G.R. No.

L-65773-74 April 30, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS,
respondents.

Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent British Airways.

MELENCIO-HERRERA, J.:

Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the

joint Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561,
dated 26 January 1983, which set aside petitioner's assessment of deficiency income
taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal
years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18
November, 1983 denying reconsideration.

BOAC is a 100% British Government-owned corporation organized and existing under

the laws of the United Kingdom It is engaged in the international airline business and is
a member-signatory of the Interline Air Transport Association (IATA). As such it
operates air transportation service and sells transportation tickets over the routes of the
other airline members. During the periods covered by the disputed assessments, it is
admitted that BOAC had no landing rights for traffic purposes in the Philippines, and
was not granted a Certificate of public convenience and necessity to operate in the
Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly
in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB.
Consequently, it did not carry passengers and/or cargo to or from the Philippines,
although during the period covered by the assessments, it maintained a general sales
agent in the Philippines — Wamer Barnes and Company, Ltd., and later Qantas
Airways — which was responsible for selling BOAC tickets covering passengers and
cargoes. 1

G.R. No. 65773 (CTA Case No. 2373, the First Case)

On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity)

assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income taxes
covering the years 1959 to 1963. This was protested by BOAC. Subsequent
investigation resulted in the issuance of a new assessment, dated 16 January 1970 for
the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment
under protest.

On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which
claim was denied by the CIR on 16 February 1972. But before said denial, BOAC had
already filed a petition for review with the Tax Court on 27 January 1972, assailing the
assessment and praying for the refund of the amount paid.

G.R. No. 65774 (CTA Case No. 2561, the Second Case)

On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and
penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of
P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as compromise
penalties for violation of Section 46 (requiring the filing of corporation returns) penalized
under Section 74 of the National Internal Revenue Code (NIRC).

On 25 November 1971, BOAC requested that the assessment be countermanded and

set aside. In a letter, dated 16 February 1972, however, the CIR not only denied the
BOAC request for refund in the First Case but also re-issued in the Second Case the
deficiency income tax assessment for P534,132.08 for the years 1969 to 1970-71 plus
P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request
for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to
file the Second Case before the Tax Court praying that it be absolved of liability for
deficiency income tax for the years 1969 to 1971.

This case was subsequently tried jointly with the First Case.

On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the
CIR. The Tax Court held that the proceeds of sales of BOAC passage tickets in the
Philippines by Warner Barnes and Company, Ltd., and later by Qantas Airways, during
the period in question, do not constitute BOAC income from Philippine sources "since
no service of carriage of passengers or freight was performed by BOAC within the
Philippines" and, therefore, said income is not subject to Philippine income tax. The
CTA position was that income from transportation is income from services so that the
place where services are rendered determines the source. Thus, in the dispositive
portion of its Decision, the Tax Court ordered petitioner to credit BOAC with the sum of
P858,307.79, and to cancel the deficiency income tax assessments against BOAC in
the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.

Hence, this Petition for Review on certiorari of the Decision of the Tax Court.

The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:

1. Whether or not the revenue derived by private respondent British

Overseas Airways Corporation (BOAC) from sales of tickets in the
Philippines for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and, accordingly,
taxable.
 2. Whether or not during the fiscal years in question BOAC s a resident
foreign corporation doing business in the Philippines or has an office or
place of business in the Philippines.

3. In the alternative that private respondent may not be considered a

resident foreign corporation but a non-resident foreign corporation, then it
is liable to Philippine income tax at the rate of thirty-five per cent (35%) of
its gross income received from all sources within the Philippines.

Under Section 20 of the 1977 Tax Code:

(h) the term resident foreign corporation engaged in trade or business

within the Philippines or having an office or place of business therein.

(i) The term "non-resident foreign corporation" applies to a foreign

corporation not engaged in trade or business within the Philippines and
not having any office or place of business therein

It is our considered opinion that BOAC is a resident foreign corporation. There is no

specific criterion as to what constitutes "doing" or "engaging in" or "transacting"
business. Each case must be judged in the light of its peculiar environmental
circumstances. The term implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or works or the exercise of
some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization. 2 "In order
that a foreign corporation may be regarded as doing business within a State, there must
be continuity of conduct and intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary character. 3

BOAC, during the periods covered by the subject - assessments, maintained a general
sales agent in the Philippines, That general sales agent, from 1959 to 1971, "was
engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of
trips — each trip in the series corresponding to a different airline company; (3) receiving
the fare from the whole trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services rendered through the mode
of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement." 4 Those activities were in exercise of the functions which are normally
incident to, and are in progressive pursuit of, the purpose and object of its organization
as an international air carrier. In fact, the regular sale of tickets, its main activity, is the
very lifeblood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines. 5

Sec. 24. Rates of tax on corporations. — ...

 (b) Tax on foreign corporations. — ...

(2) Resident corporations. — A corporation organized, authorized, or

existing under the laws of any foreign country, except a foreign fife
insurance company, engaged in trade or business within the Philippines,
shall be taxable as provided in subsection (a) of this section upon the total
net income received in the preceding taxable year from all sources within
the Philippines. (Emphasis supplied)

Next, we address ourselves to the issue of whether or not the revenue from sales of
tickets by BOAC in the Philippines constitutes income from Philippine sources and,
accordingly, taxable under our income tax laws.

The Tax Code defines "gross income" thus:

"Gross income" includes gains, profits, and income derived from salaries,
wages or compensation for personal service of whatever kind and in
whatever form paid, or from profession, vocations, trades, business,
commerce, sales, or dealings in property, whether real or personal,
growing out of the ownership or use of or interest in such property; also
from interests, rents, dividends, securities, or the transactions of any
business carried on for gain or profile, or gains, profits, and income
derived from any source whatever (Sec. 29[3]; Emphasis supplied)

The definition is broad and comprehensive to include proceeds from sales of transport
documents. "The words 'income from any source whatever' disclose a legislative policy
to include all income not expressly exempted within the class of taxable income under
our laws." Income means "cash received or its equivalent"; it is the amount of money
coming to a person within a specific time ...; it means something distinct from principal
or capital. For, while capital is a fund, income is a flow. As used in our income tax law,
"income" refers to the flow of wealth. 6

The records show that the Philippine gross income of BOAC for the fiscal years 1968-69
to 1970-71 amounted to P10,428,368 .00. 7

Did such "flow of wealth" come from "sources within the Philippines",

The source of an income is the property, activity or service that produced the income. 8
For the source of income to be considered as coming from the Philippines, it is sufficient
that the income is derived from activity within the Philippines. In BOAC's case, the sale
of tickets in the Philippines is the activity that produces the income. The tickets
exchanged hands here and payments for fares were also made here in Philippine
currency. The site of the source of payments is the Philippines. The flow of wealth
proceeded from, and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such protection, the flow of
wealth should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier,
it constitutes the contract between the ticket-holder and the carrier. It gives rise to the
obligation of the purchaser of the ticket to pay the fare and the corresponding obligation
of the carrier to transport the passenger upon the terms and conditions set forth
thereon. The ordinary ticket issued to members of the traveling public in general
embraces within its terms all the elements to constitute it a valid contract, binding upon
the parties entering into the relationship. 9

True, Section 37(a) of the Tax Code, which enumerates items of gross income from
sources within the Philippines, namely: (1) interest, (21) dividends, (3) service, (4)
rentals and royalties, (5) sale of real property, and (6) sale of personal property, does
not mention income from the sale of tickets for international transportation. However,
that does not render it less an income from sources within the Philippines. Section 37,
by its language, does not intend the enumeration to be exclusive. It merely directs that
the types of income listed therein be treated as income from sources within the
Philippines. A cursory reading of the section will show that it does not state that it is an
all-inclusive enumeration, and that no other kind of income may be so considered. " 10

BOAC, however, would impress upon this Court that income derived from transportation
is income for services, with the result that the place where the services are rendered
determines the source; and since BOAC's service of transportation is performed outside
the Philippines, the income derived is from sources without the Philippines and,
therefore, not taxable under our income tax laws. The Tax Court upholds that stand in
the joint Decision under review.

The absence of flight operations to and from the Philippines is not determinative of the
source of income or the site of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the
"source"; and the source of an income is that activity ... which produced the income. 11
Unquestionably, the passage documentations in these cases were sold in the
Philippines and the revenue therefrom was derived from a activity regularly pursued
within the Philippines. business a And even if the BOAC tickets sold covered the
"transport of passengers and cargo to and from foreign cities", 12 it cannot alter the fact
that income from the sale of tickets was derived from the Philippines. The word "source"
conveys one essential idea, that of origin, and the origin of the income herein is the
Philippines. 13

It should be pointed out, however, that the assessments upheld herein apply only to the
fiscal years covered by the questioned deficiency income tax assessments in these
cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to Presidential Decree
No. 69, promulgated on 24 November, 1972, international carriers are now taxed as
follows:

... Provided, however, That international carriers shall pay a tax of 2-½ per
cent on their cross Philippine billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory
definition of the term "gross Philippine billings," thus:

... "Gross Philippine billings" includes gross revenue realized from uplifts
anywhere in the world by any international carrier doing business in the
Philippines of passage documents sold therein, whether for passenger,
excess baggage or mail provided the cargo or mail originates from the
Philippines. ...

The foregoing provision ensures that international airlines are taxed on their income
from Philippine sources. The 2-½ % tax on gross Philippine billings is an income tax. If it
had been intended as an excise or percentage tax it would have been place under Title
V of the Tax Code covering Taxes on Business.

Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by
this Court of the appeal in JAL vs. Commissioner of Internal Revenue (G.R. No. L-
30041) on February 3, 1969, is res judicata to the present case. The ruling by the Tax
Court in that case was to the effect that the mere sale of tickets, unaccompanied by the
physical act of carriage of transportation, does not render the taxpayer therein subject to
the common carrier's tax. As elucidated by the Tax Court, however, the common
carrier's tax is an excise tax, being a tax on the activity of transporting, conveying or
removing passengers and cargo from one place to another. It purports to tax the
business of transportation. 14 Being an excise tax, the same can be levied by the State
only when the acts, privileges or businesses are done or performed within the
jurisdiction of the Philippines. The subject matter of the case under consideration is
income tax, a direct tax on the income of persons and other entities "of whatever kind
and in whatever form derived from any source." Since the two cases treat of a different
subject matter, the decision in one cannot be res judicata to the other.

WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET
ASIDE. Private respondent, the British Overseas Airways Corporation (BOAC), is
hereby ordered to pay the amount of P534,132.08 as deficiency income tax for the fiscal
years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from April 16,
1972 for a period not to exceed three (3) years in accordance with the Tax Code. The
BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.

SO ORDERED.
 THIRD DIVISION

G.R. No. 180356 February 16, 2010

SOUTH AFRICAN AIRWAYS, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19,
2007 Decision1 and October 30, 2007 Resolution2 of the Court of Tax Appeals (CTA) En
Banc in CTA E.B. Case No. 210, entitled South African Airways v. Commissioner of
Internal Revenue. The assailed decision affirmed the Decision dated May 10, 20063 and
Resolution dated August 11, 20064 rendered by the CTA First Division.

The Facts

Petitioner South African Airways is a foreign corporation organized and existing under
and by virtue of the laws of the Republic of South Africa. Its principal office is located at
Airways Park, Jones Road, Johannesburg International Airport, South Africa. In the
Philippines, it is an internal air carrier having no landing rights in the country. Petitioner
has a general sales agent in the Philippines, Aerotel Limited Corporation (Aerotel).
Aerotel sells passage documents for compensation or commission for petitioner’s off-
line flights for the carriage of passengers and cargo between ports or points outside the
territorial jurisdiction of the Philippines. Petitioner is not registered with the Securities
and Exchange Commission as a corporation, branch office, or partnership. It is not
licensed to do business in the Philippines.

For the taxable year 2000, petitioner filed separate quarterly and annual income tax
returns for its off-line flights, summarized as follows:

2.5% Gross
Period Date Filed
Phil. Billings
1st Quarter May 30, 2000 222,531.25
2nd Quarter August 29, 2000 424,046.95
For Passenger PhP
3rd Quarter November 29, 2000 422,466.00
4th Quarter April 16, 2000 453,182.91
Sub-total PhP 1,522,227.11
For Cargo 1st Quarter May 30, 2000 PhP 81,531.00
 2nd Quarter August 29, 2000 50,169.65
3rd Quarter November 29, 2000 36,383.74
4th Quarter April 16, 2000 37,454.88
Sub-total PhP 205,539.27
TOTAL 1,727,766.38

Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue,
Revenue District Office No. 47, a claim for the refund of the amount of PhP
1,727,766.38 as erroneously paid tax on Gross Philippine Billings (GPB) for the taxable
year 2000. Such claim was unheeded. Thus, on April 14, 2003, petitioner filed a Petition
for Review with the CTA for the refund of the abovementioned amount. The case was
docketed as CTA Case No. 6656.

On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack
of merit. The CTA ruled that petitioner is a resident foreign corporation engaged in trade
or business in the Philippines. It further ruled that petitioner was not liable to pay tax on
its GPB under Section 28(A)(3)(a) of the National Internal Revenue Code (NIRC) of
1997. The CTA, however, stated that petitioner is liable to pay a tax of 32% on its
income derived from the sales of passage documents in the Philippines. On this ground,
the CTA denied petitioner’s claim for a refund.

Petitioner’s Motion for Reconsideration of the above decision was denied by the CTA
First Division in a Resolution dated August 11, 2006.

Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim
for a refund of its tax payment on its GPB. This was denied by the CTA in its assailed
decision. A subsequent Motion for Reconsideration by petitioner was also denied in the
assailed resolution of the CTA En Banc.

Hence, petitioner went to us.

The Issues

Whether or not petitioner, as an off-line international carrier selling passage documents

through an independent sales agent in the Philippines, is engaged in trade or business
in the Philippines subject to the 32% income tax imposed by Section 28 (A)(1) of the
1997 NIRC.

Whether or not the income derived by petitioner from the sale of passage documents
covering petitioner’s off-line flights is Philippine-source income subject to Philippine
income tax.

Whether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax on
Gross Philippine Billings for the taxable year 2000 in the amount of P1,727,766.38. 5
 The Court’s Ruling

This petition must be denied.

Petitioner Is Subject to Income Tax at the Rate of 32% of Its Taxable Income

Preliminarily, we emphasize that petitioner is claiming that it is exempted from being

taxed for its sale of passage documents in the Philippines. Petitioner, however, failed to
sufficiently prove such contention.

In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, 6 we

held, "Since an action for a tax refund partakes of the nature of an exemption, which
cannot be allowed unless granted in the most explicit and categorical language, it is
strictly construed against the claimant who must discharge such burden convincingly."

Petitioner has failed to overcome such burden.

In essence, petitioner calls upon this Court to determine the legal implication of the
amendment to Sec. 28(A)(3)(a) of the 1997 NIRC defining GPB. It is petitioner’s
contention that, with the new definition of GPB, it is no longer liable under Sec.
28(A)(3)(a). Further, petitioner argues that because the 2 1/2% tax on GPB is
inapplicable to it, it is thereby excluded from the imposition of any income tax.

Sec. 28(b)(2) of the 1939 NIRC provided:

(2) Resident Corporations. – A corporation organized, authorized, or existing under the

laws of a foreign country, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income received
in the preceding taxable year from all sources within the Philippines: Provided, however,
that international carriers shall pay a tax of two and one-half percent on their gross
Philippine billings.

This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined
GPB as follows:

"Gross Philippine billings" include gross revenue realized from uplifts anywhere in the
world by any international carrier doing business in the Philippines of passage
documents sold therein, whether for passenger, excess baggage or mail, provided the
cargo or mail originates from the Philippines.

In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:

"Gross Philippine Billings" means gross revenue realized from uplifts of passengers
anywhere in the world and excess baggage, cargo and mail originating from the
Philippines, covered by passage documents sold in the Philippines.
Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in
the world, provided that the passage documents were sold in the Philippines.
Legislature departed from such concept in the 1997 NIRC where GPB is now defined
under Sec. 28(A)(3)(a):

"Gross Philippine Billings" refers to the amount of gross revenue derived from carriage
of persons, excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document.

Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and
cargo occur to or from the Philippines, income is included in GPB.

As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or from
the Philippines, it is not taxable under Sec. 28(A)(3)(a) of the 1997 NIRC. This much
was also found by the CTA. But petitioner further posits the view that due to the non-
applicability of Sec. 28(A)(3)(a) to it, it is precluded from paying any other income tax for
its sale of passage documents in the Philippines.

Such position is untenable.

In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British

Overseas Airways),7 which was decided under similar factual circumstances, this Court
ruled that off-line air carriers having general sales agents in the Philippines are engaged
in or doing business in the Philippines and that their income from sales of passage
documents here is income from within the Philippines. Thus, in that case, we held the
off-line air carrier liable for the 32% tax on its taxable income.

Petitioner argues, however, that because British Overseas Airways was decided under
the 1939 NIRC, it does not apply to the instant case, which must be decided under the
1997 NIRC. Petitioner alleges that the 1939 NIRC taxes resident foreign corporations,
such as itself, on all income from sources within the Philippines. Petitioner’s
interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an international
carrier that does not maintain flights to or from the Philippines, thereby having no GPB
as defined, it is exempt from paying any income tax at all. In other words, the existence
of Sec. 28(A)(3)(a) according to petitioner precludes the application of Sec. 28(A)(1) to
it.

Its argument has no merit.

First, the difference cited by petitioner between the 1939 and 1997 NIRCs with regard to
the taxation of off-line air carriers is more apparent than real.

We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term,
exempt all international air carriers from the coverage of Sec. 28(A)(1) of the 1997
NIRC. Certainly, had legislature’s intentions been to completely exclude all international
air carriers from the application of the general rule under Sec. 28(A)(1), it would have
used the appropriate language to do so; but the legislature did not. Thus, the logical
interpretation of such provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer,
then the general rule under Sec. 28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a)
does not apply, a resident foreign corporation, whether an international air carrier or not,
would be liable for the tax under Sec. 28(A)(1).

Clearly, no difference exists between British Overseas Airways and the instant case,
wherein petitioner claims that the former case does not apply. Thus, British Overseas
Airways applies to the instant case. The findings therein that an off-line air carrier is
doing business in the Philippines and that income from the sale of passage documents
here is Philippine-source income must be upheld.

Petitioner further reiterates its argument that the intention of Congress in amending the
definition of GPB is to exempt off-line air carriers from income tax by citing the
pronouncements made by Senator Juan Ponce Enrile during the deliberations on the
provisions of the 1997 NIRC. Such pronouncements, however, are not controlling on
this Court. We said in Espino v. Cleofe:8

A cardinal rule in the interpretation of statutes is that the meaning and intention of the
law-making body must be sought, first of all, in the words of the statute itself, read and
considered in their natural, ordinary, commonly-accepted and most obvious
significations, according to good and approved usage and without resorting to forced or
subtle construction. Courts, therefore, as a rule, cannot presume that the law-making
body does not know the meaning of words and rules of grammar. Consequently, the
grammatical reading of a statute must be presumed to yield its correct sense. x x x It is
also a well-settled doctrine in this jurisdiction that statements made by individual
members of Congress in the consideration of a bill do not necessarily reflect the sense
of that body and are, consequently, not controlling in the interpretation of law.
(Emphasis supplied.)

Moreover, an examination of the subject provisions of the law would show that
petitioner’s interpretation of those provisions is erroneous.

Sec. 28(A)(1) and (A)(3)(a) provides:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation

organized, authorized, or existing under the laws of any foreign country, engaged
in trade or business within the Philippines, shall be subject to an income tax
equivalent to thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines: provided, That
effective January 1, 1998, the rate of income tax shall be thirty-four percent
 (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and
effective January 1, 2000 and thereafter, the rate shall be thirty-two percent
(32%).

xxxx

(3) International Carrier. - An international carrier doing business in the

Philippines shall pay a tax of two and one-half percent (2 1/2%) on its ‘Gross
Philippine Billings’ as defined hereunder:

(a) International Air Carrier. – ‘Gross Philippine Billings’ refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross Philippine Billings
if the passenger boards a plane in a port or point in the Philippines: Provided,
further, That for a flight which originates from the Philippines, but transshipment
of passenger takes place at any port outside the Philippines on another airline,
only the aliquot portion of the cost of the ticket corresponding to the leg flown
from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings.

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are
liable for 32% tax on all income from sources within the Philippines. Sec. 28(A)(3) is an
exception to this general rule.

An exception is defined as "that which would otherwise be included in the provision from
which it is excepted. It is a clause which exempts something from the operation of a
statue by express words."9 Further, "an exception need not be introduced by the words
‘except’ or ‘unless.’ An exception will be construed as such if it removes something from
the operation of a provision of law."10

In the instant case, the general rule is that resident foreign corporations shall be liable
for a 32% income tax on their income from within the Philippines, except for resident
foreign corporations that are international carriers that derive income "from carriage of
persons, excess baggage, cargo and mail originating from the Philippines" which shall
be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international
carrier with no flights originating from the Philippines, does not fall under the exception.
As such, petitioner must fall under the general rule. This principle is embodied in the
Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing
not being excepted must be regarded as coming within the purview of the general rule. 11

To reiterate, the correct interpretation of the above provisions is that, if an international

air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2
1/2% of its Gross Philippine Billings, while international air carriers that do not have
flights to and from the Philippines but nonetheless earn income from other activities in
the country will be taxed at the rate of 32% of such income.

As to the denial of petitioner’s claim for refund, the CTA denied the claim on the basis
that petitioner is liable for income tax under Sec. 28(A)(1) of the 1997 NIRC. Thus,
petitioner raises the issue of whether the existence of such liability would preclude their
claim for a refund of tax paid on the basis of Sec. 28(A)(3)(a). In answer to petitioner’s
motion for reconsideration, the CTA First Division ruled in its Resolution dated August
11, 2006, thus:

On the fourth argument, petitioner avers that a deficiency tax assessment does not, in
any way, disqualify a taxpayer from claiming a tax refund since a refund claim can
proceed independently of a tax assessment and that the assessment cannot be offset
by its claim for refund.

Petitioner’s argument is erroneous. Petitioner premises its argument on the existence of

an assessment. In the assailed Decision, this Court did not, in any way, assess
petitioner of any deficiency corporate income tax. The power to make assessments
against taxpayers is lodged with the respondent. For an assessment to be made,
respondent must observe the formalities provided in Revenue Regulations No. 12-99.
This Court merely pointed out that petitioner is liable for the regular corporate income
tax by virtue of Section 28(A)(3) of the Tax Code. Thus, there is no assessment to
speak of.12

Precisely, petitioner questions the offsetting of its payment of the tax under Sec.
28(A)(3)(a) with their liability under Sec. 28(A)(1), considering that there has not yet
been any assessment of their obligation under the latter provision. Petitioner argues that
such offsetting is in the nature of legal compensation, which cannot be applied under
the circumstances present in this case.

Article 1279 of the Civil Code contains the elements of legal compensation, to wit:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the latter
has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

 (5) That over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor.

And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue,13 thus:

In several instances prior to the instant case, we have already made the
pronouncement that taxes cannot be subject to compensation for the simple reason that
the government and the taxpayer are not creditors and debtors of each other. There is a
material distinction between a tax and debt. Debts are due to the Government in its
corporate capacity, while taxes are due to the Government in its sovereign capacity. We
find no cogent reason to deviate from the aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, we

categorically held that taxes cannot be subject to set-off or compensation, thus:

We have consistently ruled that there can be no off-setting of taxes against the claims
that the taxpayer may have against the government. A person cannot refuse to pay a
tax on the ground that the government owes him an amount equal to or greater than the
tax being collected. The collection of a tax cannot await the results of a lawsuit against
the government.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines,
Inc. v. Commission on Audit, which reiterated that:

. . . a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other and a claim for taxes
is not such a debt, demand, contract or judgment as is allowed to be set-off.

Verily, petitioner’s argument is correct that the offsetting of its tax refund with its alleged
tax deficiency is unavailing under Art. 1279 of the Civil Code.

Commissioner of Internal Revenue v. Court of Tax Appeals, 14 however, granted the

offsetting of a tax refund with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s
supplemental motion for reconsideration alleging bringing to said court’s attention the
existence of the deficiency income and business tax assessment against Citytrust. The
fact of such deficiency assessment is intimately related to and inextricably intertwined
with the right of respondent bank to claim for a tax refund for the same year. To award
such refund despite the existence of that deficiency assessment is an absurdity and a
polarity in conceptual effects. Herein private respondent cannot be entitled to refund
and at the same time be liable for a tax deficiency assessment for the same year.

The grant of a refund is founded on the assumption that the tax return is valid, that is,
the facts stated therein are true and correct. The deficiency assessment, although not
yet final, created a doubt as to and constitutes a challenge against the truth and
accuracy of the facts stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that "(w)hen an
assessment is made in case of any list, statement, or return, which in the opinion of the
Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or return was not
false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper assessment and the
tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government will be forced to institute
anew a proceeding for the recovery of erroneously refunded taxes which recourse must
be filed within the prescriptive period of ten years after discovery of the falsity, fraud or
omission in the false or fraudulent return involved.This would necessarily require and
entail additional efforts and expenses on the part of the Government, impose a burden
on and a drain of government funds, and impede or delay the collection of much-
needed revenue for governmental operations.1avvphi1

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both

logically necessary and legally appropriate that the issue of the deficiency tax
assessment against Citytrust be resolved jointly with its claim for tax refund, to
determine once and for all in a single proceeding the true and correct amount of tax due
or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded,it would be only just
and fair that the taxpayer and the Government alike be given equal opportunities to
avail of remedies under the law to defeat each other’s claim and to determine all
matters of dispute between them in one single case. It is important to note that in
determining whether or not petitioner is entitled to the refund of the amount paid, it
would [be] necessary to determine how much the Government is entitled to collect as
taxes. This would necessarily include the determination of the correct liability of the
taxpayer and, certainly, a determination of this case would constitute res judicata on
both parties as to all the matters subject thereof or necessarily involved therein.
(Emphasis supplied.)

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997
NIRC. The above pronouncements are, therefore, still applicable today.

Here, petitioner’s similar tax refund claim assumes that the tax return that it filed was
correct. Given, however, the finding of the CTA that petitioner, although not liable under
Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of the
return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a
refund.

Be that as it may, this Court is unable to affirm the assailed decision and resolution of
the CTA En Banc on the outright denial of petitioner’s claim for a refund. Even though
petitioner is not entitled to a refund due to the question on the propriety of petitioner’s
tax return subject of the instant controversy, it would not be proper to deny such claim
without making a determination of petitioner’s liability under Sec. 28(A)(1).

It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec.
28(A)(1) is based on taxable income, that is, gross income less deductions and
exemptions, if any. It cannot be assumed that petitioner’s liabilities under the two
provisions would be the same. There is a need to make a determination of petitioner’s
liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a tax
deficiency exists. The assailed decision fails to mention having computed for the tax
due under Sec. 28(A)(1) and the records are bereft of any evidence sufficient to
establish petitioner’s taxable income. There is a necessity to receive evidence to
establish such amount vis-à-vis the claim for refund. It is only after such amount is
established that a tax refund or deficiency may be correctly pronounced.

WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution of
the CTA En Banc in CTA E.B. Case No. 210 are SET ASIDE. The instant case is
REMANDED to the CTA En Banc for further proceedings and appropriate action, more
particularly, the reception of evidence for both parties and the corresponding disposition
of CTA E.B. Case No. 210 not otherwise inconsistent with our judgment in this Decision.

SO ORDERED.

G.R. No. 169507

AIR CANADA, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONEN, J.:

An offline international air carrier selling passage tickets in the Philippines, through a
general sales agent, is a resident foreign corporation doing business in the Philippines.
As such, it is taxable under Section 28(A)(l), and not Section 28(A)(3) of the 1997
National Internal Revenue Code, subject to any applicable tax treaty to which the
Philippines is a signatory. Pursuant to Article 8 of the Republic of the Philippines-
Canada Tax Treaty, Air Canada may only be imposed a maximum tax of 1 ½% of its
gross revenues earned from the sale of its tickets in the Philippines.

This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of
Tax Appeals En Banc, which in turn affirmed the December 22, 2004 Decision 3 and
April 8, 2005 Resolution4 of the Court of Tax Appeals First Division denying Air
Canada’s claim for refund.

Air Canada is a "foreign corporation organized and existing under the laws of
Canada[.]"5 On April 24, 2000, it was granted an authority to operate as an offline carrier
by the Civil Aeronautics Board, subject to certain conditions, which authority would
expire on April 24, 2005.6 "As an off-line carrier, [Air Canada] does not have flights
originating from or coming to the Philippines [and does not] operate any airplane [in] the
Philippines[.]"7

On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its
general sales agent in the Philippines. 8 Aerotel "sells [Air Canada’s] passage
documents in the Philippines."9

For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air
Canada, through Aerotel, filed quarterly and annual income tax returns and paid the
income tax on Gross Philippine Billings in the total amount of ₱5,185,676.77, 10 detailed
as follows:

1âwphi1

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

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

Annual ITR 2000 April 16, 2001 381,893.59

1st Qtr 2001 May 30, 2001 522,465.39

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

3rd Qtr 2001 November 29, 2001 765,021.28

Annual ITR 2001 April 15, 2002 328,193.93

1st Qtr 2002 May 30, 2002 594,850.13

 2nd Qtr 2002 August 29, 2002 1,164,664.11

11
TOTAL P 5,185,676.77

On November 28, 2002, Air Canada filed a written claim for refund of alleged
erroneously paid income taxes amounting to ₱5,185,676.77 before the Bureau of
Internal Revenue,12 Revenue District Office No. 47-East Makati.13 It found basis from
the revised definition14 of Gross Philippine Billings under Section 28(A)(3)(a) of the 1997
National Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

....

(3) International Carrier. - An international carrier doing business in the

Philippines shall pay a tax of two and onehalf percent (2 1/2%) on its ‘Gross
Philippine Billings’ as defined hereunder:

(a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo
and mail originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of
the ticket or passage document: Provided, That tickets revalidated, exchanged
and/or indorsed to another international airline form part of the Gross Philippine
Billings if the passenger boards a plane in a port or point in the Philippines:
Provided, further, That for a flight which originates from the Philippines, but
transshipment of passenger takes place at any port outside the Philippines on
another airline, only the aliquot portion of the cost of the ticket corresponding to
the leg flown from the Philippines to the point of transshipment shall form part of
Gross Philippine Billings. (Emphasis supplied)

To prevent the running of the prescriptive period, Air Canada filed a Petition for Review
before the Court of Tax Appeals on November 29, 2002.15 The case was docketed as
C.T.A. Case No. 6572.16

On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision
denying the Petition for Review and, hence, the claim for refund. 17 It found that Air
Canada was engaged in business in the Philippines through a local agent that sells
airline tickets on its behalf. As such, it should be taxed as a resident foreign corporation
at the regular rate of 32%.18 Further, according to the Court of Tax Appeals First
Division, Air Canada was deemed to have established a "permanent establishment" 19 in
the Philippines under Article V(2)(i) of the Republic of the Philippines-Canada Tax
Treaty20 by the appointment of the local sales agent, "in which [the] petitioner uses its
premises as an outlet where sales of [airline] tickets are made[.]" 21

Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in
the Court of Tax Appeals First Division’s Resolution dated April 8, 2005 for lack of
merit.22 The First Division held that while Air Canada was not liable for tax on its Gross
Philippine Billings under Section 28(A)(3), it was nevertheless liable to pay the 32%
corporate income tax on income derived from the sale of airline tickets within the
Philippines pursuant to Section 28(A)(1).23

On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc. 24 The
appeal was docketed as CTA EB No. 86.25

In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc affirmed the
findings of the First Division.26 The En Banc ruled that Air Canada is subject to tax as a
resident foreign corporation doing business in the Philippines since it sold airline tickets
in the Philippines.27 The Court of Tax Appeals En Banc disposed thus:

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE

COURSE, and accordingly, DISMISSED for lack of merit.28

Hence, this Petition for Review29 was filed.

The issues for our consideration are:

First, whether petitioner Air Canada, as an offline international carrier selling passage
documents through a general sales agent in the Philippines, is a resident foreign
corporation within the meaning of Section 28(A)(1) of the 1997 National Internal
Revenue Code;

Second, whether petitioner Air Canada is subject to the 2½% tax on Gross Philippine
Billings pursuant to Section 28(A)(3). If not, whether an offline international carrier
selling passage documents through a general sales agent can be subject to the regular
corporate income tax of 32%30 on taxable income pursuant to Section 28(A)(1);

Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:

a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

b. Whether the appointment of a local general sales agent in the Philippines falls
under the definition of "permanent establishment" under Article V(2)(i) of the
Republic of the Philippines-Canada Tax Treaty; and

Lastly, whether petitioner Air Canada is entitled to the refund of ₱5,185,676.77

pertaining allegedly to erroneously paid tax on Gross Philippine Billings from the third
quarter of 2000 to the second quarter of 2002.
Petitioner claims that the general provision imposing the regular corporate income tax
on resident foreign corporations provided under Section 28(A)(1) of the 1997 National
Internal Revenue Code does not apply to "international carriers,"31 which are especially
classified and taxed under Section 28(A)(3).32 It adds that the fact that it is no longer
subject to Gross Philippine Billings tax as ruled in the assailed Court of Tax Appeals
Decision "does not render it ipso facto subject to 32% income tax on taxable income as
a resident foreign corporation."33 Petitioner argues that to impose the 32% regular
corporate income tax on its income would violate the Philippine government’s covenant
under Article VIII of the Republic of the Philippines-Canada Tax Treaty not to impose a
tax higher than 1½% of the carrier’s gross revenue derived from sources within the
Philippines.34 It would also allegedly result in "inequitable tax treatment of on-line and
off-line international air carriers[.]"35

Also, petitioner states that the income it derived from the sale of airline tickets in the
Philippines was income from services and not income from sales of personal property.36
Petitioner cites the deliberations of the Bicameral Conference Committee on House Bill
No. 9077 (which eventually became the 1997 National Internal Revenue Code),
particularly Senator Juan Ponce Enrile’s statement, 37 to reveal the "legislative intent to
treat the revenue derived from air carriage as income from services, and that the
carriage of passenger or cargo as the activity that generates the income." 38 Accordingly,
applying the principle on the situs of taxation in taxation of services, petitioner claims
that its income derived "from services rendered outside the Philippines [was] not subject
to Philippine income taxation."39

Petitioner further contends that by the appointment of Aerotel as its general sales agent,
petitioner cannot be considered to have a "permanent establishment" 40 in the
Philippines pursuant to Article V(6) of the Republic of the Philippines-Canada Tax
Treaty.41 It points out that Aerotel is an "independent general sales agent that acts as
such for . . . other international airline companies in the ordinary course of its
business."42 Aerotel sells passage tickets on behalf of petitioner and receives a
commission for its services.43 Petitioner states that even the Bureau of Internal
Revenue—through VAT Ruling No. 003-04 dated February 14, 2004—has conceded
that an offline international air carrier, having no flight operations to and from the
Philippines, is not deemed engaged in business in the Philippines by merely appointing
a general sales agent.44 Finally, petitioner maintains that its "claim for refund of
erroneously paid Gross Philippine Billings cannot be denied on the ground that [it] is
subject to income tax under Section 28 (A) (1)"45 since it has not been assessed at all
by the Bureau of Internal Revenue for any income tax liability. 46

On the other hand, respondent maintains that petitioner is subject to the 32% corporate
income tax as a resident foreign corporation doing business in the Philippines.
Petitioner’s total payment of ₱5,185,676.77 allegedly shows that petitioner was earning
a sizable income from the sale of its plane tickets within the Philippines during the
relevant period.47 Respondent further points out that this court in Commissioner of
Internal Revenue v. American Airlines, Inc.,48 which in turn cited the cases involving the
British Overseas Airways Corporation and Air India, had already settled that "foreign
airline companies which sold tickets in the Philippines through their local agents . . .
[are] considered resident foreign corporations engaged in trade or business in the
country."49 It also cites Revenue Regulations No. 6-78 dated April 25, 1978, which
defined the phrase "doing business in the Philippines" as including "regular sale of
tickets in the Philippines by offline international airlines either by themselves or through
their agents."50

Respondent further contends that petitioner is not entitled to its claim for refund
because the amount of ₱5,185,676.77 it paid as tax from the third quarter of 2000 to the
second quarter of 2001 was still short of the 32% income tax due for the period.51
Petitioner cannot allegedly claim good faith in its failure to pay the right amount of tax
since the National Internal Revenue Code became operative on January 1, 1998 and by
2000, petitioner should have already been aware of the implications of Section 28(A)(3)
and the decided cases of this court’s ruling on the taxability of offline international
carriers selling passage tickets in the Philippines.52

At the outset, we affirm the Court of Tax Appeals’ ruling that petitioner, as an offline
international carrier with no landing rights in the Philippines, is not liable to tax on Gross
Philippine Billings under Section 28(A)(3) of the 1997 National Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. –

(A) Tax on Resident Foreign Corporations. -

....

(3) International Carrier. - An international carrier doing business in the Philippines shall
pay a tax of two and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as
defined hereunder:

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross Philippine Billings
if the passenger boards a plane in a port or point in the Philippines: Provided,
further, That for a flight which originates from the Philippines, but transshipment
of passenger takes place at any port outside the Philippines on another airline,
only the aliquot portion of the cost of the ticket corresponding to the leg flown
from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings. (Emphasis supplied)
Under the foregoing provision, the tax attaches only when the carriage of persons,
excess baggage, cargo, and mail originated from the Philippines in a continuous and
uninterrupted flight, regardless of where the passage documents were sold.

Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross
Philippine Billings tax.

II

Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes.
Petitioner falls within the definition of resident foreign corporation under Section
28(A)(1) of the 1997 National Internal Revenue Code, thus, it may be subject to 32% 53
tax on its taxable income:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation organized,

authorized, or existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be subject to an income tax equivalent to
thirty-five percent (35%) of the taxable income derived in the preceding taxable
year from all sources within the Philippines: Provided, That effective January 1,
1998, the rate of income tax shall be thirty-four percent (34%); effective January 1,
1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and
thereafter, the rate shall be thirty-two percent (32%54). (Emphasis supplied)

The definition of "resident foreign corporation" has not substantially changed throughout
the amendments of the National Internal Revenue Code. All versions refer to "a foreign
corporation engaged in trade or business within the Philippines."

Commonwealth Act No. 466, known as the National Internal Revenue Code and
approved on June 15, 1939, defined "resident foreign corporation" as applying to "a
foreign corporation engaged in trade or business within the Philippines or having an
office or place of business therein."55

Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act
No. 6110, approved on August 4, 1969, reads:

Sec. 24. Rates of tax on corporations. — . . .

(b) Tax on foreign corporations. — . . .

(2) Resident corporations. — A corporation organized, authorized, or existing under the

laws of any foreign country, except a foreign life insurance company, engaged in trade
or business within the Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable year from all
sources within the Philippines.56 (Emphasis supplied)

Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections
of the 1939 National Internal Revenue Code. Section 24(b)(2) on foreign resident
corporations was amended, but it still provides that "[a] corporation organized,
authorized, or existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable year from all
sources within the Philippines[.]"57

As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas

Airways Corporation58 declared British Overseas Airways Corporation, an international
air carrier with no landing rights in the Philippines, as a resident foreign corporation
engaged in business in the Philippines through its local sales agent that sold and issued
tickets for the airline company.59 This court discussed that:

There is no specific criterion as to what constitutes "doing" or "engaging in" or

"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial dealings
and arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the
business organization. "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to establish a
continuous business, such as the appointment of a local agent, and not one of a
temporary character.["]

BOAC, during the periods covered by the subject-assessments, maintained a general

sales agent in the Philippines. That general sales agent, from 1959 to 1971, "was
engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of
trips — each trip in the series corresponding to a different airline company; (3) receiving
the fare from the whole trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services rendered through the mode
of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement." Those activities were in exercise of the functions which are normally
incident to, and are in progressive pursuit of, the purpose and object of its organization
as an international air carrier. In fact, the regular sale of tickets, its main activity, is the
very lifeblood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines. 60
(Emphasis supplied, citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance
with its definition of "doing business" with regard to foreign corporations. Section 3(d) of
the law enumerates the activities that constitute doing business:

d. the phrase "doing business" shall include soliciting orders, service contracts,
opening offices, whether called "liaison" offices or branches; appointing representatives
or distributors domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic business, firm,
entity or corporation in the Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements, and contemplate to that
extent the performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of, commercial gain or of the
purpose and object of the business organization: Provided, however, That the
phrase "doing business" shall not be deemed to include mere investment as a
shareholder by a foreign entity in domestic corporations duly registered to do business,
and/or the exercise of rights as such investor; nor having a nominee director or officer to
represent its interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its own
account[.]61 (Emphasis supplied)

While Section 3(d) above states that "appointing a representative or distributor

domiciled in the Philippines which transacts business in its own name and for its own
account" is not considered as "doing business," the Implementing Rules and
Regulations of Republic Act No. 7042 clarifies that "doing business" includes
"appointing representatives or distributors, operating under full control of the foreign
corporation, domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totaling one hundred eighty (180) days or more[.]"62

An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics]
Board, but who maintains office or who has designated or appointed agents or
employees in the Philippines, who sells or offers for sale any air transportation in behalf
of said foreign air carrier and/or others, or negotiate for, or holds itself out by solicitation,
advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such
transportation."63

"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil
Aeronautics] Board for such authority."64 Each offline carrier must file with the Civil
Aeronautics Board a monthly report containing information on the tickets sold, such as
the origin and destination of the passengers, carriers involved, and commissions
received.65

Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the

Philippines.
Aerotel performs acts or works or exercises functions that are incidental and beneficial
to the purpose of petitioner’s business. The activities of Aerotel bring direct receipts or
profits to petitioner.66 There is nothing on record to show that Aerotel solicited orders
alone and for its own account and without interference from, let alone direction of,
petitioner. On the contrary, Aerotel cannot "enter into any contract on behalf of
[petitioner Air Canada] without the express written consent of [the latter,]" 67 and it must
perform its functions according to the standards required by petitioner. 68 Through
Aerotel, petitioner is able to engage in an economic activity in the Philippines.

Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as
an offline carrier in the Philippines for a period of five years, or from April 24, 2000 until
April 24, 2005.69

Petitioner is, therefore, a resident foreign corporation that is taxable on its income
derived from sources within the Philippines. Petitioner’s income from sale of airline
tickets, through Aerotel, is income realized from the pursuit of its business activities in
the Philippines.

III

However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997
National Internal Revenue Code must consider the existence of an effective tax treaty
between the Philippines and the home country of the foreign air carrier.

In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this
court held that Section 28(A)(3)(a) does not categorically exempt all international air
carriers from the coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable
to a taxpayer, then the general rule under Section 28(A)(1) does not apply. If, however,
Section 28(A)(3)(a) does not apply, an international air carrier would be liable for the tax
under Section 28(A)(1).71

This court in South African Airways declared that the correct interpretation of these
provisions is that: "international air carrier[s] maintain[ing] flights to and from the
Philippines . . . shall be taxed at the rate of 2½% of its Gross Philippine Billings[;] while
international air carriers that do not have flights to and from the Philippines but
nonetheless earn income from other activities in the country [like sale of airline tickets]
will be taxed at the rate of 32% of such [taxable] income." 72

In this case, there is a tax treaty that must be taken into consideration to determine the
proper tax rate.

A tax treaty is an agreement entered into between sovereign states "for purposes of
eliminating double taxation on income and capital, preventing fiscal evasion, promoting
mutual trade and investment, and according fair and equitable tax treatment to foreign
residents or nationals."73 Commissioner of Internal Revenue v. S.C. Johnson and Son,
Inc.74 explained the purpose of a tax treaty:
The purpose of these international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the taxpayer avoid simultaneous
taxation in two different jurisdictions. More precisely, the tax conventions are drafted
with a view towards the elimination of international juridical double taxation, which is
defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods.

The apparent rationale for doing away with double taxation is to encourage the free flow
of goods and services and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and dynamic economies. Foreign
investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such
a climate.75 (Emphasis in the original, citations omitted)

Observance of any treaty obligation binding upon the government of the Philippines is
anchored on the constitutional provision that the Philippines "adopts the generally
accepted principles of international law as part of the law of the land[.]"76 Pacta sunt
servanda is a fundamental international law principle that requires agreeing parties to
comply with their treaty obligations in good faith. 77

Hence, the application of the provisions of the National Internal Revenue Code must be
subject to the provisions of tax treaties entered into by the Philippines with foreign
countries.

In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,78 this court

stressed the binding effects of tax treaties. It dealt with the issue of "whether the failure
to strictly comply with [Revenue Memorandum Order] RMO No. 1-200079 will deprive
persons or corporations of the benefit of a tax treaty."80 Upholding the tax treaty over
the administrative issuance, this court reasoned thus:

Our Constitution provides for adherence to the general principles of international law as
part of the law of the land. The time-honored international principle of pacta sunt
servanda demands the performance in good faith of treaty obligations on the part of the
states that enter into the agreement. Every treaty in force is binding upon the parties,
and obligations under the treaty must be performed by them in good faith. More
importantly, treaties have the force and effect of law in this jurisdiction.

