G.R. No. L-9637 April 30, 1957
3000, as amended, and Ordinances Nos. 2529, 3028 and 3364, and
AMERICAN BIBLE SOCIETY, Plaintiff-Appellant, vs. CITY OF
MANILA, Defendant-Appellee.
City Fiscal Eugenio Angeles and Juan Nabong for appellant.
Assistant City Fiscal Arsenio Na�awa for appellee.
FELIX, J.:
Plaintiff-appellant is a foreign, non-stock, non-profit, religious,
missionary corporation duly registered and doing business in the
Philippines through its Philippine agency established in Manila in
November, 1898, with its principal office at 636 Isaac Peral in said
City. The defendant appellee is a municipal corporation with powers
that are to be exercised in conformity with the provisions of
Republic Act No. 409, known as the Revised Charter of the City of
Manila.chanroblesvirtualawlibrary chanrobles virtual law library
In the course of its ministry, plaintiff's Philippine agency has been
distributing and selling bibles and/or gospel portions thereof
(except during the Japanese occupation) throughout the Philippines
and translating the same into several Philippine dialects. On May 29
1953, the acting City Treasurer of the City of Manila informed
plaintiff that it was conducting the business of general merchandise
since November, 1945, without providing itself with the necessary
Mayor's permit and municipal license, in violation of Ordinance No.
required plaintiff to secure, within three days, the corresponding
permit and license fees, together with compromise covering the
period from the 4th quarter of 1945 to the 2nd quarter of 1953, in
the total sum of P5,821.45 (Annex A).chanroblesvirtualawlibrary
chanrobles virtual law library
Plaintiff protested against this requirement, but the City Treasurer
demanded that plaintiff deposit and pay under protest the sum of
P5,891.45, if suit was to be taken in court regarding the same
(Annex B). To avoid the closing of its business as well as further fines
and penalties in the premises on October 24, 1953, plaintiff paid to
the defendant under protest the said permit and license fees in the
aforementioned amount, giving at the same time notice to the City
Treasurer that suit would be taken in court to question the legality
of the ordinances under which, the said fees were being collected
(Annex C), which was done on the same date by filing the complaint
that gave rise to this action. In its complaint plaintiff prays that
judgment be rendered declaring the said Municipal Ordinance No.
3000, as amended, and Ordinances Nos. 2529, 3028 and 3364 illegal
and unconstitutional, and that the defendant be ordered to refund
to the plaintiff the sum of P5,891.45 paid under protest, together
with legal interest thereon, and the costs, plaintiff further praying
for such other relief and remedy as the court may deem just
equitable.chanroblesvirtualawlibrary chanrobles virtual law library
Defendant answered the complaint, maintaining in turn that said
ordinances were enacted by the Municipal Board of the City of
Manila by virtue of the power granted to it by section 2444,
subsection (m-2) of the Revised Administrative Code, superseded on
June 18, 1949, by section 18, subsection (1) of Republic Act No. 409,
4th quarter 1945
known as the Revised Charter of the City of Manila, and praying that
the complaint be dismissed, with costs against plaintiff. This answer
was replied by the plaintiff reiterating the unconstitutionality of the
often-repeated ordinances.chanroblesvirtualawlibrary chanrobles P1,244.21
virtual law library

1st quarter 1946

Before trial the parties submitted the following stipulation of facts:

2,206.85
COME NOW the parties in the above-entitled case, thru their
undersigned attorneys and respectfully submit the following
stipulation of facts:chanrobles virtual law library 2nd quarter 1946

1. That the plaintiff sold for the use of the purchasers at its principal 1,950.38
office at 636 Isaac Peral, Manila, Bibles, New Testaments, bible
portions and bible concordance in English and other foreign
languages imported by it from the United States as well as Bibles, 3rd quarter 1946
New Testaments and bible portions in the local dialects imported
and/or purchased locally; that from the fourth quarter of 1945 to
the first quarter of 1953 inclusive the sales made by the plaintiff 2,235.99
were as follows:chanrobles virtual law library

4th quarter 1946

Quarter

3,256.04
Amount of Sales
1st quarter 1947

14,715.26

13,241.07

3rd quarter 1948

2nd quarter 1947

38,333.83

15,774.55

4th quarter 1948

3rd quarter 1947

16,179.90

14,654.13

1st quarter 1949

4th quarter 1947

23,975.10

12,590.94

2nd quarter 1949

1st quarter 1948

17,802.08

11,143.90

3rd quarter 1949

2nd quarter 1948

16,640.79

1st quarter 1951

4th quarter 1949

37,841.21

15,961.38

2nd quarter 1951

1st quarter 1950

29,103.98

18,562.46

3rd quarter 1951

2nd quarter 1950

20,181.10

21,816.32

4th quarter 1951

3rd quarter 1950

22,968.91

25,004.55

1st quarter 1952

4th quarter 1950

23,002.65

45,287.92
2nd quarter 1952 WHEREFORE, it is respectfully prayed that this case be set for
hearing so that the parties may present further evidence on their
behalf. (Record on Appeal, pp. 15-16).
17,626.96

When the case was set for hearing, plaintiff proved, among other
3rd quarter 1952 things, that it has been in existence in the Philippines since 1899,
and that its parent society is in New York, United States of America;
that its, contiguous real properties located at Isaac Peral are exempt
17,921.01 from real estate taxes; and that it was never required to pay any
municipal license fee or tax before the war, nor does the American
Bible Society in the United States pay any license fee or sales tax for
4th quarter 1952 the sale of bible therein. Plaintiff further tried to establish that it
never made any profit from the sale of its bibles, which are disposed
of for as low as one third of the cost, and that in order to maintain
its operating cost it obtains substantial remittances from its New
24,180.72
York office and voluntary contributions and gifts from certain
churches, both in the United States and in the Philippines, which are
interested in its missionary work. Regarding plaintiff's contention of
1st quarter 1953
lack of profit in the sale of bibles, defendant retorts that the
admissions of plaintiff-appellant's lone witness who testified on
cross-examination that bibles bearing the price of 70 cents each
29,516.21 from plaintiff-appellant's New York office are sold here by plaintiff-
appellant at P1.30 each; those bearing the price of $4.50 each are
sold here at P10 each; those bearing the price of $7 each are sold
2. That the parties hereby reserve the right to present evidence of here at P15 each; and those bearing the price of $11 each are sold
other facts not herein stipulated.chanroblesvirtualawlibrary here at P22 each, clearly show that plaintiff's contention that it
chanrobles virtual law library never makes any profit from the sale of its bible, is evidently
untenable.chanroblesvirtualawlibrary chanrobles virtual law library
After hearing the Court rendered judgment, the last part of which is
as follows:
As may be seen from the repealed section (m-2) of the Revised
Administrative Code and the repealing portions (o) of section 18 of
Republic Act No. 409, although they seemingly differ in the way the
legislative intent is expressed, yet their meaning is practically the
same for the purpose of taxing the merchandise mentioned in said
legal provisions, and that the taxes to be levied by said ordinances is
in the nature of percentage graduated taxes (Sec. 3 of Ordinance
No. 3000, as amended, and Sec. 1, Group 2, of Ordinance No. 2529,
as amended by Ordinance No. 3364).chanroblesvirtualawlibrary
chanrobles virtual law library
IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is of the
opinion and so holds that this case should be dismissed, as it is
hereby dismissed, for lack of merits, with costs against the plaintiff.
Not satisfied with this verdict plaintiff took up the matter to the
Court of Appeals which certified the case to Us for the reason that
the errors assigned to the lower Court involved only questions of
law.chanroblesvirtualawlibrary chanrobles virtual law library
Appellant contends that the lower Court erred:
1. In holding that Ordinances Nos. 2529 and 3000, as respectively
amended, are not unconstitutional;chanrobles virtual law library
2. In holding that subsection m-2 of Section 2444 of the Revised
Administrative Code under which Ordinances Nos. 2592 and 3000
were promulgated, was not repealed by Section 18 of Republic Act
No. 409;chanrobles virtual law library
3. In not holding that an ordinance providing for taxes based on
gross sales or receipts, in order to be valid under the new Charter of
the City of Manila, must first be approved by the President of the
Philippines; andchanrobles virtual law library
4. In holding that, as the sales made by the plaintiff-appellant have
assumed commercial proportions, it cannot escape from the
operation of said municipal ordinances under the cloak of religious
privilege.
The issues. - As may be seen from the proceeding statement of the
case, the issues involved in the present controversy may be reduced
to the following: (1) whether or not the ordinances of the City of
Manila, Nos. 3000, as amended, and 2529, 3028 and 3364, are
constitutional and valid; and (2) whether the provisions of said
ordinances are applicable or not to the case at
bar.chanroblesvirtualawlibrary chanrobles virtual law library
Section 1, subsection (7) of Article III of the Constitution of the
Republic of the Philippines, provides that:
(7) No law shall be made respecting an establishment of religion, or
prohibiting the free exercise thereof, and the free exercise and
enjoyment of religious profession and worship, without
discrimination or preference, shall forever be allowed. No religion
test shall be required for the exercise of civil or political rights.
Predicated on this constitutional mandate, plaintiff-appellant
contends that Ordinances Nos. 2529 and 3000, as respectively
amended, are unconstitutional and illegal in so far as its society is
concerned, because they provide for religious censorship and
restrain the free exercise and enjoyment of its religious profession,
to wit: the distribution and sale of bibles and other religious
literature to the people of the
Philippines.chanroblesvirtualawlibrary chanrobles virtual law library
Before entering into a discussion of the constitutional aspect of the
case, We shall first consider the provisions of the questioned
ordinances in relation to their application to the sale of bibles, etc.
by appellant. The records, show that by letter of May 29, 1953
(Annex A), the City Treasurer required plaintiff to secure a Mayor's
permit in connection with the society's alleged business of
distributing and selling bibles, etc. and to pay permit dues in the
sum of P35 for the period covered in this litigation, plus the sum of
P35 for compromise on account of plaintiff's failure to secure the
permit required by Ordinance No. 3000 of the City of Manila, as
amended. This Ordinance is of general application and not
particularly directed against institutions like the plaintiff, and it does
not contain any provisions whatever prescribing religious censorship
nor restraining the free exercise and enjoyment of any religious
profession. Section 1 of Ordinance No. 3000 reads as follows:
SEC. 1. PERMITS NECESSARY. - It shall be unlawful for any person or
entity to conduct or engage in any of the businesses, trades, or
occupations enumerated in Section 3 of this Ordinance or other
businesses, trades, or occupations for which a permit is required for
the proper supervision and enforcement of existing laws and
ordinances governing the sanitation, security, and welfare of the
public and the health of the employees engaged in the business
specified in said section 3 hereof, WITHOUT FIRST HAVING
OBTAINED A PERMIT THEREFOR FROM THE MAYOR AND THE
NECESSARY LICENSE FROM THE CITY TREASURER.
The business, trade or occupation of the plaintiff involved in this
case is not particularly mentioned in Section 3 of the Ordinance, and
the record does not show that a permit is required therefor under
existing laws and ordinances for the proper supervision and
enforcement of their provisions governing the sanitation, security
and welfare of the public and the health of the employees engaged
in the business of the plaintiff. However, sections 3 of Ordinance
3000 contains item No. 79, which reads as follows:
79. All other businesses, trades or occupations not
mentioned in this Ordinance, except those upon which the
City is not empowered to license or to tax P5.00
Therefore, the necessity of the permit is made to depend upon the
power of the City to license or tax said business, trade or
occupation.chanroblesvirtualawlibrary chanrobles virtual law library
As to the license fees that the Treasurer of the City of Manila
required the society to pay from the 4th quarter of 1945 to the 1st
quarter of 1953 in the sum of P5,821.45, including the sum of P50 as
compromise, Ordinance No. 2529, as amended by Ordinances Nos.
2779, 2821 and 3028 prescribes the following:
SEC. 1. FEES. - Subject to the provisions of section 578 of the
Revised Ordinances of the City of Manila, as amended, there shall
be paid to the City Treasurer for engaging in any of the businesses
or occupations below enumerated, quarterly, license fees based on
gross sales or receipts realized during the preceding quarter in
accordance with the rates herein prescribed: PROVIDED, HOWEVER,
That a person engaged in any businesses or occupation for the first
time shall pay the initial license fee based on the probable gross
sales or receipts for the first quarter beginning from the date of the
opening of the business as indicated herein for the corresponding
business or occupation.
xxx xxx x x xchanrobles virtual law library
GROUP 2. - Retail dealers in new (not yet used) merchandise, which
dealers are not yet subject to the payment of any municipal tax,
such as (1) retail dealers in general merchandise; (2) retail dealers
exclusively engaged in the sale of . . . books, including stationery.
xxx xxx xxx
As may be seen, the license fees required to be paid quarterly in
Section 1 of said Ordinance No. 2529, as amended, are not imposed
directly upon any religious institution but upon those engaged in
any of the business or occupations therein enumerated, such as
retail "dealers in general merchandise" which, it is alleged, cover
the business or occupation of selling bibles, books,
etc.chanroblesvirtualawlibrary chanrobles virtual law library
Chapter 60 of the Revised Administrative Code which includes
section 2444, subsection (m-2) of said legal body, as amended by
Act No. 3659, approved on December 8, 1929, empowers the
Municipal Board of the City of Manila:
(M-2) To tax and fix the license fee on (a) dealers in new
automobiles or accessories or both, and (b) retail dealers in new
(not yet used) merchandise, which dealers are not yet subject to the
payment of any municipal tax.chanroblesvirtualawlibrary
chanrobles virtual law library
For the purpose of taxation, these retail dealers shall be classified as
(1) retail dealers in general merchandise, and (2) retail dealers
exclusively engaged in the sale of (a) textiles . . . (e) books, including
stationery, paper and office supplies, . . .: PROVIDED, HOWEVER,
That the combined total tax of any debtor or manufacturer, or both,
enumerated under these subsections (m-1) and (m-2), whether
dealing in one or all of the articles mentioned herein, SHALL NOT BE
IN EXCESS OF FIVE HUNDRED PESOS PER ANNUM.
and appellee's counsel maintains that City Ordinances Nos. 2529
and 3000, as amended, were enacted in virtue of the power that
said Act No. 3669 conferred upon the City of Manila. Appellant,
however, contends that said ordinances are longer in force and
effect as the law under which they were promulgated has been
expressly repealed by Section 102 of Republic Act No. 409 passed
on June 18, 1949, known as the Revised Manila
Charter.chanroblesvirtualawlibrary chanrobles virtual law library
Passing upon this point the lower Court categorically stated that
Republic Act No. 409 expressly repealed the provisions of Chapter
60 of the Revised Administrative Code but in the opinion of the trial
Judge, although Section 2444 (m-2) of the former Manila Charter
and section 18 (o) of the new seemingly differ in the way the
legislative intent was expressed, yet their meaning is practically the
same for the purpose of taxing the merchandise mentioned in both
legal provisions and, consequently, Ordinances Nos. 2529 and 3000,
as amended, are to be considered as still in full force and effect
uninterruptedly up to the present.
Often the legislature, instead of simply amending the pre-existing
statute, will repeal the old statute in its entirety and by the same
enactment re-enact all or certain portions of the preexisting law. Of
course, the problem created by this sort of legislative action
involves mainly the effect of the repeal upon rights and liabilities
which accrued under the original statute. Are those rights and
liabilities destroyed or preserved? The authorities are divided as to
the effect of simultaneous repeals and re-enactments. Some adhere
to the view that the rights and liabilities accrued under the repealed
act are destroyed, since the statutes from which they sprang are
actually terminated, even though for only a very short period of
time. Others, and they seem to be in the majority, refuse to accept
this view of the situation, and consequently maintain that all rights
an liabilities which have accrued under the original statute are
preserved and may be enforced, since the re-enactment neutralizes
the repeal, therefore, continuing the law in force without
interruption. (Crawford-Statutory Construction, Sec. 322).
Appellant's counsel states that section 18 (o) of Republic Act No,
409 introduces a new and wider concept of taxation and is different
from the provisions of Section 2444(m-2) that the former cannot be
considered as a substantial re-enactment of the provisions of the
latter. We have quoted above the provisions of section 2444(m-2)
of the Revised Administrative Code and We shall now copy
hereunder the provisions of Section 18, subdivision (o) of Republic
Act No. 409, which reads as follows:
(o) To tax and fix the license fee on dealers in general merchandise,
including importers and indentors, except those dealers who may
be expressly subject to the payment of some other municipal tax
under the provisions of this section.chanroblesvirtualawlibrary
chanrobles virtual law library
Dealers in general merchandise shall be classified as (a) wholesale
dealers and (b) retail dealers. For purposes of the tax on retail
dealers, general merchandise shall be classified into four main
classes: namely (1) luxury articles, (2) semi-luxury articles, (3)
essential commodities, and (4) miscellaneous articles. A separate
license shall be prescribed for each class but where commodities of
different classes are sold in the same establishment, it shall not be
compulsory for the owner to secure more than one license if he
pays the higher or highest rate of tax prescribed by ordinance.
Wholesale dealers shall pay the license tax as such, as may be
provided by ordinance.chanroblesvirtualawlibrary chanrobles virtual
law library
For purposes of this section, the term "General merchandise" shall
include poultry and livestock, agricultural products, fish and other
allied products.
The only essential difference that We find between these two
provisions that may have any bearing on the case at bar, is that,
while subsection (m-2) prescribes that the combined total tax of any
dealer or manufacturer, or both, enumerated under subsections (m-
1) and (m-2), whether dealing in one or all of the articles mentioned
therein, shall not be in excess of P500 per annum, the
corresponding section 18, subsection (o) of Republic Act No. 409,
does not contain any limitation as to the amount of tax or license
fee that the retail dealer has to pay per annum. Hence, and in
accordance with the weight of the authorities above referred to
that maintain that "all rights and liabilities which have accrued
under the original statute are preserved and may be enforced, since
the reenactment neutralizes the repeal, therefore continuing the
law in force without interruption", We hold that the questioned
ordinances of the City of Manila are still in force and
effect.chanroblesvirtualawlibrary chanrobles virtual law library
Plaintiff, however, argues that the questioned ordinances, to be
valid, must first be approved by the President of the Philippines as
per section 18, subsection (ii) of Republic Act No. 409, which reads
as follows:
(ii) To tax, license and regulate any business, trade or occupation
being conducted within the City of Manila, not otherwise
enumerated in the preceding subsections, including percentage
taxes based on gross sales or receipts, subject to the approval of the
PRESIDENT, except amusement taxes.
but this requirement of the President's approval was not contained
in section 2444 of the former Charter of the City of Manila under
which Ordinance No. 2529 was promulgated. Anyway, as stated by
appellee's counsel, the business of "retail dealers in general
merchandise" is expressly enumerated in subsection (o), section 18
of Republic Act No. 409; hence, an ordinance prescribing a
municipal tax on said business does not have to be approved by the
President to be effective, as it is not among those referred to in said
subsection (ii). Moreover, the questioned ordinances are still in
force, having been promulgated by the Municipal Board of the City
of Manila under the authority granted to it by
law.chanroblesvirtualawlibrary chanrobles virtual law library
The question that now remains to be determined is whether said
ordinances are inapplicable, invalid or unconstitutional if applied to
the alleged business of distribution and sale of bibles to the people
of the Philippines by a religious corporation like the American Bible
Society, plaintiff herein.chanroblesvirtualawlibrary chanrobles
virtual law library
With regard to Ordinance No. 2529, as amended by Ordinances Nos.
2779, 2821 and 3028, appellant contends that it is unconstitutional
and illegal because it restrains the free exercise and enjoyment of
the religious profession and worship of
appellant.chanroblesvirtualawlibrary chanrobles virtual law library
Article III, section 1, clause (7) of the Constitution of the Philippines
aforequoted, guarantees the freedom of religious profession and
worship. "Religion has been spoken of as a profession of faith to an
active power that binds and elevates man to its Creator" (Aglipay vs.
Ruiz, 64 Phil., 201).It has reference to one's views of his relations to
His Creator and to the obligations they impose of reverence to His
being and character, and obedience to His Will (Davis vs. Beason,
133 U.S., 342). The constitutional guaranty of the free exercise and
enjoyment of religious profession and worship carries with it the
right to disseminate religious information. Any restraints of such
right can only be justified like other restraints of freedom of
expression on the grounds that there is a clear and present danger
of any substantive evil which the State has the right to prevent".
(Ta�ada and Fernando on the Constitution of the Philippines, Vol.
1, 4th ed., p. 297). In the case at bar the license fee herein involved
is imposed upon appellant for its distribution and sale of bibles and
other religious literature:
In the case of Murdock vs. Pennsylvania, it was held that an
ordinance requiring that a license be obtained before a person
could canvass or solicit orders for goods, paintings, pictures, wares
or merchandise cannot be made to apply to members of Jehovah's
Witnesses who went about from door to door distributing literature
and soliciting people to "purchase" certain religious books and
pamphlets, all published by the Watch Tower Bible & Tract Society.
The "price" of the books was twenty-five cents each, the "price" of
the pamphlets five cents each. It was shown that in making the
solicitations there was a request for additional "contribution" of
twenty-five cents each for the books and five cents each for the
pamphlets. Lesser sum were accepted, however, and books were
even donated in case interested persons were without
funds.chanroblesvirtualawlibrary chanrobles virtual law library
On the above facts the Supreme Court held that it could not be said
that petitioners were engaged in commercial rather than a religious
venture. Their activities could not be described as embraced in the
occupation of selling books and pamphlets. Then the Court
continued:chanrobles virtual law library
"We do not mean to say that religious groups and the press are free
from all financial burdens of government. See Grosjean vs.
American Press Co., 297 U.S., 233, 250, 80 L. ed. 660, 668, 56 S. Ct.
444. We have here something quite different, for example, from a
tax on the income of one who engages in religious activities or a tax
Nor could dissemination of religious information be conditioned
on property used or employed in connection with activities. It is one
upon the approval of an official or manager even if the town were
thing to impose a tax on the income or property of a preacher. It is
owned by a corporation as held in the case of Marsh vs. State of
quite another to exact a tax from him for the privilege of delivering
Alabama (326 U.S. 501), or by the United States itself as held in the
a sermon. The tax imposed by the City of Jeannette is a flat license
case of Tucker vs. Texas (326 U.S. 517). In the former case the
tax, payment of which is a condition of the exercise of these
Supreme Court expressed the opinion that the right to enjoy
constitutional privileges. The power to tax the exercise of a privilege
freedom of the press and religion occupies a preferred position as
is the power to control or suppress its enjoyment. . . . Those who
against the constitutional right of property
can tax the exercise of this religious practice can make its exercise
owners.chanroblesvirtualawlibrary chanrobles virtual law library
so costly as to deprive it of the resources necessary for its
maintenance. Those who can tax the privilege of engaging in this
form of missionary evangelism can close all its doors to all those
who do not have a full purse. Spreading religious beliefs in this "When we balance the constitutional rights of owners of property
ancient and honorable manner would thus be denied the needy. . . against those of the people to enjoy freedom of press and religion,
.chanroblesvirtualawlibrary chanrobles virtual law library as we must here, we remain mindful of the fact that the latter
occupy a preferred position. . . . In our view the circumstance that
the property rights to the premises where the deprivation of
property here involved, took place, were held by others than the
It is contended however that the fact that the license tax can
public, is not sufficient to justify the State's permitting a corporation
suppress or control this activity is unimportant if it does not do so.
to govern a community of citizens so as to restrict their
But that is to disregard the nature of this tax. It is a license tax - a
fundamental liberties and the enforcement of such restraint by the
flat tax imposed on the exercise of a privilege granted by the Bill of
application of a State statute." (Ta�ada and Fernando on the
Rights . . . The power to impose a license tax on the exercise of
Constitution of the Philippines, Vol. 1, 4th ed., p. 304-306).
these freedom is indeed as potent as the power of censorship which
this Court has repeatedly struck down. . . . It is not a nominal fee
imposed as a regulatory measure to defray the expenses of policing
the activities in question. It is in no way apportioned. It is flat license Section 27 of Commonwealth Act No. 466, otherwise known as the
tax levied and collected as a condition to the pursuit of activities National Internal Revenue Code, provides:
whose enjoyment is guaranteed by the constitutional liberties of
press and religion and inevitably tends to suppress their exercise.
That is almost uniformly recognized as the inherent vice and evil of
this flat license tax."chanrobles virtual law library
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 - chanrobles virtual law library
(e) Corporations or associations organized and operated exclusively
for religious, charitable, . . . or educational purposes, . . .: Provided,
however, That the income of whatever kind and character from any
of its properties, real or personal, or from any activity conducted for
profit, regardless of the disposition made of such income, shall be
liable to the tax imposed under this Code;
Appellant's counsel claims that the Collector of Internal Revenue
has exempted the plaintiff from this tax and says that such
exemption clearly indicates that the act of distributing and selling
bibles, etc. is purely religious and does not fall under the above legal
provisions.chanroblesvirtualawlibrary chanrobles virtual law library
It may be true that in the case at bar the price asked for the bibles
and other religious pamphlets was in some instances a little bit
higher than the actual cost of the same but this cannot mean that
appellant was engaged in the business or occupation of selling said
"merchandise" for profit. For this reason We believe that the
provisions of City of Manila Ordinance No. 2529, as amended,
cannot be applied to appellant, for in doing so it would impair its
free exercise and enjoyment of its religious profession and worship
as well as its rights of dissemination of religious
beliefs.chanroblesvirtualawlibrary chanrobles virtual law library
With respect to Ordinance No. 3000, as amended, which requires
the obtention the Mayor's permit before any person can engage in
any of the businesses, trades or occupations enumerated therein,
We do not find that it imposes any charge upon the enjoyment of a
right granted by the Constitution, nor tax the exercise of religious
practices. In the case of Coleman vs. City of Griffin, 189 S.E. 427, this
point was elucidated as follows:
An ordinance by the City of Griffin, declaring that the practice of
distributing either by hand or otherwise, circulars, handbooks,
advertising, or literature of any kind, whether said articles are being
delivered free, or whether same are being sold within the city limits
of the City of Griffin, without first obtaining written permission from
the city manager of the City of Griffin, shall be deemed a nuisance
and punishable as an offense against the City of Griffin, does not
deprive defendant of his constitutional right of the free exercise and
enjoyment of religious profession and worship, even though it
prohibits him from introducing and carrying out a scheme or
purpose which he sees fit to claim as a part of his religious system.
It seems clear, therefore, that Ordinance No. 3000 cannot be
considered unconstitutional, even if applied to plaintiff Society. But
as Ordinance No. 2529 of the City of Manila, as amended, is not
applicable to plaintiff-appellant and defendant-appellee is
powerless to license or tax the business of plaintiff Society involved
herein for, as stated before, it would impair plaintiff's right to the
free exercise and enjoyment of its religious profession and worship,
as well as its rights of dissemination of religious beliefs, We find that
Ordinance No. 3000, as amended is also inapplicable to said
business, trade or occupation of the
plaintiff.chanroblesvirtualawlibrary chanrobles virtual law library
Wherefore, and on the strength of the foregoing considerations, We
hereby reverse the decision appealed from, sentencing defendant
return to plaintiff the sum of P5,891.45 unduly collected from it.
Without pronouncement as to costs. It is so
ordered.chanroblesvirtualawlibrary chanrobles virtual law library
Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador,
Concepcion and Endencia, JJ., concur.
WENCESLAO PASCUAL, in his official capacity as Provincial
Governor of Rizal, petitioner and appellant, v. THE SECRETARY OF
PUBLIC WORKS AND COMMUNICATIONS, ET AL., respondents and
appellees.
Asst. Fiscal Noli M. Cortes and Jose P. Santos for Appellant.
Asst. Solicitor General Jose G. Bautista and Solicitor A.A. Torres for
Appellee.
SYLLABUS
1. CONSTITUTIONAL LAW; LEGISLATIVE POWERS; APPROPRIATION
OF PUBLIC REVENUES ONLY FOR PUBLIC PURPOSES; WHAT
DETERMINES VALIDITY OF A PUBLIC EXPENDITURE. — "It is a
general rule that the legislature is without power to appropriate
public revenues for anything but a public purpose. . . . It is the
essential character of the direct object of the expenditure which
must determine its validity as justifying a tax and not the magnitude
of the interests to be affected nor the degree to which the general
advantage of the community, and thus the public welfare, may be
ultimately benefited by their promotion. Incidental advantage to
the public or to the state, which results from the promotion of
private interests, and the prosperity of private enterprises or
business, does not justify their aid by the use of public money." (23
R. L. C. pp. 398-450).
2. ID.; ID.; ID.; UNDERLYING REASON FOR THE RULE. — Generally,
under the express or implied provisions of the constitution, public
funds may be used only for a public purpose. The right of the
legislature to appropriate public funds is correlative with its right to
tax, and, under constitutional provisions against taxation except for
public purposes and prohibiting the collection of a tax for one
purpose and the devotion thereof to another purpose, no
appropriate of state funds can be made for other than a public
purpose. (81 C.J.S. p. 1147).
3. ID.; ID.; ID.; TEST OF CONSTITUTIONALITY. — The test of the
constitutionality of a statute requiring the use of public funds is
whether the statute is designed to promote the public interests, as
opposed to the furtherance of the advantage of individuals,
although such advantage to individuals might incidentally serve the
public. (81 C.J.S. p. 1147).
4. ID.; ID.; ID.; ID.; POWERS OF CONGRESS AT THE TIME OF PASSAGE
OF A STATUTE SHOULD BE CONSIDERED. — The validity of a statute
depends upon the powers of Congress at the time of its passage or
approval, not upon events occurring, or acts performed,
subsequently thereto, unless the latter consist of an amendment of
the organic law, removing, with retrospective operation, the
constitutional limitation infringed by said statute.
5. ID.; ID.; ID.; APPROPRIATION FOR A PRIVATE PURPOSE NULL AND
VOID; SUBSEQUENT DONATION TO GOVERNMENT NOT CURATIVE
OF DEFECT. — Where the land on which projected feeder roads are
to be constructed belongs to a private person, an appropriation
made by Congress for that purpose is null and void, and a donation
to the Government, made over five (5) months after the approval
and effectivity of the Act for the purpose of giving a "semblance of
legality" to the appropriation, does not cure the basic defect.
Consequently, a judicial nullification of said donation need not
precede the declaration of unconstitutionality of said appropriation.
6. ID.; ID.; ID.; ID.; RIGHT OF TAXPAYERS TO CONTEST
CONSTITUTIONALITY OF A LEGISLATION. — The relation between
the people of the Philippines and its taxpayers, on the one hand,
and the Republic of the Philippines, on the other, is not identical to
that obtaining between the people and taxpayers of the U.S. and its
Federal Government. It is closer, from a domestic viewpoint, to that
existing between the people and taxpayers of each state and the
government thereof, except that the authority of the Republic of
the Philippines over the people of the Philippines is more fully direct
than that of the states of the Union, insofar as the simple and
unitary type of our national government is not subject to limitations
analogous to those imposed by the Federal Constitution upon the
states of the Union, and those imposed upon the Federal
Government in the interest of the states of the Union. For this
reason, the rule recognizing the right of taxpayers to assailed the
constitutionality of a legislation appropriating local or state public
funds - which has been upheld by the Federal Supreme Court
(Crampton v. Zabriskie, 101 U.S. 601) - has greater application in the
Philippines than that adopted with respect to acts of Congress of
the United States appropriating federal funds.
7. CONTRACTS; DEFENSE OF ILLEGALITY; EXCEPTIONS TO ARTICLE
1421 OF THE CIVIL CODE. — Article 1421 of the Civil Code is subject
to exceptions. For instance, the creditors of a party to an illegal
contract may, under the conditions set forth in Article 1177 of said
Code, exercise the rights and actions of the latter, except only those
which are inherent in his person, including his right to the
annulment of said contract, even though such creditors are not
affected by the same, except indirectly, in the manner indicated in
said legal provision.
DECISION

