benefit. The basic tax amounted to P4, 899,377.00
and could not have been paid without using part of the mistaken
remittance. Thus, it was not unreasonable for the private
respondent to simply state in his income tax return that the
amount received was still under litigation. If he had paid the tax,
would that not constitute estafa for using the funds for his own
personal benefit? And would the Government refund it to him if
the courts ordered him to refund the money to the Mellon Bank?

Fraud is never imputed and the courts never sustain

findings of fraud upon circumstances which, at most, create only
suspicion and the mere understatement of a tax is not itself proof
of fraud for the purpose of tax evasion. A "fraudulent return" is
always an attempt to evade a tax, but a merely "false return" may
not be.

In the case at bar, there was no actual and intentional

fraud through willful and deliberate misleading of the
government agency concerned, the BIR, headed by the herein

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petitioner. The government was not induced to give up some
legal right and place itself at a disadvantage so as to prevent its
lawful agents from proper assessment of tax liabilities because
Javier did not conceal anything.

Eisner vs Macomber

Mrs. Macomber owned 2,200 shares in Standard Oil.

Standard Oil declared a 50% stock dividend and she received
1,100 additional shares, of which about $20,000 in par value
represented earnings accumulated by the company --
recapitalized rather than distributed -- since the effective date of
the original tax law.

The current statute expressly included stock dividends in

income, and the government contended that those certificates
should be taxed as income to Mrs. Macomber as though the
corporation had distributed money to her. Mrs. Macomber sued
Mr. Mark Eisner, the Collector of Internal Revenue, for a refund.

Whether or not a stock dividend is taxable

In the majority opinion, Justice Mahlon Pitney ruled that

this stock dividend was not a realization of income by the
taxpayer-shareholder for purposes of the Sixteenth Amendment:

We are clear that not only does a stock dividend really

take nothing from the property of the corporation and add
nothing to that of the shareholder, but that the antecedent
accumulation of profits evidenced thereby, while indicating that
the shareholder is richer because of an increase of his capital, at
the same time shows he has not realized or received any income
in the transaction.

The Court noted that in Towne v. Eisner, it had clearly

stated that stock dividends were not income, as nothing of value

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was received by Towne - the company was not worth any less
than it was when the dividend was declared, and the total value
of Towne's stock had not changed.

Although the Eisner v. Macomber Court acknowledged

the power of the Federal Government to tax income under the
Sixteenth Amendment, the Court essentially said this did not
give Congress the power to tax - as income - anything other than
income, i.e., that Congress did not have the power to re-define
the term income as it appeared in the Constitution:

Throughout the argument of the Government, in a variety

of forms, runs the fundamental error already mentioned-a failure
to appraise correctly the force of the term "income" as used in the
Sixteenth Amendment, or at least to give practical effect to it.

Thus, the Government contends that the tax "is levied on

income derived from corporate earnings," when in truth the
stockholder has "derived" nothing except paper certificates
which, so far as they have any effect, deny him [or "her" - in this
case, Mrs. Macomber present participation in such earnings.

It [the government] contends that the tax may be laid

when earnings "are received by the stockholder," whereas [s]he
has received none; that the profits are "distributed by means of a
stock dividend," although a stock dividend distributes no profits;
that under the Act of 1916 "the tax is on the stockholder's share
in corporate earnings," when in truth a stockholder has no such
share, and receives none in a stock dividend; that "the profits are
segregated from his[her] former capital, and [s]he has a separate
certificate representing his [her] invested profits or gains,"
whereas there has been no segregation of profits, nor has [s]he
any separate certificate representing a personal gain, since the
certificates, new and old, are alike in what they represent-a
capital interest in the entire concerns of the corporation. The
Court ordered that Macomber be refunded the tax she overpaid.

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 CIR vs Lednicky

Spouses Lednicky are American citizens residing in the

Philippines whose income are derived from Philippine sources.
They were paying taxes to both the Philippine and American
governments and subsequently amended their income tax
returns by claiming deductions.

Petitioner CIR admits in its brief that the purpose of the law is
to prevent taxpayer from claiming twice the benefits of his payment of
foreign taxes, by deduction from gross income and by tax credits. The
danger of double credit cannot exist if taxpayer cannot claim benefit
under either of these headings at his option, so that he must be entitled
to a tax credit [RESPONDENT TAXPAYERS LEDNICKY SPOUSES
ARE NOT SO ENTITLED BECAUSE ALL THEIR INCOMES IS
DERIVED FROM PHIL.] or the option to deduct from gross income
disappears altogether.

The Supreme Court reversed the decisions of the Court of

Tax Appeals, thus granting the petition of the CIR:

What respondents fail to observe is that double taxation

becomes obnoxious only where the taxpayer is taxed twice for
the benefit of the SAME GOVERNMENTAL ENTTIY.

To allow an ALIEN RESIDENT (LEDNICKY) to deduct

from his gross income whatever taxes he pays to his own
government amounts to conferring on the latter the power to
reduce the tax income of the Phil. Govt. simply by increasing the
tax rates on the alien resident. Every time the rate of taxation
imposed upon an alien resident is increased by his own govt., his
deduction from Phil. Taxes would correspondingly increase, and
the proceeds for the Philippines diminished, thereby
subordinating our own taxes to those levied by a foreign govt.

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Such a result is incompatible with the status of the Philippines as
an independent and sovereign state.

CIR vs. Isabela Cultural Corp.

On Feb.23,1990, ICC, domestic Corp. received from the

BIR Assessment notice for deficiency income tax in the amount
of P333,196.86 and deficiency Expanded W/tax in the amount
ofP4,897.79 inclusive of surcharges and interest for the taxable
year 1986.The deficiency income tax arose from claimed
deductions for auditing services for 1985,legal services for 1984
and 1985, security services for April and May 1986. The
deficiency expanded w/tax of P4,897.79 was allegedly due to the
failure of ICC to withhold 1%w /tax for security services.

On Feb. 9, 1995, ICC received a final notice before seizure

demanding payment of the amounts stated in the said notices.
CTA held that the claimed deductions for professional and
security services were properly claimed by ICC in 1986 because
it was only on said year as the amount thereof could not be
determined at that time. ICC in fact withheld that the claimed
deductions for security services. Petitioner filed a petition for
review with the CA, which affirms CTA decision which holds
that although the professional services were rendered to ICC in
1984 and 1985 the cost of the services was not yet determinable
at that time, hence it could only be considered as deductions in
1986. Hence, the petitioner, through the office of Solicitor
General, filed the instant petition contending that since ICC is
using the accrual method of accounting, the said expenses
should have been declared as deductions from income during
the said year and failure of ICC to do so bars it form claiming
said expenses as deduction for the taxable year 1986.

Whether or not the professional and security services are deductible

expenses for the taxable year 1986.

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 The requisites for the deductibility of ordinary and
necessary trade, business, or professional expenses, like expenses
paid for legal and security services are (a) the expenses must be
ordinary and necessary, (b) it must have been paid and incurred
during the taxable year, (c) it must have been paid or incurred in
the carrying on the trade or business of the taxpayer, Cd) it must
be supported by a receipts, records, or other pertinent papers.
Sec 45 (NIRC) states that "the deduction provided for in this
TITLE shall be taken for the taxable year in which paid or
incurred , dependent upon the method of accounting upon the
basis of which the net income is computed."

A taxpayer who is authorized to deduct certain expenses

and other allowable deductions for the current year but failed to
do so cannot deduct the same of the next year. In the instant
case, the expenses for legal services pertain to the 1984&1985.
The failure to determine the exact amount of the expenses for
during the taxable year cannot thus be attributed solely to the
delayed billing of these liabilities by the firm. The professional
fee for the year 1985 cannot be validly claimed as expense
deductions in 1986. This is so because ICC failed to discharge the
burden of proving that the expenses were allowable deduction
for the taxable year. As to the security services, the records show
that these expenses were incurred by ICC in 1986 and could
there be validly claimed for the said year.

CIR vs Arthur Henderson

Arthur Henderson is the President of the American

International Underwriters for the Philippines, a domestic
corporation engaged in insurance business; he receives a basic
annual salary of P30,000 and allowance for house rentals and
utilities. They lived in a large apartment provided for by his
employer, they had to live in apartments of the size beyond their
personal needs because as president of the corporation, he and

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his wife had to entertain and put up house guests for the
company.

The BIR now assessed the taxable income of the

respondent and include as part of it, their allowances for rental,
residential expenses, subsistence, water, electricity and
telephone; bonus paid to him; withholding tax and entrance fee
to the country club paid by his employer for his account; and
traveling allowance of his wife.The respondent taxpayer asked
for reconsideration of the assessed deficiency taxed, but was
denied by the BIR.

Whether or not allowances for rental of the apartment furnished

by the husband taxpayer's employer-corporation, including utilities
such as light, water, telephone, etc.and the allowance for travel
expenses given by his employer-corporation to his wife in 1952 part of
taxable income?

No. The exigencies of Henderson's high executive

position, not to mention social standing, demanded and
compelled them to live in a more spacious and pretentious
quarters like the ones they had occupied. Because they had to
entertain and put up house guests, the employer had to grant
him allowances for rental and utilities in addition to his annual
basic salary to take care of those expenses for rental and utilities
in excess of their personal needs.

Hence, the fact that the taxpayers had to live or did not
have to live in the apartment chosen by the employer is of no
moment, for no part of the allowance redounded to the benefit of
the Hendersons. Neither was there an amount retained by them.
Their bills for rental and utilities were paid directly by the
employer to the creditor.

Likewise, the findings of the Court of Tax Appeals that the

wife-taxpayer had to make the trip to New York at the behest of
her husband's employer-corporation to help in drawing up the

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plans and specifications of a proposed building, is also
supported by the evidence.

CIR vs CA, CTA and A. Soriano Corp

Private respondent A. Soriano Corporation's (ANSCOR)

on various dates (1949-1963) declared stock dividends.
Thereafter, Don Andres, who is holding significant amount of
shareholdings, died. 50,495 shares of which are original issues
and the balance of 134,659 shares as stock dividend declarations.
Half of this shares are transferred to his wife. Immediately after
death of Don Andres, ANSCOR had significantly increased its
capital stock. These increases were received by the Don Andres
estate. Subsequently, Don Andres' wife reclassifying a certain
number of the common shares as preferred shares. ANSCOR
redeemed these common shares from the Don Andres' estate.
EIR examiner, after review, assessed that ANSCOR is liable for
deficiency withholding tax-at-source. ANSCOR's subsequent
protest on the assessments was denied by petitioner. ANSCOR
filed a petition for review with the CTA. In its decision, the Tax
Court reversed petitioner's ruling, after finding sufficient
evidence to overcome the prima facie correctness of the
questioned assessments. Hence, this appeal.

Whether or not ANSCOR's redemption of stocks from its

stockholder can be considered as "essentially equivalent to the
distribution of taxable dividend," making the proceeds thereof taxable
under the provisions of the above-quoted law?

Whether or not exchange of common with preferred shares can

be considered as a taxable transaction?

Yes. Generally, a stock dividend representing the transfer

of surplus to capital account shall not be subject to tax. Its mere
issuance are nothing but an "enrichment through increase in
value of capital investment. In a loose sense, stock dividends

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issued by the corporation, are considered unrealized gain, and
cannot be subjected to income tax until that gain has been
realized. Before the realization, stock dividends are nothing but a
representation of an interest in the corporate properties.

However, if a corporation cancels or redeems stock issued

as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable dividend,
the amount so distributed in redemption or cancellation of the
stock shall be considered as taxable income to the extent it
represents a distribution of earnings or profits accumulated. This
process of issuance-redemption amounts to a distribution of
taxable cash dividends which was just delayed so as to escape
the tax. It becomes a convenient technical strategy to avoid the
effects of taxation.

Although redemption and cancellation are generally

considered capital transactions, as such, they are not subject to
tax. However, it does not necessarily mean that a shareholder
may not realize a taxable gain from such transactions. Simply
put, depending on the circumstances, the proceeds of
redemption of stock dividends are essentially distribution of
cash dividends, which when paid becomes the absolute property
of the stockholder.

No. There was no change in their proportional interest

after the exchange. There was no cash flow. Both stocks had the
same par value. Under the facts herein, any difference in their
market value would be immaterial at the time of exchange
because no income is yet realized - it was a mere corporate paper
transaction. It would have been different, if the exchange
transaction resulted into a flow of wealth, in which case income
tax may be imposed. Reclassification of shares does not always
bring any substantial alteration in the subscriber's proportional
interest. Both shares are part of the corporation's capital stock.
Both stockholders are no different from ordinary investors who

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take on the same investment risks. Preferred and common
shareholders participate in the same venture, willing to share in
the profits and losses of the enterprise. In this case, the exchange
of shares, without more, produces no realized income to the
subscriber. There is only a modification of the subscriber's rights
and privileges – which is not a flow of wealth for tax purposes.
The issue of taxable dividend may arise only once a subscriber
disposes of his entire interest and not when there is still
maintenance of proprietary interest.

CIR vs. Manning

In 1952, MANTRASCO had an authorized capital stock of

P2,500,000 divided into 25,000 common shares; 24,700 of which
were owned by Reese, and the rest were owned by the
respondents with 100 shares each. On Feb. 29, 1952, Reese
executed a trust agreement with the law firm of Ross, Selph,
Carrascoso and Janda as trustees. The agreement provides that
during the life of the owner, the shares shall remain in the name
of and shall be voted upon by the owner; that upon the death of
the owner, the shares shall be transferred to the company, and
the company shall transfer such shares into the trustees, who
shall hold the same until the company pays in full; that the
trustees shall vote, subject to the provisions of the agreement;
that the estate and heirs of the owner shall receive the fair value
of the shares at the date of the owner's death. On October 19,
1954, Reese died. On February 2, 1955, after making partial
payment, the certificate was cancelled and a new one issued in
the name of MANTRAS CO. On December 22,1958, a resolution
was passed reverting the 24,700 shares in the treasury to capital
and declaring the same as stock dividend. Full payment of
Reese's interest was made in 1963. On September 14, 1962, BIR
examined the books of MANTRASCO, and found out that 24,700
shares were declared as dividends, with a book value of P,
7,973,660, and such were not included by respondents in their
gross income. On April 14, 1965, the Commissioner issued

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notices of assessment for deficiency income taxes to respondent.
CTA absolved the respondents on the ground that the
respondents' respective 1/3 interest in the corporation remained
the same; hence, CIR appealed.

Both parties agree that distribution of assets of a

corporation is taxable, but stock dividend is not. However, they
differ on the nature of the questioned shares. Respondents
maintain that their interest remained the same, while petitioner
argues that their respective interest increased from 0-4% to
331/3% after the declaration.

