Capital and 60-40

G.R. No. 176579. June 28, 2011.*

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

PABLITO V. SANIDAD and ARNO V. SANIDAD, petitioners-in-intervention.

Special Civil Actions; Declaratory Relief; Mandamus; Court treats the petition for declaratory relief as one for mandamus if the issue involved has
far-reaching implications.—In short, it is well-settled that this Court may treat a petition for declaratory relief as one for mandamus if the issue
involved has far-reaching implications. As this Court held in Salvacion: The Court has no original and exclusive jurisdiction over a petition for
declaratory relief. However, exceptions to this rule have been recognized. Thus, where the petition has far-reaching implications and raises
questions that should be resolved, it may be treated as one for mandamus.

Actions; Locus Standi; Petitioner being a stockholder of Philippine Long Distance Telephone (PLDT) has the right to question the subject sale which
he claims to violate the nationality requirement prescribed in Section 11, Article XII of the Constitution; Court upheld the right of a citizen to bring a
suit on matters of transcendental importance to the public.—There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right
to question the subject sale, which he claims to violate the nationality requirement prescribed in Section 11, Article XII of the Constitution. If the
sale indeed violates the Constitution, then there is a possibility that PLDT’s franchise could be revoked, a dire consequence directly affecting
petitioner’s interest as a stockholder. More importantly, there is no question that the instant petition raises matters of transcendental importance
to the public. The fundamental and threshold legal issue in this case, involving the national economy and the economic welfare of the Filipino
people, far outweighs any perceived impediment in the legal personality of the petitioner to bring this action. In Chavez v. PCGG, 299 SCRA 744
(1998), the Court upheld the right of a citizen to bring a suit on matters of transcendental importance to the public.

Corporation Law; Words and Phrases; “Capital”; The term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock
entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock
comprising both common and non-voting preferred shares.—We agree with petitioner and petitioners-in-intervention. The term “capital” in
Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only
to common shares, and not to the total outstanding capital stock comprising both common and non-voting preferred shares.

Same; Capital; Common shares cannot be deprived of the right to vote in any corporate meeting, and any provision in the articles of incorporation
restricting the right of common shareholders to vote is invalid.—Indisputably, one of the rights of a stockholder is the right to participate in the
control or management of the corporation. This is exercised through his vote in the election of directors because it is the board of directors that
controls or manages the corporation. In the absence of provisions in the articles of incorporation denying voting rights to preferred shares,
preferred shares have the same voting rights as common shares. However, preferred shareholders are often excluded from any control, that is,
deprived of the right to vote in the election of directors and on other matters, on the theory that the preferred shareholders are merely investors
in the corporation for income in the same manner as bondholders. In fact, under the Corporation Code only preferred or redeemable shares can be
deprived of the right to vote. Common shares cannot be deprived of the right to vote in any corporate meeting, and any provision in the articles of
incorporation restricting the right of common shareholders to vote is invalid.

Same; Same; The term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election of
directors.—Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no
voting rights, the term “capital” in Section 11, Article XII of the Constitution refers only to common shares. However, if the preferred shares also
have the right to vote in the election of directors, then the term “capital” shall include such preferred shares because the right to participate in the
control or management of the corporation is exercised through the right to vote in the election of directors. In short, the term “capital” in Section
11, Article XII of the Constitution refers only to shares of stock that can vote in the election of directors.

Same; Same; The term “capital” in Section 11, Article XII of the Constitution to include both voting and non-voting shares will result in the abject
surrender of our telecommunications industry to foreigners, amounting to a clear abdication of the State’s constitutional duty to limit control of
public utilities to Filipino citizens; The Court should never open to foreign control what the Constitution has expressly reserved to Filipinos for that
would be a betrayal of the Constitution and of the national interest.—Indisputably, construing the term “capital” in Section 11, Article XII of the
Constitution to include both voting and non-voting shares will result in the abject surrender of our telecommunications industry to foreigners,
amounting to a clear abdication of the State’s constitutional duty to limit control of public utilities to Filipino citizens. Such an interpretation
certainly runs counter to the constitutional provision reserving certain areas of investment to Filipino citizens, such as the exploitation of natural
resources as well as the ownership of land, educational institutions and advertising businesses. The Court should never open to foreign control
what the Constitution has expressly reserved to Filipinos for that would be a betrayal of the Constitution and of the national interest. The Court
must perform its solemn duty to defend and uphold the intent and letter of the Constitution to ensure, in the words of the Constitution, “a self-
reliant and independent national economy effectively controlled by Filipinos.”

Same; Securities and Exchange Commission; The Securities and Exchange Commission (SEC) is vested with the power and function to suspend or
revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the
grounds provided by law.—Under Section 5(m) of the Securities Regulation Code, the SEC is vested with the “power and function” to “suspend or
revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the
grounds provided by law.” The SEC is mandated under Section 5(d) of the same Code with the “power and function” to “investigate x x x the
activities of persons to ensure compliance” with the laws and regulations that SEC administers or enforces. The GIS that all corporations are
required to submit to SEC annually should put the SEC on guard against violations of the nationality requirement prescribed in the Constitution and
existing laws. This Court can compel the SEC, in a petition for declaratory relief that is treated as a petition for mandamus as in the present case, to
hear and decide a possible violation of Section 11, Article XII of the Constitution in view of the ownership structure of PLDT’s voting shares, as
admitted by respondents and as stated in PLDT’s 2010 GIS that PLDT submitted to SEC.

VELASCO, JR., J., Separate Dissenting Opinion:

Actions; Locus Standi; Petitioner has not shown any real interest substantial enough to give him the requisite locus standi to question the sale of
the government’s PTIC shares to First Pacific.—The Rules of Court specifically requires that “[e]very action must be prosecuted or defended in the
name of the real party in interest.” A real party in interest is defined as the “party who stands to be benefited or injured by the judgment in the
suit, or the party entitled to the avails of the suit.” Petitioner has failed to allege any interest in the 111,415 PTIC shares nor in any of the previous
purchase contracts he now seeks to annul. He is neither a shareholder of PTIC nor of First Pacific. Also, he has not alleged that he was an interested
bidder in the government’s auction sale of the PTIC shares. Finally, he has not shown how, as a nominal shareholder of PLDT, he stands to benefit
from the annulment of the sale of the 111,415 PTIC shares or of any of the sales of the PLDT common shares held by foreigners. In fine, petitioner
has not shown any real interest substantial enough to give him the requisite locus standi to question the sale of the government’s PTIC shares to
First Pacific

Same; Same; A taxpayer is deemed to have the standing to raise a constitutional issue when it is established that public funds have been disbursed
in alleged contravention of the law or the Constitution.—Likewise, petitioner’s assertion that he has standing to bring the suit as a “taxpayer” must
fail. In Gonzales v. Narvasa, We discussed that “a taxpayer is deemed to have the standing to raise a constitutional issue when it is established that
public funds have been disbursed in alleged contravention of the law or the Constitution.” In this case, no public funds have been disbursed. In fact,
the opposite has happened—there is an inflow of funds into the government coffers.

Same; Jurisdiction; Declaratory Relief; Petitions for declaratory relief, annulment of sale and injunction do not fall within the exclusive jurisdiction
of this Court; The proper jurisdiction for declaratory relief is the Regional Trial Court (RTC); Requisites for an Action for Declaratory Relief.—Based
on the foregoing provisos, it is patently clear that petitions for declaratory relief, annulment of sale and injunction do not fall within the exclusive
original jurisdiction of this Court. First, the court with the proper jurisdiction for declaratory relief is the Regional Trial Court (RTC). Sec. 1, Rule 63 of
the Rules of Court stresses that an action for declaratory relief is within the exclusive original jurisdiction of the RTC, viz.: Any person interested
under a deed, will, contract or other written instrument, whose rights are affected by a statute, executive order or regulation, ordinance, or any
other governmental regulation may, before breach or violation thereof, bring an action in the appropriate Regional Trial Court to determine any
question of construction or validity arising, and for a declaration of his rights or duties, thereunder.

An action for declaratory relief also requires the following: (1) a justiciable controversy between persons whose interests are adverse; (2) the party
seeking the relief has a legal interest in the controversy; and (3) the issue is ripe for judicial determination. As previously discussed, petitioner lacks
any real interest in this action; thus, no justiciable controversy between adverse interests exists.

Same; Same; Same; The exercise of such discretion, whether to treat a petition for declaratory relief as one for mandamus, presupposes that the
petition is otherwise viable or meritorious.—Despite this, the ponencia decided to treat the petition for declaratory relief as one for mandamus,
citing the rule that “where the petition has far-reaching implications and raises questions that should be resolved, it may be treated as one for
mandamus.” However, such rule is not absolute. In Macasiano v. National Housing Authority, 224 SCRA 236 (1993), the Court explicitly stated that
the exercise of such discretion, whether to treat a petition for declaratory relief as one for mandamus, presupposes that the petition is otherwise
viable or meritorious. As I shall discuss subsequently in the substantive portion of this opinion, the petition in this case is clearly not viable or
meritorious.

Same; Mandamus; A petition for mandamus is premature if there are administrative remedies available to petitioner.—A petition for mandamus is
premature if there are administrative remedies available to petitioner. Under the doctrine of primary administrative jurisdiction, “courts cannot or
will not determine a controversy where the issues for resolution demand the exercise of sound administrative discretion requiring the special
knowledge, experience, and services of the administrative tribunal to determine technical and intricate matters of fact. In other words, if a case is
such that its determination requires the expertise, specialized training and knowledge of an administrative body, relief must first be obtained in an
administrative proceeding before resort to the courts is had even if the matter may well be within their proper jurisdiction.” Along with this, the
doctrine of exhaustion of administrative remedies also requires that where an administrative remedy is provided by statute relief must be sought
by exhausting this remedy before the courts will act.
Same; Hierarchy of Courts; The doctrine dictates that when jurisdiction is shared concurrently with different courts, the proper suit should first be
filed with the lower-ranking court.—Although this Court, the CA, and the RTC have “concurrent jurisdiction to issue writs of certiorari, prohibition,
mandamus, quo warranto, habeas corpus and injunction, such concurrence does not give the petitioner unrestricted freedom of choice of court
forum.” The doctrine of hierarchy of courts dictates that when jurisdiction is shared concurrently with different courts, the proper suit should first
be filed with the lower-ranking court. Failure to do so is sufficient cause for the dismissal of a petition.

Corporation Law; Capital; The intent of the framers of the Constitution was not to limit the application of the word “capital” to voting or common
shares alone.—Contrary to pronouncement of the ponencia, the intent of the framers of the Constitution was not to limit the application of the
word “capital” to voting or common shares alone. In fact, the Records of the Constitutional Commission reveal that even though the UP Law Center
proposed the phrase “voting stock or controlling interest,” the framers of the Constitution did not adopt this but instead used the word “capital.”

Same; Same; Stockholders, whether holding voting or non-voting stocks, have all the rights, powers and privileges of ownership over their stocks;
Control is another inherent right of ownership.—Stockholders, whether holding voting or non-voting stocks, have all the rights, powers and
privileges of ownership over their stocks. This necessarily includes the right to vote because such is inherent in and incidental to the ownership of
corporate stocks, and as such is a property right. Additionally, control is another inherent right of ownership. The circumstances enumerated in Sec.
6 of the Corporation Code clearly evince this. It gives voting rights to the stocks deemed as non-voting as to fundamental and major corporate
changes. Thus, the issue should not only dwell on the daily management affairs of the corporation but also on the equally important fundamental
changes that may need to be voted on. On this, the “non-voting” shares also exercise control, together with the voting shares.

Same; Same; Securities and Exchange Commission; Securities and Exchange Commission (SEC) defined “capital” as to include both voting and non-
voting in the determination of the nationality of a corporation.—More importantly, the SEC defined “capital” as to include both voting and non-
voting in the determination of the nationality of a corporation, to wit: In view of the foregoing, it is opined that the term “capital” denotes the sum
total of the shares subscribed and paid by the shareholders, or secured to be paid, irrespective of their nomenclature to be issued by the
corporation in the conduct of its operation. Hence, non-voting preferred shares are considered in the computation of the 60-40% Filipino-alien
equity requirement of certain economic activities under the Constitution.

Same; Same; Outstanding Capital Stock; The Corporation Code defines “outstanding capital stock” as the “total shares of stock issued”; It includes
all types of shares.—Similarly, the Corporation Code defines “outstanding capital stock” as the “total shares of stock issued.” It does not distinguish
between common and preferred shares. It includes all types of shares.

ABAD, J., Dissenting Opinion:

Remedial Law; Actions; Jurisdiction; Gamboa actions for injunction, declaratory relief, and declaration of nullity of sale are not among the cases
that can be initiated before the Supreme Court; Only exceptional and compelling circumstances such as cases of national interest and of serious
implications justify direct resort to the Supreme Court for the extraordinary remedy of writ of certiorari, prohibition, or mandamus.—Strictly
speaking, Gamboa actions for injunction, declaratory relief, and declaration of nullity of sale are not among the cases that can be initiated before
the Supreme Court. Those actions belong to some other tribunal. And, although the Court has original jurisdiction in prohibition cases, the Court
shares this authority with the Court of Appeals and the Regional Trial Courts. But this concurrence of jurisdiction does not give the parties absolute
and unrestrained freedom of choice on which court the remedy will be sought. They must observe the hierarchy of courts. As a rule, the Supreme
Court will not entertain direct resort to it unless the remedy desired cannot be obtained in other tribunals. Only exceptional and compelling
circumstances such as cases of national interest and of serious implications justify direct resort to the Supreme Court for the extraordinary remedy
of writ of certiorari, prohibition, or mandamus.

Corporation Law; Capital; The Constitution fails to provide for the meaning of the term “capital” considering that the shares of stock of a
corporation vary in kinds.—The Constitution fails to provide for the meaning of the term “capital,” considering that the shares of stock of a
corporation vary in kinds. The usual classification depends on how profits are to be distributed and which stockholders have the right to vote the
members of the corporation’s board of directors.

Same; Same; The Court should not leave the matter of compliance with the constitutional limit on foreign ownership in public utilities, a matter of
transcendental importance, to judicial legislation especially since any ruling the Court makes on the matter could have deep economic
repercussions; It is apt for Congress to build up on this framework by defining the meaning of “capital.”—Under this confusing legislative signals,
the Court should not leave the matter of compliance with the constitutional limit on foreign ownership in public utilities, a matter of
transcendental importance, to judicial legislation especially since any ruling the Court makes on the matter could have deep economic
repercussions. This is not a concern over which the Court has competence. The 1987 Constitution laid down the general framework for restricting
foreign ownership of public utilities. It is apt for Congress to build up on this framework by defining the meaning of “capital,” establishing rules for
the implementation of the State policy, providing sanctions for its violation, and vesting in the appropriate agency the responsibility for carrying
out the purposes of such policy.

ORIGINAL ACTION in the Supreme Court. Prohibition, Injunction, Declaratory Relief and Declaration of Nullity of Sale of Shares of Stock.

The facts are stated in the opinion of the Court.

Edgar D. Dumlao for China Banking Corporation.

 Office of the General Counsel for respondent Francis Ed Lim.

Sycip, Salazar, Hernandez and Gatmaitan for respondent Manuel V. Pangilinan.

Angara, Abello, Concepcion, Regala and Cruz for Napoleon L. Nazareno.

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of the sale of shares of stock of Philippine
Telecommunications Investment Corporation (PTIC) by the government of the Republic of the Philippines to Metro Pacific Assets Holdings, Inc.
(MPAH), an affiliate of First Pacific Company Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance Telephone Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a franchise and the right to engage in
telecommunications business. In 1969, General Telephone and Electronics Corporation (GTE), an American company and a major PLDT stockholder,
sold 26 percent of the outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several persons,
including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the owner of 111,415 shares of stock of PTIC by virtue of three Deeds of
Assignment executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held by PHI were
sequestered by the Presidential Commission on Good Government (PCGG). The 111,415 PTIC shares, which represent about 46.125 percent of the
outstanding capital stock of PTIC, were later declared by this Court to be owned by the Republic of the Philippines.

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the remaining 54 percent of the outstanding capital stock
of PTIC. On 20 November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine Government announced that it would sell the 111,415
PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, through a public bidding to be conducted on 4 December 2006.
Subsequently, the public bidding was reset to 8 December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio
Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC stockholder and buy the 111,415 PTIC shares by matching
the bid price of Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead, yielded its right to PTIC itself
which was then given by IPC until 2 March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its subsidiary, MPAH, entered
into a Conditional Sale and Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with the
Philippine Government for the price of P25,217,556,000 or US$510,580,189. The sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of PTIC shares is actually an indirect sale of 12 million
shares or about 6.3 percent of the outstanding common shares of PLDT. With the sale, First Pacific’s common shareholdings in PLDT increased from
30.7 percent to 37 percent, thereby increasing the common shareholdings of foreigners in PLDT to about 81.47 percent. This violates Section 11,
Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40 percent.

On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo
Abcede allege the following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business of investment holdings. PTIC held 26,034,263 PLDT common
shares, or 13.847 percent of the total PLDT outstanding common shares. PHI, on the other hand, was incorporated in 1977, and became the owner
of 111,415 PTIC shares or 46.125 percent of the outstanding capital stock of PTIC by virtue of three Deeds of Assignment executed by Ramon
Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently declared by this
Court as part of the ill-gotten wealth of former President Ferdinand Marcos. The sequestered PTIC shares were reconveyed to the Republic of the
Philippines in accordance with this Court’s decision4 which became final and executory on 8 August 2006.

The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent of the outstanding common shares of stock of
PLDT, and designated the Inter-Agency Privatization Council (IPC), composed of the Department of Finance and the PCGG, as the disposing entity.
An invitation to bid was published in seven different newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-bid conference was
held, and the original deadline for bidding scheduled on 4 December 2006 was reset to 8 December 2006. The extension was published in nine
different newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest bidder with a bid of P25,217,556,000. The
government notified First Pacific, the majority owner of PTIC shares, of the bidding results and gave First Pacific until 1 February 2007 to exercise its
right of first refusal in accordance with PTIC’s Articles of Incorporation. First Pacific announced its intention to match Parallax’s bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good Government conducted a public hearing on the particulars of the then
impending sale of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those who attended the public hearing. The HR Committee
Report No. 2270 concluded that: (a) the auction of the government’s 111,415 PTIC shares bore due diligence, transparency and conformity with
existing legal procedures; and (b) First Pacific’s intended acquisition of the government’s 111,415 PTIC shares resulting in First Pacific’s 100%
ownership of PTIC will not violate the 40 percent constitutional limit on foreign ownership of a public utility since PTIC holds only 13.847 percent of
the total outstanding common shares of PLDT. On 28 February 2007, First Pacific completed the acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding for the sale of 111,415 PTIC shares or 46
percent of the outstanding capital stock of PTIC (the remaining 54 percent of PTIC shares was already owned by First Pacific and its affiliates); (b)
Parallax offered the highest bid amounting to P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its shareholders granted
in PTIC’s Articles of Incorporation, MPAH, a First Pacific affiliate, exercised its right of first refusal by matching the highest bid offered for PTIC
shares on 13 February 2007; and (d) on 28 February 2007, the sale was consummated when MPAH paid IPC P25,217,556,000 and the government
delivered the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory relief, and declaration of nullity of sale of the
111,415 PTIC shares. Petitioner claims, among others, that the sale of the 111,415 PTIC shares would result in an increase in First Pacific’s common
shareholdings in PLDT from 30.7 percent to 37 percent, and this, combined with Japanese NTT DoCoMo’s common shareholdings in PLDT, would
result to a total foreign common shareholdings in PLDT of 51.56 percent which is over the 40 percent constitutional limit.6 Petitioner asserts:

“If and when the sale is completed, First Pacific’s equity in PLDT will go up from 30.7 percent to 37.0 percent of its common—or voting-
stockholdings, x x x. Hence, the consummation of the sale will put the two largest foreign investors in PLDT—First Pacific and Japan’s NTT DoCoMo,
which is the world’s largest wireless telecommunications firm, owning 51.56 percent of PLDT common equity. x x x With the completion of the sale,
data culled from the official website of the New York Stock Exchange (www.nyse.com) showed that those foreign entities, which own at least five
percent of common equity, will collectively own 81.47 percent of PLDT’s common equity. x x x

x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which PLDT submitted to the New York Stock Exchange for the
period 2003-2005, revealed that First Pacific and several other foreign entities breached the constitutional limit of 40 percent ownership as early as
2003. x x x”

Petitioner raises the following issues: (1) whether the consummation of the then impending sale of 111,415 PTIC shares to First Pacific violates the
constitutional limit on foreign ownership of a public utility; (2) whether public respondents committed grave abuse of discretion in allowing the
sale of the 111,415 PTIC shares to First Pacific; and (3) whether the sale of common shares to foreigners in excess of 40 percent of the entire
subscribed common capital stock violates the constitutional limit on foreign ownership of a public utility.

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to Intervene and Admit Attached Petition-in-Intervention. In
the Resolution of 28 August 2007, the Court granted the motion and noted the Petition-in-Intervention.

Petitioners-in-intervention “join petitioner Wilson Gamboa x x x in seeking, among others, to enjoin and/or nullify the sale by respondents of the
111,415 PTIC shares to First Pacific or assignee.” Petitioners-in-intervention claim that, as PLDT subscribers, they have a “stake in the outcome of
the controversy x x x where the Philippine Government is completing the sale of government owned assets in [PLDT], unquestionably a public
utility, in violation of the nationality restrictions of the Philippine Constitution.”

The Issue

This Court is not a trier of facts. Factual questions such as those raised by petitioner,9 which indisputably demand a thorough examination of the
evidence of the parties, are generally beyond this Court’s jurisdiction. Adhering to this well-settled principle, the Court shall confine the resolution
of the instant controversy solely on the threshold and purely legal issue of whether the term “capital” in Section 11, Article XII of the Constitution
refers to the total common shares only or to the total outstanding capital stock (combined total of common and non-voting preferred shares) of
PLDT, a public utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks, only the petition for prohibition is within the
original jurisdiction of this court, which however is not exclusive but is concurrent with the Regional Trial Court and the Court of Appeals. The
actions for declaratory relief, injunction, and annulment of sale are not embraced within the original jurisdiction of the Supreme Court. On this
ground alone, the petition could have been dismissed outright.

While direct resort to this Court may be justified in a petition for prohibition,11 the Court shall nevertheless refrain from discussing the grounds in
support of the petition for prohibition since on 28 February 2007, the questioned sale was consummated when MPAH paid IPC P25,217,556,000
and the government delivered the certificates for the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term “capital” in Section 11, Article XII of the Constitution has far-
reaching implications to the national economy, the Court treats the petition for declaratory relief as one for mandamus.
In Salvacion v. Central Bank of the Philippines, the Court treated the petition for declaratory relief as one for mandamus considering the grave
injustice that would result in the interpretation of a banking law. In that case, which involved the crime of rape committed by a foreign tourist
against a Filipino minor and the execution of the final judgment in the civil case for damages on the tourist’s dollar deposit with a local bank, the
Court declared Section 113 of Central Bank Circular No. 960, exempting foreign currency deposits from attachment, garnishment or any other
order or process of any court, inapplicable due to the peculiar circumstances of the case. The Court held that “injustice would result especially to a
citizen aggrieved by a foreign guest like accused x x x” that would “negate Article 10 of the Civil Code which provides that ‘in case of doubt in the
interpretation or application of laws, it is presumed that the lawmaking body intended right and justice to prevail.’ ” The Court therefore required
respondents Central Bank of the Philippines, the local bank, and the accused to comply with the writ of execution issued in the civil case for
damages and to release the dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed aside the procedural infirmity of the petition for declaratory
relief and treated the same as one for mandamus. In Alliance, the issue was whether the government unlawfully excluded petitioners, who were
government employees, from the enjoyment of rights to which they were entitled under the law. Specifically, the question was: “Are the branches,
agencies, subdivisions, and instrumentalities of the Government, including government owned or controlled corporations included among the four
‘employers’ under Presidential Decree No. 851 which are required to pay their employees x x x a thirteenth (13th) month pay x x x ?” The
Constitutional principle involved therein affected all government employees, clearly justifying a relaxation of the technical rules of procedure, and
certainly requiring the interpretation of the assailed presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as one for mandamus if the issue involved has far-reaching
implications. As this Court held in Salvacion:

“The Court has no original and exclusive jurisdiction over a petition for declaratory relief. However, exceptions to this rule have been recognized.
Thus, where the petition has far-reaching implications and raises questions that should be resolved, it may be treated as one for mandamus.”

In the present case, petitioner seeks primarily the interpretation of the term “capital” in Section 11, Article XII of the Constitution. He prays that
this Court declare that the term “capital” refers to common shares only, and that such shares constitute “the sole basis in determining foreign
equity in a public utility.” Petitioner further asks this Court to declare any ruling inconsistent with such interpretation unconstitutional.

The interpretation of the term “capital” in Section 11, Article XII of the Constitution has far-reaching implications to the national economy. In fact, a
resolution of this issue will determine whether Filipinos are masters, or second class citizens, in their own country. What is at stake here is whether
Filipinos or foreigners will have effective control of the national economy. Indeed, if ever there is a legal issue that has far-reaching implications to
the entire nation, and to future generations of Filipinos, it is the threshhold legal issue presented in this case.

The Court first encountered the issue on the definition of the term “capital” in Section 11, Article XII of the Constitution in the case of Fernandez v.
Cojuangco, docketed as G.R. No. 157360.16 That case involved the same public utility (PLDT) and substantially the same private respondents.
Despite the importance and novelty of the constitutional issue raised therein and despite the fact that the petition involved a purely legal question,
the Court declined to resolve the case on the merits, and instead denied the same for disregarding the hierarchy of courts.17 There, petitioner
Fernandez assailed on a pure question of law the Regional Trial Court’s Decision of 21 February 2003 via a petition for review under Rule 45.

The Court’s Resolution, denying the petition, became final on 21 December 2004.

The instant petition therefore presents the Court with another opportunity to finally settle this purely legal issue which is of transcendental
importance to the national economy and a fundamental requirement to a faithful adherence to our Constitution. The Court must forthwith seize
such opportunity, not only for the benefit of the litigants, but more significantly for the benefit of the entire Filipino people, to ensure, in the words
of the Constitution, “a self-reliant and independent national economy effectively controlled by Filipinos.”18 Besides, in the light of vague and
confusing positions taken by government agencies on this purely legal issue, present and future foreign investors in this country deserve, as a
matter of basic fairness, a categorical ruling from this Court on the extent of their participation in the capital of public utilities and other
nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue has remained unresolved for over 75 years since the 1935
Constitution. There is no reason for this Court to evade this ever recurring fundamental issue and delay again defining the term “capital,” which
appears not only in Section 11, Article XII of the Constitution, but also in Section 2, Article XII on co-production and joint venture agreements for
the development of our natural resources, in Section 7, Article XII on ownership of private lands,20 in Section 10, Article XII on the reservation of
certain investments to Filipino citizens,21 in Section 4(2), Article XIV on the ownership of educational institutions,22 and in Section 11(2), Article
XVI on the ownership of advertising companies.

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question the subject sale, which he claims to violate the
nationality requirement prescribed in Section 11, Article XII of the Constitution. If the sale indeed violates the Constitution, then there is a
possibility that PLDT’s franchise could be revoked, a dire consequence directly affecting petitioner’s interest as a stockholder.
More importantly, there is no question that the instant petition raises matters of transcendental importance to the public. The fundamental and
threshold legal issue in this case, involving the national economy and the economic welfare of the Filipino people, far outweighs any perceived
impediment in the legal personality of the petitioner to bring this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters of transcendental importance to the public, thus:

“In Tañada v. Tuvera, the Court asserted that when the issue concerns a public right and the object of mandamus is to obtain the enforcement of a
public duty, the people are regarded as the real parties in interest; and because it is sufficient that petitioner is a citizen and as such is interested in
the execution of the laws, he need not show that he has any legal or special interest in the result of the action. In the aforesaid case, the petitioners
sought to enforce their right to be informed on matters of public concern, a right then recognized in Section 6, Article IV of the 1973 Constitution,
in connection with the rule that laws in order to be valid and enforceable must be published in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners’ legal standing, the Court declared that the right they sought to be enforced ‘is a public right recognized
by no less than the fundamental law of the land.’

Legaspi v. Civil Service Commission, while reiterating Tañada, further declared that ‘when a mandamus proceeding involves the assertion of a
public right, the requirement of personal interest is satisfied by the mere fact that petitioner is a citizen and, therefore, part of the general ‘public’
which possesses the right.’

Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been involved under the questioned contract for the
development, management and operation of the Manila International Container Terminal, ‘public interest [was] definitely involved considering the
important role [of the subject contract] . . . in the economic development of the country and the magnitude of the financial consideration involved.’
We concluded that, as a consequence, the disclosure provision in the Constitution would constitute sufficient authority for upholding the
petitioner’s standing.”

Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public importance, the petitioner has the requisite locus
standi.

Definition of the Term “Capital” in Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the Filipinization of public utilities, to wit:

“Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned
by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall
any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when
the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign
investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines.”

The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution, thus:

“Section 5. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of the capital of which is
owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither
shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the National
Assembly when the public interest so requires. The State shall encourage equity participation in public utilities by the general public. The
participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in the capital
thereof.”

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935 Constitution, viz.:

“Section 8. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or other entities organized under the laws of the Philippines sixty per centum of the capital of which is owned by
citizens of the Philippines, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. No
franchise or right shall be granted to any individual, firm, or corporation, except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the public interest so requires.”

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission, reminds us that the Filipinization provision in the 1987
Constitution is one of the products of the spirit of nationalism which gripped the 1935 Constitutional Convention. The 1987 Constitution “provides
for the Filipinization of public utilities by requiring that any form of authorization for the operation of public utilities should be granted only to
‘citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital
is owned by such citizens.’ The provision is [an express] recognition of the sensitive and vital position of public utilities both in the national
economy and for national security.” The evident purpose of the citizenship requirement is to prevent aliens from assuming control of public
utilities, which may be inimical to the national interest. This specific provision explicitly reserves to Filipino citizens control of public utilities,
pursuant to an overriding economic goal of the 1987 Constitution: to “conserve and develop our patrimony” and ensure “a self-reliant and
independent national economy effectively controlled by Filipinos.”

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum nationality requirement prescribed in Section
11, Article XII of the Constitution. Hence, for a corporation to be granted authority to operate a public utility, at least 60 percent of its “capital”
must be owned by Filipino citizens.

The crux of the controversy is the definition of the term “capital.” Does the term “capital” in Section 11, Article XII of the Constitution refer to
common shares or to the total outstanding capital stock (combined total of common and non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers only to common shares because such shares are
entitled to vote and it is through voting that control over a corporation is exercised. Petitioner posits that the term “capital” in Section 11, Article
XII of the Constitution refers to “the ownership of common capital stock subscribed and outstanding, which class of shares alone, under the
corporate set-up of PLDT, can vote and elect members of the board of directors.” It is undisputed that PLDT’s non-voting preferred shares are held
mostly by Filipino citizens. This arose from Presidential Decree No. 217, issued on 16 June 1973 by then President Ferdinand Marcos, requiring
every applicant of a PLDT telephone line to subscribe to non-voting preferred shares to pay for the investment cost of installing the telephone line.

Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt petitioner’s definition of the term “capital.”33Petitioners-in-
intervention allege that “the approximate foreign ownership of common capital stock of PLDT x x x already amounts to at least 63.54% of the total
outstanding common stock,” which means that foreigners exercise significant control over PLDT, patently violating the 40 percent foreign equity
limitation in public utilities prescribed by the Constitution.

Respondents, on the other hand, do not offer any definition of the term “capital” in Section 11, Article XII of the Constitution. More importantly,
private respondents Nazareno and Pangilinan of PLDT do not dispute that more than 40 percent of the common shares of PLDT are held by
foreigners.

In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps mainly on the procedural infirmities of the petition and the
supposed violation of the due process rights of the “affected foreign common shareholders.” Respondent Nazareno does not deny petitioner’s
allegation of foreigners’ dominating the common shareholdings of PLDT. Nazareno stressed mainly that the petition “seeks to divest foreign
common shareholders purportedly exceeding 40% of the total common shareholdings in PLDT of their ownership over their shares.” Thus, “the
foreign natural and juridical PLDT shareholders must be impleaded in this suit so that they can be heard.”34 Essentially, Nazareno invokes denial of
due process on behalf of the foreign common shareholders.

While Nazareno does not introduce any definition of the term “capital,” he states that “among the factual assertions that need to be established to
counter petitioner’s allegations is the uniform interpretation by government agencies (such as the SEC), institutions and corporations (such as the
Philippine National Oil Company-Energy Development Corporation or PNOC-EDC) of including both preferred shares and common shares in
“controlling interest” in view of testing compliance with the 40% constitutional limitation on foreign ownership in public utilities.”

Similarly, respondent Manuel V. Pangilinan does not define the term “capital” in Section 11, Article XII of the Constitution. Neither does he refute
petitioner’s claim of foreigners holding more than 40 percent of PLDT’s common shares. Instead, respondent Pangilinan focuses on the procedural
flaws of the petition and the alleged violation of the due process rights of foreigners. Respondent Pangilinan emphasizes in his Memorandum (1)
the absence of this Court’s jurisdiction over the petition; (2) petitioner’s lack of standing; (3) mootness of the petition; (4) non-availability of
declaratory relief; and (5) the denial of due process rights. Moreover, respondent Pangilinan alleges that the issue should be whether “owners of
shares in PLDT as well as owners of shares in companies holding shares in PLDT may be required to relinquish their shares in PLDT and in those
companies without any law requiring them to surrender their shares and also without notice and trial.”

Respondent Pangilinan further asserts that “Section 11, [Article XII of the Constitution] imposes no nationality requirement on the shareholders of
the utility company as a condition for keeping their shares in the utility company.” According to him, “Section 11 does not authorize taking one
person’s property (the shareholder’s stock in the utility company) on the basis of another party’s alleged failure to satisfy a requirement that is a
condition only for that other party’s retention of another piece of property (the utility company being at least 60% Filipino-owned to keep its
franchise).”

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and Chairman
Fe Barin, is likewise silent on the definition of the term “capital.” In its Memorandum dated 24 September 2007, the OSG also limits its discussion
on the supposed procedural defects of the petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of interested parties, and lack of basis for
injunction. The OSG does not present any definition or interpretation of the term “capital” in Section 11, Article XII of the Constitution. The OSG
contends that “the petition actually partakes of a collateral attack on PLDT’s franchise as a public utility,” which in effect requires a “full-blown trial
where all the parties in interest are given their day in court.”

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the Philippine Stock Exchange (PSE), does not also define the
term “capital” and seeks the dismissal of the petition on the following grounds: (1) failure to state a cause of action against Lim; (2) the PSE
allegedly implemented its rules and required all listed companies, including PLDT, to make proper and timely disclosures; and (3) the reliefs prayed
for in the petition would adversely impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder of record of PLDT, contended that the term
“capital” in the 1987 Constitution refers to shares entitled to vote or the common shares. Fernandez explained thus:

“The forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution refers to ownership of shares of stock entitled to
vote, i.e., common shares, considering that it is through voting that control is being exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions on fully nationalized and partially nationalized
activities is for Filipino nationals to be always in control of the corporation undertaking said activities. Otherwise, if the Trial Court’s ruling
upholding respondents’ arguments were to be given credence, it would be possible for the ownership structure of a public utility corporation to be
divided into one percent (1%) common stocks and ninety-nine percent (99%) preferred stocks. Following the Trial Court’s ruling adopting
respondents’ arguments, the common shares can be owned entirely by foreigners thus creating an absurd situation wherein foreigners, who are
supposed to be minority shareholders, control the public utility corporation

xxxx

Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial ownership and the controlling interest.

xxxx

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution refers to ownership of shares of
stock entitled to vote, i.e., common shares. Furthermore, ownership of record of shares will not suffice but it must be shown that the legal and
beneficial ownership rests in the hands of Filipino citizens. Consequently, in the case of petitioner PLDT, since it is already admitted that the voting
interests of foreigners which would gain entry to petitioner PLDT by the acquisition of SMART shares through the Questioned Transactions is
equivalent to 82.99%, and the nominee arrangements between the foreign principals and the Filipino owners is likewise admitted, there is,
therefore, a violation of Section 11, Article XII of the Constitution.

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court to support the proposition that the meaning of
the word “capital” as used in Section 11, Article XII of the Constitution allegedly refers to the sum total of the shares subscribed and paid-in by the
shareholder and it allegedly is immaterial how the stock is classified, whether as common or preferred, cannot stand in the face of a clear
legislative policy as stated in the FIA which took effect in 1991 or way after said opinions were rendered, and as clarified by the above-quoted
Amendments. In this regard, suffice it to state that as between the law and an opinion rendered by an administrative agency, the law indubitably
prevails. Moreover, said Opinions are merely advisory and cannot prevail over the clear intent of the framers of the Constitution.

In the same vein, the SEC’s construction of Section 11, Article XII of the Constitution is at best merely advisory for it is the courts that finally
determine what a law means.”

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles
Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued that the term
“capital” in Section 11, Article XII of the Constitution includes preferred shares since the Constitution does not distinguish among classes of stock,
thus:

16. The Constitution applies its foreign ownership limitation on the corporation’s “capital,” without distinction as to classes of shares.

xxx

In this connection, the Corporation Code—which was already in force at the time the present (1987) Constitution was drafted—defined
outstanding capital stock as follows:

Section 137. Outstanding capital stock defined.—The term “outstanding capital stock”, as used in this Code, means the total shares of stock
issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares.

Section 137 of the Corporation Code also does not distinguish between common and preferred shares, nor exclude either class of shares, in
determining the outstanding capital stock (the “capital”) of a corporation. Consequently, petitioner’s suggestion to reckon PLDT’s foreign equity
only on the basis of PLDT’s outstanding common shares is without legal basis. The language of the Constitution should be understood in the sense
it has in common use.

17. But even assuming that resort to the proceedings of the Constitutional Commission is necessary, there is nothing in the Record of the
Constitutional Commission (Vol. III)—which petitioner misleadingly cited in the Petition x x x—which supports petitioner’s view that only common
shares should form the basis for computing a public utility’s foreign equity.

18. In addition, the SEC—the government agency primarily responsible for implementing the Corporation Code, and which also has the
responsibility of ensuring compliance with the Constitution’s foreign equity restrictions as regards nationalized activities x x x—has categorically
ruled that both common and preferred shares are properly considered in determining outstanding capital stock and the nationality composition
thereof.

We agree with petitioner and petitioners-in-intervention. The term “capital” in Section 11, Article XII of the Constitution refers only to shares of
stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital
stock comprising both common and non-voting preferred shares.

The Corporation Code of the Philippines classifies shares as common or preferred, thus:

Sec. 6. Classification of shares.—The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which
classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share
may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of
shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of
the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The Board of Directors, where
authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to
the corporation or to its creditors in respect thereto: Provided, That shares without par value may not be issued for a consideration less than the
value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par value shares shall
be treated as capital and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every
other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless
be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code; an

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall
be deemed to refer only to stocks with voting rights.”

Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the corporation. This is exercised through
his vote in the election of directors because it is the board of directors that controls or manages the corporation. In the absence of provisions in the
articles of incorporation denying voting rights to preferred shares, preferred shares have the same voting rights as common shares. However,
preferred shareholders are often excluded from any control, that is, deprived of the right to vote in the election of directors and on other matters,
on the theory that the preferred shareholders are merely investors in the corporation for income in the same manner as bondholders.

In fact, under the Corporation Code only preferred or redeemable shares can be deprived of the right to vote. Common shares cannot be deprived
of the right to vote in any corporate meeting, and any provision in the articles of incorporation restricting the right of common shareholders to vote
is invalid.
Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no voting rights,
the term “capital” in Section 11, Article XII of the Constitution refers only to common shares. However, if the preferred shares also have the right to
vote in the election of directors, then the term “capital” shall include such preferred shares because the right to participate in the control or
management of the corporation is exercised through the right to vote in the election of directors. In short, the term “capital” in Section 11, Article
XII of the Constitution refers only to shares of stock that can vote in the election of directors.

This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino citizens the control and
management of public utilities. As revealed in the deliberations of the Constitutional Commission, “capital” refers to the voting stock or controlling
interest of a corporation, to wit:

MR. NOLLEDO.In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section
9 and 2/3-1/3 in Section 15.

MR. VILLEGAS.That is right.

MR. NOLLEDO.In teaching law, we are always faced with this question: “Where do we base the equity requirement, is it on the authorized capital
stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation”? Will the Committee please enlighten me on this?

MR. VILLEGAS.We have just had a long discussion with the members of the team from the UP Law Center who provided us a draft. The phrase that
is contained here which we adopted from the UP draft is “60 percent of voting stock.”

MR. NOLLEDO.That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be entitled to
vote.

MR. VILLEGAS.That is right.

MR. NOLLEDO.Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in another
corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS.Yes, that is the understanding of the Committee.

MR. NOLLEDO.Therefore, we need additional Filipino capital?

MR. VILLEGAS.Yes.

xxx

MR. AZCUNA.May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS.The portion accepted by the Committee is the deletion of the phrase “voting stock or controlling interest.”

MR. AZCUNA.Hence, without the Davide amendment, the committee report would read: “corporations or associations at least sixty percent of
whose CAPITAL is owned by such citizens.”

MR. VILLEGAS.Yes.

MR. AZCUNA.So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be owned by citizens.

MR. VILLEGAS.That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the capital is owned by them,
but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So, we can have a situation where the corporation is controlled by
foreigners despite being the minority because they have the voting capital. That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word “stock” as stated in the 1973 and 1935 Constitutions is that according to Commissioner
Rodrigo, there are associations that do not have stocks. That is why we say “CAPITAL.”

MR. AZCUNA. We should not eliminate the phrase “controlling interest.”

MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis supplied)

Thus, 60 percent of the “capital” assumes, or should result in, “controlling interest” in the corporation. Reinforcing this interpretation of the term
“capital,” as referring to controlling interest or shares entitled to vote, is the definition of a “Philippine national” in the Foreign Investments Act of
1991,50 to wit

SEC. 3. Definitions.—As used in this Act:

a. The term “Philippine national” shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; or a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly owned
by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%)
of the members of the Board of Directors of each of both corporations must be citizens of the Philippines, in order that the corporation, shall be
considered a “Philippine national.” (Emphasis supplied

In explaining the definition of a “Philippine national,” the Implementing Rules and Regulations of the Foreign Investments Act of 1991 provide:

“b. “Philippine national” shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by the citizens of the
Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent [60%] of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least sixty percent [60%] of the fund will accrue to the benefit of the Philippine nationals;
Provided, that where a corporation its non-Filipino stockholders own stocks in a Securities and Exchange Commission [SEC] registered enterprise, at
least sixty percent [60%] of the capital stock outstanding and entitled to vote of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent [60%] of the members of the Board of Directors of each of both corporation must be citizens of the
Philippines, in order that the corporation shall be considered a Philippine national. The control test shall be applied for this purpose.

Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital stock whether fully paid
or not, but only such stocks which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino
equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been
assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-Philippine nationals.”

Mere legal title is insufficient to meet the 60 percent Filipino-owned “capital” required in the Constitution. Full beneficial ownership of 60 percent
of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate. Otherwise, the corporation is
“considered as non-Philippine national[s].”

Under Section 10, Article XII of the Constitution, Congress may “reserve to citizens of the Philippines or to corporations or associations at least sixty
per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments.” Thus,
in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to corporations at least sixty percent of the “capital” of
which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine
Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas
Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer
Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term “capital” in Section 11, Article XII of the
Constitution is also used in the same context in numerous laws reserving certain areas of investments to Filipino citizens

To construe broadly the term “capital” as the total outstanding capital stock, including both common and non-voting preferred shares, grossly
contravenes the intent and letter of the Constitution that the “State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos.” A broad definition unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control of
the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term “capital.” Let us assume that a corporation has 100 common shares
owned by foreigners and 1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share having a par value of one peso
(P1.00) per share. Under the broad definition of the term “capital,” such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming majority, or more than 99.999 percent, of the total outstanding
capital stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the election of directors, even if they hold only 100
shares. The foreigners, with a minuscule equity of less than 0.001 percent, exercise control over the public utility. On the other hand, the Filipinos,
holding more than 99.999 percent of the equity, cannot vote in the election of directors and hence, have no control over the public utility. This
starkly circumvents the intent of the framers of the Constitution, as well as the clear language of the Constitution, to place the control of public
utilities in the hands of Filipinos. It also renders illusory the State policy of an independent national economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact exists in the present case.
Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors. PLDT’s Articles of Incorporation expressly
state that “the holders of Serial Preferred Stock shall not be entitled to vote at any meeting of the stockholders for the election of directors or for
any other purpose or otherwise participate in any action taken by the corporation or its stockholders, or to receive notice of any meeting of
stockholders.”

On the other hand, holders of common shares are granted the exclusive right to vote in the election of directors. PLDT’s Articles of Incorporation
state that “each holder of Common Capital Stock shall have one vote in respect of each share of such stock held by him on all matters voted upon
by the stockholders, and the holders of Common Capital Stock shall have the exclusive right to vote for the election of directors and for all other
purposes.”

In short, only holders of common shares can vote in the election of directors, meaning only common shareholders exercise control over PLDT.
Conversely, holders of preferred shares, who have no voting rights in the election of directors, do not have any control over PLDT. In fact, under
PLDT’s Articles of Incorporation, holders of common shares have voting rights for all purposes, while holders of preferred shares have no voting
right for any purpose whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common shares of PLDT. In fact, based on PLDT’s 2010
General Information Sheet (GIS), which is a document required to be submitted annually to the Securities and Exchange Commission, foreigners
hold 120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares. In other words, foreigners hold 64.27% of the
total number of PLDT’s common shares, while Filipinos hold only 35.73%. Since holding a majority of the common shares equates to control, it is
clear that foreigners exercise control over PLDT. Such amount of control unmistakably exceeds the allowable 40 percent limit on foreign ownership
of public utilities expressly mandated in Section 11, Article XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009, as submitted to the SEC, shows that per share the SIP preferred shares earn a pittance in
dividends compared to the common shares. PLDT declared dividends for the common shares at P70.00 per share, while the declared dividends for
the preferred shares amounted to a measly P1.00 per share.

So the preferred shares not only cannot vote in the election of directors, they also have very little and obviously negligible dividend earning
capacity compared to common shares.

As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of PLDT common shares is P5.00 per share, whereas the par value of
preferred shares is P10.00 per share. In other words, preferred shares have twice the par value of common shares but cannot elect directors and
have only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners own only a
minuscule 0.56% of the preferred shares.61 Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while common
shares constitute only 22.15%.62 This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares but with the
common shares, blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipinos in accordance with the
constitutional mandate. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is
constitutionally required for the State’s grant of authority to operate a public utility. The undisputed fact that the PLDT preferred shares, 99.44%
owned by Filipinos, are non-voting and earn only 1/70 of the dividends that PLDT common shares earn, grossly violates the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership of a public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the dividends, of PLDT. This directly contravenes
the express command in Section 11, Article XII of the Constitution that “[n]o franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to x x x corporations x x x organized under the laws of the Philippines, at least sixty per centum
of whose capital is owned by such citizens x x x.”

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises the sole right to vote in the election of
directors, and thus exercise control over PLDT; (2) Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the voting stock,
and thus do not exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only
1/70 of the dividends that common shares earn;63 (5) preferred shares have twice the par value of common shares; and (6) preferred shares
constitute 77.85% of the authorized capital stock of PLDT and common shares only 22.15%. This kind of ownership and control of a public utility is a
mockery of the Constitution.

Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock market value of P2,328.00 per share, while PLDT
preferred shares with a par value of P10.00 per share have a current stock market value ranging from only P10.92 to P11.06 per share, is a glaring
confirmation by the market that control and beneficial ownership of PLDT rest with the common shares, not with the preferred shares.

Indisputably, construing the term “capital” in Section 11, Article XII of the Constitution to include both voting and non-voting shares will result in
the abject surrender of our telecommunications industry to foreigners, amounting to a clear abdication of the State’s constitutional duty to limit
control of public utilities to Filipino citizens. Such an interpretation certainly runs counter to the constitutional provision reserving certain areas of
investment to Filipino citizens, such as the exploitation of natural resources as well as the ownership of land, educational institutions and
advertising businesses. The Court should never open to foreign control what the Constitution has expressly reserved to Filipinos for that would be a
betrayal of the Constitution and of the national interest. The Court must perform its solemn duty to defend and uphold the intent and letter of the
Constitution to ensure, in the words of the Constitution, “a self-reliant and independent national economy effectively controlled by Filipinos.”

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly reserving to Filipinos specific areas of investment, such
as the development of natural resources and ownership of land, educational institutions and advertising business, is self-executing. There is no
need for legislation to implement these self-executing provisions of the Constitution. The rationale why these constitutional provisions are self-
executing was explained in Manila Prince Hotel v. GSIS, thus:

“x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a constitutional mandate, the presumption now is that all
provisions of the constitution are self-executing. If the constitutional provisions are treated as requiring legislation instead of self-executing, the
legislature would have the power to ignore and practically nullify the mandate of the fundamental law. This can be cataclysmic. That is why the
prevailing view is, as it has always been, that —

. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-executing. . . . Unless the contrary is clearly
intended, the provisions of the Constitution should be considered self-executing, as a contrary rule would give the legislature discretion to
determine when, or whether, they shall be effective. These provisions would be subordinated to the will of the lawmaking body, which could make
them entirely meaningless by simply refusing to pass the needed implementing statute.” (Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S. Puno, later Chief Justice, agreed that constitutional
provisions are presumed to be self-executing. Justice Puno stated:

“Courts as a rule consider the provisions of the Constitution as self-executing, rather than as requiring future legislation for their enforcement. The
reason is not difficult to discern. For if they are not treated as self-executing, the mandate of the fundamental law ratified by the sovereign people
can be easily ignored and nullified by Congress. Suffused with wisdom of the ages is the unyielding rule that legislative actions may give breath to
constitutional rights but congressional inaction should not suffocate them.

Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches and seizures, the rights of a person under custodial
investigation, the rights of an accused, and the privilege against self-incrimination. It is recognized that legislation is unnecessary to enable courts
to effectuate constitutional provisions guaranteeing the fundamental rights of life, liberty and the protection of property. The same treatment is
accorded to constitutional provisions forbidding the taking or damaging of property for public use without just compensation.”

Thus, in numerous cases, this Court, even in the absence of implementing legislation, applied directly the provisions of the 1935, 1973 and 1987
Constitutions limiting land ownership to Filipinos. In Soriano v. Ong Hoo, this Court ruled:

“x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of his land to an alien, and as both the citizen and the alien
have violated the law, none of them should have a recourse against the other, and it should only be the State that should be allowed to intervene
and determine what is to be done with the property subject of the violation. We have said that what the State should do or could do in such
matters is a matter of public policy, entirely beyond the scope of judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G.R. No. L-5996, June
27, 1956.) While the legislature has not definitely decided what policy should be followed in cases of violations against the constitutional
prohibition, courts of justice cannot go beyond by declaring the disposition to be null and void as violative of the Constitution. x x x”

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the 1935 Constitution, or over the last 75 years, not
one of the constitutional provisions expressly reserving specific areas of investments to corporations, at least 60 percent of the “capital” of which is
owned by Filipinos, was enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions miserably failed to effectively reserve to
Filipinos specific areas of investment, like the operation by corporations of public utilities, the exploitation by corporations of mineral resources,
the ownership by corporations of real estate, and the ownership of educational institutions. All the legislatures that convened since 1935 also
miserably failed to enact legislations to implement these vital constitutional provisions that determine who will effectively control the national
economy, Filipinos or foreigners. This Court cannot allow such an absurd interpretation of the Constitution.

This Court has held that the SEC “has both regulatory and adjudicative functions.” Under its regulatory functions, the SEC can be compelled by
mandamus to perform its statutory duty when it unlawfully neglects to perform the same. Under its adjudicative or quasi-judicial functions, the SEC
can be also be compelled by mandamus to hear and decide a possible violation of any law it administers or enforces when it is mandated by law to
investigate such violation.

Under Section 17(4) of the Corporation Code, the SEC has the regulatory function to reject or disapprove the Articles of Incorporation of any
corporation where “the required percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied
with as required by existing laws or the Constitution.”

Thus, the SEC is the government agency tasked with the statutory duty to enforce the nationality requirement prescribed in Section 11, Article XII
of the Constitution on the ownership of public utilities. This Court, in a petition for declaratory relief that is treated as a petition for mandamus as
in the present case, can direct the SEC to perform its statutory duty under the law, a duty that the SEC has apparently unlawfully neglected to do
based on the 2010 GIS that respondent PLDT submitted to the SEC.

Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the “power and function” to “suspend or revoke, after proper
notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by
law.” The SEC is mandated under Section 5(d) of the same Code with the “power and function” to “investigate x x x the activities of persons to
ensure compliance” with the laws and regulations that SEC administers or enforces. The GIS that all corporations are required to submit to SEC
annually should put the SEC on guard against violations of the nationality requirement prescribed in the Constitution and existing laws. This Court
can compel the SEC, in a petition for declaratory relief that is treated as a petition for mandamus as in the present case, to hear and decide a
possible violation of Section 11, Article XII of the Constitution in view of the ownership structure of PLDT’s voting shares, as admitted by
respondents and as stated in PLDT’s 2010 GIS that PLDT submitted to SEC.

WHEREFORE, we PARTLY GRANT the petition and rule that the term “capital” in Section 11, Article XII of the 1987 Constitution refers only to shares
of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital
stock (common and non-voting preferred shares). Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this
definition of the term “capital” in determining the extent of allowable foreign ownership in respondent Philippine Long Distance Telephone
Company, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law

SO ORDERED.

Leonardo-De Castro, Brion, Peralta, Bersamin, Del Castillo, Villarama, Jr., Perez, Mendoza and Sereno, JJ., concur.

Corona, J., I join the dissent of Mr. Justice Velasco. Velasco, Jr., J., I Dissent.

Abad, J., See my Dissenting Opinion.

SEPARATE DISSENTING OPINION

VELASCO, JR., J.:With due respect, I dissent.

Tax Incentives

G.R. Nos. 106949-50 December 1, 1995

PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP), petitioner,

vs.
COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

G.R. Nos. 106984-85 December 1, 1995

COMMISSIONER INTERNAL REVENUE, petitioner,

vs.
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES, THE COURT OF APPEALS and THE COURT OF TAX
APPEALS, respondents.

FELICIANO, J:

The Paper Industries Corporation of the Philippines ("Picop"), which is petitioner in G.R. Nos. 106949-50 and private respondent in
G.R. Nos. 106984-85, is a Philippine corporation registered with the Board of Investments ("BOI") as a preferred pioneer enterprise with
respect to its integrated pulp and paper mill, and as a preferred non-pioneer enterprise with respect to its integrated plywood and
veneer mills.

On 21 April 1983, Picop received from the Commissioner of Internal Revenue ("CIR") two (2) letters of assessment and demand both
dated 31 March 1983: (a) one for deficiency transaction tax and for documentary and science stamp tax; and (b) the other for deficiency
income tax for 1977, for an aggregate amount of P88,763,255.00. These assessments were computed as follows:

Transaction Tax

Interest payments on money market borrowings P 45,771,849.00

———————
35% Transaction tax due thereon 16,020,147.00
Add: 25% surcharge 4,005,036.75
——————
T o t a l P 20,025,183.75
Add: 14% int. fr.
1-20-78 to 7-31-80 P 7,093,302.57
20% int, fr.
8-1-80 to 3-31-83 10,675,523.58
——————
17,768,826.15
 ——————
P 37,794,009.90
Documentary and Science Stamps Tax
Total face value of debentures P100,000,000.00
Documentary Stamps Tax Due
(P0.30 x P100,000.000 )
( P200 ) P 150,000.00
Science Stamps Tax Due
(P0.30 x P100,000,000 )
( P200 ) P 150,000.00
——————
T o t a l P 300,000.00
Add: Compromise for
non-affixture 300.00
——————
300,300.00
——————
TOTAL AMOUNT DUE AND COLLECTIBLE P 38,094,309.90
===========
Deficiency Income Tax for 1977
Net income per return P 258,166.00
Add: Unallowable deductions
1) Disallowed deductions availed of under R.A. No. 5186 P 44,332,980.00
2) Capitalized interest expenses on funds used for acquisition of machinery & other equipment 42,840,131.00
3) Unexplained financial guarantee expense 1,237,421.00
4) Understatement of sales 2,391,644.00
5) Overstatement of cost of sales 604,018.00
——————
P91,406,194.00
Net income per investigation P91,664,360.00
Income tax due thereon 34,734,559.00
Less: Tax already assessed per return 80,358.00
——————
Deficiency P34,654,201.00 Add:
14% int. fr.
4-15-78 to 7-31-81 P 11,128,503.56
20% int. fr. 8-1-80 to
4-15-81 4,886,242.34
——————
P16,014,745.90
——————
TOTAL AMOUNT DUE AND COLLECTIBLE P 50,668,946.90 1
===========

On 26 April 1983, Picop protested the assessment of deficiency transaction tax and documentary and science stamp taxes. Picop also
protested on 21 May 1983 the deficiency income tax assessment for 1977. These protests were not formally acted upon by respondent
CIR. On 26 September 1984, the CIR issued a warrant of distraint on personal property and a warrant of levy on real property against
Picop, to enforce collection of the contested assessments; in effect, the CIR denied Picop's protests.

