G.R. No. L-28896 February 17, 1988
7 It is true that as a rule the warrant of
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be
achieved.
The main issue in this case is whether or not the Collector of Internal Revenue
correctly disallowed the P75,000.00 deduction claimed by private respondent
Algue as legitimate business expenses in its income tax returns. The corollary
issue is whether or not the appeal of the private respondent from the decision
of the Collector of Internal Revenue was made on time and in accordance with
law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a
domestic corporation engaged in engineering, construction and other allied
activities, received a letter from the petitioner assessing it in the total amount
of P83,183.85 as delinquency income taxes for the years 1958 and 1959.1 On
January 18, 1965, Algue flied a letter of protest or request for reconsideration,
which letter was stamp received on the same day in the office of the
petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented
to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who
refused to receive it on the ground of the pending protest. 3 A search of the
protest in the dockets of the case proved fruitless. Atty. Guevara produced his
file copy and gave a photostat to BIR agent Ramon Reyes, who deferred
service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed
that the BIR was not taking any action on the protest and it was only then that
he accepted the warrant of distraint and levy earlier sought to be
served.5 Sixteen days later, on April 23, 1965, Algue filed a petition for review
of the decision of the Commissioner of Internal Revenue with the Court of Tax
Appeals.6
The above chronology shows that the petition was filed seasonably. According
to Rep. Act No. 1125, the appeal may be made within thirty days after receipt
of the decision or ruling challenged.
distraint and levy is "proof of the finality of the assessment" 8 and renders
hopeless a request for reconsideration," 9 being "tantamount to an outright
denial thereof and makes the said request deemed rejected." 10 But there is a
special circumstance in the case at bar that prevents application of this
accepted doctrine.
The proven fact is that four days after the private respondent received the
petitioner's notice of assessment, it filed its letter of protest. This was
apparently not taken into account before the warrant of distraint and levy was
issued; indeed, such protest could not be located in the office of the petitioner.
It was only after Atty. Guevara gave the BIR a copy of the protest that it was,
if at all, considered by the tax authorities. During the intervening period, the
warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private
respondent was not pro forma and was based on strong legal considerations.
It thus had the effect of suspending on January 18, 1965, when it was filed,
the reglementary period which started on the date the assessment was
received, viz., January 14, 1965. The period started running again only on April
7, 1965, when the private respondent was definitely informed of the implied
rejection of the said protest and the warrant was finally served on it. Hence,
when the appeal was filed on April 23, 1965, only 20 days of the reglementary
period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly
disallowed because it was not an ordinary reasonable or necessary business
expense. The Court of Tax Appeals had seen it differently. Agreeing with
Algue, it held that the said amount had been legitimately paid by the private
respondent for actual services rendered. The payment was in the form of
promotional fees. These were collected by the Payees for their work in the
creation of the Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar Estate
Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed
these promotional fees to be personal holding company income 12 but later
conformed to the decision of the respondent court rejecting this assertion.13 In
fact, as the said court found, the amount was earned through the joint efforts
of the persons among whom it was distributed It has been established that the
Philippine Sugar Estate Development Company had earlier appointed Algue
as its agent, authorizing it to sell its land, factories and oil manufacturing
process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara,
Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation
of the Vegetable Oil Investment Corporation, inducing other persons to invest
in it.14 Ultimately, after its incorporation largely through the promotion of the
said persons, this new corporation purchased the PSEDC properties.15 For
this sale, Algue received as agent a commission of P126,000.00, and it was
from this commission that the P75,000.00 promotional fees were paid to the
aforenamed individuals.16
There is no dispute that the payees duly reported their respective shares of
the fees in their income tax returns and paid the corresponding taxes
thereon.17 The Court of Tax Appeals also found, after examining the evidence,
that no distribution of dividends was involved.18
The petitioner claims that these payments are fictitious because most of the
payees are members of the same family in control of Algue. It is argued that
no indication was made as to how such payments were made, whether by
check or in cash, and there is not enough substantiation of such payments. In
short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent
when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus,
testified that the payments were not made in one lump sum but periodically
and in different amounts as each payee's need arose. 19 It should be
remembered that this was a family corporation where strict business
procedures were not applied and immediate issuance of receipts was not
required. Even so, at the end of the year, when the books were to be closed,
each payee made an accounting of all of the fees received by him or her, to
make up the total of P75,000.00. 20 Admittedly, everything seemed to be
informal. This arrangement was understandable, however, in view of the close
relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees
was not excessive. The total commission paid by the Philippine Sugar Estate
Development Co. to the private respondent was P125,000.00. 21 After
deducting the said fees, Algue still had a balance of P50,000.00 as clear profit
from the transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it was the
payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate
properties. This finding of the respondent court is in accord with the following
provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net
income there shall be allowed as deductions —
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid
or incurred during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries or
other compensation for personal services actually rendered;
... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the
ordinary and necessary expenses paid or incurred in carrying
on any trade or business may be included a reasonable
allowance for salaries or other compensation for personal
services actually rendered. The test of deductibility in the case
of compensation payments is whether they are reasonable
and are, in fact, payments purely for service. This test and
deductibility in the case of compensation payments is whether
they are reasonable and are, in fact, payments purely for
service. This test and its practical application may be further
stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact
as the purchase price of services, is not deductible. (a) An
ostensible salary paid by a corporation may be a distribution
of a dividend on stock. This is likely to occur in the case of a
corporation having few stockholders, Practically all of whom
draw salaries. If in such a case the salaries are in excess of
those ordinarily paid for similar services, and the excessive
payment correspond or bear a close relationship to the
stockholdings of the officers of employees, it would seem
likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of
earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30
O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular
employ of Algue nor were they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the
taxpayer to prove the validity of the claimed deduction. In the present case,
however, we find that the onus has been discharged satisfactorily. The private
respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors
and prominent businessmen to venture in an experimental enterprise and
involve themselves in a new business requiring millions of pesos. This was no
mean feat and should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of one's hard
earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its
part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and
material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by
those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is

a requirement in all democratic regimes that it be exercised reasonably and in
accordance with the prescribed procedure. If it is not, then the taxpayer has a
right to complain and the courts will then come to his succor. For all the
awesome power of the tax collector, he may still be stopped in his tracks if the
taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the
petitioner was filed on time with the respondent court in accordance with Rep.
Act No. 1125. And we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code and should
therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is

AFFIRMED in toto, without costs.

SO ORDERED.
BPI-FAMILY SAVINGS BANK, Inc., Petitioner, v. COURT OF APPEALS,
COURT OF TAX APPEALS and the COMMISSIONER OF INTERNAL In its Corporate Annual Income Tax Return for the year 1989, the following
REVENUE, Respondents. items are reflected:chanrob1es virtual 1aw library

DECISION Income P1,017,931,831.00

Deductions P1,026,218,791.00
PANGANIBAN, J.:
Net Income (Loss) (P8,286,960.00)

If the State expects its taxpayers to observe fairness and honesty in paying Taxable Income (Loss) P8,286,960.00
their taxes, so must it apply the same standard against itself in refunding
excess payments. When it is undisputed that a taxpayer is entitled to a refund Less:chanrob1es virtual 1aw library
the State should not invoke technicalities to keep money not belonging to it.
No one, not even the State, should enrich oneself at the expense of 1988 Tax Credit P185,001.00
another.chanrobles.com : virtual law library
1989 Tax Credit P112,491.00
The Case
————————