Tax treaties are entered into "to reconcile the national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two
different jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax
conventions are drafted with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and for identical
periods. The apparent rationale for doing away with double taxation is to encourage the
free flow of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such
a climate." Simply put, tax treaties are entered into to minimize, if not eliminate the
harshness of international juridical double taxation, which is why they are also known as
double tax treaty or double tax agreements.

"A state that has contracted valid international obligations is bound to make in its
legislations those modifications that may be necessary to ensure the fulfillment of the
obligations undertaken." Thus, laws and issuances must ensure that the reliefs granted
under tax treaties are accorded to the parties entitled thereto. The BIR must not impose
additional requirements that would negate the availment of the reliefs provided for under
international agreements. More so, when the RPGermany Tax Treaty does not provide
for any pre-requisite for the availment of the benefits under said agreement.

....

Bearing in mind the rationale of tax treaties, the period of application for the availment of
tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement
to the relief as it would constitute a violation of the duty required by good faith in
complying with a tax treaty. The denial of the availment of tax relief for the failure of a
taxpayer to apply within the prescribed period under the administrative issuance would
impair the value of the tax treaty. At most, the application for a tax treaty relief from the
BIR should merely operate to confirm the entitlement of the taxpayer to the relief.

The obligation to comply with a tax treaty must take precedence over the objective of
RMO No. 1-2000. Logically, noncompliance with tax treaties has negative implications
on international relations, and unduly discourages foreign investors. While the
consequences sought to be prevented by RMO No. 1-2000 involve an administrative
procedure, these may be remedied through other system management processes, e.g.,
the imposition of a fine or penalty. But we cannot totally deprive those who are entitled
to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief. 81 (Emphasis supplied, citations omitted)

On March 11, 1976, the representatives82 for the government of the Republic of the
Philippines and for the government of Canada signed the Convention between the
Philippines and Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income (Republic of the Philippines-Canada
Tax Treaty). This treaty entered into force on December 21, 1977.

Article V83 of the Republic of the Philippines-Canada Tax Treaty defines "permanent
establishment" as a "fixed place of business in which the business of the enterprise is
wholly or partly carried on."84

Even though there is no fixed place of business, an enterprise of a Contracting State is

deemed to have a permanent establishment in the other Contracting State if under
certain conditions there is a person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states
that "[a] person acting in a Contracting State on behalf of an enterprise of the other
Contracting State (other than an agent of independent status to whom paragraph 6
applies) shall be deemed to be a permanent establishment in the first-mentioned State if
. . . he has and habitually exercises in that State an authority to conclude contracts on
behalf of the enterprise, unless his activities are limited to the purchase of goods or
merchandise for that enterprise[.]" The provision seems to refer to one who would be
considered an agent under Article 186885 of the Civil Code of the Philippines.

On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall
not be deemed to have a permanent establishment in the other Contracting State
merely because it carries on business in that other State through a broker, general
commission agent or any other agent of an independent status, where such persons
are acting in the ordinary course of their business."

Considering Article XV86 of the same Treaty, which covers dependent personal
services, the term "dependent" would imply a relationship between the principal and the
agent that is akin to an employer-employee relationship.

Thus, an agent may be considered to be dependent on the principal where the latter
exercises comprehensive control and detailed instructions over the means and results
of the activities of the agent.87

Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics
Act of the Philippines, defines a general sales agent as "a person, not a bonafide
employee of an air carrier, who pursuant to an authority from an airline, by itself or
through an agent, sells or offers for sale any air transportation, or negotiates for, or
holds himself out by solicitation, advertisement or otherwise as one who sells, provides,
furnishes, contracts or arranges for, such air transportation."88 General sales agents
and their property, property rights, equipment, facilities, and franchise are subject to the
regulation and control of the Civil Aeronautics Board. 89 A permit or authorization issued
by the Civil Aeronautics Board is required before a general sales agent may engage in
such an activity.90

Through the appointment of Aerotel as its local sales agent, petitioner is deemed to
have created a "permanent establishment" in the Philippines as defined under the
Republic of the Philippines-Canada Tax Treaty.

Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of
transportation on petitioner and handle reservations, appointment, and supervision of
International Air Transport Associationapproved and petitioner-approved sales agents,
including the following services:

ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following
services:

a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of
AC in every matter relating to this Agreement;

....

c) Promotion of passenger transportation on AC;

....

e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory
of the GSA [Philippines], of traffic documents issued by AC outside the said territory of
the GSA [Philippines], as required by the passenger(s);

....

h) Distribution among passenger sales agents and display of timetables, fare sheets,
tariffs and publicity material provided by AC in accordance with the reasonable
requirements of AC;

....

j) Distribution of official press releases provided by AC to media and reference of any

press or public relations inquiries to AC;

....

o) Submission for AC’s approval, of an annual written sales plan on or before a date to
be determined by AC and in a form acceptable to AC;

....

q) Submission of proposals for AC’s approval of passenger sales agent incentive plans
at a reasonable time in advance of proposed implementation.

r) Provision of assistance on request, in its relations with Governmental and other

authorities, offices and agencies in the Territory [Philippines].

....

u) Follow AC guidelines for the handling of baggage claims and customer complaints
and, unless otherwise stated in the guidelines, refer all such claims and complaints to
AC.91
Under the terms of the Passenger General Sales Agency Agreement, Aerotel will
"provide at its own expense and acceptable to [petitioner Air Canada], adequate and
suitable premises, qualified staff, equipment, documentation, facilities and supervision
and in consideration of the remuneration and expenses payable[,] [will] defray all costs
and expenses of and incidental to the Agency."92 "[I]t is the sole employer of its
employees and . . . is responsible for [their] actions . . . or those of any subcontractor." 93
In remuneration for its services, Aerotel would be paid by petitioner a commission on
sales of transportation plus override commission on flown revenues. 94 Aerotel would
also be reimbursed "for all authorized expenses supported by original supplier
invoices."95

Aerotel is required to keep "separate books and records of account, including

supporting documents, regarding all transactions at, through or in any way connected
with [petitioner Air Canada] business."96

"If representing more than one carrier, [Aerotel must] represent all carriers in an
unbiased way."97 Aerotel cannot "accept additional appointments as General Sales
Agent of any other carrier without the prior written consent of [petitioner Air Canada]."98

The Passenger General Sales Agency Agreement "may be terminated by either party
without cause upon [no] less than 60 days’ prior notice in writing[.]"99 In case of breach
of any provisions of the Agreement, petitioner may require Aerotel "to cure the breach in
30 days failing which [petitioner Air Canada] may terminate [the] Agreement[.]" 100

The following terms are indicative of Aerotel’s dependent status:

First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or
takes control of another entity or merges with or is acquired or controlled by another
person or entity[.]"101 Except with the written consent of petitioner, Aerotel must not
acquire a substantial interest in the ownership, management, or profits of a passenger
sales agent affiliated with the International Air Transport Association or a non-affiliated
passenger sales agent nor shall an affiliated passenger sales agent acquire a
substantial interest in Aerotel as to influence its commercial policy and/or management
decisions.102 Aerotel must also provide petitioner "with a report on any interests held by
[it], its owners, directors, officers, employees and their immediate families in companies
and other entities in the aviation industry or . . . industries related to it[.]" 103 Petitioner
may require that any interest be divested within a set period of time. 104

Second, in carrying out the services, Aerotel cannot enter into any contract on behalf of
petitioner without the express written consent of the latter; 105 it must act according to the
standards required by petitioner;106 "follow the terms and provisions of the [petitioner Air
Canada] GSA Manual [and all] written instructions of [petitioner Air Canada;]" 107 and
"[i]n the absence of an applicable provision in the Manual or instructions, [Aerotel must]
carry out its functions in accordance with [its own] standard practices and
procedures[.]"108
Third, Aerotel must only "issue traffic documents approved by [petitioner Air Canada] for
all transportation over [its] services[.]"109 All use of petitioner’s name, logo, and marks
must be with the written consent of petitioner and according to petitioner’s corporate
standards and guidelines set out in the Manual.110

Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the
transportation sold by Aerotel are for the account of petitioner, except in the case of
negligence of Aerotel.111

Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger

General Sales Agency Agreement executed between the parties. It has the authority or
power to conclude contracts or bind petitioner to contracts entered into in the
Philippines. A third-party liability on contracts of Aerotel is to petitioner as the principal,
and not to Aerotel, and liability to such third party is enforceable against petitioner.
While Aerotel maintains a certain independence and its activities may not be devoted
wholly to petitioner, nonetheless, when representing petitioner pursuant to the
Agreement, it must carry out its functions solely for the benefit of petitioner and
according to the latter’s Manual and written instructions. Aerotel is required to submit its
annual sales plan for petitioner’s approval.

In essence, Aerotel extends to the Philippines the transportation business of petitioner.

It is a conduit or outlet through which petitioner’s airline tickets are sold. 112

Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax
Treaty, the "business profits" of an enterprise of a Contracting State is "taxable only in
that State[,] unless the enterprise carries on business in the other Contracting State
through a permanent establishment[.]"113 Thus, income attributable to Aerotel or from
business activities effected by petitioner through Aerotel may be taxed in the
Philippines. However, pursuant to the last paragraph114 of Article VII in relation to Article
VIII115 (Shipping and Air Transport) of the same Treaty, the tax imposed on income
derived from the operation of ships or aircraft in international traffic should not exceed
1½% of gross revenues derived from Philippine sources.

IV

While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of

the 1997 National Internal Revenue Code on its taxable income 116 from sale of airline
tickets in the Philippines, it could only be taxed at a maximum of 1½% of gross
revenues, pursuant to Article VIII of the Republic of the Philippines-Canada Tax Treaty
that applies to petitioner as a "foreign corporation organized and existing under the laws
of Canada[.]"117

Tax treaties form part of the law of the land,118 and jurisprudence has applied the
statutory construction principle that specific laws prevail over general ones. 119
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977
and became valid and effective on that date. On the other hand, the applicable
provisions120 relating to the taxability of resident foreign corporations and the rate of
such tax found in the National Internal Revenue Code became effective on January 1,
1998.121 Ordinarily, the later provision governs over the earlier one. 122 In this case,
however, the provisions of the Republic of the Philippines-Canada Tax Treaty are more
specific than the provisions found in the National Internal Revenue Code.

These rules of interpretation apply even though one of the sources is a treaty and not
simply a statute.

Article VII, Section 21 of the Constitution provides:

SECTION 21. No treaty or international agreement shall be valid and effective unless
concurred in by at least two-thirds of all the Members of the Senate.

This provision states the second of two ways through which international obligations
become binding. Article II, Section 2 of the Constitution deals with international
obligations that are incorporated, while Article VII, Section 21 deals with international
obligations that become binding through ratification.

"Valid and effective" means that treaty provisions that define rights and duties as well as
definite prestations have effects equivalent to a statute. Thus, these specific treaty
provisions may amend statutory provisions. Statutory provisions may also amend these
types of treaty obligations.

We only deal here with bilateral treaty state obligations that are not international
obligations erga omnes. We are also not required to rule in this case on the effect of
international customary norms especially those with jus cogens character.

The second paragraph of Article VIII states that "profits from sources within a
Contracting State derived by an enterprise of the other Contracting State from the
operation of ships or aircraft in international traffic may be taxed in the first-mentioned
State but the tax so charged shall not exceed the lesser of a) one and one-half per cent
of the gross revenues derived from sources in that State; and b) the lowest rate of
Philippine tax imposed on such profits derived by an enterprise of a third State."

The Agreement between the government of the Republic of the Philippines and the
government of Canada on Air Transport, entered into on January 14, 1997, reiterates
the effectivity of Article VIII of the Republic of the Philippines-Canada Tax Treaty:

ARTICLE XVI
(Taxation)

The Contracting Parties shall act in accordance with the provisions of Article VIII of the
Convention between the Philippines and Canada for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at
Manila on March 31, 1976 and entered into force on December 21, 1977, and any
amendments thereto, in respect of the operation of aircraft in international traffic.123

Petitioner’s income from sale of ticket for international carriage of passenger is income
derived from international operation of aircraft. The sale of tickets is closely related to
the international operation of aircraft that it is considered incidental thereto.

"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our
right to tax limited to a certain extent[.]"124 Thus, we are bound to extend to a Canadian
air carrier doing business in the Philippines through a local sales agent the benefit of a
lower tax equivalent to 1½% on business profits derived from sale of international air
transportation.

Finally, we reject petitioner’s contention that the Court of Tax Appeals erred in denying
its claim for refund of erroneously paid Gross Philippine Billings tax on the ground that it
is subject to income tax under Section 28(A)(1) of the National Internal Revenue Code
because (a) it has not been assessed at all by the Bureau of Internal Revenue for any
income tax liability;125 and (b) internal revenue taxes cannot be the subject of set-off or
compensation,126 citing Republic v. Mambulao Lumber Co., et al.127 and Francia v.
Intermediate Appellate Court.128

In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,129 we

have ruled that "[i]n an action for the refund of taxes allegedly erroneously paid, the
Court of Tax Appeals may determine whether there are taxes that should have been
paid in lieu of the taxes paid."130 The determination of the proper category of tax that
should have been paid is incidental and necessary to resolve the issue of whether a
refund should be granted.131 Thus:

Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6%
capital gains tax or other taxes at the first instance. The Court of Tax Appeals has no
power to make an assessment.

As earlier established, the Court of Tax Appeals has no assessment powers. In stating
that petitioner’s transactions are subject to capital gains tax, however, the Court of Tax
Appeals was not making an assessment. It was merely determining the proper category
of tax that petitioner should have paid, in view of its claim that it erroneously imposed
upon itself and paid the 5% final tax imposed upon PEZA-registered enterprises.

The determination of the proper category of tax that petitioner should have paid is an
incidental matter necessary for the resolution of the principal issue, which is whether
petitioner was entitled to a refund.
The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper
taxes that are due from petitioner. A claim for tax refund carries the assumption that the
tax returns filed were correct. If the tax return filed was not proper, the correctness of
the amount paid and, therefore, the claim for refund become questionable. In that case,
the court must determine if a taxpayer claiming refund of erroneously paid taxes is more
properly liable for taxes other than that paid.

In South African Airways v. Commissioner of Internal Revenue, South African Airways

claimed for refund of its erroneously paid 2½% taxes on its gross Philippine billings.
This court did not immediately grant South African’s claim for refund. This is because
although this court found that South African Airways was not subject to the 2½% tax on
its gross Philippine billings, this court also found that it was subject to 32% tax on its
taxable income.

In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission
that the quarterly tax return it filed in 2000 was improper. Hence, to determine if
petitioner was entitled to the refund being claimed, the Court of Tax Appeals has the
duty to determine if petitioner was indeed not liable for the 5% final tax and, instead,
liable for taxes other than the 5% final tax. As in South African Airways, petitioner’s
request for refund can neither be granted nor denied outright without such
determination.

If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the
amount of the taxpayer’s liability should be computed and deducted from the refundable
amount.

Any liability in excess of the refundable amount, however, may not be collected in a
case involving solely the issue of the taxpayer’s entitlement to refund. The question of
tax deficiency is distinct and unrelated to the question of petitioner’s entitlement to
refund. Tax deficiencies should be subject to assessment procedures and the rules of
prescription. The court cannot be expected to perform the BIR’s duties whenever it fails
to do so either through neglect or oversight. Neither can court processes be used as a
tool to circumvent laws protecting the rights of taxpayers.132

Hence, the Court of Tax Appeals properly denied petitioner’s claim for refund of
allegedly erroneously paid tax on its Gross Philippine Billings, on the ground that it was
liable instead for the regular 32% tax on its taxable income received from sources within
the Philippines. Its determination of petitioner’s liability for the 32% regular income tax
was made merely for the purpose of ascertaining petitioner’s entitlement to a tax refund
and not for imposing any deficiency tax.

In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the
cases cited are based on different circumstances. In both cited cases, 133 the taxpayer
claimed that his (its) tax liability was off-set by his (its) claim against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber contended
that the amounts it paid to the government as reforestation charges from 1947 to 1956,
not having been used in the reforestation of the area covered by its license, may be set
off or applied to the payment of forest charges still due and owing from it.134 Rejecting
Mambulao’s claim of legal compensation, this court ruled:

[A]ppellant and appellee are not mutually creditors and debtors of each other.
Consequently, the law on compensation is inapplicable. On this point, the trial court
correctly observed:

Under Article 1278, NCC, compensation should take place when two persons in their
own right are creditors and debtors of each other. With respect to the forest charges
which the defendant Mambulao Lumber Company has paid to the government, they are
in the coffers of the government as taxes collected, and the government does not owe
anything to defendant Mambulao Lumber Company. So, it is crystal clear that the
Republic of the Philippines and the Mambulao Lumber Company are not creditors and
debtors of each other, because compensation refers to mutual debts. * * *.

And the weight of authority is to the effect that internal revenue taxes, such as the forest
charges in question, can not be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be
set-off under the statutes of set-off, which are construed uniformly, in the light of public
policy, to exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes. Neither are they a
proper subject of recoupment since they do not arise out of the contract or transaction
sued on. * * *. (80 C.J.S. 73–74.)

The general rule, based on grounds of public policy is well-settled that no set-off is
admissible against demands for taxes levied for general or local governmental
purposes. The reason on which the general rule is based, is that taxes are not in the
nature of contracts between the party and party but grow out of a duty to, and are the
positive acts of the government, to the making and enforcing of which, the personal
consent of individual taxpayers is not required. * * * If the taxpayer can properly refuse
to pay his tax when called upon by the Collector, because he has a claim against the
governmental body which is not included in the tax levy, it is plain that some legitimate
and necessary expenditure must be curtailed. If the taxpayer’s claim is disputed, the
collection of the tax must await and abide the result of a lawsuit, and meanwhile the
financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766–
767.)135 (Emphasis supplied)

In Francia, this court did not allow legal compensation since not all requisites of legal
compensation provided under Article 1279 were present.136 In that case, a portion of
Francia’s property in Pasay was expropriated by the national government, 137 which did
not immediately pay Francia. In the meantime, he failed to pay the real property tax due
on his remaining property to the local government of Pasay, which later on would
auction the property on account of such delinquency. 138 He then moved to set aside the
auction sale and argued, among others, that his real property tax delinquency was
extinguished by legal compensation on account of his unpaid claim against the national
government.139 This court ruled against Francia:

There is no legal basis for the contention. By legal compensation, obligations of

persons, who in their own right are reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the
requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the same
time a principal creditor of the other;

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently ruled that
there can be no off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government.

....

There are other factors which compel us to rule against the petitioner. The tax was due
to the city government while the expropriation was effected by the national government.
Moreover, the amount of ₱4,116.00 paid by the national government for the 125 square
meter portion of his lot was deposited with the Philippine National Bank long before the
sale at public auction of his remaining property. Notice of the deposit dated September
28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted
in his testimony that he knew about the ₱4,116.00 deposited with the bank but he did
not withdraw it. It would have been an easy matter to withdraw ₱2,400.00 from the
deposit so that he could pay the tax obligation thus aborting the sale at public
auction.140

The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v.
Commission on Audit141 and Philex Mining Corporation v. Commissioner of Internal
Revenue.142 In Caltex, this court reiterated:

[A] taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other and a claim for taxes
is not such a debt, demand, contract or judgment as is allowed to be set-off.143
(Citations omitted)

Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts
are due to the Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity." 144 Rejecting Philex Mining’s assertion that the
imposition of surcharge and interest was unjustified because it had no obligation to pay
the excise tax liabilities within the prescribed period since, after all, it still had pending
claims for VAT input credit/refund with the Bureau of Internal Revenue, this court
explained:

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the
ground that it has a pending tax claim for refund or credit against the government which
has not yet been granted. It must be noted that a distinguishing feature of a tax is that it
is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the
consent of the taxpayer. If any tax payer can defer the payment of taxes by raising the
defense that it still has a pending claim for refund or credit, this would adversely affect
the government revenue system. A taxpayer cannot refuse to pay his taxes when they
fall due simply because he has a claim against the government or that the collection of
the tax is contingent on the result of the lawsuit it filed against the government.
Moreover, Philex’s theory that would automatically apply its VAT input credit/refund
against its tax liabilities can easily give rise to confusion and abuse, depriving the
government of authority over the manner by which taxpayers credit and offset their tax
liabilities.145 (Citations omitted)

In sum, the rulings in those cases were to the effect that the taxpayer cannot simply
refuse to pay tax on the ground that the tax liabilities were off-set against any alleged
claim the taxpayer may have against the government. Such would merely be in keeping
with the basic policy on prompt collection of taxes as the lifeblood of the
government.1âwphi1

Here, what is involved is a denial of a taxpayer’s refund claim on account of the Court of
Tax Appeals’ finding of its liability for another tax in lieu of the Gross Philippine Billings
tax that was allegedly erroneously paid.

Squarely applicable is South African Airways where this court rejected similar
arguments on the denial of claim for tax refund:

Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the

offsetting of a tax refund with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s
supplemental motion for reconsideration alleging bringing to said court’s attention the
existence of the deficiency income and business tax assessment against Citytrust. The
fact of such deficiency assessment is intimately related to and inextricably intertwined
with the right of respondent bank to claim for a tax refund for the same year. To award
such refund despite the existence of that deficiency assessment is an absurdity and a
polarity in conceptual effects. Herein private respondent cannot be entitled to refund
and at the same time be liable for a tax deficiency assessment for the same year.

The grant of a refund is founded on the assumption that the tax return is valid, that is,
the facts stated therein are true and correct. The deficiency assessment, although not
yet final, created a doubt as to and constitutes a challenge against the truth and
accuracy of the facts stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that "(w)hen an
assessment is made in case of any list, statement, or return, which in the opinion of the
Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or return was not
false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper assessment and the
tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government will be forced to institute
anew a proceeding for the recovery of erroneously refunded taxes which recourse must
be filed within the prescriptive period of ten years after discovery of the falsity, fraud or
omission in the false or fraudulent return involved. This would necessarily require and
entail additional efforts and expenses on the part of the Government, impose a burden
on and a drain of government funds, and impede or delay the collection of much-
needed revenue for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both

logically necessary and legally appropriate that the issue of the deficiency tax
assessment against Citytrust be resolved jointly with its claim for tax refund, to
determine once and for all in a single proceeding the true and correct amount of tax due
or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just
and fair that the taxpayer and the Government alike be given equal opportunities to
avail of remedies under the law to defeat each other’s claim and to determine all
matters of dispute between them in one single case. It is important to note that in
determining whether or not petitioner is entitled to the refund of the amount paid, it
would [be] necessary to determine how much the Government is entitled to collect as
taxes. This would necessarily include the determination of the correct liability of the
taxpayer and, certainly, a determination of this case would constitute res judicata on
both parties as to all the matters subject thereof or necessarily involved therein.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997
NIRC. The above pronouncements are, therefore, still applicable today.

Here, petitioner's similar tax refund claim assumes that the tax return that it filed was
correct. Given, however, the finding of the CTA that petitioner, although not liable under
Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(l), the correctness of the
return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a
refund.146 (Emphasis supplied, citation omitted)

In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue, 147
this court upheld the denial of the claim for refund based on the Court of Tax Appeals'
finding that the taxpayer had, through erroneous deductions on its gross income,
underpaid its Gross Philippine Billing tax on cargo revenues for 1999, and the amount of
underpayment was even greater than the refund sought for erroneously paid Gross
Philippine Billings tax on passenger revenues for the same taxable period.148

In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was
computed at the rate of 1 ½% of its gross revenues amounting to P345,711,806.08149
from the third quarter of 2000 to the second quarter of 2002. It is quite apparent that the
tax imposable under Section 28(A)(l) of the 1997 National Internal Revenue Code [32%
of t.axable income, that is, gross income less deductions] will exceed the maximum
ceiling of 1 ½% of gross revenues as decreed in Article VIII of the Republic of the
Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.

WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and
Resolution dated April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED.

SO ORDERED.

G.R. No. 172087 March 15, 2011

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

vs.
THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by HON. JOSE
MARIO BUÑAG, in his official capacity as COMMISSIONER OF INTERNAL
REVENUE, Public Respondent,
JOHN DOE and JANE DOE, who are persons acting for, in behalf, or under the
authority of Respondent. Public and Private Respondents.

DECISION

PERALTA, J.:
For resolution of this Court is the Petition for Certiorari and Prohibition 1 with prayer for
the issuance of a Temporary Restraining Order and/or Preliminary Injunction, dated
April 17, 2006, of petitioner Philippine Amusement and Gaming Corporation (PAGCOR),
seeking the declaration of nullity of Section 1 of Republic Act (R.A.) No. 9337 insofar as
it amends Section 27 (c) of the National Internal Revenue Code of 1997, by excluding
petitioner from exemption from corporate income tax for being repugnant to Sections 1
and 10 of Article III of the Constitution. Petitioner further seeks to prohibit the
implementation of Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005
for being contrary to law.

The undisputed facts follow.

PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A2 on January
1, 1977. Simultaneous to its creation, P.D. No. 1067-B3 (supplementing P.D. No. 1067-
A) was issued exempting PAGCOR from the payment of any type of tax, except a
franchise tax of five percent (5%) of the gross revenue. 4 Thereafter, on June 2, 1978,
P.D. No. 1399 was issued expanding the scope of PAGCOR's exemption.5

To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No.
18696 was issued. Section 13 thereof reads as follows:

Sec. 13. Exemptions. — x x x

(1) Customs Duties, taxes and other imposts on importations. - All importations of
equipment, vehicles, automobiles, boats, ships, barges, aircraft and such other
gambling paraphernalia, including accessories or related facilities, for the sole
and exclusive use of the casinos, the proper and efficient management and
administration thereof and such other clubs, recreation or amusement places to
be established under and by virtue of this Franchise shall be exempt from the
payment of duties, taxes and other imposts, including all kinds of fees, levies, or
charges of any kind or nature.

Vessels and/or accessory ferry boats imported or to be imported by any

corporation having existing contractual arrangements with the Corporation, for
the sole and exclusive use of the casino or to be used to service the operations
and requirements of the casino, shall likewise be totally exempt from the
payment of all customs duties, taxes and other imposts, including all kinds of
fees, levies, assessments or charges of any kind or nature, whether National or
Local.

(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form,
income or otherwise, as well as fees, charges, or levies of whatever nature,
whether National or Local, shall be assessed and collected under this Franchise
from the Corporation; nor shall any form of tax or charge attach in any way to the
earnings of the Corporation, except a Franchise Tax of five percent (5%)of the
gross revenue or earnings derived by the Corporation from its operation under
 this Franchise. Such tax shall be due and payable quarterly to the National
Government and shall be in lieu of all kinds of taxes, levies, fees or assessments
of any kind, nature or description, levied, established, or collected by any
municipal, provincial or national government authority.

(b) Others: The exemption herein granted for earnings derived from the
operations conducted under the franchise, specifically from the payment of
any tax, income or otherwise, as well as any form of charges, fees or
levies, shall inure to the benefit of and extend to corporation(s),
association(s), agency(ies), or individual(s) with whom the Corporation or
operator has any contractual relationship in connection with the operations
of the casino(s) authorized to be conducted under this Franchise and to
those receiving compensation or other remuneration from the Corporation
as a result of essential facilities furnished and/or technical services
rendered to the Corporation or operator.

The fee or remuneration of foreign entertainers contracted by the Corporation or

operator in pursuance of this provision shall be free of any tax.

(3) Dividend Income. − Notwithstanding any provision of law to the contrary, in

the event the Corporation should declare a cash dividend income corresponding
to the participation of the private sector shall, as an incentive to the beneficiaries,
be subject only to a final flat income rate of ten percent (10%) of the regular
income tax rates. The dividend income shall not in such case be considered as
part of the beneficiaries' taxable income; provided, however, that such dividend
income shall be totally exempted from income or other form of taxes if invested
within six (6) months from the date the dividend income is received in the
following:

(a) operation of the casino(s) or investments in any affiliate activity that will
ultimately redound to the benefit of the Corporation; or any other
corporation with whom the Corporation has any existing arrangements in
connection with or related to the operations of the casino(s);

(b) Government bonds, securities, treasury notes, or government

debentures; or

(c) BOI-registered or export-oriented corporation(s).7

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was
later restored by Letter of Instruction No. 1430, which was issued in September 1984.

On January 1, 1998, R.A. No. 8424,8 otherwise known as the National Internal Revenue
Code of 1997, took effect. Section 27 (c) of R.A. No. 8424 provides that government-
owned and controlled corporations (GOCCs) shall pay corporate income tax, except
petitioner PAGCOR, the Government Service and Insurance Corporation, the Social
Security System, the Philippine Health Insurance Corporation, and the Philippine
Charity Sweepstakes Office, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The

provisions of existing special general laws to the contrary notwithstanding, all
corporations, agencies or instrumentalities owned and controlled by the Government,
except the Government Service and Insurance Corporation (GSIS), the Social Security
System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine
Charity Sweepstakes Office (PCSO), and the Philippine Amusement and Gaming
Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or associations engaged in similar business,
industry, or activity.9

With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the National
Internal Revenue Code of 1997 were amended. The particular amendment that is at
issue in this case is Section 1 of R.A. No. 9337, which amended Section 27 (c) of the
National Internal Revenue Code of 1997 by excluding PAGCOR from the enumeration
of GOCCs that are exempt from payment of corporate income tax, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The

provisions of existing special general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned and controlled by the Government,
except the Government Service and Insurance Corporation (GSIS), the Social Security
System (SSS), the Philippine Health Insurance Corporation (PHIC), and the Philippine
Charity Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable
income as are imposed by this Section upon corporations or associations engaged in
similar business, industry, or activity.

Different groups came to this Court via petitions for certiorari and prohibition11 assailing
the validity and constitutionality of R.A. No. 9337, in particular:

1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and
properties; Section 5, which imposes a 10% VAT on importation of goods; and
Section 6, which imposes a 10% VAT on sale of services and use or lease of
properties, all contain a uniform proviso authorizing the President, upon the
recommendation of the Secretary of Finance, to raise the VAT rate to 12%. The
said provisions were alleged to be violative of Section 28 (2), Article VI of the
Constitution, which section vests in Congress the exclusive authority to fix the
rate of taxes, and of Section 1, Article III of the Constitution on due process, as
well as of Section 26 (2), Article VI of the Constitution, which section provides for
the "no amendment rule" upon the last reading of a bill;

2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the

Constitution, or the guarantee of equal protection of the laws, and Section 28 (1),
Article VI of the Constitution; and
 3) other technical aspects of the passage of the law, questioning the manner it
was passed.

On September 1, 2005, the Court dismissed all the petitions and upheld the
constitutionality of R.A. No. 9337.12

On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,13
specifically identifying PAGCOR as one of the franchisees subject to 10% VAT imposed
under Section 108 of the National Internal Revenue Code of 1997, as amended by R.A.
No. 9337. The said revenue regulation, in part, reads:

Sec. 4. 108-3. Definitions and Specific Rules on Selected Services. —

xxxx

(h) x x x

Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the
Tax Code, regardless of how their franchisees may have been granted, shall be subject
to the 10% VAT imposed under Sec.108 of the Tax Code. This includes, among others,
the Philippine Amusement and Gaming Corporation (PAGCOR), and its licensees or
franchisees.

Hence, the present petition for certiorari.

PAGCOR raises the following issues:

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR
BEING REPUGNANT TO THE EQUAL PROTECTION [CLAUSE] EMBODIED IN
SECTION 1, ARTICLE III OF THE 1987 CONSTITUTION.

II

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR
BEING REPUGNANT TO THE NON-IMPAIRMENT [CLAUSE] EMBODIED IN
SECTION 10, ARTICLE III OF THE 1987 CONSTITUTION.

III

WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND

VOID AB INITIO FOR BEING BEYOND THE SCOPE OF THE BASIC LAW, RA 8424,
SECTION 108, INSOFAR AS THE SAID REGULATION IMPOSED VAT ON THE
SERVICES OF THE PETITIONER AS WELL AS PETITIONER’S LICENSEES OR
FRANCHISEES WHEN THE BASIC LAW, AS INTERPRETED BY APPLICABLE
JURISPRUDENCE, DOES NOT IMPOSE VAT ON PETITIONER OR ON
PETITIONER’S LICENSEES OR FRANCHISEES.14

The BIR, in its Comment15 dated December 29, 2006, counters:

SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH VALID
AND CONSTITUTIONAL PROVISIONS OF LAWS THAT SHOULD BE
HARMONIOUSLY CONSTRUED TOGETHER SO AS TO GIVE EFFECT TO ALL OF
THEIR PROVISIONS WHENEVER POSSIBLE.

II

SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND SECTION 10,
ARTICLE III OF THE 1987 CONSTITUTION.

III

BIR REVENUE REGULATIONS ARE PRESUMED VALID AND CONSTITUTIONAL

UNTIL STRICKEN DOWN BY LAWFUL AUTHORITIES.

The Office of the Solicitor General (OSG), by way of Manifestation In Lieu of

Comment,16 concurred with the arguments of the petitioner. It added that although the
State is free to select the subjects of taxation and that the inequity resulting from
singling out a particular class for taxation or exemption is not an infringement of the
constitutional limitation, a tax law must operate with the same force and effect to all
persons, firms and corporations placed in a similar situation. Furthermore, according to
the OSG, public respondent BIR exceeded its statutory authority when it enacted RR
No. 16-2005, because the latter's provisions are contrary to the mandates of P.D. No.
1869 in relation to R.A. No. 9337.

The main issue is whether or not PAGCOR is still exempt from corporate income tax
and VAT with the enactment of R.A. No. 9337.

After a careful study of the positions presented by the parties, this Court finds the
petition partly meritorious.

Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal
Revenue Code of 1977, petitioner is no longer exempt from corporate income tax as it
has been effectively omitted from the list of GOCCs that are exempt from it. Petitioner
argues that such omission is unconstitutional, as it is violative of its right to equal
protection of the laws under Section 1, Article III of the Constitution:

Sec. 1. No person shall be deprived of life, liberty, or property without due process of
law, nor shall any person be denied the equal protection of the laws.
In City of Manila v. Laguio, Jr.,17 this Court expounded the meaning and scope of equal
protection, thus:

Equal protection requires that all persons or things similarly situated should be treated
alike, both as to rights conferred and responsibilities imposed. Similar subjects, in other
words, should not be treated differently, so as to give undue favor to some and unjustly
discriminate against others. The guarantee means that no person or class of persons
shall be denied the same protection of laws which is enjoyed by other persons or other
classes in like circumstances. The "equal protection of the laws is a pledge of the
protection of equal laws." It limits governmental discrimination. The equal protection
clause extends to artificial persons but only insofar as their property is concerned.

xxxx

Legislative bodies are allowed to classify the subjects of legislation. If the classification
is reasonable, the law may operate only on some and not all of the people without
violating the equal protection clause. The classification must, as an indispensable
requisite, not be arbitrary. To be valid, it must conform to the following requirements:

1) It must be based on substantial distinctions.

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

3) It must not be limited to existing conditions only.

4) It must apply equally to all members of the class. 18

It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the
five GOCCs exempted from payment of corporate income tax as shown in R.A. No.
8424, Section 27 (c) of which, reads:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The

provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies or instrumentalities owned and controlled by the Government,
except the Government Service and Insurance Corporation (GSIS), the Social Security
System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine
Charity Sweepstakes Office (PCSO), and the Philippine Amusement and Gaming
Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or associations engaged in similar business,
industry, or activity.19

A perusal of the legislative records of the Bicameral Conference Meeting of the

Committee on Ways on Means dated October 27, 1997 would show that the exemption
of PAGCOR from the payment of corporate income tax was due to the acquiescence of
the Committee on Ways on Means to the request of PAGCOR that it be exempt from
such tax.20 The records of the Bicameral Conference Meeting reveal:
HON. R. DIAZ. The other thing, sir, is we --- I noticed we imposed a tax on lotto
winnings.

CHAIRMAN ENRILE. Wala na, tinanggal na namin yon.

HON. R. DIAZ. Tinanggal na ba natin yon?

CHAIRMAN ENRILE. Oo.

HON. R. DIAZ. Because I was wondering whether we covered the tax on --- Whether on
a universal basis, we included a tax on cockfighting winnings.

CHAIRMAN ENRILE. No, we removed the ---

HON. R. DIAZ. I . . . (inaudible) natin yong lotto?

CHAIRMAN ENRILE. Pati PAGCOR tinanggal upon request.

CHAIRMAN JAVIER. Yeah, Philippine Insurance Commission.

CHAIRMAN ENRILE. Philippine Insurance --- Health, health ba. Yon ang request ng
Chairman, I will accept. (laughter) Pag-Pag-ibig yon, maliliit na sa tao yon.

HON. ROXAS. Mr. Chairman, I wonder if in the revenue gainers if we factored in an

amount that would reflect the VAT and other sales taxes---

CHAIRMAN ENRILE. No, we’re talking of this measure only. We will not ---
(discontinued)

HON. ROXAS. No, no, no, no, from the --- arising from the exemption. Assuming that
when we release the money into the hands of the public, they will not use that to --- for
wallpaper. They will spend that eh, Mr. Chairman. So when they spend that---

CHAIRMAN ENRILE. There’s a VAT.

HON. ROXAS. There will be a VAT and there will be other sales taxes no. Is there a
quantification? Is there an approximation?

CHAIRMAN JAVIER. Not anything.

HON. ROXAS. So, in effect, we have sterilized that entire seven billion. In effect, it is not
circulating in the economy which is unrealistic.

CHAIRMAN ENRILE. It does, it does, because this is taken and spent by government,
somebody receives it in the form of wages and supplies and other services and other
goods. They are not being taken from the public and stored in a vault.
CHAIRMAN JAVIER. That 7.7 loss because of tax exemption. That will be extra income
for the taxpayers.

HON. ROXAS. Precisely, so they will be spending it. 21

The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR
from paying corporate income tax was not based on a classification showing substantial
distinctions which make for real differences, but to reiterate, the exemption was granted
upon the request of PAGCOR that it be exempt from the payment of corporate income
tax.

With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR
has been excluded from the enumeration of GOCCs that are exempt from paying
corporate income tax. The records of the Bicameral Conference Meeting dated April 18,
2005, of the Committee on the Disagreeing Provisions of Senate Bill No. 1950 and
House Bill No. 3555, show that it is the legislative intent that PAGCOR be subject to the
payment of corporate income tax, thus:

THE CHAIRMAN (SEN. RECTO). Yes, Osmeña, the proponent of the amendment.

SEN. OSMEÑA. Yeah. Mr. Chairman, one of the reasons why we're even considering
this VAT bill is we want to show the world who our creditors, that we are increasing
official revenues that go to the national budget. Unfortunately today, Pagcor is unofficial.

Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7 billion
after paying some small taxes that they are subjected to. Of the 9.7 billion, they claim
they remitted to national government seven billion. Pagkatapos, there are other specific
remittances like to the Philippine Sports Commission, etc., as mandated by various
laws, and then about 400 million to the President's Social Fund. But all in all, their net
profit today should be about 12 billion. That's why I am questioning this two billion.
Because while essentially they claim that the money goes to government, and I
will accept that just for the sake of argument. It does not pass through the
appropriation process. And I think that at least if we can capture 35 percent or 32
percent through the budgetary process, first, it is reflected in our official income
of government which is applied to the national budget, and secondly, it goes
through what is constitutionally mandated as Congress appropriating and
defining where the money is spent and not through a board of directors that has
absolutely no accountability.

REP. PUENTEBELLA. Well, with all due respect, Mr. Chairman, follow up lang.

There is wisdom in the comments of my good friend from Cebu, Senator Osmeña.

SEN. OSMEÑA. And Negros.

REP. PUENTEBELLA. And Negros at the same time ay Kasimanwa. But I would not
want to put my friends from the Department of Finance in a difficult position, but may we
know your comments on this knowing that as Senator Osmeña just mentioned, he said,
"I accept that that a lot of it is going to spending for basic services," you know, going to
most, I think, supposedly a lot or most of it should go to government spending, social
services and the like. What is your comment on this? This is going to affect a lot of
services on the government side.

THE CHAIRMAN (REP. LAPUS). Mr. Chair, Mr. Chair.

SEN. OSMEÑA. It goes from pocket to the other, Monico.

REP. PUENTEBELLA. I know that. But I wanted to ask them, Mr. Senator, because you
may have your own pre-judgment on this and I don't blame you. I don't blame you. And I
know you have your own research. But will this not affect a lot, the disbursements on
social services and other?

REP. LOCSIN. Mr. Chairman. Mr. Chairman, if I can add to that question also. Wouldn't
it be easier for you to explain to, say, foreign creditors, how do you explain to them that
if there is a fiscal gap some of our richest corporations has [been] spared [from] taxation
by the government which is one rich source of revenues. Now, why do you save, why
do you spare certain government corporations on that, like Pagcor? So, would it be
easier for you to make an argument if everything was exposed to taxation?

REP. TEVES. Mr. Chair, please.

THE CHAIRMAN (REP. LAPUS). Can we ask the DOF to respond to those before we
call Congressman Teves?

MR. PURISIMA. Thank you, Mr. Chair.

Yes, from definitely improving the collection, it will help us because it will then
enter as an official revenue although when dividends declare it also goes in as
other income. (sic)

xxxx

REP. TEVES. Mr. Chairman.

xxxx

THE CHAIRMAN (REP. LAPUS). Congressman Teves.

REP. TEVES. Yeah. Pagcor is controlled under Section 27, that is on income tax.
Now, we are talking here on value-added tax. Do you mean to say we are going to
amend it from income tax to value-added tax, as far as Pagcor is concerned?
THE CHAIRMAN (SEN. RECTO). No. We are just amending that section with
regard to the exemption from income tax of Pagcor.

xxxx

REP. NOGRALES. Mr. Chairman, Mr. Chairman. Mr. Chairman.

THE CHAIRMAN (REP. LAPUS). Congressman Nograles.

REP. NOGRALES. Just a point of inquiry from the Chair. What exactly are the functions
of Pagcor that are VATable? What will we VAT in Pagcor?

THE CHAIRMAN (REP. LAPUS). This is on own income tax. This is Pagcor income tax.

REP. NOGRALES. No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?

xxxx

REP. VILLAFUERTE. Mr. Chairman, my question is, what are we VATing Pagcor with,
is it the . . .

REP. NOGRALES. Mr. Chairman, this is a secret agreement or the way they craft their
contract, which basis?

THE CHAIRMAN (SEN. RECTO). Congressman Nograles, the Senate version does
not discuss a VAT on Pagcor but it just takes away their exemption from non-
payment of income tax.22

Taxation is the rule and exemption is the exception. 23 The burden of proof rests upon
the party claiming exemption to prove that it is, in fact, covered by the exemption so
claimed.24 As a rule, tax exemptions are construed strongly against the claimant.25
Exemptions must be shown to exist clearly and categorically, and supported by clear
legal provision.26

In this case, PAGCOR failed to prove that it is still exempt from the payment of
corporate income tax, considering that Section 1 of R.A. No. 9337 amended Section 27
(c) of the National Internal Revenue Code of 1997 by omitting PAGCOR from the
exemption. The legislative intent, as shown by the discussions in the Bicameral
Conference Meeting, is to require PAGCOR to pay corporate income tax; hence, the
omission or removal of PAGCOR from exemption from the payment of corporate
income tax. It is a basic precept of statutory construction that the express mention of
one person, thing, act, or consequence excludes all others as expressed in the familiar
maxim expressio unius est exclusio alterius.27 Thus, the express mention of the GOCCs
exempted from payment of corporate income tax excludes all others. Not being
excepted, petitioner PAGCOR must be regarded as coming within the purview of the
general rule that GOCCs shall pay corporate income tax, expressed in the maxim:
exceptio firmat regulam in casibus non exceptis.28

PAGCOR cannot find support in the equal protection clause of the Constitution, as the
legislative records of the Bicameral Conference Meeting dated October 27, 1997, of the
Committee on Ways and Means, show that PAGCOR’s exemption from payment of
corporate income tax, as provided in Section 27 (c) of R.A. No. 8424, or the National
Internal Revenue Code of 1997, was not made pursuant to a valid classification based
on substantial distinctions and the other requirements of a reasonable classification by
legislative bodies, so that the law may operate only on some, and not all, without
violating the equal protection clause. The legislative records show that the basis of the
grant of exemption to PAGCOR from corporate income tax was PAGCOR’s own
request to be exempted.

Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio
for violating the non-impairment clause of the Constitution. Petitioner avers that laws
form part of, and is read into, the contract even without the parties expressly saying so.
Petitioner states that the private parties/investors transacting with it considered the tax
exemptions, which inure to their benefit, as the main consideration and inducement for
their decision to transact/invest with it. Petitioner argues that the withdrawal of its
exemption from corporate income tax by R.A. No. 9337 has the effect of changing the
main consideration and inducement for the transactions of private parties with it; thus,
the amendatory provision is violative of the non-impairment clause of the Constitution.

Petitioner’s contention lacks merit.