Thereupon, Picop went before the Court of Tax Appeals ("CTA") appealing the assessments. After trial, the CTA rendered a decision
dated 15 August 1989, modifying the findings of the CIR and holding Picop liable for the reduced aggregate amount of P20,133,762.33,
which was itemized in the dispositive portion of the decision as follows:

35% Transaction Tax P 16,020,113.20

Documentary & Science
Stamp Tax 300,300.00
Deficiency Income Tax Due 3,813,349.33

——————

TOTAL AMOUNT DUE AND PAYABLE P 20,133,762.53 2

===========

Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision of the CTA. In two (2)
Resolutions dated 7 February 1990 and 19 February 1990, respectively, the Court referred the two (2) Petitions to the Court of Appeals.
The Court of Appeals consolidated the two (2) cases and rendered a decision, dated 31 August 1992, which further reduced the liability
of Picop to P6,338,354.70. The dispositive portion of the Court of Appeals decision reads as follows:

WHEREFORE, the appeal of the Commissioner of Internal Revenue is denied for lack of merit. The judgment against
PICOP is modified, as follows:

1. PICOP is declared liable for the 35% transaction tax in the amount of P3,578,543.51;

2. PICOP is absolved from the payment of documentary and science stamp tax of P300,000.00 and the compromise
penalty of P300.00;

3. PICOP shall pay 20% interest per annum on the deficiency income tax of P1,481,579.15, for a period of three (3)
years from 21 May 1983, or in the total amount of P888,947.49, and a surcharge of 10% on the latter amount, or
P88,984.75.

No pronouncement as to costs.

SO ORDERED.

Picop and the CIR once more filed separate Petitions for Review before the Supreme Court. These cases were consolidated and, on 23
August 1993, the Court resolved to give due course to both Petitions in G.R. Nos. 106949-50 and 106984-85 and required the parties to
file their Memoranda.

Picop now maintains that it is not liable at all to pay any of the assessments or any part thereof. It assails the propriety of the thirty-five
percent (35%) deficiency transaction tax which the Court of Appeals held due from it in the amount of P3,578,543.51. Picop also
questions the imposition by the Court of Appeals of the deficiency income tax of P1,481,579.15, resulting from disallowance of certain
claimed financial guarantee expenses and claimed year-end adjustments of sales and cost of sales figures by Picop's external
auditors. 3

The CIR, upon the other hand, insists that the Court of Appeals erred in finding Picop not liable for surcharge and interest on unpaid
transaction tax and for documentary and science stamp taxes and in allowing Picop to claim as deductible expenses:

(a) the net operating losses of another corporation (i.e., Rustan Pulp and Paper Mills, Inc.); and

(b) interest payments on loans for the purchase of machinery and equipment.

The CIR also claims that Picop should be held liable for interest at fourteen percent (14%) per annum from 15 April 1978 for
three (3) years, and interest at twenty percent (20%) per annum for a maximum of three (3) years; and for a surcharge of ten
percent (10%), on Picop's deficiency income tax. Finally, the CIR contends that Picop is liable for the corporate development
tax equivalent to five percent (5%) of its correct 1977 net income.

The issues which we must here address may be sorted out and grouped in the following manner:

I. Whether Picop is liable for:

(1) the thirty-five percent (35%) transaction tax;

(2) interest and surcharge on unpaid transaction tax; and

(3) documentary and science stamp taxes;

II. Whether Picop is entitled to deductions against income of:

(1) interest payments on loans for the purchase of machinery and equipment;

(2) net operating losses incurred by the Rustan Pulp and Paper Mills, Inc.; and

(3) certain claimed financial guarantee expenses; and

III. (1) Whether Picop had understated its sales and overstated its cost of sales for 1977; and
 (2) Whether Picop is liable for the corporate development tax of five percent (5%)
of its net income for 1977.

We will consider these issues in the foregoing sequence.

I.

(1) Whether Picop is liable for the thirty-five percent (35%) transaction tax.

With the authorization of the Securities and Exchange Commission, Picop issued commercial paper consisting of serially numbered
promissory notes with the total face value of P229,864,000.00 and a maturity period of one (1) year, i.e., from 24 December 1977 to 23
December 1978. These promissory notes were purchased by various commercial banks and financial institutions. On these promissory
notes, Picop paid interest in the aggregate amount of P45,771,849.00. In respect of these interest payments, the CIR required Picop to
pay the thirty-five percent (35%) transaction tax.

The CIR based this assessment on Presidential Decree No. 1154 dated 3 June 1977, which reads in part as follows:

Sec. 1. The National Internal Revenue Code, as amended, is hereby further amended by adding a new section
thereto to read as follows:

Sec. 195-C. Tax on certain interest. — There shall be levied, assessed, collected and paid on every commercial
paper issued in the primary market as principal instrument, a transaction tax equivalent to thirty-five percent (35%)
based on the gross amount of interest thereto as defined hereunder, which shall be paid by the borrower/issuer:
Provided, however, that in the case of a long-term commercial paper whose maturity exceeds more than one year,
the borrower shall pay the tax based on the amount of interest corresponding to one year, and thereafter shall pay
the tax upon accrual or actual payment (whichever is earlier) of the untaxed portion of the interest which corresponds
to a period not exceeding one year.

The transaction tax imposed in this section shall be a final tax to be paid by the borrower and shall be allowed as a
deductible item for purposes of computing the borrower's taxable income.

For purposes of this tax —

(a) "Commercial paper" shall be defined as an instrument evidencing indebtedness of any person or entity, including
banks and non-banks performing quasi-banking functions, which is issued, endorsed, sold, transferred or in any
manner conveyed to another person or entity, either with or without recourse and irrespective of
maturity. Principally, commercial papers are promissory notes and/or similar instruments issued in the primary
market and shall not include repurchase agreements, certificates of assignments, certificates of participations, and
such other debt instruments issued in the secondary market.

(b) The term "interest" shall mean the difference between what the principal borrower received and the amount it paid
upon maturity of the commercial paper which shall, in no case, be lower than the interest rate prevailing at the time of
the issuance or renewal of the commercial paper. Interest shall be deemed synonymous with discount and shall
include all fees, commissions, premiums and other payments which form integral parts of the charges imposed as a
consequence of the use of money.

In all cases, where no interest rate is stated or if the rate stated is lower than the prevailing interest rate at the time of
the issuance or renewal of commercial paper, the Commissioner of Internal Revenue, upon consultation with the
Monetary Board of the Central Bank of the Philippines, shall adjust the interest rate in accordance herewith, and
assess the tax on the basis thereof.

The tax herein imposed shall be remitted by the borrower to the Commissioner of Internal Revenue or his Collection
Agent in the municipality where such borrower has its principal place of business within five (5) working days from the
issuance of the commercial paper. In the case of long term commercial paper, the tax upon the untaxed portion of the
interest which corresponds to a period not exceeding one year shall be paid upon accrual payment, whichever is
earlier. (Emphasis supplied)

Both the CTA and the Court of Appeals sustained the assessment of transaction tax.

In the instant Petition, Picop reiterates its claim that it is exempt from the payment of the transaction tax by virtue of its tax exemption
under R.A. No. 5186, as amended, known as the Investment Incentives Act, which in the form it existed in 1977-1978, read in relevant
part as follows:
 Sec. 8. Incentives to a Pioneer Enterprise. In addition to the incentives provided in the preceding section, pioneer
enterprises shall be granted the following incentive benefits:

(a) Tax Exemption. Exemption from all taxes under the National Internal Revenue Code, except income tax, from the
date the area of investment is included in the Investment Priorities Plan to the following extent:

(1) One hundred per cent (100%) for the first five years;

(2) Seventy-five per cent (75%) for the sixth through the eighth years;

(3) Fifty per cent (50%) for the ninth and tenth years;

(4) Twenty per cent (20%) for the eleventh and twelfth years; and

(5) Ten per cent (10%) for the thirteenth through the fifteenth year.

xxx xxx xxx 4

We agree with the CTA and the Court of Appeals that Picop's tax exemption under R.A. No. 5186, as amended, does not include
exemption from the thirty-five percent (35%) transaction tax. In the first place, the thirty-five percent (35%) transaction tax 5 is an
income tax, that is, it is a tax on the interest income of the lenders or creditors. In Western Minolco Corporation v. Commissioner of
Internal Revenue, 6 the petitioner corporation borrowed funds from several financial institutions from June 1977 to October 1977 and
paid the corresponding thirty-five (35%) transaction tax thereon in the amount of P1,317,801.03, pursuant to Section 210 (b) of the
1977 Tax Code. Western Minolco applied for refund of that amount alleging it was exempt from the thirty-five (35%) transaction tax by
reason of Section 79-A of C.A. No. 137, as amended, which granted new mines and old mines resuming operation "five (5) years
complete tax exemptions, except income tax, from the time of its actual bonafide orders for equipment for commercial production." In
denying the claim for refund, this Court held:

The petitioner's contentions deserve scant consideration. The 35% transaction tax is imposed on interest income
from commercial papers issued in the primary money market. Being a tax on interest, it is a tax on income.

As correctly ruled by the respondent Court of Tax Appeals:

Accordingly, we need not and do not think it necessary to discuss further the nature of the
transaction tax more than to say that the incipient scheme in the issuance of Letter of Instructions
No. 340 on November 24, 1975 (O.G. Dec. 15, 1975), i.e., to achieve operational simplicity and
effective administration in capturing the interest-income "windfall" from money market operations as
a new source of revenue, has lost none of its animating principle in parturition of amendatory
Presidential Decree No. 1154, now Section 210 (b) of the Tax Code. The tax thus imposed is
actually a tax on interest earnings of the lenders or placers who are actually the taxpayers in whose
income is imposed. Thus "the borrower withholds the tax of 35% from the interest he would have to
pay the lender so that he (borrower) can pay the 35% of the interest to the Government." (Citation
omitted) . . . . Suffice it to state that the broad consensus of fiscal and monetary authorities is that
"even if nominally, the borrower is made to pay the tax, actually, the tax is on the interest earning of
the immediate and all prior lenders/placers of the money. . . ." (Rollo, pp. 36-37)

The 35% transaction tax is an income tax on interest earnings to the lenders or placers. The latter are actually the
taxpayers. Therefore, the tax cannot be a tax imposed upon the petitioner. In other words, the petitioner who
borrowed funds from several financial institutions by issuing commercial papers merely withheld the 35% transaction
tax before paying to the financial institutions the interests earned by them and later remitted the same to the
respondent Commissioner of Internal Revenue. The tax could have been collected by a different procedure but the
statute chose this method. Whatever collecting procedure is adopted does not change the nature of the tax.

xxx xxx xxx 7

(Emphasis supplied)

Much the same issue was passed upon in Marinduque Mining Industrial Corporation v. Commissioner of Internal
Revenue 8 and resolved in the same way:

It is very obvious that the transaction tax, which is a tax on interest derived from commercial paper issued in the
money market, is not a tax contemplated in the above-quoted legal provisions. The petitioner admits that it is subject
to income tax. Its tax exemption should be strictly construed.
 We hold that petitioner's claim for refund was justifiably denied. The transaction tax, although nominally categorized
as a business tax, is in reality a withholding tax as positively stated in LOI No. 340. The petitioner could have shifted
the tax to the lenders or recipients of the interest. It did not choose to do so. It cannot be heard now to complain
about the tax. LOI No. 340 is an extraneous or extrinsic aid to the construction of section 210 (b).

It is thus clear that the transaction tax is an income tax and as such, in any event, falls outside the scope of the tax exemption granted
to registered pioneer enterprises by Section 8 of R.A. No. 5186, as amended. Picop was the withholding agent, obliged to withhold
thirty-five percent (35%) of the interest payable to its lenders and to remit the amounts so withheld to the Bureau of Internal Revenue
("BIR"). As a withholding agent, Picop is made personally liable for the thirty-five percent (35%) transaction tax 10 and if it did not
actually withhold thirty-five percent (35%) of the interest monies it had paid to its lenders, Picop had only itself to blame.

Picop claims that it had relied on a ruling, dated 6 October 1977, issued by the CIR, which held that Picop was not liable for the thirty-
five (35%) transaction tax in respect of debenture bonds issued by Picop. Prior to the issuance of the promissory notes involved in the
instant case, Picop had also issued debenture bonds P100,000,000.00 in aggregate face value. The managing underwriter of this
debenture bond issue, Bancom Development Corporation, requested a formal ruling from the Bureau of Internal Revenue on the liability
of Picop for the thirty-five percent (35%) transaction tax in respect of such bonds. The ruling rendered by the then Acting Commissioner
of Internal Revenue, Efren I. Plana, stated in relevant part:

It is represented that PICOP will be offering to the public primary bonds in the aggregate principal sum of one
hundred million pesos (P100,000,000.00); that the bonds will be issued as debentures in denominations of one
thousand pesos (P1,000.00) or multiples, to mature in ten (10) years at 14% interest per annum payable semi-
annually; that the bonds are convertible into common stock of the issuer at the option of the bond holder at an agreed
conversion price; that the issue will be covered by a "Trust Indenture" with a duly authorized trust corporation as
required by the Securities and Exchange Commission, which trustee will act for and in behalf of the debenture bond
holders as beneficiaries; that once issued, the bonds cannot be preterminated by the holder and cannot be redeemed
by the issuer until after eight (8) years from date of issue; that the debenture bonds will be subordinated to present
and future debts of PICOP; and that said bonds are intended to be listed in the stock exchanges, which will place
them alongside listed equity issues.

In reply, I have the honor to inform you that although the bonds hereinabove described are commercial papers which
will be issued in the primary market, however, it is clear from the abovestated facts that said bonds will not be issued
as money market instruments. Such being the case, and considering that the purposes of Presidential Decree No.
1154, as can be gleaned from Letter of Instruction No. 340, dated November 21, 1975, are (a) to regulate money
market transactions and (b) to ensure the collection of the tax on interest derived from money market transactions by
imposing a withholding tax thereon, said bonds do not come within the purview of the "commercial papers" intended
to be subjected to the 35% transaction tax prescribed in Presidential Decree No. 1154, as implemented by Revenue
Regulations No. 7-77. (See Section 2 of said Regulation) Accordingly, PICOP is not subject to 35% transaction tax on
its issues of the aforesaid bonds. However, those investing in said bonds should be made aware of the fact that the
transaction tax is not being imposed on the issuer of said bonds by printing or stamping thereon, in bold letters, the
following statement: "ISSUER NOT SUBJECT TO TRANSACTION TAX UNDER P.D. 1154. BONDHOLDER
SHOULD DECLARE INTEREST EARNING FOR INCOME TAX." 11 (Emphases supplied)

In the above quoted ruling, the CIR basically held that Picop's debenture bonds did not constitute "commercial papers" within the
meaning of P.D. No. 1154, and that, as such, those bonds were not subject to the thirty-five percent (35%) transaction tax imposed by
P.D. No. 1154.

The above ruling, however, is not applicable in respect of the promissory notes which are the subject matter of the instant case. It must
be noted that the debenture bonds which were the subject matter of Commissioner Plana's ruling were long-term bonds maturing in ten
(10) years and which could not be pre-terminated and could not be redeemed by Picop until after eight (8) years from date of issue; the
bonds were moreover subordinated to present and future debts of Picop and convertible into common stock of Picop at the option of the
bondholder. In contrast, the promissory notes involved in the instant case are short-term instruments bearing a one-year maturity
period. These promissory notes constitute the very archtype of money market instruments. For money market instruments are
precisely, by custom and usage of the financial markets, short-term instruments with a tenor of one (1) year or less. 12 Assuming,
therefore, (without passing upon) the correctness of the 6 October 1977 BIR ruling, Picop's short-term promissory notes must be
distinguished, and treated differently, from Picop's long-term debenture bonds.

We conclude that Picop was properly held liable for the thirty-five percent (35%) transaction tax due in respect of interest payments on
its money market borrowings.

At the same time, we agree with the Court of Appeals that the transaction tax may be levied only in respect of the interest earnings of
Picop's money market lenders accruing after P.D. No. 1154 went into effect, and not in respect of all the 1977 interest earnings of such
lenders. The Court of Appeals pointed out that:

PICOP, however contends that even if the tax has to be paid, it should be imposed only for the interests earned after
20 September 1977 when PD 1154 creating the tax became effective. We find merit in this contention. It appears that
the tax was levied on interest earnings from January to October, 1977. However, as found by the lower court, PD
 1154 was published in the Official Gazette only on 5 September 1977, and became effective only fifteen (15) days
after the publication, or on 20 September 1977, no other effectivity date having been provided by the PD. Based on
the Worksheet prepared by the Commissioner's office, the interests earned from 20 September to October 1977 was
P10,224,410.03. Thirty-five (35%) per cent of this is P3,578,543.51 which is all PICOP should pay as transaction
tax. 13 (Emphasis supplied)

P.D. No. 1154 is not, in other words, to be given retroactive effect by imposing the thirty-five percent (35%) transaction tax in respect of
interest earnings which accrued before the effectivity date of P.D. No. 1154, there being nothing in the statute to suggest that the
legislative authority intended to bring about such retroactive imposition of the tax.

(2) Whether Picop is liable for interest and surcharge on unpaid transaction tax.

With respect to the transaction tax due, the CIR prays that Picop be held liable for a twenty-five percent (25%) surcharge and for
interest at the rate of fourteen percent (14%) per annum from the date prescribed for its payment. In so praying, the CIR relies upon
Section 10 of Revenue Regulation 7-77 dated 3 June 1977, 14 issued by the Secretary of Finance. This Section reads:

Sec. 10. Penalties. — Where the amount shown by the taxpayer to be due on its return or part of such payment is not
paid on or before the date prescribed for its payment, the amount of the tax shall be increased by twenty-five (25%)
per centum, the increment to be a part of the tax and the entire amount shall be subject to interest at the rate of
fourteen (14%) per centum per annum from the date prescribed for its payment.

In the case of willful neglect to file the return within the period prescribed herein or in case a false or fraudulent
return is willfully made, there shall be added to the tax or to the deficiency tax in case any payment has been made
on the basis of such return before the discovery of the falsity or fraud, a surcharge of fifty (50%) per centum of its
amount. The amount so added to any tax shall be collected at the same time and in the same manner and as part of
the tax unless the tax has been paid before the discovery of the falsity or fraud, in which case the amount so added
shall be collected in the same manner as the tax.

In addition to the above administrative penalties, the criminal and civil penalties as provided for under Section 337 of
the Tax Code of 1977 shall be imposed for violation of any provision of Presidential Decree No. 1154. 15 (Emphases
supplied)

The 1977 Tax Code itself, in Section 326 in relation to Section 4 of the same Code, invoked by the Secretary of Finance in
issuing Revenue Regulation 7-77, set out, in comprehensive terms, the rule-making authority of the Secretary of Finance:

Sec. 326. Authority of Secretary of Finance to Promulgate Rules and Regulations. — The Secretary of Finance, upon
recommendation of the Commissioner of Internal Revenue, shall promulgate all needful rules and regulations for the
effective enforcement of the provisions of this Code. (Emphasis supplied)

Section 4 of the same Code contains a list of subjects or areas to be dealt with by the Secretary of Finance through the
medium of an exercise of his quasi-legislative or rule-making authority. This list, however, while it purports to be open-ended,
does not include the imposition of administrative or civil penalties such as the payment of amounts additional to the tax due.
Thus, in order that it may be held to be legally effective in respect of Picop in the present case, Section 10 of Revenue
Regulation 7-77 must embody or rest upon some provision in the Tax Code itself which imposes surcharge and penalty
interest for failure to make a transaction tax payment when due.

P.D. No. 1154 did not itself impose, nor did it expressly authorize the imposition of, a surcharge and penalty interest in case of failure to
pay the thirty-five percent (35%) transaction tax when due. Neither did Section 210 (b) of the 1977 Tax Code which re-enacted Section
195-C inserted into the Tax Code by P.D. No. 1154.

The CIR, both in its petition before the Court of Appeals and its Petition in the instant case, points to Section 51 (e) of the 1977 Tax
Code as its source of authority for assessing a surcharge and penalty interest in respect of the thirty-five percent (35%) transaction tax
due from Picop. This Section needs to be quoted in extenso:

Sec. 51. Payment and Assessment of Income Tax. —

(c) Definition of deficiency. — As used in this Chapter in respect of a tax imposed by this Title, the term "deficiency"
means:

(1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his
return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or
collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned, or
otherwise in respect of such tax; . . .
 xxx xxx xxx

(e) Additions to the tax in case of non-payment. —

(1) Tax shown on the return. — Where the amount determined by the taxpayer as the tax imposed by this Title or any
installment thereof, or any part of such amount or installment is not paid on or before the date prescribed for its
payment, there shall be collected as a part of the tax, interest upon such unpaid amount at the rate of fourteen per
centum per annum from the date prescribed for its payment until it is paid: Provided, That the maximum amount that
may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three
years, the present provisions regarding prescription to the contrary notwithstanding.

(2) Deficiency. — Where a deficiency, or any interest assessed in connection therewith under paragraph (d) of this
section, or any addition to the taxes provided for in Section seventy-two of this Code is not paid in full within thirty
days from the date of notice and demand from the Commissioner of Internal Revenue, there shall be collected upon
the unpaid amount as part of the tax, interest at the rate of fourteen per centum per annum from the date of such
notice and demand until it is paid: Provided, That the maximum amount that may be collected as interest on
deficiency shall in no case exceed the amount corresponding to a period of three years, the present provisions
regarding prescription to the contrary notwithstanding.

(3) Surcharge. — If any amount of tax included in the notice and demand from the Commissioner of Internal Revenue
is not paid in full within thirty days after such notice and demand, there shall be collected in addition to the interest
prescribed herein and in paragraph (d) above and as part of the tax a surcharge of five per centum of the amount of
tax unpaid. (Emphases supplied)

Section 72 of the 1977 Tax Code referred to in Section 51 (e) (2) above, provides:

Sec. 72. Surcharges for failure to render returns and for rendering false and fraudulent returns. — In case of willful
neglect to file the return or list required by this Title within the time prescribed by law, or in case a false or fraudulent
return or list is wilfully made, the Commissioner of Internal Revenue shall add to the tax or to the deficiency tax, in
case any payment has been made on the basis of such return before the discovery of the falsity or fraud,
as surcharge of fifty per centum of the amount of such tax or deficiency tax. In case of any failure to make and file a
return or list within the time prescribed by law or by the Commissioner or other Internal Revenue Officer, not due to
willful neglect, the Commissioner of Internal Revenue shall add to the tax twenty-five per centum of its amount,
except that, when a return is voluntarily and without notice from the Commissioner or other officer filed after such
time, and it is shown that the failure to file it was due to a reasonable cause, no such addition shall be made to the
tax. The amount so added to any tax shall be collected at the same time, in the same manner and as part of the tax
unless the tax has been paid before the discovery of the neglect, falsity, or fraud, in which case the amount so added
shall be collected in the same manner as the tax. (Emphases supplied)

It will be seen that Section 51 (c) (1) and (e) (1) and (3), of the 1977 Tax Code, authorize the imposition of surcharge and interest only
in respect of a "tax imposed by this Title," that is to say, Title II on "Income Tax." It will also be seen that Section 72 of the 1977 Tax
Code imposes a surcharge only in case of failure to file a return or list "required by this Title," that is, Title II on "Income Tax." The thirty-
five percent (35%) transaction tax is, however, imposed in the 1977 Tax Code by Section 210 (b) thereof which Section is embraced in
Title V on "Taxes on Business" of that Code. Thus, while the thirty-five percent (35%) transaction tax is in truth a tax
imposed on interest income earned by lenders or creditors purchasing commercial paper on the money market, the relevant
provisions, i.e., Section 210 (b), were not inserted in Title II of the 1977 Tax Code. The end result is that the thirty-five percent (35%)
transaction tax is not one of the taxes in respect of which Section 51 (e) authorized the imposition of surcharge and interest and Section
72 the imposition of a fraud surcharge.

It is not without reluctance that we reach the above conclusion on the basis of what may well have been an inadvertent error in
legislative draftsmanship, a type of error common enough during the period of Martial Law in our country. Nevertheless, we are
compelled to adopt this conclusion. We consider that the authority to impose what the present Tax Code calls (in Section 248) civil
penalties consisting of additions to the tax due, must be expressly given in the enabling statute, in language too clear to be mistaken.
The grant of that authority is not lightly to be assumed to have been made to administrative officials, even to one as highly placed as
the Secretary of Finance.

The state of the present law tends to reinforce our conclusion that Section 51 (c) and (e) of the 1977 Tax Code did not authorize the
imposition of a surcharge and penalty interest for failure to pay the thirty-five percent (35%) transaction tax imposed under Section 210
(b) of the same Code. The corresponding provision in the current Tax Code very clearly embraces failure to pay all taxes imposed in
the Tax Code, without any regard to the Title of the Code where provisions imposing particular taxes are textually located. Section 247
(a) of the NIRC, as amended, reads:

Title X

Statutory Offenses and Penalties

 Chapter I

Additions to the Tax

Sec. 247. General Provisions. — (a) The additions to the tax or deficiency tax prescribed in this Chapter shall apply to
all taxes, fees and charges imposed in this Code. The amount so added to the tax shall be collected at the same
time, in the same manner and as part of the tax. . . .

Sec. 248. Civil Penalties. — (a) There shall be imposed, in addition to the tax required to be paid, penalty equivalent
to twenty-five percent (25%) of the amount due, in the following cases:

xxx xxx xxx

(3) failure to pay the tax within the time prescribed for its payment; or

xxx xxx xxx

(c) the penalties imposed hereunder shall form part of the tax and the entire amount shall be subject to the interest
prescribed in Section 249.

Sec. 249. Interest. — (a) In General. — There shall be assessed and collected on any unpaid amount of
tax, interest at the rate of twenty percent (20%) per annum or such higher rate as may be prescribed by regulations,
from the date prescribed for payment until the amount is fully paid. . . . (Emphases supplied)

In other words, Section 247 (a) of the current NIRC supplies what did not exist back in 1977 when Picop's liability for the thirty-
five percent (35%) transaction tax became fixed. We do not believe we can fill that legislative lacuna by judicial fiat. There is
nothing to suggest that Section 247 (a) of the present Tax Code, which was inserted in 1985, was intended to be given
retroactive application by the legislative authority. 16

(3) Whether Picop is Liable for Documentary and Science Stamp Taxes.

As noted earlier, Picop issued sometime in 1977 long-term subordinated convertible debenture bonds with an aggregate face value of
P100,000,000.00. Picop stated, and this was not disputed by the CIR, that the proceeds of the debenture bonds were in fact utilized to
finance the BOI-registered operations of Picop. The CIR assessed documentary and science stamp taxes, amounting to P300,000.00,
on the issuance of Picop's debenture bonds. It is claimed by Picop that its tax exemption — "exemption from all taxes under the
National Internal Revenue Code, except income tax" on a declining basis over a certain period of time — includes exemption from the
documentary and science stamp taxes imposed under the NIRC.

The CIR, upon the other hand, stresses that the tax exemption under the Investment Incentives Act may be granted or recognized only
to the extent that the claimant Picop was engaged in registered operations, i.e., operations forming part of its integrated pulp and paper
project. 17 The borrowing of funds from the public, in the submission of the CIR, was not an activity included in Picop's registered
operations. The CTA adopted the view of the CIR and held that "the issuance of convertible debenture bonds [was] not synonymous
[with] the manufactur[ing] operations of an integrated pulp and paper mill." 18

The Court of Appeals took a less rigid view of the ambit of the tax exemption granted to registered pioneer enterprises. Said the Court
of Appeals:

. . . PICOP's explanation that the debenture bonds were issued to finance its registered operation is logical and is
unrebutted. We are aware that tax exemptions must be applied strictly against the beneficiary in order to deter their
abuse. It would indeed be altogether a different matter if there is a showing that the issuance of the debenture bonds
had no bearing whatsoever on the registered operations PICOP and that they were issued in connection with a totally
different business undertaking of PICOP other than its registered operation. There is, however, a dearth of evidence
in this regard. It cannot be denied that PICOP needed funds for its operations. One of the means it used to raise said
funds was to issue debenture bonds. Since the money raised thereby was to be used in its registered operation,
PICOP should enjoy the incentives granted to it by R.A. 5186, one of which is the exemption from payment of all
taxes under the National Internal Revenue Code, except income taxes, otherwise the purpose of the incentives would
be defeated. Documentary and science stamp taxes on debenture bonds are certainly not income
taxes. 19 (Emphasis supplied)

Tax exemptions are, to be sure, to be "strictly construed," that is, they are not to be extended beyond the ordinary and reasonable
intendment of the language actually used by the legislative authority in granting the exemption. The issuance of debenture bonds is
certainly conceptually distinct from pulping and paper manufacturing operations. But no one contends that issuance of bonds was a
principal or regular business activity of Picop; only banks or other financial institutions are in the regular business of raising money by
issuing bonds or other instruments to the general public. We consider that the actual dedication of the proceeds of the bonds to the
carrying out of Picop's registered operations constituted a sufficient nexus with such registered operations so as to exempt Picop from
stamp taxes ordinarily imposed upon or in connection with issuance of such bonds. We agree, therefore, with the Court of Appeals on
this matter that the CTA and the CIR had erred in rejecting Picop's claim for exemption from stamp taxes.