Before us is a Petition for Review assailing the March 31, 1995 Decision of the TOTAL AMOUNT P297,492.00
Court of Appeals 1 (CA) in CA-GR SP No. 34240, which affirmed the
December 24, 1993 Decision 2 of the Court of Tax Appeals (CTA). The CA REFUNDABLE
disposed as follows:jgc:chanrobles.com.ph
"It appears from the foregoing 1989 Income Tax Return that petitioner had a
"WHEREFORE, foregoing premises considered, the petition is hereby total refundable amount of P297,492 inclusive of the P112,491.00 being
DISMISSED for lack of merit." 3 claimed as tax refund in the present case. However, petitioner declared in the
same 1989 Income Tax Return that the said total refundable amount of
On the other hand, the dispositive portion of the CTA Decision affirmed by the P297,492.00 will be applied as tax credit to the succeeding taxable year.
CA reads as follows:jgc:chanrobles.com.ph
"On October 11, 1990, petitioner filed a written claim for refund in the amount
"WHEREFORE, in [view of] all the foregoing, Petitioner’s claim for refund is of P112,491.00 with the respondent Commissioner of Internal Revenue
hereby DENIED and this Petition for Review is DISMISSED for lack of merit." alleging that it did not apply the 1989 refundable amount of P297,492.00
4 (including P112,491.00) to its 1990 Annual Income Tax Return or other tax
liabilities due to the alleged business losses it incurred for the same year.
Also assailed is the November 8, 1995 CA Resolution 5 denying
reconsideration. "Without waiting for respondent Commissioner of Internal Revenue to act on
the claim for refund, petitioner filed a petition for review with respondent Court
The Facts of Tax Appeals, seeking the refund of the amount of P112.491.00.

"The respondent Court of Tax Appeals dismissed petitioner’s petition on the

The facts of this case were summarized by the CA in this ground that petitioner failed to present as evidence its Corporate Annual
wise:jgc:chanrobles.com.ph Income Tax Return for 1990 to establish the fact that petitioner had not yet
credited the amount of P297,492.00 (inclusive of the amount P112,491.00
"This case involves a claim for tax refund in the amount of P112,491.00 which is the subject of the present controversy) to its 1990 income tax
representing petitioner’s tax withheld for the year 1989. liability.chanrobles.com : law library
 may opt either (1) to obtain such refund or (2) to credit said amount for the
"Petitioner filed a motion for reconsideration, however, the same was denied succeeding taxable year, petitioner indicated in its 1989 Income Tax Return
by respondent court in its Resolution dated May 6,1994." 6 that it would apply the said amount as a tax credit for the succeeding taxable
year, 1990. Subsequently, petitioner informed the Bureau of Internal Revenue
As earlier noted, the CA affirmed the CTA. Hence, this Petition. 7 (BIR) that it would claim the amount as a tax refund, instead of applying it as
a tax credit. When no action from the BIR was forthcoming, petitioner filed its
Ruling of the Court of Appeals claim with the Court of Tax Appeals.

The CTA and the CA, however, denied the claim for tax refund. Since petitioner
In affirming the CTA, the Court of Appeals ruled as declared in its 1989 Income Tax Return that it would apply the excess
follows:jgc:chanrobles.com.ph withholding tax as a tax credit for the following year, the Tax Court held that
petitioner was presumed to have done so. The CTA and the CA ruled that
"It is incumbent upon the petitioner to show proof that it has not credited to its petitioner failed to overcome this presumption because it did not present its
1990 Annual income Tax Return, the amount of P297,492.00 (including 1990 Return, which would have shown that the amount in dispute was not
P112,491.00), so as to refute its previous declaration in the 1989 Income Tax applied as a tax credit. Hence, the CA concluded that petitioner was not
Return that the said amount will be applied as a tax credit in the succeeding entitled to a tax refund.chanroblesvirtual|awlibrary
year of 1990. Having failed to submit such requirement, there is no basis to
grant the claim for refund. . . . We disagree with the Court of Appeals. As a rule, the factual findings of the
appellate court are binding on this Court. This rule, however, does not apply
"Tax refunds are in the nature of tax exemptions. As such, they are regarded where, inter alia, the judgment is premised on a misapprehension of facts, or
as in derogation of sovereign authority and to be construed strictissimi juris when the appellate court failed to notice certain relevant facts which if
against the person or entity claiming the exemption. In other words, the burden considered would justify a different conclusion. 11 This case is one such
of proof rests upon the taxpayer to establish by sufficient and competent exception.
evidence its entitlement to the claim for refund." 8
In the first place, petitioner presented evidence to prove its claim that it did not
Issue apply the amount as a tax credit. During the trial before the CTA, Ms. Yolanda
Esmundo, the manager of petitioner’s accounting department, testified to this
In their Memorandum, respondents identify the issue in this fact. It likewise presented its claim for refund and a certification issued by Mr.
wise:jgc:chanrobles.com.ph Gil Lopez, petitioner’s vice-president, stating that the amount of P112,491 "has
not been and/or will not be automatically credited/offset against any
"The sole issue to be resolved is whether or not petitioner is entitled to the succeeding quarters’ income tax liabilities for the rest of the calendar year
refund of P112,491.00, representing excess creditable withholding tax paid for ending December 31, 1990." Also presented were the quarterly returns for the
the taxable year 1989." 9 first two quarters of 1990.

The Court’s Ruling The Bureau of Internal Revenue, for its part, failed to controvert petitioner’s
claim. In fact, it presented no evidence at all. Because it ought to know the tax
records of all taxpayers, the CIR could have easily disproved petitioner’s claim.
The Petition is meritorious. To repeat, it did not do so.