The non-impairment clause is contained in Section 10, Article III of the Constitution,
which provides that no law impairing the obligation of contracts shall be passed. The
non-impairment clause is limited in application to laws that derogate from prior acts or
contracts by enlarging, abridging or in any manner changing the intention of the
parties.29 There is impairment if a subsequent law changes the terms of a contract
between the parties, imposes new conditions, dispenses with those agreed upon or
withdraws remedies for the enforcement of the rights of the parties. 30

As regards franchises, Section 11, Article XII of the Constitution31 provides that no
franchise or right shall be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common good so
requires.32

In Manila Electric Company v. Province of Laguna,33 the Court held that a franchise
partakes the nature of a grant, which is beyond the purview of the non-impairment
clause of the Constitution.34 The pertinent portion of the case states:

While the Court has, not too infrequently, referred to tax exemptions contained in
special franchises as being in the nature of contracts and a part of the inducement for
carrying on the franchise, these exemptions, nevertheless, are far from being strictly
contractual in nature. Contractual tax exemptions, in the real sense of the term and
where the non-impairment clause of the Constitution can rightly be invoked, are those
agreed to by the taxing authority in contracts, such as those contained in government
bonds or debentures, lawfully entered into by them under enabling laws in which the
government, acting in its private capacity, sheds its cloak of authority and waives its
governmental immunity. Truly, tax exemptions of this kind may not be revoked without
impairing the obligations of contracts. These contractual tax exemptions, however, are
not to be confused with tax exemptions granted under franchises. A franchise partakes
the nature of a grant which is beyond the purview of the non-impairment clause of the
Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its precursor
provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the
operation of a public utility shall be granted except under the condition that such
privilege shall be subject to amendment, alteration or repeal by Congress as and when
the common good so requires.35

In this case, PAGCOR was granted a franchise to operate and maintain gambling
casinos, clubs and other recreation or amusement places, sports, gaming pools, i.e.,
basketball, football, lotteries, etc., whether on land or sea, within the territorial
jurisdiction of the Republic of the Philippines.36 Under Section 11, Article XII of the
Constitution, PAGCOR’s franchise is subject to amendment, alteration or repeal by
Congress such as the amendment under Section 1 of R.A. No. 9377. Hence, the
provision in Section 1 of R.A. No. 9337, amending Section 27 (c) of R.A. No. 8424 by
withdrawing the exemption of PAGCOR from corporate income tax, which may affect
any benefits to PAGCOR’s transactions with private parties, is not violative of the non-
impairment clause of the Constitution.

Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting
PAGCOR to 10% VAT is invalid for being contrary to R.A. No. 9337. Nowhere in R.A.
No. 9337 is it provided that petitioner can be subjected to VAT. R.A. No. 9337 is clear
only as to the removal of petitioner's exemption from the payment of corporate income
tax, which was already addressed above by this Court.

As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant
to Section 7 (k) thereof, which reads:

Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read
as follows:

Section 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2)
hereof, the following transactions shall be exempt from the value-added tax:

xxxx

(k) Transactions which are exempt under international agreements to which the
Philippines is a signatory or under special laws, except Presidential Decree No. 529.37
Petitioner is exempt from the payment of VAT, because PAGCOR’s charter, P.D. No.
1869, is a special law that grants petitioner exemption from taxes.

Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No.
9337, which retained Section 108 (B) (3) of R.A. No. 8424, thus:

[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended,
is hereby further amended to read as follows:

SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. —

(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-
added tax equivalent to ten percent (10%) of gross receipts derived from the sale or
exchange of services, including the use or lease of properties: x x x

xxxx

(B) Transactions Subject to Zero Percent (0%) Rate. — The following services
performed in the Philippines by VAT-registered persons shall be subject to zero percent
(0%) rate;

xxxx

(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the
supply of such services to zero percent (0%) rate;

x x x x38

As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section
108 of R.A. No. 8424 by imposing VAT on other services not previously covered, it did
not amend the portion of Section 108 (B) (3) that subjects to zero percent rate services
performed by VAT-registered persons to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a signatory
effectively subjects the supply of such services to 0% rate.

Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been
thoroughly and extensively discussed in Commissioner of Internal Revenue v. Acesite
(Philippines) Hotel Corporation.39 Acesite was the owner and operator of the Holiday Inn
Manila Pavilion Hotel. It leased a portion of the hotel’s premises to PAGCOR. It incurred
VAT amounting to ₱30,152,892.02 from its rental income and sale of food and
beverages to PAGCOR from January 1996 to April 1997. Acesite tried to shift the said
taxes to PAGCOR by incorporating it in the amount assessed to PAGCOR. However,
PAGCOR refused to pay the taxes because of its tax-exempt status. PAGCOR paid
only the amount due to Acesite minus VAT in the sum of ₱30,152,892.02. Acesite paid
VAT in the amount of ₱30,152,892.02 to the Commissioner of Internal Revenue, fearing
the legal consequences of its non-payment. In May 1998, Acesite sought the refund of
the amount it paid as VAT on the ground that its transaction with PAGCOR was subject
to zero rate as it was rendered to a tax-exempt entity. The Court ruled that PAGCOR
and Acesite were both exempt from paying VAT, thus:

xxxx

PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an
exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently provides:

Sec. 13. Exemptions. —

xxxx

(2) Income and other taxes. - (a) Franchise Holder: No tax of any kind or form, income
or otherwise, as well as fees, charges or levies of whatever nature, whether National or
Local, shall be assessed and collected under this Franchise from the Corporation; nor
shall any form of tax or charge attach in any way to the earnings of the Corporation,
except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by
the Corporation from its operation under this Franchise. Such tax shall be due and
payable quarterly to the National Government and shall be in lieu of all kinds of taxes,
levies, fees or assessments of any kind, nature or description, levied, established or
collected by any municipal, provincial, or national government authority.

(b) Others: The exemptions herein granted for earnings derived from the operations
conducted under the franchise specifically from the payment of any tax, income or
otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of
and extend to corporation(s), association(s), agency(ies), or individual(s) with whom the
Corporation or operator has any contractual relationship in connection with the
operations of the casino(s) authorized to be conducted under this Franchise and to
those receiving compensation or other remuneration from the Corporation or operator
as a result of essential facilities furnished and/or technical services rendered to the
Corporation or operator.

Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax
liability and not to indirect taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to
taxes with no distinction on whether the taxes are direct or indirect. We are one with the
CA ruling that PAGCOR is also exempt from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or
operator refers to PAGCOR. Although the law does not specifically mention PAGCOR's
exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes
because the law exempts from taxes persons or entities contracting with PAGCOR in
casino operations. Although, differently worded, the provision clearly exempts PAGCOR
from indirect taxes. In fact, it goes one step further by granting tax exempt status to
persons dealing with PAGCOR in casino operations. The unmistakable conclusion is
that PAGCOR is not liable for the P30, 152,892.02 VAT and neither is Acesite as the
latter is effectively subject to zero percent rate under Sec. 108 B (3), R.A. 8424.
(Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the
legislature clearly granted exemption also from indirect taxes. It must be noted that the
indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer,
transferee, or lessee of the goods, properties, or services subject to VAT. Thus, by
extending the tax exemption to entities or individuals dealing with PAGCOR in
casino operations, it is exempting PAGCOR from being liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax.

It is true that VAT can either be incorporated in the value of the goods, properties, or
services sold or leased, in which case it is computed as 1/11 of such value, or charged
as an additional 10% to the value. Verily, the seller or lessor has the option to follow
either way in charging its clients and customer. In the instant case, Acesite followed the
latter method, that is, charging an additional 10% of the gross sales and rentals. Be that
as it may, the use of either method, and in particular, the first method, does not
denigrate the fact that PAGCOR is exempt from an indirect tax, like VAT.

VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the
latter is not liable for the payment of it as it is exempt in this particular transaction by
operation of law to pay the indirect tax. Such exemption falls within the former Section
102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424),
which provides:

Section 102. Value-added tax on sale of services.- (a) Rate and base of tax - There
shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross
receipts derived by any person engaged in the sale of services x x x; Provided, that the
following services performed in the Philippines by VAT registered persons shall be
subject to 0%.

xxxx
(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the
supply of such services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the
extension of such exemption to entities or individuals dealing with PAGCOR in casino
operations are best elucidated from the 1987 case of Commissioner of Internal
Revenue v. John Gotamco & Sons, Inc., where the absolute tax exemption of the World
Health Organization (WHO) upon an international agreement was upheld. We held in
said case that the exemption of contractee WHO should be implemented to mean that
the entity or person exempt is the contractor itself who constructed the building owned
by contractee WHO, and such does not violate the rule that tax exemptions are
personal because the manifest intention of the agreement is to exempt the contractor so
that no contractor's tax may be shifted to the contractee WHO. Thus, the proviso in P.D.
1869, extending the exemption to entities or individuals dealing with PAGCOR in casino
operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to
PAGCOR.40

Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of
The Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation was
Section 102 (b) of the 1977 Tax Code, as amended, which section was retained as
Section 108 (B) (3) in R.A. No. 8424,41 it is still applicable to this case, since the
provision relied upon has been retained in R.A. No. 9337. 421avvphi1

It is settled rule that in case of discrepancy between the basic law and a rule or
regulation issued to implement said law, the basic law prevails, because the said rule or
regulation cannot go beyond the terms and provisions of the basic law. 43 RR No. 16-
2005, therefore, cannot go beyond the provisions of R.A. No. 9337. Since PAGCOR is
exempt from VAT under R.A. No. 9337, the BIR exceeded its authority in subjecting
PAGCOR to 10% VAT under RR No. 16-2005; hence, the said regulatory provision is
hereby nullified.

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337,
amending Section 27 (c) of the National Internal Revenue Code of 1997, by excluding
petitioner Philippine Amusement and Gaming Corporation from the enumeration of
government-owned and controlled corporations exempted from corporate income tax is
valid and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it
subjects PAGCOR to 10% VAT is null and void for being contrary to the National
Internal Revenue Code of 1997, as amended by Republic Act No. 9337.

No costs.

SO ORDERED.
G.R. No. 124043 October 14, 1998

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN
ASSOCIATION OF THE PHILIPPINES, INC., respondents.

PANGANIBAN, J.:

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

The Case

This is the main question raised before us in this petition for review on certiorari
challenging two Resolutions issued by the Court of Appeals1 on September 28, 19952
and February 29, 19963 in CA-GR SP No. 32007. Both Resolutions affirmed the
Decision of the Court of Tax Appeals (CTA) allowing the YMCA to claim tax exemption
on the latter's income from the lease of its real property.

The Facts

The facts are undisputed.4 Private Respondent YMCA is a non-stock, non-profit

institution, which conducts various programs and activities that are beneficial to the
public, especially the young people, pursuant to its religious, educational and charitable
objectives.

In 1980, private respondent earned, among others, an income of P676,829.80 from

leasing out a portion of its premises to small shop owners, like restaurants and canteen
operators, and P44,259.00 from parking fees collected from non-members. On July 2,
1984, the commissioner of internal revenue (CIR) issued an assessment to private
respondent, in the total amount of P415,615.01 including surcharge and interest, for
deficiency income tax, deficiency expanded withholding taxes on rentals and
professional fees and deficiency withholding tax on wages. Private respondent formally
protested the assessment and, as a supplement to its basic protest, filed a letter dated
October 8, 1985. In reply, the CIR denied the claims of YMCA.

Contesting the denial of its protest, the YMCA filed a petition for review at the Court of
Tax Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in
favor of the YMCA:
. . . [T]he leasing of [private respondent's] facilities to small shop owners,
to restaurant and canteen operators and the operation of the parking lot
are reasonably incidental to and reasonably necessary for the
accomplishment of the objectives of the [private respondents]. It appears
from the testimonies of the witnesses for the [private respondent]
particularly Mr. James C. Delote, former accountant of YMCA, that these
facilities were leased to members and that they have to service the needs
of its members and their guests. The rentals were minimal as for example,
the barbershop was only charged P300 per month. He also testified that
there was actually no lot devoted for parking space but the parking was
done at the sides of the building. The parking was primarily for members
with stickers on the windshields of their cars and they charged P.50 for
non-members. The rentals and parking fees were just enough to cover the
costs of operation and maintenance only. The earning[s] from these
rentals and parking charges including those from lodging and other
charges for the use of the recreational facilities constitute [the] bulk of its
income which [is] channeled to support its many activities and attainment
of its objectives. As pointed out earlier, the membership dues are very
insufficient to support its program. We find it reasonably necessary
therefore for [private respondent] to make [the] most out [of] its existing
facilities to earn some income. It would have been different if under the
circumstances, [private respondent] will purchase a lot and convert it to a
parking lot to cater to the needs of the general public for a fee, or
construct a building and lease it out to the highest bidder or at the market
rate for commercial purposes, or should it invest its funds in the buy and
sell of properties, real or personal. Under these circumstances, we could
conclude that the activities are already profit oriented, not incidental and
reasonably necessary to the pursuit of the objectives of the association
and therefore, will fall under the last paragraph of Section 27 of the Tax
Code and any income derived therefrom shall be taxable.

Considering our findings that [private respondent] was not engaged in the
business of operating or contracting [a] parking lot, we find no legal basis
also for the imposition of [a] deficiency fixed tax and [a] contractor's tax in
the amount[s] of P353.15 and P3,129.73, respectively.

xxx xxx xxx

WHEREFORE, in view of all the foregoing, the following assessments are

hereby dismissed for lack of merit:

1980 Deficiency Fixed Tax — P353,15;

1980 Deficiency Contractor's Tax — P3,129.23;

1980 Deficiency Income Tax — P372,578.20.

While the following assessments are hereby sustained:

1980 Deficiency Expanded Withholding Tax — P1,798.93;

1980 Deficiency Withholding Tax on Wages — P33,058.82

plus 10% surcharge and 20% interest per annum from July 2, 1984 until
fully paid but not to exceed three (3) years pursuant to Section 51(e)(2) &
(3) of the National Internal Revenue Code effective as of 1984. 5

Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals
(CA). In its Decision of February 16, 1994, the CA6 initially decided in favor of the CIR
and disposed of the appeal in the following manner:

Following the ruling in the afore-cited cases of Province of Abra vs.

Hernando and Abra Valley College Inc. vs. Aquino, the ruling of the
respondent Court of Tax Appeals that "the leasing of petitioner's (herein
respondent's) facilities to small shop owners, to restaurant and canteen
operators and the operation of the parking lot are reasonably incidental to
and reasonably necessary for the accomplishment of the objectives of the
petitioners, and the income derived therefrom are tax exempt, must be
reversed.

WHEREFORE, the appealed decision is hereby REVERSED in so far as it

dismissed the assessment for:

1980 Deficiency Income Tax P 353.15

1980 Deficiency Contractor's Tax P 3,129.23, &

1980 Deficiency Income Tax P 372,578.20

7
but the same is AFFIRMED in all other respect.

Aggrieved, the YMCA asked for reconsideration based on the following grounds:

The findings of facts of the Public Respondent Court of Tax Appeals being
supported by substantial evidence [are] final and conclusive.

II

The conclusions of law of [p]ublic [r]espondent exempting [p]rivate

[r]espondent from the income on rentals of small shops and parking fees
[are] in accord with the applicable law and jurisprudence. 8
Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed
itself and promulgated on September 28, 1995 its first assailed Resolution which, in
part, reads:

The Court cannot depart from the CTA's findings of fact, as they are
supported by evidence beyond what is considered as substantial.

xxx xxx xxx

The second ground raised is that the respondent CTA did not err in saying
that the rental from small shops and parking fees do not result in the loss
of the exemption. Not even the petitioner would hazard the suggestion that
YMCA is designed for profit. Consequently, the little income from small
shops and parking fees help[s] to keep its head above the water, so to
speak, and allow it to continue with its laudable work.

The Court, therefore, finds the second ground of the motion to be

meritorious and in accord with law and jurisprudence.

WHEREFORE, the motion for reconsideration is GRANTED; the

respondent CTA's decision is AFFIRMED in toto.9

The internal revenue commissioner's own Motion for Reconsideration was denied by
Respondent Court in its second assailed Resolution of February 29, 1996. Hence, this
petition for review under Rule 45 of the Rules of Court. 10

The Issues

Before us, petitioner imputes to the Court of Appeals the following errors:

In holding that it had departed from the findings of fact of Respondent

Court of Tax Appeals when it rendered its Decision dated February 16,
1994; and

II

In affirming the conclusion of Respondent Court of Tax Appeals that the

income of private respondent from rentals of small shops and parking fees
[is] exempt from taxation. 11

This Court's Ruling

The petition is meritorious.

 First Issue:
Factual Findings of the CTA

Private respondent contends that the February 16, 1994 CA Decision reversed the
factual findings of the CTA. On the other hand, petitioner argues that the CA merely
reversed the "ruling of the CTA that the leasing of private respondent's facilities to small
shop owners, to restaurant and canteen operators and the operation of parking lots are
reasonably incidental to and reasonably necessary for the accomplishment of the
objectives of the private respondent and that the income derived therefrom are tax
exempt." 12 Petitioner insists that what the appellate court reversed was the legal
conclusion, not the factual finding, of the CTA. 13 The commissioner has a point.

Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported
by substantial evidence, will be disturbed on appeal unless it is shown that the said
court committed gross error in the appreciation of facts. 14 In the present case, this
Court finds that the February 16, 1994 Decision of the CA did not deviate from this rule.
The latter merely applied the law to the facts as found by the CTA and ruled on the
issue raised by the CIR: "Whether or not the collection or earnings of rental income from
the lease of certain premises and income earned from parking fees shall fall under the
last paragraph of Section 27 of the National Internal Revenue Code of 1977, as
amended." 15

Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned
issue, as indeed it was expected to. That it did so in a manner different from that of the
CTA did not necessarily imply a reversal of factual findings.

The distinction between a question of law and a question of fact is clear-cut. It has been
held that "[t]here is a question of law in a given case when the doubt or difference arises
as to what the law is on a certain state of facts; there is a question of fact when the
doubt or difference arises as to the truth or falsehood of alleged facts." 16 In the present
case, the CA did not doubt, much less change, the facts narrated by the CTA. It merely
applied the law to the facts. That its interpretation or conclusion is different from that of
the CTA is not irregular or abnormal.

Second Issue:
Is the Rental Income of the YMCA Taxable?

We now come to the crucial issue: Is the rental income of the YMCA from its real estate
subject to tax? At the outset, we set forth the relevant provision of the NIRC:

Sec. 27. Exemptions from tax on corporations. — The following

organizations shall not be taxed under this Title in respect to income
received by them as such —

xxx xxx xxx

 (g) Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;

(h) Club organized and operated exclusively for pleasure, recreation, and
other non-profitable purposes, no part of the net income of which inures to
the benefit of any private stockholder or member;

xxx xxx xxx

Notwithstanding the provisions in the preceding paragraphs, the income of

whatever kind and character of the foregoing organizations from any of
their properties, real or personal, or from any of their activities conducted
for profit, regardless of the disposition made of such income, shall be
subject to the tax imposed under this Code. (as amended by Pres. Decree
No. 1457)

Petitioner argues that while the income received by the organizations enumerated in
Section 27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of
tax "in respect to income received by them as such," the exemption does not apply to
income derived ". . . from any of their properties, real or personal, or from any of their
activities conducted for profit, regardless of the disposition made of such income . . . ."

Petitioner adds that "rental income derived by a tax-exempt organization from the lease
of its properties, real or personal, [is] not, therefore, exempt from income taxation, even
if such income [is] exclusively used for the accomplishment of its objectives." 17 We
agree with the commissioner.

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine
of strict in interpretation in construing tax exemptions. 18 Furthermore, a claim of
statutory exemption from taxation should be manifest. and unmistakable from the
language of the law on which it is based. Thus, the claimed exemption "must expressly
be granted in a statute stated in a language too clear to be mistaken." 19

In the instant case, the exemption claimed by the YMCA is expressly disallowed by the
very wording of the last paragraph of then Section 27 of the NIRC which mandates that
the income of exempt organizations (such as the YMCA) from any of their properties,
real or personal, be subject to the tax imposed by the same Code. Because the last
paragraph of said section unequivocally subjects to tax the rent income of the YMCA
from its real property, 20 the Court is duty-bound to abide strictly by its literal meaning
and to refrain from resorting to any convoluted attempt at construction.

It is axiomatic that where the language of the law is clear and unambiguous, its express
terms must be applied. 21 Parenthetically, a consideration of the question of construction
must not even begin, particularly when such question is on whether to apply a strict
construction or a liberal one on statutes that grant tax exemptions to "religious,
charitable and educational propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues, should be "subject to the
qualification that the income from the properties must arise from activities 'conducted for
profit' before it may be considered taxable." 23 This argument is erroneous. As
previously stated, a reading of said paragraph ineludibly shows that the income from
any property of exempt organizations, as well as that arising from any activity it
conducts for profit, is taxable. The phrase "any of their activities conducted for profit"
does not qualify the word "properties." This makes from the property of the organization
taxable, regardless of how that income is used — whether for profit or for lofty non-profit
purposes.

Verba legis non est recedendum. Hence, Respondent Court of Appeals committed
reversible error when it allowed, on reconsideration, the tax exemption claimed by
YMCA on income it derived from renting out its real property, on the solitary but
unconvincing ground that the said income is not collected for profit but is merely
incidental to its operation. The law does not make a distinction. The rental income is
taxable regardless of whence such income is derived and how it is used or disposed of.
Where the law does not distinguish, neither should we.

Constitutional Provisions

On Taxation

Invoking not only the NIRC but also the fundamental law, private respondent submits
that Article VI, Section 28 of par. 3 of the 1987 Constitution, 24 exempts "charitable
institutions" from the payment not only of property taxes but also of income tax from any
source. 25 In support of its novel theory, it compares the use of the words "charitable
institutions," "actually" and "directly" in the 1973 and the 1987 Constitutions, on the one
hand; and in Article VI, Section 22, par. 3 of the 1935 Constitution, on the other hand. 26

Private respondent enunciates three points. First, the present provision is divisible into
two categories: (1) "[c]haritable institutions, churches and parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries," the incomes of which are,
from whatever source, all tax-exempt; 27 and (2) "[a]ll lands, buildings and
improvements actually and directly used for religious, charitable or educational
purposes," which are exempt only from property taxes. 28 Second, Lladoc v.
Commissioner of Internal Revenue, 29 which limited the exemption only to the payment
of property taxes, referred to the provision of the 1935 Constitution and not to its
counterparts in the 1973 and the 1987 Constitutions. 30 Third, the phrase "actually,
directly and exclusively used for religious, charitable or educational purposes" refers not
only to "all lands, buildings and improvements," but also to the above-quoted first
category which includes charitable institutions like the private respondent. 31

The Court is not persuaded. The debates, interpellations and expressions of opinion of
the framers of the Constitution reveal their intent which, in turn, may have guided the
people in ratifying the Charter. 32 Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is
now a member of this Court, stressed during the Concom debates that ". . . what is
exempted is not the institution itself . . .; those exempted from real estate taxes are
lands, buildings and improvements actually, directly and exclusively used for religious,
charitable or educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority on the Constitution and
also a member of the Concom, adhered to the same view that the exemption created by
said provision pertained only to property taxes. 34

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax
exemption covers property taxes only." 35 Indeed, the income tax exemption claimed by
private respondent finds no basis in Article VI, Section 26, par. 3 of the Constitution.

Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 36
claiming that the YMCA "is a non-stock, non-profit educational institution whose
revenues and assets are used actually, directly and exclusively for educational
purposes so it is exempt from taxes on its properties and income." 37 We reiterate that
private respondent is exempt from the payment of property tax, but not income tax on
the rentals from its property. The bare allegation alone that it is a non-stock, non-profit
educational institution is insufficient to justify its exemption from the payment of income
tax.

As previously discussed, laws allowing tax exemption are construed strictissimi juris.
Hence, for the YMCA to be granted the exemption it claims under the aforecited
provision, it must prove with substantial evidence that (1) it falls under the classification
non-stock, non-profit educational institution; and (2) the income it seeks to be exempted
from taxation is used actually, directly, and exclusively for educational purposes.
However, the Court notes that not a scintilla of evidence was submitted by private
respondent to prove that it met the said requisites.

Is the YMCA an educational institution within the purview of Article XIV, Section 4, par.
3 of the Constitution? We rule that it is not. The term "educational institution" or
"institution of learning" has acquired a well-known technical meaning, of which the
members of the Constitutional Commission are deemed cognizant. 38 Under the
Education Act of 1982, such term refers to schools. 39 The school system is
synonymous with formal education, 40 which "refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal school system
and for which certification is required in order for the learner to progress through the
grades or move to the higher levels." 41 The Court has examined the "Amended Articles
of Incorporation" and "By-Laws"43 of the YMCA, but found nothing in them that even
hints that it is a school or an educational institution. 44

Furthermore, under the Education Act of 1982, even non-formal education is

understood to be school-based and "private auspices such as foundations and civic-
spirited organizations" are ruled out. 45 It is settled that the term "educational institution,"
when used in laws granting tax exemptions, refers to a ". . . school seminary, college or
educational establishment . . . ." 46 Therefore, the private respondent cannot be deemed
one of the educational institutions covered by the constitutional provision under
consideration.

. . . Words used in the Constitution are to be taken in their ordinary

acceptation. While in its broadest and best sense education embraces all
forms and phases of instruction, improvement and development of mind
and body, and as well of religious and moral sentiments, yet in the
common understanding and application it means a place where
systematic instruction in any or all of the useful branches of learning is
given by methods common to schools and institutions of learning. That we
conceive to be the true intent and scope of the term [educational
institutions,] as used in the
Constitution. 47

Moreover, without conceding that Private Respondent YMCA is an educational

institution, the Court also notes that the former did not submit proof of the proportionate
amount of the subject income that was actually, directly and exclusively used for
educational purposes. Article XIII, Section 5 of the YMCA by-laws, which formed part of
the evidence submitted, is patently insufficient, since the same merely signified that
"[t]he net income derived from the rentals of the commercial buildings shall be
apportioned to the Federation and Member Associations as the National Board may
decide." 48 In sum, we find no basis for granting the YMCA exemption from income tax
under the constitutional provision invoked.

Cases Cited by Private

Respondent Inapplicable

The cases 49 relied on by private respondent do not support its cause. YMCA of Manila
v. Collector of Internal Revenue 50 and Abra Valley College, Inc. v. Aquino 51 are not
applicable, because the controversy in both cases involved exemption from the
payment of property tax, not income tax. Hospital de San Juan de Dios, Inc. v. Pasay
City 52 is not in point either, because it involves a claim for exemption from the payment
of regulatory fees, specifically electrical inspection fees, imposed by an ordinance of
Pasay City — an issue not at all related to that involved in a claimed exemption from the
payment of income taxes imposed on property leases. In Jesus Sacred Heart College v.
Com. of Internal Revenue, 53 the party therein, which claimed an exemption from the
payment of income tax, was an educational institution which submitted substantial
evidence that the income subject of the controversy had been devoted or used solely for
educational purposes. On the other hand, the private respondent in the present case
has not given any proof that it is an educational institution, or that part of its rent income
is actually, directly and exclusively used for educational purposes.

Epilogue
In deliberating on this petition, the Court expresses its sympathy with private
respondent. It appreciates the nobility of its cause. However, the Court's power and
function are limited merely to applying the law fairly and objectively. It cannot change
the law or bend it to suit its sympathies and appreciations. Otherwise, it would be
overspilling its role and invading the realm of legislation.

We concede that private respondent deserves the help and the encouragement of the
government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks.
But the Court regrets that, given its limited constitutional authority, it cannot rule on the
wisdom or propriety of legislation. That prerogative belongs to the political departments
of government. Indeed, some of the members of the Court may even believe in the
wisdom and prudence of granting more tax exemptions to private respondent. But such
belief, however well-meaning and sincere, cannot bestow upon the Court the power to
change or amend the law.

WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals

dated September 28, 1995 and February 29, 1996 are hereby REVERSED and SET
ASIDE. The Decision of the Court of Appeals dated February 16, 1995 is
REINSTATED, insofar as it ruled that the income derived by petitioner from rentals of its
real property is subject to income tax. No pronouncement as to costs.

SO ORDERED.

G.R. No. 203514

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
ST. LUKE’S MEDICAL CENTER, INC., Respondent

DECISION

DEL CASTILLO, J.:

The doctrine of stare decisis dictates that "absent any powerful countervailing
considerations, like cases ought to be decided alike."1

This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the
May 9, 2012 Decision3 and the September 17, 2012 Resolution4 of the Court of Tax
Appeals (CTA) in CTA EB Case No. 716.

Factual Antecedents
On December 14, 2007, respondent St. Luke’s Medical Center, Inc. (SLMC) received
from the Large Taxpayers Service-Documents Processing and Quality Assurance
Division of the Bureau of Internal Revenue (BIR) Audit Results/Assessment Notice Nos.
QA-07-0000965 and QA-07-000097,6 assessing respondent SLMC deficiency income
tax under Section 27(B)7 of the 1997 National Internal Revenue Code (NIRC), as
amended, for taxable year 2005 in the amount of ₱78,617,434.54 and for taxable year
2006 in the amount of ₱57,119,867.33.

On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue
(CIR) an administrative protest8 assailing the assessments. SLMC claimed that as a
non-stock, non-profit charitable and social welfare organization under Section 30(E) and
(G)9 of the 1997 NIRC, as amended, it is exempt from paying income tax.

On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed
Assessment10 dated April 9, 2008 increasing the deficiency income for the taxable year
2005 tax to ₱82,419,522.21 and for the taxable year 2006 to ₱60,259,885.94, computed
as follows:

For Taxable Year 2005:

ASSESSMENT NO. QA-07-000096

PARTICULARS AMOUNT

Sales/Revenues/Receipts/Fees ?3,623,511,616.00

Less: Cost of Sales/Services 2,643,049, 769.00

Gross Income From Operation 980,461,847.00

Add: Non-Operating & Other Income -

Total Gross Income 980,461,847.00

Less: Deductions 481,266,883 .00

Net Income Subject to Tax 499, 194,964.00

XTaxRate 10%
 Tax Due 49,919,496.40

Less: Tax Credits -

Deficiency Income Tax 49,919,496.40

Add: Increments

25% Surcharge 12,479,874.10

20% Interest Per Annum (4115/06-4/15/08) 19,995,151.71

Compromise Penalty for Late Payment 25,000.00

Total increments 32,500,025.81

Total Amount Due ?82,419,522.21

For Taxable Year 2006:

ASSESSMENT NO. QA-07-000097

PARTICULARS [AMOUNT]
Sales/Revenues/Receipts/Fees ?3,8 l 5,922,240.00

Less: Cost of Sales/Services 2,760,518,437.00

Gross Income From Operation 1,055,403,803.00

Add: Non-Operating & Other Income -

Total Gross Income 1,055,403,803.00

Less: Deductions 640,147,719.00

 Net Income Subject to Tax 415,256,084.00

XTaxRate 10%

Tax.Due 41,525,608.40

Less: Tax Credits -

Deficiency Income Tax 41,525,608.40

Add: Increments -

25% Surcharge 10,381,402.10

20% Interest Per Annum (4/15/07-4/15/08) 8,327,875.44

Compromise Penalty for Late Payment 25,000.00

Total increments 18,734,277.54

Total Amount Due ?60,259,885.9411

Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review,12 docketed
as CTA Case No. 7789.

Ruling of the Court of Tax Appeals Division

On August 26, 2010, the CTA Division rendered a Decision13 finding SLMC not liable for
deficiency income tax under Section 27(B) of the 1997 NIRC, as amended, since it is
exempt from paying income tax under Section 30(E) and (G) of the same Code. Thus:

WHEREFORE, premises considered, the Petition for Review is hereby GRANTED.

Accordingly, Audit Results/Assessment Notice Nos. QA-07-000096 and QA-07-000097,
assessing petitioner for alleged deficiency income taxes for the taxable years 2005 and
2006, respectively, are hereby CANCELLED and SET ASIDE.

SO ORDERED.14
CIR moved for reconsideration but the CTA Division denied the same in its December
28, 2010 Resolution.15

This prompted CIR to file a Petition for Review16 before the CTA En Banc.

Ruling of the Court of Tax Appeals En Banc

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

On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.

Issue

Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending that
the CTA erred in exempting SLMC from the payment of income tax.

Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos.
195909 and 195960, entitled Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.,18 finding SLMC not entitled to the tax exemption under Section 30(E) and
(G) of the NIRC of 1997 as it does not operate exclusively for charitable or social
welfare purposes insofar as its revenues from paying patients are concerned. Thus, the
Court disposed of the case in this manner:

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No.

195909is PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc
dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746
are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency
income tax in 1998 based on the 10% preferential income tax rate under Section 27(B)
of the National Internal Revenue Code. However, it is not liable for surcharges and
interest on such deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution of the Court of
Tax Appeals are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for
violating Section I, Rule 45 of the Rules of Court.

SO ORDERED.19

Considering the foregoing, SLMC then filed a Manifestation and Motion 20 informing the
Court that on April 30, 2013, it paid the BIR the amount of basic taxes due for taxable
years 1998, 2000-2002, and 2004-2007, as evidenced by the payment confirmation21
from the BIR, and that it did not pay any surcharge, interest, and compromise penalty in
accordance with the above-mentioned Decision of the Court. In view of the payment it
made, SLMC moved for the dismissal of the instant case on the ground of mootness.

CIR opposed the motion claiming that the payment confirmation submitted by SLMC is
not a competent proof of payment as it is a mere photocopy and does not even indicate
the quarter/sand/or year/s said payment covers.22

In reply,23 SLMC submitted a copy of the Certification24 issued by the Large Taxpayers
Service of the BIR dated May 27, 2013, certifying that, "[a]s far as the basic deficiency
income tax for taxable years 2000, 2001, 2002, 2004, 2005, 2006, 2007 are concen1ed,
this Office considers the cases closed due to the payment made on April 30, 2013."
SLMC likewise submitted a letter25 from the BIR dated November 26, 2013 with
attached Certification of Payment26 and application for abatement,27 which it earlier
submitted to the Court in a related case, G.R. No. 200688, entitled Commissioner of
Internal Revenue v. St. Luke's Medical Center, Inc. 28

Thereafter, the parties submitted their respective memorandum.

CIR 's Arguments

CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax
under Section 27(B) of the 1997 NIRC.29 It likewise asserts that SLMC is liable to pay
compromise penalty pursuant to Section 248(A)30 of the 1997 NIRC for failing to file its
quarterly income tax returns.31

As to the alleged payment of the basic tax, CIR contends that this does not render the
instant case moot as the payment confirmation submitted by SLMC is not a competent
proof of payment of its tax liabilities.32

SLMC's Arguments

SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R.
Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.)33 positing that earning a profit by a charitable, benevolent hospital or
educational institution does not result in the withdrawal of its tax exempt privilege. 34
SLMC further claims that the income it derives from operating a hospital is not income
from "activities conducted for profit."35 Also, it maintains that in accordance with the
ruling of the Court in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue
v. St. Luke's Medical Center, Inc.),36 it is not liable for compromise penalties. 37

In any case, SLMC insists that the instant case should be dismissed in view of its
payment of the basic taxes due for taxable years 1998, 2000-2002, and 2004-2007 to
the BIR on April 30, 2013.38

Our Ruling
SLMC is liable for income tax under
Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are
concerned

The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997
NIRC insofar as its revenues from paying patients are concerned has been settled in
G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.),39 where the Court ruled that:

x x x We hold that Section 27(B) of the NIRC does not remove the income tax
exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B)
on one hand, and Section 30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption. The effect of the introduction of Section
27(B) is to subject the taxable income of two specific institutions, namely, proprietary
non-profit educational institutions and proprietary non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under Section 27(B)
instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in
relation to Section 27(A)(l).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals.
The only qualifications for hospitals are that they must be proprietary and non-profit.
'Proprietary' means private, following the definition of a 'proprietary educational
institution' as 'any private school maintained and administered by private individuals or
groups' with a government permit. 'Non-profit' means no net income or asset accrues to
or benefits any member or specific person, with all the net income or asset devoted to
the institution's purposes and all its activities conducted not for profit.

'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue v.

Club Filipino, Inc. de Cebu, this Court considered as non-profit a sports club organized
for recreation and entertainment of its stockholders and members. The club was
primarily funded by membership fees and dues. If it had profits, they were used for
overhead expenses and improving its golf course. The club was non-profit because of
its purpose and there was no evidence that it was engaged in a profit-making
enterprise.

The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not
charitable. Tue Court defined 'charity' in Lung Center of the Philippines v. Quezon City
as 'a gift, to be applied consistently with existing laws, for the benefit of an indefinite
number of persons, either by bringing their minds and hearts under the influence of
education or religion, by assisting them to establish themselves in life or [by] otherwise
lessening the burden of government.' A nonprofit club for the benefit of its members fails
this test. An organization may be considered as non-profit if it does not distribute any
part of its income to stockholders or members. However, despite its being a tax exempt
institution, any income such institution earns from activities conducted for profit is
taxable, as expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test

of charity in Lung Center. The issue in Lung Center concerns exemption from real
property tax and not income tax. However, it provides for the test of charity in our
jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens
the burden of government. In other words, charitable institutions provide for free goods
and services to the public which would otherwise fall on the shoulders of government.
Thus, as a matter of efficiency, the government forgoes taxes which should have been
spent to address public needs, because certain private entities already assume a part of
the burden. This is the rationale for the tax exemption of charitable institutions. The loss
of taxes by the government is compensated by its relief from doing public works which
would have been funded by appropriations from the Treasury.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that '[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the Members of
Congress.' The requirements for a tax exemption are strictly construed against the
taxpayer because an exemption restricts the collection of taxes necessary for the
existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a
charitable institution for the purpose of exemption from real property taxes. This ruling
uses the same premise as Hospital de San Juan and Jesus Sacred Heart College which
says that receiving income from paying patients does not destroy the charitable nature
of a hospital.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
outpatient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which
it is intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution.

For real property taxes, the incidental generation of income is permissible because the
test of exemption is the use of the property. The Constitution provides that '[c]haritable
institutions, churches and personages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation.' The test of exemption is not strictly a requirement on the intrinsic nature or
character of the institution. The test requires that the institution use property in a certain
way, i.e., for a charitable purpose. Thus, the Court held that the Lung Center of the
Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to
remove from the tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the
NIRC, Congress decided to extend the exemption to income taxes. However, the way
Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3),
Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or
association that is exempt from income tax. On the other hand, Section 28(3), Article VI
of the Constitution does not define a charitable institution, but requires that the
institution 'actually, directly and exclusively' use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted
'exclusively' for charitable purposes. The organization of the institution refers to its
corporate form, as shown by its articles of incorporation, by-laws and other constitutive
documents. Section 30(E) of the NIRC specifically requires that the corporation or
association be non-stock, which is defined by the Corporation Code as 'one where no
part of its income is distributable as dividends to its members, trustees, or officers' and
that any profit 'obtain[ed] as an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes for which the corporation
was organized.' However, under Lung Center, any profit by a charitable institution must
not only be plowed back 'whenever necessary or proper,' but must be 'devoted or used
altogether to the charitable object which it is intended to achieve.'

The operations of the charitable institution generally refer to its regular activities.
Section 30(E) of the NIRC requires that these operations be exclusive to charity. There
is also a specific requirement that 'no part of [the] net income or asset shall belong to or
inure to the benefit of any member, organizer, officer or any specific person.' The use of
lands, buildings and improvements of the institution is but a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke's from paying taxes.
This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of
charity, a charitable institution is not ipso facto tax exempt. To be exempt from real
property taxes, Section 28(3), Article VI of the Constitution requires that a charitable
institution use the property 'actually, directly and exclusively' for charitable purposes. To
be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be 'organized and operated exclusively' for charitable purposes.
Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the
institution be 'operated exclusively' for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words 'organized
and operated exclusively' by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever

kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the disposition
made of such income, shall be subject to tax imposed under this Code.

In short, the last paragraph of Section 30 provides that if a tax exempt charitable
institution conducts 'any' activity for profit, such activity is not tax exempt even as its not-
for-profit activities remain tax exempt. This paragraph qualifies the requirements in
Section 30(E) that the '[n]on-stock corporation or association [must be] organized and
operated exclusively for . . . charitable . . . purposes . . . . ' It likewise qualifies the
requirement in Section 30(G) that the civic organization must be 'operated exclusively'
for the promotion of social welfare.

Thus, even if the charitable institution must be 'organized and operated exclusively' for
charitable purposes, it is nevertheless allowed to engage in 'activities conducted for
profit' without losing its tax exempt status for its not-for-profit activities. The only
consequence is that the 'income of whatever kind and character' of a charitable
institution 'from any of its activities conducted for profit, regardless of the disposition
made of such income, shall be subject to tax.' Prior to the introduction of Section 27(B),
the tax rate on such income from for-profit activities was the ordinary corporate rate
under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of ₱l,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately ₱l.73 billion
from paying patients is not an institution 'operated exclusively' for charitable purposes.
Clearly, revenues from paying patients are income received from 'activities conducted
for profit.' Indeed, St. Luke's admits that it derived profits from its paying patients. St.
Luke's declared ₱l,730,367,965 as 'Revenues from Services to Patients' in contrast to
its 'Free Services' expenditure of ₱218,187,498. In its Comment in G.R. No. 195909, St.
Luke's showed the following 'calculation' to support its claim that 65.20% of its 'income
after expenses was allocated to free or charitable services' in 1998.

x x xx

In Lung Center, this Court declared:

'[e]xclusive' is defined as possessed and enjoyed to the exclusion of others; debarred

from participation or enjoyment; and 'exclusively' is defined, 'in a manner to exclude; as
enjoying a privilege exclusively.' . . . The words 'dominant use' or 'principal use' cannot
be substituted for the words 'used exclusively' without doing violence to the Constitution
and thelaw. Solely is synonymous with exclusively.

The Court cannot expand the meaning of the words 'operated exclusively' without
violating the NIRC. Services to paying patients are activities conducted for profit. They
cannot be considered any other way. There is a 'purpose to make profit over and above
the cost' of services. The ₱l.73 billion total revenues from paying patients is not even
incidental to St. Luke's charity expenditure of ₱2l8,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating
income in 1998. However, if a part of the remaining 34.80% of the operating income is
reinvested in property, equipment or facilities used for services to paying and non-
paying patients, then it cannot be said that the income is 'devoted or used altogether to
the charitable object which it is intended to achieve.' The income is plowed back to the
corporation not entirely for charitable purposes, but for profit as well. In any case, the
last paragraph of Section 30 of the NIRC expressly qualifies that income from activities
for profit is taxable 'regardless of the disposition made of such income.'

Jesus Sacred Heart College declared that there is no official legislative record
explaining the phrase 'any activity conducted for profit.' However, it quoted a deposition
of Senator Mariano Jesus Cuenco, who was a member of the Committee of Conference
for the Senate, which introduced the phrase 'or from any activity conducted for profit.'

P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no cree

V d que es una actividad esencial dicho hospital para el funcionamiento def colegio de
medicina

de dicha universidad?

x x x x x x xxx

R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria afirmativa;

pero considerando que el hospital tiene cuartos de pago, y a los mismos generalmente
van enfermos de buena posicion social economica, lo que se paga por estos enfermos
debe estar sujeto a 'income tax', y es una de las razones que hemos tenido para
insertar las palabras o frase 'or from any activity conducted for profit.'

The question was whether having a hospital is essential to an educational institution like
the College of Medicine of the University of Santo Tomas.1awp++i1 Senator Cuenco
answered that if the hospital has paid rooms generally occupied by people of good
economic standing, then it should be subject to income tax. He said that this was one of
the reasons Congress inserted the phrase 'or any activity conducted for profit.'

The question in Jesus Sacred Heart College involves an educational institution.

However, it is applicable to charitable institutions because Senator Cuenco's response
shows an intent to focus on the activities of charitable institutions. Activities for profit
should not escape the reach of taxation. Being a non-stock and non-profit corporation
does not, by this reason alone, completely exempt an institution from tax. An institution
cannot use its corporate form to prevent its profitable activities from being taxed.

The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation of a provision granting
tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section
30(E) and (G) of the NIRC requires that an institution be 'operated exclusively' for
charitable or social welfare purposes to be completely exempt from income tax. An
institution under Section 30(E) or (G) does not lose its tax exemption if it earns income
from its for-profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary
corporate rate but now at the preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt
institution is spared from sharing in the expenses of government and yet benefits from
them. Tax exemptions for charitable institutions should therefore be lin1ited to
institutions beneficial to the public and those which improve social welfare. A profit-
making entity should not be allowed to exploit this subsidy to the detriment of the
government and other taxpayers.

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long as it does not distribute any of its
profits to its members and such profits are reinvested pursuant to its corporate
purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of
the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June 1990
by the BIR, which opined that St. Luke's is 'a corporation for purely charitable and social
welfare purposes' and thus exempt from income tax. In Michael J Lhuillier, Inc. v.
Commissioner of Internal Revenue, the Court said that 'good faith and honest belief that
one is not subject to tax on the basis of previous interpretation of government agencies
tasked to implement the tax law, are sufficient justification to delete the imposition of
surcharges and interest.'40

A careful review of the pleadings reveals that there is no countervailing consideration for
the Court to revisit its aforequoted ruling in G.R. Nos. 195909 and 195960
(Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.). Thus, under the
doctrine of stare decisis, which states that "[o]nce a case has been decided in one way,
any other case involving exactly the same point at issue x x x should be decided in the
same manner,"41 the Court finds that SLMC is subject to 10% income tax insofar as its
revenues from paying patients are concerned.
To be clear, for an institution to be completely exempt from income tax, Section 30(E)
and (G) of the 1997 NIRC requires said institution to operate exclusively for charitable
or social welfare purpose. But in case an exempt institution under Section 30(E) or (G)
of the said Code earns income from its for-profit activities, it will not lose its tax
exemption. However, its income from for-profit activities will be subject to income tax at
the preferential 10% rate pursuant to Section 27(B) thereof.