Whether or not the shares declared as dividend are treasury

shares, such that those were properly reverted to capital and distributed
as stock dividend which is not subject to tax

The said shares were not, on December 22, 1958 or at any

time before or after that date, treasury shares. Treasury shares
are stocks issued and fully paid for and reacquired by the
corporation either by purchase, donation, forfeiture or other
means. Treasury shares are therefore issued shares, but being in
the treasury they do not have the status of outstanding shares.
Consequently, although a treasury share, not having been retired
by the corporation re-acquiring it, may be re-issued or sold
again, such share, as long as it is held by the corporation as a
treasury share, participates neither in dividends, because
dividends cannot be declared by the corporation to itself, nor in
the meetings of the corporation as voting stock, for otherwise
equal distribution of voting powers among stockholders will be
effectively lost and the directors will be able to perpetuate their
control of the corporation, though it still represents a paid-for
interest in the property of the corporation. The foregoing
essential features of a treasury stock are lacking in the
questioned shares. The manifest intention of the parties to the
trust agreement was, in sum and substance, to treat the 24,700
shares of Reese as absolutely outstanding shares of Reese's estate
until they were fully paid. Such being the true nature of the

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24,700 shares, their declaration as treasury stock dividend in
1958 was a complete nullity and plainly violative of public
policy. A stock dividend, being one payable in capital stock,
cannot be declared out of outstanding corporate stock, but only
from retained earnings.

Sison vs. Ancheta

This is a petition for declaratory relief or prohibition,

assailing the constitutionality of Section 1 of B.P. 135, amending
Section 21 of the National Internal Revenue Code of 1977. The
assailed provision provides for rates of tax on citizens and
residents on (a) taxable compensation income, (b) taxable net
income, (c) royalties, prizes and other winnings, Cd) interest
from bank deposits and yield or any other monetary benefit from
deposit substitutes and from trust fund and similar
arrangements, (e) dividends and share of individual partner in
the net profits of taxable partnership, and (f) adjusted gross
income. Petitioner alleges that by virtue thereof, he would be
unduly discriminated against by the imposition of higher tax
rates on his income arising from the exercise of his profession
vis-a-vis those which are imposed upon fixed income of salaried
individual taxpayers. For petitioner, there is transgression of the
due process and equal protection clauses, as well as that of the
rule on uniformity in taxation.

Whether the imposition of a higher tax rate on taxable net

income derived from business or profession than on compensation is
constitutionally infirm

Where the due process and equal protection clauses are

invoked, considering that they are not fixed rules but rather
broad standards, there is a need for proof of such persuasive
character as would lead to such a conclusion. Absent such a
showing, the presumption of validity must prevail. The due
process clause may be invoked where a taxing statute is so

92
arbitrary that it finds no support in the Constitution. It has also
been held that where the assailed tax measure is beyond the
jurisdiction of the state, or is not for a public purpose, or, in case
of a retroactive statute is so harsh and unreasonable, it is subject
to attack on due process grounds. For equal protection, it suffices
that the laws operate equally and uniformly on all persons under
similar circumstances or that all persons must be treated in the
same manner, the conditions not being different, both in the
privileges conferred and the liabilities imposed. The Constitution
does not require things which are different in fact or opinion to
be treated in law as though they were the same. Classification if
rational in character is allowable. Equality and uniformity in
taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. The taxing power has
the authority to make reasonable and natural classifications for
purposes of taxation. Where "the differentiation" complained of
"conforms to the practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and is therefore
uniform." There is quite a similarity then to the standard of
equal protection for all that is required is that the tax "applies
equally to all persons, firms and corporations placed in similar
situation.

There is no legal objection to a broader tax base or taxable

income by eliminating all deductible items and at the same time
reducing the applicable tax rate. Taxpayers may be classified into
different categories. To repeat, it is enough that the classification
must rest upon substantial distinctions that make real
differences. In the case of the gross income taxation embodied in
Batas Pambansa BIg. 135, the discernible basis of classification is
the susceptibility of the income to the application of generalized
rules removing all deductible items for all taxpayers within the
class and fixing a set of reduced tax rates to be applied to all of
them. Taxpayers who are recipients of compensation income are
set apart as a class. As there is practically no overhead expense,
these taxpayers are not entitled to make deductions for income
tax purposes because they are in the same situation more or less.

93
On the other hand, in the case of professionals in the practice of
their calling and businessmen, there is no uniformity in the costs
or expenses necessary to produce their income. It would not be
just then to disregard the disparities by giving all of them zero
deduction and indiscriminately impose on all alike the same tax
rates on the basis of gross income. There is ample justification
then for the Batasang Pambansa to adopt the gross system of
income taxation to compensation income, while continuing the
system of net income taxation as regards professional and
business income.

Pascual vs. CIR

Petitioners bought 2 parcels of land in 1965, and another 3

parcels in 1966. The first 2 parcels were sold in 1968, and the
remaining 3 were sold in 1970. Petitioners realized net profit
from sale of PI65, 224.70 in 1968, and P60, 000 in 1970. Capital
gains taxes were paid in 1973 and 1974 by availing tax amnesty.
In 1979, the acting BIR Commissioner assessed the petitioners
and required them to pay deficiency income taxes of P107,
101.70. Petitioners protested the assessment, asserting that they
have availed of tax amnesty. In reply, the Commissioner
informed the petitioners that as co-owners, they formed an
unregistered partnership or joint venture taxable as a
corporation, and that the tax amnesty only relieved them from
liability with respect to their individual share in the profits but
did not relieve them from the tax liability of the unregistered
partnership. On review, the Court of Tax Appeals sustained the
assessment. Hence, petitioners filed a petition before the
Supreme Court.

Whether or not by performing the aforementioned transactions,

the petitioners have formed an unregistered partnership taxable as a
corporation

94
 The essential elements of a partnership are two, namely:
(a) an agreement to contribute money, property or industry to a
common fund; and (b) intent to divide theprofits among the
contracting parties. There is no evidence that petitioners entered
into an agreement to contribute money, property or industry to a
common fund, and that they intended to divide the profits
among themselves. Respondent commissioner and/or his
representative just assumed these conditions to be present on the
basis of the fact that petitioners purchased certain parcels of land
and became co-owners thereof. The sharing of returns does not
in itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the
property. There must be a clear intent to form a partnership, the
existence of a juridical personality different from the individual
partners, and the freedom of each party to transfer or assign the
whole property.

In the present case, there is clear evidence of co-ownership

between the petitioners. There is no adequate basis to support
the proposition that they thereby formed an unregistered
partnership. The two isolated transactions whereby they
purchased properties and sold the same a few years thereafter
did not thereby make them partners. They shared in the gross
profits as co-owners and paid their capital gains taxes on their
net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an
unregistered partnership which is thereby liable for corporate
income tax, as the respondent commissioner proposes.

Obillos vs. CIR and CTA

On March 2, 1973 Jose Obillos, Sr. completed payment to

Ortigas&Co., Ltd. on two lots with areas of 1,124 and 963 square
meters located at Greenhills, San Juan, Rizal. The next day he
transferred his rights to his four children, the petitioners, to
enable them to build their residences. Presumably, the Torrens

95
titles issued to them would show that they were co-owners of
the two lots.

In 1974, or after having held the two lots for more than a
year, the petitioners resold them to the Walled City Securities
Corporation and Olga Cruz Canda for the total sum of P
313,OSO. They derived from the sale a total profit of P 134,341.88
or P 33,S84 for each of them. They treated the profit as a capital
gain and paid an income tax on one-half thereof or of P16,792.

In April, 1980, or one day before the expiration of the five-

year prescriptive period, the Commissioner of Internal Revenue
required the four petitioners to pay corporate income tax on the
total profit of P 134,336 in addition to individual income tax on
their shares thereof He assessed P37,018 as corporate income tax,
P 18,S09 as so% fraud surcharge and P 15,S47.S6 as 42%
accumulated interest, or a total of P71,o74S6. Not only that. He
considered the share of the profits of each petitioner in the sum
of P33,S84 as taxable in full (not a mere capital gain of which 1f2
is taxable) and required them to pay deficiency income taxes
aggregating PS6,707.20 including the fraud surcharge and the
accumulated interest. Thus, the petitioners are being held liable
for deficiency income taxes and penalties totalling P127,781.76
on their profit of P134,336, in addition to the tax on capital gains
already paid by them.

The Commissioner acted on the theory that the four

petitioners had formed an unregistered partnership or joint
venture within the meaning of sections 24(a) and 84(b) of the Tax
Code.

The petitioners contested the assessments. Two Judges of

the Tax Court sustained the same. Judge Roaquin dissented.
Hence, the instant appeal.

96
 Whether or not the petitioners formed a taxable partnership that
should be subjected tocorporate income tax on the total profit of P
134,336, in addition to individual income tax on their shares thereof.

The Supreme Court held that it is error to consider the

petitioners as having formed a partnership under article 1767 of
the Civil Code simply because they allegedly contributed P
178,708.12 to buy the two lots, resold the same and divided the
profit among themselves. To regard the petitioners as having
formed a taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power to tax
involves the power to destroy. That eventuality should be
obviated. As testified by Jose Obillos, Jr., they had no such
intention. They were co-owners pure and simple. To consider
them as partners would obliterate the distinction between a co-
ownership and a partnership.

The petitioners were not engaged in any joint venture by

reason of that isolated transaction. Their original purpose was to
divide the lots for residential purposes. If later on they found it
not feasible to build their residences on the lots because of the
high cost of construction, then they had no choice but to resell
the same to dissolve the co-ownership. The division of the profit
was merely incidental to the dissolution of the co-ownership
which was in the nature of things a temporary state. It had to be
terminated sooner or later.

Article 1769(3) of the Civil Code provides that "the sharing

of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common
right or interest in any property from which the returns are
derived". There must be an unmistakable intention to form a
partnership or joint venture.

All co-ownerships are not deemed unregistered partnership.-Co-

Ownership who own properties which produce income should
not automatically be considered partners of an unregistered

97
partnership, or a corporation, within the purview of the income
tax law. To hold otherwise, would be to subject the income of all
co-ownerships of inherited properties to the tax on corporations,
inasmuch as if a property does not produce an income at all, it is
not subject to any kind of income tax, whether the income tax on
individuals or the income tax on corporation.

In the instant case, what the Commissioner, should have

investigated was whether the father donated the two lots to the
petitioners and whether he paid the donor's tax (See Art. 1448,
Civil Code). We are not prejudging this matter. It might have
already prescribed.

Philex Mining Corporation vs. CIR

On April 16, 1971, petitioner Philex Mining Corporation

(Phil ex Mining), entered into an agreement with Bagnio Gold
Mining Company ("Bagnio Gold") for the former to manage and
operate the latter's mining claim, known as the Sto. Nino mine,
located in Atok and Tublay, Benguet Province.

In the course of managing and operating the project,

Philex Mining made advances of cash and property in
accordance with paragraph 5 of the agreement. However, the
mine suffered continuing losses over the years which resulted to
petitioner's withdrawal as manager of the mine on January 28,
1982 and in the eventual cessation of mine operations on
February 20, 1982.

Thereafter, on September 27, 1982, the parties executed a

"Compromise with Dation in Payment" wherein Baguio Gold
admitted an indebtedness to petitioner in the amount of
P179,394,000.00 and agreed to pay the same in three segments by
first assigning Baguio Gold's tangible assets to petitioner,
transferring to the latter Baguio Gold's equitable title in its

98
Philodrill assets and finally settling the remaining liability
through properties that Baguio Gold may acquire in the future.

On December 31, 1982, the parties executed an

"Amendment to Compromise with Dation in Payment" where
the parties determined that Baguio Gold's indebtedness to
petitioner actually amounted to P 259,137,245.00, which sum
included liabilities of Baguio Gold to other creditors that
petitioner had assumed as guarantor. These liabilities pertained
to long-term loans amounting to US$l1, 000, 000. 00 contracted
by Baguio Gold from the Bank of America NT &SA and Citibank
N.A. Baguio Gold undertook to pay petitioner in two segments
by first assigning its tangible assets for P127,838,051.00 and then
transferring its equitable title in its Philodrill assets for
P16,302,426.00. The parties then ascertained that Baguio Gold
had a remaining outstanding indebtedness to petitioner in the
amount of P 114,996,768.00. Subsequently, petitioner wrote off in
its 1982 books of account the remaining outstanding
indebtedness of Baguio Gold by charging P 112,136,000.00 to
allowances and reserves that were set up in 1981 and P
2,860,768.00 to the 1982 operations.

In its 1982 annual income tax return, petitioner deducted

from its gross income the amount of P112, 136,000.00 as "loss on
settlement of receivables from Baguio Gold against reserves and
allowances." However, the Bureau of Internal Revenue (BIR)
disallowed the amount as deduction for bad debt and assessed
petitioner a deficiency income tax of P 62,811,161·39·

Petitioner protested before the BIR arguing that the

deduction must be allowed since all requisites for a bad debt
deduction were satisfied, to wit: (a) there was a valid and
existing debt; (b) the debt was ascertained to be worthless; and
(c) it was charged off within the taxable year when it was
determined to be worthless. On October 28, 1994, the BIR denied
petitioner's protest for lack of legal and factual basis. It held that
the alleged debt was not ascertained to be worthless since

99
Baguio Gold remained existing and had not filed a petition for
bankruptcy; and that the deduction did not consist of a valid and
subsisting debt considering that, under the management
contract, petitioner was to be paid fifty percent (50%) of the
project's net profit.

Petitioner appealed before the Court of Tax Appeals (CTA)

which rendered that the instant Petition for Review is hereby
DENIED for lack of merit. The assessment for deficiency income
tax in the amount of P 62,811,161.39 was affirmed. The Court of
Appeals affirmed the decision of the CTA.

Whether the Philex Mining Corporation and Baguio Gold

Mining Company ("Baguio Gold") has a creditor-debtor or a
partnership joint venture relationship between them.

The petition lacks merit. The lower courts correctly held

that the "Power of Attorney" is the instrument that is material in
determining the true nature of the business relationship between
petitioner and Baguio Gold. Before resort may be had to the two
compromise agreements, the parties' contractual intent must first
be discovered from the expressed language of the primary
contract under which the parties' business relations were
founded. It should be noted that the compromise agreements
were mere collateral documents executed by the parties
pursuant to the termination of their business relationship created
under the "Power of Attorney". On the other hand, it is the latter
which established the juridical relation of the parties and defined
the parameters of their dealings with one another. The
compromise agreements were executed eleven years after the
"Power of Attorney" and merely laid out a plan or procedure by
which petitioner could recover the advances and payments it
made under the "Power of Attorney".

An examination of the "Power of Attorney" reveals that a

partnership or joint venture was indeed intended by the parties.
Under a contract of partnership, two or more persons bind

100
themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves. While a corporation, like petitioner, cannot generally
enter into a contract of partnership unless authorized by law or
its charter, it has been held that it may enter into a joint venture
which is akin to a particular partnership. Perusal of the
agreement denominated as the "Power of Attorney" indicates
that the parties had intended to create a partnership and
establish a common fund for the purpose. They also had a joint
interest in the profits of the business as shown by a 50-50 sharing
in the income of the mine.

Under the "Power of Attorney", petitioner and Bagnio

Gold undertook to contribute money, property and industry to
the common fund known as the Sto. Nino mine. In this regard,
we note that there is a substantive equivalence in the respective
contributions of the parties to the development and operation of
the mine. Pursuant to paragraphs 4 and 5 of the agreement,
petitioner and Baguio Gold were to contribute equally to the
joint venture assets under their respective accounts. Baguio Gold
would contribute P11M under its owner's account plus any of its
income that is left in the project, in addition to its actual mining
claim. Meanwhile, petitioner's contribution would consist of its
expertise in the management and operation of mines, as well as
the manager's account which is comprised of P11M in funds and
property and petitioner's "compensation" as manager that cannot
be paid in cash.