Main Issue:chanrob1es virtual 1aw library More important, a copy of the Final Adjustment Return for 1990 was attached
to petitioner’s Motion for Reconsideration filed before the CTA. 12 A final
Petitioner Entitled to Refund adjustment return shows whether a corporation incurred a loss or gained a
profit during the taxable year. In this case, that Return clearly showed that
It is undisputed that petitioner had excess withholding taxes for the year 1989 petitioner incurred P52,480,173 as net loss in 1990. Clearly, it could not have
and was thus entitled to a refund amounting to P112,491. Pursuant to Section applied the amount in dispute as a tax credit.
69 10 of the 1986 Tax Code which states that a corporation entitled to a refund
Again, the BIR did not controvert the veracity of the said return. It did not even
file an opposition to petitioner’s Motion and the 1990 Final Adjustment Return
attached thereto. In denying the Motion for Reconsideration, however, the CTA
ignored the said Return. In the same vein, the CA did not pass upon that
significant document.
True, strict procedural rules generally frown upon the submission of the Return
after the trial. The law creating the Court of Tax Appeals, however, specifically
provides that proceedings before it "shall not be governed strictly by the
technical rules of evidence." 13 The paramount consideration remains the
ascertainment of truth. Verily, the quest for orderly presentation of issues is
not an absolute. It should not bar courts from considering undisputed facts to
arrive at a just determination of a controversy.
In the present case, the Return attached to the Motion for Reconsideration
clearly showed that petitioner suffered a net loss in 1990. Contrary to the
holding of the CA and the CTA, petitioner could not have applied the amount
as a tax credit. In failing to consider the said Return, as well as the other
documentary evidence presented during the trial, the appellate court
committed a reversible error.
It should be stressed that the rationale of the rules of procedure is to secure a
just determination of every action. They are tools designed to facilitate the
attainment of justice. 14 But there can be no just determination of the present
action if we ignore, on grounds of strict technicality, the Return submitted
before the CTA and even before this Court. 15 To repeat, the undisputed fact
is that petitioner suffered a net loss in 1990; accordingly, it incurred no tax
liability to which the tax credit could be applied. Consequently, there is no
reason for the BIR and this Court to withhold the tax refund which rightfully
belongs to the petitioner.chanrobles.com : chanrobles.com.ph
Public respondents maintain that what was attached to petitioner’s Motion for
Reconsideration was not the final adjustment Return, but petitioner’s first two
quarterly returns for 1990. 16 This allegation is wrong. An examination of the
records shows that the 1990 Final Adjustment Return was attached to the
Motion for Reconsideration. On the other hand, the two quarterly returns for
1990 mentioned by respondent were in fact attached to the Petition for Review
filed before the CTA. Indeed, to rebut respondents’ specific contention,
petitioner submitted before us its Surrejoinder, to which was attached the
Motion for Reconsideration and Exhibit "A" thereof, the Final Adjustment
Return for 1990. 17
CTA Case No. 4897
Petitioner also calls the attention of this Court, as it had done before the CTA,
to a Decision rendered by the Tax Court in CTA Case No. 4897, involving its
claim for refund for the year 1990. In that case, the Tax Court held that
"petitioner suffered a net loss for the taxable year 1990 . . .’’ 18 Respondent,
however, urges this Court not to take judicial notice of the said case. 19
As a rule, "courts are not authorized to take judicial notice of the contents of
the records of other cases, even when such cases have been tried or are
pending in the same court, and notwithstanding the fact that both cases may
have been heard or are actually pending before the same judge." 20
Be that as it may, Section 2, Rule 129 provides that courts may take judicial
notice of matters ought to be known to judges because of their judicial
functions. In this case, the Court notes that a copy of the Decision in CTA Case
No. 4897 was attached to the Petition for Review filed before this Court.
Significantly, respondents do not claim at all that the said Decision was
fraudulent or nonexistent. Indeed, they do not even dispute the contents of the
said Decision, claiming merely that the Court cannot take judicial notice
thereof.chanrobles.com : virtuallawlibrary
To our mind, respondents’ reasoning underscores the weakness of their case.
For if they had really believed that petitioner is not entitled to a tax refund, they
could have easily proved that it did not suffer any loss in 1990. Indeed, it is
noteworthy that respondents opted not to assail the fact appearing therein —
that petitioner suffered a net loss in 1990 — in the same way that it refused to
controvert the same fact established by petitioner’s other documentary
exhibits.
In any event, the Decision in CTA Case No. 4897 is not the sole basis of
petitioner’s case. It is merely one more bit of information showing the stark
truth: petitioner did not use its 1989 refund to pay its taxes for 1990.
Finally, respondents argue that tax refunds are in the nature of tax exemptions
and are to be construed strictissimi juris against the claimant. Under the facts
of this case, we hold that petitioner has established its claim. Petitioner may
have failed to strictly comply with the rules of procedure; it may have even
been negligent. These circumstances, however, should not compel the Court
to disregard this cold, undisputed fact: that petitioner suffered a net loss in
1990, and that it could not have applied the amount claimed as tax credits.
Substantial justice, equity and fair play are on the side of petitioner.
Technicalities and legalisms, however exalted, should not be misused by the
government to keep money not belonging to it and thereby enrich itself at the
expense of its law-abiding citizens. If the State expects its taxpayers to
observe fairness and honesty in paying their taxes, so must it apply the same
standard against itself in refunding excess payments of such taxes. Indeed,
the State must lead by its own example of honor, dignity and uprightness.
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision
and Resolution of the Court of Appeals REVERSED and SET ASIDE. The
Commissioner of Internal Revenue is ordered to refund to petitioner the
amount of P112,491 as excess creditable taxes paid in 1989. No
costs.chanroblesvirtuallawlibrary

SO ORDERED.
[G.R. No. L-7859. December 22, 1955.]
Promulgated in 1940, the law in question opens (section 1) with a declaration
WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the of emergency, due to the threat to our industry by the imminent imposition of
deceased Antonio Jayme Ledesma, Plaintiff-Appellant, v. J. ANTONIO export taxes upon sugar as provided in the Tydings-McDuffie Act, and the
ARANETA, as the Collector of Internal Revenue, Defendant-Appellee. "eventual loss of its preferential position in the United States market" ;
wherefore, the national policy was expressed "to obtain a readjustment of the
Ernesto J. Gonzaga for Appellant. benefits derived from the sugar industry by the component elements thereof"
and "to stabilize the sugar industry so as to prepare it for the eventuality of the
Solicitor General Ambrosio Padilla, First Assistant Solicitor General loss of its preferential position in the United States market and the imposition
Guillermo E. Torres and Solicitor Felicisimo R. Rosete for Appellee. of the export taxes."cralaw virtua1aw library

In section 2, Commonwealth Act 567 provides for an increase of the existing

SYLLABUS tax on the manufacture of sugar, on a graduated basis, on each picul of sugar
manufactures; while section 3 levies on owners or persons in control of lands
devoted to the cultivation of sugar cane and ceded to others for a
1. CONSTITUTIONAL LAW; TAXATION; POWER OF STATE TO LEVY TAX consideration, on lease or otherwise —
IN AND SUPPORT OF SUGAR INDUSTRY. — As the protection and
promotion of the sugar industry is a matter of public concern the Legislature "a tax equivalent to the difference between the money value of the rental or
may determine within reasonable bounds what is necessary for its protection consideration collected and the amount representing 12 per centum of the
and expedient for its promotion. Here, the legislative must be allowed full play, assessed value of such land."cralaw virtua1aw library
subject only to the test of reasonableness; and it is not contended that the
means provided in section 6 of Commonwealth Act No. 567 bear no relation According to section 6 of the law —
to the objective pursued or are oppressive in character. If objective an methods
are alike constitutionally valid, no reason is seen why the state may not levy SEC. 6. All collections made under this Act shall accrue to a special fund in
taxes to raise funds for their prosecution and attainment. Taxation may be the Philippine Treasury, to be known as the ’Sugar Adjustment and
made the implement. Taxation may be made the implement of the state’s Stabilization Fund,’ and shall be paid out only for any or all of the following
police power (Great Atl. & Pac. Tea Co. v. Grosjean, 301 U.S. 412, 81 L. Ed. purposes or to attain any or all of the following objectives, as may be provided
1193; U.S. v. Butler, 297 U.S. 1, 80 L. Ed. 477; M’Culloch v. Maryland, 4 by law.
Wheat, 316, 4 L. Ed. 579).
First, to place the sugar industry in a position to maintain itself despite the
2. ID.; ID.; POWER OF STATE TO SELECT SUBJECT OF TAXATION. — It gradual loss of the preferential position of the Philippine sugar in the United
is inherent in the power to tax that a state be free to select the subjects of States market, and ultimately to insure its continued existence notwithstanding
taxation, and it has been repeatedly held that "inequalities which result from a the loss of that market and the consequent necessity of meeting competition
singling out of one particular class for taxation or exemption infringe no in the free markets of the world;
constitutional limitation (Carmicheal v. Southern Coal & Coke Co., 301 U.S.
495, 81 L. Ed. 1245, citing numerous authorities, at 1251). Second, to readjust the benefits derived from the sugar industry by all of the
component elements thereof — the mill, the landowner, the planter of the
sugar cane, and the laborers in the factory and in the field — so that all might
DECISION continue profitably to engage therein;

Third, to limit the production of sugar to areas more economically suited to the
REYES, J. B. L., J.: production thereof; and