SLMC is not liable for Compromise

Penalty.

As to whether SLMC is liable for compromise penalty under Section 248(A) of the 1997
NIRC for its alleged failure to file its quarterly income tax returns, this has also been
resolved in G.R Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St.
Luke's Medical Center, Inc.),42 where the imposition of surcharges and interest under
Sections 24843 and 24944 of the 1997 NIRC were deleted on the basis of good faith and
honest belief on the part of SLMC that it is not subject to tax. Thus, following the ruling
of the Court in the said case, SLMC is not liable to pay compromise penalty under
Section 248(A) of the 1997 NIRC.

The Petition is rendered moot by the

payment made by SLMC on April 30,
2013.

However, in view of the payment of the basic taxes made by SLMC on April 30, 2013,
the instant Petition has become moot.1avvphi1

While the Court agrees with the CIR that the payment confirmation from the BIR
presented by SLMC is not a competent proof of payment as it does not indicate the
specific taxable period the said payment covers, the Court finds that the Certification
issued by the Large Taxpayers Service of the BIR dated May 27, 2013, and the letter
from the BIR dated November 26, 2013 with attached Certification of Payment and
application for abatement are sufficient to prove payment especially since CIR never
questioned the authenticity of these documents. In fact, in a related case, G.R. No.
200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, lnc., 45
the Court dismissed the petition based on a letter issued by CIR confirming SLMC's
payment of taxes, which is the same letter submitted by SLMC in the instant case.

In fine, the Court resolves to dismiss the instant Petition as the same has been
rendered moot by the payment made by SLMC of the basic taxes for the taxable years
2005 and 2006, in the amounts of ₱49,919,496.40 and ₱4 l,525,608.40, respectively. 46

WHEREFORE, the Petition is hereby DISMISSED.

SO ORDERED.
G.R. No. 196596

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
DE LA SALLE UNIVERSITY, INC., Respondent

x-----------------------x

G.R. No. 198841

DE LA SALLE UNIVERSITY INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

x-----------------------x

G.R. No. 198941

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
DE LA SALLE UNIVERSITY, INC., Respondent.

DECISION

BRION, J.:

Before the Court are consolidated petitions for review on certiorari:1

1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to

assail the December 10, 2010 decision and March 29, 2011 resolution of the Court of
Tax Appeals (CTA) in En Banc Case No. 622;2

2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8,
2011 decision and October 4, 2011 resolution in CTA En Banc Case No. 671;3 and

3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and
October 4, 2011 resolution in CTA En Banc Case No. 671.4

G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division
(CTA Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En Banc Case
No. 622 filed by the Commissioner to challenge CTA Case No. 7303. G.R. No. 198841
and 198941 both stemmed from CTA En Banc Case No. 671 filed by DLSU to also
challenge CTA Case No. 7303.

The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of
Authority (LOA) No. 2794 authorizing its revenue officers to examine the latter's books
of accounts and other accounting records for all internal revenue taxes for the period
Fiscal Year Ending 2003 and Unverified Prior Years.5

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand
assessed DLSU the following deficiency taxes: (1) income tax on rental earnings from
restaurants/canteens and bookstores operating within the campus; (2) value-added tax
(VAI) on business income; and (3) documentary stamp tax (DSI) on loans and lease
contracts. The BIR demanded the payment of ₱17,303,001.12, inclusive of surcharge,
interest and penalty for taxable years 2001, 2002 and 2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus,
DLSU filed on August 3, 2005 a petition for review with the CTA Division. 8

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on

Article XIV, Section 4 (3) of the Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from taxes
and duties. xxx.

On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The
dispositive portion of the decision reads:

WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST

assessment on the loan transactions of [DLSU] in the amount of ₱1,1681,774.00 is
hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income tax,
VAT and DST on its lease contracts, plus 25% surcharge for the fiscal years 2001, 2002
and 2003 in the total amount of ₱18,421,363.53 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total
amount due computed from September 30, 2004 until full payment thereof pursuant to
Section 249(C)(3) of the [National Internal Revenue Code]. Further, the compromise
penalties imposed by [the Commissioner] were excluded, there being no compromise
agreement between the parties.

SO ORDERED.9

Both the Commissioner and DLSU moved for the reconsideration of the January 5,
2010 decision.10 On April 6, 2010, the CTA Division denied the Commissioner's motion
for reconsideration while it held in abeyance the resolution on DLSU's motion for
reconsideration.11
On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc
Case No. 622) arguing that DLSU's use of its revenues and assets for non-educational
or commercial purposes removed these items from the exemption coverage under the
Constitution.12

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of
documentary evidence to prove that its rental income was used actually, directly and
exclusively for educational purposes.13 The Commissioner did not promptly object to the
formal offer of supplemental evidence despite notice. 14

On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted,
reduced the amount of DLSU's tax deficiencies. The dispositive portion of the amended
decision reads:

WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY

GRANTED. [DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT and
DST plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total adjusted
amount of ₱5,506,456.71 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on
the ... basic deficiency taxes ... until full payment thereof pursuant to Section 249(B) of
the [National Internal Revenue Code] ... xxx.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the
deficiency taxes, surcharge and deficiency interest which have accrued ... from
September 30, 2004 until fully paid.15

Consequently, the Commissioner supplemented its petition with the CTA En Banc and
argued that the CTA Division erred in admitting DLSU's additional evidence. 16

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition
for review with the CTA En Banc (CTA En Banc Case No. 671) on the following
grounds: (1) the entire assessment should have been cancelled because it was based
on an invalid LOA; (2) assuming the LOA was valid, the CTA Division should still have
cancelled the entire assessment because DLSU submitted evidence similar to those
submitted by Ateneo De Manila University (Ateneo) in a separate case where the CTA
cancelled Ateneo's tax assessment;17 and (3) the CTA Division erred in finding that a
portion of DLSU's rental income was not proved to have been used actually, directly and
exclusively for educational purposes.18

The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained the
findings of the CTA Division.19
Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public

Accountant (Independent CPA), the CTA En Banc found that DLSU was able to prove
that a portion of the assessed rental income was used actually, directly and exclusively
for educational purposes; hence, exempt from tax. 20 The CTA En Banc was satisfied
with DLSU's supporting evidence confirming that part of its rental income had indeed
been used to pay the loan it obtained to build the university's Physical Education –
Sports Complex.21

Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income
that was not shown by supporting documents to have been actually, directly and
exclusively used for educational purposes, must be subjected to income tax and VAT. 22

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU froved its remittance of the DST due
on its loan and mortgage documents.23 The CTA En Banc found that DLSU's DST
payments had been remitted to the BIR, evidenced by the stamp on the documents
made by a DST imprinting machine, which is allowed under Section 200 (D) of the
National Internal Revenue Code (Tax Code)24 and Section 2 of Revenue Regulations
(RR) No. 15-2001.25

Admissibility of DLSU's supplemental evidence

The CTA En Banc held that the supplemental pieces of documentary evidence were
admissible even if DLSU formally offered them only when it moved for reconsideration
of the CTA Division's original decision. Notably, the law creating the CTA provides that
proceedings before it shall not be governed strictly by the technical rules of evidence. 26

The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's
December 10, 2010 decision.27 Thus, she came to this court for relief through a petition
for review on certiorari (G.R. No. 196596).

CTA En Banc Case No. 671

The CTA En Banc partially granted DLSU's petition for review and further reduced its
tax liabilities to ₱2,554,825.47 inclusive of surcharge.28

On the validity of the Letter of Authority

The issue of the LOA' s validity was raised during trial; 29 hence, the issue was deemed
properly submitted for decision and reviewable on appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable
period and that the practice of issuing a LOA covering audit of unverified prior years is
prohibited.30 The prohibition is consistent with Revenue Memorandum Order (RMO) No.
43-90, which provides that if the audit includes more than one taxable period, the other
periods or years shall be specifically indicated in the LOA. 31

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
Unverified Prior Years. Hence, the assessments for deficiency income tax, VAT and
DST for taxable years 2001 and 2002 are void, but the assessment for taxable year
2003 is valid.32

On the applicability of the Ateneo case

The CTA En Banc held that the Ateneo case is not a valid precedent because it
involved different parties, factual settings, bases of assessments, sets of evidence, and
defenses.33

On the CTA Division's appreciation of the evidence

The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It held
that while DLSU successfully proved that a portion of its rental income was transmitted
and used to pay the loan obtained to fund the construction of the Sports Complex, the
rental income from other sources were not shown to have been actually, directly and
exclusively used for educational purposes.34

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the
Commissioner (G.R. No. 198941) came to this Court for relief.

The Consolidated Petitions

G.R. No. 196596

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived, used
or disposed of.35 DLSU's operations of canteens and bookstores within its campus even
though exclusively serving the university community do not negate income tax liability. 36

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be
harmonized with Section 30 (H) of the Tax Code, which states among others, that the
income of whatever kind and character of [a non-stock and non-profit educational
institution] from any of [its] properties, real or personal, or from any of [its] activities
conducted for profit regardless of the disposition made of such income, shall be subject
to tax imposed by this Code.37

The Commissioner argues that the CTA En Banc misread and misapplied the case of
Commissioner of Internal Revenue v. YMCA 38 to support its conclusion that revenues
however generated are covered by the constitutional exemption, provided that, the
revenues will be used for educational purposes or will be held in reserve for such
purposes.39

On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is
exempt only from property tax but not from income tax on the rentals earned from
property.40 Thus, DLSU's income from the leases of its real properties is not exempt
from taxation even if the income would be used for educational purposes. 41

Second, the Commissioner insists that DLSU did not prove the fact of DST payment 42
and that it is not qualified to use the On-Line Electronic DST Imprinting Machine, which
is available only to certain classes of taxpayers under RR No. 9-2000.43

Finally, the Commissioner objects to the admission of DLSU's supplemental offer of

evidence. The belated submission of supplemental evidence reopened the case for trial,
and worse, DLSU offered the supplemental evidence only after it received the
unfavorable CTA Division's original decision.44 In any case, DLSU's submission of
supplemental documentary evidence was unnecessary since its rental income was
taxable regardless of its disposition.45

G.R. No. 198841

DLSU argues as that:

First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of
unverified prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an
assessment issued based on such defective LOA must also be void. 46

DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and
Unverified Prior Years. On the basis of this defective LOA, the Commissioner assessed
DLSU for deficiency income tax, VAT and DST for taxable years 2001, 2002 and
2003.47 DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable
year 2003. According to DLSU, when RMO No. 43-90 provides that:

The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby
prohibited.

it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since
the LOA issued to DLSU follows this format, then any assessment arising from it must
be entirely voided.48

Second, DLSU invokes the principle of uniformity in taxation, which mandates that for
similarly situated parties, the same set of evidence should be appreciated and weighed
in the same manner.49 The CTA En Banc erred when it did not similarly appreciate
DLSU' s evidence as it did to the pieces of evidence submitted by Ateneo, also a non-
stock, non-profit educational institution.50
G.R. No. 198941

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are
exactly the same as those she raised in her: (1) petition docketed as G.R. No. 196596
and (2) comment on DLSU's petition docketed as G.R. No. 198841. 51

Counter-arguments

DLSU's Comment on G.R. No. 196596

First, DLSU questions the defective verification attached to the petition. 52

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all
assets and revenues of non-stock, non-profit educational institutions used actually,
directly and exclusively for educational purposes are exempt from taxes and duties. 53

On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit
educational institutions is novel to the 1987 Constitution and that Section 30 (H) of the
1997 Tax Code cannot amend the 1987 Constitution;54 (2) Section 30 of the 1997 Tax
Code is almost an exact replica of Section 26 of the 1977 Tax Code -with the addition
of non-stock, non-profit educational institutions to the list of tax-exempt entities; and (3)
that the 1977 Tax Code was promulgated when the 1973 Constitution was still in
place.

DLSU elaborates that the tax exemption granted to a private educational institution
under the 1973 Constitution was only for real property tax. Back then, the special tax
treatment on income of private educational institutions only emanates from statute, i.e.,
the 1977 Tax Code. Only under the 1987 Constitution that exemption from tax of all the
assets and revenues of non-stock, non-profit educational institutions used actually,
directly and exclusively for educational purposes, was expressly and categorically
enshrined.55

DLSU thus invokes the doctrine of constitutional supremacy, which renders any
subsequent law that is contrary to the Constitution void and without any force and
effect.56 Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income of
whatever kind and character of a non-stock and non-profit educational institution from
any of its properties, real or personal, or from any of its activities conducted for profit
regardless of the disposition made of such income, should be declared without force
and effect in view of the constitutionally granted tax exemption on "all revenues and
assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes."57

DLSU further submits that it complies with the requirements enunciated in the YMCA
case, that for an exemption to be granted under Article XIV, Section 4 (3) of the
Constitution, the taxpayer must prove that: (1) it falls under the classification non-stock,
non-profit educational institution; and (2) the income it seeks to be exempted from
taxation is used actually, directly and exclusively for educational purposes. 58 Unlike
YMCA, which is not an educational institution, DLSU is undisputedly a non-stock, non-
profit educational institution. It had also submitted evidence to prove that it actually,
directly and exclusively used its income for educational purposes. 59

DLSU also cites the deliberations of the 1986 Constitutional Commission where they
recognized that the tax exemption was granted "to incentivize private educational
institutions to share with the State the responsibility of educating the youth."60

Third, DLSU highlights that both the CTA En Banc and Division found that the bank that
handled DLSU' s loan and mortgage transactions had remitted to the BIR the DST
through an imprinting machine, a method allowed under RR No. 15-2001.61 In any case,
DLSU argues that it cannot be held liable for DST owing to the exemption granted under
the Constitution.62

Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the
formal offer of supplemental evidence. Because of the Commissioner's failure to timely
object, she became bound by the results of the submission of such supplemental
evidence.63

The CIR's Comment on G.R. No. 198841

The Commissioner submits that DLSU is estopped from questioning the LOA's validity
because it failed to raise this issue in both the administrative and judicial proceedings. 64
That it was asked on cross-examination during the trial does not make it an issue that
the CTA could resolve.65 The Commissioner also maintains that DLSU's rental income
is not tax-exempt because an educational institution is only exempt from property tax
but not from tax on the income earned from the property. 66

DLSU's Comment on G.R. No. 198941

DLSU puts forward the same counter-arguments discussed above.67 In addition, DLSU
prays that the Court award attorney's fees in its favor because it was constrained to
unnecessarily retain the services of counsel in this separate petition. 68

Issues

Although the parties raised a number of issues, the Court shall decide only the pivotal
issues, which we summarize as follows:

I. Whether DLSU' s income and revenues proved to have been used actually,
directly and exclusively for educational purposes are exempt from duties and
taxes;

II. Whether the entire assessment should be voided because of the defective
LOA;
 III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence;
and

IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence may be
disturbed by the Court.

Our Ruling

As we explain in full below, we rule that:

I. The income, revenues and assets of non-stock, non-profit educational

institutions proved to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is not entirely void. The assessment for taxable year
2003 is valid.

III. The CTA correctly admitted DLSU's formal offer of supplemental evidence;
and

IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to
have manifestly overlooked certain relevant facts not disputed by the parties and
which, if properly considered, would justify a different conclusion.

The parties failed to convince the Court that the CTA overlooked or failed to consider
relevant facts. We thus sustain the CTA En Banc's findings that:

a. DLSU proved that a portion of its rental income was used actually, directly and
exclusively for educational purposes; and

b. DLSU proved the payment of the DST through its bank's on-line imprinting
machine.

I. The revenues and assets of non-stock,

non-profit educational institutions
proved to have been used actually,
directly, and exclusively for educational
purposes are exempt from duties and
taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from
taxes and duties. Upon the dissolution or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the manner provided by law.
Proprietary educational institutions, including those cooperatively owned, may
likewise be entitled to such exemptions subject to the limitations provided by law
including restrictions on dividends and provisions for reinvestment. [underscoring and
emphasis supplied]

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

First, the constitutional provision refers to two kinds of educational institutions: (1) non-
stock, non-profit educational institutions and (2) proprietary educational institutions. 69

Second, DLSU falls under the first category. Even the Commissioner admits the status
of DLSU as a non-stock, non-profit educational institution.70

Third, while DLSU's claim for tax exemption arises from and is based on the
Constitution, the Constitution, in the same provision, also imposes certain conditions to
avail of the exemption. We discuss below the import of the constitutional text vis-a-vis
the Commissioner's counter-arguments.

Fourth, there is a marked distinction between the treatment of non-stock, non-profit

educational institutions and proprietary educational institutions. The tax exemption
granted to non-stock, non-profit educational institutions is conditioned only on the
actual, direct and exclusive use of their revenues and assets for educational purposes.
While tax exemptions may also be granted to proprietary educational institutions, these
exemptions may be subject to limitations imposed by Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a

proprietary educational institution is crucial in determining the nature and extent of the
tax exemption granted to non-stock, non-profit educational institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30
(H) of the Tax Code. The relevant text reads:

The following organizations shall not be taxed under this Title [Tax on

Income] in respect to income received by them as such:

xxxx

(H) A non-stock and non-profit educational institution

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever

kind and character of the foregoing organizations from any of their properties, real
or personal, or from any of their activities conducted for profit regardless of the
disposition made of such income shall be subject to tax imposed under this
Code. [underscoring and emphasis supplied]

The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to
non-stock, non-profit educational institutions such that the revenues and income they
derived from their assets, or from any of their activities conducted for profit, are taxable
even if these revenues and income are used for educational purposes.

Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-stock,
non-profit educational institutions?

We answer in the negative.

While the present petition appears to be a case of first impression,71 the Court in the
YMCA case had in fact already analyzed and explained the meaning of Article XIV,
Section 4 (3) of the Constitution. The Court in that case made doctrinal pronouncements
that are relevant to the present case.

The issue in YMCA was whether the income derived from rentals of real property owned
by the YMCA, established as a "welfare, educational and charitable non-profit
corporation," was subject to income tax under the Tax Code and the Constitution. 72

The Court denied YMCA's claim for exemption on the ground that as a charitable
institution falling under Article VI, Section 28 (3) of the Constitution,73 the YMCA is not
tax-exempt per se; " what is exempted is not the institution itself... those exempted from
real estate taxes are lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational purposes."74

The Court held that the exemption claimed by the YMCA is expressly disallowed by the
last paragraph of then Section 27 (now Section 30) of the Tax Code, which mandates
that the income of exempt organizations from any of their properties, real or personal,
are subject to the same tax imposed by the Tax Code, regardless of how that income is
used. The Court ruled that the last paragraph of Section 27 unequivocally subjects to
tax the rent income of the YMCA from its property. 75

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

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked
the tax privilege granted under Article XIV, Section 4 (3) of the Constitution.

The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the
Constitution holding that the term educational institution, when used in laws granting tax
exemptions, refers to the school system (synonymous with formal education); it includes
a college or an educational establishment; it refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal school system. 76
The Court then significantly laid down the requisites for availing the tax exemption under
Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the classification non-
stock, non-profit educational institution; and (2) the income it seeks to be exempted
from taxation is used actually, directly and exclusively for educational purposes. 77

We now adopt YMCA as precedent and hold that:

1. The last paragraph of Section 30 of the Tax Code is without force and effect with
respect to non-stock, non-profit educational institutions, provided, that the non-stock,
non-profit educational institutions prove that its assets and revenues are used actually,
directly and exclusively for educational purposes.

2. The tax-exemption constitutionally-granted to non-stock, non-profit educational

institutions, is not subject to limitations imposed by law.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income78 for
educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable
institutions, churches, parsonages or convents, mosques, and non-profit cemeteries),
which exempts from tax only the assets, i.e., "all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes ... ," Article XIV, Section 4 (3) categorically states that "[a]ll
revenues and assets ... used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the
Constitution is not without significance.

We find that the text demonstrates the policy of the 1987 Constitution, discernible from
the records of the 1986 Constitutional Commission79 to provide broader tax privilege to
non-stock, non-profit educational institutions as recognition of their role in assisting the
State provide a public good. The tax exemption was seen as beneficial to students who
may otherwise be charged unreasonable tuition fees if not for the tax exemption
extended to all revenues and assets of non-stock, non-profit educational institutions.80

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3)
does not require that the revenues and income must have also been sourced from
educational activities or activities related to the purposes of an educational institution.
The phrase all revenues is unqualified by any reference to the source of revenues.
Thus, so long as the revenues and income are used actually, directly and exclusively for
educational purposes, then said revenues and income shall be exempt from taxes and
duties.81

We find it helpful to discuss at this point the taxation of revenues versus the taxation of
assets.

Revenues consist of the amounts earned by a person or entity from the conduct of
business operations.82 It may refer to the sale of goods, rendition of services, or the
return of an investment. Revenue is a component of the tax base in income tax, 83
VAT,84 and local business tax (LBT).85

Assets, on the other hand, are the tangible and intangible properties owned by a person
or entity.86 It may refer to real estate, cash deposit in a bank, investment in the stocks of
a corporation, inventory of goods, or any property from which the person or entity may
derive income or use to generate the same. In Philippine taxation, the fair market value
of real property is a component of the tax base in real property tax (RPT).87 Also, the
landed cost of imported goods is a component of the tax base in VAT on importation88
and tariff duties.89

Thus, when a non-stock, non-profit educational institution proves that it uses its
revenues actually, directly, and exclusively for educational purposes, it shall be
exempted from income tax, VAT, and LBT. On the other hand, when it also shows that it
uses its assets in the form of real property for educational purposes, it shall be
exempted from RPT.

To be clear, proving the actual use of the taxable item will result in an exemption, but
the specific tax from which the entity shall be exempted from shall depend on whether
the item is an item of revenue or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or

cafeteria, the leased portion is not actually, directly and exclusively used for educational
purposes, even if the bookstore or canteen caters only to university students, faculty
and staff.

The leased portion of the building may be subject to real property tax, as held in Abra
Valley College, Inc. v. Aquino.90 We ruled in that case that the test of exemption from
taxation is the use of the property for purposes mentioned in the Constitution. We also
held that the exemption extends to facilities which are incidental to and reasonably
necessary for the accomplishment of the main purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes,
removes such asset from the property tax exemption granted under the Constitution.91
There is no exemption because the asset is not used actually, directly and exclusively
for educational purposes. The commercial use of the property is also not incidental to
and reasonably necessary for the accomplishment of the main purpose of a university,
which is to educate its students.
However, if the university actually, directly and exclusively uses for educational
purposes the revenues earned from the lease of its school building, such revenues shall
be exempt from taxes and duties. The tax exemption no longer hinges on the use of the
asset from which the revenues were earned, but on the actual, direct and exclusive use
of the revenues for educational purposes.

Parenthetically, income and revenues of non-stock, non-profit educational institution not

used actually, directly and exclusively for educational purposes are not exempt from
duties and taxes. To avail of the exemption, the taxpayer must factually prove that it
used actually, directly and exclusively for educational purposes the revenues or income
sought to be exempted.

The crucial point of inquiry then is on the use of the assets or on the use of the
revenues. These are two things that must be viewed and treated separately. But so
long as the assets or revenues are used actually, directly and exclusively for
educational purposes, they are exempt from duties and taxes.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions, unlike the exemption
that may be availed of by proprietary
educational institutions, is not subject to
limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions differently from
proprietary educational institutions cannot be doubted. As discussed, the privilege
granted to the former is conditioned only on the actual, direct and exclusive use of their
revenues and assets for educational purposes. In clear contrast, the tax privilege
granted to the latter may be subject to limitations imposed by law.

We spell out below the difference in treatment if only to highlight the privileged status of
non-stock, non-profit educational institutions compared with their proprietary
counterparts.

While a non-stock, non-profit educational institution is classified as a tax-exempt entity

under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary
educational institution is covered by Section 27 (Rates of Income Tax on Domestic
Corporations).

To be specific, Section 30 provides that exempt organizations like non-stock, non-profit

educational institutions shall not be taxed on income received by them as such.

Section 27 (B), on the other hand, states that "[p]roprietary educational institutions ...
which are nonprofit shall pay a tax of ten percent (10%) on their taxable income .. .
Provided, that if the gross income from unrelated trade, business or other activity
exceeds fifty percent (50%) of the total gross income derived by such educational
institutions ... [the regular corporate income tax of 30%] shall be imposed on the entire
taxable income ... "92

By the Tax Code's clear terms, a proprietary educational institution is entitled only to the
reduced rate of 10% corporate income tax. The reduced rate is applicable only if: (1) the
proprietary educational institution is nonprofit and (2) its gross income from unrelated
trade, business or activity does not exceed 50% of its total gross income.

Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not
apply to non-stock, non-profit educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and
effect for being contrary to the Constitution insofar as it subjects to tax the income and
revenues of non-stock, non-profit educational institutions used actually, directly and
exclusively for educational purpose. We make this declaration in the exercise of and
consistent with our duty93 to uphold the primacy of the Constitution.94

Finally, we stress that our holding here pertains only to non-stock, non-profit educational
institutions and does not cover the other exempt organizations under Section 30 of the
Tax Code.

For all these reasons, we hold that the income and revenues of DLSU proven to have
been used actually, directly and exclusively for educational purposes are exempt from
duties and taxes.

II. The LOA issued to DLSU is

not entirely void. The
assessment for taxable year
2003 is valid.

DLSU objects to the CTA En Banc 's conclusion that the LOA is valid for taxable year
2003 and insists that the entire LOA should be voided for being contrary to RMO No.
43-90, which provides that if tax audit includes more than one taxable period, the other
periods or years shall be specifically indicated in the LOA.

A LOA is the authority given to the appropriate revenue officer to examine the books of
account and other accounting records of the taxpayer in order to determine the
taxpayer's correct internal revenue liabilities95 and for the purpose of collecting the
correct amount of tax,96 in accordance with Section 5 of the Tax Code, which gives the
CIR the power to obtain information, to summon/examine, and take testimony of
persons. The LOA commences the audit process97 and informs the taxpayer that it is
under audit for possible deficiency tax assessment.

Given the purposes of a LOA, is there basis to completely nullify the LOA issued to
DLSU, and consequently, disregard the BIR and the CTA's findings of tax deficiency for
taxable year 2003?
We answer in the negative.

The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which
reads:

3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable
year. The practice of issuing [LO As] covering audit of unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the [LOA]. 98

What this provision clearly prohibits is the practice of issuing LOAs covering audit of
unverified prior years. RMO 43-90 does not say that a LOA which contains unverified
prior years is void. It merely prescribes that if the audit includes more than one taxable
period, the other periods or years must be specified. The provision read as a whole
requires that if a taxpayer is audited for more than one taxable year, the BIR must
specify each taxable year or taxable period on separate LOAs.

Read in this light, the requirement to specify the taxable period covered by the LOA is
simply to inform the taxpayer of the extent of the audit and the scope of the revenue
officer's authority. Without this rule, a revenue officer can unduly burden the taxpayer by
demanding random accounting records from random unverified years, which may
include documents from as far back as ten years in cases of fraud audit.99

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
Unverified Prior Years. The LOA does not strictly comply with RMO 43-90 because it
includes unverified prior years. This does not mean, however, that the entire LOA is
void.

As the CTA correctly held, the assessment for taxable year 2003 is valid because this
taxable period is specified in the LOA. DLSU was fully apprised that it was being
audited for taxable year 2003. Corollarily, the assessments for taxable years 2001 and
2002 are void for having been unspecified on separate LOAs as required under RMO
No. 43-90.

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA' s
validity at the CTA Division, and thus, should not have been entertained on appeal, is
not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up
during the trial.100 DLSU then raised the issue in its memorandum and motion for partial
reconsideration with the CTA Division. DLSU raised it again on appeal to the CTA En
Banc. Thus, the CTA En Banc could, as it did, pass upon the validity of the LOA. 101
Besides, the Commissioner had the opportunity to argue for the validity of the LOA at
the CTA En Banc but she chose not to file her comment and memorandum despite
notice.102
III.The CTA correctly admitted
the supplemental evidence
formally offered by DLSU.

The Commissioner objects to the CTA Division's admission of DLSU's supplemental

pieces of documentary evidence.

To recall, DLSU formally offered its supplemental evidence upon filing its motion for
reconsideration with the CTA Division.103 The CTA Division admitted the supplemental
evidence, which proved that a portion of DLSU's rental income was used actually,
directly and exclusively for educational purposes. Consequently, the CTA Division
reduced DLSU's tax liabilities.

We uphold the CTA Division's admission of the supplemental evidence on distinct but
mutually reinforcing grounds, to wit: (1) the Commissioner failed to timely object to the
formal offer of supplemental evidence; and (2) the CTA is not governed strictly by the
technical rules of evidence.

First, the failure to object to the offered evidence renders it admissible, and the court
cannot, on its own, disregard such evidence.104

The Court has held that if a party desires the court to reject the evidence offered, it must
so state in the form of a timely objection and it cannot raise the objection to the
evidence for the first time on appeal.105 Because of a party's failure to timely object, the
evidence offered becomes part of the evidence in the case. As a consequence, all the
parties are considered bound by any outcome arising from the offer of evidence
properly presented.106

As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer
of evidence despite notice.107 The Commissioner objected to the admission of the
supplemental evidence only when the case was on appeal to the CTA En Banc. By the
time the Commissioner raised her objection, it was too late; the formal offer,
admission and evaluation of the supplemental evidence were all fait accompli.

We clarify that while the Commissioner's failure to promptly object had no bearing on
the materiality or sufficiency of the supplemental evidence admitted, she was bound by
the outcome of the CTA Division's assessment of the evidence. 108

Second, the CTA is not governed strictly by the technical rules of evidence. The CTA
Division's admission of the formal offer of supplemental evidence, without prompt
objection from the Commissioner, was thus justified.

Notably, this Court had in the past admitted and considered evidence attached to the
taxpayers' motion for reconsideration.1âwphi1
In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund claimant
attached to its motion for reconsideration with the CT A its Final Adjustment Return. The
Commissioner, as in the present case, did not oppose the taxpayer's motion for
reconsideration and the admission of the Final Adjustment Return.110 We thus admitted
and gave weight to the Final Adjustment Return although it was only submitted upon
motion for reconsideration.

We held that while it is true that strict procedural rules generally frown upon the
submission of documents after the trial, the law creating the CTA specifically provides
that proceedings before it shall not be governed strictly by the technical rules of
evidence111 and that the paramount consideration remains the ascertainment of truth.
We ruled that procedural rules should not bar courts from considering undisputed facts
to arrive at a just determination of a controversy. 112

We applied the same reasoning in the subsequent cases of Filinvest Development

Corporation v. Commissioner of Internal Revenue113 and Commissioner of Internal
Revenue v. PERF Realty Corporation, 114 where the taxpayers also submitted the
supplemental supporting document only upon filing their motions for reconsideration.

Although the cited cases involved claims for tax refunds, we also dispense with the strict
application of the technical rules of evidence in the present tax assessment case. If
anything, the liberal application of the rules assumes greater force and significance in
the case of a taxpayer who claims a constitutionally granted tax exemption. While the
taxpayers in the cited cases claimed refund of excess tax payments based on the Tax
Code,115 DLSU is claiming tax exemption based on the Constitution. If liberality is
afforded to taxpayers who paid more than they should have under a statute, then with
more reason that we should allow a taxpayer to prove its exemption from tax based on
the Constitution.

Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not
only because the Commissioner failed to promptly object, but more so because the
strict application of the technical rules of evidence may defeat the intent of the
Constitution.

IV. The CTA's appreciation of

evidence is generally binding on
the Court unless compelling
reasons justify otherwise.

It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA
which, by the very nature of its function of being dedicated exclusively to the resolution
of tax problems, has developed an expertise on the subject, unless there has been an
abuse or improvident exercise of authority.116 We thus accord the findings of fact by the
CTA with the highest respect. These findings of facts can only be disturbed on appeal if
they are not supported by substantial evidence or there is a showing of gross error or
abuse on the part of the CTA. In the absence of any clear and convincing proof to the
contrary, this Court must presume that the CTA rendered a decision which is valid in
every respect.117

We sustain the factual findings of the CTA.

The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU
had used actually, directly and exclusively for educational purposes a portion of its
assessed income and that it had remitted the DST payments though an online
imprinting machine.

a. DLSU used actually, directly, and exclusively for educational purposes a portion of its
assessed income.

To see how the CTA arrived at its factual findings, we review the process undertaken,
from which it deduced that DLSU successfully proved that it used actually, directly and
exclusively for educational purposes a portion of its rental income.

The CTA reduced DLSU' s deficiency income tax and VAT liabilities in view of the
submission of the supplemental evidence, which consisted of statement of receipts,
statement of disbursement and fund balance and statement of fund changes.118

These documents showed that DLSU borrowed ₱93.86 Million,119 which was used to
build the university's Sports Complex. Based on these pieces of evidence, the CTA
found that DLSU' s rental income from its concessionaires were indeed transmitted and
used for the payment of this loan. The CTA held that the degree of preponderance of
evidence was sufficiently met to prove actual, direct and exclusive use for educational
purposes.

The CTA also found that DLSU's rental income from other concessionaires, which were
allegedly deposited to a fund (CF-CPA Account),120 intended for the university's capital
projects, was not proved to have been used actually, directly and exclusively for
educational purposes. The CTA observed that "[DLSU] ... failed to fully account for
and substantiate all the disbursements from the [fund]." Thus, the CTA "cannot
ascertain whether rental income from the [other] concessionaires was indeed used for
educational purposes."121

To stress, the CTA's factual findings were based on and supported by the report of the
Independent CPA who reviewed, audited and examined the voluminous documents
submitted by DLSU.

Under the CTA Revised Rules, an Independent CPA's functions include: (a)
examination and verification of receipts, invoices, vouchers and other long accounts; (b)
reproduction of, and comparison of such reproduction with, and certification that the
same are faithful copies of original documents, and pre-marking of documentary
exhibits consisting of voluminous documents; (c) preparation of schedules or
summaries containing a chronological listing of the numbers, dates and amounts
covered by receipts or invoices or other relevant documents and the amount(s) of taxes
paid; (d) making findings as to compliance with substantiation requirements
under pertinent tax laws, regulations and jurisprudence; (e) submission of a formal
report with certification of authenticity and veracity of findings and conclusions in the
performance of the audit; (f) testifying on such formal report; and (g) performing such
other functions as the CTA may direct.122

Based on the Independent CPA's report and on its own appreciation of the evidence,
the CTA held that only the portion of the rental income pertaining to the substantiated
disbursements (i.e., proved by receipts, vouchers, etc.) from the CF-CPA Account was
considered as used actually, directly and exclusively for educational purposes.
Consequently, the unaccounted and unsubstantiated disbursements must be subjected
to income tax and VAT.123

The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for
taxable years 2001 and 2002 due to the defective LOA. 124

The Court finds that the above fact-finding process undertaken by the CTA shows that it
based its ruling on the evidence on record, which we reiterate, were examined and
verified by the Independent CPA. Thus, we see no persuasive reason to deviate from
these factual findings.

However, while we generally respect the factual findings of the CTA, it does not mean
that we are bound by its conclusions. In the present case, we do not agree with the
method used by the CTA to arrive at DLSU' s unsubstantiated rental income (i.e.,
income not proved to have been actually, directly and exclusively used for educational
purposes).

To recall, the CTA found that DLSU earned a rental income of ₱l0,610,379.00 in taxable
year 2003.125 DLSU earned this income from leasing a portion of its premises to: 1)
MTG-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri
International, and 6) MTO Bookstore.126

To prove that its rental income was used for educational purposes, DLSU identified the
transactions where the rental income was expended, viz.: 1) ₱4,007,724.00127 used to
pay the loan obtained by DLSU to build the Sports Complex; and 2) ₱6,602,655.00
transferred to the CF-CPA Account.128

DLSU also submitted documents to the Independent CPA to prove that the
₱6,602,655.00 transferred to the CF-CPA Account was used actually, directly and
exclusively for educational purposes. According to the Independent CPA' findings,
DLSU was able to substantiate disbursements from the CF-CPA Account amounting to
₱6,259,078.30.
Contradicting the findings of the Independent CPA, the CTA concluded that out of the
₱l0,610,379.00 rental income, ₱4,841,066.65 was unsubstantiated, and thus, subject to
income tax and VAT.129

The CTA then concluded that the ratio of substantiated disbursements to the total
disbursements from the CF-CPA Account for taxable year 2003 is only 26.68%. 130 The
CTA held as follows:

However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp.,
Capri International and MTO Bookstore, which were transmitted to the CF-CPA
Account, petitioner again failed to fully account for and substantiate all the
disbursements from the CF-CPA Account; thus failing to prove that the rental income
derived therein were actually, directly and exclusively used for educational purposes.
Likewise, the findings of the Court-Commissioned Independent CPA show that the
disbursements from the CF-CPA Account for fiscal year 2003 amounts to
₱6,259,078.30 only. Hence, this portion of the rental income, being the substantiated
disbursements of the CF-CPA Account, was considered by the Special First Division as
used actually, directly and exclusively for educational purposes. Since for fiscal year
2003, the total disbursements per voucher is ₱6,259,078.3 (Exhibit "LL-25-C"), and the
total disbursements per subsidiary ledger amounts to ₱23,463,543.02 (Exhibit "LL-29-
C"), the ratio of substantiated disbursements for fiscal year 2003 is 26.68%
(₱6,259,078.30/₱23,463,543.02). Thus, the substantiated portion of CF-CPA
Disbursements for fiscal year 2003, arrived at by multiplying the ratio of 26.68% with the
total rent income added to and used in the CF-CPA Account in the amount of
₱6,602,655.00 is ₱1,761,588.35.131 (emphasis supplied)

For better understanding, we summarize the CTA's computation as follows:

1. The CTA subtracted the rent income used in the construction of the Sports Complex
(₱4,007,724.00) from the rental income (₱10,610,379.00) earned from the
abovementioned concessionaries. The difference (₱6,602,655.00) was the portion
claimed to have been deposited to the CF-CPA Account.

2. The CTA then subtracted the supposed substantiated portion of CF-CPA

disbursements (₱1,761,308.37) from the ₱6,602,655.00 to arrive at the supposed
unsubstantiated portion of the rental income (₱4,841,066.65).132

3. The substantiated portion of CF-CPA disbursements (₱l,761,308.37)133 was derived

by multiplying the rental income claimed to have been added to the CF-CPA Account
(₱6,602,655.00) by 26.68% or the ratio of substantiated disbursements to total
disbursements (₱23,463,543.02).

4. The 26.68% ratio134 was the result of dividing the substantiated disbursements from
the CF-CPA Account as found by the Independent CPA (₱6,259,078.30) by the total
disbursements (₱23,463,543.02) from the same account.
We find that this system of calculation is incorrect and does not truly give effect to the
constitutional grant of tax exemption to non-stock, non-profit educational institutions.
The CTA's reasoning is flawed because it required DLSU to substantiate an amount that
is greater than the rental income deposited in the CF-CPA Account in 2003.

To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds
of its rental income (which amounted to a total of ₱10.61 million)135 were used for
educational purposes. This amount was divided into two parts: (a) the ₱4.0l million,
which was used to pay the loan obtained for the construction of the Sports Complex;
and (b) the ₱6.60 million,136 which was transferred to the CF-CPA account.

For year 2003, the total disbursement from the CF-CPA account amounted to ₱23 .46
million.137 These figures, read in light of the constitutional exemption, raises the
question: does DLSU claim that the whole total CF-CPA disbursement of ₱23.46
million is tax-exempt so that it is required to prove that all these disbursements
had been made for educational purposes?

We answer in the negative.

The records show that DLSU never claimed that the total CF-CPA disbursements of
₱23.46 million had been for educational purposes and should thus be tax-exempt;
DLSU only claimed ₱10.61 million for tax-exemption and should thus be required to
prove that this amount had been used as claimed.

Of this amount, ₱4.01 had been proven to have been used for educational purposes, as
confirmed by the Independent CPA. The amount in issue is therefore the balance of
₱6.60 million which was transferred to the CF-CPA which in turn made disbursements
of ₱23.46 million for various general purposes, among them the ₱6.60 million
transferred by DLSU.

Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for
educational purposes in year 2003 in the amount ₱6.26 million. Based on these given
figures, the CT A concluded that the expenses for educational purposes that had been
coursed through the CF-CPA should be prorated so that only the portion that ₱6.26
million bears to the total CF-CPA disbursements should be credited to DLSU for tax
exemption.

This approach, in our view, is flawed given the constitutional requirement that revenues
actually and directly used for educational purposes should be tax-exempt. As already
mentioned above, DLSU is not claiming that the whole ₱23.46 million CF-CPA
disbursement had been used for educational purposes; it only claims that ₱6.60 million
transferred to CF-CPA had been used for educational purposes. This was what DLSU
needed to prove to have actually and directly used for educational purposes.

That this fund had been first deposited into a separate fund (the CF -CPA established to
fund capital projects) lends peculiarity to the facts of this case, but does not detract from
the fact that the deposited funds were DLSU revenue funds that had been confirmed
and proven to have been actually and directly used for educational purposes via the CF-
CPA. That the CF-CPA might have had other sources of funding is irrelevant because
the assessment in the present case pertains only to the rental income which DLSU
indisputably earned as revenue in 2003. That the proven CF-CPA funds used for
educational purposes should not be prorated as part of its total CF-CPA disbursements
for purposes of crediting to DLSU is also logical because no claim whatsoever had been
made that the totality of the CF-CPA disbursements had been for educational purposes.
No prorating is necessary; to state the obvious, exemption is based on actual and direct
use and this DLSU has indisputably proven.

Based on these considerations, DLSU should therefore be liable only for the difference
between what it claimed and what it has proven. In more concrete terms, DLSU only
had to prove that its rental income for taxable year 2003 (₱10,610,379.00) was used for
educational purposes. Hence, while the total disbursements from the CF-CPA Account
amounted to ₱23,463,543.02, DLSU only had to substantiate its Pl0.6 million rental
income, part of which was the ₱6,602,655.00 transferred to the CF-CPA account. Of
this latter amount, ₱6.259 million was substantiated to have been used for educational
purposes.

To summarize, we thus revise the tax base for deficiency income tax and VAT for
taxable year 2003 as follows:

CTA
Decision138
Revised
Rental income 10,610,379.00 10,610,379.00

Less: Rent income used in construction of the 4,007,724.00 4,007,724.00

Sports Complex

Rental income deposited to the CF-CPA

6,602,655.00 6,602,655.00
Account

Less: Substantiated portion of CF-CPA 1,761,588.35 6,259,078.30

disbursements
 Tax base for deficiency income tax and
4,841,066.65 343.576.70
VAT

On DLSU' s argument that the CTA should have appreciated its evidence in the same
way as it did with the evidence submitted by Ateneo in another separate case, the CTA
explained that the issue in the Ateneo case was not the same as the issue in the
present case.

The issue in the Ateneo case was whether or not Ateneo could be held liable to pay
income taxes and VAT under certain BIR and Department of Finance issuances 139 that
required the educational institution to own and operate the canteens, or other
commercial enterprises within its campus, as condition for tax exemption. The CTA held
that the Constitution does not require the educational institution to own or operate these
commercial establishments to avail of the exemption. 140

Given the lack of complete identity of the issues involved, the CTA held that it had to
evaluate the separate sets of evidence differently. The CTA likewise stressed that
DLSU and Ateneo gave distinct defenses and that its wisdom "cannot be equated on its
decision on two different cases with two different issues."141

DLSU disagrees with the CTA and argues that the entire assessment must be cancelled
because it submitted similar, if not stronger sets of evidence, as Ateneo. We reject
DLSU's argument for being non sequitur. Its reliance on the concept of uniformity of
taxation is also incorrect.

First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency
and materiality of the evidence supporting their respective claims for tax exemption
would necessarily differ because their attendant issues and facts differ.

To state the obvious, the amount of income received by DLSU and by Ateneo during the
taxable years they were assessed varied. The amount of tax assessment also varied.
The amount of income proven to have been used for educational purposes also varied
because the amount substantiated varied.142 Thus, the amount of tax assessment
cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency of ₱17,303,001.12 for
taxable years 2001, 2002 and 2003. On the other hand, the BIR assessed Ateneo a
total deficiency tax of ₱8,864,042.35 for the same period. Notably, DLSU was assessed
deficiency DST, while Ateneo was not.143

Thus, although both Ateneo and DLSU claimed that they used their rental income
actually, directly and exclusively for educational purposes by submitting similar
evidence, e.g., the testimony of their employees on the use of university revenues, the
report of the Independent CPA, their income summaries, financial statements,
vouchers, etc., the fact remains that DLSU failed to prove that a portion of its income
and revenues had indeed been used for educational purposes.

The CTA significantly found that some documents that could have fully supported
DLSU's claim were not produced in court. Indeed, the Independent CPA testified that
some disbursements had not been proven to have been used actually, directly and
exclusively for educational purposes.144

The final nail on the question of evidence is DLSU's own admission that the original of
these documents had not in fact been produced before the CTA although it claimed that
there was no bad faith on its part.145 To our mind, this admission is a good indicator of
how the Ateneo and the DLSU cases varied, resulting in DLSU's failure to substantiate
a portion of its claimed exemption.