CONCEPCION, J.:
Appeal, by petitioner Wenceslao Pascual, from a decision of the
Court of First Instance of Rizal, dismissing the above entitled case
and dissolving the writ of preliminary injunction therein issued,
without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial
Governor of Rizal, instituted this action for declaratory relief, with
injunction upon the ground that Republic Act No. 920, entitled An
Act Appropriating Funds for Public Works", approved on June 20,
1953, contained, in section 1-C (a) thereof, an item (43[h]) of
P85,000.00, "for the construction, reconstruction, repair, extension
and improvement" of "Pasig feeder road terminals (Gen. Roxas —
Gen. Araneta — Gen. Lucban — Gen. Capinpin — Gen. Segundo —
Gen. Delgado — Gen. Malvar — Gen. Lim)" ; that, at the time of the
passage and approval of said Act, the aforementioned feeder roads
were "nothing but projected and planned subdivision roads, not yet
constructed, . . . within the Antonio Subdivision . . . situated at . . .
Pasig, Rizal" (according to the tracings attached to the petition as
Annexes A and B, near Shaw Boulevard, nor far away from the
intersection between the latter and Highway 54), which projected
feeder roads "do not connect any government property or any
important premises to the main highway" ; that the aforementioned
Antonio Subdivision (as well as the lands on which said feeder roads
were to be constructed) were private respondent Jose C. Zulueta,
who, at the time of the passage and approval of said Act, was a
member of the Senate of the Philippines; that on May 29, 1953,
respondent Zulueta, addressed a letter to the Municipal Council of
Pasig, Rizal, offering to donate said projected feeder roads to the
municipality of Pasig, Rizal; that, on June 13, 1953, the offer was
accepted by the council, subject to the condition "that the donor
would submit a plan of the said roads and agree to change the
names of two of them" ; that no deed of donation in favor of the
municipality of Pasig was, however, executed; that on July 10, 1953,
respondent Zulueta wrote another letter to said council, calling
attention to the approval of Republic Act No. 920, and the sum of
P85,000.00 appropriated therein for the construction of the
projected feeder reads in question; that the municipal council of
Pasig endorsed said letter of respondent Zulueta to the District
Engineer of Rizal, who, up to the present "has not made any
endorsement thereon" ; that inasmuch as the projected feeder
roads in question were private property at the time of the passage
and approval of Republic Act No. 920, the appropriation of
P85,000.00 therein made, for the construction, reconstruction,
repair, extension and improvement of said projected feeder roads,
was "illegal and, therefore, void ab initio" ; that said appropriation
of P85,000.00 was made by Congress because its members were
made to believe that the projected feeder roads in question were
"public roads and not private streets of a private subdivision" ; that,
"in order to give a semblance of legality, when there is absolutely
none, to the aforementioned appropriation", respondent Zulueta
executed, on December 12, 1953, while he was a member of the
Senate of the Philippines, an alleged deed of donation — copy of
which is annexed to the petition — of the four (4) parcels of land
constituting said project feeder roads, in favor of the Government
of the Republic of the Philippines; that said alleged deed of
donation was on the same date, accepted by the ten Executive
Secretary; that being subject to an onerous condition, said donation
partook of the nature of a contract; that, such, said donation
violated the provision of our fundamental law prohibition members
of Congress from being directly or indirectly financially interested in
any contract with the Government, and, hence, is unconstitutional,
as well as null and void ab initio, for the construction of the
projected feeder roads in question with public funds would greatly
enhance or increase the value of the aforementioned subdivision of
respondent Zulueta, "aside from relieving him from the burden of
constructing his subdivision streets or roads at his own expense" ;
that the construction of said projected feeder roads was then being
undertaken by the Bureau of Public Highways; and that, unless
restrained by the court, the respondents would continue to
execute, comply with, follow and implement the aforementioned
illegal provision of law, "to the irreparable damage, detriment and
prejudice not only to the petitioner but to the Filipino
nation."cralaw virtua1aw library
Petitioner prayed, therefore, that the contested item of Republic
Act No. 920 be declared null and void; that the alleged deed of
donation of the feeder roads in question be "declared
unconstitutional and, therefore, illegal" ; that a writ of injunction be
issued enjoining the Secretary of Public Works and
Communications, the Director of the Bureau of Public Works, the
Commissioner of the Bureau of Public Highways and Jose C. Zulueta
from ordering or allowing the continuance of the above-mentioned
feeder roads project, and from making and securing any new and
further releases on the aforementioned item of Republic Act No.
926 and the disbursing officers of the Department of Public Works
and Communications, the Bureau of Public Works and the Bureau of
Public Highways from making any further payments out of said
funds provided for in Republic Act No. 920; and that pending final
hearing on the merits, a writ of preliminary injunction be issued
enjoining the aforementioned parties respondent from making and
securing any new and further releases on the aforesaid item of
Republic Act No. 920 and from making any further payments out of
said illegally appropriated funds.
Respondents moved to dismiss the petition upon the ground that
petitioner had "no legal capacity to sue", and that the petition did
"not state a cause of action." In support to this motion, respondent
Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial
governor, should represent the Province Administrative Code; that
said respondent "not aware of any law which makes illegal the
appropriation of public funds for the improvement of . . . private
proper" ; and that, the constitutional provision invoked by
petitioner inapplicable to the donation in question, the same being
a pure act of liberality, not a contract. The other respondents, in
turn, maintained that petitioner could not assail the appropriation
in question because "there is no actual bona fide case . . . in which
the validity of Republic Act No. 920 is necessarily involved and
petitioner "has not shown that he has a personal and substantial
interest" in said Act "and that its enforcement has caused or will
cause him a direct injury."
Acting upon said motion to dismiss, the lower court rendered the
aforementioned decision, dated October 29, 1953, holding that,
since public interest is involved in this case, the Provincial Governor
of Rizal and the provincial fiscal thereof who represents him therein,
"have the requisite personalities" to question the constitutionality
of the disputed item of Republic Act No. 920; that "the legislature is
without power to appropriate public revenues for anything but a
public purpose", that the construction and improvement of the
feeder roads in question, if such roads were private property, would
not be a public purpose; that, being subject to the following
condition:jgc:chanrobles.com.ph
"The within donation is hereby made upon the condition that the
Government of the Republic of the Philippines will use the parcels
of land hereby donated for street purposes only and for no other
purposes whatsoever; it being expressly understood that should the
Government of the Republic of the Philippines violate the condition
hereby imposed upon it, the title to the land hereby donated shall,
upon such violation, ipso facto revert to the DONOR, JOSE C.
ZULUETA." (Italics supplied.)
which is onerous, the donation in question is a contract; that said
donation or contract is "absolutely forbidden by the Constitution"
and consequently illegal", for Article 1409 of the Civil Code of the
Philippines, declares in existent and void from the very beginning
contracts "whose cause, object or purpose is contrary to law, morals
. . . or public policy" ; that the legality of said donation may not be
contested, however, by petitioner herein, because his "interests are
not directly affected" thereby; and that, accordingly, the
appropriation in question "should be upheld" and the case
dismissed.
At the outset, it should be noted that we are concerned with a
decision granting the aforementioned motions to dismiss, which as
such, are deemed to have admitted hypothetically the allegations of
fact made in the petition of appellant herein. According to said
petition, respondent Zulueta is the owner of several parcels of
residential land, situated in Pasig Rizal, and known as the Antonio
Subdivision, certain portions of which had been reserved for the
projected feeder roads aforementioned, which, admittedly, were
private property of said respondent when Republic Act No. 920,
appropriating P85,000.00 for the "construction, reconstruction,
repair, extension and improvement" of said roads, was passed by
Congress, as well as when it was approved by the President on June
20, 1953. The petition further alleges that the construction of said
feeder roads, to be undertaken with the aforementioned
appropriation of P85,000.00, would have the effect of relieving
respondent Zulueta of the burden of constructing its subdivision
streets or roads at his own expenses, 1 and would greatly enhance
or increase the value of the subdivision" of said Respondent. The
lower court held that under these circumstances, the appropriation
in question was "clearly for a private, not a public purpose."cralaw
virtua1aw library
Respondents do not deny the accuracy of this conclusion, which is
self-evident. 2 However, respondent Zulueta contended, in his
motion to dismiss that:jgc:chanrobles.com.ph
"A law passed by Congress and approved by the President can never
be illegal because Congress is the source of all laws . . . . Aside from
the fact that the movant is not aware of any law which makes illegal
the appropriation of public funds for the improvement of what we,
in the meantime, may assume as private property . . . ." (Record on
Appeal, pp. 33.)
The first proposition must be rejected most emphatically, it being
inconsistent with the nature of the Government established under
the Constitution of the Philippines and the system of checks and
balances underlying our political structure. Moreover, it is refuted
by the decisions of this Court invalidating legislative enactments
deemed violative of the Constitution or organic laws. 3
As regards the legal feasibility of appropriating public funds for a
private purpose the principle according to Ruling Case Law, is
this:jgc:chanrobles.com.ph
"It is a general rule that the legislature is without power to
appropriate public revenue for anything but a public purpose. . . . It
is the essential character of the direct object of the expenditure
which must determine its validity as justifying a tax, and not the
magnitude of the interests to be affected nor the degree to which
the general advantage of the community, and thus the public
welfare, may be ultimately benefited by their promotion. Incidental
advantage to the public or to the state, which results from the
promotion of private interests and the prosperity of private
enterprises or business, does not justify their aid by the use of
public money." (25 R.L.C. pp. 398-400; Italics supplied.)
The rule is set forth in Corpus Juris Secundum in the following
language:jgc:chanrobles.com.ph
"In accordance with the rule that the taxing power must be
exercised for public purposes only, discussed supra sec. 14, money
raised by taxation can be expanded only for public purposes and not
for the advantage of private individuals." (85 C.J.S. pp. 645-646;
Italics supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum
states:jgc:chanrobles.com.ph
"Generally, under the express or implied provisions of the
constitution, public funds may be used for a public purpose. The
right of the legislature to appropriate funds is correlative with its
right to tax, under constitutional provisions against taxation except
for public purposes and prohibiting the collection of a tax for one
purpose and the devotion thereof to another purpose, no
appropriation of state funds can be made for other than a public
purpose. . .
x x x
"The test of the constitutionality of a statute requiring the use of
public funds is whether the statute is designed to promote the
public interests, as opposed to the furtherance of the advantage of
individuals, although each advantage to individuals might
incidentally serve the public. . . ." (81 C.J.S. p. 1147; Italics supplied.)
 roads were public or private property when the bill, which, later on,
became Republic Act No. 920, was passed by Congress, or when said
Needless to say, this Court is fully in accord with the foregoing views
bill was approved by the President and the disbursement of said
which, apart from being patently sound, are a necessary corollary to
sum became effective, or on June 20, 1953 (see section 13 of said
our democratic system of government, which, as such, exists
Act). Inasmuch as the land on which the projected feeder roads
primarily for the promotion of the general welfare. Besides,
were to be constructed belonged then to respondent Zulueta, the
reflecting as they do, the established jurisprudence in the United
result is that said appropriation sought a private purpose, and,
States, after whose constitutional system ours has been patterned,
hence, was null and void. 4 The donation to the Government, over
said views and jurisprudence are, likewise, part and parcel of our
five (5) months after the approval and effectivity of said Act, made
own constitutional law.
according to the petition, for the purpose of giving a "semblance of
legality", or legalizing, the appropriation in question, did not cure its
aforementioned basic defect. Consequently, a judicial nullification
This notwithstanding, the lower court felt constrained to uphold the of said donation need not precede the declaration of
appropriation in question, upon the ground that petitioner may not unconstitutionality of said appropriation.
contest the legality of the donation above referred to because the
same does not affect him directly. This conclusion is, presumably,
based upon the following premises namely: (1) that, if valid, said
Again, Article 1421 of our Civil Code, like many other statutory
donation cured the constitutional infirmity of the aforementioned
enactments, is subject to exceptions. For instance, the creditors of a
appropriation; (2) that the latter may not be annulled without a
party to an illegal contract may, under the conditions set forth in
previous declaration of unconstitutionality of the said donation; and
Article 1177 of said Code, exercise the rights and actions of the
(3) that the rule set forth in Article 1421 of the Civil Code is
latter, except only those which are inherent in his person, including,
absolute, and admits of no exception. We do not agree with these
therefore, his right to the annulment of said contract, even though
premises.
such creditors are not affected by the same, except indirectly, in the
manner indicated in said legal provision.

The validity of a statute depends upon the powers of Congress at

the time of its passage or approval, not upon events occupying, or
Again, it is well settled that the validity of a statute may be
acts performed, subsequently thereto, unless the latter consist of
contested only by one who will sustain a direct injury in
an amendment of the organic law, removing, with retrospective
consequence of its enforcement. Yet, there are many decisions
operation, the constitutional limitation infringed by said statute.
nullifying, at the instance of taxpayers, laws providing for the
Referring to the P85,000.00 appropriation for the projected feeder
disbursement of public funds, 5 upon the theory that "the
roads in question, the legality thereof depended upon whether said
expenditure of public funds by an officer of the State for the
purpose of administering an unconstitutional act constitutes an
misapplication of such funds," which may be enjoined at the
request of a taxpayer. 6 Although there are some decisions to the
contrary, 7 the prevailing view in the United States is stated in the
American Jurisprudence as follows:jgc:chanrobles.com.ph
"In the determination of the degree of interest essential to give the
requisite standing to attack the constitutionality of a statute the
general rule is that only persons individually affected, but also
taxpayers, have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and may therefore
question the constitutionality of statutes requiring expenditure of
public moneys." (11 Am. Jur. 761; Italics supplied.)
However, this view was not favored by the Supreme Court of the
U.S. in Frothingham v. Mellon (262 U.S. 447), insofar as federal laws
are concerned, upon the ground that the relationship of a taxpayer
of the U.S. to its Federal Government is different from that of a
taxpayer of a municipal corporation to its government. Indeed,
under the composite system of government existing in the U.S.,
states of the Union are integral part of the Federation from an
international viewpoint, but, each state enjoys internally a
substantial measure of sovereignty, subject to the limitations
imposed by the Federal Constitution. In fact, the same was made by
representatives of each state of the Union, not of the people of the
U.S., except insofar as the former represented the people of the
respective States, and the people of each State has, independently
of that of the others, ratified said Constitution. In other words, the
Federal Constitution and the Federal statutes have become binding
upon the people of the U.S. in consequence of an act of, and, in this
sense, through the respective states of the Union of which they are
citizens. The peculiar nature of the relation between said people
and the Federal Government of the U.S. is reflected in the election
of its President, who is chosen directly, not by the people of the
U.S., but by electors chosen by each State, in such manner as the
legislature thereof may direct (Article II, section 2, of the Federal
Constitution).
The relation between the people of the Philippines and its
taxpayers, on the other hand, and the Republic of the Philippines,
on the other, is not identical to that obtaining between the people
and taxpayers of the U.S. and its Federal Government. It is closer,
from a domestic viewpoint, to that existing between the people and
taxpayers of each state and the government thereof, except that
the authority of the Republic of the Philippines over the people of
the Philippines is more fully direct than that of the states of the
Union, insofar as the simple and unitary type of our national
government is not subject to limitations analogous to those
imposed by the Federal Constitution upon the states of the Union,
and those imposed upon the Federal Government in the interest of
the states of the Union. For this reason, the rule recognizing the
right of taxpayers to assail the constitutionality of a legislation
appropriating local or state public funds — which has been upheld
by the Federal Supreme Court (Crampton v. Zabriskie, 101 U.S. 601)
— has greater application in the Philippines than that adopted with
respect to acts of Congress of the United States appropriating
federal funds.
Indeed, in the Province of Tayabas v. Perez (56 Phil., 257), involving
the expropriation of a land by the Province of Tayabas, two (2)
taxpayers thereof were allowed to intervene for the purpose of Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes, J.B.L.,
contesting the price being paid to the owner thereof, as unduly Barrera, Gutierrez David, Paredes and Dizon, JJ., concur.
exorbitant. It is true that in Custodio v. President of the Senate (42
Off. Gaz., 1243), a taxpayer and employee of the Government was
not permitted to question the constitutionality of an appropriation G.R. No. L-7859 December 22, 1955
for backpay of members of Congress. However, in Rodriguez v.
Treasurer of the Philippines and Barredo v. Commission on Election
(84 Phil., 368; 45 Off. Gaz., 4411), we entertained the action of WALTER LUTZ, as Judicial Administrator of the Intestate Estate of
taxpayers impugning the validity of certain appropriations of public the deceased Antonio Jayme Ledesma, plaintiff-appellant,
funds, and invalidated the same. Moreover, the reason that
impelled this Court to take such position in said two (2) cases — the vs.
importance of the issues therein raised — is present in the case at J. ANTONIO ARANETA, as the Collector of Internal Revenue,
bar. Again, like the petitioners in the Rodriguez and Barredo cases, defendant-appellee.
petitioner herein is not merely a taxpayer. The province of Rizal,
which he represents officially as it Provincial Governor, is our most
populated political subdivision, 7 and, the taxpayers therein bear a
Ernesto J. Gonzaga for appellant.
substantial portion of the burden of taxation, in the Philippines.
Office of the Solicitor General Ambrosio Padilla, First Assistant
Solicitor General Guillermo E. Torres and Solicitor Felicisimo R.
Hence, it is our considered opinion that the circumstances Rosete for appellee.
surrounding this case sufficiently justify petitioner’s action in
contesting the appropriation and donation in question; that this
action should not have been dismissed by the lower court; and that
the writ of preliminary injunction should have been maintained.
REYES, J.B L., J.:

Wherefore, the decision appealed from is hereby reversed, and the

This case was initiated in the Court of First Instance of Negros
records are remanded to the lower court for further proceedings
Occidental to test the legality of the taxes imposed by
not inconsistent with this decision, with the costs of this instance
Commonwealth Act No. 567, otherwise known as the Sugar
against respondent Jose C. Zulueta. It is so ordered.
Adjustment Act.
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."
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.
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;
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;lawphi1.net
Third, to limit the production of sugar to areas more economically
suited to the production thereof; and
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).
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
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).
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).
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).
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).
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).
The decision appealed from is affirmed, with costs against
appellant. So ordered.
[G.R. No. 137377. December 18, 2001.]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. MARUBENI
CORPORATION, Respondent.
DECISION
PUNO, J.:
In this petition for review, the Commissioner of Internal Revenue
assails the decision dated January 15, 1999 of the Court of Appeals
in CA-G.R. SP No. 42518 which affirmed the decision dated July 29,
1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax
court ordered the Commissioner of Internal Revenue to desist from
collecting the 1985 deficiency income, branch profit remittance and
contractor’s taxes from Marubeni Corporation after finding the
latter to have properly availed of the tax amnesty under Executive
Orders Nos. 41 and 64, as amended.
Respondent Marubeni Corporation is a foreign corporation
organized and existing under the laws of Japan. It is engaged in
general import and export trading, financing and the construction
business. It is duly registered to engage in such business in the
Philippines and maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal
Revenue issued a letter of authority to examine the books of
accounts of the Manila branch office of respondent corporation for
the fiscal year ending March 1985. In the course of the examination,
petitioner found respondent to have undeclared income from two
(2) contracts in the Philippines, both of which were completed in
1984. One of the contracts was with the National Development
Company (NDC) in connection with the construction and installation
of a wharf/port complex at the Leyte Industrial Development Estate
in the municipality of Isabel, province of Leyte. The other contract
was with the Philippine Phosphate Fertilizer Corporation (Philphos)
for the construction of an ammonia storage complex also at the
Leyte Industrial Development Estate.
On March 1, 1986, petitioner’s revenue examiners recommended
an assessment for deficiency income, branch profit remittance,
contractor’s and commercial broker’s taxes. Respondent questioned
this assessment in a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated
August 15, 1986 from petitioner assessing respondent several
deficiency taxes. The assessed deficiency internal revenue taxes,
inclusive of surcharge and interest, were as follows:chanrob1es
virtua1 1aw 1ibrary
I. DEFICIENCY INCOME TAX
FY ended March 31, 1985 ============

Undeclared gross income (Philphos and NDC construction projects) II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
P967,269,811.14 Less: Cost and expenses (50%) 483,634,905.57

FY ended March 31, 1985

———————

Undeclared gross income from

Net undeclared income 483,634,905.57

Philphos and NDC construction projects P483,634,905.57

Income tax due thereon 169,272,217.00

Less: Income tax thereon 169,272,217.00

Add: 50% surcharge 84,636,108.50

———————
20% int. p.a.fr. 7-15-85

Amount subject to Tax 314,362,688.57

to 8-15-86 36,675,646.90

———————
———————

Tax due thereon 47,154,403.00

TOTAL AMOUNT DUE P290,583,972.40

Add: 50% surcharge 23,577,201.50

 Contractor’s tax due thereon (4%) 38,690,792.00

20% int. p.a.fr. 4-26-85

Add: 50% surcharge for non-declaration 19,345,396.00

to 8-15-86 12,305,360.66

20% surcharge for late payment 9,672,698.00

———————

———————

TOTAL AMOUNT DUE P83,036,965.16

Sub-total 67,708,886.00

============

Add: 20% int. p.a.fr. 4-21-85

III. DEFICIENCY CONTRACTOR’S TAX

to 8-15-86 17,854,739.46

FY ended March 31, 1985

———————

Undeclared gross receipts/gross income from

TOTAL AMOUNT DUE P85,563,625.46

Philphos and NDC construction projects P967,269,811.14

============

———————

IV. DEFICIENCY COMMERCIAL BROKER’S TAX

 Add: 20% int. p.a.fr. 4-21-85

FY ended March 31, 1985

to 8-15-86 751,539.98

Undeclared share from commission income

———————

(denominated as "subsidy from Home

TOTAL AMOUNT DUE P3,600,535.68

Office") P24,683,114.50

============

———————

The 50% surcharge was imposed for your client’s failure to report
for tax purposes the aforesaid taxable revenues while the 25%
Tax due thereon 1,628,569.00
surcharge was imposed because of your client’s failure to pay on
time the above deficiency percentage taxes.