It remains only to note that after commencement of the present litigation before the CTA, the BIR took the position that the tax
exemption granted by R.A. No. 5186, as amended, does include exemption from documentary stamp taxes on transactions entered into
by BOI-registered enterprises. BIR Ruling No. 088, dated 28 April 1989, for instance, held that a registered preferred pioneer enterprise
engaged in the manufacture of integrated circuits, magnetic heads, printed circuit boards, etc., is exempt from the payment of
documentary stamp taxes. The Commissioner said:

You now request a ruling that as a preferred pioneer enterprise, you are exempt from the payment of Documentary
Stamp Tax (DST).

In reply, please be informed that your request is hereby granted. Pursuant to Section 46 (a) of Presidential Decree
No. 1789, pioneer enterprises registered with the BOI are exempt from all taxes under the National Internal Revenue
Code, except from all taxes under the National Internal Revenue Code, except income tax, from the date the area of
investment is included in the Investment Priorities Plan to the following extent:

xxx xxx xxx

Accordingly, your company is exempt from the payment of documentary stamp tax to the extent of the percentage
aforestated on transactions connected with the registered business activity. (BIR Ruling No. 111-81) However, if said
transactions conducted by you require the execution of a taxable document with other parties, said parties who are
not exempt shall be the one directly liable for the tax. (Sec. 173, Tax Code, as amended; BIR Ruling No. 236-87) In
other words, said parties shall be liable to the same percentage corresponding to your tax exemption. (Emphasis
supplied)

Similarly, in BIR Ruling No. 013, dated 6 February 1989, the Commissioner held that a registered pioneer enterprise producing
polyester filament yarn was entitled to exemption "from the documentary stamp tax on [its] sale of real property in Makati up to
December 31, 1989." It appears clear to the Court that the CIR, administratively at least, no longer insists on the position it
originally took in the instant case before the CTA.

II

(1) Whether Picop is entitled to deduct against current income interest payments on loans for the purchase of
machinery and equipment.

In 1969, 1972 and 1977, Picop obtained loans from foreign creditors in order to finance the purchase of machinery and equipment
needed for its operations. In its 1977 Income Tax Return, Picop claimed interest payments made in 1977, amounting to
P42,840,131.00, on these loans as a deduction from its 1977 gross income.

The CIR disallowed this deduction upon the ground that, because the loans had been incurred for the purchase of machinery and
equipment, the interest payments on those loans should have been capitalized instead and claimed as a depreciation deduction taking
into account the adjusted basis of the machinery and equipment (original acquisition cost plus interest charges) over the useful life of
such assets.

Both the CTA and the Court of Appeals sustained the position of Picop and held that the interest deduction claimed by Picop was
proper and allowable. In the instant Petition, the CIR insists on its original position.

We begin by noting that interest payments on loans incurred by a taxpayer (whether BOI-registered or not) are allowed by the NIRC as
deductions against the taxpayer's gross income. Section 30 of the 1977 Tax Code provided as follows:

Sec. 30. Deduction from Gross Income. — The following may be deducted from gross income:

(a) Expenses:

xxx xxx xxx

(b) Interest:

(1) In general. — The amount of interest paid within the taxable year on indebtedness, except on
indebtedness incurred or continued to purchase or carry obligations the interest upon which is
exempt from taxation as income under this Title: . . . (Emphasis supplied)
 Thus, the general rule is that interest expenses are deductible against gross income and this certainly includes interest paid
under loans incurred in connection with the carrying on of the business of the taxpayer. 20 In the instant case, the CIR does not
dispute that the interest payments were made by Picop on loans incurred in connection with the carrying on of the registered
operations of Picop, i.e., the financing of the purchase of machinery and equipment actually used in the registered operations
of Picop. Neither does the CIR deny that such interest payments were legally due and demandable under the terms of such
loans, and in fact paid by Picop during the tax year 1977.

The CIR has been unable to point to any provision of the 1977 Tax Code or any other Statute that requires the disallowance of the
interest payments made by Picop. The CIR invokes Section 79 of Revenue Regulations No. 2 as amended which reads as follows:

Sec. 79. Interest on Capital. — Interest calculated for cost-keeping or other purposes on account of capital or surplus
invested in the business, which does not represent a charge arising under an interest-bearing obligation,
is not allowable deduction from gross income. (Emphases supplied)

We read the above provision of Revenue Regulations No. 2 as referring to so called "theoretical interest," that is to say,
interest "calculated" or computed (and not incurred or paid) for the purpose of determining the "opportunity cost" of investing
funds in a given business. Such "theoretical" or imputed interest does not arise from a legally demandable interest-bearing
obligation incurred by the taxpayer who however wishes to find out, e.g., whether he would have been better off by lending out
his funds and earning interest rather than investing such funds in his business. One thing that Section 79 quoted above makes
clear is that interest which does constitute a charge arising under an interest-bearing obligation is an allowable deduction from
gross income.

It is claimed by the CIR that Section 79 of Revenue Regulations No. 2 was "patterned after" paragraph 1.266-1 (b), entitled "Taxes and
Carrying Charges Chargeable to Capital Account and Treated as Capital Items" of the U.S. Income Tax Regulations, which paragraph
reads as follows:

(B) Taxes and Carrying Charges. — The items thus chargeable to capital accounts are —

(11) In the case of real property, whether improved or unimproved and whether productive or nonproductive.

21
(a) Interest on a loan (but not theoretical interest of a taxpayer using his own funds).

The truncated excerpt of the U.S. Income Tax Regulations quoted by the CIR needs to be related to the relevant provisions of the U.S.
Internal Revenue Code, which provisions deal with the general topic of adjusted basis for determining allowable gain or loss on sales or
exchanges of property and allowable depreciation and depletion of capital assets of the taxpayer:

Present Rule. The Internal Revenue Code, and the Regulations promulgated thereunder provide that "No deduction
shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by
the Secretary or his delegate, are chargeable to capital account with respect to property, if the taxpayer elects, in
accordance with such regulations, to treat such taxes or charges as so chargeable."

At the same time, under the adjustment of basis provisions which have just been discussed, it is provided that
adjustment shall be made for all "expenditures, receipts, losses, or other items" properly chargeable to a capital
account, thus including taxes and carrying charges; however, an exception exists, in which event such adjustment to
the capital account is not made, with respect to taxes and carrying charges which the taxpayer has not elected to
capitalize but for which a deduction instead has been taken. 22 (Emphasis supplied)

The "carrying charges" which may be capitalized under the above quoted provisions of the U.S. Internal Revenue Code
include, as the CIR has pointed out, interest on a loan "(but not theoretical interest of a taxpayer using his own funds)." What
the CIR failed to point out is that such "carrying charges" may, at the election of the taxpayer, either be (a) capitalized in which
case the cost basis of the capital assets, e.g., machinery and equipment, will be adjusted by adding the amount of such
interest payments or alternatively, be (b) deducted from gross income of the taxpayer. Should the taxpayer elect to deduct the
interest payments against its gross income, the taxpayer cannot at the same time capitalize the interest payments. In other
words, the taxpayer is not entitled to both the deduction from gross income and the adjusted (increased) basis for determining
gain or loss and the allowable depreciation charge. The U.S. Internal Revenue Code does not prohibit the deduction of interest
on a loan obtained for purchasing machinery and equipment against gross income, unless the taxpayer has also or previously
capitalized the same interest payments and thereby adjusted the cost basis of such assets.

We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring machinery and
equipment. Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan. The 1977 Tax Code is simply
silent on a taxpayer's right to elect one or the other tax treatment of such interest payments. Accordingly, the general rule that interest
payments on a legally demandable loan are deductible from gross income must be applied.
The CIR argues finally that to allow Picop to deduct its interest payments against its gross income would be to encourage fraudulent
claims to double deductions from gross income:

[t]o allow a deduction of incidental expense/cost incurred in the purchase of fixed asset in the year it was incurred
would invite tax evasion through fraudulent application of double deductions from gross income. 23 (Emphases
supplied)

The Court is not persuaded. So far as the records of the instant cases show, Picop has not claimed to be entitled to double
deduction of its 1977 interest payments. The CIR has neither alleged nor proved that Picop had previously adjusted its cost
basis for the machinery and equipment purchased with the loan proceeds by capitalizing the interest payments here involved.
The Court will not assume that the CIR would be unable or unwilling to disallow "a double deduction" should Picop, having
deducted its interest cost from its gross income, also attempt subsequently to adjust upward the cost basis of the machinery
and equipment purchased and claim, e.g., increased deductions for depreciation.

We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picop's 1977 interest payments on its
loans for capital equipment against its gross income for 1977.

(2) Whether Picop is entitled to deduct against current income net operating losses
incurred by Rustan Pulp and Paper Mills, Inc.

On 18 January 1977, Picop entered into a merger agreement with the Rustan Pulp and Paper Mills, Inc. ("RPPM") and Rustan
Manufacturing Corporation ("RMC"). Under this agreement, the rights, properties, privileges, powers and franchises of RPPM and RMC
were to be transferred, assigned and conveyed to Picop as the surviving corporation. The entire subscribed and outstanding capital
stock of RPPM and RMC would be exchanged for 2,891,476 fully paid up Class "A" common stock of Picop (with a par value of P10.00)
and 149,848 shares of preferred stock of Picop (with a par value of P10.00), to be issued by Picop, the result being that Picop would
wholly own both RPPM and RMC while the stockholders of RPPM and RMC would join the ranks of Picop's shareholders. In addition,
Picop paid off the obligations of RPPM to the Development Bank of the Philippines ("DBP") in the amount of P68,240,340.00, by issuing
6,824,034 shares of preferred stock (with a par value of P10.00) to the DBP. The merger agreement was approved in 1977 by the
creditors and stockholders of Picop, RPPM and RMC and by the Securities and Exchange Commission. Thereupon, on 30 November
1977, apparently the effective date of merger, RPPM and RMC were dissolved. The Board of Investments approved the merger
agreement on 12 January 1978.

It appears that RPPM and RMC were, like Picop, BOI-registered companies. Immediately before merger effective date, RPPM had over
preceding years accumulated losses in the total amount of P81,159,904.00. In its 1977 Income Tax Return, Picop claimed
P44,196,106.00 of RPPM's accumulated losses as a deduction against Picop's 1977 gross income. 24

Upon the other hand, even before the effective date of merger, on 30 August 1977, Picop sold all the outstanding shares of RMC stock
to San Miguel Corporation for the sum of P38,900,000.00, and reported a gain of P9,294,849.00 from this transaction. 25

In claiming such deduction, Picop relies on section 7 (c) of R.A. No. 5186 which provides as follows:

Sec. 7. Incentives to Registered Enterprise. — A registered enterprise, to the extent engaged in a preferred area of
investment, shall be granted the following incentive benefits:

xxx xxx xxx

(c) Net Operating Loss Carry-over. — A net operating loss incurred in any of the first ten years of operations may be
carried over as a deduction from taxable income for the six years immediately following the year of such loss. The
entire amount of the loss shall be carried over to the first of the six taxable years following the loss, and any portion of
such loss which exceeds the taxable income of such first year shall be deducted in like manner from the taxable
income of the next remaining five years. The net operating loss shall be computed in accordance with the provisions
of the National Internal Revenue Code, any provision of this Act to the contrary notwithstanding, except that income
not taxable either in whole or in part under this or other laws shall be included in gross income. (Emphasis supplied)

Picop had secured a letter-opinion from the BOI dated 21 February 1977 — that is, after the date of the agreement of merger
but before the merger became effective — relating to the deductibility of the previous losses of RPPM under Section 7 (c) of
R.A. No. 5186 as amended. The pertinent portions of this BOI opinion, signed by BOI Governor Cesar Lanuza, read as
follows:

2) PICOP will not be allowed to carry over the losses of Rustan prior to the legal dissolution of the latter because at
that time the two (2) companies still had separate legal personalities;

3) After BOI approval of the merger, PICOP can no longer apply for the registration of the registered capacity of
Rustan because with the approved merger, such registered capacity of Rustan transferred to PICOP will have the
 same registration date as that of Rustan. In this case, the previous losses of Rustan may be carried over by PICOP,
because with the merger, PICOP assumes all the rights and obligations of Rustan subject, however, to the period
prescribed for carrying over of such
losses. 26

Curiously enough, Picop did not also seek a ruling on this matter, clearly a matter of tax law, from the Bureau of Internal
Revenue. Picop chose to rely solely on the BOI letter-opinion.

The CIR disallowed all the deductions claimed on the basis of RPPM's losses, apparently on two (2) grounds. Firstly, the previous
losses were incurred by "another taxpayer," RPPM, and not by Picop in connection with Picop's own registered operations. The CIR
took the view that Picop, RPPM and RMC were merged into one (1) corporate personality only on 12 January 1978, upon approval of
the merger agreement by the BOI. Thus, during the taxable year 1977, Picop on the one hand and RPPM and RMC on the other, still
had their separate juridical personalities. Secondly, the CIR alleged that these losses had been incurred by RPPM "from the borrowing
of funds" and not from carrying out of RPPM's registered operations. We focus on the first ground. 27

The CTA upheld the deduction claimed by Picop; its reasoning, however, is less than crystal clear, especially in respect of its view of
what the U.S. tax law was on this matter. In any event, the CTA apparently fell back on the BOI opinion of 21 February 1977 referred to
above. The CTA said:

Respondent further averred that the incentives granted under Section 7 of R.A. No. 5186 shall be available only to
the extent in which they are engaged in registered operations, citing Section 1 of Rule IX of the Basic Rules and
Regulations to Implement the Intent and Provisions of the Investment Incentives Act, R.A. No. 5186.

We disagree with respondent. The purpose of the merger was to rationalize the container board industry and not to
take advantage of the net losses incurred by RPPMI prior to the stock swap. Thus, when stock of a corporation is
purchased in order to take advantage of the corporation's net operating loss incurred in years prior to the purchase,
the corporation thereafter entering into a trade or business different from that in which it was previously engaged, the
net operating loss carry-over may be entirely lost. [IRC (1954), Sec. 382(a), Vol. 5, Mertens, Law of Federal Income
Taxation, Chap. 29.11a, p. 103]. 28 Furthermore, once the BOI approved the merger agreement, the registered
capacity of Rustan shall be transferred to PICOP, and the previous losses of Rustan may be carried over by PICOP
by operation of law. [BOI ruling dated February 21, 1977 (Exh. J-1)] It is clear therefrom, that the deduction availed of
under Section 7(c) of R.A. No. 5186 was only proper." (pp. 38-43, Rollo of SP No. 20070) 29 (Emphasis supplied)

In respect of the above underscored portion of the CTA decision, we must note that the CTA in fact overlooked the statement
made by petitioner's counsel before the CTA that:

Among the attractions of the merger to Picop was the accumulated net operating loss carry-over of RMC that it might
possibly use to relieve it (Picop) from its income taxes, under Section 7 (c) of R.A. 5186. Said section provides:

xxx xxx xxx

With this benefit in mind, Picop addressed three (3) questions to the BOI in a letter dated November 25, 1976. The
BOI replied on February 21, 1977 directly answering the three (3) queries. 30 (Emphasis supplied)

The size of RPPM's accumulated losses as of the date of the merger — more than P81,000,000.00 — must have constituted a
powerful attraction indeed for Picop.

The Court of Appeals followed the result reached by the CTA. The Court of Appeals, much like the CTA, concluded that since RPPM
was dissolved on 30 November 1977, its accumulated losses were appropriately carried over by Picop in the latter's 1977 Income Tax
Return "because by that time RPPMI and Picop were no longer separate and different taxpayers." 31

After prolonged consideration and analysis of this matter, the Court is unable to agree with the CTA and Court of Appeals on the
deductibility of RPPM's accumulated losses against Picop's 1977 gross income.

It is important to note at the outset that in our jurisdiction, the ordinary rule — that is, the rule applicable in respect of
corporations not registered with the BOI as a preferred pioneer enterprise — is that net operating losses cannot be carried over. Under
our Tax Code, both in 1977 and at present, losses may be deducted from gross income only if such losses were actually sustained in
the same year that they are deducted or charged off. Section 30 of the 1977 Tax Code provides:

Sec. 30. Deductions from Gross Income. — In computing net income, there shall be allowed as deduction —

xxx xxx xxx

 (d) Losses:

(1) By Individuals. — In the case of an individual, losses actually sustained during the taxable year and not
compensated for by an insurance or otherwise —

(A) If incurred in trade or business;

xxx xxx xxx

(2) By Corporations. — In a case of a corporation, all losses actually sustained and charged off within the taxable
year and not compensated for by insurance or otherwise.

(3) By Non-resident Aliens or Foreign Corporations. — In the case of a non-resident alien individual or a foreign
corporation, the losses deductible are those actually sustained during the year incurred in business or trade
conducted within the Philippines, . . . 32 (Emphasis supplied)

Section 76 of the Philippine Income Tax Regulations (Revenue Regulation No. 2, as amended) is even more explicit and
detailed:

Sec. 76. When charges are deductible. — Each year's return, so far as practicable, both as to gross income and
deductions therefrom should be complete in itself, and taxpayers are expected to make every reasonable effort to
ascertain the facts necessary to make a correct return. The expenses, liabilities, or deficit of one year cannot be used
to reduce the income of a subsequent year. A taxpayer has the right to deduct all authorized allowances and it follows
that if he does not within any year deduct certain of his expenses, losses, interests, taxes, or other charges,
he can not deduct them from the income of the next or any succeeding year. . . .

xxx xxx xxx

. . . . If subsequent to its occurrence, however, a taxpayer first ascertains the amount of a loss sustained during a
prior taxable year which has not been deducted from gross income, he may render an amended return for such
preceding taxable year including such amount of loss in the deduction from gross income and may in proper cases
file a claim for refund of the excess paid by reason of the failure to deduct such loss in the original return. A loss from
theft or embezzlement occurring in one year and discovered in another is ordinarily deductible for the year in which
sustained. (Emphases supplied)

It is thus clear that under our law, and outside the special realm of BOI-registered enterprises, there is no such thing as a
carry-over of net operating loss. To the contrary, losses must be deducted against current income in the taxable year when
such losses were incurred. Moreover, such losses may be charged off only against income earned in the same taxable year
when the losses were incurred.

Thus it is that R.A. No. 5186 introduced the carry-over of net operating losses as a very special incentive to be granted only to
registered pioneer enterprises and only with respect to their registered operations. The statutory purpose here may be seen to be the
encouragement of the establishment and continued operation of pioneer industries by allowing the registered enterprise to accumulate
its operating losses which may be expected during the early years of the enterprise and to permit the enterprise to offset such losses
against income earned by it in later years after successful establishment and regular operations. To promote its economic development
goals, the Republic foregoes or defers taxing the income of the pioneer enterprise until after that enterprise has recovered or offset its
earlier losses. We consider that the statutory purpose can be served only if the accumulated operating losses are carried over and
charged off against income subsequently earned and accumulated by the same enterprise engaged in the same registered operations.

In the instant case, to allow the deduction claimed by Picop would be to permit one corporation or enterprise, Picop, to benefit from the
operating losses accumulated by another corporation or enterprise, RPPM. RPPM far from benefiting from the tax incentive granted by
the BOI statute, in fact gave up the struggle and went out of existence and its former stockholders joined the much larger group of
Picop's stockholders. To grant Picop's claimed deduction would be to permit Picop to shelter its otherwise taxable income (an objective
which Picop had from the very beginning) which had not been earned by the registered enterprise which had suffered the accumulated
losses. In effect, to grant Picop's claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its
accumulated operating losses. Under the CTA and Court of Appeals decisions, Picop would benefit by immunizing P44,196,106.00 of
its income from taxation thereof although Picop had not run the risks and incurred the losses which had been encountered and suffered
by RPPM. Conversely, the income that would be shielded from taxation is not income that was, after much effort, eventually generated
by the same registered operations which earlier had sustained losses. We consider and so hold that there is nothing in Section 7 (c) of
R.A. No. 5186 which either requires or permits such a result. Indeed, that result makes non-sense of the legislative purpose which may
be seen clearly to be projected by Section 7 (c), R.A. No. 5186.

The CTA and the Court of Appeals allowed the offsetting of RPPM's accumulated operating losses against Picop's 1977 gross income,
basically because towards the end of the taxable year 1977, upon the arrival of the effective date of merger, only one (1) corporation,
Picop, remained. The losses suffered by RPPM's registered operations and the gross income generated by Picop's own registered
operations now came under one and the same corporate roof. We consider that this circumstance relates much more to form than to
substance. We do not believe that that single purely technical factor is enough to authorize and justify the deduction claimed by Picop.
Picop's claim for deduction is not only bereft of statutory basis; it does violence to the legislative intent which animates the tax incentive
granted by Section 7 (c) of R.A. No. 5186. In granting the extraordinary privilege and incentive of a net operating loss carry-over to BOI-
registered pioneer enterprises, the legislature could not have intended to require the Republic to forego tax revenues in order to benefit
a corporation which had run no risks and suffered no losses, but had merely purchased another's losses.

Both the CTA and the Court of Appeals appeared much impressed not only with corporate technicalities but also with the U.S. tax law
on this matter. It should suffice, however, simply to note that in U.S. tax law, the availability to companies generally of operating loss
carry-overs and of operating loss carry-backs is expressly provided and regulated in great detail by statute. 33 In our jurisdiction, save
for Section 7 (c) of R.A. No. 5186, no statute recognizes or permits loss carry-overs and loss carry-backs. Indeed, as already noted, our
tax law expressly rejects the very notion of loss carry-overs and carry-backs.

We conclude that the deduction claimed by Picop in the amount of P44,196,106.00 in its 1977 Income Tax Return must be disallowed.

(3) Whether Picop is entitled to deduct against current income certain claimed financial guarantee expenses.

In its Income Tax Return for 1977, Picop also claimed a deduction in the amount of P1,237,421.00 as financial guarantee expenses.

This deduction is said to relate to chattel and real estate mortgages required from Picop by the Philippine National Bank ("PNB") and
DBP as guarantors of loans incurred by Picop from foreign creditors. According to Picop, the claimed deduction represents registration
fees and other expenses incidental to registration of mortgages in favor of DBP and PNB.

In support of this claimed deduction, Picop allegedly showed its own vouchers to BIR Examiners to prove disbursements to the Register
of Deeds of Tandag, Surigao del Sur, of particular amounts. In the proceedings before the CTA, however, Picop did not submit in
evidence such vouchers and instead presented one of its employees to testify that the amount claimed had been disbursed for the
registration of chattel and real estate mortgages.

The CIR disallowed this claimed deduction upon the ground of insufficiency of evidence. This disallowance was sustained by the CTA
and the Court of Appeals. The CTA said:

No records are available to support the abovementioned expenses. The vouchers merely showed that the amounts
were paid to the Register of Deeds and simply cash account. Without the supporting papers such as the invoices or
official receipts of the Register of Deeds, these vouchers standing alone cannot prove that the payments made were
for the accrued expenses in question. The best evidence of payment is the official receipts issued by the Register of
Deeds. The testimony of petitioner's witness that the official receipts and cash vouchers were shown to the Bureau of
Internal Revenue will not suffice if no records could be presented in court for proper marking and identification.

The Court of Appeals added:

The mere testimony of a witness for PICOP and the cash vouchers do not suffice to establish its claim that
registration fees were paid to the Register of Deeds for the registration of real estate and chattel mortgages in favor
of Development Bank of the Philippines and the Philippine National Bank as guarantors of PICOP's loans. The
witness could very well have been merely repeating what he was instructed to say regardless of the truth, while the
cash vouchers, which we do not find on file, are not said to provide the necessary details regarding the nature and
purpose of the expenses reflected therein. PICOP should have presented, through the guarantors, its owner's copy of
the registered titles with the lien inscribed thereon as well as an official receipt from the Register of Deeds evidencing
payment of the registration fee.

We must support the CTA and the Court of Appeals in their foregoing rulings. A taxpayer has the burden of proving entitlement to a
claimed deduction. 36 In the instant case, even Picop's own vouchers were not submitted in evidence and the BIR Examiners denied
that such vouchers and other documents had been exhibited to them. Moreover, cash vouchers can only confirm the fact of
disbursement but not necessarily the purpose thereof. 37 The best evidence that Picop should have presented to support its claimed
deduction were the invoices and official receipts issued by the Register of Deeds. Picop not only failed to present such documents; it
also failed to explain the loss thereof, assuming they had existed before. 38 Under the best evidence rule, 39 therefore, the testimony of
Picop's employee was inadmissible and was in any case entitled to very little, if any, credence.

We consider that entitlement to Picop's claimed deduction of P1,237,421.00 was not adequately shown and that such deduction must
be disallowed.

III

(1) Whether Picop had understated its sales and overstated its cost of sales for 1977.
In its assessment for deficiency income tax for 1977, the CIR claimed that Picop had understated its sales by P2,391,644.00 and, upon
the other hand, overstated its cost of sales by P604,018.00. Thereupon, the CIR added back both sums to Picop's net income figure
per its own return.

The 1977 Income Tax Return of Picop set forth the following figures:

Sales (per Picop's Income Tax Return):

Paper P 537,656,719.00
Timber P 263,158,132.00
———————
Total Sales P 800,814,851.00
============
Upon the other hand, Picop's Books of Accounts reflected higher sales figures:
Sales (per Picop's Books of Accounts):
Paper P 537,656,719.00
Timber P 265,549,776.00
———————
Total Sales P 803,206,495.00
============

The above figures thus show a discrepancy between the sales figures reflected in Picop's Books of Accounts and the sales
figures reported in its 1977 Income Tax Return, amounting to: P2,391,644.00.

The CIR also contended that Picop's cost of sales set out in its 1977 Income Tax Return, when compared with the cost figures in its
Books of Accounts, was overstated:

Cost of Sales (per Income Tax Return) P607,246,084.00

Cost of Sales (per Books of Accounts) P606,642,066.00

———————

Discrepancy P 604,018.00
============

Picop did not deny the existence of the above noted discrepancies. In the proceedings before the CTA, Picop presented one of its
officials to explain the foregoing discrepancies. That explanation is perhaps best presented in Picop's own words as set forth in its
Memorandum before this Court:

. . . that the adjustment discussed in the testimony of the witness, represent the best and most objective method of
determining in pesos the amount of the correct and actual export sales during the year. It was this correct and actual
export sales and costs of sales that were reflected in the income tax return and in the audited financial statements.
These corrections did not result in realization of income and should not give rise to any deficiency tax.

xxx xxx xxx

What are the facts of this case on this matter? Why were adjustments necessary at the year-end?

Because of PICOP's procedure of recording its export sales (reckoned in U.S. dollars) on the basis of a fixed rate,
day to day and month to month, regardless of the actual exchange rate and without waiting when the actual proceeds
are received. In other words, PICOP recorded its export sales at a pre-determined fixed exchange rate. That pre-
determined rate was decided upon at the beginning of the year and continued to be used throughout the year.

At the end of the year, the external auditors made an examination. In that examination, the auditors determined with
accuracy the actual dollar proceeds of the export sales received. What exchange rate was used by the auditors to
convert these actual dollar proceeds into Philippine pesos? They used the average of the differences between (a) the
recorded fixed exchange rate and (b) the exchange rate at the time the proceeds were actually received. It was this
rate at time of receipt of the proceeds that determined the amount of pesos credited by the Central Bank (through the
agent banks) in favor of PICOP. These accumulated differences were averaged by the external auditors and this was
what was used at the year-end for income tax and other government-report purposes. (T.s.n., Oct. 17/85, pp. 20-
25) 40

The above explanation, unfortunately, at least to the mind of the Court, raises more questions than it resolves. Firstly, the explanation
assumes that all of Picop's sales were export sales for which U.S. dollars (or other foreign exchange) were received. It also assumes
that the expenses summed up as "cost of sales" were all dollar expenses and that no peso expenses had been incurred. Picop's
explanation further assumes that a substantial part of Picop's dollar proceeds for its export sales were not actually surrendered to the
domestic banking system and seasonably converted into pesos; had all such dollar proceeds been converted into pesos, then the peso
figures could have been simply added up to reflect the actual peso value of Picop's export sales. Picop offered no evidence in respect
of these assumptions, no explanation why and how a "pre-determined fixed exchange rate" was chosen at the beginning of the year
and maintained throughout. Perhaps more importantly, Picop was unable to explain why its Books of Accounts did not pick up the same
adjustments that Picop's External Auditors were alleged to have made for purposes of Picop's Income Tax Return. Picop attempted to
explain away the failure of its Books of Accounts to reflect the same adjustments (no correcting entries, apparently) simply by quoting a
passage from a case where this Court refused to ascribe much probative value to the Books of Accounts of a corporate taxpayer in a
tax case. 41 What appears to have eluded Picop, however, is that its Books of Accounts, which are kept by its own employees and are
prepared under its control and supervision, reflect what may be deemed to be admissions against interest in the instant case. For
Picop's Books of Accounts precisely show higher sales figures and lower cost of sales figures than Picop's Income Tax Return.