There is no merit to petitioner's claim that the prohibition

in paragraph 5 (c) against withdrawal of advances should not be
taken as an indication that it had entered into a partnership with
Baguio Gold; that the stipulation only showed that what the
parties entered into was actually a contract of agency coupled
with an interest which is not revocable at will and not a
partnership.

101
 In an agency coupled with interest, it is the agency that
cannot be revoked or withdrawn by the principal due to an
interest of a third party that depends upon it, or the mutual
interest of both principal and agent. In this case, the non-
revocation or non-withdrawal under paragraph 5 applies to the
advances made by petitioner who is supposedly the agent and
not the principal under the contract. Thus, it cannot be inferred
from the stipulation that the parties' relation under the
agreement is one of agency coupled with an interest and not a
partnership. Although paragraph 16 of the agreement states that
"this Agency shall be irrevocable while any obligation of the
PRINCIPAL in favour of the MANAGERS is outstanding,
inclusive of the MANAGERS' account," it does not necessarily
follow that the parties entered into an agency contract coupled
with an interest that cannot be withdrawn by Baguio Gold.

It should be stressed that the main object of the "Power of

Attorney" was not to confer a power in favour of petitioner to
contract with third persons on behalf of Baguio Gold but to
create a business relationship between petitioner and Baguio
Gold, in which the former was to manage and operate the latter's
mine through the parties' mutual contribution of material
resources and industry. The essence of an agency, even one that
is coupled with interest, is the agent's ability to represent his
principal and bring about business relations between the latter
and third persons. Where representation for and in behalf of the
principal is merely incidental or necessary for the proper
discharge of one's paramount undertaking under a contract, the
latter may not necessarily be a contract of agency, but some other
agreement depending on the ultimate undertaking of the parties.

In this case, the totality of the circumstances and the

stipulations in the parties' agreement indubitably lead to the
conclusion that a partnership was formed between petitioner
and Baguio Gold. Thus, the tax court correctly concluded that
the agreement provided for a distribution of assets of the Sto.
Nino mine upon termination, a provision that is more consistent

102
with a partnership than a creditor-debtor relationship. It should
be pointed out that in a contract of loan, a person who receives a
loan or money or any fungible thing acquires ownership thereof
and is bound to pay the creditor an equal amount of the same
kind and quality. In this case, however, there was no stipulation
for Baguio Gold to actually repay petitioner the cash and
property that it had advanced, but only the return of an amount
pegged at a ratio which the manager's account had to the
owner's account.

The "Power of Attorney" clearly provides that petitioner

would only be entitled to the return of a proportionate share of
the mine assets to be computed at a ratio that the manager's
account had to the owner's account. Except to provide a basis for
claiming the advances as a bad debt deduction, there is no
reason for Baguio Gold to hold itself liable to petitioner under
the compromise agreements, for any amount over and above the
proportion agreed upon in the "Power of Attorney". The tax
court correctly observed that it was unlikely for a business
corporation to lend hundreds of millions of pesos to another
corporation with neither security, nor collateral, nor a specific
deed evidencing the terms and conditions of such loans. The
parties also did not provide a specific maturity date for the
advances to become due and demandable, and the manner of
payment was unclear. All these point to the inevitable conclusion
that the advances were not loans but capital contributions to a
partnership.

The strongest indication that petitioner was a partner in

the 8to. Nino mine is the fact that it would receive 50% of the net
profits as "compensation" under paragraph 12 of the agreement.
The entirety of the parties' contractual stipulations simply leads
to no other conclusion than that petitioner's "compensation" is
actually its share in the income of the joint venture.

Article 1769 (4) of the Civil Code explicitly provides that

the "receipt by a person of a share in the profits of a business is

103
prima facie evidence that he is a partner in the business."
Petitioner asserts, however, that no such inference can be drawn
against it since its share in the profits of the 8to .Nino project was
in the nature of compensation or "wages of an employee", under
the exception provided in Article 1769 (4) (b). On this score, the
tax court correctly noted that petitioner was not an employee of
Baguio Gold who will be paid "wages" pursuant to an employer-
employee relationship. The petitioner was the manager of the
project and had put substantial sums into the venture in order to
ensure its viability and profitability. By pegging its compensation
to profits, petitioner also stood not to be remunerated in case the
mine had no income. The Court found that petitioner's
"compensation" under paragraph 12 of the agreement actually
constitutes its share in the net profits of the partnership. Indeed,
petitioner would not be entitled to an equal share in the income
of the mine if it were just an employee of Baguio Gold. The
"compensation" agreed upon only serves to reinforce the notion
that the parties' relations were indeed of partners and not
employer-employee.

The lower courts did not err in treating petitioner's

advances as investments in a partnership known as the 8to. Nino
mine.The advances were not "debts" of Baguio Gold to petitioner
inasmuch as the latter was under no unconditional obligation to
return the same to the former under the "Power of Attorney". As
for the amounts that petitioner paid as guarantor to Baguio
Gold's creditors, we find no reason to depart from the tax court's
factual finding that Baguio Gold's debts were not yet due and
demandable at the time that petitioner paid the same. Verily,
petitioner pre-paid Baguio Gold's outstanding loans to its bank
creditors and this conclusion is supported by the evidence on
record.

In sum, petitioner cannot claim the advances as a bad debt

deduction from its gross income. Deductions for income tax
purposes partake of the nature of tax exemptions and are strictly
construed against the taxpayer, who must prove by convincing

104
evidence that he is entitled to the deduction claimed. In this case,
petitioner failed to substantiate its assertion that the advances
were subsisting debts of Baguio Gold that could be deducted
from its gross income. Consequently, it could not claim the
advances as a valid bad debt deduction.

The petition was denied. The decision of the Court of

Appeals which affirmed the decision of the Court of Tax Appeals
was affirmed. Philex Mining Corporation was ordered to pay the
deficiency tax on its 1982 income in the amount of P
62,811,161.31, with 20% delinquency interest computed from
February 10, 1995, which is the due date is given for the payment
of the deficiency income tax, up to the actual date of payment.

Abra Valley vs. Hon. Juan Aquino

Petitioner, an educational corporation and institution of

higher learning duly incorporated with the Securities and
Exchange Commission in 1948, filed a complaint on July 10,1972
in the court a quo to annul and declare void the "Notice of
Seizure' and the "Notice of Sale" of its lot and building located at
Bangued, Abra, for non-payment of real estate taxes and
penalties amounting to P 5,140.31.

Said "Notice of Seizure" of the college lot and building

covered by Original Certificate of Title No. Q-83 duly registered
in the name of petitioner, plaintiff on July 6, 1972, by
respondents Municipal Treasurer and Provincial Treasurer,
defendants, was issued for the satisfaction of the said taxes
thereon. The ''Notice of Sale" was caused to be served upon the
petitioner by the respondent treasurers on July 8, 1972 for the
sale at public auction of said college lot and building, which sale
was held on the same date. Dr. Paterno Millare, then Municipal
Mayor of Bangued, Abra, offered the highest bid of P6,000.00
which was duly accepted. The certificate of sale was
correspondingly issued to him.

105
 On October 12, 1972, with the aforesaid sale of the school
premises at public auction, the respondent Judge, Hon. Juan P.
Aquino of the Court of First Instance of Abra, Branch I, ordered
the respondents provincial and municipal treasurers to deliver\
to the Clerk of Court the proceeds of the auction sale. Hence, on
December 14, 1972, petitioner, through Director Borgonia,
deposited with the trial court the sum of P 6,000.00 evidenced by
PNB Check No. 904369.

On April 12, 1973, the parties entered into a stipulation of

facts adopted and embodied by the trial court in its questioned
decision. The trial court among others, found the following: Ca)
that the school is recognized by the government and is offering
Primary, High School and College Courses, and has a school
population of more than one thousand students all in all; (b) that
it is located right in the heart of the town of Bangued, a few
meters from the plaza and about 120 meters from the Court of
First Instance building; Cc) that the elementary pupils are
housed in a two-storey building across the street; Cd) that the
high school and college students are housed in the main
building; Ce) that the Director with his family is in the second
floor of the main building; and Cf) that the annual gross income
of the school reaches more than one hundred thousand pesos.

Petitioner contends that the primary use of the lot and

building for educational purposes, and not the incidental use
thereof, determines and exemption from property taxes under
Section 22 (3), Article VI of the 1935 Constitution. Hence, the
seizure and sale of subject college lot and building, which are
contrary thereto as well as to the provision of Commonwealth
Act No. 470, otherwise known as the Assessment Law, are
without legal basis and therefore void.

On the other hand, private respondents maintain that the

college lot and building in question which were subjected to
seizure and sale to answer for the unpaid tax are used: (1) for the

106
educational purposes of the college; (2) as the permanent
residence of the President and Director thereof, Mr. Pedro V.
Borgonia, and his family including the in-laws and
grandchildren; and (3) for commercial purposes because the
ground floor of the college building is being used and rented by
a commercial establishment, theNorthern Marketing
Corporation

Whether or not the lot and building In question are used

exclusively for educational purposes.

Due to its time frame, the constitutional provision which

finds application in the case at bar is Section 22, paragraph 3,
Article VI, of the then 1935 Philippine Constitution, which
expressly grants exemption from realty taxes for "Cemeteries,
churches and parsonages or convents appurtenant thereto, and
all lands, buildings, and improvements used exclusively for
religious, charitable or educational purposes ...

Relative thereto, Section 54, paragraph c, Commonwealth

Act No. 470 as amended by Republic Act No. 409, otherwise
known as the Assessment Law, provides: The following are
exempted from real property tax under the Assessment Law:

xxxxxxxxx

(c) churches and parsonages or convents

appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious, charitable,
scientific or educational purposes.

In this regard petitioner argues that the primary use of the

school lot and building is the basic and controlling guide, norm
and standard to determine tax exemption, and not the mere
incidental use thereof.

107
 As early as 1916 in YMCA of Manila vs. Collector of Internal
Revenue, the Court ruled that while it may be true that the
YMCA keeps a lodging and a boarding house and maintains a
restaurant for its members, still these do not constitute business
in the ordinary acceptance of the word, but an institution used
exclusively for religious, charitable and educational purposes,
and as such, it is entitled to be exempted from taxation. In the
case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte,
the Court included in the exemption a vegetable garden in an
adjacent lot and another lot formerly used as a cemetery. It was
clarified that the term "used exclusively" considers incidental use
also. Thus, the exemption from payment of land tax in favour of
the convent includes, not only the land actually occupied by the
building but also the adjacent garden devoted to the incidental
use of the parish priest. The lot which is not used for commercial
purposes but serves solely as a sort of lodging place also
qualifies for exemption because this constitutes incidental use in
religious functions.

The test of exemption from taxation is the use of the

property for purposes mentioned in the Constitution It must be
stressed however, that while this Court allows a more liberal and
non-restrictive interpretation of the phrase "exclusively used for
educational purposes" as provided for in Article VI, Section 22,
paragraph 3 of the 1935Philippine Constitution, reasonable
emphasis has always been made that exemption extends to
facilities which are incidental to and reasonably necessary for the
accomplishment of the main purposes. Otherwise stated, the use
of the school building or lot for commercial purposes is neither
contemplated by law, nor by jurisprudence.Thus, while the use
of the second floor of the main building in the case at bar for
residential purposes of the Director and his family, may find
justification under the concept of incidental use, which is
complimentary to the main or primary purpose educational,the
lease of the first floor thereof to the Northern Marketing
Corporation cannot by any stretch of the imagination be
considered incidental to the purpose of education.

108
 It will be noted however that the aforementioned lease
appears to have been raised for the first time. That the matter
was not taken up in the court is really apparent in the decision of
respondent Judge. No mention thereof was made in the
stipulation of facts, not even in the description of the school
building by the trial judge, both embodied in the decision nor as
one of the issues to resolve in order to determine whether or not
said properly may be exempted from payment of real estate
taxes. On the other hand, it is noteworthy that such fact was not
disputed even after it was raised in the Supreme Court.

Indeed, it is axiomatic that facts not raised in the lower

court cannot be taken up for the first time on appeal.
Nonetheless, as an exception to the rule, this Court has held that
although a factual issue is not squarely raised below, still in the
interest of substantial justice, this Court is not prevented from
considering a pivotal factual matter. 'The Supreme Court is
clothed with ample authority to review palpable errors not
assigned as such if it finds that their consideration is necessary in
arriving at a just decision."

Under the 1935 Constitution, the trial court correctly

arrived at the conclusion that the school building as well as the
lot where it is built, should be taxed, not because the second
floor of the same is being used by the Director and his family for
residential purposes, but because the first floor thereof is being
used for commercial purposes. However, since only a portion is
used for purposes of commerce, it is only fair that half of the
assessed tax be returned to the school involved.

The decision of the Court of First Instance of Abra, Branch

I, is hereby affirmed subject to the modification that half of the
assessed tax be returned to the petitioner.

Royal Interocean Lines vs. CIR

109
 From March 27 to April 30, 1963, M.V. Amstelmeer and
from September 24 to October 28, 1964, MY "Amstelkroon, " both
of which are vessels of petitioner N.B. Reederij "AMSTERDAM,"
called on Philippine ports to load cargoes for foreign destination.
The freight fees for these transactions were paid abroad in the
amount of US $98,175.00 in 1963 and US $137,193.00 in 1964. In
these two instances, petitioner Royal Interocean Lines acted as
husbanding agent for a fee or commission on said vessels. No
income tax appears to have been paid by petitioner N.V. Reederij
"AMSTERDAM" on the freight receipts.Respondent
Commissioner of Internal Revenue, through his examiners, filed
the corresponding income tax returns for and in behalf of the
former under Section 15 of the National Internal Revenue Code.
On June 30, 1967, respondent Commissioner assessed said
petitioner in the amounts of PI93,973.20 and P262,904.94 as
deficiency income tax for 1963 and 1964, respectively, as "a non-
resident foreign corporation not engaged in trade or business in
the Philippines under Section 24 (b) (1) of the Tax Codeugust 28,
1967, petitioner Royal Interocean Lines filed an income tax
return of the aforementioned vessels computed at the exchange
rate of P2.00 to USSl.00 1 and paid the tax thereon in the amount
of Pl,835.52 and P9,448.94, respectively, pursuant to Section 24
(b) (2) in relation to Section 37 (B) (e) of the National Internal
Revenue Code and Section 163 of Revenue Regulations NO.2.
Royal Interocean Lines as the husbanding agent of petitioner
N.V. Reederij "AMSTERDAM" filed a written protest against the
abovementioned assessment .the respondent Court of Tax
Appeals praying for the cancellation of the subject assessment.
After due hearing, the respondent court, on December 1, 1976,
rendered a decision modifying said assessments by eliminating
the 50% fraud compromise penalties imposed upon petitioners.
Petitioners filed a motion for reconsideration of said decision but
this was denied by the respondent court.