Further, DLSU's invocation of Section 5, Rule 130 of the Revised

Rules on Evidence, that the contents of the missing supporting documents were proven
by its recital in some other authentic documents on record,146 can no longer be
entertained at this late stage of the proceeding. The CTA did not rule on this particular
claim. The CTA also made no finding on DLSU' s assertion of lack of bad faith. Besides,
it is not our duty to go over these documents to test the truthfulness of their contents,
this Court not being a trier of facts.

Second, DLSU misunderstands the concept of uniformity of taxation.

Equality and uniformity of taxation means that all taxable articles or kinds of property of
the same class shall be taxed at the same rate. 147 A tax is uniform when it operates with
the same force and effect in every place where the subject of it is found. 148 The concept
requires that all subjects of taxation similarly situated should be treated alike and placed
in equal footing.149

In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them
alike because their income proved to have been used actually, directly and exclusively
for educational purposes were exempted from taxes. The CTA equally applied the
requirements in the YMCA case to test if they indeed used their revenues for
educational purposes.

DLSU can only assert that the CTA violated the rule on uniformity if it can show that,
despite proving that it used actually, directly and exclusively for educational purposes its
income and revenues, the CTA still affirmed the imposition of taxes. That the DLSU
secured a different result happened because it failed to fully prove that it used actually,
directly and exclusively for educational purposes its revenues and income.
On this point, we remind DLSU that the rule on uniformity of taxation does not mean
that subjects of taxation similarly situated are treated in literally the same way in all and
every occasion. The fact that the Ateneo and DLSU are both non-stock, non-profit
educational institutions, does not mean that the CTA or this Court would similarly decide
every case for (or against) both universities. Success in tax litigation, like in any other
litigation, depends to a large extent on the sufficiency of evidence. DLSU's evidence
was wanting, thus, the CTA was correct in not fully cancelling its tax liabilities.

b. DLSU proved its payment of the DST

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions
were paid and remitted through its bank's On-Line Electronic DST Imprinting Machine.
The Commissioner argues that DLSU is not allowed to use this method of payment
because an educational institution is excluded from the class of taxpayers who can use
the On-Line Electronic DST Imprinting Machine.

We sustain the findings of the CTA. The Commissioner's argument lacks basis in both
the Tax Code and the relevant revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and paid for
by the person making, signing, issuing, accepting, or transferring the same. 150 The Tax
Code provides that whenever one party to the document enjoys exemption from DST,
the other party not exempt from DST shall be directly liable for the tax. Thus, it is clear
that DST shall be payable by any party to the document, such that the payment and
compliance by one shall mean the full settlement of the DST due on the document.

In the present case, DLSU entered into mortgage and loan agreements with banks.
These agreements are subject to DST.151 For the purpose of showing that the DST on
the loan agreement has been paid, DLSU presented its agreements bearing the imprint
showing that DST on the document has been paid by the bank, its counterparty. The
imprint should be sufficient proof that DST has been paid. Thus, DLSU cannot be
further assessed for deficiency DST on the said documents.

Finally, it is true that educational institutions are not included in the class of taxpayers
who can pay and remit DST through the On-Line Electronic DST Imprinting Machine
under RR No. 9-2000. As correctly held by the CTA, this is irrelevant because it was not
DLSU who used the On-Line Electronic DST Imprinting Machine but the bank that
handled its mortgage and loan transactions. RR No. 9-2000 expressly includes banks in
the class of taxpayers that can use the On-Line Electronic DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the

payment of the assessed DST deficiency, except for the unpaid balance of

₱13,265.48.152
WHEREFORE, premises considered, we DENY the petition of the Commissioner of
Internal Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision
and March 29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc
Case No. 622, except for the total amount of deficiency tax liabilities of De La Salle
University, Inc., which had been reduced.

We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and
the petition of the Commissioner of Internal Revenue in G.R. No. 198941 and thus
AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the Court of Tax
Appeals En Banc in CTA En Banc Case No. 671, with the MODIFICATION that the
base for the deficiency income tax and VAT for taxable year 2003 is ₱343,576.70.

SO ORDERED.

G.R. No. 160756 March 9, 2010

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

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING
SECRETARY OF FINANCE JUANITA D. AMATONG, and THE HON.
COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR.,
Respondents.

DECISION

CORONA, J.:

In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate
and Builders’ Associations, Inc. is questioning the constitutionality of Section 27 (E) of
Republic Act (RA) 84242 and the revenue regulations (RRs) issued by the Bureau of
Internal Revenue (BIR) to implement said provision and those involving creditable
withholding taxes.3

Petitioner is an association of real estate developers and builders in the Philippines. It

impleaded former Executive Secretary Alberto Romulo, then acting Secretary of
Finance Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo
Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT)
on corporations and creditable withholding tax (CWT) on sales of real properties
classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is

implemented by RR 9-98. Petitioner argues that the MCIT violates the due process
clause because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and
2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe
the rules and procedures for the collection of CWT on the sale of real properties
categorized as ordinary assets. Petitioner contends that these revenue regulations are
contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of
ordinary assets and capital assets and second, respondent Secretary of Finance has no
authority to collect CWT, much less, to base the CWT on the gross selling price or fair
market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue
regulations violate the due process clause because, like the MCIT, the government
collects income tax even when the net income has not yet been determined. They
contravene the equal protection clause as well because the CWT is being levied upon
real estate enterprises but not on other business enterprises, more particularly those in
the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is

unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real properties
classified as ordinary assets under RRs 2-98, 6-2001 and 7-2003, is
unconstitutional.

Overview of the Assailed Provisions

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is
assessed an MCIT of 2% of its gross income when such MCIT is greater than the
normal corporate income tax imposed under Section 27(A). 4 If the regular income tax is
higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT
over the normal tax shall be carried forward and credited against the normal income tax
for the three immediately succeeding taxable years. Section 27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

 (1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross income as of
the end of the taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its
business operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the
normal income tax as computed under Subsection (A) of this Section shall be
carried forward and credited against the normal income tax for the three (3)
immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. – The Secretary of Finance is
hereby authorized to suspend the imposition of the [MCIT] on any corporation
which suffers losses on account of prolonged labor dispute, or because of force
majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon

recommendation of the Commissioner, the necessary rules and regulations that
shall define the terms and conditions under which he may suspend the imposition
of the [MCIT] in a meritorious case.

(4) Gross Income Defined. – For purposes of applying the [MCIT] provided under
Subsection (E) hereof, the term ‘gross income’ shall mean gross sales less sales
returns, discounts and allowances and cost of goods sold. "Cost of goods sold"
shall include all business expenses directly incurred to produce the merchandise
to bring them to their present location and use.

For trading or merchandising concern, "cost of goods sold" shall include the invoice cost
of the goods sold, plus import duties, freight in transporting the goods to the place
where the goods are actually sold including insurance while the goods are in transit.

For a manufacturing concern, "cost of goods manufactured and sold" shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, "gross income" means gross
receipts less sales returns, allowances, discounts and cost of services. "Cost of
services" shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A) salaries and employee
benefits of personnel, consultants and specialists directly rendering the service and (B)
cost of facilities directly utilized in providing the service such as depreciation or rental of
equipment used and cost of supplies: Provided, however, that in the case of banks,
"cost of services" shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the
recommendation of the Commissioner of Internal Revenue (CIR), promulgated RR 9-98
implementing Section 27(E).5 The pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations. –

(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as of the
end of the taxable year (whether calendar or fiscal year, depending on the accounting
period employed) is hereby imposed upon any domestic corporation beginning the
fourth (4th) taxable year immediately following the taxable year in which such
corporation commenced its business operations. The MCIT shall be imposed whenever
such corporation has zero or negative taxable income or whenever the amount of
minimum corporate income tax is greater than the normal income tax due from such
corporation.

For purposes of these Regulations, the term, "normal income tax" means the income
tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32%
effective January 1, 2000 and thereafter.

xxx xxx xxx

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

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of

respondent CIR, promulgated RR 2-98 implementing certain provisions of RA 8424
involving the withholding of taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income
payments from the sale, exchange or transfer of real property, other than capital assets,
by persons residing in the Philippines and habitually engaged in the real estate
business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

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

With a selling price of five 1.5%

hundred thousand pesos
(₱500,000.00) or less.

With a selling price of more than 3.0%

five hundred thousand pesos
(₱500,000.00) but not more
than two million pesos
(₱2,000,000.00).

With selling price of more than 5.0%

two million pesos
(₱2,000,000.00)

xxx xxx xxx

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

Where the consideration or part thereof is payable on installment, no withholding tax is

required to be made on the periodic installment payments where the buyer is an
individual not engaged in trade or business. In such a case, the applicable rate of tax
based on the entire consideration shall be withheld on the last installment or
installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or

otherwise, the tax shall be deducted and withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

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

Where the seller/transferor is exempt from [CWT] in Exempt

accordance with Sec. 2.57.5 of these regulations.
Upon the following values of real property, where
the seller/transferor is habitually engaged in the real
estate business.
With a selling price of Five Hundred Thousand 1.5%
Pesos (₱500,000.00) or less.
With a selling price of more than Five Hundred 3.0%
Thousand Pesos (₱500,000.00) but not more than
Two Million Pesos (₱2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(₱2,000,000.00).

xxx xxx xxx

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

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or

otherwise, these rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year
of sale do not exceed 25% of the selling price), the tax shall be deducted and withheld
by the buyer on every installment.

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not
on the installment plan" (that is, payments in the year of sale exceed 25% of the selling
price), the buyer shall withhold the tax based on the gross selling price or fair market
value of the property, whichever is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer
unless the [CWT] due on the sale, transfer or exchange of real property other than
capital asset has been fully paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any
sale, barter or exchange subject to the CWT will not be recorded by the Registry of
Deeds until the CIR has certified that such transfers and conveyances have been
reported and the taxes thereof have been duly paid:7
Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of conveyances of land or
land and building/improvement thereon arising from sales, barters, or exchanges
subject to the creditable expanded withholding tax shall not be recorded by the Register
of Deeds unless the [CIR] or his duly authorized representative has certified that such
transfers and conveyances have been reported and the expanded withholding tax,
inclusive of the documentary stamp tax, due thereon have been fully paid xxxx.

On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in
determining whether a particular real property is a capital or an ordinary asset for
purposes of imposing the MCIT, among others. The pertinent portions thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. -

Gains/Income derived from sale, exchange, or other disposition of real properties shall,
unless otherwise exempt, be subject to applicable taxes imposed under the Code,
depending on whether the subject properties are classified as capital assets or ordinary
assets;

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

xxx xxx xxx

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

xxx xxx xxx

c. In the case of domestic corporations. –

xxx xxx xxx

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

xxx xxx xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy

Courts will not assume jurisdiction over a constitutional question unless the following
requisites are satisfied: (1) there must be an actual case calling for the exercise of
judicial review; (2) the question before the court must be ripe for adjudication; (3) the
person challenging the validity of the act must have standing to do so; (4) the question
of constitutionality must have been raised at the earliest opportunity and (5) the issue of
constitutionality must be the very lis mota of the case.9

Respondents aver that the first three requisites are absent in this case. According to
them, there is no actual case calling for the exercise of judicial power and it is not yet
ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has
been assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property.
Neither did petitioner allege that its members have shut down their businesses as a
result of the payment of the MCIT or CWT. Petitioner has raised concerns in mere
abstract and hypothetical form without any actual, specific and concrete instances cited
that the assailed law and revenue regulations have actually and adversely affected it.
Lacking empirical data on which to base any conclusion, any discussion on the
constitutionality of the MCIT or CWT on sales of real property is essentially an academic
exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for

adjudicating abstract issues. Otherwise, adjudication would be no different from the
giving of advisory opinion that does not really settle legal issues. 10

An actual case or controversy involves a conflict of legal rights or an assertion of

opposite legal claims which is susceptible of judicial resolution as distinguished from a
hypothetical or abstract difference or dispute.11 On the other hand, a question is
considered ripe for adjudication when the act being challenged has a direct adverse
effect on the individual challenging it.12

Contrary to respondents’ assertion, we do not have to wait until petitioner’s members

have shut down their operations as a result of the MCIT or CWT. The assailed
provisions are already being implemented. As we stated in Didipio Earth-Savers’ Multi-
Purpose Association, Incorporated (DESAMA) v. Gozun:13

By the mere enactment of the questioned law or the approval of the challenged act, the
dispute is said to have ripened into a judicial controversy even without any other overt
act. Indeed, even a singular violation of the Constitution and/or the law is enough to
awaken judicial duty.14

If the assailed provisions are indeed unconstitutional, there is no better time than the
present to settle such question once and for all.
Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the
Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did
not allege any material interest or any wrong that it may suffer from the enforcement of
[the assailed provisions].15

Legal standing or locus standi is a party’s personal and substantial interest in a case
such that it has sustained or will sustain direct injury as a result of the governmental act
being challenged.16 In Holy Spirit Homeowners Association, Inc. v. Defensor,17 we held
that the association had legal standing because its members stood to be injured by the
enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is
no dispute that the individual members of petitioner association are residents of the
NGC. As such they are covered and stand to be either benefited or injured by the
enforcement of the IRR, particularly as regards the selection process of beneficiaries
and lot allocation to qualified beneficiaries. Thus, petitioner association may assail those
provisions in the IRR which it believes to be unfavorable to the rights of its members.
xxx Certainly, petitioner and its members have sustained direct injury arising from the
enforcement of the IRR in that they have been disqualified and eliminated from the
selection process.18

In any event, this Court has the discretion to take cognizance of a suit which does not
satisfy the requirements of an actual case, ripeness or legal standing when paramount
public interest is involved.19 The questioned MCIT and CWT affect not only petitioners
but practically all domestic corporate taxpayers in our country. The transcendental
importance of the issues raised and their overreaching significance to society make it
proper for us to take cognizance of this petition. 20

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the

Philippine taxation system. It came about as a result of the perceived inadequacy of the
self-assessment system in capturing the true income of corporations. 21 It was devised
as a relatively simple and effective revenue-raising instrument compared to the normal
income tax which is more difficult to control and enforce. It is a means to ensure that
everyone will make some minimum contribution to the support of the public sector. The
congressional deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain
corporations of reporting constantly a loss in their operations to avoid the payment of
taxes, and thus avoid sharing in the cost of government. In this regard, the Tax Reform
Act introduces for the first time a new concept called the [MCIT] so as to minimize tax
evasion, tax avoidance, tax manipulation in the country and for administrative
convenience. … This will go a long way in ensuring that corporations will pay their just
share in supporting our public life and our economic advancement.22

Domestic corporations owe their corporate existence and their privilege to do business
to the government. They also benefit from the efforts of the government to improve the
financial market and to ensure a favorable business climate. It is therefore fair for the
government to require them to make a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having
large turn-overs, report minimal or negative net income resulting in minimal or zero
income taxes year in and year out, through under-declaration of income or over-
deduction of expenses otherwise called tax shelters.23

Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they
have proposed the [MCIT]. Because from experience too, you have corporations which
have been losing year in and year out and paid no tax. So, if the corporation has been
losing for the past five years to ten years, then that corporation has no business to be in
business. It is dead. Why continue if you are losing year in and year out? So, we have
this provision to avoid this type of tax shelters, Your Honor. 24

The primary purpose of any legitimate business is to earn a profit. Continued and
repeated losses after operations of a corporation or consistent reports of minimal net
income render its financial statements and its tax payments suspect. For sure, certain
tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The
MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax
evasion and minimizes tax avoidance schemes achieved through sophisticated and
artful manipulations of deductions and other stratagems. Since the tax base was
broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were
incorporated into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup
initial major capital expenditures, the imposition of the MCIT commences only on the
fourth taxable year immediately following the year in which the corporation commenced
its operations.25 This grace period allows a new business to stabilize first and make its
ventures viable before it is subjected to the MCIT. 26

Second, the law allows the carrying forward of any excess of the MCIT paid over the
normal income tax which shall be credited against the normal income tax for the three
immediately succeeding years.27

Third, since certain businesses may be incurring genuine repeated losses, the law
authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation
suffers losses due to prolonged labor dispute, force majeure and legitimate business
reverses.28
Even before the legislature introduced the MCIT to the Philippine taxation system,
several other countries already had their own system of minimum corporate income
taxation. Our lawmakers noted that most developing countries, particularly Latin
American and Asian countries, have the same form of safeguards as we do. As pointed
out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit
of room for underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax of half a
percent (0.5%) of gross assessable income. In Korea a 25% of taxable income before
deductions and exemptions. Of course the different countries have different basis for
that minimum income tax.

The other thing you’ll notice is the preponderance of Latin American countries that
employed this method. Okay, those are additional Latin American countries. 29

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and
Hungary have their own versions of the MCIT. 30

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional
because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation
of property without due process of law. It explains that gross income as defined under
said provision only considers the cost of goods sold and other direct expenses; other
major expenditures, such as administrative and interest expenses which are equally
necessary to produce gross income, were not taken into account. 31 Thus, pegging the
tax base of the MCIT to a corporation’s gross income is tantamount to a confiscation of
capital because gross income, unlike net income, is not "realized gain." 32

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither
exist nor endure. The exercise of taxing power derives its source from the very
existence of the State whose social contract with its citizens obliges it to promote public
interest and the common good.33

Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative. 35

Essentially, this means that in the legislature primarily lies the discretion to determine
the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place)
of taxation.36 It has the authority to prescribe a certain tax at a specific rate for a
particular public purpose on persons or things within its jurisdiction. In other words, the
legislature wields the power to define what tax shall be imposed, why it should be
imposed, how much tax shall be imposed, against whom (or what) it shall be imposed
and where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging
in its very nature no limits, so that the principal check against its abuse is to be found
only in the responsibility of the legislature (which imposes the tax) to its constituency
who are to pay it.37 Nevertheless, it is circumscribed by constitutional limitations. At the
same time, like any other statute, tax legislation carries a presumption of
constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be
deprived of life, liberty or property without due process of law." In Sison, Jr. v. Ancheta,
et al.,38 we held that the due process clause may properly be invoked to invalidate, in
appropriate cases, a revenue measure39 when it amounts to a confiscation of
property.40 But in the same case, we also explained that we will not strike down a
revenue measure as unconstitutional (for being violative of the due process clause) on
the mere allegation of arbitrariness by the taxpayer. 41 There must be a factual
foundation to such an unconstitutional taint. 42 This merely adheres to the authoritative
doctrine that, where the due process clause is invoked, considering that it is not a fixed
rule but rather a broad standard, there is a need for proof of such persuasive
character.43

Petitioner is correct in saying that income is distinct from capital. 44 Income means all the
wealth which flows into the taxpayer other than a mere return on capital. Capital is a
fund or property existing at one distinct point in time while income denotes a flow of
wealth during a definite period of time. 45 Income is gain derived and severed from
capital.46 For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation. 47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is
not income. In other words, it is income, not capital, which is subject to income tax.
However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent
by a corporation in the sale of its goods, i.e., the cost of goods48 and other direct
expenses from gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the
normal net income tax, and only if the normal income tax is suspiciously low. The MCIT
merely approximates the amount of net income tax due from a corporation, pegging the
rate at a very much reduced 2% and uses as the base the corporation’s gross income.

Besides, there is no legal objection to a broader tax base or taxable income by

eliminating all deductible items and at the same time reducing the applicable tax rate. 49
Statutes taxing the gross "receipts," "earnings," or "income" of particular
corporations are found in many jurisdictions. Tax thereon is generally held to be within
the power of a state to impose; or constitutional, unless it interferes with interstate
commerce or violates the requirement as to uniformity of taxation.50

The United States has a similar alternative minimum tax (AMT) system which is
generally characterized by a lower tax rate but a broader tax base.51 Since our income
tax laws are of American origin, interpretations by American courts of our parallel tax
laws have persuasive effect on the interpretation of these laws.52 Although our MCIT is
not exactly the same as the AMT, the policy behind them and the procedure of their
implementation are comparable. On the question of the AMT’s constitutionality, the
United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:53

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust
of the system growing from large numbers of taxpayers with large incomes who were
yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx
[It] is a rational means of obtaining a broad-based tax, and therefore is constitutional.54

The U.S. Court declared that the congressional intent to ensure that corporate
taxpayers would contribute a minimum amount of taxes was a legitimate governmental
end to which the AMT bore a reasonable relation. 55

American courts have also emphasized that Congress has the power to condition, limit
or deny deductions from gross income in order to arrive at the net that it chooses to
tax.56 This is because deductions are a matter of legislative grace. 57

Absent any other valid objection, the assignment of gross income, instead of net
income, as the tax base of the MCIT, taken with the reduction of the tax rate from 32%
to 2%, is not constitutionally objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative
experiences of its members nor does it present empirical data to show that the
implementation of the MCIT resulted in the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the
MCIT is arbitrary and confiscatory. The Court cannot strike down a law as
unconstitutional simply because of its yokes.58 Taxation is necessarily burdensome
because, by its nature, it adversely affects property rights. 59 The party alleging the law’s
unconstitutionality has the burden to demonstrate the supposed violations in
understandable terms.60

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

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law
because the MCIT is being imposed and collected even when there is actually a loss, or
a zero or negative taxable income:

Sec. 2.27(E) [MCIT] on Domestic Corporations. —

(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever such corporation
has zero or negative taxable income or whenever the amount of [MCIT] is greater
than the normal income tax due from such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has
zero or negative taxable income, merely defines the coverage of Section 27(E). This
means that even if a corporation incurs a net loss in its business operations or reports
zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross
income. This is consistent with the law which imposes the MCIT on gross income
notwithstanding the amount of the net income. But the law also states that the MCIT is
to be paid only if it is greater than the normal net income. Obviously, it may well be the
case that the MCIT would be less than the net income of the corporation which posts a
zero or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes)
are collected.61 Under Section 57 of RA 8424, the types of income subject to
withholding tax are divided into three categories: (a) withholding of final tax on certain
incomes; (b) withholding of creditable tax at source and (c) tax-free covenant bonds.
Petitioner is concerned with the second category (CWT) and maintains that the revenue
regulations on the collection of CWT on sale of real estate categorized as ordinary
assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under
RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii)
and (c)(ii) of RR 7-2003 were promulgated "with grave abuse of discretion amounting to
lack of jurisdiction" and "patently in contravention of law"62 because they ignore such
distinctions. Petitioner’s conclusion is based on the following premises: (a) the revenue
regulations use gross selling price (GSP) or fair market value (FMV) of the real estate
as basis for determining the income tax for the sale of real estate classified as ordinary
assets and (b) they mandate the collection of income tax on a per transaction basis, i.e.,
upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the
payment of the net income at the end of the taxable period. 63

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets
differently, respondents cannot disregard the distinctions set by the legislators as
regards the tax base, modes of collection and payment of taxes on income from the
sale of capital and ordinary assets.
Petitioner’s arguments have no merit.

Authority of the Secretary of Finance to Order the Collection of CWT on Sales of

Real Property Considered as Ordinary Assets

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to
promulgate the necessary rules and regulations for the effective enforcement of the
provisions of the law. Such authority is subject to the limitation that the rules and
regulations must not override, but must remain consistent and in harmony with, the law
they seek to apply and implement.64 It is well-settled that an administrative agency
cannot amend an act of Congress.65

We have long recognized that the method of withholding tax at source is a procedure of
collecting income tax which is sanctioned by our tax laws. 66 The withholding tax system
was devised for three primary reasons: first, to provide the taxpayer a convenient
manner to meet his probable income tax liability; second, to ensure the collection of
income tax which can otherwise be lost or substantially reduced through failure to file
the corresponding returns and third, to improve the government’s cash flow.67 This
results in administrative savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes through more
complicated means and remedies.68

Respondent Secretary has the authority to require the withholding of a tax on items of
income payable to any person, national or juridical, residing in the Philippines. Such
authority is derived from Section 57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source. –

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%)
but not more than thirty-two percent (32%) thereof, which shall be credited against the
income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given
by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the
1%-32% range; the withholding tax is imposed on the income payable and the tax is
creditable against the income tax liability of the taxpayer for the taxable year.

Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations
Engaged in the Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real
estate business’ income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to
extinguish its possible tax obligation. 69 They are installments on the annual tax which
may be due at the end of the taxable year. 70

Under RR 2-98, the tax base of the income tax from the sale of real property classified
as ordinary assets remains to be the entity’s net income imposed under Section 24
(resident individuals) or Section 27 (domestic corporations) in relation to Section 31 of
RA 8424, i.e. gross income less allowable deductions. The CWT is to be deducted from
the net income tax payable by the taxpayer at the end of the taxable year. 71 Precisely,
Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real
property classified as ordinary assets remains to be the net taxable income:

Section 4. – Applicable taxes on sale, exchange or other disposition of real property. -

Gains/Income derived from sale, exchange, or other disposition of real properties shall
unless otherwise exempt, be subject to applicable taxes imposed under the Code,
depending on whether the subject properties are classified as capital assets or ordinary
assets;

xxx xxx xxx

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

xxx xxx xxx

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

xxx xxx xxx

c. In the case of domestic corporations.

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

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return
and credit the taxes withheld (by the withholding agent/buyer) against its tax due. If the
tax due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on
the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to
a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for
purposes of practicality and convenience. Obviously, the withholding agent/buyer who is
obligated to withhold the tax does not know, nor is he privy to, how much the
taxpayer/seller will have as its net income at the end of the taxable year. Instead, said
withholding agent’s knowledge and privity are limited only to the particular transaction in
which he is a party. In such a case, his basis can only be the GSP or FMV as these are
the only factors reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real
property categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA
8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized from
the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at
source.72

The differences between the two forms of withholding tax, i.e., creditable and final, show
that ordinary assets are not treated in the same manner as capital assets. Final
withholding tax (FWT) and CWT are distinguished as follows:

FWT CWT

a) The amount of income tax a) Taxes withheld on certain income

withheld by the withholding agent is payments are intended to equal or
constituted as a full and final at least approximate the tax due of
payment of the income tax due from the payee on said income.
the payee on the said income.

b)The liability for payment of the tax b) Payee of income is required to

rests primarily on the payor as a report the income and/or pay the
withholding agent. difference between the tax withheld
 and the tax due on the income. The
payee also has the right to ask for a
refund if the tax withheld is more
than the tax due.

c) The payee is not required to file c) The income recipient is still

an income tax return for the required to file an income tax return,
particular income.73 as prescribed in Sec. 51 and Sec.
52 of the NIRC, as amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand,
CWT is imposed on the sale of ordinary assets. The inherent and substantial
differences between FWT and CWT disprove petitioner’s contention that ordinary assets
are being lumped together with, and treated similarly as, capital assets in contravention
of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction
are contrary to the provisions of RA 8424 on the manner and time of filing of the return,
payment and assessment of income tax involving ordinary assets. 75

The fact that the tax is withheld at source does not automatically mean that it is treated
exactly the same way as capital gains. As aforementioned, the mechanics of the FWT
are distinct from those of the CWT. The withholding agent/buyer’s act of collecting the
tax at the time of the transaction by withholding the tax due from the income payable is
the essence of the withholding tax method of tax collection.

No Rule that Only Passive

Incomes Can Be Subject to CWT

Petitioner submits that only passive income can be subjected to withholding tax,
whether final or creditable. According to petitioner, the whole of Section 57 governs the
withholding of income tax on passive income. The enumeration in Section 57(A) refers
to passive income being subjected to FWT. It follows that Section 57(B) on CWT should
also be limited to passive income:

SEC. 57. Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and

regulations, the [Secretary] may promulgate, upon the recommendation of the
[CIR], requiring the filing of income tax return by certain income payees, the tax
imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1);
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3),
 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1),
28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282
of this Code on specified items of income shall be withheld by payor-
corporation and/or person and paid in the same manner and subject to the same
conditions as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. — The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of
income payable to natural or juridical persons, residing in the Philippines,
by payor-corporation/persons as provided for by law, at the rate of not less than
one percent (1%) but not more than thirty-two percent (32%) thereof, which shall
be credited against the income tax liability of the taxpayer for the taxable year.
(Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income
and enumerates these as passive income. The BIR defines passive income by stating
what it is not:

…if the income is generated in the active pursuit and performance of the corporation’s
primary purposes, the same is not passive income…76

It is income generated by the taxpayer’s assets. These assets can be in the form of real
properties that return rental income, shares of stock in a corporation that earn dividends
or interest income received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on
"income payable to natural or juridical persons, residing in the Philippines." There is no
requirement that this income be passive income. If that were the intent of Congress, it
could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section
57(B) pertains to CWT. The former covers the kinds of passive income enumerated
therein and the latter encompasses any income other than those listed in 57(A). Since
the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate

from the text of Section 57(B). RR 2-98 merely implements the law by specifying what
income is subject to CWT. It has been held that, where a statute does not require any
particular procedure to be followed by an administrative agency, the agency may adopt
any reasonable method to carry out its functions. 77 Similarly, considering that the law
uses the general term "income," the Secretary and CIR may specify the kinds of income
the rules will apply to based on what is feasible. In addition, administrative rules and
regulations ordinarily deserve to be given weight and respect by the courts 78 in view of
the rule-making authority given to those who formulate them and their specific expertise
in their respective fields.

No Deprivation of Property Without Due Process

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as
ordinary assets deprives its members of their property without due process of law
because, in their line of business, gain is never assured by mere receipt of the selling
price. As a result, the government is collecting tax from net income not yet gained or
earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the
property at the end of the taxable year. The seller will be able to claim a tax refund if its
net income is less than the taxes withheld. Nothing is taken that is not due so there is
no confiscation of property repugnant to the constitutional guarantee of due process.
More importantly, the due process requirement applies to the power to tax. 79 The CWT
does not impose new taxes nor does it increase taxes. 80 It relates entirely to the method
and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome
because taxpayers have to wait years and may even resort to litigation before they are
granted a refund.81 This argument is misleading. The practical problems encountered in
claiming a tax refund do not affect the constitutionality and validity of the CWT as a
method of collecting the tax.1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the
enterprise to pay labor wages, materials, cost of money and other expenses which can
then save the entity from having to obtain loans entailing considerable interest expense.
Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the
realty industry: huge investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling development/construction costs;
heavy taxes and prohibitive "up-front" regulatory fees from at least 20 government
agencies.82

Petitioner’s lamentations will not support its attack on the constitutionality of the CWT.
Petitioner’s complaints are essentially matters of policy best addressed to the executive
and legislative branches of the government. Besides, the CWT is applied only on the
amounts actually received or receivable by the real estate entity. Sales on installment
are taxed on a per-installment basis.83 Petitioner’s desire to utilize for its operational and
capital expenses money earmarked for the payment of taxes may be a practical
business option but it is not a fundamental right which can be demanded from the court
or from the government.

No Violation of Equal Protection

Petitioner claims that the revenue regulations are violative of the equal protection clause
because the CWT is being levied only on real estate enterprises. Specifically, petitioner
points out that manufacturing enterprises are not similarly imposed a CWT on their
sales, even if their manner of doing business is not much different from that of a real
estate enterprise. Like a manufacturing concern, a real estate business is involved in a
continuous process of production and it incurs costs and expenditures on a regular
basis. The only difference is that "goods" produced by the real estate business are
house and lot units.84

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of
persons shall be deprived of the same protection of laws which is enjoyed by other
persons or other classes in the same place and in like circumstances."85 Stated
differently, all persons belonging to the same class shall be taxed alike. It follows that
the guaranty of the equal protection of the laws is not violated by legislation based on a
reasonable classification. Classification, to be valid, must (1) rest on substantial
distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing
conditions only and (4) apply equally to all members of the same class. 86

The taxing power has the authority to make reasonable classifications for purposes of
taxation.87 Inequalities which result from a singling out of one particular class for
taxation, or exemption, infringe no constitutional limitation. 88 The real estate industry is,
by itself, a class and can be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing

enterprises, fails to realize that what distinguishes the real estate business from other
manufacturing enterprises, for purposes of the imposition of the CWT, is not their
production processes but the prices of their goods sold and the number of transactions
involved. The income from the sale of a real property is bigger and its frequency of
transaction limited, making it less cumbersome for the parties to comply with the
withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of
transactions with several thousand customers every month involving both minimal and
substantial amounts. To require the customers of manufacturing enterprises, at present,
to withhold the taxes on each of their transactions with their tens or hundreds of
suppliers may result in an inefficient and unmanageable system of taxation and may
well defeat the purpose of the withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are also
sold infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital
goods yet these are not similarly subjected to the CWT. 89 As already discussed, the
Secretary may adopt any reasonable method to carry out its functions. 90 Under Section
57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is
not accurate. The sales of manufacturers who have clients within the top 5,000
corporations, as specified by the BIR, are also subject to CWT for their transactions with
said 5,000 corporations.91

Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of
Deeds should not effect the regisration of any document transferring real property
unless a certification is issued by the CIR that the withholding tax has been paid.
Petitioner proffers hardly any reason to strike down this rule except to rely on its
contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore,
this provision uses almost exactly the same wording as Section 58(E) of RA 8424 and is
unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source. –

(E) Registration with Register of Deeds. - No registration of any document

transferring real property shall be effected by the Register of Deeds unless the
[CIR] or his duly authorized representative has certified that such transfer has
been reported, and the capital gains or [CWT], if any, has been paid: xxxx any
violation of this provision by the Register of Deeds shall be subject to the penalties
imposed under Section 269 of this Code. (Emphasis supplied)

Conclusion

The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in
the world to understand is the income tax."92 When a party questions the
constitutionality of an income tax measure, it has to contend not only with Einstein’s
observation but also with the vast and well-established jurisprudence in support of the
plenary powers of Congress to impose taxes. Petitioner has miserably failed to
discharge its burden of convincing the Court that the imposition of MCIT and CWT is
unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

SO ORDERED.

G.R. No. 108067 January 20, 2000

CYANAMID PHILIPPINES, INC., petitioner,

vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and COMMISSIONER
OF INTERNAL REVENUE, respondent.

QUISUMBING, J.:

Petitioner disputes the decision1 of the Court of Appeals which affirmed the decision2 of
the Court of Tax Appeals, ordering petitioner to pay respondent Commissioner of
Internal Revenue the amount of three million, seven hundred seventy-four thousand,
eight hundred sixty seven pesos and fifty centavos (P3,774,867.50) as 25% surtax on
improper accumulation of profits for 1981, plus 10% surcharge and 20% annual interest
from January 30, 1985 to January 30, 1987, under Sec. 25 of the National Internal
Revenue Code.1âwphi1.nêt

The Court of Tax Appeals made the following factual findings:

Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is

a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is
engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of
imported finished goods, and an importer/indentor.

On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the
payment of deficiency income tax of one hundred nineteen thousand eight hundred
seventeen (P119,817.00) pesos for taxable year 1981, as follows:

Net income disclosed by the return as audited 14,575,210.00

Add: Discrepancies:

Professional fees/yr. 17018 261,877.00

per investigation 110,399.37

Total Adjustment 152,477.00

Net income per Investigation 14,727,687.00

Less: Personal and additional exemptions

Amount subject to tax 14,727,687.00

Income tax due thereon . . . 25% Surtax 2,385,231.50 3,237,495.00

 Less: Amount already assessed 5,161,788.00

BALANCE 75,709.00

monthly interest from 1,389,639.00 44,108.00

Compromise penalties

TOTAL AMOUNT DUE 3,774,867.50 119,817.003

On March 4, 1985, petitioner protested the assessments particularly, (1) the 25% Surtax
Assessment of P3,774,867.50; (2) 1981 Deficiency Income Assessment of
P119,817.00; and 1981 Deficiency Percentage Assessment of P8,846.72. 4 Petitioner,
through its external accountant, Sycip, Gorres, Velayo & Co., claimed, among others,
that the surtax for the undue accumulation of earnings was not proper because the said
profits were retained to increase petitioner's working capital and it would be used for
reasonable business needs of the company. Petitioner contended that it availed of the
tax amnesty under Executive Order No. 41, hence enjoyed amnesty from civil and
criminal prosecution granted by the law.

On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow the
cancellation of the assessment notices and rendered its resolution, as follows:

It appears that your client availed of Executive Order No. 41 under File No. 32A-
F-000455-41B as certified and confirmed by our Tax Amnesty Implementation
Office on October 6, 1987.

In reply thereto, I have the honor to inform you that the availment of the tax
amnesty under Executive Order No. 41, as amended is sufficient basis, in
appropriate cases, for the cancellation of the assessment issued after August 21,
1986. (Revenue Memorandum Order No. 4-87) Said availment does not,
therefore, result in cancellation of assessments issued before August 21, 1986.
as in the instant case. In other words, the assessments in this case issued on
January 30, 1985 despite your client's availment of the tax amnesty under
Executive Order No. 41, as amended still subsist.

Such being the case, you are therefore, requested to urge your client to pay this
Office the aforementioned deficiency income tax and surtax on undue
accumulation of surplus in the respective amounts of P119,817.00 and
 P3,774,867.50 inclusive of interest thereon for the year 1981, within thirty (30)
days from receipt hereof, otherwise this office will be constrained to enforce
collection thereof thru summary remedies prescribed by law.

This constitutes the final decision of this Office on this matter. 5

Petitioner appealed to the Court of Tax Appeals. During the pendency of the case,
however, both parties agreed to compromise the 1981 deficiency income tax
assessment of P119,817.00. Petitioner paid a reduced amount — twenty-six thousand,
five hundred seventy-seven pesos (P26,577.00) — as compromise settlement.
However, the surtax on improperly accumulated profits remained unresolved.

Petitioner claimed that CIR's assessment representing the 25% surtax on its
accumulated earnings for the year 1981 had no legal basis for the following reasons: (a)
petitioner accumulated its earnings and profits for reasonable business requirements to
meet working capital needs and retirement of indebtedness; (b) petitioner is a wholly
owned subsidiary of American Cyanamid Company, a corporation organized under the
laws of the State of Maine, in the United States of America, whose shares of stock are
listed and traded in New York Stock Exchange. This being the case, no individual
shareholder income taxes by petitioner's accumulation of earnings and profits, instead
of distribution of the same.

In denying the petition, the Court of Tax Appeals made the following pronouncements:

Petitioner contends that it did not declare dividends for the year 1981 in order to
use the accumulated earnings as working capital reserve to meet its "reasonable
business needs". The law permits a stock corporation to set aside a portion of its
retained earnings for specified purposes (citing Section 43, paragraph 2 of the
Corporation Code of the Philippines). In the case at bar, however, petitioner's
purpose for accumulating its earnings does not fall within the ambit of any of
these specified purposes.

More compelling is the finding that there was no need for petitioner to set aside a
portion of its retained earnings as working capital reserve as it claims since it had
considerable liquid funds. A thorough review of petitioner's financial statement
(particularly the Balance Sheet, p. 127, BIR Records) reveals that the corporation
had considerable liquid funds consisting of cash accounts receivable, inventory
and even its sales for the period is adequate to meet the normal needs of the
business. This can be determined by computing the current asset to liability ratio
of the company:

current ratio = current assets/ current liabilities

= P 47,052,535.00 / P21,275,544.00
 = 2.21: 1
========

The significance of this ratio is to serve as a primary test of a company's

solvency to meet current obligations from current assets as a going concern or a
measure of adequacy of working capital.

xxx xxx xxx

We further reject petitioner's argument that "the accumulated earnings tax does
not apply to a publicly-held corporation" citing American jurisprudence to support
its position. The reference finds no application in the case at bar because under
Section 25 of the NIRC as amended by Section 5 of P.D. No. 1379 [1739] (dated
September 17, 1980), the exceptions to the accumulated earnings tax are
expressly enumerated, to wit: Bank, non-bank financial intermediaries,
corporations organized primarily, and authorized by the Central Bank of the
Philippines to hold shares of stock of banks, insurance companies, or personal
holding companies, whether domestic or foreign. The law on the matter is clear
and specific. Hence, there is no need to resort to applicable cases decided by the
American Federal Courts for guidance and enlightenment as to whether the
provision of Section 25 of the NIRC should apply to petitioner.

Equally clear and specific are the provisions of E.O. 41 particularly with respect
to its effectivity and coverage . . .

. . . Said availment does not result in cancellation of assessments issued before

August 21, 1986 as petitioner seeks to do in the case at bar. Therefore, the
assessments in this case, issued on January 30, 1985 despite petitioner's
availment of the tax amnesty under E.O. 41 as amended, still subsist.

xxx xxx xxx

WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay

respondent Commissioner of Internal Revenue the sum of P3,774,867.50
representing 25% surtax on improper accumulation of profits for 1981, plus 10%
surcharge and 20% annual interest from January 30, 1985 to January 30, 1987. 6

Petitioner appealed the Court of Tax Appeal's decision to the Court of Appeals.
Affirming the CTA decision, the appellate court said:

In reviewing the instant petition and the arguments raised herein, We find no
compelling reason to reverse the findings of the respondent Court. The
respondent Court's decision is supported by evidence, such as petitioner
corporation's financial statement and balance sheets (p. 127, BIR Records). On
the other hand the petitioner corporation could only come up with an alternative
formula lifted from a decision rendered by a foreign court (Bardahl Mfg. Corp. vs.
 Commissioner, 24 T.C.M. [CCH] 1030). Applying said formula to its particular
financial position, the petitioner corporation attempts to justify its accumulated
surplus earnings. To Our mind, the petitioner corporation's alternative formula
cannot overturn the persuasive findings and conclusion of the respondent Court
based, as it is, on the applicable laws and jurisprudence, as well as standards in
the computation of taxes and penalties practiced in this jurisdiction.

WHEREFORE, in view of the foregoing, the instant petition is hereby

DISMISSED and the decision of the Court of Tax Appeals dated August 6, 1992
in C.T.A. Case No. 4250 is AFFIRMED in toto.7

Hence, petitioner now comes before us and assigns as sole issue:

WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE

PETITIONER IS LIABLE FOR THE ACCUMULATED EARNINGS TAX FOR THE
YEAR 1981.8

Sec. 259 of the old National Internal Revenue Code of 1977 states:

Sec. 25. Additional tax on corporation improperly accumulating profits or surplus

—

(a) Imposition of tax. — If any corporation is formed or availed of for the purpose
of preventing the imposition of the tax upon its shareholders or members or the
shareholders or members of another corporation, through the medium of
permitting its gains and profits to accumulate instead of being divided or
distributed, there is levied and assessed against such corporation, for each
taxable year, a tax equal to twenty-five per-centum of the undistributed portion of
its accumulated profits or surplus which shall be in addition to the tax imposed by
section twenty-four, and shall be computed, collected and paid in the same
manner and subject to the same provisions of law, including penalties, as that
tax.

(b) Prima facie evidence. — The fact that any corporation is mere holding
company shall be prima facie evidence of a purpose to avoid the tax upon its
shareholders or members. Similar presumption will lie in the case of an
investment company where at any time during the taxable year more than fifty
per centum in value of its outstanding stock is owned, directly or indirectly, by
one person.

(c) Evidence determinative of purpose. — The fact that the earnings or profits of
a corporation are permitted to accumulate beyond the reasonable needs of the
business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear preponderance of
evidence, shall prove the contrary.
 (d) Exception. — The provisions of this sections shall not apply to banks, non-
bank financial intermediaries, corporation organized primarily, and authorized by
the Central Bank of the Philippines to hold shares of stock of banks, insurance
companies, whether domestic or foreign.

The provision discouraged tax avoidance through corporate surplus accumulation.

When corporations do not declare dividends, income taxes are not paid on the
undeclared dividends received by the shareholders. The tax on improper accumulation
of surplus is essentially a penalty tax designed to compel corporations to distribute
earnings so that the said earnings by shareholders could, in turn, be taxed.

Relying on decisions of the American Federal Courts, petitioner stresses that the
accumulated earnings tax does not apply to Cyanamid, a wholly owned subsidiary of a
publicly owned company.10 Specifically, petitioner cites Golconda Mining Corp. vs.
Commissioner, 507 F.2d 594, whereby the U.S. Ninth Circuit Court of Appeals had
taken the position that the accumulated earnings tax could only apply to a closely held
corporation.

A review of American taxation history on accumulated earnings tax will show that the
application of the accumulated earnings tax to publicly held corporations has been
problematic. Initially, the Tax Court and the Court of Claims held that the accumulated
earnings tax applies to publicly held corporations. Then, the Ninth Circuit Court of
Appeals ruled in Golconda that the accumulated earnings tax could only apply to closely
held corporations. Despite Golconda, the Internal Revenue Service asserted that the tax
could be imposed on widely held corporations including those not controlled by a few
shareholders or groups of shareholders. The Service indicated it would not follow the
Ninth Circuit regarding publicly held corporations.11 In 1984, American legislation
nullified the Ninth Circuit's Golconda ruling and made it clear that the accumulated
earnings tax is not limited to closely held corporations.12 Clearly, Golconda is no longer
a reliable precedent.

The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739,
enumerated the corporations exempt from the imposition of improperly accumulated tax:
(a) banks; (b) non-bank financial intermediaries; (c) insurance companies; and (d)
corporations organized primarily and authorized by the Central Bank of the Philippines
to hold shares of stocks of banks. Petitioner does not fall among those exempt classes.
Besides, the rule on enumeration is that the express mention of one person, thing, act,
or consequence is construed to exclude all others.13 Laws granting exemption from tax
are construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power.14 Taxation is the rule and exemption is the exception. 15 The burden of proof rests
upon the party claiming exemption to prove that it is, in fact, covered by the exemption
so claimed,16 a burden which petitioner here has failed to discharge.