It is insisted by Picop that its Auditors' adjustments simply present the "best and most objective" method of reflecting in pesos the
"correct and ACTUAL export sales" 42 and that the adjustments or "corrections" "did not result in realization of [additional] income and
should not give rise to any deficiency tax." The correctness of this contention is not self-evident. So far as the record of this case shows,
Picop did not submit in evidence the aggregate amount of its U.S. dollar proceeds of its export sales; neither did it show the Philippine
pesos it had actually received or been credited for such U.S. dollar proceeds. It is clear to this Court that the testimonial evidence
submitted by Picop fell far short of demonstrating the correctness of its explanation.

Upon the other hand, the CIR has made out at least a prima facie case that Picop had understated its sales and overstated its cost of
sales as set out in its Income Tax Return. For the CIR has a right to assume that Picop's Books of Accounts speak the truth in this case
since, as already noted, they embody what must appear to be admissions against Picop's own interest.

Accordingly, we must affirm the findings of the Court of Appeals and the CTA.

(2) Whether Picop is liable for the corporate development tax of five percent (5%)
of its income for 1977.

The five percent (5%) corporate development tax is an additional corporate income tax imposed in Section 24 (e) of the 1977 Tax Code
which reads in relevant part as follows:

(e) Corporate development tax. — In addition to the tax imposed in subsection (a) of this section, an additional tax in
an amount equivalent to 5 per cent of the same taxable net income shall be paid by a domestic or a resident foreign
corporation; Provided, That this additional tax shall be imposed only if the net income exceeds 10 per cent of the net
worth, in case of a domestic corporation, or net assets in the Philippines in case of a resident foreign corporation: . . .
.

The additional corporate income tax imposed in this subsection shall be collected and paid at the same time and in
the same manner as the tax imposed in subsection (a) of this section.

Since this five percent (5%) corporate development tax is an income tax, Picop is not exempted from it under the provisions of
Section 8 (a) of R.A. No. 5186.

For purposes of determining whether the net income of a corporation exceeds ten percent (10%) of its net worth, the term "net worth"
means the stockholders' equity represented by the excess of the total assets over liabilities as reflected in the corporation's balance
sheet provided such balance sheet has been prepared in accordance with generally accepted accounting principles employed in
keeping the books of the corporation. 43

The adjusted net income of Picop for 1977, as will be seen below, is P48,687,355.00. Its net worth figure or total stockholders' equity as
reflected in its Audited Financial Statements for 1977 is P464,749,528.00. Since its adjusted net income for 1977 thus exceeded ten
percent (10%) of its net worth, Picop must be held liable for the five percent (5%) corporate development tax in the amount of
P2,434,367.75.

Recapitulating, we hold:

(1) Picop is liable for the thirty-five percent (35%) transaction tax in the amount of P3,578,543.51.
(2) Picop is not liable for interest and surcharge on unpaid transaction tax.
(3) Picop is exempt from payment of documentary and science stamp taxes in the amount of P300,000.00 and the compromise penalty
of P300.00.
(4) Picop is entitled to its claimed deduction of P42,840,131.00 for interest payments on loans for, among other things, the purchase of
machinery and equipment.
(5) Picop's claimed deduction in the amount of P44,196,106.00 for the operating losses previously incurred by RPPM, is disallowed for
lack of merit.
(6) Picop's claimed deduction for certain financial guarantee expenses in the amount P1,237,421.00 is disallowed for failure adequately
to prove such expenses.
(7) Picop has understated its sales by P2,391,644.00 and overstated its cost of sales by P604,018.00, for 1977.
(8) Picop is liable for the corporate development tax of five percent (5%) of its adjusted net income for 1977 in the amount of
P2,434,367.75.
Considering conclusions nos. 4, 5, 6, 7 and 8, the Court is compelled to hold Picop liable for deficiency income tax for the year 1977
computed as follows:

Deficiency Income Tax

Net Income Per Return P 258,166.00 Add:

Unallowable Deductions

(1) Deduction of net operating losses incurred by RPPM P 44,196,106.00

(2) Unexplained financial guarantee expenses P 1,237,421.00
(3) Understatement of Sales P 2,391,644.00
(4) Overstatement of Cost of Sales P 604,018.00
——————
Total P 48,429,189.00
——————
Net Income as Adjusted P 48,687,355.00
===========
Income Tax Due Thereon 44 P 17,030,574.00
Less:
Tax Already Assessed per Return 80,358.00
——————
Deficiency Income Tax P 16,560,216.00
Add:
Five percent (5%) Corporate Development Tax P 2,434,367.00
Total Deficiency Income Tax P 18,994,583.00
===========
Add:
Five percent (5%) surcharge 45 P 949,729.15
——————
Total Deficiency Income Tax
with surcharge P 19,944,312.15
Add:
Fourteen percent (14%) interest from 15 April 1978 to 14 April 1981 46 P 8,376,610.80
Fourteen percent (14%) interest from 21 April 1983 to 20 April 1986 47 P 11,894,787.00

——————

Total Deficiency Income Tax

Due and Payable P 40,215,709.00

===========

WHEREFORE, for all the foregoing, the Decision of the Court of Appeals is hereby MODIFIED and Picop is hereby ORDERED to pay
the CIR the aggregate amount of P43,794,252.51 itemized as follows:

(1) Thirty-five percent (35%) transaction tax P 3,578,543.51

(2) Total Deficiency Income Tax Due 40,215,709.00
———————
Aggregate Amount Due and Payable P 43,794,252.51
============
No pronouncement as to costs.
SO ORDERED.
Narvasa, C.J., Regalado, Davide, Jr., Romero, Bellosillo, Melo, Puno, Kapunan, Mendoza, Francisco, Hermosisima, Jr. and
Panganiban, JJ., concur.
Padilla, J., took no part.
Power of BOI to amend cert of registration

G.R. No. 117680. February 9, 1996.*

FIRST LEPANTO CERAMICS, INC., petitioner, vs. HON. COURT OF APPEALS and MARIWASA MANUFACTURING, INC., respondents.

Administrative Law; Board of Investments; Judgments; It is unacceptable for the Court of Appeals to base its peremptory judgment on a conjecture,
i.e., the possibility that another pending case could be decided against the petitioner, and to second-guess the BOI on what it would do in the event
of such an adverse ruling.—The challenged decision of the appellate court, annulling the BOI decision in Case No. 92-005, is anchored mainly on the
fact that the BOI did not hold in abeyance its action on First Lepanto’s application for amendment of its certificate of registration until after BOI
Case No. 92-004 would have been finally resolved. It has described the grant by the BOI of First Lepanto’s application to be “premature” and “an
exercise in futility” in the sense that “(i)f a decision is rendered in aforesaid BOI case (92-004) finding merit in the complaint, it is not farfetch that
cancellation of (First Lepanto’s) certificate of registration may be ordered.” It is unacceptable, in our view, for the appellate court to base its
peremptory judgment on a conjecture, i.e., the possibility that BOI Case No. 92-004 could be decided against petitioner, and to second-guess the
BOI on what it would do in the event of such an adverse ruling. The appellate court itself has recognized that the final results of the controversy in
BOI Case No. 92-004 cannot necessarily foreclose or circumscribe the action that may be had on First Lepanto’s application for amendment. Under
Chapter II, Art. 7(8) of E.O. No. 226, the BOI need not cancel the certificate of a registrant found to have infringed the terms and conditions of its
registration.

Same; Same; The exercise of administrative discretion is a policy decision and a matter that can best be discharged by the government agency
concerned and not by the courts.—The BOI is the agency tasked with evaluating the feasibility of an investment project and to decide which
investment might be compatible with its development plans. The exercise of administrative discretion is a policy decision and a matter that can
best be discharged by the government agency concerned and not by the courts. BOI has allowed the amendment of First Lepanto’s product line
because that agency “believes that allowing First Lepanto to manufacture wall tiles as well will give it the needed technical and market flexibility, a
key factor, to enable the firm to eventually penetrate the world market and meet its export requirements.”

Same; Courts will not interfere in matters which are addressed to the sound discretion of government agencies entrusted with the regulation of
activities coming under the special technical knowledge and training of such agencies.—In Felipe Ysmael, Jr. & Co., Inc. vs. Deputy Executive
Secretary, we have already said and now still reiterate that—“x x x while the administration grapples with the complex and multifarious problems
caused by unbridled exploitation of these resources, the judiciary will stand clear. A long line of cases establish the basic rule that the courts will
not interfere in matters which are addressed to the sound discretion of government agencies entrusted with the regulation of activities coming
under the special technical knowledge and training of such agencies.”

PETITION for review of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

Castillo, Laman, Tan, Pantaleon & San Jose for petitioner

De Borja, Medialdea, Ata, Bello, Guevarra & Serapio for private respondent.

VITUG, J.:

Sought to be reversed by the Court is the 13th August 1993 decision of the Court of Appeals nullifying the approval, dated 10 December 1992, by
the Board of Investments (“BOI”) of the application of First Lepanto Ceramics, Inc., for an amendment of its Certificate of Registration No. EP 89-
452 that would change the registered product from “glazed floor tiles” to “ceramic tiles.”

Petitioner First Lepanto Ceramics, Inc., was registered as a “non-pioneer enterprise” with public respondent BOI having been so issued, on 16
October 1989, a Certificate of Registration (No. EP 89-452) under Executive Order No. 226, also known as the Omnibus Investment Code of 1987, in
the manufacture of glazed floor tiles. Among the specific terms and conditions imposed on First Lepanto’s registration were that:

“1.The enterprise shall export at least 50% of its production; (and)

“2.The enterprise shall produce only glazed floor tile.”

First Lepanto was, by virtue of its registration, granted non-fiscal and fiscal incentives by the BOI, including an exemption from taxes on raw
materials and tax and duty exemption on its imported capital equipment.

Private respondent Mariwasa Manufacturing, Inc., a competitor of First Lepanto, is also registered with the BOI as a non-pioneer producer of
ceramic tiles (Certificate of Registration No. 89-427).

In a letter, dated 10 August 1991, addressed to the BOI, First Lepanto requested for an amendment of its registered product to “ceramic tiles” in
order to likewise enable it to manufacture ceramic wall tiles; however, before the BOI could act on First Lepanto’s request for amendment,
Mariwasa and Fil-Hispano Ceramics, Inc., already had on file their separate complaints with the BOI against First Lepanto for violating the terms and
conditions of its registration by the use of its tax and duty-free equipment in the production of ceramic wall tiles.

On 30 April 1992, the BOI rendered a decision finding First Lepanto guilty and imposing on the latter a fine of P797,950.40 without prejudice,
however, 1) to an imposition of additional penalty should First Lepanto continue to commit the same violation; and 2) to the Board’s authority to
consider/evaluate First Lepanto’s request for an amendment of its certificate of registration, including, among other things a change in its
registered product from “glazed floor tiles” to “ceramic tiles.”

After paying the imposed fine, First Lepanto, on 20 June 1992, formally filed its application with the BOI (docketed BOI Case No. 92-005)4 to amend
its registered product from “glazed floor tiles” to “ceramic tiles.”

On 06 August 1992, another verified complaint was filed by Mariwasa with the BOI (docketed BOI Case No. 92-004) which asseverated that, despite
BOI’s finding that First Lepanto had violated the terms and conditions of its registration, the latter still continued with its unauthorized production
and sale of ceramic wall tiles. Respondent BOI dismissed the complaint for lack of merit.5 Its motion for reconsideration having been denied,
Mariwasa appealed the case to the Office of the President.6

In the meantime, First Lepanto caused the publication, on 24 September 1992, in the Manila Bulletin of a notice on the official filing with the BOI of
the aforementioned application for amendment of Certificate of Registration No. EP 89-452 (BOI Case No. 92-005).7 Mariwasa opposed the
application. On 10 December 1992, respondent BOI handed down its decision approving First Lepanto’s application.

Mariwasa went to the Court of Appeals via a petition for review, with an application for a writ of preliminary injunction and/or temporary
restraining order, assailing the decision of the BOI. On 17 February 1992, the appellate court issued a temporary restraining order enjoining the BOI
and First Lepanto from enforcing or executing the assailed ruling. First Lepanto moved for the dismissal of the petition and to lift the restraining
order. The motion was denied. On 13 August 1993, the Court of Appeals rendered its now disputed decision8 annulling the 10th December 1992
decision of the BOI. First Lepanto moved for a reconsideration but it was denied.

Hence, the instant recourse.

The Court grants the petition.

The challenged decision of the appellate court, annulling the BOI decision in Case No. 92-005, is anchored mainly on the fact that the BOI did not
hold in abeyance its action on First Lepanto’s application for amendment of its certificate of registration until after BOI Case No. 92-004 would have
been finally resolved. It has described the grant by the BOI of First Lepanto’s application to be “premature” and “an exercise in futility” in the sense
that “(i)f a decision is rendered in aforesaid BOI case (92-004) finding merit in the complaint, it is not farfetch that cancellation of (First Lepanto’s)
certificate of registration may be ordered.” It is unacceptable, in our view, for the appellate court to base its peremptory judgment on a conjecture,
i.e., the possibility that BOI Case No. 92-004 could be decided against petitioner, and to second-guess the BOI on what it would do in the event of
such an adverse ruling. The appellate court itself has recognized that the final results of the controversy in BOI Case No. 92-004 cannot necessarily
foreclose or circumscribe the action that may be had on First Lepanto’s application for amendment. Under Chapter II, Art. 7(8) of E.O. No. 226,9 the
BOI need not cancel the certificate of a registrant found to have infringed the terms and conditions of its registration.

Rather significant is the fact that to hold the BOI from taking action on First Lepanto’s application would be to defeat the declaration of investment
policies expressed in the law; viz:

“ART. 2. Declaration of Investment Policies.—To accelerate the sound development of the national economy in consonance with the principles and
objectives of economic nationalism and in pursuance of a planned economically feasible and practical dispersal of industries and the promotion of
small and medium scale industries, under condition which will encourage competition and discourage monopolies.”

The BOI is the agency tasked with evaluating the feasibility of an investment project and to decide which investment might be compatible with its
development plans. The exercise of administrative discretion is a policy decision and a matter that can best be discharged by the government
agency concerned and not by the courts. BOI has allowed the amendment of First Lepanto’s product line because that agency “believes that
allowing First Lepanto to manufacture wall tiles as well will give it the needed technical and market flexibility, a key factor, to enable the firm to
eventually penetrate the world market and meet its export requirements.” In Felipe Ysmael, Jr. & Co., Inc. vs. Deputy Executive Secretary, we have
already said and now still reiterate that___

“x x x while the administration grapples with the complex and multifarious problems caused by unbridled exploitation of these resources, the
judiciary will stand clear. A long line of cases establish the basic rule that the courts will not interfere in matters which are addressed to the sound
discretion of government agencies entrusted with the regulation of activities coming under the special technical knowledge and training of such
agencies.”

WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Appeals is hereby REVERSED and SET ASIDE and the decision of the
Board of Investments is REINSTATED. No costs.

Padilla (Chairman), Bellosillo, Kapunan and Hermosisima, Jr., JJ., concur.

Petition granted. Judgment reversed and set aside, that of the Board of Investments reinstated.
Notes.—One thrust of the multiplication of administrative agencies is that the interpretation of certain contracts and agreements and the
determination of private rights under these agreements is no longer a uniquely judicial function. (Realty Exchange Venture Corporation vs. Sendino,
233 SCRA 665 [1994])

An application with BPTII for an administrative cancellation of a registered trade mark cannot per se have the effect of restraining or preventing the
courts from the exercise of their lawfully conferred jurisdiction. (Conrad and Company, Inc. vs. Court of Appeals, 246 SCRA 691 [1995])

BOI-Quasi-Judicial/Reducing Incentive

G.R. No. 105014. December 18, 2001.*

PILIPINAS KAO, INC., petitioner, vs. THE HONORABLE COURT OF APPEALS and BOARD OF INVESTMENTS, respondents.

Board of Investments (BOI); Administrative Law; Judgments; The Court cannot ignore the fact, so obvious upon the record, that BOI did not render
a decision in the manner prescribed by its own rules and the law, and this perceived shortcoming also offers the opportunity to remind BOI and
other quasi-judicial agencies exercising quasi-judicial functions of the prescription of the law and in the case of BOI, also its own rules, that their
decision in contested cases shall be in writing and shall state clearly and distinctly the facts and the law on which these are based.—For added
measure, this Court cannot ignore the fact, so obvious upon the record, that respondent BOI did not render a decision in the manner prescribed by
its own rules and the law. We take cognizance of the flaw because it has a bearing on the timeliness of the petition, a key issue involved in this
case, which has to be resolved in order to arrive at a just decision on the merits of the case. Moreover, the perceived shortcoming also offers the
opportunity to remind BOI and other quasi-judicial agencies exercising quasijudicial functions of the prescription of the law and in the case of BOI,
also its own rules, that their decision in contested cases shall be in writing and shall state clearly and distinctly the facts and the law on which these
are based. Indeed, a judicious and well-reasoned resolution of the questions peculiar in their fields of expertise, comes a strong persuasive effect
and will go a long way in easing the courts’ burden.

Same; Same; Same; The constitutional and statutory mandate that “no decision shall be rendered by any court of record without expressing therein
clearly and distinctly the facts and the law on which it is based,” applies as well to dispositions by quasi-judicial and administrative bodies.—It is
readily evident that the issues raised and arguments proffered by petitioner in asking for reconsideration were weighty enough to deserve a full-
length decision as prescribed by the rules. The manner by which BOI brushed off petitioner’s reiterative protests did not amount to a decision
within the mandate of its own rules, nor that contained in the Administrative Code of 1987 which similarly provides as follows: SEC. 14. Decision.—
Every decision rendered by the agency in a contested case shall be in writing and shall state clearly and distinctly the facts and the law on which it is
based. We have occasion to rule that the constitutional and statutory mandate that “no decision shall be rendered by any court of record without
expressing therein clearly and distinctly the facts and the law on which it is based,” applies as well to dispositions by quasi-judicial and
administrative bodies.

Same; Same; Same; BOI Resolutions of May 10, 1990, as well as its Letters of August 1, 1990 and March 11, 1991 did not qualify as “decision,”
absent a clear and distinct statement of the facts and the law to support the action, and lacking the essential attribute of a decision, the acts in
question were at best interlocutory orders that did not attain finality nor acquire the effects of a final judgment despite the lapse of the statutory
period to appeal.—In the context of what the law and its own rules prescribe, as well as our applicable pronouncements, the BOI Resolution of May
10, 1990, as well as its Letters of August 1, 1990 and March 11, 1991 did not qualify as “decision,” absent a clear and distinct statement of the facts
and the law to support the action. Lacking the essential attribute of a decision, the acts in question were at best interlocutory orders that did not
attain finality nor acquire the effects of a final judgment despite the lapse of the statutory period of appeal.

Same; Same; Same; While BOI should first resolve the merits of the case in the proper exercise of its primary jurisdiction, the Court shall
nevertheless proceed with the review for procedural expediency and consideration of public interest involved in the questions before the Court
which bear on the certainty and stability of economic policies and proper implementation thereof—it cannot be denied that inappropriate and
irresolute implementation of our investment incentive laws detracts from the very purpose of these laws.—The element of time relied upon by
respondents does not bar our inquiry into the substantive merits of the petition, and that respondent court erred in considering the petition for
review filed out of time. While BOI should first resolve the merits of the case in the proper exercise of its primary jurisdiction, we shall nevertheless
proceed with this review for procedural expediency and consideration of public interest involved in the questions before us which bear on the
certainty and stability of economic policies and proper implementation thereof. For it cannot be denied that inappropriate and irresolute
implementation of our investment incentive laws detracts from the very purpose of these laws.

Same; Investment Incentives; Tax Credits; The simplistic view of the respondent court failed to take into account the policy and intent of the law
and overlooked the absurd and unjust consequence that results from such construction and application of B.P. Blg. 391; There is a sense of irony in
penalizing the petitioner BOI-registered enterprise as BOI did, for the excess production when it meant correspondingly, more foreign exchange
earnings from its export, more job opportunities and a host of direct and indirect benefits to the economy, which are precisely the reasons for the
incentives granted by the law.—But respondent court went further and ruled that “if an existing registered enterprise has attained a capacity
higher than its registered capacity, then it follows that said attained capacity is the capacity existing prior to expansion. This simplistic view failed to
take into account the policy and intent of the law and overlooked the absurd and unjust consequence that results from such construction and
application of the law. Thus, in the case of petitioner whose performance exceeded its original registered capacity, the base figure used was the
highest attained production volume before the registration of its new expanded capacity. This meant a bigger base figure deductible from the net
value earned (NVE) and net local content (NLC) entitled to the fiscal incentive, than another enterprise whose production never reached its
registered capacity. In the case of the latter, the base figure is the registered capacity, nothing more. The tax credit incentive being a percentage of
the net value earned and the net local content the larger the deductible base figure the smaller the tax credit incentive. As petitioner correctly
lamented, it would have been better off if it did not perform well enough to exceed its original registered capacity, because the use of the highest
attained production volume as a base figure, and not simply the registered capacity, resulted in penalizing it for producing and exporting more than
its official commitment and placing it in a position inferior in terms of incentives, to a similar enterprise which failed to produce more than its
registered capacity. There is a sense of irony in penalizing petitioner as BOI did, for the excess production when it meant correspondingly, more
foreign exchange earnings from its export, more job opportunities and a host of direct and indirect benefits to the economy. These are precisely
the reasons for the incentives granted by the law.

Same; Same; Same; Statutory Construction; The highest attained production capacity is inappropriate as a base figure, as it is reasonable to assume
that actual production is affected in large measure by the vagaries of market forces, the law of supply and demand, and a host of unforeseen and
unforeseeable factors that contribute to its lack of constancy; The view that the application of the highest attained production capacity as a base
figure is implicit or has basis in the law itself is not correct, for it leads to an unreasonable situation and rejects the presumption that absurd or
undesirable consequences are never intended by a legislative measure.—For another cogent reason, the highest attained production capacity is
inappropriate as a base figure. It is reasonable to assume that actual production is affected in large measure by the vagaries of market forces, the
law of supply and demand, and a host of unforeseen and unforeseeable factors that contribute to its lack of constancy. Given these variants, a
circumstantial and temporary peak in production capacity should not be interpreted as the “existing capacity,” in a way disadvantageous to
petitioner. It is thus difficult to accede to respondents’ urging that the application of the highest attained production capacity as a base figure is
implicit or has basis in the law itself, or otherwise justiciable. This is not a correct view. For one, it leads to an unreasonable situation already
discussed and rejects the presumption that absurd or undesirable consequences are never intended by a legislative measure. But here,
consequences of the kind were unwittingly read into the law.

Same; Same; Same; Same; Viewed from the unmistakable statutory purpose, the reduction of the tax incentives a BOI-registered firm deserved
under the law for producing more than its registered capacity, is against the purpose of investment incentive laws.—In essence, the law intends to
encourage and promote an export-led economy through incentives which are performance-oriented. The same policy and intent can be discerned
in P.D. 1789, prior to its amendment by B.P. Blg. 301, evident from its declared purpose to “attain a rising level of production and employment,
increase foreign exchange earnings, hasten the economic development of the nation, and assure that the benefits of development accrue to the
Filipino people; x x x” This provision was reproduced in Art. 79 of the Omnibus Investments Code of 1987 (E.O. 226), a clear manifestation of the
continuing policy of the State to liberalize the grant of incentives, as a way to attain the purpose of the law, which is to encourage investments that
tend to “result in increased volume and value of exports for the economy. Viewed from the unmistakable statutory purpose, the reduction of the
tax incentives petitioner deserved under the law for producing more than its registered capacity, is against the purpose of investment incentive
laws.

Same; Same; Same; Same; A statute derives its vitality from the purpose for which it is enacted and to construe it in a manner that disregards or
defeats such purpose is to nullify or destroy the law.—As we have consistently ruled, if the statutory purpose is clear, the provisions of the law
should be construed so as not to defeat but to carry out such end and purpose. For a statute derives its vitality from the purpose for which it is
enacted and to construe it in a manner that disregards or defeats such purpose is to nullify or destroy the law.

Same; Same; Same; Same; Administrative Law; An administrative agency may not enlarge, alter or restrict the provisions of the statute being
administered.—An administrative agency may not enlarge, alter or restrict the provisions of the statute being administered. It may not engraft
additional non-contradictory requirements on the statute which were not contemplated by the legislature.

Same; Right to Information; Publication; BOI’s Manual of Operations having been issued to implement the provisions of the Investment Code, its
adoption being “in execution of or supplementary . . . to the law itself,” needs to be published to be effective.—Respondent BOI, having
acknowledged that the Manual of Operations in which the “base figure” was formulated, was issued to implement the provisions of the Investment
Code, its adoption being “in execution of or supplementary . . . to the law itself” cannot ignore the need for publication made imperative in the
cited provision. The absence of publication is a fatal omission that renders the Manual of Operations void and of no effect, as held in Tañada vs.
Tuvera: We hold therefor that all statutes, including those of local application and private laws, shall be published as a condition for their
effectivity, which shall begin fifteen days after publication unless a different effectivity date is fixed by the legislature. x x x Administrative rules and
regulations must also be published if their purpose is to enforce or implement existing law pursuant to a valid delegation.

Same; Same; Same; The BOI Manual of Operations is not just an internal rule affecting only the personnel of BOI—its effects reach out to petitioner
and enterprises similarly situated to diminish considerably what the law intends to grant by way of incentives.—This Court is not persuaded. The
Manual of Operations is not just an internal rule affecting only the personnel of BOI. As implemented by BOI, its effects reach out to petitioner and
enterprises similarly situated to diminish considerably what the law intends to grant by way of incentives. For the exception to apply, the Manual of
Operations must not affect the rights of the public. But it did in a very substantial way.

Same; Same; Same; Publication of the Manual of Operations was a mandatory requirement for its effectivity and BOI’s failure to comply with the
expressed provision of the law and the teachings in Tañada v. Tuvera, 146 SCRA 446 (1986), is a fatal omission.—As respondent admit, the Manual
of Operations was meant to enforce or implement B.P. Blg. 391, a law of general application. As we said in Tañada: Administrative rules and
regulations must also be published if their purpose is to enforce or implement existing law pursuant to a valid delegation. Clearly then, publication
of the Manual of Operations was a mandatory requirement for its effectivity and BOI’s failure to comply with the expressed provision of the law
and the teachings in Tañada is a fatal omission
PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court

Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for petitioner.

The Solicitor General for BOI.

KAPUNAN, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside the decision of the respondent court in CA-G.R. SP No.
24979, titled “Pilipinas Kao, Inc. vs. Board of Investments.”

In that decision, respondent Court of Appeals sustained the reduction of tax credits on net value earned and net local content applied for by
petitioners in 1988 and 1989, an act of respondent Board of Investments (BOI), which petitioner assailed as invalid for a number of reasons.

The essential facts as found by the respondent court and which are not disputed are quoted hereunder:

Petitioner, Pilipinas Kao, Inc. is a corporation organized and existing under the laws of the Philippines with principal office at 108-A E. Rodriguez, Jr.
Avenue, Libis, Quezon City. It is a corporation engaged in multiple areas of registered activity, which is to say it has a number of projects registered
with respondent Board of Investments (BOI, for brevity). For each registered project, petitioner was issued Certificates of Registration as follows:

Project Certificate of Registration No. Date Issued Law of Registration

1 76-611 Aug. 24, 1976 R.A. No. 6135
2 78-725 Mar. 20, 1978 R.A. No. 6135

3 87-1247 Jan. 08, 1987 P.D. No. 1789 as amended by B.P.Blg. 391
487-1476July 29, 1987P.D. No. 1789 asamended by B.P.Blg. 391

588-0240Feb. 29, 1988E.O. No. 226

6EP 88-496July 26, 1988E.O. No. 226
7EP 89-965Jan. 31, 1990E.O. No. 226
8EP 90-082Mar. 16, 1990E.O. No. 226
Each project is entitled to a certain set of incentives depending upon, among others, the law of registration and the status and type of registration.
The present controversy refers only to the tax incentives provided for under Article 48 of P.D. No. 1789, as amended by B.P. Blg. 391, which states:

“ART. 48. Incentives for Registration New or Expanding Export Producers.—All registered export producers, whether pioneer or non-pioneer, shall
be granted the following incentives to the extent engaged in new capacity or expansion of capacity in a preferred area of investment.