Add: 50% surcharge for non-declaration 814,284.50

x x x" 1

20% surcharge for late payment 407,142.25

Petitioner found that the NDC and Philphos contracts were made on
a "turn-key" basis and that the gross income from the two projects
——————— amounted to P967,269,811.14. Each contract was for a piece of
work and since the projects called for the construction and
installation of facilities in the Philippines, the entire income
Sub-total 2,849,995.75 therefrom constituted income from Philippine sources, hence,
subject to internal revenue taxes. The assessment letter further
stated that the same was petitioner’s final decision and that if
respondent disagreed with it, respondent may file an appeal with
the Court of Tax Appeals within thirty (30) days from receipt of the
assessment.
On September 26, 1986, respondent filed two (2) petitions for
review with the Court of Tax Appeals. The first petition, CTA Case
No. 4109, questioned the deficiency income, branch profit
remittance and contractor’s tax assessments in petitioner’s
assessment letter. The second, CTA Case No. 4110, questioned the
deficiency commercial broker’s assessment in the same
letter.cralaw : red
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring
a one-time amnesty covering unpaid income taxes for the years
1981 to 1985 was issued. Under this E.O., a taxpayer who wished to
avail of the income tax amnesty should, on or before October 31,
1986: (a) file a sworn statement declaring his net worth as of
December 31, 1985; (b) file a certified true copy of his statement
declaring his net worth as of December 31, 1980 on record with the
Bureau of Internal Revenue (BIR), or if no such record exists, file a
statement of said net worth subject to verification by the BIR; and
(c) file a return and pay a tax equivalent to ten per cent (10%) of the
increase in net worth from December 31, 1980 to December 31,
1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax
amnesty return dated October 30, 1986 and attached thereto its
sworn statement of assets and liabilities and net worth as of Fiscal
Year (FY) 1981 and FY 1986. The return was received by the BIR on
November 3, 1986 and respondent paid the amount of
P2,891,273.00 equivalent to ten percent (10%) of its net worth
increase between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from
October 31, 1986 to December 5, 1986 by E.O. No. 54 dated
November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was
expanded by Executive Order (E.O.) No. 64. In addition to the
income tax amnesty granted by E.O. No. 41 for the years 1981 to
1985, E.O. No. 64 3 included estate and donor’s taxes under Title III
and the tax on business under Chapter II, Title V of the National
Internal Revenue Code, also covering the years 1981 to 1985. E.O.
No. 64 further provided that the immunities and privileges under
E.O. No. 41 were extended to the foregoing tax liabilities, and the
period within which the taxpayer could avail of the amnesty was
extended to December 15, 1986. Those taxpayers who already filed
their amnesty return under E.O. No. 41, as amended, could avail
themselves of the benefits, immunities and privileges under the
new E.O. by filing an amended return and paying an additional 5%
on the increase in net worth to cover business, estate and donor’s
tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January
31, 1987 by E.O No. 95 dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax
amnesty return under the benefit of E.O. No. 64 and paid a further
amount of P1,445,637.00 to the BIR equivalent to five percent (5%)
of the increase of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the
Court of Tax Appeals rendered a decision in CTA Case No. 4109. The
tax court found that respondent had properly availed of the tax
amnesty under E.O. Nos. 41 and 64 and declared the deficiency
taxes subject of said case as deemed cancelled and withdrawn. The
Court of Tax Appeals disposed of as follows:jgc:chanrobles.com.ph
"WHEREFORE, the respondent Commissioner of Internal Revenue is
hereby ORDERED to DESIST from collecting the 1985 deficiency
taxes it had assessed against petitioner and the same are deemed
considered [sic] CANCELLED and WITHDRAWN by reason of the
proper availment by petitioner of the amnesty under Executive
Order No. 41, as amended." 4
Petitioner challenged the decision of the tax court by filing CA-G.R.
SP No. 42518 with the Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition
and affirmed the decision of the Court of Tax Appeals. Hence, this
recourse.
Before us, petitioner raises the following
issues:jgc:chanrobles.com.ph
"(1) Whether or not the Court of Appeals erred in affirming the
Decision of the Court of Tax Appeals which ruled that herein
respondent’s deficiency tax liabilities were extinguished upon
respondent’s availment of tax amnesty under Executive Orders Nos.
41 and 64.
(2) Whether or not respondent is liable to pay the income, branch
profit remittance, and contractor’s taxes assessed by petitioner." 5
The main controversy in this case lies in the interpretation of the
exception to the amnesty coverage of E.O. Nos. 41 and 64. There
are three (3) types of taxes involved herein — income tax, branch
profit remittance tax and contractor’s tax. These taxes are covered
by the amnesties granted by E.O. Nos. 41 and 64. Petitioner claims,
however, that respondent is disqualified from availing of the said
amnesties because the latter falls under the exception in Section 4
(b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of
the amnesty granted thereunder, viz:jgc:chanrobles.com.ph
"Sec. 4. Exceptions. — The following taxpayers may not avail
themselves of the amnesty herein granted:chanrob1es virtual 1aw
library
a) Those falling under the provisions of Executive Order Nos. 1, 2
and 14;
b) Those with income tax cases already filed in Court as of the
effectivity hereof;
c) Those with criminal cases involving violations of the income tax
law already filed in court as of the effectivity hereof;
d) Those that have withholding tax liabilities under the National
Internal Revenue Code, as amended, insofar as the said liabilities
are concerned;
e) Those with tax cases pending investigation by the Bureau of
Internal Revenue as of the effectivity hereof as a result of
information furnished under Section 316 of the National Internal
Revenue Code, as amended;chanrob1es virtua1 1aw 1ibrary
f) Those with pending cases involving unexplained or unlawfully
acquired wealth before the Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal
Exactions and Transactions) and Chapter Four (Malversation of
Public Funds and Property) of the Revised Penal Code, as
amended."cralaw virtua1aw library
Petitioner argues that at the time respondent filed for income tax
amnesty on October 30, 1986, CTA Case No. 4109 had already been
filed and was pending; before the Court of Tax Appeals. Respondent
therefore fell under the exception in Section 4 (b) of E.O. No. 41.
Petitioner’s claim cannot be sustained. Section 4 (b) of E.O. No. 41 is
very clear and unambiguous. It excepts from income tax amnesty
those taxpayers "with income tax cases already filed in court as of
the effectivity hereof." The point of reference is the date of
effectivity of E.O. No. 41. The filing of income tax cases in court
must have been made before and as of the date of effectivity of E.O.
No. 41. Thus, for a taxpayer not to be disqualified under Section 4
(b) there must have been no income tax cases filed in court against
him when E.O. No. 41 took effect. This is regardless of when the
taxpayer filed for income tax amnesty, provided of course he files it
on or before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109
questioning the 1985 deficiency income, branch profit remittance
and contractor’s tax assessments was filed by respondent with the
Court of Tax Appeals on September 26, 1986. When E.O. No. 41
became effective on August 22, 1986, CTA Case No. 4109 had not
yet been filed in court. Respondent corporation did not fall under
the said exception in Section 4 (b), hence, respondent was not
disqualified from availing of the amnesty for income tax under E.O.
No. 41.
The same ruling also applies to the deficiency branch profit
remittance tax assessment. A branch profit remittance tax is
defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of
the National Internal Revenue Code. 6 In the tax code, this tax falls
under Title II on Income Tax. It is a tax on income. Respondent
therefore did not fall under the exception in Section 4 (b) when it
filed for amnesty of its deficiency branch profit remittance tax
assessment.
The difficulty herein is with respect to the contractor’s tax
assessment and respondent’s availment of the amnesty under E.O.
No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41 by
including estate and donor’s taxes and tax on business. Estate and
donor’s taxes fall under Title III of the Tax Code while business taxes
fall under Chapter II, Title V of the same. The contractor’s tax is
provided in Section 205, Chapter II, Title V of the Tax Code; it is
defined and imposed under the title on business taxes, and is
therefore a tax on business. 7
When E.O. No. 64 took effect on November 17, 1986, it did not
provide for exceptions to the coverage of the amnesty for business,
estate and donor’s taxes. Instead, Section 8 of E.O. No. 64 provided
that:jgc:chanrobles.com.ph
"Section 8. The provisions of Executive Orders Nos. 41 and 54 which
are not contrary to or inconsistent with this amendatory Executive
Order shall remain in full force and effect."cralaw virtua1aw library
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41
not contrary to or inconsistent with the amendatory act were
reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the
exceptions to amnesty coverage also applied to E.O. No. 64. With
respect to Section 4 (b) in particular, this provision excepts from tax
amnesty coverage a taxpayer who has "income tax cases already
filed in court as of the effectivity hereof." As to what Executive
Order the exception refers to, respondent argues that because of
the words "income" and "hereof," they refer to Executive Order No.
41. 8
In view of the amendment introduced by E.O. No. 64, Section 4 (b)
cannot be construed to refer to E.O. No. 41 and its date of
effectivity. The general rule is that an amendatory act operates
prospectively. 9 While an amendment is generally construed as
becoming a part of the original act as if it had always been
contained therein, 10 it may not be given a retroactive effect unless
it is so provided expressly or by necessary implication and no vested
right or obligations of contract are thereby impaired. 11
There is nothing in E.O. No. 64 that provides that it should retroact
to the date of effectivity of E.O. No. 41, the original issuance.
Neither is it necessarily implied from E.O. No. 64 that it or any of its
provisions should apply retroactively. Executive Order No. 64 is a
substantive amendment of E.O. No. 41. It does not merely change
provisions in E.O. No. 41. It supplements the original act by adding
other taxes not covered in the first. 12 It has been held that where a
statute amending a tax law is silent as to whether it operates
retroactively, the amendment will not be given a retroactive effect
so as to subject to tax past transactions not subject to tax under the
original act.13 In an amendatory act, every case of doubt must be
resolved against its retroactive effect. 14
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax
amnesty is a general pardon or intentional overlooking by the State
of its authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law. 15 It partakes of an
absolute forgiveness or waiver by the government of its right to
collect what is due it and to give tax evaders who wish to relent a
chance to start with a clean slate. 16 A tax amnesty, much like a tax
exemption, is never favored nor presumed in law. 17 If granted, the
terms of the amnesty, like that of a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the
taxing authority. 18 For the right of taxation is inherent in
government. The State cannot strip itself of the most essential
power of taxation by doubtful words. He who claims an exemption
(or an amnesty) from the common burden must justify his claim by
the clearest grant of organic or state law. It cannot be allowed to
exist upon a vague implication. If a doubt arises as to the intent of
the legislature, that doubt must be resolved in favor of the state. 19
In the instant case, the vagueness in Section 4 (b) brought about by
E.O. No. 64 should therefore be construed strictly against the
taxpayer. The term "income tax cases" should be read as to refer to
estate and donor’s taxes and taxes on business while the word
"hereof," to E.O. No. 64. Since Executive Order No. 64 took effect on
November 17, 1986, consequently, insofar as the taxes in E.O. No.
64 are concerned, the date of effectivity referred to in Section 4 (b)
of E.O. No. 41 should be November 17, 1986.chanrob1es virtua1
1aw 1ibrary
Respondent filed CTA Case No. 4109 on September 26, 1986. When
E.O. No. 64 took effect on November 17, 1986, CTA Case No. 4109
was already filed and pending in court. By the time respondent filed
its supplementary tax amnesty return on December 15, 1986,
respondent already fell under the exception in Section 4 (b) of E.O.
Nos. 41 and 64 and was disqualified from availing of the business
tax amnesty granted therein.
It is respondent’s other argument that assuming it did not validly
avail of the amnesty under the two Executive Orders, it is still not
liable for the deficiency contractor’s tax because the income from
the projects came from the "Offshore Portion" of the contracts. The
two contracts were divided into two parts, i.e., the Onshore Portion
and the Offshore Portion. All materials and equipment in the
contract under the "Offshore Portion" were manufactured and
completed in Japan, not in the Philippines, and are therefore not
subject to Philippine taxes.
Before going into respondent’s arguments, it is necessary to discuss
the background of the two contracts, examine their pertinent
provisions and implementation.
The NDC and Philphos are two government corporations. In 1980,
the NDC, as the corporate investment arm of the Philippine
Government, established the Philphos to engage in the large-scale
manufacture of phosphatic fertilizer for the local and foreign
markets. 20 The Philphos plant complex which was envisioned to be
the largest phosphatic fertilizer operation in Asia, and among the
largest in the world, covered an area of 180 hectares within the
435-hectare Leyte Industrial Development Estate in the municipality
of Isabel, province of Leyte.
In 1982, the NDC opened for public bidding a project to construct
and install a modern, reliable, efficient and integrated wharf/port
complex at the Leyte Industrial Development Estate. The wharf/port
complex was intended to be one of the major facilities for the
industrial plants at the Leyte Industrial Development Estate. It was
to be specifically adapted to the site for the handling of phosphate
rock, bagged or bulk fertilizer products, liquid materials and other
products of Philphos, the Philippine Associated Smelting and
Refining Corporation (Pasar), 21 and other industrial plants within
the Estate. The bidding was participated in by Marubeni Head Office
in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and
respondent entered into an agreement entitled "Turn-Key Contract
for Leyte Industrial Estate Port Development Project Between
National Development Company and Marubeni Corporation." 22
The Port Development Project would consist of a wharf, berths,
causeways, mechanical and liquids unloading and loading systems,
fuel oil depot, utilities systems, storage and service buildings, offsite
facilities, harbor service vessels, navigational aid system, fire-
fighting system, area lighting, mobile equipment, spare parts and
other related facilities. 23 The scope of the works under the
contract covered turn-key supply, which included grants of licenses
and the transfer of technology and know-how, 24
and:jgc:chanrobles.com.ph
". . . the design and engineering, supply and delivery, construction,
erection and installation, supervision, direction and control of
testing and commissioning of the Wharf-Port Complex as set forth
in Annex I of this Contract, as well as the coordination of tie-ins at
boundaries and schedule of the use of a part or the whole of the
Wharf/Port Complex through the Owner, with the design and
construction of other facilities around the site. The scope of works
shall also include any activity, work and supply necessary for,
incidental to or appropriate under present international industrial
port practice, for the timely and successful implementation of the
object of this Contract, whether or not expressly referred to in the
abovementioned Annex I."25cralaw:red
The contract price for the wharf/port complex was
¥12,790,389,000.00 and P44,327,940.00. In the contract, the price
in Japanese currency was broken down into two portions: (1) the
Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the
price in Philippine currency was referred to as the Philippine Pesos
Portion. The Japanese Yen Portions I and II were financed in two (2)
ways: (a) by yen credit loan provided by the Overseas Economic
Cooperation Fund (OECF); and (b) by supplier’s credit in favor of
Marubeni from the Export-Import Bank of Japan. The OECF is a Fund
under the Ministry of Finance of Japan extended by the Japanese
government as assistance to foreign governments to promote
economic development. 26 The OECF extended to the Philippine
Government a loan of ¥7,560,000,000.00 for the Leyte Industrial
Estate Port Development Project and authorized the NDC to
implement the same. 27 The other type of financing is an indirect
type where the supplier, i.e., Marubeni, obtained a loan from the
Export-Import Bank of Japan to advance payment to its sub-
contractors. 28
Under the financing schemes, the Japanese Yen Portions I and II and
the Philippine Pesos Portion were further broken down and
subdivided according to the materials, equipment and services
rendered on the project. The price breakdown and the
corresponding materials, equipment and services were contained in
a list attached as Annex III to the contract. 29
A few months after execution of the NDC contract, Philphos opened
for public bidding a project to construct and install two ammonia
storage tanks in Isabel. Like the NDC contract, it was Marubeni Head
Office in Japan that participated in and won the bidding. Thus, on
May 2, 1982, Philphos and respondent corporation entered into an
agreement entitled "Turn-Key Contract for Ammonia Storage
Complex Between Philippine Phosphate Fertilizer Corporation and
Marubeni Corporation." 30 The object of the contract was to
establish and place in operating condition a modern, reliable,
efficient and integrated ammonia storage complex adapted to the
site for the receipt and storage of liquid anhydrous ammonia 31 and
for the delivery of ammonia to an integrated fertilizer plant
adjacent to the storage complex and to vessels at the dock. 32 The
storage complex was to consist of ammonia storage tanks,
refrigeration system, ship unloading system, transfer pumps,
ammonia heating system, fire-fighting system, area lighting, spare
parts, and other related facilities. 33 The scope of the works
required for the completion of the ammonia storage complex
covered the supply, including grants of licenses and transfer of
technology and know-how, 34 and:chanrob1es virtua1 1aw 1ibrary
". . . the design and engineering, supply and delivery, construction,
erection and installation, supervision, direction and control of
testing and commissioning of the Ammonia Storage Complex as set
forth in Annex I of this Contract, as well as the coordination of tie-
ins at boundaries and schedule of the use of a part or the whole of
the Ammonia Storage Complex through the Owner with the design
and construction of other facilities at and around the Site. The
scope of works shall also include any activity, work and supply
necessary for, incidental to or appropriate under present
international industrial practice, for the timely and successful
implementation of the object of this Contract, whether or not
expressly referred to in the abovementioned Annex I." 35
The contract price for the project was ¥3,255,751,000.00 and
P17,406,000.00. Like the NDC contract, the price was divided into
three portions. The price in Japanese currency was broken down
into the Japanese Yen Portion I and Japanese Yen Portion II while
the price in Philippine currency was classified as the Philippine
Pesos Portion. Both Japanese Yen Portions I and II were financed by
supplier’s credit from the Export-Import Bank of Japan. The price
stated in the three portions were further broken down into the
corresponding materials, equipment and services required for the
project and their individual prices. Like the NDC contract, the
breakdown in the Philphos contract is contained in a list attached to
the latter as Annex III. 36
The division of the price into Japanese Yen Portions I and II and the
Philippine Pesos Portion under the two contracts corresponds to the
two parts into which the contracts were classified — the Foreign
Offshore Portion and the Philippine Onshore Portion. In both
contracts, the Japanese Yen Portion I corresponds to the Foreign
Offshore Portion. 37 Japanese Yen Portion II and the Philippine
Pesos Portion correspond to the Philippine Onshore Portion. 38
Under the Philippine Onshore Portion, respondent does not deny its
liability for the contractor’s tax on the income from the two
projects. In fact respondent claims, which petitioner has not denied,
that the income it derived from the Onshore Portion of the two
projects had been declared for tax purposes and the taxes thereon
already paid to the Philippine government. 39 It is with regard to
the gross receipts from the Foreign Offshore Portion of the two
contracts that the liabilities involved in the assessments subject of
this case arose. Petitioner argues that since the two agreements are
turn-key, 40 they call for the supply of both materials and services
to the client, they are contracts for a piece of work and are
indivisible. The situs of the two projects is in the Philippines, and the
materials provided and services rendered were all done and
completed within the territorial jurisdiction of the Philippines. 41
Accordingly, respondent’s entire receipts from the contracts,
including its receipts from the Offshore Portion, constitute income
from Philippine sources. The total gross receipts covering both labor
and materials should be subjected to contractor’s tax in accordance
with the ruling in Commissioner of Internal Revenue v. Engineering
Equipment & Supply Co. 42
A contractor’s tax is imposed in the National Internal Revenue Code
(NIRC) as follows:jgc:chanrobles.com.ph
"Sec. 205. Contractors, proprietors or operators of dockyards, and
others. —A contractor’s tax of four percent of the gross receipts is
hereby imposed on proprietors or operators of the following
business establishments and/or persons engaged in the business of
selling or rendering the following services for a fee or
compensation:chanrob1es virtual 1aw library
(a) General engineering, general building and specialty contractors,
as defined in Republic Act No. 4566;
x x x
(q) Other independent contractors. The term "independent
contractors" includes persons (juridical or natural) not enumerated
above (but not including individuals subject to the occupation tax
under the Local Tax Code) whose activity consists essentially of the
sale of all kinds of services for a fee regardless of whether or not the
performance of the service calls for the exercise or use of the
physical or mental faculties of such contractors or their employees.
It does not include regional or area headquarters established in the
Philippines by multinational corporations, including their alien
In the case at bar, it is undisputed that respondent was an
executives, and which headquarters do not earn or derive income
independent contractor under the terms of the two subject
from the Philippines and which act as supervisory, communications
contracts. Respondent, however, argues that the work therein were
and coordinating centers for their affiliates, subsidiaries or branches
not all performed in the Philippines because some of them were
in the Asia-Pacific Region.
completed in Japan in accordance with the provisions of the
contracts.