Another point raised by the petitioner in objecting to the assessment, is that increase of
working capital by a corporation justifies accumulating income. Petitioner asserts that
respondent court erred in concluding that Cyanamid need not infuse additional working
capital reserve because it had considerable liquid funds based on the 2.21:1 ratio of
current assets to current liabilities. Petitioner relies on the so-called "Bardahl" formula,
which allowed retention, as working capital reserve, sufficient amounts of liquid assets
to carry the company through one operating cycle. The "Bardahl" 17 formula was
developed to measure corporate liquidity. The formula requires an examination of
whether the taxpayer has sufficient liquid assets to pay all of its current liabilities and
any extraordinary expenses reasonably anticipated, plus enough to operate the
business during one operating cycle. Operating cycle is the period of time it takes to
convert cash into raw materials, raw materials into inventory, and inventory into sales,
including the time it takes to collect payment for the
sales.18

Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00

pesos as working capital. As of 1981, its liquid asset was only P25,776,991.00. Thus,
petitioner asserts that Cyanamid had a working capital deficit of P7,986,633.00. 19
Therefore, the P9,540,926.00 accumulated income as of 1981 may be validly
accumulated to increase the petitioner's working capital for the succeeding year.

We note, however, that the companies where the "Bardahl" formula was applied, had
operating cycles much shorter than that of petitioner. In Atlas Tool Co., Inc, vs. CIR,20
the company's operating cycle was only 3.33 months or 27.75% of the year. In
Cataphote Corp. of Mississippi vs. United States,21 the corporation's operating cycle
was only 56.87 days, or 15.58% of the year. In the case of Cyanamid, the operating
cycle was 288.35 days, or 78.55% of a year, reflecting that petitioner will need sufficient
liquid funds, of at least three quarters of the year, to cover the operating costs of the
business. There are variations in the application of the "Bardahl" formula, such as
average operating cycle or peak operating cycle. In times when there is no recurrence
of a business cycle, the working capital needs cannot be predicted with accuracy. As
stressed by American authorities, although the "Bardahl" formula is well-established and
routinely applied by the courts, it is not a precise rule. It is used only for administrative
convenience.22 Petitioner's application of the "Bardahl" formula merely creates a false
illusion of exactitude.

Other formulas are also used, e.g. the ratio of current assets to current liabilities and the
adoption of the industry standard.23 The ratio of current assets to current liabilities is
used to determine the sufficiency of working capital. Ideally, the working capital should
equal the current liabilities and there must be 2 units of current assets for every unit of
current liability, hence the so-called "2 to 1" rule.24

As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its
current liabilities. That current ratio of Cyanamid, therefore, projects adequacy in
working capital. Said working capital was expected to increase further when more funds
were generated from the succeeding year's sales. Available income covered expenses
or indebtedness for that year, and there appeared no reason to expect an impending
"working capital deficit" which could have necessitated an increase in working capital,
as rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal Revenue,25 we held that:

. . . [T]here is no need to have such a large amount at the beginning of the

following year because during the year, current assets are converted into cash
and with the income realized from the business as the year goes, these
expenses may well be taken care of. [citation omitted]. Thus, it is erroneous to
say that the taxpayer is entitled to retain enough liquid net assets in amounts
approximately equal to current operating needs for the year to cover "cost of
goods sold and operating expenses:" for "it excludes proper consideration of
funds generated by the collection of notes receivable as trade accounts during
the course of the year."26

If the CIR determined that the corporation avoided the tax on shareholders by permitting
earnings or profits to accumulate, and the taxpayer contested such a determination, the
burden of proving the determination wrong, together with the corresponding burden of
first going forward with evidence, is on the taxpayer. This applies even if the corporation
is not a mere holding or investment company and does not have an unreasonable
accumulation of earnings or profits.27

In order to determine whether profits are accumulated for the reasonable needs to avoid
the surtax upon shareholders, it must be shown that the controlling intention of the
taxpayer is manifest at the time of accumulation, not intentions declared subsequently,
which are mere afterthoughts.28 Furthermore, the accumulated profits must be used
within a reasonable time after the close of the taxable year. In the instant case,
petitioner did not establish, by clear and convincing evidence, that such accumulation of
profit was for the immediate needs of the business.

In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue,29 we ruled:

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

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

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

WHEREFORE, the instant petition is DENIED, and the decision of the Court of Appeals,
sustaining that of the Court of Tax Appeals, is hereby AFFIRMED. Costs against
petitioner.1âwphi1.nêt

SO ORDERED.

G.R. No. 188550 August 19, 2013

DEUTSCHE BANK AG MANILA BRANCH, PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

SERENO, CJ.:

This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch (petitioner)
under Rule 45 of the 1997 Rules of Civil Procedure assailing the Court of Tax Appeals
En Banc (CTA En Banc) Decision2 dated 29 May 2009 and Resolution3 dated 1 July
2009 in C.T.A. EB No. 456.

THE FACTS

In accordance with Section 28(A)(5)4 of the National Internal Revenue Code (NIRC) of
1997, petitioner withheld and remitted to respondent on 21 October 2003 the amount of
PHP 67,688,553.51, which represented the fifteen percent (15%) branch profit
remittance tax (BPRT) on its regular banking unit (RBU) net income remitted to
Deutsche Bank Germany (DB Germany) for 2002 and prior taxable years. 5

Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large
Taxpayers Assessment and Investigation Division on 4 October 2005 an administrative
claim for refund or issuance of its tax credit certificate in the total amount of PHP
22,562,851.17. On the same date, petitioner requested from the International Tax
Affairs Division (ITAD) a confirmation of its entitlement to the preferential tax rate of
10% under the RP-Germany Tax Treaty.6

Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for
Review7 with the CTA on 18 October 2005. Petitioner reiterated its claim for the refund
or issuance of its tax credit certificate for the amount of PHP 22,562,851.17
representing the alleged excess BPRT paid on branch profits remittance to DB
Germany.

THE CTA SECOND DIVISION RULING8

After trial on the merits, the CTA Second Division found that petitioner indeed paid the
total amount of PHP 67,688,553.51 representing the 15% BPRT on its RBU profits
amounting to PHP 451,257,023.29 for 2002 and prior taxable years. Records also
disclose that for the year 2003, petitioner remitted to DB Germany the amount of EURO
5,174,847.38 (or PHP 330,175,961.88 at the exchange rate of PHP 63.804:1 EURO),
which is net of the 15% BPRT.

However, the claim of petitioner for a refund was denied on the ground that the
application for a tax treaty relief was not filed with ITAD prior to the payment by the
former of its BPRT and actual remittance of its branch profits to DB Germany, or prior to
its availment of the preferential rate of ten percent (10%) under the RP-Germany Tax
Treaty provision. The court a quo held that petitioner violated the fifteen (15) day period
mandated under Section III paragraph (2) of Revenue Memorandum Order (RMO) No.
1-2000.

Further, the CTA Second Division relied on Mirant (Philippines) Operations Corporation
(formerly Southern Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of
Internal Revenue9 (Mirant) where the CTA En Banc ruled that before the benefits of the
tax treaty may be extended to a foreign corporation wishing to avail itself thereof, the
latter should first invoke the provisions of the tax treaty and prove that they indeed apply
to the corporation.

THE CTA EN BANC RULING10

The CTA En Banc affirmed the CTA Second Division’s Decision dated 29 August 2008
and Resolution dated 14 January 2009. Citing Mirant, the CTA En Banc held that a
ruling from the ITAD of the BIR must be secured prior to the availment of a preferential
tax rate under a tax treaty. Applying the principle of stare decisis et non quieta movere,
the CTA En Banc took into consideration that this Court had denied the Petition in G.R.
No. 168531 filed by Mirant for failure to sufficiently show any reversible error in the
assailed judgment.11 The CTA En Banc ruled that once a case has been decided in one
way, any other case involving exactly the same point at issue should be decided in the
same manner.
The court likewise ruled that the 15-day rule for tax treaty relief application under RMO
No. 1-2000 cannot be relaxed for petitioner, unlike in CBK Power Company Limited v.
Commissioner of Internal Revenue.12 In that case, the rule was relaxed and the claim
for refund of excess final withholding taxes was partially granted. While it issued a ruling
to CBK Power Company Limited after the payment of withholding taxes, the ITAD did
not issue any ruling to petitioner even if it filed a request for confirmation on 4 October
2005 that the remittance of branch profits to DB Germany is subject to a preferential tax
rate of 10% pursuant to Article 10 of the RP-Germany Tax Treaty.

ISSUE

This Court is now confronted with the issue of whether the failure to strictly comply with
RMO No. 1-2000 will deprive persons or corporations of the benefit of a tax treaty.

THE COURT’S RULING

The Petition is meritorious.

Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be
subject to a tax of 15% based on the total profits applied for or earmarked for remittance
without any deduction of the tax component. However, petitioner invokes paragraph 6,
Article 10 of the RP-Germany Tax Treaty, which provides that where a resident of the
Federal Republic of Germany has a branch in the Republic of the Philippines, this
branch may be subjected to the branch profits remittance tax withheld at source in
accordance with Philippine law but shall not exceed 10% of the gross amount of the
profits remitted by that branch to the head office.

By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the
Philippines, remitting to its head office in Germany, the benefit of a preferential rate
equivalent to 10% BPRT.

On the other hand, the BIR issued RMO No. 1-2000, which requires that any availment
of the tax treaty relief must be preceded by an application with ITAD at least 15 days
before the transaction. The Order was issued to streamline the processing of the
application of tax treaty relief in order to improve efficiency and service to the taxpayers.
Further, it also aims to prevent the consequences of an erroneous interpretation and/or
application of the treaty provisions (i.e., filing a claim for a tax refund/credit for the
overpayment of taxes or for deficiency tax liabilities for underpayment). 13

The crux of the controversy lies in the implementation of RMO No. 1-2000.

Petitioner argues that, considering that it has met all the conditions under Article 10 of
the RP-Germany Tax Treaty, the CTA erred in denying its claim solely on the basis of
RMO No. 1-2000. The filing of a tax treaty relief application is not a condition precedent
to the availment of a preferential tax rate. Further, petitioner posits that, contrary to the
ruling of the CTA, Mirant is not a binding judicial precedent to deny a claim for refund
solely on the basis of noncompliance with RMO No. 1-2000.

Respondent counters that the requirement of prior application under RMO No. 1-2000 is
mandatory in character. RMO No. 1-2000 was issued pursuant to the unquestioned
authority of the Secretary of Finance to promulgate rules and regulations for the
effective implementation of the NIRC. Thus, courts cannot ignore administrative
issuances which partakes the nature of a statute and have in their favor a presumption
of legality.

The CTA ruled that prior application for a tax treaty relief is mandatory, and
noncompliance with this prerequisite is fatal to the taxpayer’s availment of the
preferential tax rate.

We disagree.

A minute resolution is not a binding precedent

At the outset, this Court’s minute resolution on Mirant is not a binding precedent. The
Court has clarified this matter in Philippine Health Care Providers, Inc. v. Commissioner
of Internal Revenue14 as follows:

It is true that, although contained in a minute resolution, our dismissal of the petition
was a disposition of the merits of the case. When we dismissed the petition, we
effectively affirmed the CA ruling being questioned. As a result, our ruling in that case
has already become final. When a minute resolution denies or dismisses a petition for
failure to comply with formal and substantive requirements, the challenged decision,
together with its findings of fact and legal conclusions, are deemed sustained. But what
is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same
parties, it constitutes res judicata. However, if other parties or another subject matter
(even with the same parties and issues) is involved, the minute resolution is not binding
precedent. Thus, in CIR v. Baier-Nickel, the Court noted that a previous case, CIR v.
Baier-Nickel involving the same parties and the same issues, was previously disposed
of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of
the CA. Nonetheless, the Court ruled that the previous case "ha(d) no bearing" on the
latter case because the two cases involved different subject matters as they were
concerned with the taxable income of different taxable years.

Besides, there are substantial, not simply formal, distinctions between a minute
resolution and a decision. The constitutional requirement under the first paragraph of
Section 14, Article VIII of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly applies only to decisions,
not to minute resolutions. A minute resolution is signed only by the clerk of court by
authority of the justices, unlike a decision. It does not require the certification of the
Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a
decision. Indeed, as a rule, this Court lays down doctrines or principles of law which
constitute binding precedent in a decision duly signed by the members of the Court and
certified by the Chief Justice. (Emphasis supplied)

Even if we had affirmed the CTA in Mirant, the doctrine laid down in that Decision
cannot bind this Court in cases of a similar nature. There are differences in parties,
taxes, taxable periods, and treaties involved; more importantly, the disposition of that
case was made only through a minute resolution.

Tax Treaty vs. RMO No. 1-2000

Our Constitution provides for adherence to the general principles of international law as
part of the law of the land.15 The time-honored international principle of pacta sunt
servanda demands the performance in good faith of treaty obligations on the part of the
states that enter into the agreement. Every treaty in force is binding upon the parties,
and obligations under the treaty must be performed by them in good faith. 16 More
importantly, treaties have the force and effect of law in this jurisdiction. 17

Tax treaties are entered into "to reconcile the national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two
different jurisdictions."18 CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax
conventions are drafted with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and for identical
periods. The apparent rationale for doing away with double taxation is to encourage the
free flow of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such
a climate."19

Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of
international juridical double taxation, which is why they are also known as double tax
treaty or double tax agreements.

"A state that has contracted valid international obligations is bound to make in its
legislations those modifications that may be necessary to ensure the fulfillment of the
obligations undertaken."20 Thus, laws and issuances must ensure that the reliefs
granted under tax treaties are accorded to the parties entitled thereto. The BIR must not
impose additional requirements that would negate the availment of the reliefs provided
for under international agreements. More so, when the RP-Germany Tax Treaty does
not provide for any pre-requisite for the availment of the benefits under said agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would
indicate a deprivation of entitlement to a tax treaty relief for failure to comply with the 15-
day period. We recognize the clear intention of the BIR in implementing RMO No. 1-
2000, but the CTA’s outright denial of a tax treaty relief for failure to strictly comply with
the prescribed period is not in harmony with the objectives of the contracting state to
ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons
or corporations.

Bearing in mind the rationale of tax treaties, the period of application for the availment of
tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement
to the relief as it would constitute a violation of the duty required by good faith in
complying with a tax treaty. The denial of the availment of tax relief for the failure of a
taxpayer to apply within the prescribed period under the administrative issuance would
impair the value of the tax treaty. At most, the application for a tax treaty relief from the
BIR should merely operate to confirm the entitlement of the taxpayer to the relief.

The obligation to comply with a tax treaty must take precedence over the objective of
RMO No. 1-2000.1âwphi1 Logically, noncompliance with tax treaties has negative
implications on international relations, and unduly discourages foreign investors. While
the consequences sought to be prevented by RMO No. 1-2000 involve an
administrative procedure, these may be remedied through other system management
processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those
who are entitled to the benefit of a treaty for failure to strictly comply with an
administrative issuance requiring prior application for tax treaty relief.

Prior Application vs. Claim for Refund

Again, RMO No. 1-2000 was implemented to obviate any erroneous interpretation
and/or application of the treaty provisions. The objective of the BIR is to forestall
assessments against corporations who erroneously availed themselves of the benefits
of the tax treaty but are not legally entitled thereto, as well as to save such investors
from the tedious process of claims for a refund due to an inaccurate application of the
tax treaty provisions. However, as earlier discussed, noncompliance with the 15-day
period for prior application should not operate to automatically divest entitlement to the
tax treaty relief especially in claims for refund.

The underlying principle of prior application with the BIR becomes moot in refund cases,
such as the present case, where the very basis of the claim is erroneous or there is
excessive payment arising from non-availment of a tax treaty relief at the first instance.
In this case, petitioner should not be faulted for not complying with RMO No. 1-2000
prior to the transaction. It could not have applied for a tax treaty relief within the period
prescribed, or 15 days prior to the payment of its BPRT, precisely because it
erroneously paid the BPRT not on the basis of the preferential tax rate under

the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence,
the prior application requirement becomes illogical. Therefore, the fact that petitioner
invoked the provisions of the RP-Germany Tax Treaty when it requested for a
confirmation from the ITAD before filing an administrative claim for a refund should be
deemed substantial compliance with RMO No. 1-2000.

Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy for tax
recovery when there has been an erroneous payment of tax.1âwphi1 The outright
denial of petitioner’s claim for a refund, on the sole ground of failure to apply for a tax
treaty relief prior to the payment of the BPRT, would defeat the purpose of Section 229.

Petitioner is entitled to a refund

It is significant to emphasize that petitioner applied – though belatedly – for a tax treaty
relief, in substantial compliance with RMO No. 1-2000. A ruling by the BIR would have
confirmed whether petitioner was entitled to the lower rate of 10% BPRT pursuant to the
RP-Germany Tax Treaty.

Nevertheless, even without the BIR ruling, the CTA Second Division found as follows:

Based on the evidence presented, both documentary and testimonial, petitioner was
able to establish the following facts:

a. That petitioner is a branch office in the Philippines of Deutsche Bank AG, a

corporation organized and existing under the laws of the Federal Republic of
Germany;

b. That on October 21, 2003, it filed its Monthly Remittance Return of Final
Income Taxes Withheld under BIR Form No. 1601-F and remitted the amount of
₱67,688,553.51 as branch profits remittance tax with the BIR; and

c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having issued a
clearance, petitioner remitted to Frankfurt Head Office the amount of
EUR5,174,847.38 (or ₱330,175,961.88 at 63.804 Peso/Euro) representing its
2002 profits remittance.22

The amount of PHP 67,688,553.51 paid by petitioner represented the 15% BPRT on its
RBU net income, due for remittance to DB Germany amounting to PHP 451,257,023.29
for 2002 and prior taxable years.23

Likewise, both the administrative and the judicial actions were filed within the two-year
prescriptive period pursuant to Section 229 of the NIRC.24

Clearly, there is no reason to deprive petitioner of the benefit of a preferential tax rate of
10% BPRT in accordance with the RP-Germany Tax Treaty.

Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net income
amounting to PHP 451,257,023.29 for 2002 and prior taxable years, applying the 10%
BPRT. Thus, it is proper to grant petitioner a refund ofthe difference between the PHP
67,688,553.51 (15% BPRT) and PHP 45,125,702.34 (10% BPRT) or a total of PHP
22,562,851.17.

WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the

Court of Tax Appeals En Banc Decision dated 29 May 2009 and Resolution dated 1
July 2009 are REVERSED and SET ASIDE. A new one is hereby entered ordering
respondent Commissioner of Internal Revenue to refund or issue a tax credit certificate
in favor of petitioner Deutsche Bank AG Manila Branch the amount of TWENTY TWO
MILLION FIVE HUNDRED SIXTY TWO THOUSAND EIGHT HUNDRED FIFTY ONE
PESOS AND SEVENTEEN CENTAVOS (PHP 22,562,851.17), Philippine currency,
representing the erroneously paid BPRT for 2002 and prior taxable years.

SO ORDERED.

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE
COURT OF TAX APPEALS, respondents.

T.A. Tejada & C.N. Lim for private respondent.

RESOLUTION

FELICIANO, J.:

For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending
30 June 1975, private respondent Procter and Gamble Philippine Manufacturing
Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole
stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to
P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the
thirty-five percent (35%) withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of

Internal Revenue a claim for refund or tax credit in the amount of P4,832,989.26
claiming, among other things, that pursuant to Section 24 (b) (1) of the National Internal
Revenue Code ("NITC"), 1 as amended by Presidential Decree No. 369, the applicable
rate of withholding tax on the dividends remitted was only fifteen percent (15%) (and not
thirty-five percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13

July 1977, filed a petition for review with public respondent Court of Tax Appeals
("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the CTA rendered a
decision ordering petitioner Commissioner to refund or grant the tax credit in the amount
of P4,832,989.00.

On appeal by the Commissioner, the Court through its Second Division reversed the
decision of the CTA and held that:

(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to
claim the refund or tax credit here involved;

(b) there is nothing in Section 902 or other provisions of the US Tax Code that
allows a credit against the US tax due from P&G-USA of taxes deemed to have
been paid in the Philippines equivalent to twenty percent (20%) which represents
the difference between the regular tax of thirty-five percent (35%) on corporations
and the tax of fifteen percent (15%) on dividends; and

(c) private respondent P&G-Phil. failed to meet certain conditions necessary in

order that "the dividends received by its non-resident parent company in the US
(P&G-USA) may be subject to the preferential tax rate of 15% instead of 35%."

These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will
deal with them seriatim in this Resolution resolving that Motion.

1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to
bring the present claim for refund or tax credit, which need to be examined. This
question was raised for the first time on appeal, i.e., in the proceedings before this Court
on the Petition for Review filed by the Commissioner of Internal Revenue. The question
was not raised by the Commissioner on the administrative level, and neither was it
raised by him before the CTA.

We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat
an otherwise valid claim for refund by raising this question of alleged incapacity for the
first time on appeal before this Court. This is clearly a matter of procedure. Petitioner
does not pretend that P&G-Phil., should it succeed in the claim for refund, is likely to run
away, as it were, with the refund instead of transmitting such refund or tax credit to its
parent and sole stockholder. It is commonplace that in the absence of explicit statutory
provisions to the contrary, the government must follow the same rules of procedure
which bind private parties. It is, for instance, clear that the government is held to
compliance with the provisions of Circular No. 1-88 of this Court in exactly the same
way that private litigants are held to such compliance, save only in respect of the matter
of filing fees from which the Republic of the Philippines is exempt by the Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any
other litigant, be allowed to raise for the first time on appeal questions which had not
been litigated either in the lower court or on the administrative level. For, if petitioner
had at the earliest possible opportunity, i.e., at the administrative level, demanded that
P&G-Phil. produce an express authorization from its parent corporation to bring the
claim for refund, then P&G-Phil. would have been able forthwith to secure and produce
such authorization before filing the action in the instant case. The action here was
commenced just before expiration of the two (2)-year prescriptive period.

2. The question of the capacity of P&G-Phil. to bring the claim for refund has
substantive dimensions as well which, as will be seen below, also ultimately relate to
fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the
Commissioner of Internal Revenue is essential for maintenance of a suit for recovery of
taxes allegedly erroneously or illegally assessed or collected:

Sec. 306. Recovery of tax erroneously or illegally collected. — No suit or

proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessive or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner of Internal Revenue; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest
or duress. In any case, no such suit or proceeding shall be begun after the
expiration of two years from the date of payment of the tax or penalty regardless
of any supervening cause that may arise after payment: . . . (Emphasis supplied)

Section 309 (3) of the NIRC, in turn, provides:

Sec. 309. Authority of Commissioner to Take Compromises and to Refund

Taxes.—The Commissioner may:

xxx xxx xxx

(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of

taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after the payment of the
tax or penalty. (As amended by P.D. No. 69) (Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-
Phil. a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is defined in
our NIRC as referring to "any person subject to tax imposed by the Title [on Tax on
Income]." 2 It thus becomes important to note that under Section 53 (c) of the NIRC, the
withholding agent who is "required to deduct and withhold any tax" is made " personally
liable for such tax" and indeed is indemnified against any claims and demands which
the stockholder might wish to make in questioning the amount of payments effected by
the withholding agent in accordance with the provisions of the NIRC. The withholding
agent, P&G-Phil., is directly and independently liable 3 for the correct amount of the tax
that should be withheld from the dividend remittances. The withholding agent is,
moreover, subject to and liable for deficiency assessments, surcharges and penalties
should the amount of the tax withheld be finally found to be less than the amount that
should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly
considered a "taxpayer." 4 The terms liable for tax" and "subject to tax" both connote
legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to
consider a person who is statutorily made "liable for tax" as not "subject to tax." By any
reasonable standard, such a person should be regarded as a party in interest, or as a
person having sufficient legal interest, to bring a suit for refund of taxes he believes
were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court

pointed out that a withholding agent is in fact the agent both of the government and of
the taxpayer, and that the withholding agent is not an ordinary government agent:

The law sets no condition for the personal liability of the withholding agent to
attach. The reason is to compel the withholding agent to withhold the tax under
all circumstances. In effect, the responsibility for the collection of the tax as well
as the payment thereof is concentrated upon the person over whom the
Government has jurisdiction. Thus, the withholding agent is constituted the agent
of both the Government and the taxpayer. With respect to the collection and/or
withholding of the tax, he is the Government's agent. In regard to the filing of the
necessary income tax return and the payment of the tax to the Government, he is
the agent of the taxpayer. The withholding agent, therefore, is no ordinary
government agent especially because under Section 53 (c) he is held personally
liable for the tax he is duty bound to withhold; whereas the Commissioner and his
deputies are not made liable by law. 6 (Emphasis supplied)

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect
to the filing of the necessary income tax return and with respect to actual payment of the tax to the government, such authority may
reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such claim. This implied
authority is especially warranted where, is in the instant case, the withholding agent is the wholly owned subsidiary of the parent-
stockholder and therefore, at all times, under the effective control of such parent-stockholder. In the circumstances of this case, it
seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.

We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed
confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax credit and to remit the proceeds of the refund., or to
apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual payment of the refund or issuance of a tax credit
certificate. What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is directly and personally
liable to the Government for the taxes and any deficiency assessments to be collected, the Government is not legally liable for a
refund simply because it did not demand a written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign
government should act honorably and fairly at all times, even vis-a-vis taxpayers.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the
meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such claim.

II

1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to P&G-USA of
the fifteen percent (15%) tax rate provided for in the following portion of Section 24 (b) (1) of the NIRC:

(b) Tax on foreign corporations.—

(1) Non-resident corporation. — A foreign corporation not engaged in trade and business in the Philippines, . . ., shall pay
a tax equal to 35% of the gross income receipt during its taxable year from all sources within the Philippines, as . . .
dividends . . . Provided, still further, that on dividends received from a domestic corporation liable to tax under this
Chapter, the tax shall be 15% of the dividends, which shall be collected and paid as provided in Section 53 (d) of this
Code, subject to the condition that the country in which the non-resident foreign corporation, is domiciled shall allow a
credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines
equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on
dividends as provided in this Section . . .

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a
Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation "shall
allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the
domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%)
dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable
against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a
minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular thirty-
five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the
dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred divided tax rate of fifteen percent
(15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20)
percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed
paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines.
2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue
Code ("Tax Code") are the following:

Sec. 901 — Taxes of foreign countries and possessions of United States.

(a) Allowance of credit. — If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter
shall, subject to the applicable limitation of section 904, be credited with the amounts provided in the applicable paragraph
of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960.
Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for
making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed
against the tax imposed by section 531 (relating to the tax on accumulated earnings), against the additional tax imposed
for the taxable year under section 1333 (relating to war loss recoveries) or under section 1351 (relating to recoveries of
foreign expropriation losses), or against the personal holding company tax imposed by section 541.

(b) Amount allowed. — Subject to the applicable limitation of section 904, the following amounts shall be allowed as the
credit under subsection (a):

(a) Citizens and domestic corporations. — In the case of a citizen of the United States and of a domestic
corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable
year to any foreign country or to any possession of the United States; and

xxx xxx xxx

Sec. 902. — Credit for corporate stockholders in foreign corporation.

(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of this subject, a domestic corporation
which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in
any taxable year shall —

xxx xxx xxx

(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in
subsection (c) (1) (b)] of a year for which such foreign corporation is a less developed country corporation, be
deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to
be paid by such foreign corporation to any foreign country or to any possession of the United States on or with
respect to such accumulated profits, which the amount of such dividends bears to the amount of such
accumulated profits.

xxx xxx xxx

(c) Applicable Rules

 (1) Accumulated profits defined. — For purposes of this section, the term "accumulated profits" means with
respect to any foreign corporation,

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

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in
excess of the income, war profits, and excess profits taxes imposed on or with respect to such profits
or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or
years such dividends were paid, treating dividends paid in the first 20 days of any year as having been paid
from the accumulated profits of the preceding year or years (unless to his satisfaction shows otherwise), and in
other respects treating dividends as having been paid from the most recently accumulated gains, profits, or
earning. . . . (Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code 7

shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the
amount of the dividend tax actually paid (i.e., withheld) from the dividend
remittances to P&G-USA;

b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed

paid' tax credit 8 for a proportionate part of the corporate income tax actually paid to the Philippines by
P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income tax although that
tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely
reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues earned
in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words, US tax law treats the
Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of
carrying on business operations in the Philippines through the medium of P&G-Phil. and here earning profits. What is,
under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate income taxes actually
paid here by P&G-Phil., which are very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for
the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available
or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed because of the US
congressional desire to avoid or reduce double taxation of the same income stream. 9
In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential
fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is necessary:

a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under
Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;

b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and

c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount
of the dividend tax waived by the Philippine Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the
following manner:

P100.00 — Pretax net corporate income earned by P&G-Phil.

x 35% — Regular Philippine corporate income tax rate
———
P35.00 — Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.

P100.00
-35.00
———
P65.00 — Available for remittance as dividends to P&G-USA

P65.00 — Dividends remittable to P&G-USA

x 35% — Regular Philippine dividend tax rate under Section 24
——— (b) (1), NIRC
P22.75 — Regular dividend tax

P65.00 — Dividends remittable to P&G-USA

x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC
———
P9.75 — Reduced dividend tax

P22.75 — Regular dividend tax under Section 24 (b) (1), NIRC

-9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC
———
P13.00 — Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also the
minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA is to qualify for the reduced or
preferential dividend tax rate under Section 24 (b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code,
may be computed arithmetically as follows:

P65.00 — Dividends remittable to P&G-USA

- 9.75 — Dividend tax withheld at the reduced (15%) rate
———
P55.25 — Dividends actually remitted to P&G-USA

P35.00 — Philippine corporate income tax paid by P&G-Phil.

to the BIR

Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
——————— = ——— x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent
P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine corporate income tax "deemed
paid" by the parent but actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902,
US Tax Code, specifically and clearly complies with the requirements of Section 24 (b) (1), NIRC.

3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the
reading of the BIR of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901
and 902 as shown by administrative rulings issued by the BIR.

The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal
Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of which stated:

However, after a restudy of the decision in the American Chicle Company case and the provisions of Section
901 and 902 of the U.S. Internal Revenue Code, we find merit in your contention that our computation of the
credit which the U.S. tax law allows in such cases is erroneous as the amount of tax "deemed paid" to the
Philippine government for purposes of credit against the U.S. tax by the recipient of dividends includes a portion
of the amount of income tax paid by the corporation declaring the dividend in addition to the tax withheld from
the dividend remitted. In other words, the U.S. government will allow a credit to the U.S. corporation or recipient
 of the dividend, in addition to the amount of tax actually withheld, a portion of the income tax paid by the
corporation declaring the dividend. Thus, if a Philippine corporation wholly owned by a U.S. corporation has a
net income of P100,000, it will pay P25,000 Philippine income tax thereon in accordance with Section 24(a) of
the Tax Code. The net income, after income tax, which is P75,000, will then be declared as dividend to the U.S.
corporation at 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned sections of the U.S.
Internal Revenue Code, U.S. corporation receiving the dividend can utilize as credit against its U.S. tax payable
on said dividends the amount of P30,000 composed of:

(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:

P75,000 x P25,000 = P18,750

———
100,000 **

(2) The amount of 15% of

P75,000 withheld = 11,250
———
P30,000

The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the
U.S. corporation from a Philippine subsidiary is clearly more than 20% requirement of Presidential Decree No.
369 as 20% of P75,000.00 the dividends to be remitted under the above example, amounts to P15,000.00 only.

In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense
that the dividends to be remitted by your client to its parent company shall be subject to the withholding tax at
the rate of 15% only.

This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal
Tax Code, which are the bases of the ruling, are not revoked, amended and modified, the effect of which will
reduce the percentage of tax deemed paid and creditable against the U.S. tax on dividends remitted by a
foreign corporation to a U.S. corporation. (Emphasis supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR
Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and Associates. In other words, the 1976 Ruling of Hon.
Efren I. Plana was reiterated by the BIR even as the case at bar was pending before the CTA and this Court.

4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US
Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and which Philippine tax law allows to
Philippine corporations which have operations abroad (say, in the United States) and which, therefore, pay income taxes
to the US government.

Section 30 (c) (3) and (8), NIRC, provides:

(d) Sec. 30. Deductions from Gross Income.—In computing net income, there shall be allowed as deductions —
...
 (c) Taxes. — . . .

xxx xxx xxx

(3) Credits against tax for taxes of foreign countries. — If the taxpayer signifies in his return his desire to have
the benefits of this paragraphs, the tax imposed by this Title shall be credited with . . .

(a) Citizen and Domestic Corporation. — In the case of a citizen of the Philippines and of domestic corporation,
the amount of net income, war profits or excess profits, taxes paid or accrued during the taxable year to any
foreign country. (Emphasis supplied)

Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid
by it to the US government—e.g., for taxes collected by the US government on dividend remittances to the Philippine
corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:

(8) Taxes of foreign subsidiary. — For the purposes of this subsection a domestic corporation which owns a
majority of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be
deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such
foreign corporation to any foreign country, upon or with respect to the accumulated profits of such foreign
corporation from which such dividends were paid, which the amount of such dividends bears to the amount of
such accumulated profits: Provided, That the amount of tax deemed to have been paid under this subsection
shall in no case exceed the same proportion of the tax against which credit is taken which the amount of such
dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are
included. The term "accumulated profits" when used in this subsection reference to a foreign corporation,
means the amount of its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes
imposed upon or with respect to such profits or income; and the Commissioner of Internal Revenue shall have
full power to determine from the accumulated profits of what year or years such dividends were paid; treating
dividends paid in the first sixty days of any year as having been paid from the accumulated profits of the
preceding year or years (unless to his satisfaction shown otherwise), and in other respects treating dividends as
having been paid from the most recently accumulated gains, profits, or earnings. In the case of a foreign
corporation, the income, war-profits, and excess-profits taxes of which are determined on the basis of an
accounting period of less than one year, the word "year" as used in this subsection shall be construed to mean
such accounting period. (Emphasis supplied)

Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for
taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US subsidiary of a Philippine-parent corporation.
The Philippine parent or corporate stockholder is "deemed" under our NIRC to have paid a proportionate part of the US
corporate income tax paid by its US subsidiary, although such US tax was actually paid by the subsidiary and not by the
Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same
"deemed paid" tax credit that Philippine law allows to a Philippine corporation with a wholly- or majority-owned subsidiary in (for
instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than
is the "deemed paid" tax credit granted in Section 30 (c) (8), NIRC.

III

1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five
percent (35%) rate rather than the reduced rate of fifteen percent (15%), held that P&G-Phil. had failed to prove that its parent,
P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1),
NIRC.

We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative
implementation arising after the legal question has been answered. The basic legal issue is of course, this: which is the applicable
dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The
question of whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount,
relates to the administrative implementation of the applicable reduced tax rate.

In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been
granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent (15%). As noted several
times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue
regulation issued by the Secretary of Finance requiring the actual grant of the "deemed paid" tax credit by the US Internal Revenue
Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does
not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is
legally applicable.

In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative
circularity. The Second Division in effect held that the reduced dividend tax rate is not applicable until the US tax credit for "deemed

paid" taxes is actually given in the required minimum amount by the US Internal Revenue Service to P&G-USA. But, the US
"deemed paid" tax credit cannot be given by the US tax authorities unless dividends have actually been remitted to the US, which
means that the Philippine dividend tax, at the rate here applicable, was actually imposed and collected. 11
It is this practical
or operating circularity that is in fact avoided by our BIR when it issues rulings that the
tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu 12 Hongkong, 13
Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for
applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the
Philippine subsidiary begins to withhold at the reduced dividend tax rate.

A requirement relating to administrative implementation is not properly imposed as a

condition for the applicability, as a matter of law, of a particular tax rate. Upon the other
hand, upon the determination or recognition of the applicability of the reduced tax rate,
there is nothing to prevent the BIR from issuing implementing regulations that would
require P&G Phil., or any Philippine corporation similarly situated, to certify to the BIR
the amount of the "deemed paid" tax credit actually subsequently granted by the US tax
authorities to P&G-USA or a US parent corporation for the taxable year involved. Since
the US tax laws can and do change, such implementing regulations could also provide
that failure of P&G-Phil. to submit such certification within a certain period of time, would
result in the imposition of a deficiency assessment for the twenty (20) percentage points
differential. The task of this Court is to settle which tax rate is applicable, considering
the state of US law at a given time. We should leave details relating to administrative
implementation where they properly belong — with the BIR.

2. An interpretation of a tax statute that produces a revenue flow for the government is
not, for that reason alone, necessarily the correct reading of the statute. There are many
tax statutes or provisions which are designed, not to trigger off an instant surge of
revenues, but rather to achieve longer-term and broader-gauge fiscal and economic
objectives. The task of our Court is to give effect to the legislative design and objectives
as they are written into the statute even if, as in the case at bar, some revenues have to
be foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by

reducing the thirty-five percent (35%) dividend rate to fifteen percent (15%) are set out
in the preambular clauses of P.D. No. 369 which amended Section 24 (b) (1), NIRC,
into its present form:

WHEREAS, it is imperative to adopt measures responsive to the requirements of

a developing economy foremost of which is the financing of economic
development programs;

WHEREAS, nonresident foreign corporations with investments in the Philippines

are taxed on their earnings from dividends at the rate of 35%;

WHEREAS, in order to encourage more capital investment for large projects an

appropriate tax need be imposed on dividends received by non-resident foreign
corporations in the same manner as the tax imposed on interest on foreign loans;

xxx xxx xxx

(Emphasis supplied)

More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity
investment in the Philippines by reducing the tax cost of earning profits here and
thereby increasing the net dividends remittable to the investor. The foreign investor,
however, would not benefit from the reduction of the Philippine dividend tax rate unless
its home country gives it some relief from double taxation (i.e., second-tier taxation) (the
home country would simply have more "post-R.P. tax" income to subject to its own
taxing power) by allowing the investor additional tax credits which would be applicable
against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC,
requires the home or domiciliary country to give the investor corporation a "deemed
paid" tax credit at least equal in amount to the twenty (20) percentage points of dividend
tax foregone by the Philippines, in the assumption that a positive incentive effect would
thereby be felt by the investor.

The net effect upon the foreign investor may be shown arithmetically in the following
manner:

P65.00 — Dividends remittable to P&G-USA (please

see page 392 above
- 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil.
———
P55.25 — Dividends actually remitted to P&G-USA

P55.25
x 46% — Maximum US corporate income tax rate
———
P25.415—US corporate tax payable by P&G-USA
without tax credits

P25.415
- 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)
———
P15.66 — US corporate income tax payable after Section 901
——— tax credit.

P55.25
- 15.66
———
P39.59 — Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.

P25.415
- 29.75 — "Deemed paid" tax credit under Section 902 US
——— Tax Code (please see page 18 above)

- 0 - — US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.

P55.25 — Amount received by P&G-USA net of RP and US

====== taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code,
could offset the US corporate income tax payable on the dividends remitted by P&G-
Phil. The result, in fine, could be that P&G-USA would after US tax credits, still wind up
with P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine
taxes. In the calculation of the Philippine Government, this should encourage additional
investment or re-investment in the Philippines by P&G-USA.

3. It remains only to note that under the Philippines-United States Convention "With
Respect to Taxes on Income," 15 the Philippines, by a treaty commitment, reduced the
regular rate of dividend tax to a maximum of twenty percent (20%) of the gross amount
of dividends paid to US parent corporations:

Art 11. — Dividends

xxx xxx xxx

(2) The rate of tax imposed by one of the Contracting States on dividends
derived from sources within that Contracting State by a resident of the other
Contracting State shall not exceed —

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of the gross amount of the
dividend if during the part of the paying corporation's taxable year which
precedes the date of payment of the dividend and during the whole of its prior
taxable year (if any), at least 10 percent of the outstanding shares of the voting
stock of the paying corporation was owned by the recipient corporation.

xxx xxx xxx

(Emphasis supplied)

The Tax Convention, at the same time, established a treaty obligation on the part of the
United States that it "shall allow" to a US parent corporation receiving dividends from its
Philippine subsidiary "a [tax] credit for the appropriate amount of taxes paid or accrued
to the Philippines by the Philippine [subsidiary] —. 16 This is, of course, precisely the
"deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above.
Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce
the regular dividend tax rate of twenty percent (20%) is a maximum rate, there is still a
differential or additional reduction of five (5) percentage points which compliance of US
law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in
respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit
which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's
Motion for Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the and
Division of the Court promulgated on 15 April 1988, and in lieu thereof, to REINSTATE
and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31
January 1984 and to DENY the Petition for Review for lack of merit. No pronouncement
as to costs.

Narvasa, Gutierrez, Jr., Griño-Aquino, Medialdea and Romero, JJ., concur.

Fernan, C.J., is on leave.

THIRD DIVISION

G.R. No. 175651, September 14, 2016

PILMICO-MAURI FOODS CORP., Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.

RESOLUTION

REYES, J.:

Before the Court is a petition for review on certiorari1 under Rule 45 of the Rules of
Court pursuant to Republic Act (R.A.) No. 1125,2 Section 19,3 as amended by R.A. No.
9282,4 Section 12.5 The petition filed by Pilmico-Mauri Foods Corp. (PMFC) against the
Commissioner of Internal Revenue (CIR) assails the Decision6 and Resolution7 of the
Court of Appeals (CTA) en banc, dated August 29, 2006 and December 4, 2006,
respectively, in C.T.A. EB No. 97.

Antecedents

The CTA aptly summed up the facts of the case as follows:ChanRoblesVirtualawlibrary

[PMFC] is a corporation, organized and existing under the laws of the Philippines, with
principal place of business at Aboitiz Corporate Center, Banilad, Cebu City.

The books of accounts of [PMFC] pertaining to 1996 were examined by the [CIR] thru
Revenue Officer Eugenio D. Maestrado of Revenue District No. 81 (Cebu City North
District) for deficiency income, value-added [tax] (VAT) and withholding tax liabilities.

As a result of the investigation, the following assessment notices were issued against
[PMFC]:

chanRoblesvirtualLawlibrary

(a) Assessment Notice No. 81-WT-13-96-98-11-126, dated November 26, 1998,

 demanding payment for deficiency withholding taxes for the year 1996 in the sum
of P384,925.05 (inclusive of interest and other penalties);

(b) Assessment Notice No. 81-VAT-13-96-98-11-127, dated November 26, 1998,

demanding payment of deficiency value-added tax in the sum of P5,017,778.01
(inclusive of interest and other penalties); [and]

(c) Assessment Notice No. 81-IT-13-96[-]98-11-128, dated November 26, 1998,

demanding payment of. deficiency income tax for the year 1996 in the sum of
P4,359,046.96 (inclusive of interest and other penalties).

The foregoing Assessment Notices were all received by [PMFC] on December 1, 1998.
On December 29, 1998, [PMFC] filed a protest letter against the aforementioned
deficiency tax assessments through the Regional Director, Revenue Region No. 13,
Cebu City.

In a final decision of the [CIR] on the disputed assessments dated July 3, 2000, the
deficiency tax liabilities of [PMFC] were reduced from P9,761,750.02 to P3,020,259.30,
broken down as follows:

chanRoblesvirtualLawlibrarya) Deficiency withholding tax from P384,925.05 to

P197,780.67;
b) Deficiency value-added tax from P5,017,778.01 to P1,642,145.79; and
c) Deficiency Income Tax from P4,359,046.96 to P1,180,332.84.

xxxx
On the basis of the foregoing facts[, PMFC] filed its Petition for Review on August 9,
2000. In the "Joint Stipulation of Facts" filed on March 7, 2001, the parties have agreed
that the following are the issues to be resolved:ChanRoblesVirtualawlibrary

I. Whether or not [PMFC] is liable for the payment of deficiency income, value-
added, expanded withholding, final withholding and withholding tax (on
compensation).