“x x x xxx x x x.

“ ‘(c) Tax Credit on Net Value Earned.—For the same period and at the same rates provided for in subparagraph (c), Article 45, a tax credit on net
value earned shall be granted to registered export producers.

“ ‘(d) Tax Credit on Net Local Contents of Exports.—For the first five (5) years of commercial operation or registration, all registered new or
expanding export producers shall be entitled to a tax credit equivalent to ten percent (10%) of net local content without prejudice to the further
enjoyment of the incentive for another period of five (5) years immediately following, the tax credit to be computed on the basis of the increment
in real terms over the average net local content for the immediate preceding three years of enjoyment of this incentive. For purposes of calculation
of the tax credit, ‘net local content’ shall mean value of export sales less depreciation of capital equipment and the value of imported raw materials
and supplies and indigenous commodities which the Board may exclude if they are not anyway available under clearly more favorable terms in the
international market.’ ”

Article 45 (c), in relation to Article 48 (c), in turn provides:

(c) Tax Credit on net value earned.—For the first five (5) years of commercial operation, all registered domestic producers shall be entitled to a tax
credit equivalent to five percent (5%) of net value earned. Those engaged in pioneer projects shall be entitled to this incentive to the extent of ten
percent (10%) of net value earned over the same period or coterminous with the remaining period of availment of the registrant who first starts
commercial operation in case there are several registered pioneer enterprises in the same activity, regardless of their respective dates of
registration. For purposes of calculation of the tax credit, ‘net value earned’ shall mean value of sales less cost of raw materials and components,
supplies and utilities and depreciation of capital equipment. For raw materials and components which are produced by the registered enterprise,
allocated costs may be determined by the Board.’

These tax incentives apply only to project Nos. 3 and 4 of petitioner. Certificate of Registration No. 87-1476 (Project No. 4) is that of new export
producer, whereas Certificate of Registration No. 87-1247 (Project No. 3) is that of an expanding export producer (which is an expansion of
petitioner’s existing projects registered under R.A. No. 6135).
On March 31, 1989, petitioner filed applications for its 1988 tax credits on the Net Value Earned (NVE, for short) for P8,583,328.00 and on the Net
Local Content (NLC, for brevity) for P25,928,675.00 for a grand total of P34,512,000.00 (Annexes “J” & “K,” respectively). The computations are laid
down as follows:

Notified of respondent’s decision petitioner requested for a reconsideration, but before respondent could act thereon, petitioner again filed on July
3, 1990 its applications for 1989 tax credits on the NVE in the amount of P9,649,459.00 and on the NLC, P25,648,401.00, for a grand total of
P35,297,860.00. The computation are as follows:

“NET VALUE EARNED COMPUTATION

On July 27, 1990, respondent denied petitioner’s request for reconsideration anent its 1988 tax credit, the denial being communicated to petitioner
in a letter dated August 1, 1990 (Annex “11,” Comment) and received by the latter on August 15, 1990.

On December 17, 1990, petitioner again moved for reconsideration of respondent’s letter dated August 1, 1990 (Annex “12,” Comment), but the
same was denied by respondent in a letter dated March 11, 1991 (copy of which was received by petitioner on March 15, 1991). (Annex “13,”
Comment)

On March 11, 1991, respondent also advised petitioner of the approval of the application for the year 1989 tax credit but only in the following
reduced amounts:

NVE .........................................P 3,441,473.00

NLC .........................................P 649,471.00

Total ..........................P 4,090,944.00

Petitioner then filed with the Honorable Supreme Court, by registered mail on April 15, 1991, a motion for extension of time to file petition
pursuant to Article 82 of the Omnibus Investments Code; it likewise filed a second motion for extension of time to file petition on May 15, 1991,
both of which were not acted upon by the Honorable Supreme Court. However, on May 6, 1991, the Honorable Supreme Court issued a resolution
referring the instant petition to this Court, (p. 5, Rollo).

Respondent Court dismissed the petition for review “on technical and substantive grounds.”

On technical ground, respondent court ruled that the petition for review was filed beyond the thirty-day period of appeal set in Article 78 of P.D.
1789, as amended by B.P. Blg. 391.

In ruling against the timeliness of the petition for review, respondent court made the following findings:

In the instant case, petitioner received a copy of respondent’s letter dated August 1, 1990 (letter denying petitioner’s first request for
reconsideration of respondent’s decision relative to petitioner’s 1988 tax credit on NVE and NLC) on August 15, 1990 (p. 13, Petition). Yet, it filed its
second request for reconsideration only on December 17, 1990, or more than four (4) months from receipt of the challenged letter-decision. This
clear failure and negligence of petitioner to interpose a timely appeal within the thirty (30) days reglementary period is fatal to its cause.

The woes of petitioner were compounded when it received a copy of respondent’s letter-decision dated March 11, 1991 (letter denying
petitioner’s second request for reconsideration, and granting its 1989 tax credits at reduced amounts) on March 15, 1991, and yet it utterly failed
to interpose an appeal in due time as provided for in P.D. No 1789, as amended. It only filed this petition only on May 30, 1991.

Two letters of respondent BOI were involved in CA-G.R. SP No. 24979. The first concerns petitioner’s application for tax credits for 1988 and the
second, its application for tax credits for 1989.

On the second matter concerning the 1989 tax credit, respondent court noted that its letter of March 11, 1991 reducing the tax credit applied for
was received by petitioner on March 15, 1991 and as it found:

Petitioner then filed with the Honorable Supreme Court, by registered mail on April 15, 1991, a motion for extension of time to file petition
pursuant to Article 82 of the Omnibus Investments Code; it likewise filed a second motion for extension of time to file petition on May 15, 1991,
both of which were not acted upon by the Honorable Supreme Court. However on May 6, 1991, the Honorable Supreme Court issued a resolution
referring the instant petition to this Court. x x x

The first motion for extension of thirty (30) days filed with this Court on April 15, 1991 was on time because April 14, 1991, the last day for appeal,
was a Sunday.

The second motion for extension of fifteen (15) days was filed with this Court on May 15, 1991, was also on time because petitioner received a
copy of the Resolution of May 6, 1991 referring this case to the Court of Appeals only on May 29, 1991. It was in the latter court that the petition
for review was filed on May 30, 1991.

Petitioner’s judicial recourse from BOI’s letter of March 11, 1991 in so far as it dealt with the 1989 tax credit application was filed within the
periods of extension prayed for in two motions seasonably filed with this Court. The failure of this Court and respondent Court of Appeals to act
upon these motions was an oversight not of petitioner’s making and it should not result in any prejudice to it. For this reason, and considering that
the motions for extension were not denied, we consider the petition filed on time insofar as it concerns the 1989 tax credit application summarily
resolved in the March 11 letter.

For added measure, this Court cannot ignore the fact, so obvious upon the record, that respondent BOI did not render a decision in the manner
prescribed by its own rules and the law. We take cognizance of the flaw because it has a bearing on the timeliness of the petition, a key issue
involved in this case, which has to be resolved in order to arrive at a just decision on the merits of the case.4 Moreover, the perceived shortcoming
also offers the opportunity to remind BOI and other quasi-judicial agencies exercising quasijudicial functions of the prescription of the law and in
the case of BOI, also its own rules, that their decision in contested cases shall be in writing and shall state clearly and distinctly the facts and the law
on which these are based.5 Indeed, a judicious and well-reasoned resolution of the questions peculiar in their fields of expertise, comes a strong
persuasive effect and will go a long way in easing the courts’ burden

The questioned acts of respondent BOI need to be examined in the light of this mandatory requirement of the law and its own rules.

In respect to the incentive availment for 1988, respondent BOI substantially reduced the tax credit on net local content and net value earned
applied for by the petition for that year, without explaining the basis or reason for the reduction. An explanation was in order if only because,
according to petitioner, and this was not denied BOI granted the full incentives for 1987. Yet, for the following year, 1988, BOI simply passed a
Resolution on May 10, 1990 which is contained in the certification of it’s Board Secretary, to wit:

CERTI FICATI ON

Quoted hereunder is an excerpt from the Minutes of the Board Meeting held on May 10, 1990:

“RESOLVED, that PILIPINAS KAO, INC., be as it is hereby GRANTED tax credits on Net Local Content and Net Value Earned in the amount of
P2,681,018.165 and P1,542,758.61, respectively (net of E.O. 1045 amortizations for 2 years) in consideration of the foregoing resolutions (Bd. Res.
No. 188 S’ 90).”

Makati, Metro Manila, 23 July 1991.

CERTIFIED CORRECT:

(Sgd.) JOSEFINA Q. GARCIA

Acting Board Secretary

The board resolution cited in the certification, bare as it is, is offered by respondent BOI as its decision on the matter of the 1988 tax incentive
availment

It is not clear from the record how the resolution was communicated to petitioner and when the latter received it. What is on record is petitioner’s
Letter dated June 4, 1990 asking for reconsideration and for the full allowance of the tax credit as applied for.

In that letter, petitioner contested the reduction which BOI accomplished with the application for the first time, of a deductible “base figure”
equivalent to the highest production volume for a three-year period before the expansion capacity was registered. Petitioner argued that the use
of the “base figure” was not sanctioned by the law and contravened the long standing practice of respondent BOI, as well as the policy and intent
of the State in granting the incentives.

Respondent BOI denied the request for reconsideration in its Letter dated August 1, 1990.8

It is to be noted that in refusing to reconsider, respondent BOI did not address any of the issues presented by the petitioner, simply saying in its
August 1 letter “that the Board in its meeting on July 27, 1990 denied your request for reconsideration of 1988 net local content and new value
earned of tax credit application.”

Because of the failure of respondent BOI to resolve the issues, petitioner again asked for reconsideration by a Letter dated December 17, 1990,9
reiterating that the use of the base figure defeated the very purpose of the law which was to encourage private domestic and foreign investment
and reward performance contributing to economic development. Further, that the use of the highest attained production in the three (3) years
preceding the expansion as base figure in effect penalized petitioner for its efficiency.

Denying petitioner’s last request in the same cavalier fashion, respondent BOI simply informed it “that the Board in its meeting of March 5, 1991
denied your request for reconsideration of your NLC/NVE tax credit application for 1988.”

In the same letter of March 11, 1991, respondent BOI informed petitioner that its application for 1989 NLC/NVE tax credit had been approved in
reduced amount stated therein, again without any explanation for the reduction. This letter is supposed to be the decision of the BOI on the
matter.

This brings into focus the question of whether BOI rendered a decision within the meaning of its own rules which requires that the decision in a
contested case shall be in writing and shall state clearly and distinctly the facts and the law on which it is based. It reads—
Sec. 4. Contents of Decision.—The orders, resolutions and decision determining the merits of the case shall be in writing and shall state clearly and
distinctly the facts and the law on which it is based.

It is readily evident that the issues raised and arguments proffered by petitioner in asking for reconsideration were weighty enough to deserve a
full-length decision as prescribed by the rules.

The manner by which BOI brushed off petitioner’s reiterative protests did not amount to a decision within the mandate of its own rules, nor that
contained in the Administrative Code of 1987 which similarly provides as follows

SEC. 14. Decision.—Every decision rendered by the agency in a contested case shall be in writing and shall state clearly and distinctly the facts and
the law on which it is based.

We have occasion to rule that the constitutional and statutory mandate that “no decision shall be rendered by any court of record without
expressing therein clearly and distinctly the facts and the law on which it is based,” applies as well to dispositions by quasijudicial and
administrative bodies.

In Malinao vs. Reyes, we held that the voting in the Sanggunian in which the majority found the respondent official guilty of the administrative
charge, was not a decision contemplated in the law, and had no legal effect as such.

In the context of what the law and its own rules prescribe, as well as our applicable pronouncements, the BOI Resolution of May 10, 1990, as well
as its Letters of August 1, 1990 and March 11, 1991 did not qualify as “decision,” absent a clear and distinct statement of the facts and the law to
support the action.

Lacking the essential attribute of a decision, the acts in question were at best interlocutory orders that did not attain finality nor acquire the effects
of a final judgment despite the lapse of the statutory period of appeal.

Thus, the element of time relied upon by respondents does not bar our inquiry into the substantive merits of the petition, and that respondent
court erred in considering the petition for review filed out of time.

While BOI should first resolve the merits of the case in the proper exercise of its primary jurisdiction, we shall nevertheless proceed with this
review for procedural expediency and consideration of public interest involved in the questions before us which bear on the certainty and stability
of economic policies and proper implementation thereof. For it cannot be denied that inappropriate and irresolute implementation of our
investment incentive laws detracts from the very purpose of these laws.

The essential facts which gave rise to the substantive issue resolved by respondent court and which is now before this Court are not disputed.

Petitioner is engaged in the manufacture for export of methyl esters, refined glycerine and fatty alcohols. It initially registered with respondent BOI
on August 24, 1976 and March 20, 1978 as an Export Producer pursuant to Republic Act No. 6135, as amended, otherwise known as the Export
Incentive Act. Under this registration approved by BOI, petitioner’s registered production capacity were as follows:

Batas Pambansa Blg. 391, otherwise known as the Investment Policy Act of 1983 was enacted in 1983, to amend P.D. 1789. The new law provided,
among others, for tax incentives for new and expanding export producer.

To avail itself of these tax incentives, petitioner applied with BOI for registration of its expanded production capacity, which together with the then
existing registered capacity are detailed below

BOI approved petitioner’s application and consequently issued in its favor on January 8, 1987 a certificate of registration as an expanding export
producer on a pioneer status to the extent of the expanded or additional capacity.

As an expanding export producer on a pioneer status, petitioner was entitled to certain incentives granted under that law. Among such incentives
were the “tax credit on net value earned” provided in Article 48(c) in relation to Article 45(c) of the law and the “tax credit on net local content of
exports” as provided in Article 48(d), thereof. These provisions are cited in the decision of respondent court in CA-G.R. SP No. 24979 quoted earlier
in this decision.

The initial application by petitioner for tax credit incentives for the year 1987 was approved by BOI substantially as applied for.

But those applied for in 1988 and onwards were drastically reduced by BOI with the adoption and application of a deductible “base figure”
provided in its Tax Credit on NLC and NVE Manual of Operations, which reads as follows:

xxx

VII. COMPUTATION OF APPROPRIATE BASE FIGURE FOR TAX CREDIT ON NLC AND NVE.

A.New ProducerNo base figure used.

B.Expanding Domestic Export Producer With Registered Existing Capacity—

1.Base figure for NVE shall be existing registered capacity or highest attained production volume, whichever is higher. If product is heterogeneous,
base figure shall be highest projected value of sales or highest attained sales value, whichever is higher.

2.Base figure for NLC shall be highest projected value of export sales or highest attained export sales value, whichever is higher.

x x x.18

The use of the “base figure” precipitated the present controversy because of the considerable diminution of what petitioner considered to be the
fiscal incentives it deserved under the law.

At the core of the present dispute is the validity of BOI’s Manual of Operations, which petitioner has assailed as void for lack of publication and
because it effected an impermissible amendment of the law and subverted its purpose and intent.

Respondent court’s discussion and resolution of some of the issues are succinctly stated in its decision in CA-G.R. SP No. 24979, thus:

On Substantive Ground

Petitioner maintains that respondent arbitrarily deducted from its (petitioner) total sales a “base figure” equivalent to its “highest attained
production volume” in the three-year period preceding registration of its expanded production capacity under P.D. No. 1789, as amended.
According to petitioner, the term “base figure” in computing tax credits has no basis in the statute, and therefore, its use is null and void.

Petitioner’s posture is more apparent than real, and is not convincing.

As correctly argued by the Solicitor General, the term “base figure” is simply used to conveniently separate existing production capacity on one
hand from the registered new and/or expanding production capacity on the other, as concepts provided for in P.D. No. 1789, as amended by B.P.
Blg. 391. The segregation is material for the purpose of determining which capacity/project is entitled to tax credit on NLC and/or NVE.

As can be clearly gathered under paragraphs (c) and (d) of Article 48 of P.D. 1789 as amended by B.P. Blg 391 in relation to paragraph (c) of Article
45 thereof (earlier quoted in this decision) only those new or expansion production capacity are entitled to NVE and NLC, existing production
capacity are not. To determine therefore the production capacity/project which is entitled to NVE and NLC incentives under aforesaid law, it is
imperative to set apart existing from either new or expanding capacity. It was in this context that respondent adopted the term “base figure” to call
existing capacity or highest attained capacity from which to reckon the registered expansion capacity. Thus, on respondent’s Tax Credit on NLC and
NVE Manual of Operations (Annex “14,” Comment) it states:

“VII. COMPUTATION ON APPROPRIATE BASE FIGURE FOR TAX CREDIT ON NLC AND NVE.

A.New Producer—No base figure used.

B.Expanding Domestic/Export Producer With Registered Existing Capacity—

1.Base figure for NVE shall be existing registered capacity or highest attained production volume, whichever is higher. If product is heterogeneous,
base figure shall be highest projected value of sales or highest attained sale value whichever is higher.

2.Base figure for NLC shall be highest projected value of export sales or highest attained export sales or highest attained export sales value,
whichever is higher

The definition of base figure as aforequoted includes “highest attained production volume” (meaning higher than its registered capacity) simply
because if an existing registered enterprise has attained a capacity higher than its registered capacity, then it follows that said attained capacity is
the capacity existing prior to expansion. And the capacity in excess of the registered capacity is not entitled to NLC and NVE obviously because it is
not registered.

Indeed, the term “base figure” is nowhere to be found in the law, but the use thereof in the manner already discussed does not render its adoption
without basis. “Base figure” is used to refer to “existing capacity” which is not entitled to tax credit on NLC and NVE under the law. Contrary
therefore to petitioner’s contention, the term “base figure” has basis in law, i.e., the term “existing capacity,” and said “base figure” does not
subvert the purpose of the law which is to grant tax credit on NVE and NLC to new and expanding production capacity only.”

As admitted by respondent court, the term “base figure” is nowhere to be found in the law. By way of jurisdiction for its application, respondent
court ruled in essence that the “base figure” was simply the capacity existing prior to expansion which was not entitled to the fiscal incentives
reserved for new or additional capacity. It then concluded that the formulated “base figure” had basis in the law itself.

It is to be conceded that the original registered capacity is not “new capacity” or “expansion of capacity” that the law intended to encourage and
reward. In this regard, respondent court is correct. Indeed, when petitioner applied for, and BOI registered its expanded or additional capacity, it
means that only this and not the original registered capacity is entitled to the incentive under B.P. Blg. 391.
But respondent court went further and ruled that “if an existing registered enterprise has attained a capacity higher than its registered capacity,
then it follows that said attained capacity is the capacity existing prior to expansion.

This simplistic view failed to take into account the policy and intent of the law and overlooked the absurd and unjust consequence that results from
such construction and application of the law.

Thus, in the case of petitioner whose performance exceeded its original registered capacity, the base figure used was the highest attained
production volume before the registration of its new expanded capacity. This meant a bigger base figure deductible from the net value earned
(NVE) and net local content (NLC) entitled to the fiscal incentive, than another enterprise whose production never reached its registered capacity.
In the case of the latter, the base figure is the registered capacity, nothing more.

The tax credit incentive being a percentage of the net value earned and the net local content the larger the deductible base figure the smaller the
tax credit incentive.

As petitioner correctly lamented, it would have been better off if it did not perform well enough to exceed its original registered capacity, because
the use of the highest attained production volume as a base figure, and not simply the registered capacity, resulted in penalizing it for producing
and exporting more than its official commitment and placing it in a position inferior in terms of incentives, to a similar enterprise which failed to
produce more than its registered capacity.

There is a sense of irony in penalizing petitioner as BOI did, for the excess production when it meant correspondingly, more foreign exchange
earnings from its export, more job opportunities and a host of direct and indirect benefits to the economy. These are precisely the reasons for the
incentives granted by the law

It is true that the excess in production came about before petitioner registered its expanded capacity in 1987, but it only means that petitioner
began to serve the purpose of the law since its enactment in 1983. While the excess occurring in the interim was not entitled to fiscal incentive as
an expanded capacity, there is no sense in penalizing petitioner for such excess.

For another cogent reason, the highest attained production capacity is inappropriate as a base figure. It is reasonable to assume that actual
production is affected in large measure by the vagaries of market forces, the law of supply and demand, and a host of unforeseen and
unforeseeable factors that contribute to its lack of constancy. Given these variants, a circumstantial and temporary peak in production capacity
should not be interpreted as the “existing capacity,” in a way disadvantageous to petitioner.

It is thus difficult to accede to respondents’ urging that the application of the highest attained production capacity as a base figure is implicit or has
basis in the law itself, or otherwise justiciable.

This is not a correct view. For one, it leads to an unreasonable situation already discussed and rejects the presumption that absurd or undesirable
consequences are never intended by a legislative measure. But here, consequences of the kind were unwittingly read into the law.

To be sure, as respondent court admits, the concept of “base figure” is “nowhere to be found in the law.” Nor can it be considered as being in
accord with the purpose and intent of the law, when it is not.

The policy of the law as spelled out in the Investment Policy Act of 1983 is to stimulate private domestic and foreign investments in industry and
other sectors of the economy to achieve among others “increased volume and value of exports for the economy.”

We find in the law the expressed declaration of investment policy, thus:

SECTION 1. This Act shall be known and referred to as the Investment Incentive Policy Act of 1983.

SEC. 2. Declaration of Investment Policy.—It is the policy of the state to encourage private domestic and foreign investments in industry,
agriculture, mining and other sectors of the economy which shall: provide significant employment opportunities relative to the amount of the
capital being invested; increase productivity of the land, minerals, forestry, aquatic and other resources of the country, and improve utilization of
the products thereof; improve technical skills of the people employed in the enterprise; provide a foundation for the future development of the
economy; meet the tests of international competitiveness; accelerate development of less developed regions of the country, and result in
increased volume and value of exports for the economy.

It is the policy of the State to extend projects which will significantly contribute to the attainment of these objectives, fiscal incentives without
which said projects may not be established in the locales, number and/or pace required for optimum national economic development. Fiscal
incentive systems shall be devised to compensate for market imperfections, reward performance of making contributions to economic
development, cost-efficient and be simple to administer.

The fiscal incentives shall be extended to stimulate establishment and assist initial operations of the enterprise, and shall terminate after a period
of not more than 10 years from registration or start-up of operation unless a specific period is otherwise stated.

In essence, the law intends to encourage and promote an exportled economy through incentives which are performance-oriented. The same policy
and intent can be discerned in P.D. 1789, prior to its amendment by B.P. Blg. 301, evident from its declared purpose to “attain a rising level of
production and employment, increase foreign exchange earnings, hasten the economic development of the nation, and assure that the benefits of
development accrue to the Filipino people; x x x”

In furtherance of the declared statutory policy, the law mandates that all doubts shall be resolved in favor of the grant of benefits therein provided.
This is an emphatic provision of Article 63, P.D. 1789, as amended by B.P. Blg. 391, which reads:

All doubts concerning the benefits and incentives granted enterprises and investors by this Code shall be resolved in favor of investors and
registered enterprises.

This provision was reproduced in Art. 79 of the Omnibus Investments Code of 1987 (E.O. 226), a clear manifestation of the continuing policy of the
State to liberalize the grant of incentives, as a way to attain the purpose of the law, which is to encourage investments that tend to “result in
increased volume and value of exports for the economy.

Viewed from the unmistakable statutory purpose, the reduction of the tax incentives petitioner deserved under the law for producing more than
its registered capacity, is against the purpose of investment incentive laws.

As we have consistently ruled, if the statutory purpose is clear, the provisions of the law should be construed so as not to defeat but to carry out
such end and purpose. For a statute derives its vitality from the purpose for which it is enacted and to construe it in a manner that disregards or
defeats such purpose is to nullify or destroy the law.

An administrative agency may not enlarge, alter or restrict the provisions of the statute being administered. It may not engraft additional non-
contradictory requirements on the statute which were not contemplated by the legislature.

There is yet a significant issue raised by petitioner but left unresolved by respondent court, one that bears on the validity or invalidity of the
Manual of Operations for lack of publication.

There is no dispute that the Manual of Operations was not published. Without prior notice of it, the “base figure” therein formulated, was sprung
upon petitioner in 1989 and applied to whittle down its tax incentives for 1988. That was the first time BOI used a “base figure” since the passage
of B.P. Blg. 391 in 1983.

Section 17 of P.D. 1789, as amended by B.P. Blg. 391, explicitly provides that the rules and regulations implementing the Investments Code take
effect only after due publication:

SEC 17. The Board [of Investments] shall promulgate rules and regulations to implement the intent and provisions of this act . . . . Such rules and
regulations shall take effect fifteen days following its publication in a newspaper of general circulation in the Philippines.

Respondent BOI, having acknowledged that the Manual of Operations in which the “base figure” was formulated, was issued to implement the
provisions of the Investment Code, its adoption being “in execution of or supplementary ... to the law itself” cannot ignore the need for publication
made imperative in the cited provision.

The absence of publication is a fatal omission that renders the Manual of Operations void and of no effect, as held in Tañada vs. Tuvera:

We hold therefor that all statutes, including those of local application and private laws, shall be published as a condition for their effectivity, which
shall begin fifteen days after publication unless a different effectivity date is fixed by the legislature

xxx

Administrative rules and regulations must also be published if their purpose is to enforce or implement existing law pursuant to a valid delegation.

To save the day, respondent BOI argues that the Manual of Operations is merely internal in nature, designed for use by its staff in the proper
computation of the tax credits, and therefore, need not be published, citing for support our ruling in Tañada, on the exceptions to the requirement
of publication, thus—

Interpretative regulations and those merely internal in nature, regulating only the personnel of the administrative agency and not the public, need
not be published. Neither is publication required of the socalled letters of instructions issued by administrative superiors concerning the rules and
guidelines to be followed by their subordinates in the performance of their duties.

This Court is not persuaded. The Manual of Operations is not just an internal rule affecting only the personnel of BOI As implemented by BOI, its
effects reach out to petitioner and enterprises similarly situated to diminish considerably what the law intends to grant by way of incentives.

For the exception to apply, the Manual of Operations must not affect the rights of the public. But it did in a very substantial way.

Furthermore, as respondent admits, the Manual of Operations was meant to enforce or implement B.P. Blg. 391, a law of general application.

As we said in Tañada:

Administrate rules and regulations must also be published if their purpose is to enforce or implement existing law pursuant to a valid delegation.
Clearly then, publication of the Manual of Operations was a mandatory requirement for its effectivity and BOI’s failure to comply with the
expressed provision of the law and the teachings in Tañada is a fatal omission. As we held:

x x x At the very least, before the said circular under attack may be permitted to substantially reduce their income, the government officials and
employees concerned should be apprised and alerted by the publication of subject circular in the Official Gazette or in a newspaper of general
circulation in the Philippines—to the end that they be given amplest opportunity to voice out whatever opposition they may have, and to ventilate
their stance on the matter. This approach is more in keeping with democratic precepts and rudiments of fairness and transparency. (De Jesus v.
COA, 294 SCRA 152, 158)

x x x 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 informed, before that new issuance is given the force and effect of law. (Commissioner of Internal Revenue v. CA, 261
SCRA 236, 247).

We, therefore, rule that the “Tax Credit on NLC and NVE Manual of Operations” (Manual of Operations) of respondent Board of Investment (BOI)
has no legal effect insofar as it adopts as a “base figure” for net value earned (NVE) the “highest attained production volume” in the period
preceding the registration of petitioner’s additional or expanded capacity.

We rule that only the expanded or additional capacity of petitioner registered under B.P. Blg. 1789, as amended by B.P. Blg. 391, is entitled to the
tax credit provided therein, and not the preexisting registered capacity.

WHEREFORE, the petition is GRANTED. Accordingly, the Decision dated November 26, 1991 of respondent court in CA-G.R. SP No. 24979 and its
Resolution dated April 8, 1992, denying petitioner’s motion for reconsideration, the Board Resolution of respondent Board of Investments (BOI)
dated May 10, 1990, and its Letters dated August 1, 1990 and March 11, 1991, are hereby SET ASIDE.

Respondent BOI is ordered to grant the tax credits due to petitioner for its registered expanded capacity in the year 1988 and onwards, computed
strictly in accordance with Articles 48(c) in relation to 48(c) of P.D. 1789, as amended by P.D. 391, subject only to deductions provided in the cited
provisions of the law, and without applying the base figure under the Manual of Operations of respondent BOI.

SO ORDERED.

Davide, Jr. (C.J., Chairman), Puno, Pardo and Ynares-Santiago, JJ., concur.

Petition granted, judgment and resolution set aside.