x x x 43

An examination of Annex III to the two contracts reveals that the

materials and equipment to be made and the works and services to
Under the afore-quoted provision, an independent contractor is a
be performed by respondent are indeed classified into two. The first
person whose activity consists essentially of the sale of all kinds of
part, entitled "Breakdown of Japanese Yen Portion I"
services for a fee, regardless of whether or not the performance of
provides:chanrob1es virtua1 1aw 1ibrary
the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. The word
"contractor" refers to a person who, in the pursuit of independent
"Japanese Yen Portion I of the Contract Price has been subdivided
business, undertakes to do a specific job or piece of work for other
according to discrete portions of materials and equipment which
persons, using his own means and methods without submitting
will be shipped to Leyte as units and lots. This subdivision of price is
himself to control as to the petty details. 44
to be used by owner to verify invoice for Progress Payments under
Article 19.2.1 of the Contract. The agreed subdivision of Japanese
Yen Portion I is as follows:chanrob1es virtual 1aw library
A contractor’s tax is a tax imposed upon the privilege of engaging in
business. 45 It is generally in the nature of an excise tax on the
exercise of a privilege of selling services or labor rather than a sale
x x x 50
on products; 46 and is directly collectible from the person exercising
the privilege. 47 Being an excise tax, it can be levied by the taxing
authority only when the acts, privileges or business are done or
performed within the jurisdiction of said authority. 48 Like property The subdivision of Japanese Yen Portion I covers materials and
taxes, it cannot be imposed on an occupation or privilege outside equipment while Japanese Yen Portion II and the Philippine Pesos
the taxing district. 49 Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words,
the supplies for the project are listed under Portion I while labor
and other supplies are listed under Portion II and the Philippine
Pesos Portion. Mr. Takeshi Hojo, then General Manager of the
Industrial Plant Section II of the Industrial Plant Department of
Marubeni Corporation in Japan who supervised the implementation
of the two projects, testified that all the machines and equipment
listed under Japanese Yen Portion I in Annex III were manufactured
in Japan. 51 The machines and equipment were designed,
engineered and fabricated by Japanese firms sub-contracted by
Marubeni from the list of sub-contractors in the technical
appendices to each contract. 52 Marubeni sub-contracted a
majority of the equipment and supplies to Kawasaki Steel
Corporation which did the design, fabrication, engineering and
manufacture thereof; 53 Yashima & Co. Ltd. which manufactured
the mobile equipment; Bridgestone which provided the rubber
fenders of the mobile equipment; 54 and B.S. Japan for the supply
of radio equipment. 55 The engineering and design works made by
Kawasaki Steel Corporation included the lay-out of the plant facility
and calculation of the design in accordance with the specifications
given by Respondent. 56 All sub-contractors and manufacturers are
Japanese corporations and are based in Japan and all engineering
and design works were performed in that country. 57
The materials and equipment under Portion I of the NDC Port
Project is primarily composed of two (2) sets of ship unloader and
loader; several boats and mobile equipment. 58 The ship unloader
unloads bags or bulk products from the ship to the port while the
ship loader loads products from the port to the ship. The unloader
and loader are big steel structures on top of each is a large crane
and a compartment for operation of the crane. Two sets of these
equipment were completely manufactured in Japan according to
the specifications of the project. After manufacture, they were
rolled on to a barge and transported to Isabel, Leyte. 59 Upon
reaching Isabel, the unloader and loader were rolled off the barge
and pulled to the pier to the spot where they were installed. 60
Their installation simply consisted of bolting them onto the pier. 61
Like the ship unloader and loader, the three tugboats and a line
boat were completely manufactured in Japan. The boats sailed to
Isabel on their own power. The mobile equipment, consisting of
three to four sets of tractors, cranes and dozers, trailers and
forklifts, were also manufactured and completed in Japan. They
were loaded on to a shipping vessel and unloaded at the Isabel Port.
These pieces of equipment were all on wheels and self-propelled.
Once unloaded at the port, they were ready to be driven and
perform what they were designed to do. 62
In addition to the foregoing, there are other items listed in Japanese
Yen Portion I in Annex III to the NDC contract. These other items
consist of supplies and materials for five (5) berths, two (2) roads, a
causeway, a warehouse, a transit shed, an administration building
and a security building. Most of the materials consist of steel sheets,
steel pipes, channels and beams and other steel structures,
navigational and communication as well as electrical equipment. 63
In connection with the Philphos contract, the major pieces of
equipment supplied by respondent were the ammonia storage
tanks and refrigeration units. 64 The steel plates for the tank were
manufactured and cut in Japan according to drawings and
specifications and then shipped to Isabel. Once there, respondent’s
employees put the steel plates together to form the storage tank.
As to the refrigeration units, they were completed and assembled in
Japan and thereafter shipped to Isabel. The units were simply
installed there. 65 Annex III to the Philphos contract lists down
under the Japanese Yen Portion I the materials for the ammonia
storage tank, incidental equipment, piping facilities, electrical and
instrumental apparatus, foundation material and spare parts.
All the materials and equipment transported to the Philippines were
inspected and tested in Japan prior to shipment in accordance with
the terms of the contracts. 66 The inspection was made by
representatives of respondent corporation, of NDC and Philphos.
NDC, in fact, contracted the services of a private consultancy firm to
verify the correctness of the tests on the machines and equipment
67 while Philphos sent a representative to Japan to inspect the
storage equipment. 68
The sub-contractors of the materials and equipment under
Japanese Yen Portion I were all paid by respondent in Japan. In his
deposition upon oral examination, Kenjiro Yamakawa, formerly the
Assistant General Manager and Manager of the Steel Plant
Marketing Department, Engineering & Construction Division,
Kawasaki Steel Corporation, testified that the equipment and
supplies for the two projects provided by Kawasaki under Japanese
Yen Portion I were paid by Marubeni in Japan. Receipts for such
payments were duly issued by Kawasaki in Japanese and English. 69
Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in
Japan. 70
Between Marubeni and the two Philippine corporations, payments
for all materials and equipment under Japanese Yen Portion I were
made to Marubeni by NDC and Philphos also in Japan. The NDC,
through the Philippine National Bank, established letters of credit in
favor of respondent through the Bank of Tokyo. The letters of credit
were financed by letters of commitment issued by the OECF with
the Bank of Tokyo. The Bank of Tokyo, upon respondent’s
submission of pertinent documents, released the amount in the
letters of credit in favor of respondent and credited the amount
therein to respondent’s account within the same bank. 71
Clearly, the service of "design and engineering, supply and delivery,
construction, erection and installation, supervision, direction and
control of testing and commissioning, coordination. . ." 72 of the
two projects involved two taxing jurisdictions. These acts occurred
in two countries — Japan and the Philippines. While the
construction and installation work were completed within the
Philippines, the evidence is clear that some pieces of equipment and
supplies were completely designed and engineered in Japan. The
two sets of ship unloader and loader, the boats and mobile
equipment for the NDC project and the ammonia storage tanks and
refrigeration units were made and completed in Japan. They were
already finished products when shipped to the Philippines. The
other construction supplies listed under the Offshore Portion such
as the steel sheets, pipes and structures, electrical and instrumental
apparatus, these were not finished products when shipped to the
Philippines. They, however, were likewise fabricated and
manufactured by the sub-contractors in Japan. All services for the
design, fabrication, engineering and manufacture of the materials
and equipment under Japanese Yen Portion I were made and
completed in Japan. These services were rendered outside the
taxing jurisdiction of the Philippines and are therefore not subject to
contractor’s tax.chanrob1es virtua1 1aw 1ibrary
Contrary to petitioner’s claim, the case of Commissioner of Internal
Revenue v. Engineering Equipment & Supply Co 73 is not in point. In
that case, the Court found that Engineering Equipment, although an
independent contractor, was not engaged in the manufacture of air
conditioning units in the Philippines. Engineering Equipment
designed, supplied and installed centralized air-conditioning
systems for clients who contracted its services. Engineering,
however, did not manufacture all the materials for the air-
conditioning system. It imported some items for the system it
designed and installed. 74 The issues in that case dealt with services
performed within the local taxing jurisdiction. There was no foreign
element involved in the supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other
issues raised by the parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R.
SP No. 42518 is affirmed.chanrob1es virtua1 1aw 1ibrary
SO ORDERED.
Davide, Jr., C.J., Kapunan, Pardo, and Ynares-Santiago, JJ., concur.
G.R. No. 144104 June 29, 2004
LUNG CENTER OF THE PHILIPPINES, petitioner,
vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City
Assessor of Quezon City, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules
of Court, as amended, of the Decision1 dated July 17, 2000 of the
Court of Appeals in CA-G.R. SP No. 57014 which affirmed the
decision of the Central Board of Assessment Appeals holding that
the lot owned by the petitioner and its hospital building constructed
thereon are subject to assessment for purposes of real property tax.
The Antecedents
The petitioner Lung Center of the Philippines is a non-stock and
non-profit entity established on January 16, 1981 by virtue of
Presidential Decree No. 1823.2 It is the registered owner of a parcel
of land, particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-
000495, located at Quezon Avenue corner Elliptical Road, Central
District, Quezon City. The lot has an area of 121,463 square meters
and is covered by Transfer Certificate of Title (TCT) No. 261320 of
the Registry of Deeds of Quezon City. Erected in the middle of the
aforesaid lot is a hospital known as the Lung Center of the
Philippines. A big space at the ground floor is being leased to private
parties, for canteen and small store spaces, and to medical or
professional practitioners who use the same as their private clinics
for their patients whom they charge for their professional services.
Almost one-half of the entire area on the left side of the building
along Quezon Avenue is vacant and idle, while a big portion on the
right side, at the corner of Quezon Avenue and Elliptical Road, is
being leased for commercial purposes to a private enterprise known
as the Elliptical Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also
renders medical services to out-patients, both paying and non-
paying. Aside from its income from paying patients, the petitioner
receives annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the
petitioner were assessed for real property taxes in the amount of
₱4,554,860 by the City Assessor of Quezon City.3 Accordingly, Tax
Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-
A) were issued for the land and the hospital building, respectively.4
On August 25, 1993, the petitioner filed a Claim for Exemption5
from real property taxes with the City Assessor, predicated on its
claim that it is a charitable institution. The petitioner’s request was
denied, and a petition was, thereafter, filed before the Local Board
of Assessment Appeals of Quezon City (QC-LBAA, for brevity) for the
reversal of the resolution of the City Assessor. The petitioner
alleged that under Section 28, paragraph 3 of the 1987 Constitution,
the property is exempt from real property taxes. It averred that a
minimum of 60% of its hospital beds are exclusively used for charity
patients and that the major thrust of its hospital operation is to
serve charity patients. The petitioner contends that it is a charitable
institution and, as such, is exempt from real property taxes. The QC-
LBAA rendered judgment dismissing the petition and holding the
petitioner liable for real property taxes.6
The QC-LBAA’s decision was, likewise, affirmed on appeal by the
Central Board of Assessment Appeals of Quezon City (CBAA, for
brevity)7 which ruled that the petitioner was not a charitable
institution and that its real properties were not actually, directly and
exclusively used for charitable purposes; hence, it was not entitled
to real property tax exemption under the constitution and the law.
The petitioner sought relief from the Court of Appeals, which
rendered judgment affirming the decision of the CBAA.8
Undaunted, the petitioner filed its petition in this Court contending
that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT
ENTITLED TO REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS
LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF ASSESSMENT,
ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED FOR
CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX
EXEMPT UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY
NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the
context of Section 28(3), Article VI of the 1987 Constitution. It
asserts that its character as a charitable institution is not altered by
the fact that it admits paying patients and renders medical services
to them, leases portions of the land to private parties, and rents out
portions of the hospital to private medical practitioners from which
it derives income to be used for operational expenses. The
petitioner points out that for the years 1995 to 1999, 100% of its
out-patients were charity patients and of the hospital’s 282-bed
capacity, 60% thereof, or 170 beds, is allotted to charity patients. It
asserts that the fact that it receives subsidies from the government
attests to its character as a charitable institution. It contends that
the "exclusivity" required in the Constitution does not necessarily
mean "solely." Hence, even if a portion of its real estate is leased
out to private individuals from whom it derives income, it does not
lose its character as a charitable institution, and its exemption from
the payment of real estate taxes on its real property. The petitioner
cited our ruling in Herrera v. QC-BAA9 to bolster its pose. The
petitioner further contends that even if P.D. No. 1823 does not
exempt it from the payment of real estate taxes, it is not precluded
from seeking tax exemption under the 1987 Constitution.
In their comment on the petition, the respondents aver that the
petitioner is not a charitable entity. The petitioner’s real property is
not exempt from the payment of real estate taxes under P.D. No.
1823 and even under the 1987 Constitution because it failed to
prove that it is a charitable institution and that the said property is
actually, directly and exclusively used for charitable purposes. The
respondents noted that in a newspaper report, it appears that graft
charges were filed with the Sandiganbayan against the director of
the petitioner, its administrative officer, and Zenaida Rivera, the
proprietress of the Elliptical Orchids and Garden Center, for
entering into a lease contract over 7,663.13 square meters of the
property in 1990 for only ₱20,000 a month, when the monthly
rental should be ₱357,000 a month as determined by the
Commission on Audit; and that instead of complying with the
directive of the COA for the cancellation of the contract for being
grossly prejudicial to the government, the petitioner renewed the
same on March 13, 1995 for a monthly rental of only ₱24,000. They
assert that the petitioner uses the subsidies granted by the
government for charity patients and uses the rest of its income from
the property for the benefit of paying patients, among other
purposes. They aver that the petitioner failed to adduce substantial
evidence that 100% of its out-patients and 170 beds in the hospital
are reserved for indigent patients. The respondents further assert,
thus:
13. That the claims/allegations of the Petitioner LCP do not speak
well of its record of service. That before a patient is admitted for
treatment in the Center, first impression is that it is pay-patient and
required to pay a certain amount as deposit. That even if a patient is
living below the poverty line, he is charged with high hospital bills.
And, without these bills being first settled, the poor patient cannot
be allowed to leave the hospital or be discharged without first
paying the hospital bills or issue a promissory note guaranteed and
indorsed by an influential agency or person known only to the
Center; that even the remains of deceased poor patients suffered
the same fate. Moreover, before a patient is admitted for treatment
as free or charity patient, one must undergo a series of interviews
and must submit all the requirements needed by the Center, usually
accompanied by endorsement by an influential agency or person
known only to the Center. These facts were heard and admitted by
the Petitioner LCP during the hearings before the Honorable QC-
BAA and Honorable CBAA. These are the reasons of indigent
patients, instead of seeking treatment with the Center, they prefer
to be treated at the Quezon Institute. Can such practice by the
Center be called charitable?10
The Issues
The issues for resolution are the following: (a) whether the
petitioner is a charitable institution within the context of
Presidential Decree No. 1823 and the 1973 and 1987 Constitutions
and Section 234(b) of Republic Act No. 7160; and (b) whether the
real properties of the petitioner are exempt from real property
taxes.
The Court’s Ruling
The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable
institution within the context of the 1973 and 1987 Constitutions.
To determine whether an enterprise is a charitable
institution/entity or not, the elements which should be considered
include the statute creating the enterprise, its corporate purposes,
its constitution and by-laws, the methods of administration, the
nature of the actual work performed, the character of the services
rendered, the indefiniteness of the beneficiaries, and the use and
occupation of the properties.11
In the legal sense, a charity may be fully defined 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 otherwise lessening the
burden of government.12 It may be applied to almost anything that
tend to promote the well-doing and well-being of social man. It
embraces the improvement and promotion of the happiness of
man.13 The word "charitable" is not restricted to relief of the poor
or sick.14 The test of a charity and a charitable organization are in
law the same. The test whether an enterprise is charitable or not is
whether it exists to carry out a purpose reorganized in law as
charitable or whether it is maintained for gain, profit, or private
advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock
corporation which, subject to the provisions of the decree, is to be
administered by the Office of the President of the Philippines with
the Ministry of Health and the Ministry of Human Settlements. It
was organized for the welfare and benefit of the Filipino people
principally to help combat the high incidence of lung and pulmonary
diseases in the Philippines. The raison d’etre for the creation of the
petitioner is stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a priority
concern, having been the leading cause of illness and death in the
Philippines, comprising more than 45% of the total annual deaths
from all causes, thus, exacting a tremendous toll on human
resources, which ailments are likely to increase and degenerate into
serious lung diseases on account of unabated pollution,
industrialization and unchecked cigarette smoking in the
country;lavvph!l.net
Whereas, the more common lung diseases are, to a great extent,
preventable, and curable with early and adequate medical care,
immunization and through prompt and intensive prevention and
health education programs;
Whereas, there is an urgent need to consolidate and reinforce
existing programs, strategies and efforts at preventing, treating and
rehabilitating people affected by lung diseases, and to undertake
research and training on the cure and prevention of lung diseases,
through a Lung Center which will house and nurture the above and
related activities and provide tertiary-level care for more difficult
and problematical cases;
Whereas, to achieve this purpose, the Government intends to
provide material and financial support towards the establishment
and maintenance of a Lung Center for the welfare and benefit of the
Filipino people.15
The purposes for which the petitioner was created are spelled out in
its Articles of Incorporation, thus:
SECOND: That the purposes for which such corporation is formed
are as follows:
1. To construct, establish, equip, maintain, administer and conduct
an integrated medical institution which shall specialize in the
treatment, care, rehabilitation and/or relief of lung and allied
diseases in line with the concern of the government to assist and
provide material and financial support in the establishment and
maintenance of a lung center primarily to benefit the people of the
Philippines and in pursuance of the policy of the State to secure the
well-being of the people by providing them specialized health and
medical services and by minimizing the incidence of lung diseases in
the country and elsewhere.
2. To promote the noble undertaking of scientific research related
to the prevention of lung or pulmonary ailments and the care of
lung patients, including the holding of a series of relevant
congresses, conventions, seminars and conferences;
3. To stimulate and, whenever possible, underwrite scientific
researches on the biological, demographic, social, economic,
8. To seek and obtain assistance in any form from both international
eugenic and physiological aspects of lung or pulmonary diseases
and local foundations and organizations; and to administer grants
and their control; and to collect and publish the findings of such
and funds that may be given to the organization;
research for public consumption;

9. To extend, whenever possible and expedient, medical services to

4. To facilitate the dissemination of ideas and public acceptance of
the public and, in general, to promote and protect the health of the
information on lung consciousness or awareness, and the
masses of our people, which has long been recognized as an
development of fact-finding, information and reporting facilities for
economic asset and a social blessing;
and in aid of the general purposes or objects aforesaid, especially in
human lung requirements, general health and physical fitness, and
other relevant or related fields;
10. To help prevent, relieve and alleviate the lung or pulmonary
afflictions and maladies of the people in any and all walks of life,
including those who are poor and needy, all without regard to or
5. To encourage the training of physicians, nurses, health officers,
discrimination, because of race, creed, color or political belief of the
social workers and medical and technical personnel in the practical
persons helped; and to enable them to obtain treatment when such
and scientific implementation of services to lung patients;
disorders occur;

6. To assist universities and research institutions in their studies

11. To participate, as circumstances may warrant, in any activity
about lung diseases, to encourage advanced training in matters of
designed and carried on to promote the general health of the
the lung and related fields and to support educational programs of
community;
value to general health;

12. To acquire and/or borrow funds and to own all funds or

7. To encourage the formation of other organizations on the
equipment, educational materials and supplies by purchase,
national, provincial and/or city and local levels; and to coordinate
donation, or otherwise and to dispose of and distribute the same in
their various efforts and activities for the purpose of achieving a
such manner, and, on such basis as the Center shall, from time to
more effective programmatic approach on the common problems
time, deem proper and best, under the particular circumstances, to
relative to the objectives enumerated herein;
serve its general and non-profit purposes and
objectives;lavvphil.net
13. To buy, purchase, acquire, own, lease, hold, sell, exchange,
transfer and dispose of properties, whether real or personal, for
purposes herein mentioned; and
14. To do everything necessary, proper, advisable or convenient for
the accomplishment of any of the powers herein set forth and to do
every other act and thing incidental thereto or connected
therewith.16
Hence, the medical services of the petitioner are to be rendered to
the public in general in any and all walks of life including those who
are poor and the needy without discrimination. After all, any
person, the rich as well as the poor, may fall sick or be injured or
wounded and become a subject of charity.17
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it
derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the government,
so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money
inures to the private benefit of the persons managing or operating
the institution.18 In Congregational Sunday School, etc. v. Board of
Review,19 the State Supreme Court of Illinois held, thus:
… [A]n institution does not lose its charitable character, and
consequent exemption from taxation, by reason of the fact that
those recipients of its benefits who are able to pay are required to
do so, where no profit is made by the institution and the amounts
so received are applied in furthering its charitable purposes, and
those benefits are refused to none on account of inability to pay
therefor. The fundamental ground upon which all exemptions in
favor of charitable institutions are based is the benefit conferred
upon the public by them, and a consequent relief, to some extent,
of the burden upon the state to care for and advance the interests
of its citizens.20
As aptly stated by the State Supreme Court of South Dakota in
Lutheran Hospital Association of South Dakota v. Baker:21
… [T]he fact that paying patients are taken, the profits derived from
attendance upon these patients being exclusively devoted to the
maintenance of the charity, seems rather to enhance the usefulness
of the institution to the poor; for it is a matter of common
observation amongst those who have gone about at all amongst the
suffering classes, that the deserving poor can with difficulty be
persuaded to enter an asylum of any kind confined to the reception
of objects of charity; and that their honest pride is much less
wounded by being placed in an institution in which paying patients
are also received. The fact of receiving money from some of the
patients does not, we think, at all impair the character of the
charity, so long as the money thus received is devoted altogether to
the charitable object which the institution is intended to further.22
 exemption if the facts otherwise support such an exemption, as
they do here.25
The money received by the petitioner becomes a part of the trust
fund and must be devoted to public trust purposes and cannot be
diverted to private profit or benefit.23
In this case, the petitioner adduced substantial evidence that it
spent its income, including the subsidies from the government for
1991 and 1992 for its patients and for the operation of the hospital.
Under P.D. No. 1823, the petitioner is entitled to receive donations.
It even incurred a net loss in 1991 and 1992 from its operations.
The petitioner does not lose its character as a charitable institution
simply because the gift or donation is in the form of subsidies
granted by the government. As held by the State Supreme Court of
Even as we find that the petitioner is a charitable institution, we
Utah in Yorgason v. County Board of Equalization of Salt Lake
hold, anent the second issue, that those portions of its real property
County:24
that are leased to private entities are not exempt from real property
taxes as these are not actually, directly and exclusively used for
charitable purposes.
Second, the … government subsidy payments are provided to the
project. Thus, those payments are like a gift or donation of any
other kind except they come from the government. In both
The settled rule in this jurisdiction is that laws granting exemption
Intermountain Health Care and the present case, the crux is the
from tax are construed strictissimi juris against the taxpayer and
presence or absence of material reciprocity. It is entirely irrelevant
liberally in favor of the taxing power. Taxation is the rule and
to this analysis that the government, rather than a private
exemption is the exception. The effect of an exemption is
benefactor, chose to make up the deficit resulting from the
equivalent to an appropriation. Hence, a claim for exemption from
exchange between St. Mark’s Tower and the tenants by making a
tax payments must be clearly shown and based on language in the
contribution to the landlord, just as it would have been irrelevant in
law too plain to be mistaken.26 As held in Salvation Army v.
Intermountain Health Care if the patients’ income supplements had
Hoehn:27
come from private individuals rather than the government.

An intention on the part of the legislature to grant an exemption

Therefore, the fact that subsidization of part of the cost of
from the taxing power of the state will never be implied from
furnishing such housing is by the government rather than private
language which will admit of any other reasonable construction.
charitable contributions does not dictate the denial of a charitable
Such an intention must be expressed in clear and unmistakable
terms, or must appear by necessary implication from the language
used, for it is a well settled principle that, when a special privilege or
exemption is claimed under a statute, charter or act of
incorporation, it is to be construed strictly against the property
owner and in favor of the public. This principle applies with peculiar
force to a claim of exemption from taxation . …28
Section 2 of Presidential Decree No. 1823, relied upon by the
petitioner, specifically provides that the petitioner shall enjoy the
tax exemptions and privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-
stock corporation organized primarily to help combat the high
incidence of lung and pulmonary diseases in the Philippines, all
donations, contributions, endowments and equipment and supplies
to be imported by authorized entities or persons and by the Board
of Trustees of the Lung Center of the Philippines, Inc., for the actual
use and benefit of the Lung Center, shall be exempt from income
and gift taxes, the same further deductible in full for the purpose of
determining the maximum deductible amount under Section 30,
paragraph (h), of the National Internal Revenue Code, as amended.
The Lung Center of the Philippines shall be exempt from the
payment of taxes, charges and fees imposed by the Government or
any political subdivision or instrumentality thereof with respect to
equipment purchases made by, or for the Lung Center.29
It is plain as day that under the decree, the petitioner does not
enjoy any property tax exemption privileges for its real properties as
well as the building constructed thereon. If the intentions were
otherwise, the same should have been among the enumeration of
tax exempt privileges under Section 2:
It is a settled rule of statutory construction that the express
mention of one person, thing, or consequence implies the exclusion
of all others. The rule is expressed in the familiar maxim, expressio
unius est exclusio alterius.
The rule of expressio unius est exclusio alterius is formulated in a
number of ways. One variation of the rule is the principle that what
is expressed puts an end to that which is implied. Expressium facit
cessare tacitum. Thus, where a statute, by its terms, is expressly
limited to certain matters, it may not, by interpretation or
construction, be extended to other matters.
...
The rule of expressio unius est exclusio alterius and its variations are
canons of restrictive interpretation. They are based on the rules of
logic and the natural workings of the human mind. They are
predicated upon one’s own voluntary act and not upon that of
others. They proceed from the premise that the legislature would
not have made specified enumeration in a statute had the intention
been not to restrict its meaning and confine its terms to those
expressly mentioned.30
The exemption must not be so enlarged by construction since the
reasonable presumption is that the State has granted in express
terms all it intended to grant at all, and that unless the privilege is
limited to the very terms of the statute the favor would be intended
beyond what was meant.31
Section 28(3), Article VI of the 1987 Philippine Constitution
provides, thus:
(3) Charitable institutions, churches and parsonages 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.32
The tax exemption under this constitutional provision covers
property taxes only.33 As Chief Justice Hilario G. Davide, Jr., then a
member of the 1986 Constitutional Commission, explained: ". . .
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."34
Consequently, the constitutional provision is implemented by
Section 234(b) of Republic Act No. 7160 (otherwise known as the
Local Government Code of 1991) as follows:
SECTION 234. Exemptions from Real Property Tax. – The following
are exempted from payment of the real property tax:
...
(b) Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, non-profit or religious cemeteries
and all lands, buildings, and improvements actually, directly, and
exclusively used for religious, charitable or educational purposes.35
We note that under the 1935 Constitution, "... all lands, buildings,
and improvements used ‘exclusively’ for … charitable … purposes
shall be exempt from taxation."36 However, under the 1973 and
the present Constitutions, for "lands, buildings, and improvements"
of the charitable institution to be considered exempt, the same
should not only be "exclusively" used for charitable purposes; it is
required that such property be used "actually" and "directly" for
such purposes.37
In light of the foregoing substantial changes in the Constitution, the
petitioner cannot rely on our ruling in Herrera v. Quezon City Board
of Assessment Appeals which was promulgated on September 30,
1961 before the 1973 and 1987 Constitutions took effect.38 As this
Court held in Province of Abra v. Hernando:39
… Under the 1935 Constitution: "Cemeteries, churches, and
parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious,
charitable, or educational purposes shall be exempt from taxation."
The present Constitution added "charitable institutions, mosques,
and non-profit cemeteries" and required that for the exemption of
"lands, buildings, and improvements," they should not only be
"exclusively" but also "actually" and "directly" used for religious or
charitable purposes. The Constitution is worded differently. The
change should not be ignored. It must be duly taken into
consideration. Reliance on past decisions would have sufficed were
the words "actually" as well as "directly" not added. There must be
proof therefore of the actual and direct use of the lands, buildings,
and improvements for religious or charitable purposes to be exempt
from taxation. …
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in
order to be entitled to the exemption, the petitioner is burdened to
prove, by clear and unequivocal proof, that (a) it is a charitable
institution; and (b) its real properties are ACTUALLY, DIRECTLY and
EXCLUSIVELY used for charitable purposes. "Exclusive" 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."40 If real
property is used for one or more commercial purposes, it is not
exclusively used for the exempted purposes but is subject to
taxation.41 The words "dominant use" or "principal use" cannot be
substituted for the words "used exclusively" without doing violence
to the Constitutions and the law.42 Solely is synonymous with
exclusively.43
What is meant by actual, direct and exclusive use of the property for
charitable purposes is the direct and immediate and actual
application of the property itself to the purposes for which the
charitable institution is organized. It is not the use of the income
from the real property that is determinative of whether the
property is used for tax-exempt purposes.44
The petitioner failed to discharge its burden to prove that the
entirety of its real property is actually, directly and exclusively used
for charitable purposes. While portions of the hospital are used for
the treatment of patients and the dispensation of medical services
to them, whether paying or non-paying, other portions thereof are
being leased to private individuals for their clinics and a canteen.
Further, a portion of the land is being leased to a private individual
for her business enterprise under the business name "Elliptical
Orchids and Garden Center." Indeed, the petitioner’s evidence
shows that it collected ₱1,136,483.45 as rentals in 1991 and
₱1,679,999.28 for 1992 from the said lessees.
Accordingly, we hold that the portions of the land leased to private
entities as well as those parts of the hospital leased to private
individuals are not exempt from such taxes.45 On the other hand,
the portions of the land occupied by the hospital and portions of the
hospital used for its patients, whether paying or non-paying, are
exempt from real property taxes.
 This is a petition for review on certiorari of the decision ** of the
defunct Court of First Instance of Abra, Branch I, dated June 14,
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY
1974, rendered in Civil Case No. 656, entitled "Abra Valley Junior
GRANTED. The respondent Quezon City Assessor is hereby
College, Inc., represented by Pedro V. Borgonia, plaintiff v. Armin M.
DIRECTED to determine, after due hearing, the precise portions of
Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque as
the land and the area thereof which are leased to private persons,
Municipal Treasurer of Bangued, Abra and Paterno Millare,
and to compute the real property taxes due thereon as provided for
Defendants," the decretal portion of which
by law.
reads:jgc:chanrobles.com.ph

SO ORDERED.
"IN VIEW OF ALL THE FOREGOING, the Court hereby
declares:jgc:chanrobles.com.ph

ABRA VALLEY COLLEGE, INC. represented by PEDRO V. BORGONIA,

Petitioner, v. HON. JUAN P. AQUINO, Judge, Court of First
"That the distraint seizure and sale by the Municipal Treasurer of
Instance, Abra; ARMIN M. CARIAGA, Provincial Treasurer, Abra;
Bangued, Abra, the Provincial Treasurer of said province against the
GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra; HEIRS
lot and building of the Abra Valley Junior College, Inc., represented
CF PATERNO MILLARE, Respondents.
by Director Pedro Borgonia located at Bangued, Abra, is valid;

"That since the school is not exempt from paying taxes, it should
DECISION therefore pay all back taxes in the amount of P5,140.31 and back
taxes and penalties from the promulgation of this decision;

"That the amount deposited by the plaintiff in the sum of

PARAS, J.: P60,000.00 before the trial, be confiscated to apply for the payment
of the back taxes and for the redemption of the property in
question, if the amount is less than P6,000.00, the remainder must
be returned to the Director of Pedro Borgonia, who represents the
plaintiff herein;
 duly accepted. The certificate of sale was correspondingly issued to
him.
"That the deposit of the Municipal Treasurer in the amount of
P6,000.00 also before the trial must be returned to said Municipal
Treasurer of Bangued, Abra;
On August 10, 1972, the respondent Paterno Millare (now
deceased) filed through counsel a motion to dismiss the complaint.

"And finally the case is hereby ordered dismissed with costs against
the plaintiff.
On August 23, 1972, the respondent Provincial Treasurer and
Municipal Treasurer, through then Provincial Fiscal Loreto C.
Roldan, filed their answer (Annex "2" of Answer by the respondents
"SO ORDERED." (Rollo, pp. 22-23)
Heirs of Paterno Millare; Rollo, pp. 98-100) to the complaint this
was followed by an amended answer (Annex "3," ibid; Rollo, pp.
101-103) on August 31, 1972.
Petitioner, an educational corporation and institution of higher
learning duly incorporated with the Securities and Exchange
Commission in 1948, filed a complaint (Annex "1" of Answer by the
On September 1, 1972, the respondent Paterno Millare filed his
respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10,
answer (Annex "5," ibid; Rollo, pp. 106-108).
1972 in the court a quo to annul and declare void the "Notice of
Seizure" and the "Notice of Sale" of its lot and building located at
Bangued, Abra, for non-payment of real estate taxes and penalties
On October 12, 1972, with the aforesaid sale of the school premises
amounting to P5,140.31. Said "Notice of Seizure" of the college lot
at public auction, the respondent Judge, Hon. Juan P. Aquino of the
and building covered by Original Certificate of Title No. Q-83 duly
Court of First Instance of Abra, Branch I, ordered (Annex "6," ibid;
registered in the name of petitioner, plaintiff below, on July 6, 1972,
Rollo, pp. 109-110) the respondents provincial and municipal
by respondents Municipal Treasurer and Provincial Treasurer,
treasurers to deliver to the Clerk of Court the proceeds of the
defendants below, was issued for the satisfaction of the said taxes
auction sale. Hence, on December 14, 1972, Petitioner, through
thereon. The "Notice of Sale" was caused to be served upon the
Director Borgonia, deposited with the trial court the sum of
petitioner by the respondent treasurers on July 8, 1972 for the sale
P6,000.00 evidenced by PNB Check No. 904369.chanrobles law
at public auction of said college lot and building, which sale was
library : red
held on the same date. Dr. Paterno Millare, then Municipal Mayor
of Bangued, Abra, offered the highest bid of P6,000.00 which was
On April 12, 1973, the parties entered into a stipulation of facts
adopted and embodied by the trial court in its questioned decision.
"4. That on June 8, 1972 the above properties of the Abra Valley
Said Stipulations reads:jgc:chanrobles.com.ph
Junior College, Inc. was sold at public auction for the satisfaction of
the unpaid real property taxes thereon and the same was sold to
defendant Paterno Millare who offered the highest bid of P6,000.00
"STIPULATION OF FACTS
and a Certificate of Sale in his favor was issued by the defendant
Municipal Treasurer.

"COME NOW the parties, assisted by counsels, and to this

Honorable Court respectfully enter into the following agreed
"5. That all other matters not particularly and specially covered by
stipulation of facts:jgc:chanrobles.com.ph
this stipulation of facts will be the subject of evidence by the
parties.

"1. That the personal circumstances of the parties as stated in

paragraph 1 of the complaint is admitted; but the particular person
WHEREFORE, it is respectfully prayed of the Honorable Court to
of Mr. Armin M. Cariaga is to be substituted, however, by anyone
consider and admit this stipulation of facts on the point agreed
who is actually holding the position of Provincial Treasurer of the
upon by the parties.
Province of Abra;

Bangued, Abra, April 12, 1973.