Whether N.V. Reederij "Amsterdam" not having any office or

place of business in the philippines, whose vessels called on the

110
philippine ports for the purpose of loading cargoes only twice-one in
1963 and another in 1964 - should be taxed as a foreign corporation not
engaged in trade or business in the Philippines under section 24(b) (1)
of the tax code or should be taxed as a foreign corporation engaged in
trade or business in the philippines under section 24(b) (2) in relation
to section 37 (e) of the same code; and

Whether the foreign exchange receipts of n.v. reederij

"amsterdam" should be converted into Philipine pesos at the official
rate of p2.00 to us $1.00, or at P3.90 to us $1.00.

The petition is devoid of merit.

Petitioner N.V. Reederij "AMSTERDAM" is a foreign

corporation not authorized or licensed to do business in the
Philippines. It does not have a branch office in the Philippines
and it made only two calls in Philippine ports, one in 1963 and
the other in 1964. In order that a foreign corporation may be
considered engaged in trade or business, its business
transactions must be continuous. A casual business activity in
the Philippines by a foreign corporation, as in the present case,
does not amount to engaging in trade or business in the
Philippines for income tax purposes.Foreign corporation doing
business in the Philippines is taxable on income solely from
sources within the Philippines, it is permitted to deductions from
gross income but only to the extent connected with income
earned in the Philippines. (Sees. 24(b) (2) and 37, Tax Code.) On
the other hand, foreign corporations not doing business in the
Philippines are taxable on income from all sources within the
Philippines, as interest, dividends, rents, salaries, wages,
premiums, annuities Compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical
or casual gains, profits and income and capital gains" The tax is
30% (now 35%) of such gross income. (Sec. 24 (b) (1), Tax Code.)
As stated above Amsterdam is therefore taxable.

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 !The conversion rate of P2.00 to US $1.00 which petitioners
claim should be applicable to the income of petitioners for
income tax purposes instead of P3.90 toSl.00 is likewise
untenable. The transactions involved in this case are for the
taxable years 1963 and 1964. Under Rep. Act No. 2609, the
monetary board was authorized to fix the legal conversion rate
for foreign exchange. The free market conversion rate during
those years was P3.90 to US $1.00.

CIR vs. Solidbank Corporation

Under the Tax Code, the earnings of banks from "passive"

income are subject to a twenty percent final withholding tax
(20% FWT). This tax is withheld at source and is thus not actually
and physically received by the banks, because it is paid directly
to the government by the entities from which the banks derived
the income. Apart from the 20% FWT, banks are also subject to a
five percent gross receipts tax (5% GRT) which is imposed by the
Tax Code on their gross receipts, including the "passive" income.

Since the 20% FWT is constructively received by the banks

and forms part of their gross receipts or earnings, it follows that
it is subject to the 5% GRT.

Before us is a Petition for Review[l] under Rule 45 of the

Rules of Court, seeking to annul the July 18, 2000 Decision [2]
and the May 8, 2001 Resolution[3] of the Court of Appeals[4]
(CA) in CA-GR SP No. 54599.

For the calendar year 1995, [respondent] seasonably filed

its Quarterly Percentage Tax Returns reflecting gross receipts
(pertaining to 5% [Gross Receipts Tax] rate) in the total amount
of Fl,474,691,693.44 with corresponding gross receipts tax
payments in the sum of F73,734,584.60,Respondent] alleges that
the total gross receipts in the amount of Fl,474,691,693.44
included the sum of F350,807,875.15 representing gross receipts

112
from passive income which was already subjected to 20% final
withholding tax. June 19, 1997, on the strength of the
aforementioned decision, [respondent] filed with the Bureau of
Internal Revenue [BIR] a letter-request for the refund or issuance
of [a] tax credit certificate in the aggregate amount of
F3,508,078.75, representing allegedly overpaid gross receipts tax
for the year 1995Asian BankCorporation vs. Commissioner of
Internal Revenue x xx, wherein it was held that the 20% [final
withholding tax] on [a] bank's interest income should not form
part of its taxable gross receipts for purposes of computing the
[gross receipts tax]The CA held that the 20% FWT on a bank's
interest income did not form part of the taxable gross receipts in
computing the 5% GRT, because the FWT was not actually
received by the bank but was directly remitted to the
government. The appellate court curtly said that while the Tax
Code "does not specifically state any exemption, x xx the statute
must receive a sensible construction such as will give effect to
the legislative intention, and so as to avoid an unjust or absurd
conclusion." Hence, this appeal

Whether or not the 20% final withholding tax on bank's interest

income forms part of the taxable gross receipts in computing the 5%
gross receipts tax.

The Petition is meritorious.

Petitioner claims that although the 20% FWT on

respondent's interest income was not actually received by
respondent because it was remitted directly to the government,
the fact that the amount redounded to the bank's benefit makes it
part of the taxable gross receipts in computing the 5% GRT.
Respondent, on the other hand, maintains that the CA correctly
ruled otherwise.

We agree with petitioner. In fact, the same issue has been

raised recently in China Banking Corporation v. CA, where this
Court held that the amount of interest income withheld in

113
payment of the 20% FWT forms part of gross receipts in
computing for the GRT on banks.

The 5% GRT is included under "Title v. Other Percentage

Taxes" of the Tax Code and is not subject to withholding. The
banks and non-bank financial intermediaries liable therefor shall,
under Section 125(a)(1),file quarterly returns on the amount of
gross receipts and pay the taxes due thereon within twenty (20)
days after the end of each taxable quarter.

The 20% FWT,on the other hand, falls under Section 24(e)
(1)of "Title II. Tax onIncome."It is a tax on passive income,
deducted and withheld at source by the pay or corporation and/
or person as withholding agent pursuant to Section 50, and paid
in the same manner and subject to the same conditions as
provided for in Section 51.

Double taxation means taxing the same property twice

when it should be taxed only once; that is, "x xx taxing the same
person twice by the same jurisdiction for the same thing.” It is
obnoxious when the taxpayer is taxed twice, when it should be
but once. Otherwise described as "direct duplicate taxation," the
two taxes must be imposed on the same subject matter, for the
same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period; and they must be of
the same kind or character.

CIR vs. Tokyo Shipping and CTA

Private respondent is a foreign corporation represented in

the Philippines by Soriamont Steamship Agencies, Incorporated.
It owns and operates tramper vessel M/V Gardenia. In
December 1980, NASUTRA chartered M/V Gardenia to load
16,500 metric tons of raw sugar in the Philippines. On December
23, 1980, Mr. Edilberto Lising, the operations supervisor of
Soriamont Agency, paid the required income and common

114
carrier's taxes in the total amount of P107,142.75 based on the
expected gross receipts of the vessel. Upon arriving, however, at
Guimaras Port of Iloilo, the vessel found no sugar for loading.
On January 10, 1981, NASUTRA and private respondent's agent
mutually agreed to have the vessel sail for Japan without any
cargo.

Claiming the pre-payment of income and common

carrier's taxes as erroneous since no receipt was realized from the
charter agreement, private respondent instituted a claim for tax
credit or refund before petitioner Commissioner of Internal
Revenue on March 23, 1981. Petitioner failed to act promptly on
the claim, hence, on May 14, 1981, private respondent filed a
petition for review before public respondent Court of Tax
Appeals.

Petitioner contested the petition and contends: (1) private

respondent has the burden of proof to support its claim of
refund; (2) it failed to prove that it did not realize any receipt
from its charter agreement; and (3) it suppressed evidence when
it did not present its charter agreement.

After trial, respondent tax court decided in favor of the

private respondent. It also denied petitioner's motion for
reconsideration. Hence, this petition for review on certiorari.

Whether or not the private respondent was able to prove that it

derived no receipts from its charter agreement, and hence is entitled to
a refund of the taxes it prepaid to the government.

Pursuant to Section 24 (b)(2) of the National Internal

Revenue Code, a resident foreign corporation engaged in the
transport of cargo is liable for taxes depending on the amount of
income it derives from sources within the Philippines. Thus,
before such a tax liability can be enforced the taxpayer must be
shown to have earned income sourced from the Philippines.

115
 A claim for refund is in the nature of a claim for
exemption and should be construed in strictissimi juris against
the taxpayer. There can be no disagreement with petitioner's
stance that private respondent has the burden of proof to
establish the factual basis of its claim for tax refund.

The Supreme Court held that respondent court was

correct when it held that sufficient evidence has been adduced
by the private respondent proving that it derived no receipt from
its charter agreement with NASUTRA. Exhibits "E", "F," and "G"
positively showed that the tramper vessel M/V "Gardenia"
arrived in Iloilo on January 10, 1981 but found no raw sugar to
load and returned to Japan without any cargo laden on board.
Exhibit "E" is the Clearance Vessel to a Foreign Port issued by the
District Collector of Customs, Port of lloilo while Exhibit "F" is
the Certification by the Officer-inCharge, Export Division of the
Bureau of Customs lloilo.

The correctness of the contents of these documents

regularly issued by officials of the Bureau of Customs cannot be
doubted as indeed, they have not been contested by the
petitioner.

With respect to petitioner's contention that private

respondent suppressed evidence when it did not present its
charter agreement with NASUTRA, the Court held that since the
said charter agreement was not presented to bolster its position,
the petitioner cannot take to task the private respondent for not
presenting what it mistakenly calls "suppressed evidence."

The power of taxation is sometimes called also the power

to destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must
be exercised fairly, equally and uniformly, lest the tax collector
kill the "hen that lays the golden egg." And, in order to maintain
the general public's trust and confidence in the Government this

116
power must be used justly and not treacherously. The assailed
decision of respondent Court of Tax Appeals was affirmed.

Marubeni Corporation vs CIR and CTA

Petitioner Marubeni Corporation of Japan has equity

investments in AG&P of Manila. For the first and third quarter of
1981, Atlantic Gulf & Pacific (AG&P) declared and paid cash
dividends to petitioner in the amount of P849,720 each quarter
and withheld the corresponding 10% final dividend tax thereon.
AG&P directly remitted the cash dividends to petitioner's head
office in Tokyo, Japan, net not only of the 10% final dividend tax
but also of the withheld 15% profit remittance tax based on the
remittable amount after deducting the final withholding tax of
10%.

A ruling was then sought by the petitioner, through the

accounting firm Sycip, Gorres, Velayo and Company, from the
Bureau of Internal Revenue 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. The then
Acting Commissioner Ruben Ancheta ruled that the dividends
received by Marubeni from AG&P are not income arising from
the business activity in which Marubeni is engaged and that
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 ...

Consequently, a letter-claim for refund was filed with the

Commissioner of Internal Revenue on September 24, 1981.
However, on June 14, 1982 respondent Commissioner of Internal
Revenue denied petitioner's claim for refund/credit of
P229,424-40 on the ground that while said dividends remitted

117
were not subject to 15% profit remittance tax nor the 10% inter
corporate 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. On appeal, the Court of Tax Appeals affirmed the denial
of the refund. 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 %
inter corporate final tax on dividends received from a domestic
corporation in accordance with Section 24(c) (1) of the Tax Code
of 1977

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 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.

Whether or not Marubeni is a resident or a non-resident foreign

corporation under Philippine laws.

As held, the Solicitor General has adequately refuted

petitioner's arguments that the same is a resident foreign
corporation. 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

118
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.

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. Petitioner cannot claim the increments as ordinary
consequences of its trade or business in the Philippines and avail
itself of the lower tax rate of 10 %.

While public respondents correctly concluded that the

dividends in dispute were neither subject to the 15 % profit
remittance tax nor to the 10 % inter corporate 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).

It is 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." 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

119
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 nonresident 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.

The questioned decision of respondent Court of Tax

Appeals dated February 12, 1986 which affirmed the denial by
respondent Commissioner of Internal Revenue of petitioner
Marubeni Corporation's claim for refund was REVERSED. The
Commissioner of Internal Revenue was 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.

CIR vs. Johnson and Son and CA

Respondent, a domestic corporation organized and

operating under the Philippine laws, entered into a license
agreement with SC Johnson and Son, United States of America
(USA), a non-resident foreign corporation based in the U.S.A.

120
pursuant to which the [respondent] was granted the right to use
the trademark, patents and technology owned by the latter
including the right to manufacture, package and distribute the
products covered by the Agreement and secure assistance in
management, marketing and production from SC Johnson and
Son, U. S. A.

For the use of the trademark or technology, [respondent]

was obliged to pay SC Johnson and Son, USA royalties based on
a percentage of net sales and subjected the same to 25%
withholding tax on royalty payments which [respondent] paid
for the period covering July 1992 to May 1993 in the total amount
of P1,603.443.00.

On October 29, 1993, [respondent] filed with the

International Tax Affairs Division (ITAD) of the BIR a claim for
refund of overpaid withholding tax on royalties arguing that,
"the antecedent facts attending [respondent's] case fall squarely
within the same circumstances under which said MacGeorge
and Gillete rulings were issued. Since the agreement was
approved by the Technology Transfer Board, the preferential tax
rate of 10% should apply to the [respondent]. We therefore
submit that royalties paid by the [respondent] to SC Johnson and
Son, USA is only subject to 10% withholding tax pursuant to the
most-favored nation clause of the RP-US Tax Treaty [Article 13
Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax
Treaty [Article 12 (2) (b)]" (Petition for Review [filed with the
Court of Appeals], par. 12). [Respondent's] claim for there fund
of P963,266.00.

The Commissioner did not act on said claim for refund.

Private respondent S.C. Johnson &Son, Inc. (S.C. Johnson) then
filed a petition for review before the Court of Tax Appeals (CTA)
where the case was docketed as CTA Case No. 5136, to claim a
refund of the overpaid withholding tax on royalty payments
from July 1992 to May 1993.

121
 On May 7,1996, the Court of Tax Appeals rendered its
decision in favor of S.C. Johnson and ordered the Commissioner
of Internal Revenue to issue a tax credit certificate in the amount
ofP963,266.00 representing overpaid withholding tax on royalty
payments, beginning July, 1992 to May, 1993.

The Court of Appeals erred in ruling that SC Johnson and Son

and Son, USA is entitled to the "Most Favored Nation" tax rate on
royalties as provided in the RPUS tax treaty in relation to the RP-
WEST Germany tax treaty.

The main point of contention in this appeal is the

interpretation of Article 13 (2)(b) (iii) of the RP-US Tax Treaty
regarding the rate of tax to be imposed by thePhilippines upon
royalties received by a non-resident foreign corporation. The
provision states insofar as pertinent that-

1) Royalties derived by a resident of one of the

Contracting States from sources within the other
Contracting State may be taxed by both
Contracting States.

2) However, the tax imposed by that Contracting

State shall not exceed.

a) In the case of the United States, 15 percent of

the gross amount of the royalties, and

b) In the case of the Philippines, the least of:

(i) 25 percent of the gross amount of the royalties;

(ii) 15 percent of the gross amount of the royalties,

where the royalties are paid by a corporation
registered with the Philippine Board of
Investments and engaged in preferred areas of
activities; and

122
 (iii) thelowest rate of Philippine tax that may be
imposed on royalties of the same kind paid under
similar circumstances to a resident of a third
State.

xxxxxxxxx

(emphasis supplied)

The court unable to sustain the position of the Court of

Tax Appeals, which was upheld by the Court of Appeals, that the
phrase "paid under similar circumstances in Article 13 (2) (b),
(iii) of the RP-US Tax Treaty should be interpreted to refer to
payment of royalty, and not to the payment of the tax, for the
reason that the phrase "paid under similar circumstances" is
followed by the phrase "to a resident of a third state". The
respondent court held that "Words are to be understood in the
context in which they are used", and since what is paid to a
resident of a third state is not a tax but a royalty 'logic instructs"
that the treaty provision in question should refer to royalties of
the same kind paid under similar circumstances.