Fourth, to afford labor employed in the industry a living wage and to improve
This case was initiated in the Court of First Instance of Negros Occidental to their living and working conditions: Provided, That the President of the
test the legality of the taxes imposed by Commonwealth Act No. 567, Philippines may, until the adjournment of the next regular session of the
otherwise known as the Sugar Adjustment Act.
National Assembly, make the necessary disbursements from the fund herein
created (1) for the establishment and operation of sugar experiment station or
stations and the undertaking of researchers (a)to increase the recoveries of
the centrifugal sugar factories with the view of reducing manufacturing costs,
(b) to produce and propagate higher yielding varieties of sugar cane more
adaptable to different distinct conditions in the Philippines, (c) to lower the
costs of raising sugar cane, (d) to improve the buying quality of denatured
alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing
the other by-products of the industry, (f) to determine what crop or crops are
suitable for rotation and for the utilization of excess cane lands, and (g) on
other problems the solution of which would help rehabilitated and stabilize the
industry, and (2) for the improvement of living and working conditions in sugar
mills and sugar plantations, authorizing him to organize the necessary agency
or agencies to take charge of the expenditure and allocation of said funds to
carry out the purpose hereinbefore enumerated, and, likewise, authorizing the
disbursement from the fund herein created of the necessary amount of
amounts needed for salaries, wages, travelling expenses, equipment, and
other sundry expenses or said agency or agencies."cralaw virtua1aw library
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate
Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of
Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under
section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that
such tax is unconstitutional and void, being levied for the aid and support of
the sugar industry exclusively, which in plaintiff’s opinion is not a public
purpose for which a tax may be constitutionally levied. The action having been
dismissed by the Court of First Instance, the plaintiffs appealed the case
directly to this Court (Judiciary Act, section 17).
The basic defect in the plaintiff’s position is his assumption that the tax
provided for in Commonwealth Act No. 567 is a pure exercise of the taxing
power. Analysis of the Act, and particularly of section 6 (heretofore quoted in
full), will show that the tax is levied with a regulatory purpose, to provide means
for the rehabilitation and stabilization of the threatened sugar industry. In other
words, the act is primarily an exercise of the police power.
This Court can take judicial notice of the fact that sugar production in one of
the great industries of our nation, sugar occupying a leading position among
its export products; that it gives employment to thousands of laborers in fields
and factories; that it is a great source of the state’s wealth, is one of the
important sources of foreign exchange needed by our government, and is thus
pivotal in the plans of a regime committed to a policy of currency stability. Its
promotion, protection and advancement, therefore redounds greatly to the
general welfare. Hence it was competent for the legislature to find that the
general welfare demanded that the sugar industry should be stabilized in turn;
and in the wide field of its police power, the law-making body could provide
that the distribution of benefits therefrom be readjusted among its components
to enable it to resist the added strain of the increase in taxes that it had to
sustain (Sligh v. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson v. State ex
rel. Marey, 99 Fla. 1311, 128 So 853; Maxcy Inc. v. Mayo, 103 Fla. 552, 139
So. 121).
As stated in Johnson v. State ex rel. Marey, with reference to the citrus industry
in Florida —
"The protection of a large industry constituting one of the great sources of the
state’s wealth and therefore directly or indirectly affecting the welfare of so
great a portion of the population of the State is affected to such an extent by
public interests as to be within the police power of the sovereign." (128 So.
857)
Once it is conceded, as it must, that the protection and promotion of the sugar
industry is a matter of public concern, it follows that the Legislature may
determine within reasonable bounds what is necessary for its protection and
expedient for its promotion. Here, the legislative discretion must be allowed full
play, subject only to the test of reasonableness; and it is not contended that
the means provided in section 6 of the law (above quoted) bear no relation to
the objective pursued or are oppressive in character. If objective and methods
are alike constitutionally valid, no reason is seen why the state may not be levy
taxes to raise funds for their prosecution and attainment. Taxation may be
made the implement of the state’s police power (Great Atl. & Pac. Tea Co. v.
Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. v. Butler, 297 U. S. 1, 80 L. Ed.
477; M’Culloch v. Maryland, 4 Wheat. 318, 4 L. Ed. 579).
That the tax to be levied should burden the sugar producers themselves can
hardly be a ground of complaint; indeed, it appears rational that the tax be
obtained precisely from those who are to be benefited from the expenditure of
the funds derived from it. At any rate, it is inherent in the power to tax that a
state be free to select the subjects of taxation, and it has been repeatedly held
that "inequalities which result from a singling out of one particular class for
taxation, or exemption infringe no constitutional limitation" (Carmichael v.
Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous
authorities, at p. 1251).
From the point of view we have taken it appears of no moment that the funds
raised under the Sugar Stabilization Act, now in question, should be
exclusively spent in aid of the sugar industry, since it is that very enterprise
that is being protected. It may be that other industries are also in need of similar
protection; but the legislature is not required by the Constitution to adhere to a
policy of "all or none." As ruled in Minnesota ex rel. Pearson v. Probate Court,
309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where it is
most felt, it is not to be overthrown because there are other instances to which
it might have been applied;" and that the legislative authority, exerted within
its proper field, need not embrace all the evils within its reach" (N. L. R. B. v.
Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).

Even from the standpoint that the Act is a pure tax measure, it cannot be said
that the devotion of tax money to experimental stations to seek increase of
efficiency in sugar production, utilization of by- products and solution of allied
problems, as well as to the improvement of living and working conditions in
sugar mills or plantations, without any part of such money being channeled
directly to private persons, constitutes expenditure of tax money for private
purposes, (compare Everson v. Board of Education, 91 L. Ed. 472, 168 ALR
1392, 1400).