"2. That the plaintiff Abra Valley Junior College, Inc. is the owner of
the lot and buildings thereon located in Bangued, Abra under
Original Certificate of Title No. 0-83;
Sgd. Agripino Brillantes

"3. That the defendant Gaspar V. Bosque, as Municipal Treasurer of

Typ. AGRIPINO BRILLANTES
Bangued, Abra caused to be served upon the Abra Valley Junior
College, Inc. a Notice of Seizure on the property of said school under
Original Certificate of title No. 0-83 for the satisfaction of real
property taxes thereon, amounting to P5,140.31; the Notice of Attorney for Plaintiff
Seizure being the one attached to the complaint as Exhibit A;
Sgd. Loreto Roldan

(Rollo, pp. 17-18)

Typ. LORETO ROLDAN

Aside from the Stipulation of Facts, the trial court among others,
found the following: (a) that the school is recognized by the
Provincial Fiscal
government and is offering Primary, High School and College
Courses, and has a school population of more than one thousand
students all in all; (b) that it is located right in the heart of the town
Counsel for Defendants of Bangued, a few meters from the plaza and about 120 meters
from the Court of First Instance building; (c) that the elementary
pupils are housed in a two-storey building across the street; (d) that
Provincial Treasurer of the high school and college students are housed in the main
building; (e) that the Director with his family is in the second floor of
the main building; and (f) that the annual gross income of the school
Abra and the Municipal reaches more than one hundred thousand pesos.chanrobles law
library

Treasurer of Bangued, Abra

From all the foregoing, the only issue left for the Court to determine
and as agreed by the parties, is whether or not the lot and building
Sgd. Demetrio V. Pre in question are used exclusively for educational purposes. (Rollo, p.
20)

Typ. DEMETRIO V. PRE

The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his
Assistant, Hon. Eustaquio Z. Montero, filed a Memorandum for the
Attorney for Defendant Government on March 25, 1974, and a Supplemental Memorandum
on May 7, 1974, wherein they opined "that based on the evidence,
the laws applicable, court decisions and jurisprudence, the school
Paterno Millare" building and school lot used for educational purposes of the Abra
Valley College, Inc., are exempted from the payment of taxes." THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE
(Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49). AND SALE OF THE COLLEGE LOT AND BUILDING USED FOR
EDUCATIONAL PURPOSES OF THE PETITIONER.

Nonetheless, the trial court disagreed because of the use of the

second floor by the Director of petitioner school for residential II
purposes. He thus ruled for the government and rendered the
assailed decision.

THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT

After having been granted by the trial court ten (10) days from
AND BUILDING OF THE PETITIONER ARE NOT USED EXCLUSIVELY
August 6, 1974 within which to perfect its appeal (Per Order dated
FOR EDUCATIONAL PURPOSES MERELY BECAUSE THE COLLEGE
August 6, 1974; Annex "G" of Petition; Rollo, p. 57) petitioner
PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.
instead availed of the instant petition for review on certiorari with
prayer for preliminary injunction before this Court, which petition
was filed on August 17, 1974 (Rollo, p. 2).
III

In the resolution dated August 16, 1974, this Court resolved to give
DUE COURSE to the petition (Rollo, p. 58). Respondents were
required to answer said petition (Rollo, p. 74). THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT
AND BUILDING OF THE PETITIONER ARE NOT EXEMPT FROM
PROPERTY TAXES AND IN ORDERING PETITIONER TO PAY P5,140.31
Petitioner raised the following assignments of error:chanrob1es AS REALTY TAXES.
virtual 1aw library

IV
I
THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE
P6,000.00 DEPOSIT MADE IN THE COURT BY PETITIONER AS
PAYMENT OF THE P5,140.31 REALTY TAXES. (See Brief for the
Petitioner, pp. 1-2)
The main issue in this case is the proper interpretation of the phrase
"used exclusively for educational purposes."cralaw virtua1aw library
Petitioner contends that the primary use of the lot and building for
educational purposes, and not the incidental use thereof,
determines and exemption from property taxes under Section 22
(3), Article VI of the 1935 Constitution. Hence, the seizure and sale
of subject college lot and building, which are contrary thereto as
well as to the provision of Commonwealth Act No. 470, otherwise
known as the Assessment Law, are without legal basis and therefore
void.chanrobles virtual lawlibrary
On the other hand, private respondents maintain that the college
lot and building in question which were subjected to seizure and
sale to answer for the unpaid tax are used: (1) for the educational
purposes of the college; (2) as the permanent residence of the
President and Director thereof, Mr. Pedro V. Borgonia, and his
family including the in-laws and grandchildren; and (3) for
commercial purposes because the ground floor of the college
building is being used and rented by a commercial establishment,
the Northern Marketing Corporation (See photograph attached as
Annex "8" [Comment; Rollo, p. 90]).
Due to its time frame, the constitutional provision which finds
application in the case at bar is Section 22, paragraph 3, Article VI,
of the then 1935 Philippine Constitution, which expressly grants
exemption from realty taxes for "Cemeteries, churches and
parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious,
charitable or educational purposes . . . ."cralaw virtua1aw library
Relative thereto, Section 54, paragraph c, Commonwealth Act No.
470 as amended by Republic Act No. 409, otherwise known as the
Assessment Law, provides:jgc:chanrobles.com.ph
"The following are exempted from real property tax under the
Assessment Law:chanrob1es virtual 1aw library
x x x
(c) churches and parsonages or convents appurtenant thereto, and
all lands, buildings, and improvements used exclusively for religious,
charitable, scientific or educational purposes.
x x x
In this regard petitioner argues that the primary use of the school
lot and building is the basic and controlling guide, norm and
standard to determine tax exemption, and not the mere incidental
use thereof.
As early as 1916 in YMCA of Manila v. Collector of Internal Revenue,
33 Phil. 217 [1916], this Court ruled that while it may be true that
the YMCA keeps a lodging and a boarding house and maintains a
restaurant for its members, still these do not constitute business in
the ordinary acceptance of the word, but an institution used
exclusively for religious, charitable and educational purposes, and as
such, it is entitled to be exempted from taxation.chanrobles law
library : red
In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos
Norte, 51 Phil. 352 [1972], this Court included in the exemption a
vegetable garden in an adjacent lot and another lot formerly used
as a cemetery. It was clarified that the term "used exclusively"
considers incidental use also. Thus, the exemption from payment of
land tax in favor of the convent includes, not only the land actually
occupied by the building but also the adjacent garden devoted to
the incidental use of the parish priest. The lot which is not used for
commercial purposes but serves solely as a sort of lodging place,
also qualifies for exemption because this constitutes incidental use
in religious functions.
The phrase "exclusively used for educational purposes" was further
clarified by this Court in the cases of Herrera v. Quezon City Board
of Assessment Appeals, 3 SCRA 186 [1961] and Commissioner of
Internal Revenue v. Bishop of the Missionary District, 14 SCRA 991
[1965], thus —
"Moreover, the exemption in favor of property used exclusively for
charitable or educational purposes is ‘not limited to property
actually indispensable’ therefor (Cooley on Taxation, Vol. 2, p.
1430), but extends to facilities which are incidental to and
reasonably necessary for the accomplishment of said purposes,
such as in the case of hospitals, ‘a school for training nurses, a
nurses’ home, property use to provide housing facilities for interns,
resident doctors, superintendents, and other members of the
hospital staff, and recreational facilities for student nurses, interns,
and residents’ (84 CJS 6621), such as ‘Athletic fields’ including ‘a
firm used for the inmates of the institution.’" (Cooley on Taxation,
Vol. 2, p. 1430).
The test of exemption from taxation is the use of the property for
purposes mentioned in the Constitution (Apostolic Prefect v. City
Treasurer of Baguio, 71 Phil. 547 [1941]).chanrobles.com : virtual
law library
It must be stressed however, that while this Court allows a more
liberal and non-restrictive interpretation of the phrase "exclusively
used for educational purposes" as provided for in Article VI, Section
22, paragraph 3 of the 1935 Philippine Constitution, reasonable
emphasis has always been made that exemption extends to
facilities which are incidental to and reasonably necessary for the
accomplishment of the main purposes. Otherwise stated, the use of
the school building or lot for commercial purposes is neither
contemplated by law, nor by jurisprudence. Thus, while the use of
the second floor of the main building in the case at bar for
Under the 1935 Constitution, the trial court correctly arrived at the
residential purposes of the Director and his family, may find
conclusion that the school building as well as the lot where it is
justification under the concept of incidental use, which is
built, should be taxed, not because the second floor of the same is
complimentary to the main or primary purpose — educational, the
being used by the Director and his family for residential purposes,
lease of the first floor thereof to the Northern Marketing
but because the first floor thereof is being used for commercial
Corporation cannot by any stretch of the imagination be considered
purposes. However, since only a portion is used for purposes of
incidental to the purpose of education.
commerce, it is only fair that half of the assessed tax be returned to
the school involved.

It will be noted however that the aforementioned lease appears to

have been raised for the first time in this Court. That the matter was
PREMISES CONSIDERED, the decision of the Court of First Instance
not taken up in the trial court is really apparent in the decision of
of Abra, Branch I, is hereby AFFIRMED subject to the modification
respondent Judge. No mention thereof was made in the stipulation
that half of the assessed tax be returned to the petitioner.
of facts, not even in the description of the school building by the
trial judge, both embodied in the decision nor as one of the issues
to resolve in order to determine whether or not said property may
be exempted from payment of real estate taxes (Rollo, pp. 17-23). SO ORDERED.
On the other hand, it is noteworthy that such fact was not disputed
even after it was raised in this Court.
Yap, C.J., Melencio-Herrera, Padilla and Sarmiento, JJ., concur.

Indeed it is axiomatic that facts not raised in the lower court cannot
be taken up for the first time on appeal. Nonetheless, as an
exception to the rule, this Court has held that although a factual
issue is not squarely raised below, still in the interest of substantial
justice, this Court is not prevented from considering a pivotal
factual matter. "The Supreme Court is clothed with ample authority
to review palpable errors not assigned as such if it finds that their
consideration is necessary in arriving at a just decision." (Perez v.
Court of Appeals, 127 SCRA 645 [1984]).chanrobles virtual
lawlibrary
G.R. No. 215383
HON. KIM S. JACINTO-HENARES, in her official capacity as
COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE,
Petitioner
vs
ST. PAUL COLLEGE OF MAKATI, Respondent
CARPIO, J.:
The Case
This petition for review1 assails the Decision dated 25 July 20142
and Joint Resolution dated 29 October 20143 of the Regional Trial
Court, Branch 143, Makati City (RTC), in Civil Case No. 13-1405,
declaring Revenue Memorandum Order (RMO) No. 20-2013
unconstitutional.
The Facts
On 22 July 2013, petitioner Kim S. Jacinto-Henares, acting in her
capacity as then Commissioner of Internal Revenue (CIR), issued
RMO No. 20-2013, "Prescribing the Policies and Guidelines in the
Issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-
Profit Corporations and Associations under Section 30 of the
National Internal Revenue Code of 1997, as Amended."
On 29 November 2013, respondent St. Paul College of Makati
(SPCM), a non-stock, non-profit educational institution organized
and existing under Philippine laws, filed a Civil Action to Declare
Unconstitutional [Bureau of Internal Revenue] RMO No. 20-2013
with Prayer for Issuance of Temporary Restraining Order and Writ of
Preliminary Injunction4 before the RTC. SPCM alleged that "RMO
No. 20-2013 imposes as a prerequisite to the enjoyment by non-
stock, non-profit educational institutions of the privilege of tax
exemption under Sec. 4(3) of Article XIV of the Constitution both a
registration and approval requirement, i.e., that they submit an
application for tax exemption to the BIR subject to approval by CIR
in the form of a Tax[]Exemption Ruling (TER) which is valid for a
period of [three] years and subject to renewal."5 According to
SPCM, RMO No. 20-2013 adds a prerequisite to the requirement
under Department of Finance Order No. 137-87,6 and makes failure
to file an annual information return a ground for a non-stock,
nonprofit educational institution to "automatically lose its income
tax-exempt status."7
In a Resolution dated 27 December 2013,8 the RTC issued a
temporary restraining order against the implementation of RMO
No. 20- 2013. It found that failure of SPCM to comply with RMO No.
20-2013 would necessarily result to losing its tax-exempt status and
cause irreparable injury.
In a Resolution dated 22 January 2014,9 the RTC granted the writ of
preliminary injunction after finding that RMO No. 20-2013 appears
to divest non-stock, non-profit educational institutions of their tax
exemption privilege. Thereafter, the RTC denied the CIR's motion
for reconsideration. On 29 April 2014, SPCM filed a Motion for
Judgment on the Pleadings under Rule 34 of the Rules of Court.
The Ruling of the RTC
In a Decision dated 25 July 2014, the RTC ruled in favor of SPCM and
declared RMO No. 20-2013 unconstitutional.1âwphi1 It held that
"by imposing the x x x [prerequisites alleged by SPCM,] and if not
complied with by nonstock, non-profit educational institutions,
[RMO No. 20-2013 serves] as diminution of the constitutional
privilege, which even Congress cannot diminish by legislation, and
thus more so by the [CIR] who merely exercise[s] quasi-legislative
function."10
The dispositive portion of the Decision reads:
WHEREFORE, in view of all the foregoing, the Court hereby declares
BIR RMO No. 20-2013 as UNCONSTITUTIONAL for being violative of
Article XIV, Section 4, paragraph 3. Consequently, all Revenue
Memorandum Orders subsequently issued to implement BIR RMO
No. 20-2013 are declared null and void.
The writ of preliminary injunction issued on 03 February 2014 is
hereby made permanent.
SO ORDERED.11
On 18 September 2014, the CIR issued RMO No. 34-2014,12 which
clarified certain provisions of RMO No. 20-2013, as amended by
RMO No. 28-2013.13
In a Joint Resolution dated 29 October 2014, the RTC denied the
CIR's motion for reconsideration, to wit:
WHEREFORE, viewed in the light of the foregoing premises, the
Motion for Reconsideration filed by the respondent is hereby
DENIED for lack of merit.
Meanwhile, this Court clarifies that the phrase "Revenue
Memorandum Order" referred to in the second sentence of its
decision dated July 25, 2014 refers to "issuance/s" of the
respondent which tends to implement RMO 20-2013 for if it is
otherwise, said decision would be useless and would be rendered
nugatory.
SO ORDERED.14
Hence, this present petition.
The Issues
The CIR raises the following issues for resolution:
WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO
[NO.] 20-2013 IMPOSES A PREREQUISITE BEFORE A NONSTOCK,
NON-PROFIT EDUCATIONAL INSTITUTION MAY AVAIL OF THE TAX
EXEMPTION UNDER SECTION 4(3), ARTICLE XIV OF THE
CONSTITUTION.
WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO
NO. 20-2013 ADDS TO THE REQUIREMENT UNDER DEPARTMENT OF
FINANCE ORDER NO. 137-87.15
The Ruline of the Court
We deny the petition on the ground of mootness.
We take judicial notice that on 25 July 2016, the present CIR Caesar
R. Dulay issued RMO No. 44-2016, which provides that:
SUBJECT: Amending Revenue Memorandum Order No. 20- 2013, as
amended (Prescribing the Policies and Guidelines in the Issuance of
Tax Exemption Rulings to Qualified Non-Stock, Non-Profit
Corporations and Associations under Section 30 of the National
Internal Revenue Code of 1997, as Amended)
In line with the Bureau's commitment to put in proper context the
nature and tax status of non-profit, non-stock educational
institutions, this Order is being issued to exclude non-stock, non-
profit educational institutions from the coverage of Revenue
Memorandum Order No. 20-2013, as amended.
SECTION 1. Nature of Tax Exemption. --- The tax exemption of non-
stock, non-profit educational institutions is directly conferred by
paragraph 3, Section 4, Article XIV of the 1987 Constitution, the
pertinent portion of which reads:
"All revenues and assets of non-stock, non-profit educational
institutions used actually, directly and exclusively (or educational
purposes shall be exempt from taxes and duties."
This constitutional exemption is reiterated in Section 30 (H) of the
1997 Tax Code, as amended, which provides as follows:
"Sec. 30. Exempt 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
(H) A non-stock and non-profit educational institution; x x x."
It is clear and unmistakable from the aforequoted constitutional
provision that non-stock, non-profit educational institutions are
constitutionally exempt from tax on all revenues derived in
pursuance of its purpose as an educational institution and used
actually, directly and exclusively for educational purposes. This
constitutional exemption gives the non-stock, non-profit
educational institutions a distinct character. And for the
constitutional exemption to be enjoyed, jurisprudence and tax
rulings affirm the doctrinal rule that there are only two requisites:
(1) The school must be non-stock and non-profit; and (2) The
income is actually, directly and exclusively used for educational
purposes. There are no other conditions and limitations.
In this light, the constitutional conferral of tax exemption upon non-
stock and non-profit educational institutions should not be
implemented or interpreted in such a manner that will defeat or
diminish the intent and language of the Constitution.
SECTION 2. Application for Tax Exemption. --- Non-stock, nonprofit
educational institutions shall file their respective Applications for
Tax Exemption with the Office of the Assistant Commissioner, Legal
Service, Attention: Law Division.
SECTION 3. Documentary Requirements. --- The non-stock,
nonprofit educational institution shall submit the following
documents:
a. Original copy of the application letter for issuance of Tax
Exemption Ruling;
b. Certified true copy of the Certificate of Good Standing issued by
the Securities and Exchange Commission;
c. Original copy of the Certification under Oath of the Treasurer as
to the amount of the income, compensation, salaries or any
emoluments paid to its trustees, officers and other executive
officers;
d. Certified true copy of the Financial Statements of the corporation
for the last three (3) years;
e. Certified true copy of government
recognition/permit/accreditation to operate as an educational
institution issued by the Commission on Higher Education (CHED),
Department of Education (DepEd), or Technical Education and Skills
Development Authority (TESDA); Provided, that if the government
recognition/permit/accreditation to operate as an educational
institution was issued five (5) years prior to the application for tax
exemption, an original copy of a current Certificate of
Operation/Good Standing, or other equivalent document issued by
the appropriate government agency (i.e., CHED, DepEd, or TESDA)
shall be submitted as proof that the non-stock and non-profit
education is currently operating as such; and
f. Original copy of the Certificate of utilization of annual revenues
and assets by the Treasurer or his equivalent of the non-stock and
nonprofit educational institution.
SECTION 4. Request for Additional Documents. --- In the course of
review of the application for tax exemption, the Bureau may require
additional information or documents as the circumstances may
warrant.
SECTION 5. Validity of the Tax Exemption Ruling. --- Tax Exemption
Rulings or Certificates of Tax Exemption of non-stock, nonprofit
educational institutions shall remain valid and effective, unless
recalled for valid grounds. They are not required to renew or
revalidate the Tax exemption rulings previously issued to them.
The Tax Exemption Ruling shall be subject to revocation if there are
material changes in the character, purpose or method of operation
of the corporation which are inconsistent with the basis for its
income tax exemption.
SECTION 6. Transitory Provisions. --- To update the records of the
Bureau and for purposes of a better system of monitoring, non-
stock, nonprofit educational institutions with Tax Exemption Rulings
or Certificates of Exemption issued prior to June 30, 2012 are
required to apply for new Tax Exemption Rulings.
SECTION 7. Repealing Clause. --- Any revenue issuance which is
inconsistent with this Order is deemed revoked, repealed, or
modified accordingly.
SECTION 8. Effectivity. --- This Order shall take effect immediately.
(Emphases supplied)
A moot and academic case is one that ceases to present a justiciable
controversy by virtue of supervening events, so that an adjudication
of the case or a declaration on the issue would be of no practical
value or use.16 Courts generally decline jurisdiction over such case
or dismiss it on the ground of mootness.17
With the issuance of RMO No. 44-2016, a supervening event has
transpired that rendered this petition moot and academic, and
subject to denial.1âwphi1 The CIR, in her petition, assails the RTC
Decision finding RMO No. 20-2013 unconstitutional because it
violated the non-stock, non-profit educational institutions' tax
exemption privilege under the Constitution. However,
subsequently, RMO No. 44-2016 clarified that non-stock, nonprofit
educational institutions are excluded from the coverage of RMO No.
20-2013. Consequently, the RTC Decision no longer stands, and DE LA SALLE UNIVERSITY INC., Petitioner,
there is no longer any practical value in resolving the issues raised in
vs.
this petition.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

WHEREFORE, we DENY the petition on the ground of mootness. We

SET ASIDE the Decision dated 25 July 2014 and Joint Resolution x-----------------------x
dated 29 October 2014 of the Regional Trial Court, Branch 143,
Makati City, declaring Revenue Memorandum Order No. 20-2013
unconstitutional. The writ of preliminary injunction is superseded by G.R. No. 198941
this Resolution.

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

SO ORDERED.
vs.

DE LA SALLE UNIVERSITY, INC., Respondent.

G.R. No. 196596

DECISION
COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
BRION, J.:
DE LA SALLE UNIVERSITY, INC., Respondent

Before the Court are consolidated petitions for review on

x-----------------------x certiorari:1

G.R. No. 198841 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
 Citing jurisprudence, the CTA En Banc held that a LOA should cover
only one taxable period and that the practice of issuing a LOA
The CTA En Banc held that the supplemental pieces of documentary
covering audit of unverified prior years is prohibited.30 The
evidence were admissible even if DLSU formally offered them only
prohibition is consistent with Revenue Memorandum Order (RMO)
when it moved for reconsideration of the CTA Division's original
No. 43-90, which provides that if the audit includes more than one
decision. Notably, the law creating the CTA provides that
taxable period, the other periods or years shall be specifically
proceedings before it shall not be governed strictly by the technical
indicated in the LOA.31
rules of evidence.26

In the present case, the LOA issued to DLSU is for Fiscal Year Ending
The Commissioner moved but failed to obtain a reconsideration of
2003 and Unverified Prior Years. Hence, the assessments for
the CTA En Banc's December 10, 2010 decision.27 Thus, she came to
deficiency income tax, VAT and DST for taxable years 2001 and 2002
this court for relief through a petition for review on certiorari (G.R.
are void, but the assessment for taxable year 2003 is valid.32
No. 196596).

On the applicability of the Ateneo case

CTA En Banc Case No. 671

The CTA En Banc held that the Ateneo case is not a valid precedent
The CTA En Banc partially granted DLSU's petition for review and
because it involved different parties, factual settings, bases of
further reduced its tax liabilities to ₱2,554,825.47 inclusive of
assessments, sets of evidence, and defenses.33
surcharge.28

On the CTA Division's appreciation of the evidence

On the validity of the Letter of Authority

The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s

The issue of the LOA' s validity was raised during trial;29 hence, the
evidence. It held that while DLSU successfully proved that a portion
issue was deemed properly submitted for decision and reviewable
of its rental income was transmitted and used to pay the loan
on appeal.
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.
YMCA38 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 payment42 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
 Second, DLSU invokes the principle of uniformity in taxation, which
mandates that for similarly situated parties, the same set of
G.R. No. 198841
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
DLSU argues as that: submitted by Ateneo, also a non-stock, non-profit educational
institution.50

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 G.R. No. 198941
No. 43-90 is void, thus, an assessment issued based on such
defective LOA must also be void.46
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)
DLSU points out that the LOA issued to it covered the Fiscal Year petition docketed as G.R. No. 196596 and (2) comment on DLSU's
Ending 2003 and Unverified Prior Years. On the basis of this petition docketed as G.R. No. 198841.51
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
Counter-arguments
for taxable year 2003. According to DLSU, when RMO No. 43-90
provides that:

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

The practice of issuing [LOAs] covering audit of 'unverified prior

years' is hereby prohibited.
First, DLSU questions the defective verification attached to the
petition.52

it refers to the LOA which has the format "Base Year + Unverified
Prior Years." Since the LOA issued to DLSU follows this format, then
Second, DLSU stresses that Article XIV, Section 4 (3) of the
any assessment arising from it must be entirely voided.48
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.
First, the failure to object to the offered evidence renders it
Thus, the CTA En Banc could, as it did, pass upon the validity of the
admissible, and the court cannot, on its own, disregard such
LOA.101 Besides, the Commissioner had the opportunity to argue
evidence.104
for the validity of the LOA at the CTA En Banc but she chose not to
file her comment and memorandum despite notice.102

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
III.The CTA correctly admitted
and it cannot raise the objection to the evidence for the first time
the supplemental evidence 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
formally offered by DLSU.
consequence, all the parties are considered bound by any outcome
arising from the offer of evidence properly presented.106

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.
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
 For year 2003, the total disbursement from the CF-CPA account
amounted to ₱23 .46 million.137 These figures, read in light of the
3. The substantiated portion of CF-CPA disbursements
constitutional exemption, raises the question: does DLSU claim that
(₱l,761,308.37)133 was derived by multiplying the rental income
the whole total CF-CPA disbursement of ₱23.46 million is tax-
claimed to have been added to the CF-CPA Account (₱6,602,655.00)
exempt so that it is required to prove that all these disbursements
by 26.68% or the ratio of substantiated disbursements to total
had been made for educational purposes?
disbursements (₱23,463,543.02).

We answer in the negative.

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
The records show that DLSU never claimed that the total CF-CPA
(₱23,463,543.02) from the same account.
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
We find that this system of calculation is incorrect and does not
amount had been used as claimed.
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
Of this amount, ₱4.01 had been proven to have been used for
greater than the rental income deposited in the CF-CPA Account in
educational purposes, as confirmed by the Independent CPA. The
2003.
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
To reiterate, to be exempt from tax, DLSU has the burden of proving
million transferred by DLSU.
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
Significantly, the Independent CPA confirmed that the CF-CPA made
used to pay the loan obtained for the construction of the Sports
disbursements for educational purposes in year 2003 in the amount
Complex; and (b) the ₱6.60 million,136 which was transferred to the
₱6.26 million. Based on these given figures, the CT A concluded that
CF-CPA account.
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 Sports Complex
4,007,724.00 4,007,724.00
Rental income deposited to the CF-CPA Account 6,602,655.00
6,602,655.00
Less: Substantiated portion of CF-CPA disbursements
1,761,588.35 6,259,078.30
Tax base for deficiency income tax and VAT 4,841,066.65
343.576.70
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 issuances139 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.
 accepting, or transferring the same.150 The Tax Code provides that
whenever one party to the document enjoys exemption from DST,
On this point, we remind DLSU that the rule on uniformity of
the other party not exempt from DST shall be directly liable for the
taxation does not mean that subjects of taxation similarly situated
tax. Thus, it is clear that DST shall be payable by any party to the
are treated in literally the same way in all and every occasion. The
document, such that the payment and compliance by one shall
fact that the Ateneo and DLSU are both non-stock, non-profit
mean the full settlement of the DST due on the document.
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
In the present case, DLSU entered into mortgage and loan
large extent on the sufficiency of evidence. DLSU's evidence was
agreements with banks. These agreements are subject to DST.151
wanting, thus, the CTA was correct in not fully cancelling its tax
For the purpose of showing that the DST on the loan agreement has
liabilities.
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
b. DLSU proved its payment of the DST
been paid. Thus, DLSU cannot be further assessed for deficiency DST
on the said documents.