In negotiating tax treaties, the underlying rationale for

reducing the tax rate is that the Philippines will give up a part of
the tax in the expectation that the tax given up for this particular
investment is not taxed by the other country. Thus the petitioner
correctly opined that the phrase "royalties paid under similar
circumstances" in the most favored nation clause of the US-RP
Tax Treaty necessarily contemplated "circumstances that are tax-
related".

Given the purpose underlying tax treaties and the

rationale for the most favored nation clause, the concessional tax
rate of 10 percent provided for in the RP-Germany Tax Treaty
should apply only if the taxes imposed upon royalties in the RP-
US Tax Treaty and in the RP-Germany Tax Treaty are paid under

123
similar circumstances. This would mean that private respondent
must prove that the RP-US Tax Treaty grants similar tax reliefs to
residents of the United States in royalties earned from sources
within the Philippines as those allowed to their German
counterparts under the RP-Germany Tax Treaty.

The RP-US and the RP-West Germany Tax Treaties do not

contain similar provisions on tax crediting. Article 24 of the RP-
Germany Tax Treaty, supra, expressly allows crediting against
German income and corporation tax of 20% of the gross amount
of royalties paid under the law of the Philippines. On the other
hand, Article 23 of the RP-US Tax Treaty, which is the
counterpart provision with respect to relief for double taxation,
does not provide for similar crediting of 20% of the gross amount
of royalties paid.

The court agree with petitioner that since the RP-US Tax
Treaty does not give a matching tax credit of 20 percent for the
taxes paid to the Philippines on royalties as allowed under the
RP-West Germany Tax Treaty, private respondent cannot be
deemed entitled to the 10 percent rate granted under the latter
treaty for the reason that there is no payment of taxes on
royalties under similar circumstances.

CIR vs Procter & Gamble and CTA

Private respondent, Procter and Gamble Philippine

Manufacturing Corporation (hereinafter referred to as PMC-
PhiL), a corporation duly organized and existing under and by
virtue of the Philippine laws, is engaged in business in the
Philippines and is a wholly owned subsidiary of Procter and
Gamble, U.S.A. herein referred to as PMC-USA), a non-resident
foreign corporation in the Philippines, not engaged in trade and
business therein. As such PMC-U.s.A. is the sole shareholder or
stockholder of PMC Phil., as PMC-U.S.A. owns wholly or by
100% the voting stock of PMC Phil. and is entitled to receive

124
income from PMC-Phil. in the form of dividends, if not rents or
royalties. In addition, PMC-Phil has a legal personality separate
and distinct from PMC-U.S.A.

After taxation it declared a dividend in favor of its sole

corporate stockholder and parent corporation PMC-U.S.A. in the
total sum of P17,707,460.00 which latter amount was subjected to
Philippine taxation of 35% or P6,197,611.23 as provided for in
Section 24(b) of the Philippine Tax Code which reads in full:

SECTION 1. The first paragraph of subsection (b) of

Section 24 of the National Bureau Internal Revenue Code, as
amended, is hereby further amended to read as follows:

(b) Tax on foreign corporations. - 41) Non-resident

corporation. – A foreign corporation not engaged in trade or
business in the Philippines, including a foreign life insurance
company not engaged in the life insurance business in the
Philippines, shall pay a tax equal to 35% of the gross income
received during its taxable year from all sources within the
Philippines, as interest (except interest on foreign loans which
shall be subject to 15% tax), dividends, rents, royalties, salaries,
wages, premiums, annuities, compensations, remunerations for
technical services or otherwise, emoluments or other fixed or
determinable, annual, periodical or casual gains, profits, and
income, and capital gains: Provided, however, That premiums
shall not include re-insurance premium Provided, further, That
cinematograpy film owners, lessors, or distributors, shall pay a
tax of 15% on their gross income from sources within the
Philippines: Provided, still further That on dividends received
from a domestic corporation subject 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

125
20% which represents the difference between the regular tax
(35%) on corporations and the tax (15%) on dividends as
provided in this section: Provided, finally That regional or area
headquarters established in the Philippines by multinational
corporations and which headquarters do not earn or derive
income from the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates,
subsidiaries or branches in theAsia-Pacific Region shaJl not be
subject to tax.

For the taxable year ending June 30, 1975 PMC-Phil.

realized a taxable net income of P8,735,125.00 which was
subjected to Philippine taxation at the rate of 25%- 35% or
P2,952,159.00, thereafter leaving a net profit of P5,782,966.00. As
in the 2nd quarter of 1975, PMC-Phil. again declared a dividend
in favor of PMC-U.S.A. at the tax rate of 35% or P6,457,485.00.

In July, 1977 PMC-Phil., invoking the tax-sparing credit

provision in Section24(b) as afore quoted, as the withholding
agent of the Philippine government, with respect to the dividend
taxes paid by PMC-U.S.A., filed a claim with the herein
petitioner, Commissioner of Internal Revenue, for the refund of
the 20 percentage-point portion of the 35 percentage-point whole
tax paid, arising allegedly from the alleged "overpaid
withholding tax at source or overpaid withholding tax in the
amount of P 4,832,989.00.

There being no immediate action by the BIR on PMC-

Philippines' letter-claim the latter sought the intervention of the
CfA. On January 31,1974 the Court of Tax Appeals in its decision
ruled in favor of thePMC.

The sole issue in this case is whether or not private respondent is

entitled to the preferential 15% tax rate on dividends declared and
remitted to its parent corporation.

126
 The law pertinent to the issue is Section 902 of the U.S.
Internal Revenue Code,as amended by Public Law 87-834, the
law governing tax credits granted to U.S. corporations on
dividends received from foreign corporations, which to the
extent applicable reads:

SEC. 902 - CREDIT FOR CORPORATE

STOCKHOLDERS IN FOREIGNCORPORATION.

(a) Treatment of Taxes Paid by Foreign

Corporation - For purposes of this subject, adomestic
corporation which owns at least 10 percent of the
voting stock of a foreign corporation from which it
receives dividends in any taxable year shall-

(1) to the extent such dividends are paid by

such foreign corporation out of accumulated profits
[as defined in subsection (c) (1) (a)] of a year for
which such foreign corporation is not a less
developed country corporation, be deemed to have
paid the same proportion of any income, war
profits, or excess profits taxes paid or deemed to be
paid by such foreign corporation to any foreign
country or to any possession of the United States on
or with respect to such accumulated profits, which
the amount of such dividends (determined without
regard to Section 78) bears to the amount of such
accumulated profits in excess of such income, war
profits, and excess profits taxes (other than those
deemed paid); and

(2) to the extent such dividends are paid by

such foreign corporation out of accumulated profits
[as defined in subsection (c) (1) (b)] of a year for
which such foreign corporation is a less-developed
country corporation, be deemed to have paid the
same proportion of any income, war profits, or

127
 excess profits taxes paid or deemed to be paid by
such foreign corporation to any foreign country or
to any possession of the United States on or with
respect to such accumulated profits, which the
amount of such dividends bears to the amount of
such accumulated profits.
!
xxxxxxxxx

(c) Applicable Rules

(1) Accumulated profits defined - For purpose of

this section, the term 'accumulated profits' means
with respect to any foreign corporation.

(A) for purposes of subsections (a) (1) and (b)

(1), the amount of its gains, profits, or income
computed without reduction by the amount of the
income, war profits, and excess profits taxes
imposed on or with respect to such profits or
income by any foreign country .... ; and

(B) for purposes of subsections (a) (2) and (b)

(2), the amount of its gains, profits, or income in
excess of the income, was profits, and excess profits
taxes imposed on or with respect to such profits or
income.

The Secretary or his delegate shall have full power to

determine from the accumulated profits of what year or years
such dividends were paid, treating dividends paid in the first 20
days of any year as having been paid from the accumulated
profits of the preceding year or years (unless to his satisfaction
shows otherwise), and in other respects treating dividends as
having been paid from the most recently accumulated gains,
profits, or earnings ...

128
 To Our mind there is nothing in the afore cited provision
that would justify tax return of the disputed 15% to the private
respondent. Furthermore, as ably argued by the petitioner, the
private respondent failed to meet certain conditions necessary in
order that the dividends received by the non-resident parent
company in the United States may be subject to the preferential
15% tax instead of 35%. Among other things, the private
respondent failed: (1) to show the actual amount credited by the
U.S. government against the income tax due from PMC-U.S.A.
on the dividends received from private respondent; (2) to
present the income tax return of its mother company for 1975
when the dividends were received; and (3) to submit any duly
authenticated document showing that the U.S. government
credited the 20% tax deemed paid in the Philippines.

Cyanamid vs. CA, CTA and CIR

The Commissioner of Internal Revenue (CIR) sent an

assessment letter to petitioner Cyanamid Philippines, Inc. and
demanded the payment of deficiency income tax of PU9,817.00
for taxable year 1981. A 25% Surtax of P3,774,867.50 was also
assessed on its accumulated earnings for the same taxable year.

Petitioner protested the assessments and claimed that the

CIR's assessment representing the 25% surtax on its accumulated
earnings for the year 1981 had no legal basis. The accumulation
of its earnings and profits was for reasonable business
requirements to meet working capital needs and
retirement of indebtedness.

Whether or not petitioner is liable for the accumulated earnings

tax for the year 1981.

BardahlFonnula - Petitioner claims that increase of working

capital by a corporation justifies accumulating income. Petitioner

129
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" 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 an extraordinary expenses reasonably anticipated,
plus enough to operate the business during one operating cycle.

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. Therefore, the P9,540,926.00 accumulated income
as of 1981 may be validly accumulated to increase the
petitioner's working capital for the succeeding year.

However, the companies where the "Bardahl" formula was

applied had operating cycles much shorter than that of
petitioner. 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 vanabons
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. Petitioner'S
application of the "Bardahl" formula merely creates a false
illusion of exactitude.

Other formulas are also used, e.g. the ratio of current

assets to current liabilities and the adoption of the industry
standard. The ratio of current assets to current liabilities is used
to determine the sufficiency of working capital. Ideally, the

130
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.

As of 1981 the working capital of Cyanamid was

P25,776,991.00, or more than twice its current liabilities. That
current ratio of Cyanamid, therefore, projects adequacy in
working capital. Said working capital was expected to increase
further when more funds were generated from the succeeding
year's sales. Available income covered expenses or indebtedness
for that year, and there appeared no reason to expect an
impending "working capital deficit" which could have
necessitated an increase in working capital, as rationalized by
petitioner.

Immediacy Test - In order to determine whether profits are

accumulated for the reasonable needs to avoid the surtax upon
shareholders, it must be shown that the controlling intention of
the taxpayer is manifest at the time of accumulation, not
intentions declared subsequently, which are mere afterthoughts.
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.

CIR vs. Young Men's Christian Association

Private Respondent Young Men's Christian Association of

the Philippines, Inc. (YMCA) is a non-stock, non-profit
institution, which conducts various programs and activities that
are beneficial to the public, especially the young people,
pursuant to its religious, educational and charitable objectives.

131
 In 1980, private respondent earned, among others, an
income of P676,829.80 from leasing out a portion of its premises
to small shop owners, like restaurants and canteen operators,
and P44,259.00 from parking fees collected from non-members.
The Commissioner of Internal Revenue (CIR) issued an
assessment to private respondent, in the total amount of
P415,615.01 including surcharge and interest, for deficiency
income tax, deficiency expanded withholding taxes on rentals
and professional fees and deficiency withholding tax on wages.
Private respondent formally protested the assessment. The CIR,
however, denied the claims of YMCA.

Contesting the denial of its protest, the YMCA filed a

petition for review at the Court of Tax Appeals (CTA). The CTA
issued a ruling in favor of the YMCA and held that the income
earned from leasing out its premises and from parking fees are
not subject to tax. The leasing of private respondent's facilities to
small shop owners, to restaurant and canteen operators and the
operation of the parking lot are reasonably incidental to and
reasonably necessary for the accomplishment of its objectives.

Dissatisfied with the CTA ruling, the CIR elevated the case
to the Court of Appeals (CA). The CA initially decided in favor
of the CIR but it reversed itself upon finding merit on private
respondent's motion for reconsideration

Whether or not the income derived from rentals of real property

owned by the Young Men's Christian Association of the Philippines,
Inc. (YMCA) - established as "a welfare, educational and charitable
non-profit corporation" - subject to income tax under the National
Internal Revenue Code (NIRC) and the Constitution.

!National Internal Revenue Code - In the instant case, the

exemption claimed by the YMCA is expressly disallowed by the
very wording of the last paragraph of Section 30 of the NIRC
which mandates that the income of exempt organizations (such
as the YMCA) from any of their properties,real or personal, be

132
subject to the tax imposed by the same Code. Because the last
paragraph of said section unequivocally subjects to tax the rent
income of the YMCA from its real property, the Court is duty-
bound to abide strictly by its literal meaning and to refrain from
resorting to any convoluted attempt at construction. Hence,
Respondent Court of Appeals committed reversible error when
it allowed, on reconsideration, the tax exemption claimed by
YMCA on income it derived from renting out its real property,
on the solitary but unconvincing ground that the said income is
not collected for profit but is merely incidental to its operation.
The law does not make a distinction. The rental income is taxable
regardless of whence such income is derived and how it is used
or disposed of. Where the law does not distinguish, neither
should we.

!Constitutional Provisions on Taxation - Invoking not

only the NIRC but also the fundamental law, private
respondentsubmits that Article VI, Section 28 of par. 3 of the 1987
Constitution, exempts "charitable institutions" from the payment
not only of property taxes but also of income tax from any
source.

Accordingly, Justice Hilario G. Davide, Jr., a former

constitutional commissioner,stressed during the Concom debates
that " ... what is exempted is not the institution itself ... ; those
exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for
religious, charitable or educational purposes." Father Joaquin G.
Bernas, an eminent authority on the Constitution and also a
member of the Concom, adhered to the same view that the
exemption created by said provision pertained only to property
taxes. In his treatise on taxation, Mr. Justice Jose C. Vitug
concurs, stating that "[t]he tax exemption covers property taxes
only." Indeed, the income tax exemption claimed by private
respondent finds no basis in Article VI, Section 26, par. 3 of the
Constitution.

133
 Private respondent also invokes Article XIV, Section 4, par.
3 of the Constitution,claiming that the YMCA "is a non-stock,
non-profit educational institution whose revenues and assets are
used actually, directly and exclusively for educational purposes
so it is exempt from taxes on its properties and income." For the
YMCA to be granted the exemption it claims under the afore
cited provision, it must prove with substantial evidence 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. However, the Court notes that not a scintilla of
evidence was submitted by private respondent to prove that it
met the said requisites.