The decision appealed from is affirmed, with costs against appellant. So

ordered.
G.R. No. L-7859 December 22, 1955
WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the
deceased Antonio Jayme Ledesma, Plaintiff-Appellant, vs. J. ANTONIO
ARANETA, as the Collector of Internal Revenue, Defendant-Appellee.
Ernesto J. Gonzaga for appellant.
Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor
General Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee.
REYES, J.B L., J.:
This case was initiated in the Court of First Instance of Negros Occidental to
test the legality of the taxes imposed by Commonwealth Act No. 567,
otherwise known as the Sugar Adjustment
Act.chanroblesvirtualawlibrary chanrobles virtual law library
Promulgated in 1940, the law in question opens (section 1) with a declaration
of emergency, due to the threat to our industry by the imminent imposition of
export taxes upon sugar as provided in the Tydings-McDuffe Act, and the
"eventual loss of its preferential position in the United States market";
wherefore, the national policy was expressed "to obtain a readjustment of the
benefits derived from the sugar industry by the component elements thereof"
and "to stabilize the sugar industry so as to prepare it for the eventuality of the
loss of its preferential position in the United States market and the imposition
of the export taxes."chanrobles virtual law library
In section 2, Commonwealth Act 567 provides for an increase of the existing
tax on the manufacture of sugar, on a graduated basis, on each picul of sugar
manufactured; while section 3 levies on owners or persons in control of lands
devoted to the cultivation of sugar cane and ceded to others for a
consideration, on lease or otherwise -
a tax equivalent to the difference between the money value of the rental or
consideration collected and the amount representing 12 per centum of the
assessed value of such land.
According to section 6 of the law -
SEC. 6. All collections made under this Act shall accrue to a special fund in
the Philippine Treasury, to be known as the 'Sugar Adjustment and
Stabilization Fund,' and shall be paid out only for any or all of the following
purposes or to attain any or all of the following objectives, as may be provided
by law.chanroblesvirtualawlibrary chanrobles virtual law library
First, to place the sugar industry in a position to maintain itself, despite the
gradual loss of the preferntial position of the Philippine sugar in the United
States market, and ultimately to insure its continued existence notwithstanding
the loss of that market and the consequent necessity of meeting competition
in the free markets of the world;chanrobles virtual law library
Second, to readjust the benefits derived from the sugar industry by all of the
component elements thereof - the mill, the landowner, the planter of the sugar
cane, and the laborers in the factory and in the field - so that all might continue
profitably to engage therein;chanrobles virtual law library
Third, to limit the production of sugar to areas more economically suited to the
production thereof; andchanrobles virtual law library
Fourth, to afford labor employed in the industry a living wage and to improve
their living and working conditions: Provided, That the President of the
Philippines may, until the adjourment of the next regular session of the
National Assembly, make the necessary disbursements from the fund herein
created (1) for the establishment and operation of sugar experiment station or
stations and the undertaking of researchers (a) to increase the recoveries of
the centrifugal sugar factories with the view of reducing manufacturing costs,
(b) to produce and propagate higher yielding varieties of sugar cane more
adaptable to different district conditions in the Philippines, (c) to lower the costs
of raising sugar cane, (d) to improve the buying quality of denatured alcohol
from molasses for motor fuel, (e) to determine the possibility of utilizing the
other by-products of the industry, (f) to determine what crop or crops are
suitable for rotation and for the utilization of excess cane lands, and (g) on
other problems the solution of which would help rehabilitate and stabilize the
industry, and (2) for the improvement of living and working conditions in sugar
mills and sugar plantations, authorizing him to organize the necessary agency
or agencies to take charge of the expenditure and allocation of said funds to
carry out the purpose hereinbefore enumerated, and, likewise, authorizing the
disbursement from the fund herein created of the necessary amount or
amounts needed for salaries, wages, travelling expenses, equipment, and
other sundry expenses of said agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate
Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of
Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under
section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that
such tax is unconstitutional and void, being levied for the aid and support of
the sugar industry exclusively, which in plaintiff's opinion is not a public
purpose for which a tax may be constitutioally levied. The action having been
dismissed by the Court of First Instance, the plaintifs appealed the case
directly to this Court (Judiciary Act, section
17).chanroblesvirtualawlibrary chanrobles virtual law library
The basic defect in the plaintiff's position is his assumption that the tax
provided for in Commonwealth Act No. 567 is a pure exercise of the taxing
power. Analysis of the Act, and particularly of section 6 (heretofore quoted in
full), will show that the tax is levied with a regulatory purpose, to provide means
for the rehabilitation and stabilization of the threatened sugar industry. In other
words, the act is primarily an exercise of the police
power.chanroblesvirtualawlibrary chanrobles virtual law library
This Court can take judicial notice of the fact that sugar production is one of
the great industries of our nation, sugar occupying a leading position among
its export products; that it gives employment to thousands of laborers in fields
and factories; that it is a great source of the state's wealth, is one of the
important sources of foreign exchange needed by our government, and is thus
pivotal in the plans of a regime committed to a policy of currency stability. Its
promotion, protection and advancement, therefore redounds greatly to the
general welfare. Hence it was competent for the legislature to find that the
general welfare demanded that the sugar industry should be stabilized in turn;
and in the wide field of its police power, the lawmaking body could provide that
the distribution of benefits therefrom be readjusted among its components to
enable it to resist the added strain of the increase in taxes that it had to sustain
(Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel.
Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552, 139 So.
121).chanroblesvirtualawlibrary chanrobles virtual law library
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus
industry in Florida -
The protection of a large industry constituting one of the great sources of the
state's wealth and therefore directly or indirectly affecting the welfare of so
great a portion of the population of the State is affected to such an extent by
public interests as to be within the police power of the sovereign. (128 Sp.
857).
Once it is conceded, as it must, that the protection and promotion of the sugar
industry is a matter of public concern, it follows that the Legislature may
determine within reasonable bounds what is necessary for its protection and
expedient for its promotion. Here, the legislative discretion must be allowed
fully play, subject only to the test of reasonableness; and it is not contended
that the means provided in section 6 of the law (above quoted) bear no relation
to the objective pursued or are oppressive in character. If objective and
methods are alike constitutionally valid, no reason is seen why the state may
not levy taxes to raise funds for their prosecution and attainment. Taxation may
be made the implement of the state's police power (Great Atl. & Pac. Tea Co.
vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80
L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed.
579).chanroblesvirtualawlibrary chanrobles virtual law library
That the tax to be levied should burden the sugar producers themselves can
hardly be a ground of complaint; indeed, it appears rational that the tax be
obtained precisely from those who are to be benefited from the expenditure of
the funds derived from it. At any rate, it is inherent in the power to tax that a
state be free to select the subjects of taxation, and it has been repeatedly held
that "inequalities which result from a singling out of one particular class for
taxation, or exemption infringe no constitutional limitation" (Carmichael vs.
Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous
authorities, at p. 1251).chanroblesvirtualawlibrary chanrobles virtual law
library
From the point of view we have taken it appears of no moment that the funds
raised under the Sugar Stabilization Act, now in question, should be
exclusively spent in aid of the sugar industry, since it is that very enterprise
that is being protected. It may be that other industries are also in need of similar
protection; that the legislature is not required by the Constitution to adhere to
a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate
Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where
it is most felt, it is not to be overthrown because there are other instances to
which it might have been applied;" and that "the legislative authority, exerted
within its proper field, need not embrace all the evils within its reach" (N. L. R.
B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed.
893).chanroblesvirtualawlibrary chanrobles virtual law library
Even from the standpoint that the Act is a pure tax measure, it cannot be said
that the devotion of tax money to experimental stations to seek increase of
efficiency in sugar production, utilization of by-products and solution of allied
problems, as well as to the improvements of living and working conditions in
sugar mills or plantations, without any part of such money being channeled