Notes.—Taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of
each other. (Philex Mining Corporation vs. Commissioner of Internal Revenue, 294 SCRA 687 [1998])

If a taxpayer suffered a net loss in a subsequent year, incurring no tax liability to which a previous year’s tax credit could be applied, there is no
reason for the Bureau of Internal Revenue to withhold the tax refund which rightfully belongs to the taxpayer. (BPI-Family Savings Bank, Inc. vs.
Court of Appeals, 330 SCRA 507 [2000])

Exemption from Local Govt. Taxes

G.R. No. 152675. April 28, 2004.*

BATANGAS POWER CORPORATION, petitioner, vs. BATANGAS CITY and NATIONAL POWER CORPORATION, respondents.

G.R. No. 152771. April 28, 2004.*

NATIONAL POWER CORPORATION, petitioner, vs. HON. RICARDO R. ROSARIO, in his capacity as Presiding Judge, RTC, Br. 66, Makati City;
BATANGAS CITY GOVERNMENT; ATTY. TEODULFO DEGUITO, in his capacity as Chief Legal Officer, Batangas City; and BENJAMIN PARGAS, in his
capacity as City Treasurer, Batangas City, respondents.

Remedial Law; Estoppel; The fundamental rule is that a party cannot be allowed to participate in a judicial proceeding, submit the case for decision
accept the judgment only if it is favorable to him but attack the jurisdiction of the court when it is adverse.—Anent the second issue, the records
disclose that petitioner NPC did not oppose BPC’s conversion of the petition for declaratory relief to a petition for injunction or raise the issue of
the alleged lack of jurisdiction of the Makati RTC over the petition for injunction before said court. Hence, NPC is estopped from raising said issue
before us. The fundamental rule is that a party cannot be allowed to participate in a judicial proceeding, submit the case for decision, accept the
judgment only if it is favorable to him but attack the jurisdiction of the court when it is adverse.

PETITIONS for review on certiorari of a decision of the Regional Trial Court of Makati, Br. 66.

The facts are stated in the opinion of the Court.

 Quisumbing Torres for petitioner. The Solicitor General for National Power Corporation.

PUNO, J.:

Before us are two (2) consolidated petitions for review under Rule 45 of the Rules of Civil Procedure, seeking to set aside the rulings of the Regional
Trial Court of Makati in its February 27, 2002 Decision in Civil Case No. 00-205.

The facts show that in the early 1990’s, the country suffered from a crippling power crisis. Power outages lasted 8-12 hours daily and power
generation was badly needed. Addressing the problem, the government, through the National Power Corporation (NPC), sought to attract investors
in power plant operations by providing them with incentives, one of which was through the NPC’s assumption of payment of their taxes in the Build
Operate and Transfer (BOT) Agreement

On June 29, 1992, Enron Power Development Corporation (Enron) and petitioner NPC entered into a Fast Track BOT Project. Enron agreed to
supply a power station to NPC and transfer its plant to the latter after ten (10) years of operation. Section 11.02 of the BOT Agreement provided
that NPC shall be responsible for the payment of all taxes that may be imposed on the power station, except income taxes and permit fees.
Subsequently, Enron assigned its obligation under the BOT Agreement to petitioner Batangas Power Corporation (BPC).

On September 13, 1992, BPC registered itself with the Board of Investments (BOI) as a pioneer enterprise. On September 23, 1992, the BOI issued a
certificate of registration1 to BPC as a pioneer enterprise entitled to a tax holiday for a period of six (6) years. The construction of the power station
in respondent Batangas City was then completed. BPC operated the station

On October 12, 1998, Batangas City (the city, for brevity), thru its legal officer Teodulfo A. Deguito, sent a letter to BPC demanding payment of
business taxes and penalties, commencing from the year 1994 as provided under Ordinance XI or the 1992 Batangas City Tax Code.2 BPC refused to
pay, citing its tax-exempt status as a pioneer enterprise for six (6) years under Section 133 (g) of the Local Government Code (LGC).

On April 15, 1999, city treasurer Benjamin S. Pargas modified the city’s tax claim4 and demanded payment of business taxes from BPC only for the
years 1998-1999. He acknowledged that BPC enjoyed a 6-year tax holiday as a pioneer industry but its tax exemption period expired on September
22, 1998, six (6) years after its registration with the BOI on September 23, 1992. The city treasurer held that thereafter BPC became liable to pay its
business taxes.

BPC still refused to pay the tax. It insisted that its 6-year tax holiday commenced from the date of its commercial operation on July 16, 1993, not
from the date of its BOI registration in September 1992.5 It furnished the city with a BOI letter6 wherein BOI designated July 16, 1993 as the start
of BPC’s income tax holiday as BPC was not able to immediately operate due to force majeure. BPC claimed that the local tax holiday is concurrent
with the income tax holiday. In the alternative, BPC asserted that the city should collect the tax from the NPC as the latter assumed responsibility
for its payment under their BOT Agreement.

The matter was not put to rest. The city legal officer insisted7 that BPC’s tax holiday has already expired, while the city argued that it directed its
tax claim to BPC as it is the entity doing business in the city and hence liable to pay the taxes. The city alleged that it was not privy to NPC’s
assumption of BPC’s tax payment under their BOT Agreement as the only parties thereto were NPC and BPC.

BPC adamantly refused to pay the tax claims and reiterated its position.8 The city was likewise unyielding on its stand.9 On August 26, 1999, the
NPC intervened.10 While admitting assumption of BPC’s tax obligations under their BOT Agreement, NPC refused to pay BPC’s business tax as it
allegedly constituted an indirect tax on NPC which is a tax-exempt corporation under its Charter.11

In view of the deadlock, BPC filed a petition for declaratory relief12 with the Makati Regional Trial Court (RTC) against Batangas City and NPC,
praying for a ruling that it was not bound to pay the business taxes imposed on it by the city. It alleged that under the BOT Agreement, NPC is
responsible for the payment of such taxes but as NPC is exempt from taxes, both the BPC and NPC are not liable for its payment. NPC and Batangas
City filed their respective answers.

On February 23, 2000, while the case was still pending, the city refused to issue a permit to BPC for the operation of its business unless it paid the
assessed business taxes amounting to close to P29M.

In view of this supervening event, BPC, whose principal office is in Makati City, filed a supplemental petition with the Makati RTC to convert its
original petition into an action for injunction to enjoin the city from withholding the issuance of its business permit and closing its power plant. The
city opposed on the grounds of lack of jurisdiction and lack of cause of action. The Supplemental Petition was nonetheless admitted by the Makati
RTC.

On February 27, 2002, the Makati RTC dismissed the petition for injunction. It held that: (1) BPC is liable to pay business taxes to the city; (2) NPC’s
tax exemption was withdrawn with the passage of R.A. No. 7160 (The Local Government Code); and, (3) the 6-year tax holiday granted to pioneer
business enterprises starts on the date of registration with the BOI as provided in Section 133 (g) of R.A. No. 7160, and not on the date of its actual
business operations.

BPC and NPC filed with this Court a petition for review on certiorari assailing the Makati RTC decision. The petitions were consolidated as they
impugn the same decision, involve the same parties and raise related issues.

In G.R. No. 152771, the NPC contends:

I. RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT ARBITRARILY AND
CAPRICIOUSLY RULED THAT PETITIONER NPC HAS LOST ITS TAX EXEMPTION PRIVILEGE BECAUSE SECTION 193 OF R.A. 7160 (LOCAL GOVERNMENT
CODE) HAS WITHDRAWN SUCH PRIVILEGE DESPITE THE SETTLED JURISPRUDENCE THAT THE ENACTMENT OF A LEGISLATION, WHICH IS A GENERAL
LAW, CANNOT REPEAL A SPECIAL LAW AND THAT SECTION 13 OF R.A. 6395 (NPC LAW) WAS NOT SPECIFICALLY MENTIONED IN THE REPEALING
CLAUSE IN SECTION 534 OF R.A. 7160, AMONG OTHERS.

II. RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT ARBITRARILY AND
CAPRICIOUSLY OMITTED THE CLEAR PROVISION OF SECTION 133, PARAGRAPH (O) OF R.A. 7160 WHICH EXEMPTS “NATIONAL GOVERNMENT, ITS
AGENCIES AND INSTRUMENTALITIES” FROM THE IMPOSITION OF “TAXES, FEES OR CHARGES OF ANY KIND.”

III. RESPONDENT COURT ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT ERRONEOUSLY
AND CAPRICIOUSLY ADMITTED BPC’s SUPPLEMENTAL PETITION FOR INJUNCTION NOTWITHSTANDING THAT IT HAD NO JURISDICTION OVER THE
PARTY (CITY GOVERNMENT OF BATANGAS) SOUGHT TO BE ENJOINED.

In G.R. No. 152675, BPC also contends that the trial court erred: 1) in holding it liable for payment of business taxes even if it is undisputed that
NPC has already assumed payment thereof; and, 2) in ruling that BPC’s 6-year tax holiday commenced on the date of its registration with the BOI as
a pioneer enterprise.

The issues for resolution are:

1.whether BPC’s 6-year tax holiday commenced on the date of its BOI registration as a pioneer enterprise or on the date of its actual commercial
operation as certified by the BOI;

2.whether the trial court had jurisdiction over the petition for injunction against Batangas City; and,

3.whether NPC’s tax exemption privileges under its Charter were withdrawn by Section 193 of the Local Government Code (LGC).

We find no merit in the petition.

On the first issue, petitioners BPC and NPC contend that contrary to the impugned decision, BPC’s 6-year tax holiday should commence on the date
of its actual commercial operations as certified to by the BOI, not on the date of its BOI registration.

We disagree. Sec. 133 (g) of the LGC, which proscribes local government units (LGUs) from levying taxes on BOI-certified pioneer enterprises for a
period of six years from the date of registration, applies specifically to taxes imposed by the local government, like the business tax imposed by
Batangas City on BPC in the case at bar. Reliance of BPC on the provision of Executive Order No. 226,18 specifically Section 1, Article 39, Title III, is
clearly misplaced as the six-year tax holiday provided therein which commences from the date of commercial operation refers to income taxes
imposed by the national government on BOI-registered pioneer firms. Clearly, it is the provision of the Local Government Code that should apply to
the tax claim of Batangas City against the BPC. The 6-year tax exemption of BPC should thus commence from the date of BPC’s registration with the
BOI on July 16, 1993 and end on July 15, 1999.

Anent the second issue, the records disclose that petitioner NPC did not oppose BPC’s conversion of the petition for declaratory relief to a petition
for injunction or raise the issue of the alleged lack of jurisdiction of the Makati RTC over the petition for injunction before said court. Hence, NPC is
estopped from raising said issue before us. The fundamental rule is that a party cannot be allowed to participate in a judicial proceeding, submit
the case for decision, accept the judgment only if it is favorable to him but attack the jurisdiction of the court when it is adverse.

Finally, on the third issue, petitioners insist that NPC’s exemption from all taxes under its Charter had not been repealed by the LGC. They argue
that NPC’s Charter is a special law which cannot be impliedly repealed by a general and later legislation like the LGC. They likewise anchor their
claim of tax-exemption on Section 133 (o) of the LGC which exempts government instrumentalities, such as the NPC, from taxes imposed by local
government units (LGUs), citing in support thereof the case of Basco v. PAGCOR.

We find no merit in these contentions. The effect of the LGC on the tax exemption privileges of the NPC has already been extensively discussed and
settled in the recent case of National Power Corporation v. City of Cabanatuan.21 In said case, this Court recognized the removal of the blanket
exclusion of government instrumentalities from local taxation as one of the most significant provisions of the 1991 LGC. Specifically, we stressed
that Section 193 of the LGC,22 an express and general repeal of all statutes granting exemptions from local taxes, withdrew the sweeping tax
privileges previously enjoyed by the NPC under its Charter. We explained the rationale for this provision, thus:

In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has become a tool to realize social
justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar
objectives. Taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer
vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X,
section 5 of the 1987 Constitution, viz.:

Section 5. Each Local Government unit shall have the power to create its own sources of revenue, to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall
accrue exclusively to the Local Governments.
This paradigm shift results from the realization that genuine development can be achieved only by strengthening local autonomy and promoting
decentralization of governance. For a long time, the country’s highly centralized government structure has bred a culture of dependence among
local government leaders upon the national leadership. It has also “dampened the spirit of initiative, innovation and imaginative resilience in
matters of local development on the part of local government leaders. The only way to shatter this culture of dependence is to give the LGUs a
wider role in the delivery of basic services, and confer them sufficient powers to generate their own sources for the purpose. To achieve this goal, x
x x the 1987 Constitution mandates Congress to enact a local government code that will, consistent with the basic policy of local autonomy, set the
guidelines and limitations to this grant of taxing powers x x x.”

To recall, prior to the enactment of the x x x Local Government Code x x x, various measures have been enacted to promote local autonomy, x x x
Despite these initiatives, however, the shackles of dependence on the national government remained. Local government units were faced with the
same problems that hamper their capabilities to participate effectively in the national development efforts, among which are: (a) inadequate tax
base, (b) lack of fiscal control over external sources of income, (c) limited authority to prioritize and approve development projects, (d) heavy
dependence on external sources of income, and (e) limited supervisory control over personnel of national line agencies.

Considered as the most revolutionary piece of legislation on local autonomy, the LGC effectively deals with the fiscal constraints faced by LGUs. It
widens the tax base of LGUs to include taxes which were prohibited by previous laws x x x.

Neither can the NPC successfully rely on the Basco case23 as this was decided prior to the effectivity of the LGC, when there was still no law
empowering local government units to tax instrumentalities of the national government.

Consequently, when NPC assumed the tax liabilities of the BPC under their 1992 BOT Agreement, the LGC which removed NPC’s tax exemption
privileges had already been in effect for six (6) months. Thus, while BPC remains to be the entity doing business in said city, it is the NPC that is
ultimately liable to pay said taxes under the provisions of both the 1992 BOT Agreement and the 1991 Local Government Code.

IN VIEW WHEREOF, the petitions are DISMISSED. No costs.

SO ORDERED.

Quisumbing, Austria-Martinez, Callejo, Sr. and Tinga, JJ., concur.

Petitions dismissed Note.—The rule that jurisdictional question may be raised at any time admits of an exception as when estoppel has
supervened. (Oro Cam Enterprises, Inc. vs. Court of Appeals, 319 SCRA 444 [1999])

Multinational Companies-Doing Business

G.R. No. 109272. August 10, 1994.*

GEORG GROTJAHN GMBH & CO., petitioner, vs. HON. LUCIA VIOLAGO ISNANI, Presiding Judge, Regional Trial Court, Makati, Br. 59; ROMANA R.
LANCHINEBRE; and TEOFILO A. LANCHINEBRE, respondents.

Actions; Jurisdiction; Labor Law; The jurisdiction of labor arbiters and the NLRC is limited to disputes arising from an employer-employee
relationship which can only be resolved by reference to the Labor Code, other labor statutes, or their collective bargaining agreement.—Firstly, the
trial court should not have held itself without jurisdiction over Civil Case No. 92-2486. It is true that the loan and cash advances sought to be
recovered by petitioner were contracted by private respondent Romana Lanchinebre while she was still in the employ of petitioner. Nonetheless, it
does not follow that Article 217 of the Labor Code covers their relationship. Not every dispute between an employer and employee involves
matters that only labor arbiters and the NLRC can resolve in the exercise of their adjudicatory or quasi-judicial powers. The jurisdiction of labor
arbiters and the NLRC under Article 217 of the Labor Code is limited to disputes arising from an employer-employee relationship which can only be
resolved by reference to the Labor Code, other labor statutes, or their collective bargaining agreement.

Same; Same; Same; An action for recovery of a sum of money brought by employer, as creditor, against an employee, as debtor, falls under the
jurisdiction of regular courts.—Civil Case No. 92-2486 is a simple collection of a sum of money brought by petitioner, as creditor, against private
respondent Romana Lanchinebre, as debtor. The fact that they were employer and employee at the time of the transaction does not negate the
civil jurisdiction of the trial court. The case does not involve adjudication of a labor dispute but recovery of a sum of money based on our civil laws
on obligation and contract.

Same; Foreign Corporations; Parties; “Doing business” in the Philippines; A foreign corporation performing acts pursuant to its primary purpose and
functions as regional/area headquarters for its home office is clearly doing business in the country.—The trial court erred in holding that petitioner
does not have capacity to sue in the Philippines. It is clear that petitioner is a foreign corporation doing business in the Philippines. Petitioner is
covered by the Omnibus Investment Code of 1987. There is no general rule or governing principle as to what constitutes “doing” or “engaging in”
or “transacting” business in the Philip-pines. Each case must be judged in the light of its peculiar circumstances. In the case at bench, petitioner
does not engage in commercial dealings or activities in the country because it is precluded from doing so by P.D. No. 218, under which it was
established. Nonetheless, it has been continuously, since 1983, acting as a supervision, communications and coordination center for its home
office’s affiliates in Singapore, and in the process has named its local agent and has employed Philippine nationals like private respondent Romana
Lanchinebre. From this uninterrupted performance by petitioner of acts pursuant to its primary purposes and functions as a regional/area
headquarters for its home office, it is clear that petitioner is doing business in the country.
Same; Same; Same; Estoppel; A party is estopped to challenge the personality of a corporation after having acknowledged the same by entering
into a contract with it.—Moreover, private respondents are estopped from assailing the personality of petitioner. So we held in Merrill Lynch
Futures, Inc. vs. Court of Appeals, 211 SCRA 824, 837, (1992): “The rule is that a party is estopped to challenge the personality of a corporation
after having acknowledged the same by entering into a contract with it. And the ‘doctrine of estoppel to deny corporate existence applies to
foreign as well as to domestic corporations;’ ‘one who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its
corporate existence and capacity.’ The principle ‘will be applied to prevent a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes chiefly in cases where such person has received the benefits of the contract, x x x.” (Citations
omitted.)

Same; Same; Same; Misjoinder of parties is not ground for dismissal of an action.—Finally, the trial court erred when it dismissed Civil Case No. 92-
2486 on what it found to be the misjoinder of private respondent Teofilo Lanchinebre as party defendant. It is a basic rule that “(m)isjoinder of
parties is not ground for dismissal of an action.”

PETITION for review of a decision of the Regional Trial Court of Makati, Br. 59.

The facts are stated in the opinion of the Court.

A.M. Sison, Jr. & Associates for petitioner.

Pedro L. Laso for private respondents.

PUNO, J.:

Petitioner impugns the dismissal of its Complaint for a sum of money by the respondent judge for lack of jurisdiction and lack of capacity to sue.

The records show that petitioner is a multinational company organized and existing under the laws of the Federal Republic of Germany. On July 6,
1983, petitioner filed an application, dated July 2, 1983,1 with the Securities and Exchange Commission (SEC) for the establishment of a regional or
area headquarters in the Philippines, pursuant to Presidential Decree No. 218. The application was approved by the Board of Investments (BOI) on
September 6, 1983. Consequently, on September 20, 1983, the SEC issued a Certificate of Registration and License to petitioner.

Private respondent Romana R. Lanchinebre was a sales representative of petitioner from 1983 to mid-1992. On March 12, 1992, she secured a loan
of twenty-five thousand pesos (P25,000.00) from petitioner. On March 26 and June 10, 1992, she made additional cash advances in the sum of ten
thousand pesos (P10,000.00). Of the total amount, twelve thousand one hundred seventy pesos and thirty-seven centavos (P12,170.37) remained
unpaid. Despite demand, private respondent Romana failed to settle her obligation with petitioner.

On July 22, 1992, private respondent Romana Lanchinebre filed with the Arbitration Branch of the National Labor Relations Commission (NLRC) in
Manila, a Complaint for illegal suspension, dismissal and non-payment of commissions against petitioner. On August 18, 1992, petitioner in turn
filed against private respondent a Complaint for damages amounting to one hundred twenty thousand pesos (P120,000.00) also with the NLRC
Arbitration Branch (Manila).3 The two cases were consolidated.

On September 2, 1992, petitioner filed another Complaint for collection of sum of money against private respondents spouses Romana and Teofilo
Lanchinebre which was docketed as Civil Case No. 92-2486 and raffled to the sala of respondent judge. Instead of filing their Answer, private
respondents moved to dismiss the Complaint. This was opposed by petitioner.

On December 21, 1992, respondent judge issued the first impugned Order, granting the motion to dismiss. She held, viz:

“Jurisdiction over the subject matter or nature of the action is conferred by law and not subject to the whims and caprices of the parties.

“Under Article 217 of the Labor Code of the Philippines, the Labor Arbiters shall have original and exclusive jurisdiction to hear and decide, within
thirty (30) calendar days after the submission of the case by the parties for decision, the following cases involving all workers, whether agricultural
or non-agricultural:

‘(4) claims for actual, moral, exemplary and other forms of damages arising from an employer-employee relations.

x x x

(6) Except claims for employees compensation, social security, medicare and maternity benefits, all other claims arising from employer-employee
relations, including those of persons in domestic or household service, involving an amount exceeding five thousand pesos (P5,000.00) regardless
of whether or not accompanied with a claim for reinstatement.’

“In its complaint, the plaintiff (petitioner herein) seeks to recover alleged cash advances made by defendant (private respondent herein) Romana
Lanchinebre while the latter was in the employ of the former. Obviously the said cash advances were made pursuant to the employer-employee
relationship between the (petitioner) and the said (private respondent) and as such, within the original and exclusive jurisdiction of the National
Labor Relations Commission.
“Again, it is not disputed that the Certificate of Registration and License issued to the (petitioner) by the Securities and Exchange Commission was
merely ‘for the establishment of a regional or area headquarters in the Philippines, pursuant to Presidential Decree No. 218 and its implementing
rules and regulations.’ It does not include a license to do business in the Philippines. There is no allegation in the complaint moreover that
(petitioner) is suing under an isolated transaction. It must be considered that under Section 4, Rule 8 of the Revised Rules of Court, facts showing
the capacity of a party to sue or be sued or the authority of a party to sue or be sued in a representative capacity or the legal existence of an
organized association of persons that is made a party must be averred. There is no averment in the complaint regarding (petitioner’s) capacity to
sue or be sued.

“Finally, (petitioner’s) claim being clearly incidental to the occupation or exercise of (respondent) Romana Lanchinebre’s profession, (respondent)
husband should not be joined as party defendant.”

On March 8, 1993, the respondent judge issued a minute Order denying petitioner’s Motion for Reconsideration.

Petitioner now raises the following assignments of errors:

“I. THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE REGULAR COURTS HAVE NO JURISDICTION OVER DISPUTES BETWEEN AN EMPLOYER
AND AN EMPLOYEE INVOLVING THE APPLICATION PURELY OF THE GENERAL CIVIL LAW.

“II. THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PETITIONER HAS NO CAPACITY TO SUE AND BE SUED IN THE PHILIPPINES DESPITE THE
FACT THAT PETITIONER IS DULY LICENSED BY THE SECURITIES AND EXCHANGE COMMISSION TO SET UP AND OPERATE A REGIONAL OR AREA HEAD-
QUARTERS IN THE COUNTRY AND THAT IT HAS CONTI-NUOUSLY OPERATED AS SUCH FOR THE LAST NINE (9) YEARS.

“III. THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE ERRONEOUS INCLUSION OF THE HUSBAND IN A COMPLAINT IS A FATAL DEFECT
THAT SHALL RESULT IN THE OUTRIGHT DISMISSAL OF THE COMPLAINT.

“IV. THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE HUSBAND IS NOT REQUIRED BY THE RULES TO BE JOINED AS A DEFENDANT IN A
COMPLAINT AGAINST THE WIFE.”

There is merit to the petition.

Firstly, the trial court should not have held itself without jurisdiction over Civil Case No. 92-2486. It is true that the loan and cash advances sought
to be recovered by petitioner were contracted by private respondent Romana Lanchinebre while she was still in the employ of petitioner.
Nonetheless, it does not follow that Article 217 of the Labor Code covers their relationship.

Not every dispute between an employer and employee involves matters that only labor arbiters and the NLRC can resolve in the exercise of their
adjudicatory or quasi-judicial powers. The jurisdiction of labor arbiters and the NLRC under Article 217 of the Labor Code is limited to disputes
arising from an employer-employee relationship which can only be resolved by reference to the Labor Code, other labor statutes, or their collective
bargaining agreement. In this regard, we held in the earlier case of Molave Motor Sales, Inc. vs. Laron, 129 SCRA 485 (1984), viz:

“Before the enactment of BP Blg. 227 on June 1, 1982, Labor Arbiters, under paragraph 5 of Article 217 of the Labor Code had jurisdiction over “all
other cases arising from employer-employee relation, unless expressly excluded by this Code.” Even then, the principle followed by this Court was
that, although a controversy is between an employer and an employee, the Labor Arbiters have no jurisdiction if the Labor Code is not involved. In
Medina vs. Castro-Bartolome, 116 SCRA 597, 604 in negating jurisdiction of the Labor Arbiter, although the parties were an employer and two
employees, Mr. Justice Abad Santos stated:

‘The pivotal question to Our mind is whether or not the Labor Code has any relevance to the reliefs sought by plaintiffs. For if the Labor Code has
no relevance, any discussion concerning the statutes amending it and whether or not they have retroactive effect is unnecessary.

xxx xxx x x x’

“And in Singapore Airlines Limited vs. Paño, 122 SCRA 671, 677, the following was said:

‘Stated differently, petitioner seeks protection under the civil laws and claims no benefits under the Labor Code. The primary relief sought is for
liquidated damages for breach of a contractual obligation. The other items demanded are not labor benefits demanded by workers generally taken
cognizance of in labor disputes, such as payment of wages, overtime compensation or separation pay. The items claimed are the natural
consequences flowing from breach of an obligation, intrinsically a civil dispute.’

“x x x xxx xxx”

In San Miguel Corporation vs. NLRC, 161 SCRA 719 (1988), we crystallized the doctrines set forth in the Medina, Singapore Airlines, and Molave
Motors cases, thus:

“x x x The important principle that runs through these three (3) cases is that where the claim to the principal relief sought is to be resolved not by
reference to the Labor Code or other labor relations statute or a collective bargaining agreement but by the general civil law, the jurisdiction over
the dispute belongs to the regular courts of justice and not to the Labor Arbiter and the NLRC. In such situations, resolutions of the dispute requires
expertise, not in labor management relations nor in wage structures and other terms and conditions of employment, but rather in the application
of the general civil law. Clearly, such claims fall outside the area of competence or expertise ordinarily ascribed to Labor Arbiters and the NLRC and
the rationale for granting jurisdiction over such claims to these agencies disappears.”

Civil Case No. 92-2486 is a simple collection of a sum of money brought by petitioner, as creditor, against private respondent Romana Lanchinebre,
as debtor. The fact that they were employer and employee at the time of the transaction does not negate the civil jurisdiction of the trial court. The
case does not involve adjudication of a labor dispute but recovery of a sum of money based on our civil laws on obligation and contract.

Secondly, the trial court erred in holding that petitioner does not have capacity to sue in the Philippines. It is clear that petitioner is a foreign
corporation doing business in the Philippines. Petitioner is covered by the Omnibus Investment Code of 1987. Said law defines “doing business,” as
follows:

“x x x shall include soliciting orders, purchases, service contracts, opening offices, whether called ‘liaison’ offices or branches; appointing
representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines for a period or periods
totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business firm, entity or
corporation in the Philippines, and any other act or acts that imply a continuity of commercial dealings or arrangements and contemplate to that
extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business organization.”

There is no general rule or governing principle as to what constitutes “doing” or “engaging in” or “transacting” business in the Philippines. Each
case must be judged in the light of its peculiar circumstances. In the case at bench, petitioner does not engage in commercial dealings or activities
in the country because it is precluded from doing so by P.D. No. 218, under which it was established. Nonetheless, it has been continuously, since
1983, acting as a supervision, communications and coordination center for its home office’s affiliates in Singapore, and in the process has named its
local agent and has employed Philippine nationals like private respondent Romana Lanchinebre. From this uninterrupted performance by
petitioner of acts pursuant to its primary purposes and functions as a regional/area headquarters for its home office, it is clear that petitioner is
doing business in the country. Moreover, private respondents are estopped from assailing the personality of petitioner. So, we held in Merrill Lynch
Futures, Inc. vs. Court of Appeals, 211 SCRA 824, 837 (1992):

“The rule is that a party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract
with it. And the ‘doctrine of estoppel to deny corporate existence applies to foreign as well as to domestic corporations;’ ‘one who has dealt with a
corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity.’ The principle ‘will be applied to
prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where
such person has received the benefits of the contract, x x x.”

Finally, the trial court erred when it dismissed Civil Case No. 92-2486 on what it found to be the misjoinder of private respondent

Teofilo Lanchinebre as party defendant. It is a basic rule that “(m)isjoinder of parties is not ground for dismissal of an action.”8 Moreover, the
Order of the trial court is based on Section 4(h), Rule 3 of the Revised Rules of Court, which provides:

“A married woman may not xxx be sued alone without joining her husband, except x x x if the litigation is incidental to the profession, occupation
or business in which she is engaged,”

Whether or not the subject loan was incurred by private respondent as an incident to her profession, occupation or business is a question of fact. In
the absence of relevant evidence, the issue cannot be resolved in a motion to dismiss.