PLDT vs. CIR

Petitioner, the Philippine Long Distance Telephone

Company (PLDT), claiming that it terminated in 1995 the
employment of several rank-and-file, supervisory, and executive
employees due to redundancy; that in compliance with labor law
requirements, it paid those separated employees separation pay
and other benefits; and that as employer and withholding agent,
it deducted from the separation pay withholding taxes in the
total amount of P23,707,909.20 which it remitted to the Bureau of
Internal Revenue (BIR), filed on November 20, 1997 with the BIR
a claim for tax credit or refund of the P23,707,909.20, invoking
Section 28(b)(7)(B) of the 1977 National Internal Revenue Code
which excluded from gross income:

"any amount received by an official or employee or by his heirs

from the employer as a consequence of separation of such official or
employee from the service of the employer due to death, sickness or
other physical disability or for any cause beyond the control of the said
official or employee."

134
 As the BIR took no action on its claim, PLDT filed a claim
for judicial refund before the Court of Tax Appeals.

In its Answer, respondent, the Commissioner of Internal

Revenue, contended that PLDT failed to show proof of payment
of separation pay and remittance of the alleged withheld taxes.
PLOT later manifested on March 19, 1998 that it was reducing its
claim to P16,439,777.61 because a number of the separated
employees opted to file their respective claims for refund of
taxes erroneously withheld from their separation pay.

By Decision of July 25, 2000, the CTA denied PLDTs claim

on the ground that it "failed to sufficiently prove that the
terminated employees received separation pay and that taxes
were withheld therefrom and remitted to the BIR."

PLDT filed a Motion for New TrialReconsideration,

praying for an opportunity to present the receipts and quitclaims
executed by the employees and prove that they received their
separation pay.

The CTA denied PLDTs motion.

PLDT thus filed a Petition for Review before the Court of

Appeals which, by Decision of February 11, 2002, dismissed the
same. PLDTs Motion for Reconsideration having been denied, it
filed the present Petition for Review on Certiorari, faulting the
appellate court to have committed grave abuse of discretion.

PLDT argues that it is not essential to prove that the

separation pay benefits were actually received by the terminated
employees. This issue is not for the CTA, nor the Court of
Appeals to resolve, but is a matter that falls within the
competence and exclusive jurisdiction of the Department of
Labor and Employment and/or the National Labor Relations
Commission.

135
 Whether or not the court committed grave abuse of discretion in
affirming the denial ofPLDT's motion for a judicial tax refund?

PLDT's position does not lie. Tax refunds, like tax

exemptions, are construed strictly against the taxpayer and
liberally in favor of the taxing authority, and the taxpayer bears the
burden of establishing the factual basis of his claim for a refund.

Under the earlier quoted portion of Section 28 (b)(7)(B) of

the National Internal Revenue Code of 1977 (now Section 32(B)6
(b) of the National Internal Revenue Code of 1997), it is
incumbent on PLDT as a claimant for refund on behalf of each of
the separated employees to show that each employee did

x xx reflect in his or its own return the income upon which

any creditable tax is required to be withheld at the source. Only
when there is an excess of the amount of tax so withheld over the
tax due on the payee's return can a refund become possible.

A taxpayer must thus do two things to be able to

successfully make a claim for the tax refund: (a)declare the
income payments it received as part of its gross income and (b)
establish the fact of withholding.

It must be stressed that newly discovered evidence as a

basis of a motion for new trial should be supported by affidavits
of the witnesses by whom such evidence is expected to be given,
or by duly authenticated documents which are proposed to be
introduced in evidence. And the grant or denial of a new trial is,
generally speaking, addressed to the sound discretion of the
court which cannot be interfered with unless a clear abuse
thereof is shown. PLDT has not shown any such abuse, however.

Finally, on PLDT's plea for a liberal application of the rules

of procedure, Commissioner of Internal Revenue v. A. Soriano
Corporation37 furnishes a caveat on the matter:

136
 Perhaps realizing that under the Rules the said report
cannot be admitted as newly discovered evidence, the petitioner
invokes a liberal application of the Rules. He submits that
Section 8 of the Rules of the Court of Tax Appeals declaring that
the latter shall not be governed strictly by technical rules of
evidence mandates a relaxation of the requirements of new trial
on the basis of newly discovered evidence. This is a dangerous
proposition and one which we refuse to countenance. We cannot
agree more with the Court of Appeals when it stated thus,

"To accept the contrary view of the petitioner would give

rise to a dangerous precedent in that there would be no end to a
hearing before respondent court because, every time a party is
aggrieved by its decision, he can have it set aside by asking to be
allowed to present additional evidence without having to
comply with the requirements of a motion for new trial based on
newly discovered evidence. Rule 13, Section 5 of the Rules of the
Court of Tax Appeals should not be ignored at will and at
random to the prejudice of the orderly presentation of issues and
their resolution. To do so would affect, to a considerable extent,
the stability of judicial decisions."

We are left with no recourse but to conclude that this is a

simple case of negligence on the part of the petitioner. For this
act of negligence, the petitioner cannot be allowed to seek refuge
in a liberal application of the Rules. For it should not be
forgotten that the first and fundamental concern of the rules of
procedure is to secure a just determination of every action. In the
case at bench, a liberal application of the rules of procedure to
suit the petitioner's purpose would clearly pave the way for
injustice as it would be rewarding an act of negligence with
undeserved tolerance.

At all events, the alleged "newly discovered evidence" that

PLDT seeks to offer does not suffice to establish its claim for
refund, as it would still have to comply with Revenue
Regulation 6-85 by proving that the redundant employees, on

137
whose behalf it filed the claim for refund, declared the
separation pay received as part of their gross income.
Furthermore, the same Revenue Regulation requires that "the
fact of withholding is established by a copy of the statement
duly issued by the payor to the payee (BIR Form No. 1743.1)
showing the amount paid and the amount of tax withheld
therefrom."

Aguinaldo Industries vs. CTA

This is a petition for review of the decision and resolution

of the Court of TaxAppeals holding the petitioner liable for the
sum of P17,123.93 as deficiency income tax for 1957, plus 5%
surcharge and 1% monthly interest for late payment from
December 15, 1957 until full payment is made.

Aguinaldo Industries Corporation is a domestic

corporation engaged in the manufacture of fishing nets, a tax-
exempt industry, and the manufacture of furniture. For
accounting purposes, each division is provided with separate
books of accounts as required by the Department of Finance and
each division's income is computed individually, as per its
accounting methods. Previously, petitioner acquired a parcel of
land in Muntinglupa, Rizal, and this transaction was entered in
the books of the Fish Nets Division of the Company. Later, the
petitioner sold the property and the profit from this sale was
entered in the books of the Fish Nets Division as miscellaneous
income to distinguish it from its tax-exempt income.

For the year 1957, petitioner filed two separate income tax
returns. After investigation of these returns, the examiners of the
Bureau of Internal Revenue found that the Fish Nets Division
deducted from its gross income for that year the amount of
P61,187.48 as additional remuneration paid to the officers of
petitioner. It was further found that the amount was taken from
the net profit of an isolated transaction (sale of aforementioned

138
land) not in the course of or carrying on of petitioner's trade or
business.

It was recommended that the said sum of P61,187.48 be

disallowed as deduction from gross income. Petitioner, however,
asserted in its letter of February 19, 1958, that said amount
should be allowed as deduction because it was paid to its
officers as allowance or bonus pursuant to Section 3 of its by-
laws. Upon the submission of the case for judgment on the basis
of the pleadings and BIR official records, the respondent Court
rendered the questioned decision. Subsequently, on a motion for
reconsideration filed by petitioner, the respondent Court issued a
resolution imposing a 5% surcharge and 1% monthly interest on
the deficiency assessment.

Dissatisfied, petitioner has come to this Court on errors

assigned in its brief. Petitioner argues that the profit derived
from the sale of its Muntinglupa land is not taxable for it is tax-
exempt income, considering that its Fish Nets Division enjoys
tax exemption as a new and necessary industry under Republic
Act 901.

Whether or not herein petitioner for the sum of PI7,123.93 as

deficiency income tax for 1957, plus 5% surcharge and 1% monthly
interest for late payment from December15,1957 until full payment is
made?

The court held that petitioner's belated claim for tax

exemption was properly rejected.

!In computing net income there shall be allowed as

deductions:

(a) Expenses:

(1) In general. All the Ordinary and necessary

expenses paid or incurred during the taxable year in

139
 carrying on any trade or business, including a reasonable
allowance for personal services actually rendered ....

On the basis of the foregoing standards, the bonus given

to the officers of the petitioner as their share of the profit realized
from the sale of petitioner's Muntinglupa land cannot be deemed
a deductible expense for tax purposes, even if the aforesaid sale
could be considered as a transaction for Carrying on the trade or
business of the petitioner and the grant of the bonus to the
corporate officers pursuant to petitioner's bylaws could, as an
intra-corporate matter, be sustained.

The records show that the sale was effected through a

broker who was paid by petitioner a commission of P51,723.72
for his services. On the other hand, there is absolutely no
evidence of any service actually rendered by petitioner's officers
which could be the basis of a grant to them of a bonus out of the
profit derived from the sale. This being so, the payment of a
bonus to them out of the gain realized from the sale cannot be
considered as a selling expense; nor can it be deemed reasonable
and necessary so as to make it deductible for tax purposes. As
stated by this Court in Alhambra Cigar and Cigarette
Manufacturing Co. vs. Collector of Internal Revenue, G.R. No.
L-12026, May 29, 1959, construing Section 30 (a) (1) of the Tax
Code:

.... whenever a controversy arises on the

deductibility, for purposes of income tax, of certain items
for alleged compensation of officers of the taxpayer, two
(2) questions become material, namely: (a) Have
personal services been actually rendered by said
officers? (b) In the affirmative case, what is the
reasonable allowance' therefor?

This posture is in line with the doctrine in the law of

taxation that the taxpayer must show that its claimed deductions

140
clearly come within the language of the law since allowances,
like exemptions, are matters of legislative grace.

Now to resolve the issue regarding the imposition of 5%

surcharge and 1% monthly interest for late payment of the
deficiency tax on petitioner's income. The provision of Section 51
of the Tax Code shall be applied.

It should be observed that the 5% surcharge and interest

on deficiency was imposed from the time the tax became due,
and said interest was imposable in case of non-payment on time,
not only on the basic income tax, but also on the deficiency tax,
since the deficiency was part and parcel of the taxpayer's income
tax liability.

Inasmuch as petitioner had filed its income tax return for

1957 on the fiscal year basis ending June 30, 1957, the deficiency
income tax in question should have been paid on or before
November 15, 1957-the fifteenth day of the fifth month following
the close of the fiscal year. This Court held that the interest and
surcharges on deficiency taxes are imposable upon failure of the
taxpayer to pay the tax on the date fixed in the law for the
payment thereof. The rule has to be so because a deficiency tax
indicates non-payment of the correct tax, and such deficiency
exists not only from the assessment thereof but from the very
time the taxpayer failed to pay the correct amount of tax when it
should have been paid and the imposition thereof is mandatory
even in the absence of fraud or willful failure to pay the tax is
full.

The imposition of 1% monthly is but a just compensation

to the State for the delay in paying the tax and for the
concomitant use by the taxpayer of funds that rightfully should
be in the government's hands. The fact that the interest charged
is made proportionate to the period of delay constitutes the best
evidence that such interest is not penal but compensator. As

141
regards the prescribed 5% surcharge, this Court has had occasion
to cite the reason for the strict enforcement thereof.

Strong reasons of policy support a strict observance of this

rule. Tax laws imposing penalties for delinquencies are clearly
intended to hasten tax payments or to punish evasion or neglect
of duty in respect thereof. If delays in tax payments are to be
condoned for light reasons, the law imposing penalties for
delinquencies would be rendered nugatory, and the maintenance
of the government and its multifarious activities would be as
precarious as taxpayers are wining or unwilling to pay their
obligations to the state in time. Imperatives of public welfare will
not approve of this result.

Esso Standard Eastern, Inc. vs. CIR

This is an appeal in the decision of the CTA denying

petitioner's claims for refund of overpaid income taxes of
P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases No.
1251 and 1558 respectively.

In CTA Case No. 1251, petitioner ESSO deducted from its

gross income for 1959, as part of its ordinary and necessary
business expenses, the amount it had spent for drilling and
exploration of its petroleum concessions. This claim was
disallowed by the respondent Commissioner of Internal
Revenue on the ground that the expenses should be capitalized
and might be written off as a loss only when a "dry hole" should
result. ESSO then filed an amended return where it asked for the
refund of P323,279.00by reason of its abandonment as dry holes
of several of its oil wells. Also claimed as ordinary and necessary
expenses in the same return was the amount of P340,822.04,
representing margin fees it had paid to the Central Bank on its
profit remittances to its New York head office.

142
 On August 5, 1964, the CIR granted a tax credit of
P221,033.00 only, disallowing the claimed deduction for the
margin fees paid.

In CTA Case No. 1558, the CR assessed ESSO a deficiency

income tax for the year 1960, in the amount of P367,994.00, plus
18% interest thereon of P66,238.92 for the period from April
18,1961 to April 18, 1964, for a total of P434,232.92. The
deficiency arose from the disallowance of the margin fees of PI,
226,647.72 paid by ESSO to the Central Bank on its profit
remittances to its New York head office.

ESSO settled this deficiency assessment on August 10,

1964, by applying the tax credit of P221,033.00 representing its
overpayment on its income tax for 1959 and paying under
protest the additional amount of P213,20l.92. On August 13,
1964, it claimed the refund of P39,787.94 as overpayment on the
interest on its deficiency income tax. It argued that the 18%
interest should have been imposed not on the total deficiency of
P367,944.00 but only on the amount of P146,961.00, the difference
between the total deficiency and its tax credit of P221,033.00.

This claim was denied by the CIR, who insisted on

charging the 18% interest on the entire amount of the deficiency
tax. On May 4,1965, the CIR also denied the claims of ESSO for
refund of the overpayment of its 1959 and 1960 income taxes,
holding that the margin fees paid to the Central Bank could not
be considered taxes or allowed as deductible business expenses.

Whether or not margin fee is a tax?

Whether or not the margin fees be considered ordinary and

necessary expenses when paid?

Margin fee is not a tax but an exaction designed to curb

the excessive demands upon our international reserve.

143
 A margin levy on foreign exchange is a form of exchange
control or restriction designed to discourage imports and
encourage exports, and ultimately, 'curtail any excessive demand
upon the international reserve' in order to stabilize the currency.
Originally adopted to cope with balance of payment pressures,
exchange restrictions have come to serve various purposes, such
as limiting non-essential imports, protecting domestic industry
and when combined with the use of multiple currency rates
providing a source of revenue to the government, and are in
many developing countries regarded as a more or less inevitable
concomitant of their economic development programs.

The different measures of exchange control or restriction

cover different phases of foreign exchange transactions, i.e., in
quantitative restriction, the control is on the amount of foreign
exchange allowable. In the case of the margin levy, the
immediate impact is on the rate of foreign exchange; in fact, its
main function is to control the exchange rate without changing
the par value of the peso as fixed in the Bretton Woods
Agreement Act.