directly to private persons, constitutes expenditure of tax money for private
purposes, (compare Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR
1392, 1400).chanroblesvirtualawlibrary chanrobles virtual law library
The decision appealed from is affirmed, with costs against appellant. So
ordered.chanroblesvirtualawlibrary chanrobles virtual law library
G.R. No. L-29059 December 15, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU PORTLAND CEMENT COMPANY and COURT OF TAX
APPEALS, respondents.
CRUZ, J.:
By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961,
as modified on appeal by the Supreme Court on February 27, 1965, the
Commissioner of Internal Revenue was ordered to refund to the Cebu Portland
Cement Company the amount of P 359,408.98, representing overpayments
of ad valorem taxes on cement produced and sold by it after October 1957. 1
On March 28, 1968, following denial of motions for reconsideration filed by
both the petitioner and the private respondent, the latter moved for a writ of
execution to enforce the said judgment . 2
The motion was opposed by the petitioner on the ground that the private
respondent had an outstanding sales tax liability to which the judgment debt
had already been credited. In fact, it was stressed, there was still a balance
owing on the sales taxes in the amount of P 4,789,279.85 plus 28%
surcharge. 3
On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that
the alleged sales tax liability of the private respondent was still being
questioned and therefore could not be set-off against the refund. 4
In his petition to review the said resolution, the Commissioner of Internal
Revenue claims that the refund should be charged against the tax deficiency
of the private respondent on the sales of cement under Section 186 of the Tax
Code. His position is that cement is a manufactured and not a mineral product
and therefore not exempt from sales taxes. He adds that enforcement of the
said tax deficiency was properly effected through his power of distraint of
personal property under Sections 316 and 318 5 of the said Code and,
moreover, the collection of any national internal revenue tax may not be
enjoined under Section 305, 6 subject only to the exception prescribed in Rep.
Act No. 1125. 7 This is not applicable to the instant case. The petitioner also
denies that the sales tax assessments have already prescribed because the
prescriptive period should be counted from the filing of the sales tax returns,
which had not yet been done by the private respondent.
For its part, the private respondent disclaims liability for the sales taxes, on the
ground that cement is not a manufactured product but a mineral product. 8 As
such, it was exempted from sales taxes under Section 188 of the Tax Code
after the effectivity of Rep. Act No. 1299 on June 16, 1955, in accordance with
Cebu Portland Cement Co. v. Collector of Internal Revenue, 9 decided in 1968.
Here Justice Eugenio Angeles declared that "before the effectivity of Rep. Act
No. 1299, amending Section 246 of the National Internal Revenue Code,
cement was taxable as a manufactured product under Section 186, in
connection with Section 194(4) of the said Code," thereby implying that it was
not considered a manufactured product afterwards. Also, the alleged sales tax
deficiency could not as yet be enforced against it because the tax assessment
was not yet final, the same being still under protest and still to be definitely
resolved on the merits. Besides, the assessment had already prescribed, not
having been made within the reglementary five-year period from the filing of
the tax returns. 10
Our ruling is that the sales tax was properly imposed upon the private
respondent for the reason that cement has always been considered a
manufactured product and not a mineral product. This matter was extensively
discussed and categorically resolved in Commissioner of Internal Revenue v.
Republic Cement Corporation, 11 decided on August 10, 1983, where Justice
Efren L. Plana, after an exhaustive review of the pertinent cases, declared for
a unanimous Court:
From all the foregoing cases, it is clear that
cement qua cement was never considered as a mineral
product within the meaning of Section 246 of the Tax Code,
notwithstanding that at least 80% of its components are
minerals, for the simple reason that cement is the product of
a manufacturing process and is no longer the mineral product
contemplated in the Tax Code (i.e.; minerals subjected to
simple treatments) for the purpose of imposing the ad
valorem tax.
What has apparently encouraged the herein respondents to
maintain their present posture is the case of Cebu Portland
Cement Co. v. Collector of Internal Revenue, L-20563, Oct.
29, 1968 (28 SCRA 789) penned by Justice Eugenio Angeles.
For some portions of that decision give the impression that
Republic Act No. 1299, which amended Section 246,
reclassified cement as a mineral product that was not subject
to sales tax. ...
xxx xxx xxx
After a careful study of the foregoing, we conclude that
reliance on the decision penned by Justice Angeles is
 misplaced. The said decision is no authority for the
proposition that after the enactment of Republic Act No. 1299
in 1955 (defining mineral product as things with at least 80%
mineral content), cement became a 'mineral product," as
distinguished from a "manufactured product," and therefore
ceased to be subject to sales tax. It was not necessary for the
Court to so rule. It was enough for the Court to say in effect
that even assuming Republic Act No. 1299 had reclassified
cement was a mineral product, the reclassification could not
be given retrospective application (so as to justify the refund
of sales taxes paid before Republic Act 1299 was adopted)
because laws operate prospectively only, unless the
legislative intent to the contrary is manifest, which was not so
in the case of Republic Act 1266. [The situation would have
been different if the Court instead had ruled in favor of refund,
in which case it would have been absolutely necessary (1) to
make an unconditional ruling that Republic Act 1299 re-
classified cement as a mineral product (not subject to sales
tax), and (2) to declare the law retroactive, as a basis for
granting refund of sales tax paid before Republic Act 1299.]
In any event, we overrule the CEPOC decision of October 29,
1968 (G.R. No. L-20563) insofar as its pronouncements or
any implication therefrom conflict with the instant decision.
The above views were reiterated in the resolution 12 denying reconsideration
of the said decision, thus:
The nature of cement as a "manufactured product" (rather
than a "mineral product") is well-settled. The issue has
repeatedly presented itself as a threshold question for
determining the basis for computing the ad valorem mining
tax to be paid by cement Companies. No pronouncement was
made in these cases that as a "manufactured product" cement
is subject to sales tax because this was not at issue.
The decision sought to be reconsidered here referred to the
legislative history of Republic Act No. 1299 which introduced
a definition of the terms "mineral" and "mineral products" in
Sec. 246 of the Tax Code. Given the legislative intent, the
holding in the CEPOC case (G.R. No. L-20563) that cement
was subject to sales tax prior to the effectivity •f Republic Act
No. 1299 cannot be construed to mean that, after the law took
effect, cement ceased to be so subject to the tax. To erase
any and all misconceptions that may have been spawned by
reliance on the case of Cebu Portland Cement Co. v.
Collector of Internal Revenue, L-20563, October 29, 1968 (28
SCRA 789) penned by Justice Eugenio Angeles, the Court
has expressly overruled it insofar as it may conflict with the
decision of August 10, 1983, now subject of these motions for
reconsideration.
On the question of prescription, the private respondent claims that the five-
year reglementary period for the assessment of its tax liability started from the
time it filed its gross sales returns on June 30, 1962. Hence, the assessment
for sales taxes made on January 16, 1968 and March 4, 1968, were already
out of time. We disagree. This contention must fail for what CEPOC filed was
not the sales returns required in Section 183(n) but the ad valorem tax returns
required under Section 245 of the Tax Code. As Justice Irene R. Cortes
emphasized in the aforestated resolution:
In order to avail itself of the benefits of the five-year
prescription period under Section 331 of the Tax Code, the
taxpayer should have filed the required return for the tax
involved, that is, a sales tax return. (Butuan Sawmill, Inc. v.
CTA, et al., G.R. No. L-21516, April 29, 1966, 16 SCRA 277).
Thus CEPOC should have filed sales tax returns of its gross
sales for the subject periods. Both parties admit that returns
were made for the ad valorem mining tax. CEPOC argues that
said returns contain the information necessary for the
assessment of the sales tax. The Commissioner does not
consider such returns as compliance with the requirement for
the filing of tax returns so as to start the running of the five-
year prescriptive period.
We agree with the Commissioner. It has been held in Butuan
Sawmill Inc. v. CTA, supra, that the filing of an income tax
return cannot be considered as substantial compliance with
the requirement of filing sales tax returns, in the same way
that an income tax return cannot be considered as a return for
compensating tax for the purpose of computing the period of
prescription under Sec. 331. (Citing Bisaya Land
Transportation Co., Inc. v. Collector of Internal Revenue, G.R.
Nos. L-12100 and L-11812, May 29, 1959). There being no
sales tax returns filed by CEPOC, the statute of stations in
Sec. 331 did not begin to run against the government. The
assessment made by the Commissioner in 1968 on CEPOC's
cement sales during the period from July 1, 1959 to December
31, 1960 is not barred by the five-year prescriptive period.
Absent a return or when the return is false or fraudulent, the
applicable period is ten (10) days from the discovery of the
fraud, falsity or omission. The question in this case is: When
 was CEPOC's omission to file tha return deemed discovered
by the government, so as to start the running of said
period? 13