II. On the P1,180,382.84 deficiency income tax

A. Whether or not the P5,895,694.66 purchases of raw materials are
unsupported[;]

B. Whether or not the cancelled invoices and expenses for taxes, repairs and
freight are unsupported[;]

C. Whether or not commission, storage and trucking charges claimed are

deductible[; and]
 D. Whether or not the alleged deficiency income tax for the year 1996 was
correctly computed.

xxxx

V. Whether or not [CIR's] decision on the 1996 internal revenue tax liabilities of
[PMFC] is contrary to law and the facts.
After trial on the merits, the [CTA] in Division rendered the assailed Decision affirming
the assessments but in the reduced amount of P2,804,920.36 (inclusive of surcharge
and deficiency interest) representing [PMFC's] Income, VAT and Withholding Tax
deficiencies for the taxable year 1996 plus 20% delinquency interest per annum until
fully paid. The [CTA] in Division ruled as follows:ChanRoblesVirtualawlibrary
"However, [PMFC's] contention that the NIRC of 1977 did not impose substantiation
requirements on deductions from gross income is bereft of merit. Section 238 of the
1977 Tax Code [now Section 237 of the National Internal Revenue Code of 1997]
provides:ChanRoblesVirtualawlibrary
SEC. 238. Issuance of receipts or sales or commercial invoices. - All persons,
subject to an internal revenue tax shall for each sale or transfer of merchandise or for
services rendered valued at P25.00 or more, issue receipts or sales or commercial
invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit
cost and description of merchandise or nature of service: Provided, That in the case of
sales, receipts or transfers in the amount of P100.00 or more, or, regardless of amount,
where the sale or transfer is made by persons subject to value-added tax to other
persons, also subject to value-added tax; or, where the receipt is issued to cover
payment made as rentals, commissions, compensations or fees, receipts or invoices
shall be issued which shall show the name, business style, if any, and address of the
purchaser, customer, or client. The original of each receipt or invoice shall be
issued to the purchaser, customer or client at the time the transaction is effected,
who, if engaged in business or in the exercise of profession, shall keep and
preserve the same in his place of business for a period of three (3) years from the
close of the taxable year in which such invoice or receipt was issued, while the
duplicate shall be kept and preserved by the issuer, also in his place of business for a
like period. x x x
From the foregoing provision of law, a person who is subject to an internal revenue tax
shall issue receipts, sales or commercial invoices, prepared at least in duplicate. The
provision likewise imposed a responsibility upon the purchaser to keep and preserve the
original copy of the invoice or receipt for a period of three years from the close of the
taxable year in which such invoice or receipt was issued. The rationale behind the latter
requirement is the duty of the taxpayer to keep adequate records of each and every
transaction entered into in the conduct of its business. So that when their books of
accounts are subjected to a tax audit examination, all entries therein, could be shown as
adequately supported and proven as legitimate business transactions. Hence, [PMFC's]
claim that the NIRC of 1977 did not require substantiation requirements is erroneous.

In fact, in its effort to prove the above-mentioned purchases of raw materials, [PMFC]
presented the following sales invoices:

chanRoblesvirtualLawlibrary
Exhibit Invoice
Date Gross Amount 10% VAT Net Amount
Number No.

B-3 2072 04/18/96 P2,312,670.00 P210,242.73 P2,102,427.27

B-7,

B-11 2026 Undated 2,762,099.10 251,099.92 2,510,999.18

P5,074,769.10 P461,342.65 P4,613,426.45

The mere fact that [PMFC] submitted the foregoing sales invoices belies [its] claim that
the NIRC of 1977 did not require that deductions must be substantiated by adequate
records.

From the total purchases of P5,893,694.64 which have been disallowed, it seems that a
portion thereof amounting to P1,280,268.19 (729,663.64 + 550,604.55) has no
supporting sales invoices because of [PMFC's] failure to present said invoices.

A scrutiny of the invoices supporting the remaining balance of P4,613,426.45

(P5,893,694.64 less P1,280,268.19) revealed the following:

chanRoblesvirtualLawlibrary

a) In Sales Invoice No. 2072 marked as Exhibit B-3, the name Pilmico Foods
Corporation was erased and on top of it the name [PMFC] was inserted but with a
counter signature therein;

b) For undated Sales Invoice No. 2026, [PMFC] presented two exhibits marked as
Exhibits B-7 and B-11. Exhibit B-11 is the original sales invoice whereas Exhibit B-7
is a photocopy thereof. Both exhibits contained the word Mauri which was inserted
on top and between the words Pilmico and Foods. The only difference is that in the
original copy (Exhibit B-11), there was a counter signature although the ink used
was different from that used in the rest of the writings in the said invoice; while in
the photocopied invoice (Exhibit B-7), no such counter signature appeared. [PMFC]
did not explain why the said countersignature did not appear in the photocopied
invoice considering it was just a mere reproduction of the original copy.

The sales invoices contain alterations particularly in the name of the purchaser giving
rise to serious doubts regarding their authenticity and if they were really issued to
[PMFC]. Exhibit B-11 does not even have any date indicated therein, which is a clear
violation of Section 238 of the NIRC of 1977 which required that the official receipts
must show the date of the transaction.
Furthermore, [PMFC] should have presented documentary evidence establishing that
Pilmico Foods Corporation did not claim the subject purchases as deduction from its
gross income. After all, the records revealed that both [PMFC] and its parent company,
Pilmico Foods Corporation, have the same AVP Comptroller in the person of Mr.
Eugenio Gozon, who is in-charge of the financial records of both entities x x x.

Similarly, the official receipts presented by [PMFC] x x x, cannot be considered as valid

proof of [PMFC's] claimed deduction for raw materials purchases. The said receipts did
not conform to the requirements provided for under Section 238 of the NIRC of 1977, as
amended. First the official receipts were not in the name of [PMFC] but in the name of
Golden Restaurant. And second, these receipts were issued by PFC and not the
alleged seller, JTE.

Likewise, [PMFC's] allegations regarding the offsetting of accounts between [PMFC],

PFC and JTE is untenable. The following circumstances contradict [PMFC's]
proposition: 1) the Credit Agreement itself does not provide for the offsetting
arrangement; 2) [PMFC] was not even a party to the credit agreement; and 3) the
official receipts in question pertained to the year 1996 whereas the Credit Agreement
(Exhibit M) and the Real Estate Mortgage Agreement (Exhibit N) submitted by [PMFC]
to prove the fact of the offsetting of accounts, were both executed only in 1997.

Besides, in order to support its claim, [PMFC] should have presented the following vital
documents, namely, 1) Written Offsetting Agreement; 2) proof of payment by [PMFC] to
Pilmico Foods Corporation; and 3) Financial Statements for the year 1996 of Pilmico
Foods Corporation to establish the fact that Pilmico Foods Corporation did not deduct
the amount of raw materials being claimed by [PMFC].

Considering that the official receipts and sales invoices presented by [PMFC] failed to
comply with the requirements of Section 238 of the NIRC of 1977, the disallowance by
the [CIR] of the claimed deduction for raw materials is proper.
[PMFC] filed a Motion for Partial Consideration on January 21, 2005 x x x but x x x
[PMFC's] Motion for Reconsideration was denied in a Resolution dated May 19, 2005
for lack of merit, x x x.8 (Citation omitted, italics ours and emphasis in the original)
Unperturbed, PMFC then filed a petition for review before the CTA en banc, which
adopted the CTA First Division's ruling and ratiocinations. Additionally, the CTA en banc
declared that:ChanRoblesVirtualawlibrary
The language of [Section 238] of the 1977 NIRC, as amended, is clear. It requires that
for each sale valued at P100.00 or more, the name, business style and address of the
purchaser, customer or client shall be indicated and that the purchaser is required to
keep and preserve the same in his place of business. The purpose of the law in
requiring the preservation by the purchaser of the official receipts or sales invoices for a
period of three years is two-fold: 1) to enable said purchaser to substantiate his
claimed deductions from the gross income, and 2) to enable the Bureau of Internal
Revenue to verify the accuracy of the gross income of the seller from external sources
such as the customers of said seller. Hence, [PMFC's] argument that there was no
substantiation requirement under the 1977 NIRC is without basis.

Moreover, the Supreme Court had ruled that in claiming deductions for business
expenses [,] it is not enough to prove the business test but a claimant must substantially
prove by evidence or records the deductions claimed under the law,
thus:ChanRoblesVirtualawlibrary
The principle is recognized that when a taxpayer claims a deduction, he must point to
some specific provision of the statute in which that deduction is authorized and must be
able to prove that he is entitled to the deduction which the law allows. As previously
adverted to, the law allowing expenses as deduction from gross income for purposes of
the income tax is Section 30 (a) (l) of the National Internal Revenue which allows a
deduction of "all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business.["] An item of expenditure, in order to
be deductible under this section of the statute must fall squarely within its language.

We come, then, to the statutory test of deductibility where it is axiomatic that to be

deductible as a business expense, three conditions are imposed, namely: (1) the
expense must be ordinary and necessary; (2) it must be paid or incurred within the
taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In
addition, not only must the taxpayer meet the business test, he must
substantially prove by evidence or records the deductions claimed under the law,
otherwise, the same will be disallowed. The mere allegation of the taxpayer that an
item of expense is ordinary and necessary does not justify its deduction. x x x
And in proving claimed deductions from gross income, the Supreme Court held that
invoices and official receipts are the best evidence to substantiate deductible business
expenses. x x x

xxxx

The irregularities found on the official receipts and sales invoices submitted in evidence
by [PMFC], i.e. not having been issued in the name of [PMFC] as the purchaser and the
fact that the same were not issued by the alleged seller himself directly to the
purchaser, rendered the same of no probative value.

Parenthetically, the "Cohan Rule" which according to [PMFC] was adopted by the
Supreme Court in the case of Visayan Cebu Terminal v. Collector, x x x, is not
applicable because in both of these cases[,] there were natural calamities that
prevented the taxpayers therein to fully substantiate their claimed deductions. In the
Visayan Cebu Terminal case, there was a fire that destroyed some of the supporting
documents for the claimed expenses. There is no such circumstance in [PMFC's] case,
hence, the ruling therein is not applicable. It is noteworthy that notwithstanding the
destruction of some of the supporting documents in the aforementioned Visayan Cebu
Terminal case, the Supreme Court[,] in denying the appeal[,] issued the following caveat
noting the violation of the provision of the Tax Code committed by [PMFC]
therein:ChanRoblesVirtualawlibrary
"It may not be amiss to note that the explanation to the effect that the supporting paper
of some of those expenses had been destroyed when the house of the treasurer was
burned, can hardly be regarded as satisfactory, for appellant's records are
supposed to be kept in its offices, not in the residence of one of its officers." x x x
From the above-quoted portion of the Supreme Court's Decision, it is clear that
compliance with the mandatory record-keeping requirements of the National Internal
Revenue Code should not be taken lightly. Raw materials are indeed deductible
provided they are duly supported by official receipts or sales invoices prepared and
issued in accordance with the invoicing requirements of the National Internal Revenue
Code. x x x [PMFC] failed to show compliance with the requirements of Section 238 of
the 1977 NIRC as shown by the fact that the sales invoices presented by [it] were not in
its name but in the name of Pilmico Foods Corporation.

xxxx

In the Joint Stipulation of Facts filed on March 7, 2001, the parties have agreed that with
respect to the deficiency income tax assessment, the following are the issues to be
resolved:
Whether or not the P5,895,694.66 purchases of raw materials are unsupported;
xxxx

Clearly, the issue of proper substantiation of the deduction from gross income pertaining
to the purchases of raw materials was properly raised even before [PMFC] began
presenting its evidence. [PMFC] was aware that the [CIR] issued the assessment from
the standpoint of lack of supporting documents for the claimed deduction and the fact
that the assessments were not based on the deductibility of the cost of raw materials.
There is no difference in the basis of the assessment and the issue presented to the
[CTA] in Division for resolution since both pertain to the issue of proper supporting
documents for ordinary and necessary business expenses.9 (Citation omitted, italics
ours and emphasis in the original)
PMFC moved for reconsideration. Pending its resolution, the CIR issued Revenue
Regulation (RR) No. 15-2006,10 the abatement program of which was availed by PMFC
on October 27, 2006. Out of the total amount of P2,804,920.36 assessed as income,
value-added tax (VAT) and withholding tax deficiencies, plus surcharges and deficiency
interests, PMFC paid the CIR P1,101,539.63 as basic deficiency tax. The PMFC, thus,
awaits the CIR's approval of the abatement, which can render moot the resolution of the
instant petition.11chanrobleslaw

Meanwhile, the CTA en banc denied the motion for reconsideration12 of PMFC, in its
Resolution13 dated December 4, 2006.

Issues

In the instant petition, what is essentially being assailed is the CTA en banc's
concurrence with the CTA First Division's ruling, which affirmed but reduced the CIR's
income deficiency tax assessment against PMFC. More specifically, the following errors
are ascribed to the CTA:ChanRoblesVirtualawlibrary
I

The Honorable CTA First Division deprived PMFC of due process of law and the CTA
assumed an executive function when it substituted a legal basis other than that stated in
the assessment and pleading of the CIR, contrary to law.

II

The decision of the Honorable CTA First Division must conform to the pleadings and the
theory of the action under which the case was tried. A judgment going outside the
issues and purporting to adjudicate something on which the parties were not heard is
invalid. Since the legal basis cited by the CTA supporting the validity of the assessment
was never raised by the CIR, PMFC was deprived of its constitutional right to be
apprised of the legal basis of the assessment.

III

The nature of evidence required to prove an ordinary expense like raw materials is
governed by Section 2914 of the 1977 National Internal Revenue Code (NIRC) and not
by Section 238 as found by the CTA.15chanroblesvirtuallawlibrary
In support of the instant petition, PMFC claims that the deficiency income tax
assessment issued against it was anchored on Sect on 34(A)(l)(b) 16 of the 1997 NIRC.
In disallowing the deduction of the purchase of raw materials from PMFC's gross
income, the CIR never m any reference to Section 238 of the 1977 NIRC relative to the
mandatory requirement of keeping records of official receipts, upon which the CTA had
misplaced reliance. Had substantiation requirements under Section 23 the 1977 NIRC
been made an issue during the trial, PMFC could have presented official receipts or
invoices, or could have compelled its suppliers to issue the same. 17chanrobleslaw

PMFC further argues that in determining the deductibility of the purchase of raw
materials from gross income, Section 29 of the 1977 NIRC is the applicable provision.
According to the said section, for the deduction to be allowed, the expenses must be (a)
both ordinary and necessary; (b) incurred in carrying on a trade or business; and (c)
paid or incurred within the taxable year. PMFC, thus, claims that prior to the
promulgation of the 1997 NIRC, the law does not require the production of official
receipts to prove an expense.18chanrobleslaw

In its Comment,19 the Office of the Solicitor General (OSG) counters that the arguments
advanced by PMFC are mere reiterations of those raised in the proceedings below.
Further, PMFC was fully apprised of the assailed tax assessments and had all the
opportunities to prove its claims.20chanrobleslaw

The OSG also avers that in the Joint Stipulation of Facts filed before the CTA First
Division on March 7, 2001, it was stated that one of the issues for resolution was
"whether or not the Php5,895,694.66 purchases of raw materials are unsupported."
Hence, PMFC was aware that the CIR issued the assessments due to lack of
supporting documents for the deductions claimed. Essentially then, even in the
proceedings before the CIR, the primary issue has always been the lack or inadequacy
of supporting documents for ordinary and necessary business
expenses.21chanrobleslaw

The OSG likewise points out that PMFC failed to satisfactorily discharge the burden of
proving the propriety of the tax deductions claimed. Further, there were discrepancies in
the names of the sellers and purchasers i indicated in the receipts casting doubts on
their authenticity.22chanrobleslaw

Ruling of the Court

The Court affirms but modifies the herein assailed decision and resolution.

Preliminary matters

On December 19, 2006, PMFC filed before the Court a motion for extension of time to
file a petition for review.23 In the said motion, PMFC informed the Court that it had
availed of the CIR's tax abatement program, the details of which were provided for in
RR No. 15-2006. PMFC paid the CIR the amount of P1,101,539.63 as basic deficiency
tax. PMFC manifested that if the abatement application would be approved by the CIR,
the instant petition filed before the Court may be rendered superfluous.

According to Section 4 of RR No. 15-2006, after the taxpayer's payment of the

assessed basic deficiency tax, the docket of the case shall forwarded to the CIR, thru
the Deputy Commissioner for Operations Group, for issuance of a termination letter.
However, as of this Resolution's writing, none of the parties have presented the said
termination letter. Hence, the Court cannot outrightly dismiss the instant petition on the
ground of mootness.

On the procedural issues raised by PMFC

The first and second issues presented by PMFC are procedural in nature. They both
pertain to the alleged omission of due process of law by the CTA since in its rulings, it
invoked Section 238 of the 1977 NIRC, while in the proceedings below, the CIR's tax
deficiency assessments issued against PMFC were instead anchored on Section 34 of
the 1997 NIRC.

Due process was not violated.

In CIR v. Puregold Duty Free, Inc.,24 the Court is emphatic

that:ChanRoblesVirtualawlibrary
It is well settled that matters that were neither alleged in the pleadings nor raised during
the proceedings below cannot be ventilated for the first time on appeal and are barred
by estoppel. To allow the contrary would constitute a violation of the other party's right
to due process, and is contrary to the principle of fair play. x x x
x x x Points of law, theories, issues, and arguments not brought to the attention of the
trial court ought not to be considered by a reviewing court, as these cannot be raised for
the first time on appeal. To consider the alleged facts and arguments belatedly raised
would amount to trampling on the basic principles of fair play, justice, and due
process.25cralawred (Citations omitted)
In the case at bar, the CIR issued assessment notices against PMFC for deficiency
income, VAT and withholding tax for the year 1996. PMFC assailed the assessments
before the Bureau of Internal Revenue and late before the CTA.

In the Joint Stipulation of Facts, dated March 7, 2001, filed before CTA First Division,
the CIR and PMFC both agreed that among the issues for resolution was "whether or
not the P5,895,694.66 purchases of raw materials are unsupported."26 Estoppel, thus,
operates against PMFC anent its argument that the issue of lack or inadequacy of
documents to justify the costs of purchase of raw materials as deductions from the
gross income had not been presented in the proceedings below, hence, barred for
being belatedly raised only on appeal.

Further, in issuing the assessments, the CIR had stated the material facts and the law
upon which they were based. In the petition for review filed by PMFC before the CTA, it
was the former's burden to properly invoke the applicable legal provisions in pursuit of
its goal to reduce its tax liabilities. The CTA, on the other hand, is not bound to rule
solely on the basis of the laws cited by the CIR. Were it otherwise, the tax court's
appellate power of review shall be rendered useless. An absurd situation would arise
leaving the CTA with only two options, to wit: (a) affirming the CIR's legal findings; or (b)
altogether absolving the taxpayer from liability if the CIR relied on misplaced legal
provisions. The foregoing is not what the law intends.

To reiterate, PMFC was at the outset aware that the lack or inadequacy of supporting
documents to justify the deductions claimed from the gross income was among the
issues raised for resolution before the CTA. With PMFC's acquiescence to the Joint
Stipulation of Facts filed before the CTA and thenceforth, the former's participation in
the proceedings with all opportunities it was afforded to ventilate its claims, the alleged
deprivation of due process is bereft of basis.

On the applicability of Section 29 of the 1977 NIRC

The third issue raised by PMFC is substantive in nature. At its core is the alleged
application of Section 29 of the 1977 NIRC as regards the deductibility from the gross
income of the cost of raw materials purchased by PMFC.

It bears noting that while the CIR issued the assessments on the basis of Section 34 of
the 1997 NIRC, the CTA and PMFC are in agreement that the 1977 NIRC finds
application.

However, while the CTA ruled on the basis of Section 238 of the 1977 NIRC, PMFC
now insists that Section 29 of the same code should be applied instead. Citing Atlas
Consolidated Mining and Development Corporation v. CIR,27 PMFC argues that Section
29 imposes less stringent requirements and the presentation of official receipts as
evidence of the claimed deductions dispensable. PMFC further posits that the
mandatory nature of the submission of official receipts as proof is a mere innovation in
the 19 NIRC, which cannot be applied retroactively. 28chanrobleslaw

PMFC's argument fails.

The Court finds that the alleged differences between the requirements of Section 29 of
the 1977 NIRC invoked by PMFC, on one hand, and Section 238 relied upon by the
CTA, on the other, are more imagined than real.

In CIR v. Pilipinas Shell Petroleum Corporation,29 the Count enunciated

that:ChanRoblesVirtualawlibrary
It is a rule in statutory construction that every part of the statute must be interpreted with
reference to the context, i.e., that every part of the statute must be considered together
with the other parts, and kept subservient to the general intent of the whole enactment.
The law must not be read in truncated parts, its provisions must be read in relation to
the whole law. The particular words, clauses and phrases should not be studied as
detached and isolated expression, but the whole and every part of the statute must be
considered in fixing the meaning of any of its parts and in order to produce a
harmonious whole.30 (Citations omitted)
The law, thus, intends for Sections 29 and 238 of the 1977 NIRC to be read together,
and not for one provision to be accorded preference over the other.

It is undisputed that among the evidence adduced by PMFC on it behalf are the official
receipts of alleged purchases of raw materials. Thus, the CTA cannot be faulted for
making references to the same, and for applying Section 238 of the 1977 NIRC in
rendering its judgment. Required or not, the official receipts were submitted by PMFC
as evidence. Inevitably, the said receipts were subjected to scrutiny, and the CTA
exhaustively explained why it had found them wanting.

PMFC cites Atlas31 to contend that the statutory test, as provided in Section 29 of the
1977 NIRC, is sufficient to allow the deductibility of a business expense from the gross
income. As long as the expense is: (a) both ordinary and necessary; (b) incurred in
carrying a business or trade; and (c) paid or incurred within the taxable year, then, it
shall be allowed as a deduction from the gross income. 32chanrobleslaw

Let it, however, be noted that in Atlas, the Court likewise declared
that:ChanRoblesVirtualawlibrary
In addition, not only must the taxpayer meet the business test, he must substantially
prove by evidence or records the deductions claimed under the law, otherwise, the
same will be disallowed. The mere allegation of the taxpayer that an item of expense is
ordinary and necessary does not justify its deduction. 33 (Citation omitted and italics
ours)
It is, thus, clear that Section 29 of the 1977 NIRC does not exempt the taxpayer from
substantiating claims for deductions. While official receipts are not the only pieces of
evidence which can prove deductible expenses, if presented, they shall be subjected to
examination. PMFC submitted official receipts as among its evidence, and the CTA
doubted their veracity. PMFC was, however, unable to persuasively explain and prove
through other documents the discrepancies in the said receipts. Consequently, the CTA
disallowed the deductions claimed, and in its ruling, invoked Section 238 of the 1977
NIRC considering that official receipts are matters provided for in the said section.

Conclusion

The Court recognizes that the CTA, which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an
expertise on the subject, and its conclusions will not be overturned unless there has
been an abuse or improvident exercise of authority. Such findings can only be disturbed
on appeal if they are not supported by substantial evidence or there is a showing of
gross error or abuse on the part of the tax court. In the absence of any clear and
convincing proof to the contrary, the Court must presume that the CTA rendered a
decision which is valid in every respect.34chanrobleslaw

Further, revenue laws are not intended to be liberally construed. Taxes are the lifeblood
of the government and in Holmes' memorable metaphor, the price we pay for
civilization; hence, laws relative thereto must be faithfully and strictly implemented. 35
While the 1977 NIRC required substantiation requirements for claimed deductions to be
allowed, PMFC insists on leniency, which is not warranted under the circumstances.

Lastly, the Court notes too that PMFC's tax liabilities have been me than substantially
reduced to P2,804,920.36 from the CIR's initial assessment of
P9,761,750.02.36chanrobleslaw

In precis, the affirmation of the herein assailed decision and resolution is in order.

However, the Court finds it proper to modify the herein assail decision and resolution to
conform to the interest rates prescribed in Nacar v. Gallery Frames, et al.37 The total
amount of P2,804,920.36 to be paid PMFC to the CIR shall be subject to an interest of
six percent (6%) per annum to be computed from the finality of this Resolution until full
payment.

WHEREFORE, the instant petition is DENIED. The Decision dated August 29, 2006 and
Resolution dated December 4, 2006 of the Court of Tax Appeals en banc in C.T.A. EB
No. 97 are AFFIRMED. However, MODIFICATION thereof, the legal interest of six
percent (6%) per annum reckoned from the finality of this Resolution until full
satisfaction, is here imposed upon the amount of P2,804,920.36 to be paid by Pilmico-
Mauri Foods Corporation to the Commissioner of Internal Revenue.

SO ORDERED.chanRoblesvirtualLawlibrary
 THIRD DIVISION

G.R. No. 165617 February 25, 2011

SUPREME TRANSLINER, INC., MOISES C. ALVAREZ and PAULITA S. ALVAREZ,

Petitioners,
vs.
BPI FAMILY SAVINGS BANK, INC., Respondent.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 165837

BPI FAMILY SAVINGS BANK, INC., Petitioner,

vs.
SUPREME TRANSLINER, INC., MOISES C. ALVAREZ and PAULITA S. ALVAREZ,
Respondents.

DECISION

VILLARAMA, JR., J.:

This case involves the question of the correct redemption price payable to a mortgagee
bank as purchaser of the property in a foreclosure sale.

On April 24, 1995, Supreme Transliner, Inc. represented by its Managing Director,
Moises C. Alvarez, and Paulita S. Alvarez, obtained a loan in the amount of
₱9,853,000.00 from BPI Family Savings Bank with a 714-square meter lot covered by
Transfer Certificate of Title No. T-79193 in the name of Moises C. Alvarez and Paulita
S. Alvarez, as collateral.1

For non-payment of the loan, the mortgage was extrajudicially foreclosed and the
property was sold to the bank as the highest bidder in the public auction conducted by
the Office of the Provincial Sheriff of Lucena City. On August 7, 1996, a Certificate of
Sale2 was issued in favor of the bank and the same was registered on October 1, 1996.

Before the expiration of the one-year redemption period, the mortgagors notified the
bank of their intention to redeem the property. Accordingly, the following Statement of
Account3 was prepared by the bank indicating the total amount due under the mortgage
loan agreement:

xxxx
Balance of Principal P 9,551,827.64

Add: Interest Due 1,417,761.24

Late Payment Charges 155,546.25

MRI 0.00

Fire Insurance 0.00

Foreclosure Expenses 155,817.23

Sub-total P 11,280,952.36

Less: Unapplied Payment 908,241.01

Total Amount Due As Of 08/07/96 (Auction Date) 10,372,711.35

Add: Attorney’s Fees (15%) 1,555,906.70

Liquidated Damages (15%) 1,555,906.70

Interest on P 10,372,711.35 from 08/07/96 to 1,207,772.58

04/07/97 (243 days) at 17.25% p.a.

xxxx
Asset Acquired Expenses:

Documentary Stamps 155,595.00

Capital Gains Tax 518,635.57

Foreclosure Fee 207,534.23

 Registration and Filing Fee 23,718.00

Add’l. Registration & Filing Fee 660.00 906,142.79

Interest on P 906,142.79 from 08/07/96 to 105,509.00

04/07/97 (243 days)

at 17.25% p.a.
Cancellation Fee 300.00

Total Amount Due As Of 04/07/97 (Subject to Audit) P 15,704,249.12

xxxx

The mortgagors requested for the elimination of liquidated damages and reduction of
attorney’s fees and interest (1% per month) but the bank refused. On May 21, 1997, the
mortgagors redeemed the property by paying the sum of ₱15,704,249.12. A Certificate
of Redemption4 was issued by the bank on May 27, 1997.

On June 11, 1997, the mortgagors filed a complaint against the bank to recover the
allegedly unlawful and excessive charges totaling ₱5,331,237.77, with prayer for
damages and attorney’s fees, docketed as Civil Case No. 97-72 of the Regional Trial
Court of Lucena City, Branch 57.

In its Answer with Special and Affirmative Defenses and Counterclaim, the bank
asserted that the redemption price reflecting the stipulated interest, charges and/or
expenses, is valid, legal and in accordance with documents duly signed by the
mortgagors. The bank further contended that the claims are deemed waived and the
mortgagors are already estopped from questioning the terms and conditions of their
contract.

On September 30, 1997, the bank filed a motion to set the case for hearing on the
special and affirmative defenses by way of motion to dismiss. The trial court denied the
motion on January 8, 1998 and also denied the bank’s motion for reconsideration. The
bank elevated the matter to the Court of Appeals (CA-G.R. SP No. 47588) which
dismissed the petition for certiorari on February 26, 1999.
On February 14, 2002, the trial court rendered its decision5 dismissing the complaint
and the bank’s counterclaims. The trial court held that plaintiffs-mortgagors are bound
by the terms of the mortgage loan documents which clearly provided for the payment of
the following interest, charges and expenses: 18% p.a. on the loan, 3% post-default
penalty, 15% liquidated damages, 15% attorney’s fees and collection and legal costs.
Plaintiffs-mortgagors’ claim that they paid the redemption price demanded by the
defendant bank under extreme pressure was rejected by the trial court since there was
active negotiation for the final redemption price between the bank’s representatives and
plaintiffs-mortgagors who at the time had legal advice from their counsel, together with
Orient Development Banking Corporation which committed to finance the redemption.

According to the trial court, plaintiffs-mortgagors are estopped from questioning the
correctness of the redemption price as they had freely and voluntarily signed the letter-
agreement prepared by the defendant bank, and along with Orient Bank expressed their
conformity to the terms and conditions therein, thus:

May 14, 1997

ORIENT DEVELOPMENT BANKING CORPORATION

7th Floor Ever Gotesco Corporate Center
C.M. Recto Avenue corner Matapang Street
Manila

Attention: MS. AIDA C. DELA ROSA

Senior Vice-President

Gentlemen:

This refers to your undertaking to settle the account of SUPREME TRANS LINER, INC.
and spouses MOISES C. ALVAREZ and PAULITA S. ALVAREZ, covering the real
estate property located in the Poblacion, City of Lucena under TCT No. T-79193 which
was foreclosed by BPI FAMILY SAVINGS BANK, INC.

With regard to the proposed refinancing of the account, we interpose no objection to the
annotation of your mortgage lien thereon subject to the following conditions:

1. That all expenses for the registration of the annotation of mortgage and other
incidental registration and cancellation expenses shall be borne by the borrower.

2. That you will recognize our mortgage liens as first and superior until the loan
with us is fully paid.

3. That you will annotate your mortgage lien and pay us the full amount to close
the loan within five (5) working days from the receipt of the titles. If within this
period, you have not registered the same and paid us in full, you will immediately
 and unconditionally return the titles to us without need of demand, free from
liens/encumbrances other than our lien.

4. That in case of loss of titles, you will undertake and shoulder the cost of re-
issuance of a new owner’s titles.

5. That we will issue the Certificate of Redemption after full payment of

P15,704,249.12. representing the outstanding balance of the loan as of May 15,
1997 including interest and other charges thereof within a period of five (5)
working days after clearance of the check payment.

6. That we will release the title and the Certificate of Redemption and other
pertinent papers only to your authorized representative with complete
authorization and identification.

7. That all expenses related to the cancellation of your annotated mortgage lien
should the Bank be not fully paid on the period above indicated shall be charged
to you.

If you find the foregoing conditions acceptable, please indicate your conformity on the
space provided below and return to us the duplicate copy.

Very truly yours,

BPI FAMILY BANK

BY:

(SGD.) LOLITA C. CARRIDO

Manager

CONFORME:

ORIENT DEVELOPMENT BANKING CORPORATION

(SGD.) AIDA C. DELA ROSA
Senior Vice President

CONFORME:

SUPREME TRANS LINER, INC.

(SGD.) MOISES C. ALVAREZ/PAULITA S. ALVAREZ

Mortgagors6

(Underscoring in the original; emphasis supplied.)

As to plaintiffs-mortgagors’ contention that the amounts representing attorney’s fees
and liquidated damages were already included in the ₱10,372,711.35 bid price, the trial
court said this was belied by their own evidence, the Statement of Account showing the
breakdown of the redemption price as computed by the defendant bank.

The mortgagors appealed to the CA (CA-G.R. CV No. 74761) which, by Decision7 dated
April 6, 2004 reversed the trial court and decreed as follows:

WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and

SET ASIDE. A new one is hereby entered as follows:

1. Plaintiffs-appellants’ complaint for damages against defendant-appellee is

hereby REINSTATED;

2. Defendant-appellee is hereby ORDERED to return to plaintiffs-appellees (sic)

the invalidly collected amount of P3,111,813.40 plus six (6) percent legal interest
from May 21, 1997 until fully returned;

3. Defendant-appellee is hereby ORDERED to pay plaintiffs-appellees (sic) the

amount of P100,000.00 as moral damages, P100,000.00 as exemplary damages
and P100,000.00 as attorney’s fees;

4. Costs against defendant-appellee.

SO ORDERED.8

The CA ruled that attorney’s fees and liquidated damages were already included in the
bid price of ₱10,372,711.35 as per the recitals in the Certificate of Sale that said amount
was paid to the foreclosing mortgagee to satisfy not only the principal loan but also
"interest and penalty charges, cost of publication and expenses of the foreclosure
proceedings." These "penalty charges" consist of 15% attorney’s fees and 15%
liquidated damages which the bank imposes as penalty in cases of violation of the
terms of the mortgage deed. The total redemption price thus should only be
₱12,592,435.72 and the bank should return the amount of ₱3,111,813.40 representing
attorney’s fees and liquidated damages. The appellate court further stated that the
mortgagors cannot be deemed estopped to question the propriety of the charges
because from the very start they had repeatedly questioned the imposition of attorney’s
fees and liquidated damages and were merely constrained to pay the demanded
redemption price for fear that the redemption period will expire without them redeeming
their property.9

By Resolution10 dated October 12, 2004, the CA denied the parties’ respective motions
for reconsideration.

Hence, these petitions separately filed by the mortgagors and the bank.
In G.R. No. 165617, the petitioners-mortgagors raise the single issue of whether the
foreclosing mortgagee should pay capital gains tax upon execution of the certificate of
sale, and if paid by the mortgagee, whether the same should be shouldered by the
redemptioner. They specifically prayed for the return of all asset-acquired expenses
consisting of documentary stamps tax, capital gains tax, foreclosure fee, registration
and filing fee, and additional registration and filing fee totaling ₱906,142.79, with 6%
interest thereon from May 21, 1997.11

On the other hand, the petitioner bank in G.R. No. 165837 assails the CA in holding that
–

1. … the Certificate of Sale, the bid price of P10,372,711.35 includes penalty

charges and as such for purposes of computing the redemption price petitioner
can no longer impose upon the private respondents the penalty charges in the
form of 15% attorney’s fees and the 15% liquidated damages in the aggregate
amount of P3,111,813.40, although the evidence presented by the parties show
otherwise.

2. … private respondents cannot be considered to be under estoppel to question

the propriety of the aforestated penalty charges despite the fact that, as found by
the Honorable Trial Court, "there was very active negotiation between the parties
in the computation of the redemption price" culminating into the signing freely
and voluntarily by the petitioner, the private respondents and Orient Bank, which
financed the redemption of the foreclosed property, of Exhibit "3", wherein they
mutually agreed that the redemption price is in the sum of P15,704,249.12.

3. … petitioner [to] pay private respondents damages in the aggregate amount of

P300,000.00 on the ground that the former acted in bad faith in the imposition
upon them of the aforestated penalty charges, when in truth it is entitled thereto
as the law and the contract expressly provide and that private respondents
agreed to pay the same.12

On the correct computation of the redemption price, Section 78 of Republic Act No. 337,
otherwise known as the General Banking Act, governs in cases where the mortgagee is
a bank.13 Said provision reads:

SEC. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of any

mortgage on real estate which is security for any loan granted before the passage of
this Act or under the provisions of this Act, the mortgagor or debtor whose real property
has been sold at public auction, judicially or extrajudicially, for the full or partial payment
of an obligation to any bank, banking or credit institution, within the purview of this Act
shall have the right, within one year after the sale of the real estate as a result of the
foreclosure of the respective mortgage, to redeem the property by paying the amount
fixed by the court in the order of execution, or the amount due under the mortgage
deed, as the case may be, with interest thereon at the rate specified in the mortgage,
and all the costs, and judicial and other expenses incurred by the bank or institution
concerned by reason of the execution and sale and as a result of the custody of said
property less the income received from the property. x x x x (Emphasis supplied.)

Under the Mortgage Loan Agreement,14 petitioners-mortgagors undertook to pay the

attorney’s fees and the costs of registration and foreclosure. The following contract
terms would show that the said items are separate and distinct from the bid price which
represents only the outstanding loan balance with stipulated interest thereon.

23. Application of Proceeds of Foreclosure Sale. The proceeds of sale of the mortgaged
property/ies shall be applied as follows:

a) To the payment of the expenses and cost of foreclosure and sale, including
the attorney’s fees as herein provided;

b) To the satisfaction of all interest and charges accruing upon the obligations
herein and hereby secured.

c) To the satisfaction of the principal amount of the obligations herein and hereby
secured.

d) To the satisfaction of all other obligations then owed by the

Borrower/Mortgagor to the Bank or any of its subsidiaries/affiliates such as, but
not limited to BPI Credit Corporation; or to Bank of the Philippine Islands or any
of its subsidiaries/affiliates such as, but not limited to BPI Leasing Corporation,
BPI Express Card Corporation, BPI Securities Corporation and BPI Agricultural
Development Bank; and

e) The balance, if any, to be due to the Borrower/Mortgagor.

xxxx

31. Attorney’s Fees: In case the Bank should engage the services of counsel to enforce
its rights under this Agreement, the Borrower/Mortgagor shall pay an amount equivalent
to fifteen (15%) percent of the total amount claimed by the Bank, which in no case shall
be less than P2,000.00, Philippine currency, plus costs, collection expenses and
disbursements allowed by law, all of which shall be secured by this mortgage. 15

Additionally, the Disclosure Statement on Loan/Credit Transaction16 also duly signed by

the petitioners-mortgagors provides:

10. ADDITIONAL CHARGES IN CASE CERTAIN STIPULATIONS ARE NOT MET BY

THE BORROWER

a. Post Default Penalty 3.00% per month

b. Attorney’s Services 15% of sum due but not less than P2,000.00
 c. Liquidated Damages 15% of sum due but not less than P10,000.00

d. Collection & Legal Cost As provided by the Rules of Court

e. Others (Specify)

As correctly found by the trial court, that attorney’s fees and liquidated damages were
not yet included in the bid price of ₱10,372,711.35 is clearly shown by the Statement of
Account as of April 4, 1997 prepared by the petitioner bank and given to petitioners-
mortgagors. On the other hand, par. 23 of the Mortgage Loan Agreement indicated that
asset acquired expenses were to be added to the redemption price as part of "costs and
other expenses incurred" by the mortgagee bank in connection with the foreclosure
sale.

Coming now to the issue of capital gains tax, we find merit in petitioners-mortgagors’
argument that there is no legal basis for the inclusion of this charge in the redemption
price. Under Revenue Regulations (RR) No. 13-85 (December 12, 1985), every sale or
exchange or other disposition of real property classified as capital asset under Section
34(a)17 of the Tax Code shall be subject to the final capital gains tax. The term sale
includes pacto de retro and other forms of conditional sale. Section 2.2 of Revenue
Memorandum Order (RMO) No. 29-86 (as amended by RMO No. 16-88 and as further
amended by RMO Nos. 27-89 and 6-92) states that these conditional sales "necessarily
include mortgage foreclosure sales (judicial and extrajudicial foreclosure sales)."
Further, for real property foreclosed by a bank on or after September 3, 1986, the
capital gains tax and documentary stamp tax must be paid before title to the property
can be consolidated in favor of the bank.18

Under Section 63 of Presidential Decree No. 1529 otherwise known as the Property
Registration Decree, if no right of redemption exists, the certificate of title of the
mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser.
But where the right of redemption exists, the certificate of title of the mortgagor shall not
be cancelled, but the certificate of sale and the order confirming the sale shall be
registered by brief memorandum thereof made by the Register of Deeds upon the
certificate of title. In the event the property is redeemed, the certificate or deed of
redemption shall be filed with the Register of Deeds, and a brief memorandum thereof
shall be made by the Register of Deeds on the certificate of title.

It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged
real property until after the expiration of the one-year redemption period as provided in
Act No. 3135 and title thereto is consolidated in the name of the mortgagee in case of
non-redemption. In the interim, the mortgagor is given the option whether or not to
redeem the real property. The issuance of the Certificate of Sale does not by itself
transfer ownership.19
RR No. 4-99 issued on March 16, 1999, further amends RMO No. 6-92 relative to the
payment of Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure
sale of capital assets initiated by banks, finance and insurance companies.

SEC. 3. CAPITAL GAINS TAX. –

(1) In case the mortgagor exercises his right of redemption within one year from
the issuance of the certificate of sale, no capital gains tax shall be imposed
because no capital gains has been derived by the mortgagor and no sale or
transfer of real property was realized. x x x

(2) In case of non-redemption, the capital gains [tax] on the foreclosure sale
imposed under Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall
become due based on the bid price of the highest bidder but only upon the
expiration of the one-year period of redemption provided for under Sec. 6 of Act
No. 3135, as amended by Act No. 4118, and shall be paid within thirty (30) days
from the expiration of the said one-year redemption period.

SEC. 4. DOCUMENTARY STAMP TAX. –

(1) In case the mortgagor exercises his right of redemption, the transaction shall
only be subject to the P15.00 documentary stamp tax imposed under Sec. 188 of
the Tax Code of 1997 because no land or realty was sold or transferred for a
consideration.

(2) In case of non-redemption, the corresponding documentary stamp tax shall

be levied, collected and paid by the person making, signing, issuing, accepting,
or transferring the real property wherever the document is made, signed, issued,
accepted or transferred where the property is situated in the Philippines. x x x
(Emphasis supplied.)

Although the subject foreclosure sale and redemption took place before the effectivity of
RR No. 4-99, its provisions may be given retroactive effect in this case.

Section 246 of the NIRC of 1997 states:

SEC. 246. Non-Retroactivity of Rulings. – Any revocation, modification, or reversal of

any of the rules and regulations promulgated in accordance with the preceding Sections
or any of the rulings or circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification, or reversal will be prejudicial to the
taxpayers, except in the following cases:

(a) where the taxpayer deliberately misstates or omits material facts from his
return or in any document required of him by the Bureau of Internal Revenue;
 (b) where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or

(c) where the taxpayer acted in bad faith.

In this case, the retroactive application of RR No. 4-99 is more consistent with the policy
of aiding the exercise of the right of redemption. As the Court of Tax Appeals concluded
in one case, RR No. 4-99 "has curbed the inequity of imposing a capital gains tax even
before the expiration of the redemption period [since] there is yet no transfer of title and
no profit or gain is realized by the mortgagor at the time of foreclosure sale but only
upon expiration of the redemption period."20 In his commentaries, De Leon expressed
the view that while revenue regulations as a general rule have no retroactive effect, if
the revocation is due to the fact that the regulation is erroneous or contrary to law, such
revocation shall have retroactive operation as to affect past transactions, because a
wrong construction of the law cannot give rise to a vested right that can be invoked by a
taxpayer.21

Considering that herein petitioners-mortgagors exercised their right of redemption

before the expiration of the statutory one-year period, petitioner bank is not liable to pay
the capital gains tax due on the extrajudicial foreclosure sale. There was no actual
transfer of title from the owners-mortgagors to the foreclosing bank. Hence, the
inclusion of the said charge in the total redemption price was unwarranted and the
corresponding amount paid by the petitioners-mortgagors should be returned to them.

WHEREFORE, premises considered, both petitions are PARTLY GRANTED.

In G.R. No. 165617, BPI Family Savings Bank, Inc. is hereby ordered to RETURN the
amounts representing capital gains and documentary stamp taxes as reflected in the
Statement of Account To Redeem as of April 7, 1997, to petitioners Supreme
Transliner, Inc., Moises C. Alvarez and Paulita Alvarez, and to retain only the sum
provided in RR No. 4-99 as documentary stamps tax due on the foreclosure
sale.1awphi1

In G.R. No. 165837, petitioner BPI Family Savings Bank, Inc. is hereby declared entitled
to the attorney’s fees and liquidated damages included in the total redemption price paid
by Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez. The sums awarded
as moral and exemplary damages, attorney’s fees and costs in favor of Supreme
Transliner, Inc., Moises C. Alvarez and Paulita Alvarez are DELETED.

The Decision dated April 6, 2004 of the Court of Appeals in CA-G.R. CV No. 74761 is
accordingly MODIFIED.

SO ORDERED.
SMI-ED PHILIPPINES TECHNOLOGY, INC. vs. COMMISSIONER OF INTERNAL
REVENUE,

DECISION

LEONEN, J.:

In an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals
may determine whether there are taxes that should have been paid in lieu of the taxes
paid. Determining the proper category of tax that should have been paid is not an
assessment. It is incidental to determining whether there should be a refund.

A Philippine Economic Zone Authority (PEZA)-registered corporation that has never

commenced operations may not avail the tax incentives and preferential rates given to
PEZA-registered enterprises. Such corporation is subject to ordinary tax rates under the
National Internal Revenue Code of 1997.