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-
Finally, it is true that educational institutions are not included in the
Line Electronic DST Imprinting Machine. The Commissioner argues
class of taxpayers who can pay and remit DST through the On-Line
that DLSU is not allowed to use this method of payment because an
Electronic DST Imprinting Machine under RR No. 9-2000. As
educational institution is excluded from the class of taxpayers who
correctly held by the CTA, this is irrelevant because it was not DLSU
can use the On-Line Electronic DST Imprinting Machine.
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
We sustain the findings of the CTA. The Commissioner's argument the On-Line Electronic DST Imprinting Machine.
lacks basis in both the Tax Code and the relevant revenue
regulations.
Thus, the Court sustains the finding of the CTA that DLSU proved the

DST on documents, loan agreements, and papers shall be levied,

collected and paid for by the person making, signing, issuing,
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. 73705. August 27, 1987.]
VICTORIAS MILLING CO., INC., Petitioner, v. OFFICE OF THE
PRESIDENTIAL ASSISTANT FOR LEGAL AFFAIRS and PHILIPPINE
PORTS AUTHORITY, Respondents.
SYLLABUS
1. ADMINISTRATIVE LAW; PHILIPPINE PORTS AUTHORITY;
EMPOWERED TO PROMULGATE RULES AS AID IN ACCOMPLISHING
ITS PURPOSE. — While it is true that neither Presidential Decree No.
505 nor Presidential Decree No. 857 provides for the remedy of
appeal to the Office of the President, nevertheless, Presidential
Decree No. 857 empowers the PPA to promulgate such rules as
would aid it in accomplishing its purpose. Section 6 of the said
Decree provides — "Sec. 6. Corporate Powers and Duties — "a. The
corporate duties of the Authority shall be: ". . . . (III) To prescribe
rules and regulations, procedures, and guidelines governing the
establishment, construction, maintenance, and operation of all
other ports, including private ports in the country.." . . . Pursuant to
the aforequoted provision, PPA enacted Administrative Order No.
13-77 precisely to govern, among others, appeals from PPA
decisions.
2. ID.; ID.; ID.; ADMINISTRATIVE RULES AND REGULATIONS HAVE
THE FORCE AND EFFECT OF LAW. — It is now finally settled that
administrative rules and regulations issued in accordance with law,
like PPA Administrative Order No. 13-77, have the force and effect
of law (Valerio v. Secretary of Agriculture and Natural Resources, 7
SCRA 719; Antique Sawmills, Inc. v. Zayco, Et Al., 17 SCRA 316; and
Macailing v. Andrada, 31 SCRA 126), and are binding on all persons
dealing with that body.
3. REMEDIAL LAW; ACTIONS; RIGHT TO APPEAL, A STATUTORY
PRIVILEGE. — It must be stated that as correctly observed by the
Solicitor General, the facts of this case show that petitioner’s failure
to appeal to the Office of the President on time stems entirely from
its own negligence and not from a purported ignorance of the
proper procedural steps to take. Petitioner had been aware of the
rules governing PPA procedures. In fact, as embodied in the
December 16, 1985 Order of the Office of the President, petitioner
even assailed the PPA’s rule making powers at the hearing before
the Court of Tax Appeals. It is axiomatic that the right to appeal is
merely a statutory privilege and may be exercised only in the
manner and in accordance with the provision of law (United CMC
Textile Workers Union v. Clave, 137 SCRA 346, citing the cases of
Bello v. Fernando, 4 SCRA 138; Aguila v. Navarro, 55 Phil. 898; and
Santiago v. Valenzuela, 78 Phil. 397).
4. TAXATION; NATIONAL INTERNAL REVENUE CODE; BERTHING
CHARGES; COLLECTED FOR THE PRIVILEGE OF NAVIGATING IN
PUBLIC HARBORS, STREAMS OR WATERS. — As correctly stated by
the Solicitor General, the fees and charges PPA collects are not for
the use of the wharf that petitioner owns but for the privilege of
navigating in public waters, of entering and leaving public harbors
and berthing on public streams or waters. (Rollo, pp. 056-057). In
Compañia General de Tabacos de Filipinas v. Actg. Commissioner of
Customs (23 SCRA 600), this Court laid down the rule that berthing
charges against a vessel are collectible regardless of the fact that
mooring or berthing is made from a private pier or wharf. This is
because the government maintains bodies of water in navigable
condition and it is to support its operations in this regard that dues
and charges are imposed for the use of piers and wharves
regardless of their ownership.
5. ID.; ID.; HANDLING CHARGES; 10% THEREOF TO BE REMITTED TO
THE NATIONAL GOVERNMENT, IN THE NATURE OF CONTRACTUAL
COMPENSATION. — As to the requirement to remit 10% of the
handling charges, Section 6B-(ix) of the Presidential Decree No. 857
authorized the PPA "To levy dues, rates, or charges for the use of
the premises, works, appliances, facilities, or for services provided
by or belonging to the Authority, or any organization concerned
with port operations." This 10% government share of earnings of
arrastre and stevedoring operators is in the nature of contractual
compensation to which a person desiring to operate arrastre service
must agree as a condition to the grant of the permit to operate.
DECISION
PARAS, J.:
 In reply, on November 3, 1981, PPA Iloilo sent petitioner a
memorandum of PPA’s Executive Officer, Maximo Dumlao, which
This is a petition for review on certiorari of the July 27, 1984
justified the PPA’s demands. Further request for reconsideration
Decision of the Office of the Presidential Assistant For Legal Affairs
was denied on January 14, 1982.
dismissing the appeal from the adverse ruling of the Philippine Ports
Authority on the sole ground that the same was filed beyond the
reglementary period.
On March 29, 1982, petitioner served notice to PPA that it is
appealing the case to the Court of Tax Appeals; and accordingly, on
March 31, 1982, petitioner filed a Petition for Review with the said
On April 28, 1981, the Iloilo Port Manager of respondent Philippine
Court, entitled "Victorias Milling Co., Inc. v. Philippine Ports
Ports Authority (PPA for short) wrote petitioner Victorias Milling
Authority," and docketed therein as CTA Case No. 3466.
Co., requiring it to have its tugboats and barges undergo harbor
formalities and pay entrance/clearance fees as well as berthing fees
effective May 1, 1981. PPA, likewise, requiring petitioner to secure a
On January 10, 1984, the Court of Tax Appeals dismissed
permit for cargo handling operations at its Da-an Banua wharf and
petitioner’s action on the ground that it has no jurisdiction. It
remit 10% of its gross income for said operations as the
recommended that the appeal be addressed to the Office of the
government’s share.
President.

To these demands, petitioner sent two (2) letters, both dated June
2, 1981, wherein it maintained that it is exempt from paying PPA
any fee or charge because: (1) the wharf and all its facilities were
built and installed in its land; (2) repair and maintenance thereof
were and solely paid by it; (3) even the dredging and maintenance
of the Malijao River Channel from Guimaras Strait up to said private
wharf are being done by petitioner’s equipment and personnel; and
(4) at no time has the government ever spent a single centavo for
such activities. Petitioner further added that the wharf was being
used mainly to handle sugar purchased from district planters
pursuant to existing milling agreements.chanrobles law library
On January 23, 1984, petitioner filed a Petition for Review with this
Court, docketed as G.R. No. 66381, but the same was denied in a
Resolution dated February 29, 1984.
On April 2, 1984, petitioner filed an appeal with the Office of the
President, but in a Decision dated July 27, 1984 (Record, p. 22), the
same was denied on the sole ground that it was filed beyond the
reglementary period. A motion for Reconsideration was filed, but in
an Order dated December 16, 1985, the same was denied (ibid., pp.
3-21): Hence, the instant petition.
The Second Division of this Court, in a Resolution dated June 2,
1986, resolved to require the respondents to comment (ibid., p. 45);
and in compliance therewith, the Solicitor General filed his
Comment on June 4, 1986 (Ibid., pp. 50-59).
In a Resolution of July 2, 1986, petitioner was required to file a reply
(Ibid., p. 61) but before receipt of said resolution, the latter filed a
motion on July 1, 1986 praying that it be granted leave to file a reply
to respondents’ Comment, and an extension of time up to June 30,
1986 within which to file the same. (Ibid., p. 62).
On July 18, 1986, petitioner filed its reply to respondents’ Comment
(Ibid., pp. 68-76).
The Second Division of this Court, in a Resolution dated August 25,
1986, resolved to give due course to the petition and to require the
parties to file their respective simultaneous memoranda (Ibid., p.
78).
On October 8, 1986, the Solicitor General filed a Manifestation and
Rejoinder, stating, among others, that respondents are adopting en
toto their Comment of June 3, 1986 as their memorandum; with the
clarification that the assailed PPA Administrative Order No. 13-77
was duly published in full in the nationwide circulated newspaper,
"The Times Journal", on November 9, 1977 (ibid., pp. 79-
81).chanrobles virtual lawlibrary
The sole legal issue raised by the petitioner is —
WHETHER OR NOT THE 30-DAY PERIOD FOR APPEAL UNDER
SECTION 131 OF PPA ADMINISTRATIVE ORDER NO. 13-77 WAS
TOLLED BY THE PENDENCY OF THE PETITIONS FILED FIRST WITH THE
COURT OF TAX APPEALS, AND THEN WITH THIS HONORABLE
TRIBUNAL.
The instant petition is devoid of merit.
Petitioner, in holding that the recourse first to the Court of Tax
Appeals and then to this Court tolled the period to appeal, submits
that it was guided, in good faith, by considerations which lead to the
assumption that procedural rules of appeal then enforced still hold
true. It contends that when Republic Act No. 1125 (creating the
Court of Tax Appeals) was passed in 1955, PPA was not yet in
existence; and under the said law, the Court of Tax Appeals had
exclusive appellate jurisdiction over appeals from decisions of the
Commissioner of Customs regarding, among others, customs duties,
fees and other money charges imposed by the Bureau under the
Tariff and Customs Code. On the other hand, neither in Presidential
Decree No. 505, creating the PPA on July 11, 1974 nor in
Presidential Decree No. 857, revising its charter (said decrees,
among others, merely transferred to the PPA the powers of the
Bureau of Customs to impose and collect customs duties, fees and
other money charges concerning the use of ports and facilities
thereat) is there any provision governing appeals from decisions of
the PPA on such matters, so that it is but reasonable to seek
recourse with the Court of Tax Appeals. Petitioner, likewise,
contends that an analysis of Presidential Decree No. 857, shows that
the PPA is vested merely with corporate powers and duties (Sec. 6),
Pursuant to the aforequoted provision, PPA enacted Administrative
which do not and can not include the power to legislate on
Order No. 13-77 precisely to govern, among others, appeals from
procedural matters, much less to effectively take away from the
PPA decisions. It is now finally settled that administrative rules and
Court of Tax Appeals the latter’s appellate jurisdiction.
regulations issued in accordance with law, like PPA Administrative
Order No. 13-77, have the force and effect of law (Valerio v.
Secretary of Agriculture and Natural Resources, 7 SCRA 719; Antique
These contentions are untenable for while it is true that neither
Sawmills, Inc. v. Zayco, Et Al., 17 SCRA 316; and Macailing v.
Presidential Decree No. 505 nor Presidential Decree No. 857
Andrada, 31 SCRA 126), and are binding on all persons dealing with
provides for the remedy of appeal to the Office of the President,
that body.chanrobles.com.ph : virtual law library
nevertheless, Presidential Decree No. 857 empowers the PPA to
promulgate such rules as would aid it in accomplishing its purpose.
Section 6 of the said Decree provides —
As to petitioner’s contention that Administrative Order No. 13-77,
specifically its Section 131, only provides for appeal when the
decision is adverse to the government, worth mentioning is the
"Sec. 6. Corporate Powers and Duties —
observation of the Solicitor General that petitioner misleads the
Court. Said Section 131 provides —

"a. The corporate duties of the Authority shall

be:jgc:chanrobles.com.ph
"Sec. 131. Supervisory Authority of General Manager and PPA
Board. — If in any case involving assessment of port charges, the
Port Manager/OIC renders a decision adverse to the government,
"x x x. such decision shall automatically be elevated to, and reviewed by,
the General Manager of the authority; and if the Port Manager’s
decision would be affirmed by the General Manager, such decision
(III) To prescribe rules and regulations, procedures, and guidelines shall be subject to further affirmation by the PPA Board before it
governing the establishment, construction, maintenance, and shall become effective; Provided, however, that if within thirty (30)
operation of all other ports, including private ports in the country. days from receipt of the record of the case by the General Manager,
no decision is rendered, the decision under review shall become
final and executory; Provided further, that any party aggrieved by
"x x x." the decision of the General Manager as affirmed by the PPA Board
may appeal said decision to the Office of the President within thirty
(30) days from receipt of a copy thereof." (Emphasis supplied).
From a cursory reading of the aforequoted provision, it is evident
that the above contention has no basis.
As to petitioner’s allegation that to its recollection there had been
no prior publication of said PPA Administrative Order No. 13-77, the
Solicitor General correctly pointed out that said Administrative
Order was duly published in full in the nationwide newspaper, "The
Times Journal", on November 9, 1977.
Moreover, it must be stated that as correctly observed by the
Solicitor General, the facts of this case show that petitioner’s failure
to appeal to the Office of the President on time stems entirely from
its own negligence and not from a purported ignorance of the
proper procedural steps to take. Petitioner had been aware of the
rules governing PPA procedures. In fact, as embodied in the
December 16, 1985 Order of the Office of the President, petitioner
even assailed the PPA’s rule making powers at the hearing before
the Court of Tax Appeals.
It is axiomatic that the right to appeal is merely a statutory privilege
and may be exercised only in the manner and in accordance with
the provision of law (United CMC Textile Workers Union v. Clave,
137 SCRA 346, citing the cases of Bello v. Fernando, 4 SCRA 138;
Aguila v. Navarro, 55 Phil. 898; and Santiago v. Valenzuela, 78 Phil.
397).chanrobles.com.ph : virtual law library
Furthermore, even if petitioner’s appeal were to be given due
course, the result would still be the same as it does not present a
substantially meritorious case against the PPA.
Petitioner maintains and submits that there is no basis for the PPA
to assess and impose the dues and charges it is collecting, since the
wharf is private, constructed and maintained at no expense to the
government, and that it exists primarily so that its tugboats and
barges may ferry the sugarcane of its Panay planters.
As correctly stated by the Solicitor General, the fees and charges
PPA collects are not for the use of the wharf that petitioner owns
but for the privilege of navigating in public waters, of entering and
leaving public harbors and berthing on public streams or waters.
(Rollo, pp. 056-057).
In Compañia General de Tabacos de Filipinas v. Actg. Commissioner
of Customs (23 SCRA 600), this Court laid down the rule that
berthing charges against a vessel are collectible regardless of the
fact that mooring or berthing is made from a private pier or wharf.
This is because the government maintains bodies of water in
navigable condition and it is to support its operations in this regard
that dues and charges are imposed for the use of piers and wharves
regardless of their ownership.
As to the requirement to remit 10% of the handling charges, Section
6B-(ix) of the Presidential Decree No. 857 authorized the PPA "To
levy dues, rates, or charges for the use of the premises, works,
appliances, facilities, or for services provided by or belonging to the
Authority, or any organization concerned with port operations."
This 10% government share of earnings of arrastre and stevedoring
operators is in the nature of contractual compensation to which a
person desiring to operate arrastre service must agree as a
condition to the grant of the permit to operate.
PREMISES CONSIDERED, the instant petition is hereby DISMISSED.
SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. FIREMAN’S
FUND INSURANCE COMPANY and the COURT OF TAX APPEALS,
Respondents.
B.V . Abela, M.C. Gutierrez & F.J . Malate, Jr., for Respondents.
DECISION
PARAS, J.:
This is an appeal from the decision of the respondent Court of Tax
Appeals dated May 24, 1969, in C.T.A. Case No. 1629, entitled
"FIREMAN’S FUND INSURANCE COMPANY v. COMMISSIONER OF
INTERNAL REVENUE," which reversed the decision of petitioner
Commissioner of Internal Revenue holding private respondent
Fireman’s Fund Insurance Company liable for the payment of the
amount of P81,406.87 as documentary stamp taxes and
compromise penalties for the years 1952 to
1958.chanroblesvirtualawlibrary
Private respondent is a resident foreign insurance corporation
organized under the laws of the United States, authorized and duly
licensed to do business in the Philippines. It is a member of the
American Foreign Insurance Association, through which its business
is cleared (Brief for Respondents, pp. 1-2).
The antecedent facts of this case are as follows:chanrob1es virtual
1aw library
From January, 1952 to December, 1958, herein private respondent
Fireman’s Fund Insurance Company entered into various insurance
contracts involving casualty, fire and marine risks, for which the
corresponding insurance policies were issued. From January, 1952
to 1956, documentary stamps were bought and affixed to the
monthly statements of policies issued; and from 1957 to 1958
documentary stamps were bought and affixed to the corresponding
pages of the policy register, instead of on the insurance policies
1953 9,977.72
issued. On July 3, 1959, respondent company discovered that its
monthly statements of business and policy register were lost. The
loss was reported to the Building Administration of Ayala Building
and the National Bureau of Investigation on July 6, 1959. Herein 1954 10,908.89
petitioner was also informed of such loss by respondent company,
through the latter’s auditors, Sycip, Gorres and Velayo, in a letter
dated July, 14, 1959. After conducting an investigation of said loss, 1955 14,204.52
petitioner’s examiner’s examiner ascertained that respondent
company failed to affix the required documentary stamps to the
insurance policies issued by it and failed to preserve its accounting 1956 12,108.26
records within the time prescribed by Section 337 of the Revenue
Code by using loose leaf forms as registers of documentary stamps
without written authority from the Commissioner of Internal 1957 7,880.68
Revenue as required by Section 4 of Revenue Regulations No. V-1.
As a consequence of these findings, Petitioner, in a letter dated
December 7, 1962, assessed and demanded from petitioner the 1958 16,257.60
payment of documentary stamp taxes for the years 1952 to 1958 in
the total amount of P79,806.87 and plus compromise penalties, a
total of P81,406.87. Total stamp taxes due on

A breakdown of the amount of taxes due and collectible are as policies issued from 1952 to 1958 77,837.67
follows:chanrob1es virtual 1aw library

Add: Stamp taxes on monthly

YEAR AMOUNT

statements during:chanrob1es virtual 1aw library

1952 P6,500.00
1957 1,218.35 (CTA Decision, Rollo, pp. 16-17).

1958 3,264.39 The compromise penalties consisted of the sum of P1,000.00 as

penalty for the alleged failure to affix documentary stamps and the
further sum of P600.00 as penalty for an alleged violation of
———— Revenue Regulations No. V-1 otherwise known as the Bookkeeping
Regulations (Brief for Respondents, p. 4).

Total P82,320.41
In a letter dated January 14, 1963, respondent company contested
the assessment. After petitioner denied the protest in a decision
Less: Stamp taxes paid per voucher shown:chanrob1es virtual 1aw dated March 17, 1965, respondent company appealed to the
library respondent Court of Tax Appeals on May 8, 1965. After hearing
respondent court rendered its decision dated May 24, 1969 (Rollo,
pp. 16-21) reversing the decision of the Commissioner of Internal
1957 P 416.82 Revenue. The assailed decision reads in part:jgc:chanrobles.com.ph

1958 2,096.72 2,513.54 "The affixture of documentary stamps to papers other than those
authorized by law is not tantamount to failure to pay the same. It is
true that the mode of affixing the stamps as prescribed by law was
not followed, but the fact remains that the documentary stamps
———
corresponding to the various insurance policies were purchased and
paid by petitioner. There is no legal justification for respondent to
require petitioner to pay again the documentary stamp tax which it
AMOUNT DUE & COLLECTIBLE P79,906.87
had already paid. To sustain respondent’s stand would require
petitioner to pay the same tax twice. If at all, petitioner should be
proceeded against for failure to comply with the requirement of
=======
affixing the documentary stamps to the taxable insurance policies
and not for failure to pay the tax. (See Sec. 239 and 332, Rev. Code).
"It should be observed that the law allows the affixture of
documentary stamps `to such other paper as may be indicated by
law or regulations as the proper recipient of the stamp.’ It appears
from this provision that respondent has authority to allow
documentary stamps to be affixed to papers other than the
documents or instruments taxed. Although the practice adopted by
petitioner in affixing the documentary stamps to the business
statements and policy register was without specific permission from
respondent but only on the strength of his ruling given to Wise &
Company (see Petitioner’s Memorandum, p. 176, CTA rec.; p. 24,
t.s.n.), one of the general agents of petitioner, however, considering
that petitioner actually purchased the documentary stamps, affixed
them to the business statements and policy register and cancelled
the stamps by perforating them, we hold that petitioner cannot be
held liable to pay again the same tax.
"With respect to the ‘compromise penalties’ in the total sum of
P1,600.00, suffice it to say that penalties cannot be imposed in the
absence of a showing that petitioner consented thereto. A
compromise implies agreement. If the offer is rejected by the
taxpayer, as in this case, respondent cannot enforce it except
through a criminal action. (See Comm. of Int. Rev. v. Abad, L-19627,
June 27, 1968.)" (CTA Decision, Rollo, pp. 20-21).
Hence, this petition filed on June 26, 1969 (Rollo, pp. 1-8).
The petition is devoid of merit.
The principal issue in this case is whether or not respondent
company may be required to pay again the documentary stamps it
has actually purchased, affixed and cancelled.
The relevant provisions of the National Internal Revenue Code
provide:jgc:chanrobles.com.ph
"SEC. 210. Stamp taxes upon documents, instruments, and papers.
— Upon documents, instruments, and papers, and upon
acceptances, assignments, sales, and transfers of the obligation,
right, or property incident thereto, there shall be levied, collected
and paid, for and in respect of the transaction so had or
accomplished, the corresponding documentary stamp taxes
prescribed in the following sections of this Title, by the person
making, signing, issuing, accepting, or transferring the same, and at
the same time such act is done or transaction had." (Now. Sec. 222).
"SEC. 232. Stamp tax on life insurance policies. — On all policies of
insurance or other instruments by whatever name the same may be
called, whereby any insurance shall be made or renewed upon any
life or lives, there shall be collected a documentary stamp tax of
thirty-five centavos on each two hundred pesos or fractional part
thereof, of the amount issued by any such policy. (220) (As
amended by PD 1457).
"Insurance policies issued by a Philippine company to persons in
other countries are not subject to documentary stamp tax. (Rev.
Regs. No. 26).
"Medical certificate attached to an insurance policy is not a part of
the said policy. Insurance policy is subject to Section 232 of the Tax
Code while medical certificate is taxable under Section 237 of the
same Code.
"Insurance policies are issued in the place where delivered to the
person insured." (As amended.)
"SEC. 221. Stamp tax on policies of insurance upon property. — On
all policies of insurance or other instruments by whatever name the
same may be called, by which insurance shall be made or renewed
upon property of any description, including rents or profits, against
peril by sea or on inland waters, or by fire or lightning, there shall be
collected a documentary stamp tax of six centavos on each four
persons, or fractional part thereof, of the amount of premium
charged." (Now Sec. 250.).
"SEC. 237. Payment of documentary stamp tax. — Documentary
stamp taxes shall be paid by the purchase and affixture of
documentary stamps to the document or instrument taxed or to
such other paper as may be indicated by law or regulations as the
proper recepient of the stamp, and by the subsequent cancellation
of same, such cancellation to be accomplished by writing, stamping,
or perforating the date of the cancellation across the face of each
stamp in such manner that part of the writing, impression, or
perforation shall be on the stamp itself and part on the paper to
which it is attached; Provided, That if the cancellation is
accomplished by writing or stamping the date of cancellation, a hole
sufficiently large to be visible to the naked eye shall be punched, cut
or perforated on both the stamp and the document either by the
use of a hand punch, knife, perforating machine, scissors, or any
other cutting instrument but if the cancellation is accomplished by
perforating the date of cancellation, no other hole need be made on
the stamp." (Now Sec. 249.).
SEC. 239. Failure to affix or cancel documentary stamps. — Any
person who fails to affix the correct amount of documentary stamps
to any taxable document, instrument, or paper, or to cancel in the
manner prescribed by section 237 any documentary stamp affixed
to any document, instrument, or paper, shall be subject to a fine of
not less than twenty pesos or more than three hundred pesos.
(Emphasis supplied.) (Now Sec. 250.)
As correctly pointed out by respondent Court of Tax Appeals, under
the above-quoted provisions of law, documentary tax is deemed
paid by: (a) the purchase of documentary stamps; (b) affixture of
documentary stamps to the document or instrument taxed or to
such other paper as may be indicated by law or regulations; and (c)
cancellation of the stamps as required by law (Rollo, p. 18).
It will be observed however, that the over-riding purpose of these
provisions of law is the collection of taxes. The three steps above-
mentioned are but the means to that end. Thus, the purchase of the
stamps is the form of payment made; the affixture thereof on the
document or instrument taxed is to insure that the corresponding
tax has been paid for such document while the cancellation of the
stamps is to obviate the possibility that said stamps will be reused
for similar documents for similar purposes.
In the case at bar, there appears to be no dispute on the fact that
the documentary stamps corresponding to the various policies were
purchased and paid for by the respondent Company. Neither is
there any argument that the same were cancelled as required by
law. In fact such were the findings of petitioner’s examiner Amando
B. Melgar who stated as follows:jgc:chanrobles.com.ph
"Investigation disclosed that the subject insurance company is a
duly organized corporation doing business in the Philippines. It
keeps the necessary books of accounts and other accounting
records needed by the business. Further verification revealed that it
has, since July, 1959, been using a `HASLER’ franking machine,
Model F-88, which stamps the documentary stamps on the
duplicates of the policies issued. Prior to the acquisition of the said
machine, the company buys its stamps by allowing the Manager to
issue a Manager’s check drawn against the National City Bank of
New York and payable to the City Treasurer of Manila. It was also
found out that during this period (1952 to 1958), the total
purchases of documentary stamps amounted to P77,837.67, while
the value of the used stamps lost amounted to P65.901.11.
Verification with the files revealed that most of the monthly
statements of business and registers of documentary stamps
corresponding to insurance policies issued were missing while some
where the punched documentary stamps affixed were small in
amount are still intact.
"The taxpayer was found to be negligent in the preservation and
keeping of its records. Although the loss was found by the
company’s private investigator (see attached true copies of his
reports) was not an `Inside Job,’ still the company should be held
liable for its negligence, it appearing that the said records were
placed in a bodega, where almost all patrons of the coffee shop
nearby could see them. The company also violated the provision of
Section 221 of the National Internal Revenue Code which provides
that the documentary stamps should be affixed and cancelled on
the duplicates of bonds and policies issued. In this case, the said
stamps were affixed on the register of documentary stamps. (pp.
35-36, BIR rec.; Emphasis supplied.)" (CTA Decision, Rollo, pp. 18-
19.)
Such findings were confirmed by the Memorandum of Acting
Commissioner of Internal Revenue Jose B. Lingad, dated November
7, 1962 to the Chief, Business Tax Division, which
states:jgc:chanrobles.com.ph
"The records show that the FIREMAN’S FUND INSURANCE
COMPANY allegedly paid P77,837.67 in documentary stamp taxes
for the policies of insurance issued by it for the years 1952 to 1958
but could only present as proof of payment P11,936.56 of said taxes
as the rest of the amount of P65,901.11 were lost due to robbery.
Upon verification of this payment however it was found that the
FIREMAN’S FUND INSURANCE COMPANY affixed the documentary
stamps not on the individual insurance policies issued by it but on a
monthly statement of business and a register of documentary
stamps, the use of which was not authorized by this Office. It was
claimed that the same procedure was used in the case of the lost
documentary stamps aforementioned. As this practice is irregular
and the remaining records are not conclusive proofs of the payment
of the corresponding documentary stamp tax on the policies, the
FIREMAN’S FUND AND INSURANCE COMPANY is still liable for the
payment of the documentary stamp taxes on the policies found not
affixed with stamps." (Original BIR Record, p. 87).
Later, respondent Court of Tax Appeals correctly observed that the
purchase of documentary stamps and their being affixed to the
monthly statements of business and policy registers were also
admitted by counsel for the Government as could clearly be gleaned
from his Memorandum submitted to the respondent Court.
(Decision, CTA Rollo, pp. 4-5)
Thus, all investigations made by the petitioner show the same
factual findings that respondent company purchased documentary
stamps for the various policies it has issued for the period in
question although it has attached the same on documents not
authorized by law.chanrobles virtual lawlibrary
There is no argument to petitioner’s contention that the insurance
policies with the corresponding documentary stamps affixed are the
best evidence to prove payment of said documentary stamp tax.
This rule however does not preclude the admissibility of other
proofs which are uncontradicted and of considerable weight, such
as: copies of the applications for manager’s checks, copies of the
manager’s check vouchers of the bank showing the purchases of
documentary stamps corresponding to the various insurance
policies issued during the years 1952-1958 duly and properly
identified by the witnesses for respondent company during the
hearing and admitted by the respondent Court of Tax Appeals (Brief
for Respondent, p. 15).
It is a general rule in the interpretation of statutes levying taxes or
duties, 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
(Manila Railroad Co. v. Collector of Customs, 52 Phil. 950 [1929]).
There appears to be no question that the purpose of imposing
documentary stamp taxes is to raise revenue and the corresponding
amount has already been paid by respondent and has actually
become part of the revenue of the government. In the same
manner, it is evident that the affixture of the stamps on documents
not authorized by law is not attended by bad faith as the practice
was adopted from the authority granted to Wise & Company, one of
respondent’s general agents (CTA Decision, Rollo, p. 20). Indeed,
petitioner argued that such authority was not given to respondent
company specifically, but under the general principle of agency,
where the acts of the agents bind the principal, the conclusion is
inescapable that the justification for the acts of the agents may also
be claimed for the acts of the principal itself (Brief for the
Respondents, pp. 12-13).
Be that as it may, there is no justification for the government which
has already realized the revenue which is the object of the
imposition of subject stamp tax, to require the payment of the same
tax for the same documents. Enshrined in our basic legal principles
is the time honored doctrine that no person shall unjustly enrich
himself at the expense of another. It goes without saying that the
government is not exempted from the application of this doctrine
(Ramie Textiles, Inc. v. Mathay Sr., 89 SCRA 587 [1979]).
Under the circumstances, this court RESOLVED to DISMISS this
petition and to AFFIRM the assailed decision of the Court of Tax
Appeals.
Fernan, Gutierrez, Jr., Padilla, Bidin and Cortes, JJ., concur.
Alampay, J., on leave.
THE COMMISSIONER OF INTERNAL REVENUE, Petitioner-Appellant,
v. P. J. KIENER COMPANY, LTD., INTERNATIONAL CONSTRUCTION
CORPORATION, GAVINO T. UNCHUAN AND THE COURT OF TAX
APPEALS, Respondents-Appellees.
Solicitor General Antonio P. Barredo, Assistant Solicitor General
Felicisimo R. Rosete, and Special Attorney Antonio H . Garces for
Petitioner-Appellant.
Andres T . Velarde for Respondents-Appellees.
SYNOPSIS
Private respondents entered into a contract with the government
for the construction of the Mactan Airfield in Cebu. The "General
Conditions" of the contract, adopting the tax exemption clause of
the Mutual Defense Agreement between the United States and the
Philippines, provided that "no tax of any kind or description will be
levied on any material, equipment or supplies which may be
purchased or otherwise acquired in connection with the project
under contract, which material equipment or supplies are required
solely for such project." Thereafter, private respondents sought
from petitioner a refund of the amount of P21,478.31 paid by Caltex
as taxes for the petroleum products sold to it which amount had
been included in the purchase price. Since no answer was
forthcoming private respondents instituted a petition for review
before the Court of Tax Appeals. Petitioner thereafter, denied the
claim for return, but the Tax Court came up with a decision allowing
tax credit in the amount of P18,272.21 deducting from the amount
claimed taxes for petroleum products used in the demolition of the
Opon Church in Mactan and taxes which can no longer be claimed
because of prescription.
Hence, this petition for review.
The Supreme Court held that the petroleum products acquired by
private respondent are not exempt for they did not go into the
construction of the bases.
Judgment reversed.chanroblesvirtuallawlibrary
SYLLABUS
1. TAXATION EXEMPTION, PROVISION THEREFOR IN THE MUTUAL
DEFENSE AGREEMENT BETWEEN THE UNITED STATES OF AMERICA
AND THE REPUBLIC OF THE PHILIPPINES, CONSTRUED. — The
phrases "for exclusive use in the construction," "acquired in
connection with the construction," "acquired with the project" used
in the tax exemption provisions of the Military Bases Agreement,
the Aide Memoire" and the stipulations in the contract for the
construction of a military air base could only mean, collectively,
"construction" materials or supplies which must necessarily be
incorporated in the construction of the airfield. For the terms
"materials’ and "supplies" refers to something "going into or
consumed" in the performance of the work such as mortar, cement,
sand, bricks, lumber or nails, glass, hardware, and a thousand other
things that might be meant, which are necessary to the completed
erection of a building or structure.
2. ID.; ID.; ID.; PETROLEUM PRODUCTS WHICH DO NOT GO INTO
THE CONSTRUCTION OF THE BASES, NOT TAX EXEMPT; REASON. —
The petroleum products purchased by contractors "to run their
machineries and equipment" used in the construction of an air base
cannot be categorized as such "materials" or "supplies" as are
subject to tax exemption under the Military Bases Agreement, since
they do not go into or are consumed in the construction, but in the
machineries and equipment. Moreover, the stipulation in the
contract between the government and the contractor providing
that" (o)nly equipment which will be incorporated in the
construction can be imported tax on certification of the Engineer,"
deals centrally on the importation of equipment, for which the
government had conceded the privilege of exemption because the
same may not be "economically procurable in terms of price and
quality in the Philippines." To assure however that the privilege is
not abused and to restrain against possible detour of the revenue
and customs laws, the government has stipulated that the
equipment must be incorporated in the construction.
3. ID.; ID.; ID.; ID.; CASE OF COMMISSIONER OF CUSTOM VS. CALTEX
PHILIPPINES NOT APPLICABLE TO THE CASE AT BAR. — In the case of
Commissioner of Customs v. Caltex (Phil.) Inc., No. L-13067,
December 29, 1959, gasoline and oil furnished to the drivers during
the constitution of the petroleum refinery came within the import
of the "materials" or "supplies" that are tax-exempt. This ruling
cannot be applied where there is an express provision in the treaties
that the "materials" or "supplies" must be "for exclusive use in the
construction." Where it is explicitly provided that the "materials"
and "supplies" must be for exclusive use in, in connection with, and
required solely for the construction of an air base, they must be
incorporated in the construction for the exemption to apply.
 accorded deference, such being well-nigh conclusive upon the
Supreme Court.
4. ID.; ID.; ID.; RULING OF THE SECRETARY OF FINANCE IN A SIMILAR
CASE ENTITLED TO GREAT WEIGHT IN THE DETERMINATION OF THE
PRESENT ISSUE. — The ruling of the Secretary of Finance — that oils
used by contractors in the operation of their machines or other
equipment are not materials to be used solely for military projects DECISION
but petroleum products to be used in the operation of the
contractor’s machine, and therefore not exempt — commands
respect and weight, since it proceeds from the official of the
government called upon to execute or implement administrative
laws it lays down a sound rule on the matter. MARTIN, J.:

5. ID.; ID.; INTERPRETATION OF STIPULATIONS. — If two meanings

of a stipulation are admissible, that which is least to the advantage This is a case that draws Us to the tax exemption provision written
of the party for whose benefit the stipulation was inserted in the in the Military Bases Agreement 1 celebrated by the Republic of the
treaty should be preferred. Thus, an ambiguity in the tax exemption Philippines and the United States of America on March 14, 1947,
provision in the Military Bases Agreement and in the "Aide and pursued in the "Aide Memoire" 2 between the two
Memoire" in a accordance with which a contract was entered into, Governments on April 27, 1955.
cannot be interpreted in favor of the American Government or for
that matter a party claiming under it, like a taxpayer, especially
when it is considered that for the Philippine Government "the
A quo a decision was rendered by respondent Court of Tax Appeals
exception contained in tax statutes must be strictly construed
ordering the Commissioner of Internal Revenue "to give tax credit
against the one claiming exemption and that he who would seek to
to [private respondents] the amount of P18,272.21, without
be thus privileged must justify it by words too plain to be mistaken
pronouncement as to costs." The Tax Court modified the ruling of
and too categorical to be misinterpreted."cralaw virtua1aw library
the Commissioner of Internal Revenue denying the request of the
private respondents for tax credit amounting to P21,478.31, the
total of specific taxes supposedly paid by them. Petitioner seeks a
6. ID.; ID.; ID.; FINDINGS OF COURT OF TAX APPEALS BINDING. — review of said judgment.
The findings of the Tax Court that the specific tax paid by Caltex
(Phil.) Inc. has been shifted by it to private respondents must be
Respondent P. J. Kiener Company, Ltd. is a domestic limited co-
partnership, doing business in the Philippines, while respondent
International Construction Corporation is a domestic corporation
duly organized and existing under and by virtue of the laws of the
Philippines, likewise engaged in business in the Philippines. 3 On or
about December 14, 1957, respondent companies entered into a
joint venture with respondent Gavino T. Unchuan, a licensed Filipino
civil engineer, to bid for the construction of the Mactan Airfield in
Mactan Island, Municipality of Opon (now Lapu-lapu City), Cebu.
Respondents won the bid. And so, on February 19, 1958, the
Republic of the Philippines, represented by Lt. Gen. Alfonso
Arellano, then Chief of Staff, Armed Forces of the Philippines,
entered into a contract with private respondents, Article I of which
provides, inter alia,." . . That the . . . general conditions . . . are
hereby made integral parts of this contract by incorporation and
reference respectively." Of these "General Conditions", Section 3-19
provides:jgc:chanrobles.com.ph
"3-19 Taxes — In accordance with the Mutual defense Agreement
between the United States of America and the Republic of the
Philippines, no tax of any kind or description will be levied on any
material, equipment or supplies which may be purchased or
otherwise acquired in connection with the project under contract,
which material, equipment or supplies are required solely for such
project." (Emphasis supplied)
This is the root of the controversy.
Towards the middle of 1958, private respondents commenced
construction of the Mactan Airfield and started purchasing
"petroleum products to run and maintain their machineries and
equipment" from Caltex (Phil.) Inc. 4 During the period of February
1, 1960 through April 11, 1960, they likewise purchased motor
gasoline, kerosene, lubricating and/or motor oil, and diesel fuel
from Caltex (Phil.) Inc. For these petroleum products, Caltex (Phil.)
Inc. paid the Bureau of Internal Revenue P21,478.31 of specific
taxes. This amount was, in turn, included in the prices of the
petroleum products paid by private respondents to Caltex (Phil.) Inc.
5
On 29 December 1960, private respondents wrote petitioner,
requesting it to refund to Caltex (Phil.) Inc. the amount of
P21,478.31. 6 Caltex (Phil.) Inc. followed the request with a formal
claim for tax credit on January 12, 1961. Since no answer was
forthcoming, private respondents instituted on January 31, 1962, a
petition for review with the respondent Court of Tax Appeals. They
prayed that they be credited the amounts of P21,478.31 and
P151.65, specific and sales taxes, respectively, plus interest at the
legal rate from that date until the grant of the tax credit. 7
However, before the trial of the case, the sales tax of P151.65 was
credited in favor of Caltex (Phil.) Inc. 8
Subsequently, or on 7 January 1963, petitioner formally denied the
request of Caltex (Phil.) Inc. stating that as per the ruling of the
Department of Finance in its answer to the query of the Philippine
Electrical Supply, dated July 18, 1962:jgc:chanrobles.com.ph
"Oils used by contractors in the operation of their machines or
other equipment in pursuance of their contract are not materials to
II
be used solely for the aforesaid military projects but petroleum
products to be used in the operation of contractor’s machines or
equipment Consequently, the same cannot he exempted from local
taxes as well as customs duties and special import tax."cralaw
virtua1aw library ". . . IN HOLDING THAT UNDER THE ‘AIDE MEMOIRE’ OF APRIL 27,
1955, BETWEEN THE PHILIPPINE REPUBLIC AND THE UNITED STATES
OF AMERICA, THE PETROLEUM PRODUCTS IN QUESTION ARE
After trial, the Tax Court rendered the judgment appealed from. It EXEMPT FROM THE PAYMENT OF SPECIFIC TAX.
deducted from the P21,478.31 claimed for the specific tax of
P908.40 (petroleum products used in the demolition of the Opon
Church in Mactan) and the specific tax of P2,297.74 paid on January III
15, and 25, 1960 for being barred by prescription (claim for refund
was filed only on January 31, 1962. 9

Petitioner delimits its issue or question to the dispositive portion of
the Tax Court decision ordering petitioner "to give tax credit to
[private respondents in the amount of P18,272.21 . . ." 10 and
assigns that the Tax Court erred.
I WAS MADE AN INTEGRAL PART OF THE CONTRACT BETWEEN THE
". . . IN HOLDING THAT THE PETROLEUM PRODUCTS IN QUESTION
COME WITHIN THE PURVIEW OF THE WORDS ‘MATERIAL’ OR
‘SUPPLIES’ MENTIONED IN THE ‘AIDE MEMOIRE’ OF APRIL 27, 1955,
BETWEEN THE PHILIPPINE REPUBLIC AND THE UNITED STATES OF
AMERICA, AND OF SECTION 3-19 OF THE GENERAL CONDITIONS
ATTACHED TO THE SPECIFICATION FOR MACTAN AIRFIELD WHICH
PHILIPPINE GOVERNMENT AND THE RESPONDENTS P.J. KIENER
COMPANY, LTD., INTERNATIONAL CONSTRUCTION CORPORATION
AND GAVINO T. UNCHUAN.

". . . IN HOLDING THAT UNDER THE MUTUAL DEFENSE AGREEMENT

BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF IV
THE PHILIPPINES THE PETROLEUM PRODUCTS IN QUESTION ARE
EXEMPT FROM THE PAYMENT OF THE SPECIFIC TAX.

". . . IN HOLDING THAT THE RESPONDENTS P. J. KIENER COMPANY
LTD., INTERNATIONAL CONSTRUCTION CORPORATION AND GAVINO
T. UNCHUAN ARE ENTITLED TO CLAIM FOR TAX CREDIT OF THE
SPECIFIC TAXES WHICH THEY ALLEGEDLY PAID ON THE PETROLEUM
PRODUCTS IN QUESTION; AND.
V
". . . IN ORDERING THE HEREIN PETITIONER TO GIVE TAX CREDITS TO
THE RESPONDENTS IN THE AMOUNT OF P18,272.21.
The matrix of these imputations, however, is whether the
petroleum products in question are "materials" or "supplies"
purchased or otherwise acquired "in connection with" the
construction of the Mactan Airfield and which "materials" or
"supplies" are required "solely" for such project.
Private respondents flawlessly narrate that when they began
construction towards the middle of 1958, they started purchasing
the petroleum products from Caltex (Phil.) Inc. "to run and maintain
their machineries and equipment used in the construction." The
"equipment" refers to fuel pumping machineries, radar facilities,
and the like. Purchase went through April 11,1960, when months
thereafter the conflict on the tax credit arose. Private respondents
would deliver the conclusion that these petroleum products are tax-
exempt since they have been." . . purchased or otherwise acquired
in connection with the project . . ." The fact that they are not
incorporated into the Mactan Air base would not defeat the
exemption. 11
The sense which private respondents proffer to attach to the terms
"materials" and "supplies" eludes the link welded into the Military
Bases Agreement and "Aide Memoire" and recognized in Section 3-
19 of the "General Conditions." The Military Bases Agreement states
that ‘No import, excise, consumption or other tax ... shall be
charged on material, equipment, supplies or goods, . . . for exclusive
use in the construction . . . of the bases . . ." (Art. V, footnote 1). The
"Aide Memoire" provides: ". . . no internal taxes of any kind or
description, except income taxes, shall be levied on any materials,
equipment, supplies and/or services which may be purchased or
otherwise acquired in connection with the [construction of the
Mactan Airfield] ..." (Sec. 6, Footnote 2). Section 13-9 of the
"General Condition" stipulates that." . . no tax of any kind or
description will be levied on any material, equipment or supplies
which may be purchased or otherwise acquired in connection with
the project . . ." Reduced into simple terms, the underscored
phrases continuously used in the two treaties and in the contract
could only mean, collectively "construction" materials or supplies
which must necessarily be incorporated in the construction of the
airfield. For the terms "materials" and "supplies" refer to something
"going into or consumed" in the performance of the work 12 such
as mortar, cement, sand, bricks, lumber 13 or nails, glass, hardware,
and a thousand other things that might be meant, which are
necessary to the completed erection of a building or structure. 14
Thus, examined, the petroleum products purchased by the private
respondents "to run and maintain their machineries and
equipment" cannot be categorized as "materials" or "supplies" since
they do not go into or are consumed in the construction, but in the
machineries and equipment.
Nonetheless, private respondents would unwrap a thesis that if
Section 13-9 of the "General Conditions" intended to refer only to
"materials" or "supplies" which form part and/or incorporated into
the project, the said section would have so stated, just like when it
provided that "Only equipment which will be incorporated in the
construction" are tax free. 15 They would thus seize the absence of
such proviso as a recognition of the tax-exemption of those
"materials" or "supplies" not necessarily incorporated in the
construction. The argument misses the point. In its textual
completeness, Section 13-9 provides: "Only equipment which will
be incorporated in the construction can be imported tax free on
certification of the Engineer." (Last sentence, 2nd par.) It deals
centrally on the importation of equipment. The Government had
conceded the privilege of exemption to this item because the same
may not be "economically procurable in terms of price and quality
within the Philippines." (Sec. 2, "Aide Memoire"). To assure,
however, that the privilege is not abused or circumvented, the
Government has stipulated in Section 13-9 of the "General
Conditions" that the equipment" [must] be incorporated in the
construction . . ." It was intended by the Government as an open
restraint against possible detour of the revenue and customs laws.
The reason is easily discernible. There still pervaded even at that
time the sentiment of preference to local products, as can be
plucked from the ultimate sentence of Section 2, "Aide Memoire",
thus:jgc:chanrobles.com.ph
"Locally produced materials, however, shall be used wherever such
materials are of satisfactory quality and are available at reasonable,
comparable prices."cralaw virtua1aw library
Under these circumstances, the contractual proviso in Section 13-9
(supra) cannot be isolated and stretched to mean that "materials"
and "supplies" need not be incorporated in the construction to be
tax-exempt. It is essentially non sequitur.
Private respondents would, however, seek a final refuge in the
Commissioner of Customs v. Caltex (Phil.) Inc., No. L13067,
December 29, 1959 ruling that "gasoline and oil furnished [Caltex]
drivers during the construction job come within the import of the
‘material or supplies’." In that case, Caltex (Phil.) Inc. was granted by
the Secretary of Agriculture and Natural Resources a petroleum
refining concession with the right to establish and operate a
petroleum refinery in the municipalities of Bauan and Batangas,
province of Batangas. The concession made the provisions of
Republic Act No. 387 16 as an integral part. In its operation, Caltex
(Phil.) Inc. used as basic material crude oil imported from abroad.
Customs duties were imposed on this imported crude oil and so,
Caltex sought for refund. The Court of Tax Appeals ordered a
refund. On petition for review, the Supreme Court held that under
Article 103 of the Act. 17 the petroleum products imported by
respondent Caltex (Phil.) Inc. for its use during the construction of
the refinery are exempt from the customs duties and that gasoline
and oil furnished its drivers during the construction job come within
the import of the words "material" or "supplies"
It bears emphasis, however, that the words "material" or "supplies"
in that ruling were interpreted in relation to the provisions of the
Act, particularly Article 103. Unlike the treaties and contract in the
case at bar, no express provision 18 is therein contained that the
"materials" or "supplies" must be "for exclusive use in the
construction" (Art. V, Military Bases Agreement) or "in connection
with the [construction] . . . which materials . . . supplies are required
solely for such projects." (Cf. Sec. 6, "Aide Memoire" and Sec. 13-9
of "General Conditions"). It is understandable why. At that time
there was no Philippine crude petroleum available for the use of any
refinery in the Philippines, and so imported crude petroleum was
allowed so as not to defeat the objective of the Act which was to
promote and encourage the exploration, development, production
and utilization of the petroleum resources of the Philippines. Thus
far, the importation of these "materials" and "supplies" was only
circumscribed by a liberal proviso that the exemption shall not be
allowed on "goods imported by the concessionaire for his personal
use or that of any others." 19 Beyond that, the exemption operates.
As far as the "materials" and "supplies" are concerned, they need
not be incorporated into the construction to fall within the province
of the exemption.
The present case is situated on a different plane. Explicitly, the
"materials" and "supplies" must be for exclusive use in, in
connection with, and required solely for the construction of the
Mactan Airfield. In short, the "materials" and "supplies" need be
incorporated in the construction for the exemption to apply. It,
therefore, results that the Caltex ruling cannot be invoked as it is to
be interpreted within the context of Republic Act 387.
Anent this, the Secretary of Finance in its letter of July 18, 1962 to
the Philippine Electrical Supply Co., Inc. ruled that "Oils used by
contractors in the operation of their machines or other equipment .
. . are not materials to be used solely for . . . military projects but
petroleum products to be used in the operation of the contractor’s
machines or equipment." 20 They are, consequently, not tax-
exempt. The ruling commands much respect and weight, since it
proceeds from the official of the government called upon to execute
or implement administrative laws 21 and it lays down a sound rule
on the matter. 22
Nor could the ambiguity that thus sprang from the tax-exemption
provision in the Military Bases Agreement and in the "Aide
Memoire" in accordance with which 23 the contract in question was
entered into be interpreted in favor of the American Government
or, for that matter, any party claiming under it, like private
respondents. 24 Lauterpacht says that "if two meanings of a
stipulation are admissible, that which is least to the advantage of
the party for whose benefit the stipulation was inserted in the
treaty should be preferred." 25 Especially when it is considered that
for the Philippine Government, "the exception contained in the tax
statutes must be strictly construed against the one claiming the
exemption" 26 because the law "does not look with favor on tax
exemptions and that he who would seek to be thus privileged must
justify it by words too plain to be mistaken and too categorical to be
misinterpreted." 27
An error has been assigned by petitioner that while the petroleum
products were all purchased by private respondents from the Caltex
(Phil.) Inc., for which the latter paid the specific taxes and sales
taxes, private respondents did not come up with proofs that the
specific taxes of P21,478.31 were included in the purchase price
paid by them, and that the phrase "Statement of Specific Tax
Excluded from Sales to P. J. Kiener Co. Ltd." appearing in both
Exhibits A and B of private respondents means that the purchase
price did not include said taxes. 28 The Court of Tax Appeals,
however, found that the tax of P21,478.31 has been shifted by
Caltex (Phil.) Inc. to private respondents. 29 This finding of the Tax
Court must be accorded deference, "being well-nigh conclusive"
upon the Supreme Court. 30
IN VIEW OF THE FOREGOING, the judgment of the Court of Tax
Appeals ordering petitioner "to give tax credit to [private
respondents] the amount of P18,272.21" is reversed and set aside.
In all other respects the judgment appealed from is affirmed.
Without pronouncement as to costs.
SO ORDERED.
G.R. No. L-30232 July 29, 1988
LUZON STEVEDORING CORPORATION, petitioner-appellant,
vs.
COURT OF TAX APPEALS and the HONORABLE COMMISSIONER OF
INTERNAL REVENUE, respondents-appellees.
H. San Luis & V.L. Simbulan for petitioner-appellant.
PARAS, J.:
This is a petition for review of the October 21, 1968 Decision * of
the Court of Tax Appeals in CTA Case No. 1484, "Luzon Stevedoring
Corporation v. Hon. Ramon Oben, Commissioner, Bureau of Internal
Revenue", denying the various claims for tax refund; and the
February 20, 1969 Resolution of the same court denying the motion
for reconsideration.
Herein petitioner-appellant, in 1961 and 1962, for the repair and
maintenance of its tugboats, imported various engine parts and
other equipment for which it paid, under protest, the assessed
compensating tax. Unable to secure a tax refund from the
Commissioner of Internal Revenue, on January 2, 1964, it filed a
Petition for Review (Rollo, pp. 14-18) with the Court of Tax Appeals,
docketed therein as CTA Case No. 1484, praying among others, that
it be granted the refund of the amount of P33,442.13. The Court of
Tax Appeals, however, in a Decision dated October 21, 1969 (Ibid.,
pp. 22-27), denied the various claims for tax refund. The decretal
portion of the said decision reads:
 The lower court erred in not holding that the business in which
petitioner-appellant is engaged, is part and parcel of the shipping
WHEREFORE, finding petitioner's various claims for refund
industry.
amounting to P33,442.13 without sufficient legal justification, the
said claims have to be, as they are hereby, denied. With costs
against petitioner.
III

On January 24, 1969, petitioner-appellant filed a Motion for

The lower court erred in not allowing the refund sought by
Reconsideration (Ibid., pp. 28-34), but the same was denied in a
petitioner-appellant.
Resolution dated February 20, 1969 (Ibid., p. 35). Hence, the instant
petition.

The instant petition is without merit.

This Court, in a Resolution dated March 13, 1969, gave due course
to the petition (Ibid., p. 40). Petitioner-appellant raised three (3)
assignments of error, to wit:
I
The pivotal issue in this case is whether or not petitioner's tugboats"
can be interpreted to be included in the term "cargo vessels" for
purposes of the tax exemption provided for in Section 190 of the
National Internal Revenue Code, as amended by Republic Act No.
3176.

The lower court erred in holding that the petitioner-appellant is

Said law provides:
engaged in business as stevedore, the work of unloading and
loading of a vessel in port, contrary to the evidence on record.

Sec. 190. Compensating tax. — ... And Provided further, That the tax
imposed in this section shall not apply to articles to be used by the
II
importer himself in the manufacture or preparation of articles
subject to specific tax or those for consignment abroad and are to
form part thereof or to articles to be used by the importer himself
as passenger and/or cargo vessel, whether coastwise or oceangoing,
including engines and spare parts of said vessel. ....
Petitioner contends that tugboats are embraced and included in the
term cargo vessel under the tax exemption provisions of Section
190 of the Revenue Code, as amended by Republic Act. No. 3176.
He argues that in legal contemplation, the tugboat and a barge
loaded with cargoes with the former towing the latter for loading
and unloading of a vessel in part, constitute a single vessel.
Accordingly, it concludes that the engines, spare parts and
equipment imported by it and used in the repair and maintenance
of its tugboats are exempt from compensating tax (Rollo, p. 23).
On the other hand, respondents-appellees counter that petitioner-
appellant's "tugboats" are not "Cargo vessel" because they are
neither designed nor used for carrying and/or transporting persons
or goods by themselves but are mainly employed for towing and
pulling purposes. As such, it cannot be claimed that the tugboats in
question are used in carrying and transporting passengers or
cargoes as a common carrier by water, either coastwise or
oceangoing and, therefore, not within the purview of Section 190 of
the Tax Code, as amended by Republic Act No. 3176 (Brief for
Respondents-Appellees, pp. 45).
This Court has laid down the rule that "as the power of taxation is a
high prerogative of sovereignty, the relinquishment is never
presumed and any reduction or dimunition thereof with respect to
its mode or its rate, must be strictly construed, and the same must
be coached in clear and unmistakable terms in order that it may be
applied." (84 C.J.S. pp. 659-800), More specifically stated, the
general rule is that any claim for exemption from the tax statute
should be strictly construed against the taxpayer (Acting
Commissioner of Customs v. Manila Electric Co. et al., 69 SCRA 469
[1977] and Commissioner of Internal Revenue v. P.J. Kiener Co. Ltd.,
et al., 65 SCRA 142 [1975]).
As correctly analyzed by the Court of Tax Appeals, in order that the
importations in question may be declared exempt from the
compensating tax, it is indispensable that the requirements of the
amendatory law be complied with, namely: (1) the engines and
spare parts must be used by the importer himself as a passenger
and/or cargo, vessel; and (2) the said passenger and/or cargo vessel
must be used in coastwise or oceangoing navigation (Decision, CTA
Case No. 1484; Rollo, p. 24).
As pointed out by the Court of Tax Appeals, the amendatory
provisions of Republic Act No. 3176 limit tax exemption from the
compensating tax to imported items to be used by the importer
himself as operator of passenger and/or cargo vessel (Ibid., p. 25).
As quoted in the decision of the Court of Tax Appeals, a tugboat is
defined as follows:
A tugboat is a strongly built, powerful steam or power vessel, used
for towing and, now, also used for attendance on vessel. (Webster
New International Dictionary, 2nd Ed.)