The argument that the assessment cannot as yet be enforced because it is still
being contested loses sight of the urgency of the need to collect taxes as "the
lifeblood of the government." If the payment of taxes could be postponed by
simply questioning their validity, the machinery of the state would grind to a
halt and all government functions would be paralyzed. That is the reason why,
save for the exception already noted, the Tax Code provides:

Sec. 291. Injunction not available to restrain collection of

tax. — No court shall have authority to grant an injunction to
restrain the collection of any national internal revenue tax, fee
or charge imposed by this Code.

It goes without saying that this injunction is available not only when the
assessment is already being questioned in a court of justice but more so if, as
in the instant case, the challenge to the assessment is still-and only-on the
administrative level. There is all the more reason to apply the rule here
because it appears that even after crediting of the refund against the tax
deficiency, a balance of more than P 4 million is still due from the private
respondent.

To require the petitioner to actually refund to the private respondent the

amount of the judgment debt, which he will later have the right to distrain for
payment of its sales tax liability is in our view an Idle ritual. We hold that the
respondent Court of Tax Appeals erred in ordering such a charade.

WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968,
in CTA Case No. 786 is SET ASIDE, without any pronouncement as to costs.

SO ORDERED.

G.R. No. 153793 August 29, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman
(Attorney-in-fact) Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the January
18, 2002 Decision1 of the Court of Appeals in CA-G.R. SP No. 59794, which
granted the tax refund of respondent Juliane Baier-Nickel and reversed the
June 28, 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No.
5633. Petitioner also assails the May 8, 2002 Resolution3 of the Court of
Appeals denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German
citizen, is the President of JUBANITEX, Inc., a domestic corporation engaged
in "[m]anufacturing, marketing on wholesale only, buying or otherwise
acquiring, holding, importing and exporting, selling and disposing embroidered
textile products."4 Through JUBANITEX’s General Manager, Marina Q.
Guzman, the corporation appointed and engaged the services of respondent
as commission agent. It was agreed that respondent will receive 10% sales
commission on all sales actually concluded and collected through her efforts.5
In 1995, respondent received the amount of P1,707,772.64, representing her
sales commission income from which JUBANITEX withheld the corresponding
10% withholding tax amounting to P170,777.26, and remitted the same to the
Bureau of Internal Revenue (BIR). On October 17, 1997, respondent filed her
1995 income tax return reporting a taxable income of P1,707,772.64 and a tax
due of P170,777.26.6
On April 14, 1998, respondent filed a claim to refund the amount of
P170,777.26 alleged to have been mistakenly withheld and remitted by
JUBANITEX to the BIR. Respondent contended that her sales commission
income is not taxable in the Philippines because the same was a
compensation for her services rendered in Germany and therefore considered
as income from sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA
contending that no action was taken by the BIR on her claim for refund. 7 On
June 28, 2000, the CTA rendered a decision denying her claim. It held that the
commissions received by respondent were actually her remuneration in the
performance of her duties as President of JUBANITEX and not as a mere sales
agent thereof. The income derived by respondent is therefore an income
taxable in the Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the
CTA, holding that respondent received the commissions as sales agent of
JUBANITEX and not as President thereof. And since the "source" of income
means the activity or service that produce the income, the sales commission
received by respondent is not taxable in the Philippines because it arose from
the marketing activities performed by respondent in Germany. The dispositive
portion of the appellate court’s Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court of Tax
Appeals dated June 28, 2000 is hereby REVERSED and SET ASIDE and the
respondent court is hereby directed to grant petitioner a tax refund in the
amount of Php 170,777.26.
SO ORDERED.8
Petitioner filed a motion for reconsideration but was denied.9 Hence, the
instant recourse.
Petitioner maintains that the income earned by respondent is taxable in the
Philippines because the source thereof is JUBANITEX, a domestic corporation
located in the City of Makati. It thus implied that source of income means the
physical source where the income came from. It further argued that since
respondent is the President of JUBANITEX, any remuneration she received
from said corporation should be construed as payment of her overall
managerial services to the company and should not be interpreted as a
compensation for a distinct and separate service as a sales commission agent.
Respondent, on the other hand, claims that the income she received was
payment for her marketing services. She contended that income of
nonresident aliens like her is subject to tax only if the source of the income is
within the Philippines. Source, according to respondent is the situs of the
activity which produced the income. And since the source of her income were
her marketing activities in Germany, the income she derived from said
activities is not subject to Philippine income taxation.
The issue here is whether respondent’s sales commission income is taxable
in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual. –
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines. –
(1) In General. – A nonresident alien individual engaged in trade or business
in the Philippines shall be subject to an income tax in the same manner as an
individual citizen and a resident alien individual, on taxable income received
from all sources within the Philippines. A nonresident alien individual who shall
come to the Philippines and stay therein for an aggregate period of more than
one hundred eighty (180) days during any calendar year shall be deemed a
‘nonresident alien doing business in the Philippines,’ Section 22(G) of this
Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines. – There shall be levied, collected and paid for each taxable year
upon the entire income received from all sources within the Philippines by
every nonresident alien individual not engaged in trade or business within the
Philippines x x x a tax equal to twenty-five percent (25%) of such income. x x
x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether
or not engaged in trade or business, are subject to Philippine income taxation
on their income received from all sources within the Philippines. Thus, the
keyword in determining the taxability of non-resident aliens is the income’s
"source." In construing the meaning of "source" in Section 25 of the NIRC,
resort must be had on the origin of the provision.
The first Philippine income tax law enacted by the Philippine Legislature was
Act No. 2833,10 which took effect on January 1, 1920.11 Under Section 1
thereof, nonresident aliens are likewise subject to tax on income "from all
sources within the Philippine Islands," thus –
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually
upon the entire net income received in the preceding calendar year from all
sources by every individual, a citizen or resident of the Philippine Islands, a
tax of two per centum upon such income; and a like tax shall be levied,
assessed, collected, and paid annually upon the entire net income received in
the preceding calendar year from all sources within the Philippine Islands by
every individual, a nonresident alien, including interest on bonds, notes, or
other interest-bearing obligations of residents, corporate or otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law
of 1916 as amended by U.S. Revenue Law of 1917.12 Being a law of American
origin, the authoritative decisions of the official charged with enforcing it in the
U.S. have peculiar persuasive force in the Philippines.13
The Internal Revenue Code of the U.S. enumerates specific types of income
to be treated as from sources within the U.S. and specifies when similar types
of income are to be treated as from sources outside the U.S.14 Under the said
Code, compensation for labor and personal services performed in the U.S., is
generally treated as income from U.S. sources; while compensation for said
services performed outside the U.S., is treated as income from sources outside
the U.S.15 A similar provision is found in Section 42 of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. – Compensation for labor or personal services performed in the
Philippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without the
Philippines;
The following discussions on sourcing of income under the Internal Revenue
Code of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often debated,
that income may be derived from three possible sources only: (1) capital and/or
(2) labor; and/or (3) the sale of capital assets. While the three elements of this
attempt at definition need not be accepted as all-inclusive, they serve as useful
guides in any inquiry into whether a particular item is from "sources within the
United States" and suggest an investigation into the nature and location of the
activities or property which produce the income.
If the income is from labor the place where the labor is done should be
decisive; if it is done in this country, the income should be from "sources within
the United States." If the income is from capital, the place where the capital is
employed should be decisive; if it is employed in this country, the income
should be from "sources within the United States." If the income is from the
sale of capital assets, the place where the sale is made should be likewise
decisive.
Much confusion will be avoided by regarding the term "source" in this
fundamental light. It is not a place, it is an activity or property. As such, it has
a situs or location, and if that situs or location is within the United States the
resulting income is taxable to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to discard
the 1909 and 1913 basis of taxing nonresident aliens and foreign corporations
and to make the test of taxability the "source," or situs of the activities or
property which produce the income. The result is that, on the one hand,
nonresident aliens and nonresident foreign corporations are prevented from
deriving income from the United States free from tax, and, on the other hand,
there is no undue imposition of a tax when the activities do not take place in,