This is a petition for review1 on certiorari of the November 3, 2006 Court of Tax Appeals
En Banc decision.2 It affirmed the Court of Tax Appeals Second Division’s decision3
and resolution4 denying petitioner SMI-Ed Philippines Technology, Inc.’s (SMI-Ed
Philippines) claim for tax refund.5

SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage in the

business of manufacturing ultra high-density microprocessor unit package."6

After its registration on June 29, 1998, SMI-Ed Philippines constructed buildings and
purchased machineries and equipment.7 As of December 31, 1999, the total cost of the
properties amounted to ₱3,150,925,917.00.8
SMI-Ed Philippines "failed to commence operations."9 Its factory was temporarily
closed, effective October 15, 1999. On August 1, 2000, it sold its buildings and some of
its installed machineries and equipment to Ibiden Philippines, Inc., another PEZA-
registered enterprise, for ¥2,100,000,000.00 (₱893,550,000.00). SMI-Ed Philippines
was dissolved on November 30, 2000.10

In its quarterly income tax return for year 2000, SMI-Ed Philippines subjected the entire
gross sales of itsproperties to 5% final tax on PEZA registered corporations. SMI-Ed
Philippines paid taxes amounting to ₱44,677,500.00.11

On February 2, 2001, after requesting the cancellation of its PEZA registration and
amending its articles of incorporation to shorten its corporate term, SMI-Ed Philippines
filed an administrative claim for the refund of ₱44,677,500.00 with the Bureauof Internal
Revenue (BIR). SMIEd Philippines alleged that the amountwas erroneously paid. It also
indicated the refundable amount in its final income tax return filed on March 1, 2001. It
also alleged that it incurred a net loss of ₱2,233,464,538.00.12

The BIR did not act on SMI-Ed Philippines’ claim, which prompted the latter to file a
petition for reviewbefore the Court of Tax Appeals on September 9, 2002.13

The Court of Tax Appeals Second Division denied SMI-Ed Philippines’ claim for refund
in the decision dated December 29, 2004.14

The Court of Tax Appeals Second Division found that SMI-Ed Philippines’ administrative
claim for refund and the petition for review with the Court of Tax Appeals were filed
within the two-year prescriptive period.15 However, fiscal incentives given to PEZA-
registered enterprises may be availed only by PEZA-registered enterprises that had
already commenced operations.16 Since SMI-Ed Philippines had not commenced
operations, it was not entitled to the incentives of either the income tax holiday or the
5% preferential tax rate.17 Payment of the 5% preferential tax amounting to
₱44,677,500.00 was erroneous.18
After finding that SMI-Ed Philippines sold properties that were capital assets under
Section 39(A)(1) of the National Internal Revenue Code of 1997, the Court of Tax
Appeals Second Division subjected the sale of SMIEd Philippines’ assets to 6% capital
gains tax under Section 27(D)(5) of the same Code and Section 2 of Revenue
Regulations No. 8-98.19 It was found liable for capital gains tax amounting to
₱53,613,000.00.20 Therefore, SMIEd Philippines must still pay the balance of
₱8,935,500.00 as deficiency tax,21 "which respondent should perhaps look into."22 The
dispositive portion of the Court of Tax Appeals Second Division’s decision reads:

WHEREFORE, premises considered, the instant petition is hereby DENIED.

SO ORDERED.23

The Court of Tax Appeals denied SMI-Ed Philippines’ motion for reconsideration in its
June 15, 2005 resolution.24

On July 17, 2005, SMI-Ed Philippines filed a petition for review before the Court of Tax
Appeals En Banc.25 It argued that the Court of Tax Appeals Second Division
erroneously assessed the 6% capital gains tax on the sale of SMI-Ed Philippines’
equipment, machineries, and buildings.26 It also argued that the Court of Tax Appeals
Second Division cannot make an assessment at the first instance.27 Even if the Court
of Tax Appeals Second Division has such power, the period to make an assessment
had already prescribed.28

In the decision promulgated on November 3, 2006, the Court of Tax Appeals En Banc
dismissed SMI-Ed Philippines’ petition and affirmed the Court of Tax Appeals Second
Division’s decision and resolution.29 The dispositive portion of the Court of Tax Appeals
En Banc’s decision reads:

WHEREFORE, finding no reversible error to reverse the assailed Decision promulgated

on December 29, 2004 and the Resolution dated June 15, 2005, the instant petition for
review is hereby DISMISSED. Accordingly, the assailed Decision and Resolution are
hereby AFFIRMED. SO ORDERED.30
SMI-Ed Philippines filed a petition for review before this court on December 27, 2006,31
praying for the grant of its claim for refund and the reversal of the Court of Tax Appeals
En Banc’s decision.32

SMI-Ed Philippines assigned the following errors:

A. The honorable CTA En Banc grievously erred and acted beyond its jurisdiction when
it assessed for deficiency tax in the first instance.

B. Even assuming that the honorable CTA En Banc has the right to make an
assessment against the petitioner-appellant, it grievously erred in finding that the
machineries and equipment sold by the petitioner-appellant is subject to the six percent
(6%) capital gains tax under Section 27(D)(5) of the Tax Code.33

Petitioner argued that the Court of Tax Appeals has no jurisdiction to make an
assessment since its jurisdiction, with respect to the decisions of respondent, is merely
appellate.34 Moreover, the power to make assessment had already prescribed under
Section 203 of the National Internal Revenue Code of 1997 since the return for the
erroneous payment was filed on September 13, 2000. This is more than three (3) years
from the last day prescribed by law for the filing of the return.35

Petitioner also argued that the Court of Tax Appeals En Banc erroneously subjected
petitioner’s machineries to 6% capital gains tax.36 Section 27(D)(5) of the National
Internal Revenue Code of 1997 is clear that the 6% capital gains tax on domestic
corporations applies only on the sale of lands and buildings and not tomachineries and
equipment.37 Since ¥1,700,000,000.00 of the ¥2,100,000,000.00 constituted the
consideration for the sale of petitioner’s machineries, only ¥400,000,000.00 or
₱170,200,000.00 should be subjected to the 6% capital gains tax.38 Petitioner should
be liable only for ₱10,212,000.00.39 It should be entitled to a refund of ₱34,464,500.00
after deducting ₱10,212,000.00 from the erroneously paid final tax of
₱44,677,500.00.40
In its comment, respondent argued that the Court of Tax Appeals’ determination of
petitioner’s liability for capital gains tax was not an assessment. Such determination was
necessary to settle the question regarding the tax consequence of the sale of the
properties.41 This is clearly within the Court of Tax Appeals’ jurisdiction under Section 7
of Republic Act No. 9282.42 Respondent also argued that "petitioner failed to justify its
claim for refund."43

The petition is meritorious.

Jurisdiction of the Court of Tax Appeals

The term "assessment" refers to the determination of amounts due from a person
obligated to make payments. In the context of national internal revenue collection, it
refers the determination of the taxes due from a taxpayer under the National Internal
Revenue Code of 1997.

The power and duty to assess national internal revenue taxes are lodged with the
BIR.44 Section 2 of the National Internal Revenue Code of 1997 provides:

SEC. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau of Internal
Revenue shall be under the supervision and control of the Department of Finance and
its powers and duties shall comprehend the assessment and collection ofall national
internal revenue taxes, fees, and charges, and the enforcement of all forfeitures,
penalties, and fines connected therewith, including the execution of judgments in all
cases decided in its favor by the Court of Tax Appeals and the ordinary courts. The
Bureau shall give effect to and administer the supervisory and police powers conferred
to it by this Code or other laws. (Emphasis supplied) The BIR is not mandated to make
an assessment relative to every return filed with it. Tax returns filed with the BIR enjoy
the presumption that these are in accordance with the law.45 Tax returns are also
presumed correct since these are filed under the penalty of perjury.46 Generally,
however, the BIR assesses taxes when it appears, after a return had been filed, that the
taxes paid were incorrect,47 false,48 or fraudulent.49 The BIR also assesses taxes
when taxes are due but no return is filed.50 Thus:

SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional

Requirements for Tax Administration and Enforcement.–

(A) Examination of Returns and Determination of Tax Due. - After a return has been
filed as required under the provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examination of any taxpayer and the
assessment of the correct amount of tax: Provided, however; That failure to file a return
shall not prevent the Commissioner from authorizing the examination of any
taxpayer.The tax or any deficiency tax so assessed shall be paid upon notice and
demand from the Commissioner or from his duly authorized representative.

....

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a preceeding in court for the collection of such tax
may be filed without assessment, at any time within ten (10) years after the discovery of
the falsity, fraud or omission: Provided, That in a fraud assessment which has become
final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or
criminal action for the collection thereof. (Emphasis supplied)

The Court of Tax Appeals has no powerto make an assessment at the first instance. On
matters such as tax collection, tax refund, and others related to the national internal
revenue taxes, the Court of Tax Appeals’ jurisdiction is appellate in nature.

Section 7(a)(1) and Section 7(a)(2) of Republic Act No. 1125,51 as amended by
Republic Act No. 9282,52 provide that the Court of Tax Appeals reviews decisions and
inactions of the Commissioner of Internal Revenue in disputed assessments and claims
for tax refunds. Thus: SEC. 7. Jurisdiction.- The CTA shall exercise:

a. Exclusive appellate jurisdiction toreview by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue or other
laws administered by the Bureau of Internal Revenue;

2. Inaction by the Commissioner of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relations thereto, or other matters arising under the National Internal Revenue Code or
other laws administered by the Bureau of Internal Revenue, where the National Internal
Revenue Code provides a specific period of action, in which case the inaction shall be
deemed a denial[.] (Emphasis supplied) Based on these provisions, the following must
be present for the Court of Tax Appeals to have jurisdiction over a case involving the
BIR’s decisions or inactions:

a) A case involving any of the following:

i. Disputed assessments;

ii. Refunds of internal revenue taxes, fees, or other charges, penalties in relation
thereto; and

iii. Other matters arising under the National Internal Revenue Code of 1997.

b) Commissioner of Internal Revenue’s decision or inaction in a case submitted to him

or her
Thus, the BIR first has to make an assessment of the taxpayer’s liabilities. When the
BIR makes the assessment, the taxpayer is allowed to dispute that assessment before
the BIR. If the BIR issues a decision that is unfavorable to the taxpayer or if the BIR fails
to act on a dispute brought by the taxpayer, the BIR’s decision or inaction may be
brought on appeal to the Court of Tax Appeals. The Court of Tax Appeals then acquires
jurisdiction over the case.

When the BIR’s unfavorable decision is brought on appeal to the Court of Tax Appeals,
the Court of Tax Appeals reviews the correctness of the BIR’s assessment and
decision. In reviewing the BIR’s assessment and decision, the Court of Tax Appeals had
to make its own determination of the taxpayer’s tax liabilities. The Court of Tax Appeals
may not make such determination before the BIR makes its assessment and before a
dispute involving such assessment is brought to the Court of Tax Appeals on appeal.

The Court of Tax Appeals’ jurisdiction is not limited to cases when the BIR makes an
assessment or a decision unfavorable to the taxpayer. Because Republic Act No.
112553 also vests the Court of Tax Appeals with jurisdiction over the BIR’s inaction on a
taxpayer’s refund claim, there may be instances when the Court of Tax Appeals has to
take cognizance of cases that have nothing to do with the BIR’s assessments or
decisions. When the BIR fails to act on a claim for refund of voluntarily but mistakenly
paid taxes, for example, there is no decision or assessment involved.

Taxes are generally self-assessed. They are initially computed and voluntarily paid by
the taxpayer. The government does not have to demand it. If the tax payments are
correct, the BIR need not make an assessment.

The self-assessing and voluntarily paying taxpayer, however, may later find that he or
she has erroneously paid taxes. Erroneously paid taxes may come in the form of
amounts thatshould not have been paid. Thus, a taxpayer may find that he or she has
paid more than the amount that should have been paid under the law. Erroneously paid
taxes may also come in the form of tax payments for the wrong category of tax. Thus, a
taxpayer may find that he or she has paid a certain kindof tax that he or she is not
subject to.
In these instances, the taxpayer may ask for a refund. If the BIR fails to act on the
request for refund, the taxpayer may bring the matter to the Court of Tax Appeals.

From the taxpayer’s self-assessment and tax payment up to his or her request for
refund and the BIR’s inaction,the BIR’s participation is limited to the receipt of the
taxpayer’s payment. The BIR does not make an assessment; the BIR issues no
decision; and there is no dispute yet involved. Since there is no BIR assessment yet,
the Court of Tax Appeals may not determine the amount of taxes due from the taxpayer.
There is also no decision yet to review. However, there was inaction on the part of the
BIR. That inaction is within the Court of Tax Appeals’ jurisdiction.

In other words, the Court of Tax Appeals may acquire jurisdiction over cases even if
they do not involve BIR assessments or decisions.

In this case, the Court of Tax Appeals’ jurisdiction was acquired because petitioner
brought the case on appeal before the Court of Tax Appeals after the BIR had failed to
act on petitioner’s claim for refund of erroneously paid taxes. The Court of Tax Appeals
did not acquire jurisdiction as a result of a disputed assessment of a BIR decision.

Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6%
capital gains tax or other taxes at the first instance. The Court of Tax Appeals has no
power to make an assessment.

As earlier established, the Court of Tax Appeals has no assessment powers. In stating
that petitioner’s transactions are subject to capital gains tax, however, the Court of Tax
Appeals was not making an assessment. It was merely determining the proper category
of tax that petitioner should have paid, in view of its claim that it erroneously imposed
upon itself and paid the 5% final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an
incidental matter necessary for the resolution of the principal issue, which is whether
petitioner was entitled to a refund.54

The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper
taxes that are due from petitioner. A claim for tax refund carries the assumption that the
tax returns filed were correct.55 If the tax return filed was not proper, the correctness of
the amount paid and, therefore, the claim for refund become questionable. In that case,
the court must determine if a taxpayer claiming refund of erroneously paid taxes is more
properly liable for taxes other than that paid.

In South African Airways v. Commissioner of Internal Revenue,56 South African

Airways claimed for refund of its erroneously paid 2½% taxes on its gross Philippine
billings. This court did not immediately grant South African’s claim for refund. This is
because although this court found that South African Airways was not subject to the
2½% tax on its gross Philippine billings, this court also found that it was subject to 32%
tax on its taxable income.57

In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission
that the quarterly tax return it filed in 2000 was improper. Hence, to determine if
petitioner was entitled to the refund being claimed, the Court of Tax Appeals has the
duty to determine if petitioner was indeed not liable for the 5% final tax and, instead,
liable for taxes other than the 5% final tax. As in South African Airways, petitioner’s
request for refund can neither be granted nor denied outright without such
determination.58

If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the
amount of the taxpayer’s liability should be computed and deducted from the refundable
amount.

Any liability in excess of the refundable amount, however, may not be collected in a
case involving solely the issue of the taxpayer’s entitlement to refund. The question of
tax deficiencyis distinct and unrelated to the question of petitioner’s entitlement to
refund. Tax deficiencies should be subject to assessment procedures and the rules of
prescription. The court cannot be expected to perform the BIR’s duties whenever it fails
to do so either through neglect or oversight. Neither can court processes be used as a
tool to circumvent laws protecting the rights of taxpayers.

II

Petitioner’s entitlement to benefits given to PEZA-registered enterprises

Petitioner is not entitled to benefits given to PEZA-registered enterprises, including the

5% preferential tax rate under Republic Act No. 7916 or the Special Economic Zone Act
of 1995. This is because it never began its operation.

Essentially, the purpose of Republic Act No. 7916 is to promote development and
encourage investments and business activities that will generate employment.59 Giving
fiscal incentives to businesses is one of the means devised to achieve this purpose. It
comes with the expectation that persons who will avail these incentives will contribute to
the purpose’s achievement. Hence, to avail the fiscal incentives under Republic Act No.
7916, the law did not say that mere PEZA registration is sufficient.

Republic Act No. 7916 or The Special Economic Zone Act of 1995 provides:

SEC. 23. Fiscal Incentives.— Business establishments operating within the

ECOZONES shall be entitled to the fiscal incentives as provided for under Presidential
Decree No. 66, the law creating the Export Processing Zone Authority, or those
provided under Book VI of Executive Order No. 226, otherwise known as the Omnibus
Investment Code of 1987.

Furthermore, tax credits for exporters using local materials as inputs shall enjoy the
same benefits provided for in the Export Development Act of 1994.
SEC. 24. Exemption from Taxes Under the National Internal Revenue Code. — Any
provision of existing laws, rules and regulations to the contrary notwithstanding, no
taxes, local and national, shall be imposed on business establishments operating within
the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by
all businesses and enterprises within the ECOZONE shall be remitted tothe national
government. This five percent (5%) shall be shared and distributed as follows:

a. Three percent (3%) to the national government;

b. One percent (1%) to the localgovernment units affected by the declaration of the
ECOZONE inproportion to their population, land area, and equal sharing factors; and

c. One percent (1%) for the establishment of a development fund to be utilized for the
development of municipalities outside and contiguous to each ECOZONE: Provided,
however, That the respective share of the affected local government units shall be
determined on the basis of the following formula:

1. Population - fifty percent (50%);

2. Land area - twenty-five percent (25%); and

3. Equal sharing - twenty-five percent (25%). (Emphasis supplied)

Based on these provisions, the fiscal incentives and the 5% preferential tax rate are
available only to businesses operating within the Ecozone.60 A business is considered
in operation when it starts entering into commercial transactions that are not merely
incidental to but are related to the purposes of the business. It is similar to the definition
of "doing business," as applied in actions involvingthe right of foreign corporations to
maintain court actions. In Mentholatum Co. Inc., et al. v. Mangaliman, et al.,61 this court
said that the terms "doing" or "engaging in" or "transacting" business":
. . . impl[y] a continuity of commercial dealings and arrangements, and contemplates, to
that extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of, the purpose and object of its
organization.62 Petitioner never started its operations since its registration on June 29,
199863 because of the Asian financial crisis.64 Petitioner admitted this.65 Therefore, it
cannot avail the incentives provided under Republic Act No. 7916. It is not entitled to the
preferential tax rate of 5% on gross income in lieu of all taxes. Because petitioner is not
entitled to a preferential rate, it is subject to ordinary tax rates under the National
Internal Revenue Code of 1997.

III

Imposition of capital gains tax

The Court of Tax Appeals found that petitioner’s sale of its properties is subject to
capital gains tax.

For petitioner’s properties to be subjected to capital gains tax, the properties must form
part ofpetitioner’s capital assets.

Section 39(A)(1) of the National Internal Revenue Code of 1997 defines "capital
assets":

SEC. 39. Capital Gains and Losses. -

(A) Definitions.- As used in this Title -

(1) Capital Assets.- the term ‘capital assets’ means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in
trade of the taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or property held by
the taxpayer primarily for sale to customers in the ordinary course of his trade
orbusiness, or property used in the trade or business, of a character which is subject to
the allowance for depreciation provided in Subsection (F) of Section 34; or real property
used in trade or business of the taxpayer. (Emphasis supplied) Thus, "capital assets"
refers to taxpayer’s property that is NOT any of the following:

1. Stock in trade;

2. Property that should be included inthe taxpayer’s inventory at the close of the taxable
year;

3. Property held for sale in the ordinary course of the taxpayer’s business;

4. Depreciable property used in the trade or business; and

5. Real property used in the trade or business.

The properties involved in this case include petitioner’s buildings, equipment, and
machineries. They are not among the exclusions enumerated in Section 39(A)(1) of the
National Internal Revenue Code of 1997. None of the properties were used in
petitioner’s trade or ordinary course of business because petitioner never commenced
operations. They were not part of the inventory. None of themwere stocks in trade.
Based on the definition of capital assets under Section 39 of the National Internal
Revenue Code of 1997, they are capital assets.

Respondent insists that since petitioner’s machineries and equipment are classified as
capital assets, their sales should be subject to capital gains tax. Respondent is
mistaken.
In Commissioner of Internal Revenue v. Fortune Tobacco Corporation,66 this court
said:

The rule in the interpretation of tax laws is that a statute will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be
imposed without clear and express words for that purpose. Accordingly, the general rule
of requiring adherence to the letter in construing statutes applies with peculiar strictness
to tax laws and the provisions of a taxing act are not to be extended by implication. In
answering the question of who is subject to tax statutes, it is basic that in case of doubt,
such statutes are to be construed most strongly against the government and in favor of
the subjects or citizens because burdens are not to be imposed nor presumed to be
imposed beyond what statutes expressly and clearly import. As burdens, taxes should
not be unduly exacted nor assumed beyond the plain meaning of the tax laws.67
(Citations omitted)

Capital gains of individuals and corporations from the sale of real properties are taxed
differently. Individuals are taxed on capital gains from sale of all real properties located
in the Philippines and classified as capital assets. Thus:

SEC. 24. Income Tax Rates.

....

(D) Capital Gains from Sale of Real Property. –

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six
percent (6%) based on the gross selling price or current fair market value as determined
in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed
upon capital gains presumed to have been realized from the sale, exchange, or other
disposition of real property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional sales, by individuals,
including estates and trusts: Provided, That the tax liability, if any, on gains from sales
or other dispositions of real property to the government or any of its political
subdivisions or agencies or to government-owned or controlled corporations shall be
determined either under Section 24 (A) or under this Subsection, at the option of the
taxpayer.68 (Emphasis supplied)

For corporations, the National Internal Revenue Code of 1997 treats the sale of land
and buildings, and the sale of machineries and equipment, differently. Domestic
corporations are imposed a 6% capital gains tax only on the presumed gain realized
from the sale of lands and/or buildings. The National Internal Revenue Code of 1997
does not impose the 6% capital gains tax on the gains realized from the sale of
machineries and equipment. Section 27(D)(5) of the National Internal Revenue Code of
1997 provides:

SEC. 27. Rates of Income tax on Domestic Corporations. -

....

(D) Rates of Tax on Certain Passive Incomes. -

....

(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to
have been realized on the sale, exchange or disposition of lands and/or buildings which
are not actually used in the business of a corporation and are treated as capital assets,
based on the gross selling price of fair market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.
(Emphasis supplied)

Therefore, only the presumed gain from the sale of petitioner’s land and/or building may
be subjected to the 6% capital gains tax. The income from the sale of petitioner’s
machineries and equipment is subject to the provisions on normal corporate income tax.
To determine, therefore, if petitioner is entitled to refund, the amount of capital gains tax
for the sold land and/or building of petitioner and the amount of corporate income tax for
the sale of petitioner’s machineries and equipment should be deducted from the total
final tax paid. Petitioner indicated, however, in its March 1, 2001 income tax return for
the 11-month period ending on November 30, 2000 that it suffered a net loss of
₱2,233,464,538.00.69 This declaration was made under the pain of perjury. Section 267
of the National Internal Revenue Code of 1997 provides:

SEC. 267. Declaration under Penalties of Perjury. - Any declaration, return and other
statement required under this Code, shall, in lieu of an oath, contain a written statement
that they are made under the penalties of perjury. Any person who willfully files a
declaration, return or statement containing information which is not true and correct as
to every material matter shall, upon conviction, be subject to the penalties prescribed for
perjury under the Revised Penal Code. Moreover, Rule 131, Section 3(ff) of the Rules of
Court provides for the presumption that the law has been obeyed unless contradicted or
overcome by other evidence, thus:

SEC. 3. Disputable presumptions.— The following presumptions are satisfactory if

uncontradicted, but may be contradicted and overcome by other evidence:

....

(ff) That the law has been obeyed;

The BIR did not make a deficiency assessment for this declaration. Neither did the BIR
dispute this statement in its pleadings filed before this court. There is, therefore, no
reason todoubt the truth that petitioner indeed suffered a net loss in 2000.

Since petitioner had not started its operations, it was also not subject to the minimum
corporate income tax of 2% on gross income.70 Therefore, petitioner is not liable for
any income tax.
IV

Prescription

Section 203 of the National Internal Revenue Code of 1997 provides that as a general
rule, the BIR has three (3) years from the last day prescribed by law for the filing of a
return to make an assessment. If the return is filed beyond the last day prescribed by
law for filing, the three-year period shall run from the actual date of filing. Thus:

SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided
in Section 222, internal revenue taxes shall be assessed within three (3) years after the
last day prescribed by law for the filing of the return, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the expiration of such
period: Provided, That in a case where a return is filed beyond the period prescribed by
law, the three (3)-year period shall be counted from the day the return was filed. For
purposes of this Section, a return filed before the last day prescribed by law for the filing
thereof shall be considered as filed on such last day.

This court said that the prescriptive period to make an assessment of internal revenue
taxes is provided "primarily to safeguard the interests of taxpayers from unreasonable
investigation."71 This court explained in Commissioner of Internal Revenue v. FMF
Development Corporation72 the reason behind the provisions on prescriptive periods
for tax assessments: Accordingly, the government must assess internal revenue taxes
on time so as not to extend indefinitely the period of assessment and deprive the
taxpayer of the assurance that it will no longer be subjected to further investigation for
taxes after the expiration of reasonable period of time.73

Rules derogating taxpayers’ right against prolonged and unscrupulous investigations

are strictly construed against the government.74
[T]he law on prescription should beinterpreted in a way conducive to bringing about the
beneficent purpose of affording protection to the taxpayer within the contemplation of
the Commission which recommended the approval of the law. To the Government, its
tax officers are obliged to act promptlyin the making of assessment so that taxpayers,
after the lapse of the period of prescription, would have a feeling of security against
unscrupulous tax agents who will always try to find an excuse to inspect the books of
taxpayers, not to determine the latter’s real liability, but to take advantage of a possible
opportunity to harass even law-abiding businessmen. Without such legal defense,
taxpayers would be open season to harassment by unscrupulous tax agents.75

Moreover, in Commissioner of Internal Revenue v. BF Goodrich Phils.:76

For the purpose of safeguarding taxpayers from any unreasonable examination,

investigation or assessment, our tax law provides a statute of limitations in the collection
of taxes. Thus, the law on prescription, being a remedial measure, should be liberally
construed in order to afford such protection. As a corollary, the exceptions to the law on
prescription should perforce be strictly construed[.]

....

. . . . Such instances of negligence or oversight on the part of the BIR cannot prejudice
taxpayers, considering that the prescriptive period was precisely intended to give them
peace of mind.77 (Citation omitted)

The BIR had three years from the filing of petitioner’s final tax return in 2000 to assess
petitioner’s taxes. Nothing stopped the BIR from making the correct assessment. The
elevation of the refund claim with the Court of Tax Appeals was not a bar against the
BIR’s exercise of its assessment powers.

The BIR, however, did not initiate any assessment for deficiency capital gains tax.78
Since more than a decade have lapsed from the filing of petitioner's return, the BIR can
no longer assess petitioner for deficiency capital gains taxes, if petitioner is later found
to have capital gains tax liabilities in excess of the amount claimed for refund.
The Court of Tax Appeals should not be expected to perform the BIR's duties of
assessing and collecting taxes whenever the BIR, through neglect or oversight, fails to
do so within the prescriptive period allowed by law.

WHEREFORE, the Court of Tax Appeals' November 3, 2006 decision is SET ASIDE.
The Bureau of Internal Revenue is ordered to refund petitioner SMI-Ed Philippines
Technology, Inc. the amount of 5% final tax paid to the BIR, less the 6% capital gains
tax on the sale of petitioner SMI-Ed Philippines Technology, Inc. 's land and building. In
view of the lapse of the prescriptive period for assessment, any capital gains tax
accrued from the sale of its land and building that is in excess of the 5% final tax paid to
the Bureau of Internal Revenue may no longer be recovered from petitioner SMI-Ed
Philippines Technology, Inc.

SO ORDERED.

G.R. No. L-26284 October 8, 1986

TOMAS CALASANZ, ET AL., petitioners,

vs.

THE COMMISSIONER OF INTERNAL REVENUE and the COURT OF TAX

APPEALS, respondents.

San Juan, Africa, Gonzales & San Agustin Law Office for petitioners.

FERNAN, J.:

Appeal taken by Spouses Tomas and Ursula Calasanz from the decision of the Court of
Tax Appeals in CTA No. 1275 dated June 7, 1966, holding them liable for the payment
of P3,561.24 as deficiency income tax and interest for the calendar year 1957 and
P150.00 as real estate dealer's fixed tax.
Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural
land located in Cainta, Rizal, containing a total area of 1,678,000 square meters. In
order to liquidate her inheritance, Ursula Calasanz had the land surveyed and
subdivided into lots. Improvements, such as good roads, concrete gutters, drainage and
lighting system, were introduced to make the lots saleable. Soon after, the lots were
sold to the public at a profit.

In their joint income tax return for the year 1957 filed with the Bureau of Internal
Revenue on March 31, 1958, petitioners disclosed a profit of P31,060.06 realized from
the sale of the subdivided lots, and reported fifty per centum thereof or P15,530.03 as
taxable capital gains.

Upon an audit and review of the return thus filed, the Revenue Examiner adjudged
petitioners engaged in business as real estate dealers, as defined in Section 194 [s] 1 of
the National Internal Revenue Code, required them to pay the real estate dealer's tax 2
and assessed a deficiency income tax on profits derived from the sale of the lots based
on the rates for ordinary income.

On September 29, 1962, petitioners received from respondent Commissioner of Internal

Revenue:

a. Demand No. 90-B-032293-57 in the amount of P160.00 representing real estate

dealer's fixed tax of P150.00 and P10.00 compromise penalty for late payment; and

b. Assessment No. 90-5-35699 in the amount of P3,561.24 as deficiency income

tax on ordinary gain of P3,018.00 plus interest of P 543.24.

On October 17, 1962, petitioners filed with the Court of Tax Appeals a petition for review
contesting the aforementioned assessments.
On June 7, 1966, the Tax Court upheld the respondent Commissioner except for that
portion of the assessment regarding the compromise penalty of P10.00 for the reason
that in this jurisdiction, the same cannot be collected in the absence of a valid and
binding compromise agreement.

Hence, the present appeal.

The issues for consideration are:

a. Whether or not petitioners are real estate dealers liable for real estate dealer's
fixed tax; and

b. Whether the gains realized from the sale of the lots are taxable in full as ordinary
income or capital gains taxable at capital gain rates.

The issues are closely interrelated and will be taken jointly.

Petitioners assail their liabilities as "real estate dealers" and seek to bring the profits
from the sale of the lots under Section 34 [b] [2] 3 of the Tax Code.

The theory advanced by the petitioners is that inherited land is a capital asset within the
meaning of Section 34[a] [1] of the Tax Code and that an heir who liquidated his
inheritance cannot be said to have engaged in the real estate business and may not be
denied the preferential tax treatment given to gains from sale of capital assets, merely
because he disposed of it in the only possible and advantageous way.

Petitioners averred that the tract of land subject of the controversy was sold because of
their intention to effect a liquidation. They claimed that it was parcelled out into smaller
lots because its size proved difficult, if not impossible, of disposition in one single
transaction. They pointed out that once subdivided, certainly, the lots cannot be sold in
one isolated transaction. Petitioners, however, admitted that roads and other
improvements were introduced to facilitate its sale. 4

On the other hand, respondent Commissioner maintained that the imposition of the
taxes in question is in accordance with law since petitioners are deemed to be in the
real estate business for having been involved in a series of real estate transactions
pursued for profit. Respondent argued that property acquired by inheritance may be
converted from an investment property to a business property if, as in the present case,
it was subdivided, improved, and subsequently sold and the number, continuity and
frequency of the sales were such as to constitute "doing business." Respondent
likewise contended that inherited property is by itself neutral and the fact that the
ultimate purpose is to liquidate is of no moment for the important inquiry is what the
taxpayer did with the property. Respondent concluded that since the lots are ordinary
assets, the profits realized therefrom are ordinary gains, hence taxable in full.

We agree with the respondent.

The assets of a taxpayer are classified for income tax purposes into ordinary assets and
capital assets. Section 34[a] [1] of the National Internal Revenue Code broadly defines
capital assets as follows:

[1] Capital assets.-The term 'capital assets' means property held by the taxpayer
[whether or not connected with his trade or business], but does not include, stock in
trade of the taxpayer or other property of a kind which would properly be included, in the
inventory of the taxpayer if on hand at the close of the taxable year, or property held by
the taxpayer primarily for sale to customers in the ordinary course of his trade or
business, or property used in the trade or business of a character which is subject to the
allowance for depreciation provided in subsection [f] of section thirty; or real property
used in the trade or business of the taxpayer.

The statutory definition of capital assets is negative in nature. 5 If the asset is not
among the exceptions, it is a capital asset; conversely, assets falling within the
exceptions are ordinary assets. And necessarily, any gain resulting from the sale or
exchange of an asset is a capital gain or an ordinary gain depending on the kind of
asset involved in the transaction.

However, there is no rigid rule or fixed formula by which it can be determined with
finality whether property sold by a taxpayer was held primarily for sale to customers in
the ordinary course of his trade or business or whether it was sold as a capital asset. 6
Although several factors or indices 7 have been recognized as helpful guides in making
a determination, none of these is decisive; neither is the presence nor the absence of
these factors conclusive. Each case must in the last analysis rest upon its own peculiar
facts and circumstances. 8

Also a property initially classified as a capital asset may thereafter be treated as an

ordinary asset if a combination of the factors indubitably tend to show that the activity
was in furtherance of or in the course of the taxpayer's trade or business. Thus, a sale
of inherited real property usually gives capital gain or loss even though the property has
to be subdivided or improved or both to make it salable. However, if the inherited
property is substantially improved or very actively sold or both it may be treated as held
primarily for sale to customers in the ordinary course of the heir's business. 9

Upon an examination of the facts on record, We are convinced that the activities of
petitioners are indistinguishable from those invariably employed by one engaged in the
business of selling real estate.

One strong factor against petitioners' contention is the business element of

development which is very much in evidence. Petitioners did not sell the land in the
condition in which they acquired it. While the land was originally devoted to rice and fruit
trees, 10 it was subdivided into small lots and in the process converted into a residential
subdivision and given the name Don Mariano Subdivision. Extensive improvements like
the laying out of streets, construction of concrete gutters and installation of lighting
system and drainage facilities, among others, were undertaken to enhance the value of
the lots and make them more attractive to prospective buyers. The audited financial
statements 11 submitted together with the tax return in question disclosed that a
considerable amount was expended to cover the cost of improvements. As a matter of
fact, the estimated improvements of the lots sold reached P170,028.60 whereas the
cost of the land is only P 4,742.66. There is authority that a property ceases to be a
capital asset if the amount expended to improve it is double its original cost, for the
extensive improvement indicates that the seller held the property primarily for sale to
customers in the ordinary course of his business. 12

Another distinctive feature of the real estate business discernible from the records is the
existence of contracts receivables, which stood at P395,693.35 as of the year ended
December 31, 1957. The sizable amount of receivables in comparison with the sales
volume of P446,407.00 during the same period signifies that the lots were sold on
installment basis and suggests the number, continuity and frequency of the sales. Also
of significance is the circumstance that the lots were advertised 13 for sale to the public
and that sales and collection commissions were paid out during the period in question.

Petitioners, likewise, urge that the lots were sold solely for the purpose of liquidation.

In Ehrman vs. Commissioner,14 the American court in clear and categorical terms
rejected the liquidation test in determining whether or not a taxpayer is carrying on a
trade or business The court observed that the fact that property is sold for purposes of
liquidation does not foreclose a determination that a "trade or business" is being
conducted by the seller. The court enunciated further:

We fail to see that the reasons behind a person's entering into a business-whether it is
to make money or whether it is to liquidate-should be determinative of the question of
whether or not the gains resulting from the sales are ordinary gains or capital gains. The
sole question is-were the taxpayers in the business of subdividing real estate? If they
were, then it seems indisputable that the property sold falls within the exception in the
definition of capital assets . . . that is, that it constituted 'property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business.

Additionally, in Home Co., Inc. vs. Commissioner, 15 the court articulated on the matter
in this wise:

One may, of course, liquidate a capital asset. To do so, it is necessary to sell. The sale
may be conducted in the most advantageous manner to the seller and he will not lose
the benefits of the capital gain provision of the statute unless he enters the real estate
business and carries on the sale in the manner in which such a business is ordinarily
conducted. In that event, the liquidation constitutes a business and a sale in the
ordinary course of such a business and the preferred tax status is lost.

In view of the foregoing, We hold that in the course of selling the subdivided lots,
petitioners engaged in the real estate business and accordingly, the gains from the sale
of the lots are ordinary income taxable in full.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No costs.

SO ORDERED.

Feria (Chairman), Alampay, Gutierrez, Jr. and Paras, JJ., concur.

G.R. No. L-24248 July 31, 1974

ANTONIO TUASON, JR., petitioner,

vs.

JOSE B. LINGAD, as Commissioner of Internal Revenue, respondent.

Araneta, Mendoza & Papa for petitioner.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R.
Rosete and Special Attorney Antonio H. Garces for respondent.
CASTRO, J.:p

In this petition for review of the decision of the Court of Tax Appeals in CTA Case 1398,
the petitioner Antonio Tuason, Jr. (hereinafter referred to as the petitioner) assails the
Tax Court's conclusion that the gains he realized from the sale of residential lots
(inherited from his mother) were ordinary gains and not gains from the sale of capital
assets under section 34(1) of the National Internal Revenue Code.

The essential facts are not in dispute.

In 1948 the petitioner inherited from his mother several tracts of land, among which
were two contiguous parcels situated on Pureza and Sta. Mesa streets in Manila, with
an area of 318 and 67,684 square meters, respectively.

When the petitioner's mother was yet alive she had these two parcels subdivided into
twenty-nine lots. Twenty-eight were allocated to their then occupants who had lease
contracts with the petitioner's predecessor at various times from 1900 to 1903, which
contracts expired on December 31, 1953. The 29th lot (hereinafter referred to as Lot
29), with an area of 48,000 square meters, more or less, was not leased to any person.
It needed filling because of its very low elevation, and was planted to kangkong and
other crops.

After the petitioner took possession of the mentioned parcels in 1950, he instructed his
attorney-in-fact, J. Antonio Araneta, to sell them.

There was no difficulty encountered in selling the 28 small lots as their respective
occupants bought them on a 10-year installment basis. Lot 29 could not however be
sold immediately due to its low elevation.

Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdivided into
small lots and paved with macadam roads. The small lots were then sold over the years
on a uniform 10-year annual amortization basis. J. Antonio Araneta, the petitioner's
attorney-in-fact, did not employ any broker nor did he put up advertisements in the
matter of the sale thereof.

In 1953 and 1954 the petitioner reported his income from the sale of the small lots
(P102,050.79 and P103,468.56, respectively) as long-term capital gains. On May 17,
1957 the Collector of Internal Revenue upheld the petitioner's treatment of his gains
from the said sale of small lots, against a contrary ruling of a revenue examiner.

In his 1957 tax return the petitioner as before treated his income from the sale of the
small lots (P119,072.18) as capital gains and included only ½ thereof as taxable
income. In this return, the petitioner deducted the real estate dealer's tax he paid for
1957. It was explained, however, that the payment of the dealer's tax was on account of
rentals received from the mentioned 28 lots and other properties of the petitioner. On
the basis of the 1957 opinion of the Collector of Internal Revenue, the revenue
examiner approved the petitioner's treatment of his income from the sale of the lots in
question. In a memorandum dated July 16, 1962 to the Commissioner of Internal
Revenue, the chief of the BIR Assessment Department advanced the same opinion,
which was concurred in by the Commissioner of Internal Revenue.

On January 9, 1963, however, the Commissioner reversed himself and considered the
petitioner's profits from the sales of the mentioned lots as ordinary gains. On January
28, 1963 the petitioner received a letter from the Bureau of Internal Revenue advising
him to pay deficiency income tax for 1957, as follows:

Net income per orig. investigation ............... P211,095.36

Add:

56% of realized profit on sale

of lots which was deducted in the

income tax return and allowed in

the original report of examination ................. 59,539.09 Net income per final
investigation ................. P270,824.70

Less: Personal exemption ..................................... 1,800.00

Amount subject to tax ................................. P269,024.70 Tax due thereon
.......................................... P98,551.00

Less: Amount already assessed .................... 72,199.00 Balance ......... P26,352.00

Add:

½% monthly interest from

6-20-59 to 6-29-62 .................................... 4,742.36

TOTAL AMOUNT DUE AND

COLLECTIBLE ......................................... P31,095.36

The petitioner's motion for reconsideration of the foregoing deficiency assessment was
denied, and so he went up to the Court of Tax Appeals, which however rejected his
posture in a decision dated January 16, 1965, and ordered him, in addition, to pay a 5%
Surcharge and 1% monthly interest "pursuant to Sec. 51(e) of the Revenue Code."

Hence, the present petition.

The petitioner assails the correctness of the opinion below that as he was engaged in
the business of leasing the lots he inherited from his mother as well other real
properties, his subsequent sales of the mentioned lots cannot be recognized as sales of
capital assets but of "real property used in trade or business of the taxpayer." The
petitioner argues that (1) he is not the one who leased the lots in question; (2) the lots
were residential, not commercial lots; and (3) the leases on the 28 small lots were to
last until 1953, before which date he was powerless to eject the lessees therefrom.

The basic issue thus raised is whether the properties in question which the petitioner
had inherited and subsequently sold in small lots to other persons should be regarded
as capital assets.

1. The National Internal Revenue Code (C.A. 466, as amended) defines the term
"capital assets" as follows:
(1) Capital assets. — The term "capital assets" means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in
trade of the taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or property held by
the taxpayer primarily for sale to customers in the ordinary course of his trade or
business, or property, used in the trade or business, of a character which is subject to
the allowance for depreciation provided in subsection (f) of section thirty; or real
property used in the trade or business of the taxpayer.

As thus defined by law, the term "capital assets" includes all the properties of a taxpayer
whether or not connected with his trade or business, except: (1) stock in trade or other
property included in the taxpayer's inventory; (2) property primarily for sale to customers
in the ordinary course of his trade or business; (3) property used in the trade or
business of the taxpayer and subject to depreciation allowance; and (4) real property
used in trade or business.1 If the taxpayer sells or exchanges any of the properties
above-enumerated, any gain or loss relative thereto is an ordinary gain or an ordinary
loss; the gain or loss from the sale or exchange of all other properties of the taxpayer is
a capital gain or a capital loss.2

Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer (other than a
corporation) from the sale or exchange of capital assets held for more than twelve
months, only 50% of the net capital gain shall be taken into account in computing the
net income.

The Tax Code's provision on so-called long-term capital gains constitutes a statute of
partial exemption. In view of the familiar and settled rule that tax exemptions are
construed in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority,3 the field of application of the term it "capital assets" is necessarily narrow,
while its exclusions must be interpreted broadly.4 Consequently, it is the taxpayer's
burden to bring himself clearly and squarely within the terms of a tax-exempting
statutory provision, otherwise, all fair doubts will be resolved against him.5 It bears
emphasis nonetheless that in the determination of whether a piece of property is a
capital asset or an ordinary asset, a careful examination and weighing of all
circumstances revealed in each case must be made.6
@

In the case at bar, after a thoroughgoing study of all the circumstances relevant to the
resolution of the issue raised, this Court is of the view, and so holds, that the petitioner's
thesis is bereft of merit.

When the petitioner obtained by inheritance the parcels in question, transferred to him
was not merely the duty to respect the terms of any contract thereon, but as well the
correlative right to receive and enjoy the fruits of the business and property which the
decedent had established and maintained.7 Moreover, the record discloses that the
petitioner owned other real properties which he was putting out for rent, from which he
periodically derived a substantial income, and for which he had to pay the real estate
dealer's tax (which he used to deduct from his gross income).8 In fact, as far back as
1957 the petitioner was receiving rental payments from the mentioned 28 small lots,
even if the leases executed by his deceased mother thereon expired in 1953. Under the
circumstances, the petitioner's sales of the several lots forming part of his rental
business cannot be characterized as other than sales of non-capital assets.

The sales concluded on installment basis of the subdivided lots comprising Lot 29 do
not deserve a different characterization for tax purposes. The following circumstances in
combination show unequivocally that the petitioner was, at the time material to this
case, engaged in the real estate business: (1) the parcels of land involved have in
totality a substantially large area, nearly seven (7) hectares, big enough to be
transformed into a subdivision, and in the case at bar, the said properties are located in
the heart of Metropolitan Manila; (2) they were subdivided into small lots and then sold
on installment basis (this manner of selling residential lots is one of the basic earmarks
of a real estate business); (3) comparatively valuable improvements were introduced in
the subdivided lots for the unmistakable purpose of not simply liquidating the estate but
of making the lots more saleable to the general public; (4) the employment of J. Antonio
Araneta, the petitioner's attorney-in-fact, for the purpose of developing, managing,
administering and selling the lots in question indicates the existence of owner-realty
broker relationship; (5) the sales were made with frequency and continuity, and from
these the petitioner consequently received substantial income periodically; (6) the
annual sales volume of the petitioner from the said lots was considerable, e.g.,
P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in 1957; and (7) the
petitioner, by his own tax returns, was not a person who can be indubitably adjudged as
a stranger to the real estate business. Under the circumstances, this Court finds no
error in the holding below that the income of the petitioner from the sales of the lots in
question should be considered as ordinary income.

2. This Court notes, however, that in ordering the petitioner to pay the deficiency
income tax, the Tax Court also required him to pay a 5% surcharge plus 1% monthly
interest. In our opinion this additional requirement should be eliminated because the
petitioner relied in good faith upon opinions rendered by no less than the highest
officials of the Bureau of Internal Revenue, including the Commissioner himself. The
following ruling in Connell Bros. Co. (Phil.) vs. Collector of Internal Revenue9 applies
with reason to the case at bar:

We do not think Section 183(a) of the National Internal Revenue Code is applicable.
The same imposes the penalty of 25% when the percentage tax is not paid on time, and
contemplates a case where the liability for the tax is undisputed or indisputable. In the
present case the taxes were paid, the delay being with reference to the deficiency,
owing to a controversy as to the proper interpretation if Circulars Nos. 431 and 440 of
the office of respondent-appellee. The controversy was generated in good faith, since
that office itself appears to have formerly taken the view that the inclusion of the words
"tax included" on invoices issued by the taxpayer was sufficient compliance with the
requirements of said circulars. 10

ACCORDINGLY, the judgment of the Court of Tax Appeals is affirmed, except the
portion thereof that imposes 5% surcharge and 1% monthly interest, which is hereby set
aside. No costs.

Makalintal, C.J., Makasiar, Esguerra and Muñoz Palma, JJ., concur.

Teehankee, J., took no part.