IN VIEW WHEREOF, the instant Petition is GRANTED. The Orders, dated December 21, 1992 and March 8, 1993, in Civil Case No. 92-2486 are
REVERSED AND SET ASIDE. The RTC of Makati, Br. 59, is hereby ordered to hear the reinstated case on its merits. No costs.

SO ORDERED.

Narvasa (C.J., Chairman), Padilla, Regalado and Mendoza, JJ., concur.

Petition granted. Orders reversed and set aside.

Notes.—Where the complaint alleges that the foreign corporation has an agent in the Philippines, summons can validly be served thereto even
without prior evidence of the truth of such factual allegation. (Signetics Corporation vs. Court of Appeals, 225 SCRA 737 [1993])

Acceptance of benefits by an illegally dismissed employee is not necessarily construed to estop him from questioning the legality of his dismissal.
(Zurbano, Sr. vs. National Labor Relations Commission, 228 SCRA 556 [1993])

G.R. No. 150154. August 9, 2005.*

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC., respondent.

Taxation; Value-Added Tax; Words and Phrases; A VAT-exempt transaction involves goods or services which, by their nature, are specifically listed
in and expressly exempted from the VAT under the Tax Code, without regard to the tax status of the party to the transaction; A VAT-exempt party
is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory,
and by virtue of which its taxable transactions become exempt from VAT; Section 103(q) of the Tax Code of 1977, as amended, relates to VAT-
exempt transactions.—It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-exempt entities. In the
case of Commissioner of Internal Revenue v. Seagate Technology (Philippines), this Court already made such distinction—An exempt transaction,
on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax
Code, without regard to the tax status—VAT-exempt or not—of the party to the transaction . . . An exempt party, on the other hand, is a person or
entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue
of which its taxable transactions become exempt from VAT . . . Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR,
relates to VAT-exempt transactions. These are transactions exempted from VAT by special laws or international agreements to which the
Philippines is a signatory. Since such transactions are not subject to VAT, the sellers cannot pass on any output VAT to the purchasers of goods,
properties, or services, and they may not claim tax credit/refund of the input VAT they had paid thereon.

Same; Same; Philippine Economic Zone Authority (PEZA); P.D. No. 66, creating the Export Processing Zone Authority (EPZA), is the precursor of Rep.
Act No. 7916, as amended, under which the EPZA Information Equipment (Phils.), Inc. evolved into the PEZA. Consequently, the exception of
Presidential Decree No. 66 from Section 103(q) of the Tax Code of 1977, as amended, extends likewise to Rep. Act No. 7916, as amended.—Section
103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent Toshiba because although the said section recognizes that
transactions covered by special laws may be exempt from VAT, the very same section provides that those falling under Presidential Decree No. 66
are not. Presidential Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the precursor of Rep. Act No. 7916, as amended, under
which the EPZA evolved into the PEZA. Consequently, the exception of Presidential Decree No. 66 from Section 103(q) of the Tax Code of 1977, as
amended, extends likewise to Rep. Act No. 7916, as amended.

Same; Same; Same; Special Economic Zones (Ecozones); Words and Phrases; PEZA-registered enterprises, which would necessarily be located
within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No. 7916, as amended, but, rather, because of Section 8 of the
same statute which establishes the fiction that ECOZONES are foreign territory; An ECOZONE refers to selected areas with highly developed or
which have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and financial
centers whose metes and bounds are fixed or delimited by Presidential Proclamations; Section 8 of Rep. Act No. 7916, as amended, mandates that
the PEZA shall manage and operate the ECOZONES as a separate customs territory, thus creating the fiction that the ECOZONE is a foreign
territory.—This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within ECOZONES, are VAT-exempt
entities, not because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%) preferential tax rate on gross income of
PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES
are foreign territory. It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE or a Special Economic Zone
has been described as—. . . [S]elected areas with highly developed or which have the potential to be developed into agro-industrial, industrial,
tourist, recreational, commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential
Proclamations. An ECOZONE may contain any or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones and
tourist/recreational centers. The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the
Customs Territory. Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the ECOZONES as a separate
customs territory; thus, creating the fiction that the ECOZONE is a foreign territory. As a result, sales made by a supplier in the Customs Territory to
a purchaser in the ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier from the
ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the Customs Territory.

Same; Same; Same; Same; Cross Border Doctrine; The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT
shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority.—The
Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines
to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with ten percent
(10%) VAT.

Same; Same; Same; Same; Same; Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an ECOZONE
enterprise shall be treated as export sales, while sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be
exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.—Sales of goods, properties and services by a VAT-
registered supplier from the Customs Territory to an ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-
registered supplier, they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-registered supplier shall not pass on any
output VAT to the ECOZONE enterprise, and at the same time, shall be entitled to claim tax credit/refund of its input VAT attributable to such sales.
Zero-rating of export sales primarily intends to benefit the exporter (i.e., the supplier from the Customs Territory), who is directly and legally liable
for the VAT, making it internationally competitive by allowing it to credit/refund the input VAT attributable to its export sales. Meanwhile, sales to
an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be exempt from VAT and the supplier shall not be able to claim
credit/refund of its input VAT.

Same; Same; Same; Same; Same; The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered enterprise
shall be considered an export sale and subject to zero percent (0%) VAT was clearly established only on 15 October 1999, upon the issuance of RMC
No. 74-99—prior to the said date, whether or not a PEZA-registered enterprise was VAT-exempt depended on the type of fiscal incentives availed
of by the said enterprise.—The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered enterprise shall be
considered an export sale and subject to zero percent (0%) VAT was clearly established only on 15 October 1999, upon the issuance of RMC No. 74-
99. Prior to the said date, however, whether or not a PEZA-registered enterprise was VAT-exempt depended on the type of fiscal incentives availed
of by the said enterprise. This old rule on VAT-exemption or liability of PEZA-registered enterprises, followed by the BIR, also recognized and
affirmed by the CTA, the Court of Appeals, and even this Court, cannot be lightly disregarded considering the great number of PEZA-registered
enterprises which did rely on it to determine its tax liabilities, as well as, its privileges. According to the old rule, Section 23 of Rep. Act No. 7916, as
amended, gives the PEZA-registered enterprise the option to choose between two sets of fiscal incentives: (a) The five percent (5%) preferential tax
rate on its gross income under Rep. Act No. 7916, as amended; and (b) the income tax holiday provided under Executive Order No. 226, otherwise
known as the Omnibus Investment Code of 1987, as amended. The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916,
as amended, is in lieu of all taxes. Except for real property taxes, no other national or local tax may be imposed on a PEZA-registered enterprise
availing of this particular fiscal incentive, not even an indirect tax like VAT. Alternatively, Book VI of Exec. Order No. 226, as amended, grants
income tax holiday to registered pioneer and non-pioneer enterprises for six-year and four-year periods, respectively. Those availing of this
incentive are exempt only from income tax, but shall be subject to all other taxes, including the ten percent (10%) VAT.

Same; Same; Same; Same; Same; The old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT system or the
fiction of the ECOZONE as a foreign territory.—This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT
system or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal incentives of the PEZA-registered enterprise.
Again, for emphasis, the old VAT rule for PEZA-registered enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered
enterprise chose the five percent (5%) preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as amended, then
it would be VAT-exempt; (2) If the PEZA-registered enterprise availed of the income tax holiday under Exec. Order No. 226, as amended, it shall be
subject to VAT at ten percent (10%). Such distinction was abolished by RMC No. 74-99, which categorically declared that all sales of goods,
properties, and services made by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be subject to VAT, at zero
percent (0%) rate, regardless of the latter’s type or class of PEZA registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE
enterprise as a VAT-exempt entity.

Same; Same; Same; It seems irrational and unreasonable for the Commissioner of Internal Revenue to oppose a PEZA-registered enterprise’s
application for tax credit/refund of its input VAT when such claim had already been determined and approved by the Court of Tax Appeals after
due hearing, and even affirmed by the Court of Appeals, while said CIR could accept, process, and even approve applications filed by other
similarly-situated PEZA-registered enterprises at the administrative level.—Under RMC No. 42-2003, the DOF would still accept applications for tax
credit/refund filed by PEZA-registered enterprises, availing of the income tax holiday, for input VAT on their purchases made prior to RMC No. 74-
99. Acceptance of applications essentially implies processing and possible approval thereof depending on whether the given conditions are met.
Respondent Toshiba’s claim for tax credit/refund arose from the very same circumstances recognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It
therefore seems irrational and unreasonable for petitioner CIR to oppose respondent Toshiba’s application for tax credit/refund of its input VAT,
when such claim had already been determined and approved by the CTA after due hearing, and even affirmed by the Court of Appeals; while it
could accept, process, and even approve applications filed by other similarly-situated PEZA-registered enterprises at the administrative level

PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

Pablo M. Bastes, Jr. and Rhodora J. Corcuera-Menzon for petitioner.

Rommel S. Agan and Carlito M. Montenegro for private respondent.

CHICO-NAZARIO, J.:

In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue (CIR) prays for the reversal of the
decision of the Court of Appeals in CA-G.R. SP No. 59106,1 affirming the order of the Court of Tax Appeals (CTA) in CTA Case No. 5593,2 which
ordered said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba Information Equipment (Phils.),
Inc. (Toshiba), in the amount of P16,188,045.44, representing unutilized input value-added tax (VAT) payments for the first and second quarters of
1996.

There is hardly any dispute as to the facts giving rise to the present Petition.

Respondent Toshiba was organized and established as a domestic corporation, duly-registered with the Securities and Exchange Commission on 07
July 1995,3 with the primary purpose of engaging in the business of manufacturing and exporting of electrical and mechanical machinery,
equipment, systems, accessories, parts, components, materials and goods of all kinds, including, without limitation, to those relating to office
automation and information technology, and all types of computer hardware and software, such as HDD, CD-ROM and personal computer printed
circuit boards.

On 27 September 1995, respondent Toshiba also registered with the Philippine Economic Zone Authority (PEZA) as an ECOZONE Export Enterprise,
with principal office in Laguna Technopark, Biñan, Laguna. Finally, on 29 December 1995, it registered with the Bureau of Internal Revenue (BIR) as
a VAT taxpayer and a withholding agent.
Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year 1996, reporting input VAT in the amount of
P13,118,542.007 and P5,128,761.94,8 respectively, or a total of P18,247,303.94. It alleged that the said input VAT was from its purchases of capital
goods and services which remained unutilized since it had not yet engaged in any business activity or transaction for which it may be liable for any
output VAT. Consequently, on 27 March 1998, respondent Toshiba filed with the One-Stop Shop InterAgency Tax Credit and Duty Drawback Center
of the Department of Finance (DOF) applications for tax credit/refund of its unutilized input VAT for 01 January to 31 March 1996 in the amount of
P14,176,601.28,10 and for 01 April to 30 June 1996 in the amount of P5,161,820.79,11 for a total of P19,338,422.07. To toll the running of the two-
year prescriptive period for judicially claiming a tax credit/refund, respondent Toshiba, on 31 March 1998, filed with the CTA a Petition for Review.
It would subsequently file an Amended Petition for Review on 10 November 1998 so as to conform to the evidence presented before the CTA
during the hearings.

In his Answer to the Amended Petition for Review before the CTA, petitioner CIR raised several Special and Affirmative Defenses, to wit—

5.Assuming without admitting that petitioner filed a claim for refund/tax credit, the same is subject to investigation by the Bureau of Internal
Revenue.

6.Taxes are presumed to have been collected in accordance with law. Hence, petitioner must prove that the taxes sought to be refunded were
erroneously or illegally collected.

7.Petitioner must prove the allegations supporting its entitlement to a refund.

8.Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the 1997 Tax Code on the filing of a written claim for
refund within two (2) years from the date of payment of the tax.

9.Claims for refund of taxes are construed strictly against claimants, the same being in the nature of an exemption from taxation.

After evaluating the evidence submitted by respondent Toshiba, the CTA, in its Decision dated 10 March 2000, ordered petitioner CIR to refund, or
in the alternative, to issue a tax credit certificate to respondent Toshiba in the amount of P16,188,045.44.

In a Resolution, dated 24 May 2000, the CTA denied petitioner CIR’s Motion for Reconsideration for lack of merit.

The Court of Appeals, in its Decision dated 27 September 2001, dismissed petitioner CIR’s Petition for Review and affirmed the CTA Decision dated
10 March 2000.

Comes now petitioner CIR before this Court assailing the above-mentioned Decision of the Court of Appeals based on the following grounds—

1.The Court of Appeals erred in holding that petitioner’s failure to raise in the Tax Court the arguments relied upon by him in the petition, is fatal to
his cause.

2.The Court of Appeals erred in not holding that respondent being registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone
Export Enterprise, its business is not subject to VAT pursuant to Section 24 of Republic Act No. 7916 in relation to Section 103 (now 109) of the Tax
Code.

3.The Court of Appeals erred in not holding that since respondent’s business is not subject to VAT, the capital goods and services it purchased are
considered not used in VAT taxable business, and, therefore, it is not entitled to refund of input taxes on such capital goods pursuant to Section
4.106-1 of Revenue Regulations No. 7-95 and of input taxes on services pursuant to Section 4.103-1 of said Regulations.

4.The Court of Appeals erred in holding that respondent is entitled to a refund or tax credit of input taxes it paid on zero-rated transactions.

Ultimately, however, the issue still to be resolved herein shall be whether respondent Toshiba is entitled to the tax credit/refund of its input VAT
on its purchases of capital goods and services, to which this Court answers in the affirmative.

I. An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by persons from the Customs Territory to ECOZONE
enterprises shall be subject to VAT at zero percent (0%).

Respondent Toshiba bases its claim for tax credit/refund on Section 106(b) of the Tax Code of 1977, as amended, which reads:

SEC. 106. Refunds or tax credits of creditable input tax.—

(b) Capital goods.—A VAT-registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods
imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only
within two (2) years after the close of the taxable quarter when the importation or purchase was made.

Petitioner CIR, on the other hand, opposes such claim on account of Section 4.106-1(b) of Revenue Regulations (RR) No. 7-95, otherwise known as
the VAT Regulations, as amended, which provides as follows—

Sec. 4.106-1. Refunds or tax credits of input tax.—

...

(b) Capital Goods.—Only a VAT-registered person may apply for issuance of a tax credit certificate or refund of input taxes paid on capital goods
imported or locally purchased. The refund shall be allowed to the extent that such input taxes have not been applied against output taxes. The
application should be made within two (2) years after the close of the taxable quarter when the importation or purchase was made.

Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business. If it is also used
in exempt operations, the input tax refundable shall only be the ratable portion corresponding to the taxable operations.

“Capital goods or properties” refer to goods or properties with estimated useful life greater than one year and which are treated as depreciable
assets under Section 29(f), used directly or indirectly in the production or sale of taxable goods or services.

Petitioner CIR argues that although respondent Toshiba may be a VAT-registered taxpayer, it is not engaged in a VAT-taxable business. According to
petitioner CIR, respondent Toshiba is actually VAT-exempt, invoking the following provision of the Tax Code of 1977, as amended—

SEC. 103. Exempt transactions.—The following shall be exempt from value-added tax.

...

(q) Transactions which are exempt under special laws, except those granted under Presidential Decree No. 66, 529, 972, 1491, and 1590, and non-
electric cooperatives under Republic Act No. 6938, or international agreements to which the Philippines is a signatory.

Since respondent Toshiba is a PEZA-registered enterprise, it is subject to the five percent (5%) preferential tax rate imposed under Chapter III,
Section 24 of Republic Act No. 7916, otherwise known as The Special Economic Zone Act of 1995, as amended. According to the said section,
“[e]xcept for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating
within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid . . .”
The five percent (5%) preferential tax rate imposed on the gross income of a PEZA-registered enterprise shall be in lieu of all national taxes,
including VAT. Thus, petitioner CIR contends that respondent Toshiba is VAT-exempt by virtue of a special law, Rep. Act No. 7916, as amended.

It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions from VAT-exempt entities. In the case of Commissioner
of Internal Revenue v. Seagate Technology (Philippines), this Court already made such distinction—

An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from
the VAT under the Tax Code, without regard to the tax status—VAT-exempt or not—of the party to the transaction . . .

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement
to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT . . .

Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates to VAT-exempt transactions. These are transactions
exempted from VAT by special laws or international agreements to which the Philippines is a signatory. Since such transactions are not subject to
VAT, the sellers cannot pass on any output VAT to the purchasers of goods, properties, or services, and they may not claim tax credit/refund of the
input VAT they had paid thereon.

Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of respondent Toshiba because although the said section
recognizes that transactions covered by special laws may be exempt from VAT, the very same section provides that those falling under Presidential
Decree No. 66 are not. Presidential Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the precursor of Rep. Act No. 7916, as
amended,20 under which the EPZA evolved into the PEZA. Consequently, the exception of Presidential Decree No. 66 from Section 103(q) of the
Tax Code of 1977, as amended, extends likewise to Rep. Act No. 7916, as amended.

This Court agrees, however, that PEZA-registered enterprises, which would necessarily be located within ECO-ZONES, are VAT-exempt entities, not
because of Section 24 of Rep. Act No. 7916, as amended, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-
registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES are
foreign territory.

It is important to note herein that respondent Toshiba is located within an ECOZONE. An ECOZONE or a Special Economic Zone has been described
as—

. . . [S]elected areas with highly developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational,
commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE
may contain any or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational centers.

The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs Territory.

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the ECOZONES as a separate customs territory;
thus, creating the fiction that the ECOZONE is a foreign territory. As a result, sales made by a supplier in the Customs Territory to a purchaser in the
ECOZONE shall be treated as an exportation from the Customs Territory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in
the Customs Territory shall be considered as an importation into the Customs Territory.

Given the preceding discussion, what would be the VAT implication of sales made by a supplier from the Customs Territory to an ECOZONE
enterprise?

The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines
to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with ten percent
(10%) VAT.

Applying said doctrine to the sale of goods, properties, and services to and from the ECOZONES,26 the BIR issued Revenue Memorandum Circular
(RMC) No. 74-99, on 15 October 1999. Of particular interest to the present Petition is Section 3 thereof, which reads—

SECTION 3. Tax Treatment of Sales Made by a VAT Registered Supplier from the Customs Territory, to a PEZA Registered Enterprise.—

(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of all taxes, except real property tax, pursuant to
R.A. No. 7916, as amended:

(a)Sale of goods (i.e., merchandise).—This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT, pursuant to Sec.
106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus Investments Code.

(b)Sale of service.—This shall be treated subject to zero percent (0%) VAT under the “cross border doctrine” of the VAT System, pursuant to VAT
Ruling No. 032-98 dated Nov. 5, 1998.

(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime, hence, subject to taxes under the NIRC, e.g., Service
Establishments which are subject to taxes under the NIRC rather than the 5% special tax regime:

(a)Sale of goods (i.e., merchandise).—This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT, pursuant to Sec.
106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916 in relation to ART. 77(2) of the Omnibus Investments Code.

(b)Sale of Service.—This shall be treated subject to zero percent (0%) VAT under the “cross border doctrine” of the VAT System, pursuant to VAT
Ruling No. 032-98 dated Nov. 5, 1998.

(3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier from the Customs Territory to any registered
enterprise operating in the ecozone, regardless of the class or type of the latter’s PEZA registration, is actually qualified and thus legally entitled to
the zero percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the Customs
Territory shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code,
while all sales of services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall be treated effectively subject
to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. No. 7916 and the “Cross Border Doctrine” of the VAT
system.

This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to the benefit of the zero percent (0%) VAT for
sales made to the aforementioned ECOZONE enterprises and shall serve as sufficient compliance to the requirement for prior approval of zero-
rating imposed by Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular.

Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity. The VAT treatment of sales to it, however,
varies depending on whether the supplier from the Customs Territory is VAT-registered or not.

Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be treated as
export sales. If such sales are made by a VAT-registered supplier, they shall be subject to VAT at zero percent (0%). In zero-rated transactions, the
VAT-registered supplier shall not pass on any output VAT to the ECOZONE enterprise, and at the same time, shall be entitled to claim tax
credit/refund of its input VAT attributable to such sales. Zero-rating of export sales primarily intends to benefit the exporter (i.e., the supplier from
the Customs Territory), who is directly and legally liable for the VAT, making it internationally competitive by allowing it to credit/refund the input
VAT attributable to its export sales.

Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be exempt from VAT and the supplier shall
not be able to claim credit/refund of its input VAT.

Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-exempt entity that could not have engaged in a VAT-
taxable business, this Court still believes, given the particular circumstances of the present case, that it is entitled to a credit/refund of its input
VAT.

II. Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the income tax holiday under Executive Order No. 226, as amended,
were deemed subject to VAT.
In his Petition, petitioner CIR opposed the grant of tax credit/refund to respondent Toshiba, reasoning thus—

In the first place, respondent could not have paid input taxes on its purchases of goods and services from VAT-registered suppliers because such
purchases being zero-rated, that is, no output tax was paid by the suppliers, no input tax was shifted or passed on to respondent. The VAT is an
indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services (Section 105,
1997 Tax Code). Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:

“SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any
output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit
or refund in accordance with these regulations.”

From the foregoing, the VAT-registered person who can avail as tax credit or refund of the input tax on his purchases of goods, services or
properties is the seller whose sale is zero-rated. Applying the foregoing provision to the case at bench, the VAT-registered supplier, whose sale of
goods and services to respondent is zero-rated, can avail as tax credit or refund the input taxes on its (supplier) own purchases of goods and
services related to its zero-rated sale of goods and services to respondent. On the other hand, respondent, as the buyer in such zero-rated sale of
goods and services, could not have paid input taxes for which it can claim as tax credit or refund.

Before anything else, this Court wishes to point out that petitioner CIR is working on the erroneous premise that respondent Toshiba is claiming tax
credit or refund of input VAT based on Section 4.100-2, in relation to Section 4.106-1(a),29 of RR No. 7-95, as amended, which allows the tax
credit/refund of input VAT on zero-rated sales of goods, properties or services. Instead, respondent Toshiba is basing its claim for tax credit or
refund on Sec. 4.106-1(b) of the same regulations, which allows a VAT-registered person to apply for tax credit/refund of the input VAT on its
capital goods. While in the former, the seller of the goods, properties or services is the one entitled to the tax credit/refund; in the latter, it is the
purchaser of the capital goods.

Nevertheless, regardless of his mistake as to the basis for respondent Toshiba’s application for tax credit/refund, petitioner CIR validly raised the
question of whether any output VAT was actually passed on to respondent Toshiba which it could claim as input VAT subject to credit/refund. If the
VAT-registered supplier from the Customs Territory did not charge any output VAT to respondent Toshiba believing that it is exempt from VAT or it
is subject to zero-rated VAT, then respondent Toshiba did not pay any input VAT on its purchase of capital goods and it could not claim any tax
credit/refund thereof.

The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered enterprise shall be considered an export sale
and subject to zero percent (0%) VAT was clearly established only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to the said date,
however, whether or not a PEZA-registered enterprise was VAT-exempt depended on the type of fiscal incentives availed of by the said enterprise.
This old rule on VAT-exemption or liability of PEZA-registered enterprises, followed by the BIR, also recognized and affirmed by the CTA, the Court
of Appeals, and even this Court,30 cannot be lightly disregarded considering the great number of PEZA-registered enterprises which did rely on it to
determine its tax liabilities, as well as, its privileges.

According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered enterprise the option to choose between two
sets of fiscal incentives: (a) The five percent (5%) preferential tax rate on its gross income under Rep. Act No. 7916, as amended; and (b) the income
tax holiday provided under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, as amended.

The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as amended, is in lieu of all taxes. Except for real property
taxes, no other national or local tax may be imposed on a PEZA-registered enterprise availing of this particular fiscal incentive, not even an indirect
tax like VAT.

Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to registered pioneer and non-pioneer enterprises for six-year
and four-year periods, respectively. Those availing of this incentive are exempt only from income tax, but shall be subject to all other taxes,
including the ten percent (10%) VAT.

This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT system or the fiction of the ECOZONE as a
foreign territory. It relied totally on the choice of fiscal incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-
registered enterprises was based on their choice of fiscal incentives: (1) If the PEZA-registered enterprise chose the five percent (5%) preferential
tax on its gross income, in lieu of all taxes, as provided by Rep. Act No. 7916, as amended, then it would be VAT-exempt; (2) If the PEZA-registered
enterprise availed of the income tax holiday under Exec. Order No. 226, as amended, it shall be subject to VAT at ten percent (10%). Such
distinction was abolished by RMC No. 74-99, which categorically declared that all sales of goods, properties, and services made by a VAT-registered
supplier from the Customs Territory to an ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latter’s type or
class of PEZA registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity.

The sale of capital goods by suppliers from the Customs Territory to respondent Toshiba in the present Petition took place during the first and
second quarters of 1996, way before the issuance of RMC No. 74-99, and when the old rule was accepted and implemented by no less than the BIR
itself.

Since respondent Toshiba opted to avail itself of the income tax holiday under Exec. Order No. 226, as amended, then it was deemed subject to the
ten percent (10%) VAT. It was very likely therefore that suppliers from the Customs Territory had passed on output VAT to respondent Toshiba, and
the latter, thus, incurred input VAT. It bears emphasis that the CTA, with the help of SGV & Co., the independent accountant it commissioned to
make a report, already thoroughly reviewed the evidence submitted by respondent Toshiba consisting of receipts, invoices, and vouchers, from its
suppliers from the Customs Territory. Accordingly, this Court gives due respect to and adopts herein the CTA’s findings that the suppliers of capital
goods from the Customs Territory did pass on output VAT to respondent Toshiba and the amount of input VAT which respondent Toshiba could
claim as credit/refund.

Moreover, in another circular, Revenue Memorandum Circular (RMC) No. 42-2003, issued on 15 July 2003, the BIR answered the following
question—

Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-registered firms automatically qualify as zero-rated without
seeking prior approval from the BIR effective October 1999.

1) Will the OSS-DOF Center still accept applications from PEZA-registered claimants who were allegedly billed VAT by their suppliers before and
during the effectivity of the RMC by issuing VAT invoices/receipts?

A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of all other taxes, the said PEZA-registered taxpayer cannot claim
TCC or refund for the VAT paid on purchases. However, if the taxpayer is availing of the income tax holiday, it can claim VAT credit provided:

a.The taxpayer-claimant is VAT-registered;

b.Purchases are evidenced by VAT invoices or receipts, whichever is applicable, with shifted VAT to the purchaser prior to the implementation of
RMC No. 74-99; and

c.The supplier issues a sworn statement under penalties of perjury that it shifted the VAT and declared the sales to the PEZA-registered purchaser
as taxable sales in its VAT returns.

For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for input VAT by PEZA-registered companies, regardless of the type
or class of PEZA registration, should be denied.

Under RMC No. 42-2003, the DOF would still accept applications for tax credit/refund filed by PEZA-registered enterprises, availing of the income
tax holiday, for input VAT on their purchases made prior to RMC No. 74-99. Acceptance of applications essentially implies processing and possible
approval thereof depending on whether the given conditions are met. Respondent Toshiba’s claim for tax credit/refund arose from the very same
circumstances recognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It therefore seems irrational and unreasonable for petitioner CIR to oppose
respondent Toshiba’s application for tax credit/refund of its input VAT, when such claim had already been determined and approved by the CTA
after due hearing, and even affirmed by the Court of Appeals; while it could accept, process, and even approve applications filed by other similarly-
situated PEZA-registered enterprises at the administrative level.

III. Findings of fact by the CTA are respected and adopted by this Court.

Finally, petitioner CIR, in a last desperate attempt to block respondent Toshiba’s claim for tax credit/refund, challenges the allegation of said
respondent that it availed of the income tax holiday under Exec. Order No. 226, as amended, rather than the five percent (5%) preferential tax rate
under Rep. Act No. 7916, as amended. Undoubtedly, this is a factual matter that should have been raised and threshed out in the lower courts.
Giving it credence would belie petitioner CIR’s assertion that it is raising only issues of law in its Petition that may be resolved without need for
reception of additional evidences. Once more, this Court respects and adopts the finding of the CTA, affirmed by the Court of Appeals, that
respondent Toshiba had indeed availed of the income tax holiday under Exec. Order No. 226, as amended.

WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court of Appeals in CA-G.R. SP. No. 59106, and the order of the CTA in
CTA Case No. 5593, ordering said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent Toshiba, in the
amount of P16,188,045.44, representing unutilized input VAT for the first and second quarters of 1996.

SO ORDERED.

Puno (Chairman), Austria-Martinez, Callejo, Sr. and Tinga, JJ., concur.

Judgment affirmed.

Note.—A VAT invoice can be used only for the sale of goods and services that are subject to VAT. (Atlas Consolidated Mining & Development
Corporation vs. Commissioner of Internal Revenue, 318 SCRA 386 [1999])