and the property producing income is not employed in, this country. Thus, if
income is to be taxed, the recipient thereof must be resident within the
jurisdiction, or the property or activities out of which the income issues or is
derived must be situated within the jurisdiction so that the source of the income
may be said to have a situs in this country.
The underlying theory is that the consideration for taxation is protection of life
and property and that the income rightly to be levied upon to defray the
burdens of the United States Government is that income which is created by
activities and property protected by this Government or obtained by persons
enjoying that protection. 16
The important factor therefore which determines the source of income of
personal services is not the residence of the payor, or the place where the
contract for service is entered into, or the place of payment, but the place
where the services were actually rendered.17
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,18 the Court
addressed the issue on the applicable source rule relating to reinsurance
premiums paid by a local insurance company to a foreign insurance company
in respect of risks located in the Philippines. It was held therein that the
undertaking of the foreign insurance company to indemnify the local insurance
company is the activity that produced the income. Since the activity took place
in the Philippines, the income derived therefrom is taxable in our jurisdiction.
Citing Mertens, The Law of Federal Income Taxation, the Court emphasized
that the technical meaning of source of income is the property, activity or
service that produced the same. Thus:
The source of an income is the property, activity or service that produced the
income. The reinsurance premiums remitted to appellants by virtue of the
reinsurance contracts, accordingly, had for their source the undertaking to
indemnify Commonwealth Insurance Co. against liability. Said undertaking is
the activity that produced the reinsurance premiums, and the same took place
in the Philippines. x x x the reinsured, the liabilities insured and the risk
originally underwritten by Commonwealth Insurance Co., upon which the
reinsurance premiums and indemnity were based, were all situated in the
Philippines. x x x19
In Commissioner of Internal Revenue v. British Overseas Airways
Corporation (BOAC),20 the issue was whether BOAC, a foreign airline
company which does not maintain any flight to and from the Philippines is liable
for Philippine income taxation in respect of sales of air tickets in the
Philippines, through a general sales agent relating to the carriage of
passengers and cargo between two points both outside the Philippines. Ruling
in the affirmative, the Court applied the case of Alexander Howden & Co., Ltd.
v. Collector of Internal Revenue, and reiterated the rule that the source of
income is that "activity" which produced the income. It was held that the "sale
of tickets" in the Philippines is the "activity" that produced the income and
therefore BOAC should pay income tax in the Philippines because it undertook
an income producing activity in the country.
Both the petitioner and respondent cited the case of Commissioner of Internal
Revenue v. British Overseas Airways Corporation in support of their
arguments, but the correct interpretation of the said case favors the theory of
respondent that it is the situs of the activity that determines whether such
income is taxable in the Philippines. The conflict between the majority and the
dissenting opinion in the said case has nothing to do with the underlying
principle of the law on sourcing of income. In fact, both applied the case of
Alexander Howden & Co., Ltd. v. Collector of Internal Revenue. The
divergence in opinion centered on whether the sale of tickets in the Philippines
is to be construed as the "activity" that produced the income, as viewed by the
majority, or merely the physical source of the income, as ratiocinated by
Justice Florentino P. Feliciano in his dissent. The majority, through Justice
Ameurfina Melencio-Herrera, as ponente, interpreted the sale of tickets as a
business activity that gave rise to the income of BOAC. Petitioner cannot
therefore invoke said case to support its view that source of income is the
physical source of the money earned. If such was the interpretation of the
majority, the Court would have simply stated that source of income is not the
business activity of BOAC but the place where the person or entity disbursing
the income is located or where BOAC physically received the same. But such
was not the import of the ruling of the Court. It even explained in detail
the business activity undertaken by BOAC in the Philippines to pinpoint the
taxable activity and to justify its conclusion that BOAC is subject to Philippine
income taxation. Thus –
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. x x x21
xxxx
The source of an income is the property, activity or service that produced the
income. 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 situs 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.22
The Court reiterates the rule that "source of income" relates to the property,
activity or service that produced the income. With respect to rendition of labor
or personal service, as in the instant case, it is the place where the labor or
service was performed that determines the source of the income. There is
therefore no merit in petitioner’s interpretation which equates source of income
in labor or personal service with the residence of the payor or the place of
payment of the income.
Having disposed of the doctrine applicable in this case, we will now determine
whether respondent was able to establish the factual circumstances showing
that her income is exempt from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent
received the income, but the sufficiency of evidence to prove that the services
she rendered were performed in Germany. Though not raised as an issue, the
Court is clothed with authority to address the same because the resolution
thereof will settle the vital question posed in this controversy.23
The settled rule is that tax refunds are in the nature of tax exemptions and are
to be construed strictissimi juris against the taxpayer.24 To those therefore,
who claim a refund rest the burden of proving that the transaction subjected to
tax is actually exempt from taxation.
In the instant case, the appointment letter of respondent as agent of
JUBANITEX stipulated that the activity or the service which would entitle her
to 10% commission income, are "sales actually concluded and collected
through [her] efforts."25 What she presented as evidence to prove that she
performed income producing activities abroad, were copies of documents she
allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or
designs and fabrics to be used in the finished products as well as samples of
sales orders purportedly relayed to her by clients. However, these documents
do not show whether the instructions or orders faxed ripened into concluded
or collected sales in Germany. At the very least, these pieces of evidence show
that while respondent was in Germany, she sent instructions/orders to
JUBANITEX. As to whether these instructions/orders gave rise to
consummated sales and whether these sales were truly concluded in
Germany, respondent presented no such evidence. Neither did she establish
reasonable connection between the orders/instructions faxed and the reported
monthly sales purported to have transpired in Germany.
The paucity of respondent’s evidence was even noted by Atty. Minerva
Pacheco, petitioner’s counsel at the hearing before the Court of Tax Appeals.
She pointed out that respondent presented no contracts or orders signed by
the customers in Germany to prove the sale transactions therein.26 Likewise,
in her Comment to the Formal Offer of respondent’s evidence, she objected to
the admission of the faxed documents bearing instruction/orders marked as
Exhibits "R,"27 "V," "W", and "X,"28 for being self serving.29 The concern raised
by petitioner’s counsel as to the absence of substantial evidence that would
constitute proof that the sale transactions for which respondent was paid
commission actually transpired outside the Philippines, is relevant because
respondent stayed in the Philippines for 89 days in 1995. Except for the
months of July and September 1995, respondent was in the Philippines in the
months of March, May, June, and August 1995,30 the same months when she
earned commission income for services allegedly performed abroad.
Furthermore, respondent presented no evidence to prove that JUBANITEX
does not sell embroidered products in the Philippines and that her appointment
as commission agent is exclusively for Germany and other European
markets.
In sum, we find that the faxed documents presented by respondent did not
constitute substantial evidence, or that relevant evidence that a reasonable
mind might accept as adequate to support the conclusion 31 that it was in
Germany where she performed the income producing service which gave rise
to the reported monthly sales in the months of March and May to September
of 1995. She thus failed to discharge the burden of proving that her income
was from sources outside the Philippines and exempt from the application of
our income tax law. Hence, the claim for tax refund should be denied.

The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,32 a

previous case for refund of income withheld from respondent’s remunerations
for services rendered abroad, the Court in a Minute Resolution dated February
17, 2003,33 sustained the ruling of the Court of Appeals that respondent is
entitled to refund the sum withheld from her sales commission income for the
year 1994. This ruling has no bearing in the instant controversy because the
subject matter thereof is the income of respondent for the year 1994 while, the
instant case deals with her income in 1995. Otherwise, stated, res judicata has
no application here. Its elements are: (1) there must be a final judgment or
order; (2) the court that rendered the judgment must have jurisdiction over the
subject matter and the parties; (3) it must be a judgment on the merits; (4)
there must be between the two cases identity of parties, of subject matter, and
of causes of action. 34 The instant case, however, did not satisfy the fourth
requisite because there is no identity as to the subject matter of the previous
and present case of respondent which deals with income earned and activities
performed for different taxable years.

WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision
and May 8, 2002 Resolution of the Court of Appeals in CA-G.R. SP No. 59794,
are REVERSED and SET ASIDE. The June 28, 2000 Decision of the Court of
Tax Appeals in C.T.A. Case No. 5633, which denied respondent’s claim for
refund of income tax paid for the year 1995 is REINSTATED.

SO ORDERED.