For a member nation is not supposed to alter its exchange

rate (at par value) to correct a merely temporary disequilibrium
in its balance of payments. By its nature, the margin levy is part
of the rate of exchange as fixed by the government.

As to the contention that the margin levy is a tax on the

purchase of foreign exchange and hence should not form part of
the exchange rate, suffice it to state that We have already held
the contrary for the reason that a tax is levied to provide revenue
for government operations, while the proceeds of the margin fee
are applied to strengthen our country's international reserves.

We find merit in the argument that the 20% retention of

exporter's foreign exchange constitutes an export tax. A tax is a
levy for the purpose of providing revenue for government

144
operations, while the proceeds of the 20% retention, as we have
seen, are applied to strengthen the Central Bank's international
reserve.

We conclude then that the margin fee was imposed by the

State in the exercise of its police power and not the power of
taxation.

Alternatively, ESSO prays that if margin fees are not taxes,

they should nevertheless be considered necessary and ordinary
business expenses and therefore still deductible from its gross
income. The fees were paid for the remittance by ESSO as part of
the profits to the head office in the Unites States. Such remittance
was an expenditure necessary and proper for the conduct of its
corporate affairs.

The statutory test of deductibility where it is axiomatic

that to be deductible as a business expense, three conditions are
imposed, namely: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the taxable year,
and (3) it must be paid or incurred in carrying on a trade or
business.

In addition, not only must the taxpayer meet the business

test, he must substantially prove by evidence or records the
deductions claimed under the law, otherwise, the same will be
disallowed. The mere allegation of the taxpayer that an item of
expense is ordinary and necessary does not justify its deduction.

There is thus no hard and fast rule on the matter. The right
to a deduction depends in each case on the particular facts and
the relation of the payment to the type of business in which the
taxpayer is engaged.

The intention of the taxpayer often may be the controlling

fact in making the determination. Assuming that the expenditure
is ordinary and necessary in the operation of the taxpayer's

145
business, the answer to the question as to whether the
expenditure is an allowable deduction as a business expense
must be determined from the nature of the expenditure itself,
which in turn depends on the extent and permanency of the
work accomplished by the expenditure.

Since the margin fees in question were incurred for the

remittance of funds to petitioner's Head Office in New York,
which is a separate and distinct income taxpayer from the
branch in the Philippines, for its disposal abroad, it can never be
said therefore that the margin fees were appropriate and helpful
in the development of petitioner's business in the Philippines
exclusively or were incurred for purposes proper to the conduct
of the affairs of petitioner's branch in the Philippines exclusively
or for the purpose of realizing a profit or of minimizing a loss in
the Philippines exclusively.

If at all, the margin fees were incurred for purposes proper

to the conduct of the corporate affairs of Standard Vacuum Oil
Company in New York, but certainly not in the Philippines.

ESSO has not shown that the remittance to the head office
of part of its profits was made in furtherance of its own trade or
business. The petitioner merely presumed that all corporate
expenses are necessary and appropriate in the absence of a
showing that they are illegal or ultra vires.

This is error. The public respondent is correct when it

asserts that "the paramount rule is that claims for deductions are
a matter of legislative grace and do not turn on mere equitable
considerations ... . The taxpayer in every instance has the burden
of justifying the allowance of any deduction claimed." 5

It is clear that ESSO, having assumed an expense properly

attributable to its head office, cannot now claim this as an
ordinary and necessary expense paid or incurred in carrying on
its own trade or business.

146
 FEBTC vs. CA

This is a Petition for Review on Certiorari assailing the

decision of the Court of Appeals.

Petitioner is a domestic banking corporation duly

organized and existing under and by virtue of Philippine laws.
In the early part of 1992, the Cavite Development Bank [CDB],
also a domestic banking corporation, was merged with
Petitioner with the latter as its surviving entity [under] the
merger. Petitioner being the surviving entity[, it] acquired all
[the] assets of CDB.

During the period from 1990 to 1991, CDB sold some

acquired assets in the course of which it allegedly withheld the
creditable tax from the sales proceeds which amounted to
P755,715.00.

In said years, CDB filed income tax returns which

reflected that CDB incurred negative taxable income or losses for
both years. Since there was no tax against which to credit or
offset the taxes withheld by CDB, the result was that CDB,
according to petitioner, had excess creditable withholding tax.

Thus, petitioner, being the surviving entity of the merger,

filed this Petition for Review after its administrative claim for
refund was not acted upon.

Whether or not petitioner adduced sufficient evidence to prove

its entitlement to a refund.

Petitioner has not sufficiently presented a case for the

application of an exception from the rule.

147
 The findings of fact of the CTA, a special court exercising
particular expertise on the subject of tax, are generally regarded
as final, binding and conclusive upon this Court, especially if
these are substantially similar to the findings of the CA which is
normally the final arbiter of questions of fact.-The findings shall
not be reviewed nor disturbed on appeal unless a party can
show that these are not supported by evidence, or when the
judgment is premised on a misapprehension of facts, or when
the lower courts failed to notice certain relevant facts which if
considered would justify a different conclusion.

A taxpayer must thus do two things to be able to

successfully make a claim for the tax refund:
(a) declare the income payments it received as part of its gross
income and (b) establish the fact of withholding.

We must emphasize that tax refunds, like tax exemptions,

are construed strictly against the taxpayer and liberally in favor
of the taxing authority. In the event, petitioner has not met its
burden of proof in establishing the factual basis for its claim for
refund and we find no reason to disturb the ruling of the lower
courts.

PNB vs. Savellano

The Petitions before this Court originated from a sworn

statement submitted by private respondent Tirso B. Savellano
(Savellano) to the Bureau of Internal Revenue (BIR) on 24 June
1986. Through his sworn statement, private respondent
Savellano informed the BIR that PNB had failed to withhold the
15% final tax on interest earnings and/ or yields from the money
placements of PNOC with the said bank, in violation of
Presidential Decree (P.O.) No. 1931. P.O. No. 1931, which took
effect on 11 June 1984, withdrew all tax exemptions of
government-owned and controlled corporations.

148
 In a letter, dated 08 August 1986, the BIR requested PNOC
to settle its liability for taxes on the interests earned by its money
placements with PNB and which PNB did not withhold. PNOC
wrote the BIR on 25 September 1986, and made an offer to
compromise its tax liability, which it estimated to be in the sum
of P304, 419,396.83, excluding interest and surcharges, as of 31
July 1986. PNOC proposed to set-off its tax liability against a
claim for tax refund/credit of the National Power Corporation
(NAPOCOR),then pending with the BIR, in the amount of 11335,
259.450.21. The amount of the claim for tax refund/credit was
supposedly a receivable account of PNOC from NAPOCOR.

On 08 October 1986, the BIR sent a demand letter to PNB,

as withholding agent, for the payment of the final tax on the
interest earnings and/or yields from PNOC's money placements
with the bank, from 15 October 1984 to 15 October 1986, in the
total amount of P376, 301,133.33. On the same date, the BIR also
mailed a letter to PNOC informing it of the demand letter sent to
PNB.

PNOC, in another letter, dated 14 October 1986, reiterated

its proposal to settle its tax liability through the set-off of the said
tax liability against NAPOCOR'S pending claim for tax refund/
credit. The BIR replied on 11 November 1986 that the proposal
for set-off was premature since NAPOCOR's claim was still
under process. Once more, BIR requested PNOC to settle its tax
liability in the total amount of P385, 961,580.82, consisting of
P303,343,765.32 final tax, plus P82,617,815.50 interest computed
until 15 November 1986.

On 09 June 1987, PNOC made another offer to the BIR to

settle its tax liability. This time, however, PNOC proposed a
compromise by paying 1191,003,129.89,representing 30% of the
P303,343,766.29 basic tax, in accordance with the provisions
ofExecutive Order (E.O.) No. 44.

149
 PNOC and PNB filed separate Motions to Dismiss, both
arguing that the CTA lacked jurisdiction to decide the case. In its
Resolution, dated 28 November 1988, the CTA denied the
Motions to Dismiss since the question of lack of jurisdiction
and/or cause of action do not appear to be indubitable.

After their Motions to Dismiss were denied by the CTA,

PNOC and PNB filed their respective Answers to the amended
Petition. PNOC averred, among other things,that (1) it had no
privity with private respondent Savellano; (2) the BIR
Commissioner's discretionary act in entering into the
compromise agreement had legal basis under E.O.No. 44 and
RMO No. 39-86 and RMO No. 4-87; and (3) the CTA had no
jurisdiction to resolve the case against it. On the other hand, PNB
asserted that (1) the CCA lacked jurisdiction over the case; and
(2) the BIR Commissioner's decision to accept the compromise
was discretionary on his part and, therefore, cannot be reviewed
or interfered with by the courts. PNOC and PNB later filed their
amended Answer invoking an opinion of the Commission on
Audit (COA) disallowing the payment by the BIR of informer's
reward to private respondent Savellano.

The compromise agreement between PNOC and the BIR,

dated 22 June 1987, is declared void for being contrary to law
and public policy, and is without force and effect; Paragraph 2 of
RMO No. 39-86 remains a valid provision of the regulation; The
withholding tax assessment against PNB, dated 08 October 1986,
had become final and unappealable. The BIR Commissioner is
ordered to enforce the said assessment and collect the amount of
1'294,958.450.73, the balance of tax assessed after crediting the
previous payment made by PNOC pursuant to the compromise
agreement, dated 22 June 1987; and Private respondent
Savellano shall be paid the remainder of his informer's reward,
equivalent to 15% of the deficiency withholding tax ordered
collected herein, or P 44,243,767.61

150
 CIR vs. Isabela Cultural Corporation

On February 23, 1990, ICC, a domestic corporation,

received from the BIR Assessment Notice No.
FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for
deficiency expanded withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for the taxable year
1986. The deficiency income tax ofP333,196.86, arose from:

(1) The BIR's disallowance of ICC's claimed expense

deductions for professional and security services
billed to and paid by ICC in 1986, to wit:

(a) Expenses for the auditing services of SGV &Co.,3

for the year ending December 31, 1985;4

(b) Expenses for the legal services [inclusive of

retainer fees] of the law firm for the years 1984 and
1985.5

(c) Expense for security services of EI Tigre Security

&Investigation Agency for the months of April and
May 1986.6

(2) The alleged understatement of ICC's interest

income on the three promissory notes due from
Realty Investment, Inc.

The deficiency expanded withholding tax of P4,897.79

(inclusive of interest and surcharge) was allegedly due to the
failure of ICC to withhold 1% expanded withholding tax on its
claimed P244,890.00 deduction for security services.7

On March 23, 1990, ICC sought a reconsideration of the

subject assessments. On February 9, 1995, however, it received a
final notice before seizure demanding payment of the amounts

151
stated in the said notices. Hence, it brought the case to the CTA
which held that the petition is premature because the final notice
of assessment cannot be considered as a final decision appealable
to the tax court. This was reversed by the Court of Appeals
holding that a demand letter of the BIR reiterating the payment
of deficiency tax amounts to a final decision on the protested
assessment and may therefore be questioned before the CTA.
This conclusion was sustained by this Court on July 1, 2001, in
G.R. No. 135210.8 the case was thus remanded to the CTA for
further proceedings.

Was the cost of the services such as advertising expenses be

considered as deductible expenses?

It held that the claimed deductions for professional and

security services were properly claimed by ICC in 1986 because
it was only in the said year when the bills demanding payment
were sent to ICC. Hence, even if some of these professional
services were rendered to ICC in 1984 or 1985, it could not
declare the same as deduction for the said years as the amount
thereof could not be determined at that time.

The CTA also held that ICC did not understate its interest
income on the subject promissory notes. It found that it was the
BIR which made an overstatement of said income when it
compounded the interest income receivable by ICC from the
promissory notes of Realty Investment, Inc., despite the absence
of a stipulation in the contract providing for a compounded
interest; nor of a circumstance, like delay in payment or breach
of contract, that would justify the application of compounded
interest.

ClR vs. Central Luzon Drug Corporation

Central Luzon Drug Corporation is a retailer of medicines

and other pharmaceutical products. For the period January 1995

152
to December 1995, pursuant to the mandate of Sec. 4(a) of
Republic Act No. 7432, otherwise known as the Senior Citizens
Act, it granted a 20% discount on the sale of medicines to
qualified senior citizens amounting to P219,778.00. lt then
deducted the same amount from its gross income for the taxable
year 1995, pursuant to Revenue Regulations No. 2-94
implementing the Senior Citizens Act, which states that the
discount given to the senior citizens shall be deducted by the
establishment from its gross sales for value-added tax and other
percentage tax purposes. For the said taxable period, Central
Luzon Drug reported a net loss of P20,963.00in its corporate
income tax returns, thus it did not pay income tax for 1995.

Subsequently, Central Luzon Drug filed a claim for refund

in the amount ofPI50,193.00, claiming that according to Sec. 4(a)
of the Senior Citizens Act, the amount of P219,778.00 should be
applied as tax credit. The Commissioner of Internal Revenue
(CIR) was not able to decide the claim on time,hence, Central
Luzon Drug filed a Petition for Review with the Court of
TaxAppeals. The latter dismissed the petition, declaring that
even if the law treats the 20% discount granted to senior citizens
as a tax credit, the same cannot apply when there is no tax
liability or the amount of the tax credit is greater than the tax
due. In the latter case, the tax credit will only be to the extent of
the tax liability. Furthermore, the law does not sate that a refund
can be claimed by the establishment concerned as an alternative
to tax credit.

Central Luzon Drug filed a Petition for Review with the

Court of Appeals. The appellate court held that the 20% discount
given to senior citizens which is treated as a tax credit is
considered just compensation and, as such, may be carried over
to the next taxable period if there is no current tax liability.

Whether or not the 20% discount granted by the Central Luzon

Drug to qualified senior citizens pursuant to Section 4(a) of the Senior
Citizens Act may be claimed as a tax credit or as a deduction from

153
gross sales in accordance with Section 2(1) of Revenue Regulations No.
2-94.

!The Petition is denied.

!Section 4(a) of the Senior Citizen Acts provides:

"Section 4.Privileges for the Senior Citizens.- The

senior citizens shall be entitled to the following:

(a) the grant of twenty percent (20%) discount

from all establishments relative to utilization of
transportations services, hotels and similar lodging
establishments, restaurants and recreation centers and
purchase of medicines anywhere in the country:
Provided, That private establishments may claim the cost
as tax credit. "

The above provision explicitly employed the term ''tax

credit." Nothing in this provision suggests for it to mean a
"deduction" from gross sales. Thus, the 20% discount required by
the law to be given to senior citizens is tax credit, not a
deduction from the gross sales of the establishment concerned.
As a corollary to this, the definition of ''tax credit" found in Sec. 2
(1) of Revenue Regulations No. 2-94 is erroneous as it refers to
tax credit as the amount representing the 20% discount that
"shall be deducted by the said establishment from their gross
sales for value added tax and other percentage tax purposes."
When the law says that the cost of the discount may be claimed
as a tax credit, it means that the amount, when claimed, shall be
treated as a reduction from any tax liability. The law cannot be
amended by a mere regulation.

Finally, for purposes of clarity, Section 229 of the Tax Code

does not apply to cases that fall under Sec. 4 of the Senior
Citizens Act because the former provision governs exclusively
all kinds of refund or credit internal revenue taxes that were

154
erroneously or illegally imposed an collected pursuant to the Tax
Code while the latter extends the tax credit benefit to the private
establishments concerned even before tax payments have been
made. The tax credit that is contemplated under the Senior
Citizens Act is a form of just compensation, not a remedy for
taxes that were erroneously or illegally assessed and collected. In
the same vein, proper payment of any tax liability is not a
precondition before taxable entity can benefit from the tax credit.
The credit may be availed of upon payment of the tax due, if any.
Where there is no tax liability or where a private establishment
reports a net loss for the period, the tax credit can be availed of
and carried over the next taxable year.

Philex Mining Corporation vs. CIR

On August 5, 1992, BIR send a letter to Philex asking it to

settle its tax liabilities for the 2nd, 3cd and 4th quarter of 1991 as
well as the 1" and 2nd quarter of 1992 in the total amount of
P123,821,982.52. Philex protested stating that it has pending
claims for VAT input credit/refund for the taxes it paid for the
years 1989 to 1991 in the amount of PU9,977,037.02 plus interest.
Therefore, these claims for tax credit/refund should be applied
against the tax liabilities citing eIR vs. Itogon-Suyoc Mines, Inc.
BIR, founding no merit in Phil ex's position stating that these
claims have not yet been established or determined with
certainty, hence no legal compensation can take place.

Philex appealed to the CTA. CTA ruled that "taxes cannot

be subject to set-off on compensation since claim for taxes is not
a debt or contract". Phil ex filed a motion for reconsideration but
it was denied. However, a few days after the denial of the
Motion for Reconsideration, Philex was able to obtain is VAT
input credit/ refund and Philex contends that it should off-set its
excise tax liabilities since both had already become "due and
demandable", as well as fully liquidated.

155
 Whether or not the grant of VAT input credit/refund can be
applied against the tax liabilities.

Taxes cannot be subject to compensation for the simple

reason that the government and the taxpayer are not creditors
and debtors of each other. There is a material distinction between
a tax and debt. Debts are due to the government in its corporate
capacity, while taxes are due to the government in its sovereign
capacity. The court cited Francia us. Intermediate Appellate Court
where it was held that taxes cannot be subject to set-off or
compensation.

The court 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 matter of bargain. Hence, a tax
does not depend upon the consent of the taxpayer. If any
taxpayer 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.

Ericsson vs. City of Pasig

In an Assessment Notice, petitioner was assessed a

business tax deficiency for the years1998 and 1999 amounting to
P9,466,885.00 and P4,993,682.00, respectively, based on its gross
revenues as reported in its audited financial statements for the
years 1997 and 1998. Petitioner filed a Protest claiming that the
computation of the local business tax should be based on gross
receipts and not on gross revenue. The City of Pasig

156
(respondent) issued another Notice of Assessment to petitioner
on November 19, 2001, this time based on business tax
deficiencies for the years 2000 and 2001, amounting to
P4,665,775.51 and P4,71O,242.93, respectively, based on its gross
revenues for the years 1999 and 2000. Again, petitioner filed a
Protest on January 21 2002, reiterating its position that the local
business tax should be based on gross receipts and not gross
revenue. Respondent denied the protest. The RTC, however,
canceled and set aside the assessments made by respondent and
its City Treasurer. The CA reversed and set aside the complaint
for lack of authority to sign the CNFS. Issue: WON the case
should be dismissed based on procedural grounds Held: No
Ratio: First, the complaint filed by petitioner with theRTC was
erroneously dismissed by the CA for failure of petitioner to show
that its Manager for Tax and Legal Affairs, Atty. Ramos, was
authorized by the Board of Directors to sign the Verification and
Certification of Non-Forum Shopping in behalf of the petitioner
corporation.Time and again, the Court, under special
circumstances and for compelling reasons, sanctioned
substantial compliance with the rule on the submission of
verification and certification against non-forum shopping. In the
present case, petitioner submitted a Secretary's Certificate signed
on May 6, 2002, whereby Atty. Ramos was authorized to file a
protest at the local government level and to "sign, execute and
deliver any and all papers, documents and pleadings relative to
the said protest and to do and perform all such acts and things as
may be necessary to effect the foregoing." Applying the
foregoing jurisprudence, the subsequent submission of the
Secretary's Certificate and the substantial merits of the petition,
which will be shown forthwith, justify a relaxation of the rule.

Whether or not the local business tax on contractors

should be based on gross receipts or gross revenue.

Insofar as petitioner is concerned, the applicable provision

is subsection (e), Section 143of the same Code covering
contractors and other independent contractors. The provision

157
specifically refers to gross receipts which is defined under
Section 131 of the Local GovernmentCode, as follows:"Gross
Sales or Receipts" include the total amount of money or its
equivalent representing the contract price, compensation or
service fee, including the amount charged or materials supplied
with the services and the deposits or advance payments actually
or constructively received during the taxable quarter for the
services performed or to be performed for another person
excluding discounts if determinable at the time of sales, sales
return, excise tax, and value-added tax (VAT).

The law is clear. Gross receipts include money or its

equivalent actually or constructively received in consideration of
services rendered or articles sold, exchanged or leased, whether
actual or constructive. In Commissioner of Internal Revenue v.
Bank of Commerce, the Court interpreted gross receipts as
including those which were actually or constructively received:

"Actual receipt of interest income is not limited to physical

receipt. Actual receipt may either be physical receipt or
constructive receipt. When the depository bank withholds the
final tax to pay the tax liability of the lending bank, there is prior
to the withholding a constructive receipt by the lending bank of
the amount withheld. From the amount constructively received
by the lending bank, the depository bank deducts the final
withholding tax and remits it to the government for the account
of the lending bank. Thus, the interest income actually received
by the lending bank, both physically and constructively, is the
net interest plus the amount withheld as final tax."

There is constructive receipt, when the consideration for

the articles sold, exchanged or leased, or the services rendered
has already been placed under the control of the person who
sold the goods or rendered the services without any restriction
by the payor. In contrast, gross revenue covers money or its
equivalent actually or constructively received, including the
value of services rendered or articles sold, exchanged or leased,

158
the payment of which is yet to be received. This is in consonance
with the International Financial Reporting Standards, which
defines revenue as the gross inflow of economic benefits (cash,
receivables, and other assets) arising from the ordinary operating
activities of an enterprise (such as sales of goods, sales of
services, interest, royalties, and dividends),which is measured at
the fair value of the consideration received or receivable. The
imposition of local business tax based on petitioner's gross
revenue will inevitably result in the constitutionally proscribed
double taxation - taxing of the same person twice by the same
jurisdiction for the same thing - inasmuch as petitioner's revenue
or income for a taxable year will definitely include its gross
receipts already reported during the previous year and for which
local business tax has already been paid. Thus, respondent
committed a palpable error when it assessed petitioner's local
business tax based on its gross revenue as reported in its audited
financial statements, as Section 143 of the LocalGovernment
Code and Section 22(e) of the Pasig Revenue Code clearly
provide that the tax should be computed based on gross receipts.

Philam Asset Management vs. CIR

The Petioner, formerly known as Philam Fund

Management, Inc., is a domestic corporation duly organized and
existing under the laws of the Philippines, with its main purpose
as an Investment Manager. It acts as the investment manager of
both Philippine Fund, Inc. (PFI) and Philam Bond Fund, Inc.
(PBFI), which are open-end investment companies, in the sale of
their shares of stocks and in the investment of the proceeds of
these sales into a diversified portfolio of debt and equity
securities. The case involves two cases under Philam.

On April 3, 1998, petitioner filed its annual corporate

income tax return for the taxable year 1997 representing a net
loss of P2,689,242.00. Consequently, it failed to utilize the
creditable tax withheld in the amount of Five Hundred Twenty-

159
Two Thousand Ninety-Two Pesos (P522,092.00) representing the
tax withheld by petitioner's withholding agents, PFI and PBFI,
on professional fees.

On September 11, 1998, petitioner filed an administrative

claim for refund with theBureau of Internal Revenue Appellate
Division in the amount of P522,092.00representing unutilized
excess tax credits for calendar year 1997. Thereafter, on July 28,
1999, a written request was filed with the same division for the
early resolution of petitioner's claim for refund. Upon appeal to
the Court of Tax Appeals, the court denied Philam's claim.

In another case, on April 13, 1999, Philam filed its Annual

Income Tax Return with the Bureau of Internal Revenue for the
taxable year 1998 declaring a net loss of P1,504,951.00. Thus,
there was no tax due against Philam for the taxable year 1998.
Likewise, Phil am had an unapplied creditable withholding tax
in the amount of P459,756.07, which amount had been
previously withheld in that year by petitioner's withholding
agents, namely PFI, PBFI, and Phil am Strategic Growth Fund,
Inc. (PSGFI). In the next succeeding year, Philam had a tax due in
the amount of of P80,042.00, and a creditable withholding tax in
the amount of P915,995.00. Philam likewise declared in its
1999 tax return the amount of P459,756.07, which
represents its prior excess credit for taxable year 1998. That is
why on November 14, 2000, Philam filed and Administrative
claim for refund with the Revenue District Office with respect to
the unapplied creditable withholding tax of P459,756.07.
According to Philam, the amount of P80,042.00, representing the
tax due for the taxable year 1999 has been credited from
itsP915,995.00 creditable withholding tax for taxable year 1999,
thus leaving its 1998 creditable withholding tax in the amount of
P459,756.07 still unapplied. The BIR denied Philam's claim and
was also denied upon petition to the Court of Tax Appeals.

Whether or not Philam is entitled to refund of its

creditable taxes withheld for the taxable years 1997 and 1998.

160
 The court favored Philam on the first case but did not on
the second case. Section76 of the National Internal Revenue
Code states that:

"Section 76.Final Adjustment Return. -- Every corporation

liable to tax under Section 24 shall file a final adjustment return
covering the total net income for the preceding calendar or fiscal year. If
the sum of the quarterly tax payments made during the said taxable
year is not equal to the total tax due on the entire taxable net income of
that year the corporation shall either:

"(a) Pay the excess tax still due; or

"(b) Be refunded the excess amount paid, as the case maybe.

"In case the corporation is entitled to a refund of the excess

estimated quarterly income taxes paid, the refundable amount shown
on its final adjustment return may be credited against the estimated
quarterly income tax liabilities for the taxable quarters of the
succeeding taxable year."

The Court said that the options under Section 76 are

alternative in nature. The choice of one precludes the other. In
Philippine Bank of Communications v. Commissioner of Internal
Revenue, the Court ruled that a corporation must signify its
intention, whether to request a tax refund or claim a tax credit,
by marking the corresponding option box provided in the FAR,
While a taxpayer is required to mark its choice in the form
provided by the BIR, this requirement is only for the purpose of
facilitating tax collection. One cannot get a tax refund and a tax
credit at the same time for the same excess income taxes paid.
Failure to signify one's intention in the FAR does not mean
outright barring of a valid request for a refund, should one still
choose this option later on. A tax credit should be construed
merely as an alternative remedy to a tax refund under Section 76,
subject to prior verification and approval by the BIR. In the
present case, although petitioner did not mark the refund box in

161
its 1997 FAR, neither did it perform any act indicating that it
chose a tax credit. On the contrary, it filed on September 11, 1998,
an administrative claim for the refund of its excess taxes
withheld in 1997. In none of its quarterly returns for 1998 did it
apply the excess creditable taxes.Under these circumstances,
petitioner is entitled to a tax refund of its 1997 excess tax credits
in the amount of FS22,092.

Collector of Internal Revenue vs. Meralco

Juan Maniego substituted by his wife and children

submitted before theCommissioner of Internal Revenue a
confidential denunciation against Manila Electric Corporation
for having paid only 25% of the dividends from 1962 up to 1966.
Hence, the said company is alleged to have committed tax
evasion for short changing the government. The Commissioner
of Internal Revenue held that no deficiency was committed by
Meralco in accordance with the provision of Sec 24 (a) of the
National Internal Revenue Code. The judge of the court of First
Instance of the city of Manila on the other hand, ruled that a
mandamus be issued against the Commissioner compelling him
to issue an assessment to Meralco for the collection of the alleged
deficiency and ordered as well that the informant Maniego be
rewarded.

The Commissioner of Internal Revenue contended that

mandamus will not lie since he is exercising discretionary
powers. Meralco argued further more that there is no cause of
action and the action is premature and that mandamus will not
lie. Also, that the court of first Instance has no jurisdiction to
reside over the said subject matter.

Whether or not the Court of First Instance has jurisdiction to

hear and decide casesinvolving disputed assessments, refunds of
internal revenue taxes, and other matters arising from the Internal
Revenue Code.

162
 The Supreme Court ruled that in accordance to the
provisions of RA 1125, Sec. 7,and the power to hear and decide
cases relating to taxation are vested upon the Court ofTax
Appeals. The disputed assessment claims against Meralco is
within the jurisdiction of the Court of Tax Appeals. The most
that Maniego would have done is to file a complaint before the
Court of Tax Appeals. Furthermore, the mandamus issued
cannotlie as such would be tantamount to usurpation of
executive functions. Hence, no assessment may be issued against
Meralco, and in thus, the Maniego's heirs cannot claim the
reward.

Stateland Investment vs. CIR

Stateland Investment Corporation opted to apply the

excess tax credits amounting to Php 13,929,793.51 for the
succeeding year 1998. That year the declared minimum
corporate income tax of Stateland amounted to Php4, 187, 523.
Hence, a balance of Php 9, 742,270.51 was left unutilized. In 1999,
the said company filed its motion for refund of the said
unutilized excess tax payment. The Court of Tax Appeals denied
the said motion due to the fact that the "x" mark on the
company's income tax return which means that the company
intended the said amount to be carried over the next year.
Stateland contended however that it intended to carry over for
the year 1999 only what it has earned during the taxable year
1998 as it the company was aware that it could no longer avail
the excess tax credit for the year 1997. The Court of Tax Appeals
find no merits on this argument presented by Stateland.

Whether or not the petitioner, Stateland Corporation, isentitled

to the Php9,742,270.51 representing the excess credit tax for the year
1997.

163
 The petitioner alleged that the "x" mark indicated in the
income tax return was not appreciated by the Court of Tax
Appeals. They furthermore argued that the said excess amount
cannot be used in the year 1999 because they have incurred loss
during that year. Hence, they do not have any tax liability in
which the excess amount can be utilized.

The Supreme Court ruled in accordance to the provision

of Sec 69 of the InternalRevenue Code ruled in favor of Stateland
Corporation. It has been well defined in the said provision that if
the total tax due is less than the quarterly tax payments made
during the year, a taxpayer is entitled to a refund or credit for the
excess amount paid. Also, excess tax payments that cannot be
applied to tax due the following year may be refunded the next
year. This is exactly what the petitioner has done which the
Court of Tax Appeals failed to appreciate. The Court held that
justice and fair play are on the side of the petitioner. The
principle of solutio indebiti could also be applied in this case. The
BIR received something that is due it; hence it has the obligation
to return the same. Wherefore, the petition of Stateland
Corporation ordering the Bureau of Internal Revenue to refund
the excess tax payment.

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TAX ONE CLASS
First Semester 2011

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