A tugboat is a diesel or steam power vessel designed primarily for
moving large ships to and from piers for towing barges and lighters
in harbors, rivers and canals. (Encyclopedia International Grolier,
Vol. 18, p. 256).
A tug is a steam vessel built for towing, synonymous with tugboat.
(Bouvier's Law Dictionary.) (Rollo, p. 24).
Under the foregoing definitions, petitioner's tugboats clearly do not
fall under the categories of passenger and/or cargo vessels. Thus, it
is a cardinal principle of statutory construction that where a
provision of law speaks categorically, the need for interpretation is
obviated, no plausible pretense being entertained to justify non-
compliance. All that has to be done is to apply it in every case that
falls within its terms (Allied Brokerage Corp. v. Commissioner of
Customs, L-27641, 40 SCRA 555 [1971]; Quijano, etc. v. DBP, L-
26419, 35 SCRA 270 [1970]).
And, even if construction and interpretation of the law is insisted
upon, following another fundamental rule that statutes are to be
construed in the light of purposes to be achieved and the evils
sought to be remedied (People v. Purisima etc., et al., L-42050-66,
86 SCRA 544 [1978], it will be noted that the legislature in amending
Section 190 of the Tax Code by Republic Act 3176, as appearing in
the records, intended to provide incentives and inducements to
bolster the shipping industry and not the business of stevedoring, as
manifested in the sponsorship speech of Senator Gil Puyat (Rollo, p.
26).
On analysis of petitioner-appellant's transactions, the Court of Tax
Appeals found that no evidence was adduced by petitioner-
appellant that tugboats are passenger and/or cargo vessels used in
the shipping industry as an independent business. On the contrary,
petitioner-appellant's own evidence supports the view that it is
engaged as a stevedore, that is, the work of unloading and loading
of a vessel in port; and towing of barges containing cargoes is a part
of petitioner's undertaking as a stevedore. In fact, even its trade
name is indicative that its sole and principal business is stevedoring
and lighterage, taxed under Section 191 of the National Internal
Revenue Code as a contractor, and not an entity which transports
passengers or freight for hire which is taxed under Section 192 of
the same Code as a common carrier by water (Decision, CTA Case
No. 1484; Rollo, p. 25).
Under the circumstances, there appears to be no plausible reason
to disturb the findings and conclusion of the Court of Tax Appeals.
As a matter of principle, this Court will not set aside the conclusion
reached by an agency such as the Court of Tax Appeals, which is, by
the very nature of its function, dedicated exclusively to the study
and consideration of tax problems and has necessarily developed an
expertise on the subject unless there has been an abuse or
improvident exercise of authority (Reyes v. Commissioner of
Internal Revenue, 24 SCRA 199 [1981]), which is not present in the
instant case.

PREMISES CONSIDERED, the instant petition is DISMISSED and the
decision of the Court of Tax Appeals is AFFIRMED.
SO ORDERED.
G.R. Nos. L-22805 & L-27858 June 30, 1975
WONDER MECHANICAL ENGINEERING CORPORATION represented
by Mr. LUCIO QUIJANO, President & General Manager, petitioner,
vs.
THE HON. COURT OF TAX APPEALS and THE BUREAU OF INTERNAL
REVENUE BEING REPRESENTED BY THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
ESGUERRA, J.:
Two petitions for review of the decisions of the respondent Court of
Tax Appeals in G.R. Nos. L-22805 and L-27858. The first decision (L-
22805) dismissed the appeal of petitioner Wonder Mechanical
Engineering Corporation in C.T.A. Case No. 1036, "for lack of
jurisdiction, the same having been filed beyond the 30 day period
prescribed in Section 11 of Republic Act No. 1125", and confirmed
the decision of respondent Commissioner of Internal Revenue
which "assessed against petitioner the total amount of P69,699.56
as fixed taxes and sales and percentage taxes, inclusive of the 25%
surcharge for the years 1953-54". The second decision (L-27858)
ordered the same petitioner to pay, respondent Commissioner of
Internal Revenue the amount of "P25,080.91 as deficiency sales and
percentage taxes from 1957 to June 30, 1960, inclusive of the 25%
surcharge, plus costs", based on the common principal issue of
"whether or not the manufacture and sale of steel chairs, jeepney
parts and other articles which are not machines for making other
products, and job orders done by petitioner come within the
purview of the tax exemption granted it under Republic Act Nos. 35
and 901."
Petitioner is a corporation which was granted tax exemption
privilege under Republic Act 35 in respect to the "manufacture of
machines for making cigarette paper, pails, lead washers, rivets,
nails, candies. chairs, etc.". The tax exemption expired on May 30,
1951. On September 14, 1953, petitioner applied with the Secretary
of Finance for reinstatement of the exemption privilege under the
provisions of R.A. 901 approved July 7, 1954, the reinstatement to
commence on June 20, 1953, the date Republic Act 901 took effect.
In G.R. No. L-22805, respondent Commissioner of Internal Revenue,
sometime in 1955, caused the investigation of petitioner for the
purpose of ascertaining whether or not it had any tax liability. The
findings of Revenue Examiner Alfonso B. Camillo on September 30,
1955, stated "that during the years 1953 and 1954 the petitioner
was engaged in the business of manufacturing various articles,
namely, auto spare parts, flourescent lamp shades, rice threshers,
post clips, radio screws, washers, electric irons, kerosene stoves and
other articles; that it also engaged in business of electroplating and
in repair of machines; that although it was engaged in said business,
it did not provide itself with the proper privilege tax receipts as
required by Section 182 of the Tax Code and did not pay the sales
tax on its gross sales of articles manufactured by it and the
percentage tax due on the gross receipts of its electroplating and
repair business pursuant to Sections 183, 185, 186 and 191 of the
same Code".
Based on the foregoing, respondent Commissioner of Internal
Revenue assessed against petitioner on November 29, 1955, the
total amount of P69,699.56 as fixed taxes and sales and percentage
taxes, inclusive of the 25% surcharge, as follows:
Sales and percentage taxes for
1953 and 1954 P55,719.65
25% surcharge 13,929.91
C-14 fixed tax (1953-1954) 20.00
C-4 (27) fixed tax (1954) 10.00
C-4 (37) fixed tax (1953-1954) 20.00
TOTAL P69.699.56
Respondent also suggested the payment of the amount of
P3,300.00 as penalties in extrajudicial settlement of petitioner's
violations of Sections 182, 183, 185, 186 and 191 of the Tax Code
and of the Bookkeeping Regulations (p. 25, B.I.R. rec.).
In G.R. No. L-27858, respondent Commissioner of Internal Revenue
caused the investigation of petitioner for the purpose of
ascertaining its tax liability on August 10, 1960, as a result of which
on December 7, 1960, Revenue Examiner Pedro Cabigao reported
that "petitioner had manufactured and sold steel chairs without
paying the 30% sales tax imposed by Section 185(c) of the Tax Code;
accepted job orders without paying the 3% tax in gross receipts
imposed by Section 191 of the same Code; manufactured and sold
other articles subject to 7% sales tax under Section 186 of the same
Code but not covered by the tax exemption privilege; failed to
register with the Bureau of Internal Revenue books of accounts and
sales invoices as required by the Bookkeeping Regulations; failed to
indicate in the sales invoices the Residence Certificate number of
customers who purchased articles worth P50.00 or over, in violation
of the Bookkeeping Regulation; and failed to produce its books of
accounts and business records for inspection and examination when
required to do so by the revenue examiner in violation of the
Bookkeeping Regulations (pp. 17-18 B.I.R. rec.)".
Based on the foregoing, the respondent Commissioner of Internal
Revenue on October 6, 1961, assessed against the petitioner "the
payment of P25,080.91 as deficiency percentage taxes and 25%
surcharge for 1957 to 1960 and suggested the payment of
P5,020.00 as total compromise penalty in extrajudicial settlement of
the various violations of the Tax Code and Bookkeeping Regulation
(pp. 28-29 B.I.R. rec.).1äwphï1.ñët "
Regarding the compromise penalty suggested by respondent
Bureau of Internal Revenue in both G.R. L-22805 and L-27858, it
does not appear that petitioner accepted the imposition of the
compromise amounts. Hence We find no compelling reasons to
alter the decision of respondent Court of Tax Appeals in L-27858
that —
With respect to the compromise penalty in the total amount of
P5,020.00 suggested by respondent to be paid by petitioner, it is
now a well settled doctrine that compromise penalty cannot be
imposed or collected without the agreement or conformity of the
tax payer (Collector of Internal Revenue vs. University of Santo
Tomas, et al., G.R. Nos. L-11274 & L-11280, November 28, 1958; the
Collector of Internal Revenue v. Bautista, et al., G.R. Nos. L-12250 &
12259, May 27, 1959; the Philippines International Fair, Inc. v.
Collector of Internal Revenue, G.R. Nos. L-12928 & L-12932, March
31, 1962). (Emphasis for emphasis)
Inasmuch as the figures appearing in the Bureau of Internal
Revenue's tax delinquency assessments in both cases (L-22805 and
L-27858) are not in dispute, and the respondent Court of Tax
Appeals ruled in its decision in G.R. No. L-27858 on the lone issue
presented in both cases that the tax assessment of "P25,080.91 as
deficiency sales and percentage taxes from 1957 to June 30, 1960"
must be paid by petitioner as the sale of other manufactured items
did not come within the purview, of the tax exemption granted
petitioner. We find it no longer necessary to make a definite stand
on the question raised in L-22805 as to the alleged error committed
by respondent Court of Tax Appeals in dismissing the appeal in
C.T.A. 1036 (subject matter of L-22805) for lack of jurisdiction, the
same having been filed beyond the 30-day period prescribed in
Section 11 of Republic Act 1126. Suffice it to say on that issue that
appellants must perfect their appeal from the decision of the
Commissioner of Internal Revenue to the Court of Tax Appeals
within the statutory period of 30 days, otherwise said Court
acquires no jurisdiction.
We turn Our attention on the vital issue of tax exemption claimed
by petitioner as basis for questioning the tax assessments made by
respondent Bureau of Internal Revenue in both cases (G.R. L-22805
and 27858). There is no doubt that petitioner was given a Certificate
of Tax Exemption By the Secretary of Finance on July 7,1954, as
follows:
Be it known that upon application filed by Wonder Mechanical
Engineering Corporation, 1310 M. Hizon, Sta. Cruz, Manila, in
respect to the manufacture of machines for making cigarette paper,
pails, lead washers, nails, rivets, candies, etc., the said
industry/industries have been determined to be new and necessary
under the provisions of Republic Act No. 901 (or of Republic Act No.
35), in view of which this Certificate of Tax Exemption has been
issued entitling the abovenamed firm/person to tax exemption from
the payment of taxes directly payable by it/him in respect to the
said industry/industries until December 31, 1958, and thereafter to
a diminishing exemption until June 20, 1959, as provided in section
1 of Republic Act No. 901, except the exemption from the income
tax which will wholly terminate on June 20, 1955 (B.I.R. rec., page
13). (Emphasis for emphasis)
Republic Act 35, approved on September 30, 1946, grants to
persons "who or which shall engage in a new and necessary
industry", for a period of four years from the date of the
organization of such industry, exemption "from the payment of all
internal revenue taxes directly payable by such person". Republic
Act 901, approved on June 20, 1953, which amended Republic Act
35 by extending the period of tax exemption, elaborated on the
meaning of "new and necessary industry" as follows:
Sec. 2. For the purposes of this Act, a "new industry is one not
existing or operating on a commercial scale prior to January first,
nineteen hundred and forty-five. Where several applications for
exemption are filed in connection with the same kind of industry,
the Secretary of Finance shall approve them in the order in which
they have been filed until the total output or production of those
already granted exemption for that particular kind of industry is
sufficient to meet local demand or consumption: Provided, That the
limitation shall not apply to products intended for export. (Emphasis
for emphasis)
Sec. 3. For the purposes of this Act, a "necessary" industry is one
complying with the following requirements:
(1) Where the establishment of the industry will contribute to the
attainment of a stable and balanced national economy.
(2) Where the industry will operate on a commercial scale in
conformity with up-to-date practices and will make its products
available to the general public in quantities and at prices which
justify its operation with a reasonable degree of permanency.
(3) Where the imported raw materials represent a value not
exceeding sixty percentum of the manufacturing cost plus
reasonable selling price and administrative expenses: Provided, That
a grantee of tax exemption shall use materials of domestic origin,
growth, or manufacture wherever the same are available or could
be made available in reasonable quantity and quality and at
reasonable prices. ... (Emphasis for emphasis) .
From the above-quoted provisions of the law, it is clear that an
industry to be entitled to tax exemption must be "new and
necessary" and that the tax exemption was granted to new and
necessary industries as an incentive to greater and adequate
production of products made scarce by the second world war which
wrought havoc on our national economy, a production "sufficient to
meet local demand or consumption"; that will contribute "to the
attainment of a stable and balanced national economy"; an industry
that "will make its products available to the general public in
quantities and at prices which will justify its operation."
Viewed in the light of the foregoing reasons for the State grant of
tax exemption, We are firmly convinced that petitioner was granted
tax exemption in the manufacture and sale "of machines for making
cigarette paper, pails, lead washers, nails, rivets, candies, etc.", as
explicitly stated in the Certificate of Exemption (Annex A of the
petition in G.R. No. L-22805), but certainly not for the manufacture
and sale of the articles produced by those machines.
That such was the intention of the State when it granted tax
exemption to the petitioner in the manufacture of machines for
making certain products could be deduced from the following:
Before the approval of the original grant of tax exemption to
Petitioner for engaging in a new and necessary industry under
Republic Act No. 35, the then Secretary of Finance submitted a
memorandum to the Cabinet, dated March 3, 1949, the pertinent
portions of which read as follows:
"... If (petitioner) turns out machines whenever orders therefore are
received. Among its products are a medicine tablet wrapping
machine for Dr. Agustin Liboro, photographs of which are attached,
a loud speaker for the Manila Supply, and a "Lompia wrapping"
machine for a certain Chinese. ...
The manufacture of the above-mentioned machines can be
considered a new and necessary industry for the purpose of
Republic Act No. 35. It is recommended that the benefits of said Act
be extended to this corporation in respect to said industry.
Respectfully submitted:
(SGD.) PIO PEDROSA
Secretary"
The letter of the Executive Secretary to the petitioner dated May
30, 1949, reads as follows:
"Sirs:
I have the honor to advise you that His Excellency, the President,
has today, upon recommendation of the Honorable, the Secretary
of Finance, approved your application for exemption from the
payment of internal revenue taxes on your business of
manufacturing machines for making a number of products, such as
cigarette paper, pails, lead washers, rivets, nails, candies, chairs,
etc., under the provisions of Section 2 of Republic Act No. 35.
Very respectfully,
(SGD.) TEODORO EVANGELISTA
Executive Secretary"

(Emphasis for emphasis) WHEREFORE, the decisions of respondent Court of Tax Appeals in
these two cases are affirmed. Costs against the petitioner in both
cases.
Aside from the clarity of the State's intention in granting tax
exemption to petitioner in so far as it manufactures machines for
making certain products, as manifested in the acts of its duly
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. THE COURT
authorized representatives in the Executive branch of the
OF APPEALS, THE COURT OF TAX APPEALS and ATENEO DE
government, it is quite difficult for Us to believe that the
MANILA UNIVERSITY, Respondents.
manufacture of steel chairs, jeep parts, and other articles not
constituting machines for making certain products would fall under The Solicitor General for Petitioner.
the classification of "new and necessary" industries envisioned in
Bengzon Zarraga Narciso Cudala Pecson and Bengson for Private
Republic Acts 35 and 901 as to entitle the petitioner to tax
Respondent.
exemption.
YLLABUS

There is no way to dispute the "cardinal rule in taxation that

exemptions therefrom are highly disfavored in law and he who
claims tax exemption must be able to justify his claim or right
thereto by the dearest grant of organic or statute law" as succinctly
stated in the decision of the respondent Court of Tax Appeals in
C.T.A. No. 1265 (L-27858).1äwphï1.ñët
Tax exemption must be clearly expressed and cannot be established
by implication. Exemption from a common burden cannot be
permitted to exist upon vague implication. (Asiatic Petroleum Co.
vs. Llanes, 49 Phil. 466; House vs. Posadas, 53 Phil. 338; Collector of
Internal Revenue vs. Manila Jockey Club, Inc., G.R. No. L-8755,
March 23, 1956, 98 Phil. 676).
1. TAXATION; TAX IMPOSITION; AS A RULE, A STATUTE WILL NOT BE
CONSTRUED AS IMPOSING A TAX UNLESS IT DOES SO CLEARLY,
EXPRESSLY, AND UNAMBIGUOUSLY. — The Court takes this
occasion to reiterate the hornbook doctrine in the interpretation of
tax laws that" (a) statute will not be construed as imposing a tax
unless it does so clearly, expressly, and unambiguously. . . (A) tax
cannot be imposed without clear and express words for that
purpose. Accordingly, the general rule of requiring adherence to the
letter in construing statutes applies with peculiar strictness to tax
laws and the provisions of a taxing act are not to be extended by
implication." Parenthetically, in answering the question of who is
subject to tax statutes, it is basics 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.
2. ID.; ID.; SEC. 20 OF THE NATIONAL INTERNAL REVENUE CODE;
APPLICATION; EXEMPTION; NOT PRESENT IN CASE AT BAR. — The
Commissioner should have determined first if private respondent
was covered by Section 205, applying the rule of strict
interpretation of laws imposing taxes and other burdens on the
populace, before asking Ateneo to prove its exemption therefrom.
To fall under its coverage, Section 205 of the National Internal
Revenue Code requires that the independent contractor be engaged
in the business of selling its services. Hence, to impose the three
percent contractor’s tax on Ateneo’s Institute of Philippine Culture,
it should be sufficiently proven that the private respondent is
indeed selling its services for a fee in pursuit of an independent
business. And it is only after private respondent has been found
clearly to be subject to the provisions of Sec. 205 that the question
of exemption therefrom would arise. Only after such coverage is
shown does the rule of construction — that tax exemptions are to
be strictly construed against the taxpayer — come into play. After
reviewing the records of this case, we find no evidence that
Ateneo’s Institute of Philippine Culture ever sold its services for a
free to anyone or was ever engaged in a business apart from and
independently of the academic purposes of the university. The
petitioner has presented no evidence to prove its bare contention
that, indeed, contracts for sale of services were ever entered into by
the private Respondent.
3. ID.; ID.; ID.; EXEMPTION OF GIFTS OR DONATIONS TO AN
EDUCATIONAL INSTITUTION; APPLICATION IN CASE AT BAR. — The
Court of Tax Appeals accurately and correctly declared that the
"funds received by Ateneo de Manila University are technically not a
fee. They may however fall as gifts or donations which are tax-
exempt" as shown by private respondent’s compliance with the
requirement of Section 123 of the National Internal Revenue Code
providing for the exemption of such gifts to an educational
institution. It is, clear that the funds received by Ateneo’s Institute
of Philippine Culture are not given in the concept of a fee or price in
exchange for the performance of a service or delivery of an object.
Rather, the amounts are in the nature of an endowment or
donation given by IPC’s benefactors solely for the purpose of
sponsoring or funding the research with no strings attached. As
found by the two courts below, such sponsorships are subject to
IPC’s terms and conditions. No proprietary or commercial research
is done, and IPC retains the ownership of the results of the research,
including the absolute right to publish the same. The copyrights
over the results of the research are owned by Ateneo and,
consequently, no portion thereof may be reproduced without its
permission. The amount., given to IPC, therefore. may not be
deemed, it bears stressing. as fees or gross receipts that can be
subjected to the three percent contractor’s tax.
4. CIVIL LAW; CONTRACTS; CONTRACT OF SALE AND FOR A PIECE OF
WORK REQUIRE TRANSFER OF OWNERSHIP; NOT PRESENT IN CASE
AT BAR. — The questioned transactions of Ateneo’s Institute of
Philippine Culture cannot be deemed either as a contract of sale or
a contract for a piece of work. "By the contract of sale, one of the
contracting parties obligates himself to transfer the ownership of
and to deliver a determinate thing, and the other to pay therefor a
price certain in money or its equivalents." By its very nature, a
contract of sale requires a transfer of ownership. Thus, Article 1458
of the Civil Code "expressly makes the obligation to transfer
ownership as an essential element of the contract of sale, following
modern codes, such as the German and the Swiss. Even in the
absence of this express requirement, however, most writers,
including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and
Capitant, have considered such transfer of ownership as the primary
purpose of sale. Perez and Alguer follow the same view, stating that
the delivery of the thing does not mean a mere physical transfer,
but is a means of transmitting ownership. Transfer of title or an
agreement to transfer it for a price paid or promised to be paid is
the essence of sale." In the case of a contract for a piece of work,
"the contractor binds himself to execute a piece of work for the
employer, in consideration of a certain price or compensation. . . If
the contractor agrees to produce the work from materials furnished
by him, he shall deliver the thing produced to the employer and
transfer dominion over the thing. . ." (Articles 1713 and 1714 of the
Civil Code of the Philippines). Ineludably, whether the contract be
one of sale or one for a piece of work, a transfer of ownership is
involved and a party necessarily walks away with an object. In the
case at bench, it is clear from the evidence on record that there was
no sale either of objects or services because. as adverted to earlier,
there was no transfer of ownership over the research data obtained
or the results of research projects undertaken by the Institute of
Philippine Culture. Furthermore, it is clear that the research activity
of the Institute of Philippine Culture is done in pursuance of
maintaining Ateneo’s university status and not in the course of an
independent business of selling such research with profit in mind.
5. REMEDIAL LAW; EVIDENCE; FACTUAL FINDINGS AND
CONCLUSIONS OF THE COURT OF TAX APPEALS; GENERALLY
CONCLUSIVE; CASE AT BAR. — We reiterate that the "Court of Tax
Appeals is a highly specialized body specifically created for the
purpose of reviewing tax cases. Through its expertise, it is
undeniably competent to determine the issue of whether" Ateneo
de Manila University may be deemed a subject of the three percent
contractor’s tax "through the evidence presented before it."
Consequently, "as a matter of principle, this Court will not set aside
the conclusion reached by . . . the Court of Tax Appeals which is, by
the very nature of its function, dedicated exclusively to the study
and consideration of tax problems and has necessarily developed an
expertise on the subject unless there has been an abuse or
improvident exercise of authority . . ." This point becomes more
evident in the case before us where the findings and conclusions of
both the Court of Tax Appeals and the Court of Appeals appear
untainted by any abuse of authority, much less grave abuse of
discretion. Thus, we find the decision of the latter affirming that of
the former free from any palpable error.
DECISION
PANGANIBAN, J.:
In conducting researches and studies of social organizations and
cultural values thru its Institute of Philippine Culture, is the Ateneo
de Manila University performing the work of an independent
contractor and thus taxable within the purview of then Section 205
of the National Internal Revenue Code levying a three percent
contractor’s tax? This question is answered by the Court in the
negative as it resolves this petition assailing the Decision 1 of the
Respondent Court of Appeals 2 in CA-G.R. SP No. 31790
promulgated on April 27, 1994 affirming that of the Court of Tax
Appeals. 3
The Antecedent Facts
The antecedents as found by the Court of Appeals are reproduced
hereinbelow, the same being largely undisputed by the parties.
cdtech
"Private respondent is a non-stock, non-profit educational
institution with auxiliary units and branches all over the Philippines.
One such auxiliary unit is the Institute of Philippine Culture (IPC),
which has no legal personality separate and distinct from that of
private Respondent. The IPC is a Philippine unit engaged in social
science studies of Philippine society and culture. Occasionally, it
accepts sponsorships for its research activities from international
organizations, private foundations and government agencies.
On July 8, 1983, private respondent received from petitioner
Commissioner of Internal Revenue a demand letter dated June 3,
1983, assessing private respondent the sum of P174,043.97 for
alleged deficiency contractor’s tax, and an assessment dated June
27, 1983 in the sum of P1,141,837 for alleged deficiency income tax,
both for the fiscal year ended March 31, 1978. Denying said tax
liabilities, private respondent sent petitioner a letter-protest and
subsequently filed with the latter a memorandum contesting the
validity of the assessments.
On March 17, 1988, petitioner rendered a letter-decision canceling
the assessment for deficiency income tax but modifying the
assessment for deficiency contractor’s tax by increasing the amount
due to P193,475.55. Unsatisfied, private respondent requested for a
reconsideration or reinvestigation of the modified assessment. At
the same time, it filed in the respondent court a petition for review
of the said letter-decision of the petitioner. While the petition was
pending before the respondent court, petitioner issued a final
decision dated August 3, 1988 reducing the assessment for
deficiency contractor’s tax from P193,475.55 to P46,516.41,
exclusive of surcharge and interest.
On July 12, 1993, the respondent court rendered the questioned
decision which dispositively reads:chanrob1es virtual 1aw library
‘WHEREFORE, in view of the foregoing, respondent’s decision is SET
ASIDE. The deficiency contractor’s tax assessment in the amount of
P46,516.41 exclusive of surcharge and interest for the fiscal year
ended March 31, 1978 is hereby CANCELED. No pronouncement as x x x
to cost.

SO ORDERED.’
(16) Business agents and other independent contractors except
persons, associations and corporations under contract for
embroidery and apparel for export, as well as their agents and
Not in accord with said decision, petitioner has come to this Court
contractors and except gross receipts of or from a pioneer industry
via the present petition for review raising the following
registered with the Board of Investments under Republic Act No.
issues:chanrob1es virtual 1aw library
5186:chanrob1es virtual 1aw library

‘1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE

x x x
PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT TO SECTION
205 OF THE TAX CODE; and

2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3%
CONTRACTOR’S TAX UNDER SECTION 205 OF THE TAX CODE’.
The pertinent portions of Section 205 of the National Internal
Revenue Code, as amended, provide:chanrob1es virtual 1aw library
The term ‘independent contractors’ include persons (juridical or
natural) not enumerated above (but not including individuals
subject to the occupation tax under Section 12 of the Local Tax
Code) whose activity consists essentially of the sale of all kinds of
services for a fee regardless of whether or not the performance of
the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees.

‘Sec. 205. Contractor, proprietors or operators of dockyards, and

others. — A contractor’s tax of three per centum of the gross x x x
receipts is hereby imposed on the following:chanrob1es virtual 1aw
library
Petitioner contends that the respondent court erred in holding that
private respondent is not an "independent contractor" within the
purview of Section 205 of the Tax Code. To petitioner, the term
"independent contractor", as defined by the Code, encompasses all
kinds of services rendered for a fee and that the only exceptions are
the following:chanrob1es virtual 1aw library
‘a. Persons, association and corporations under contract for
embroidery and apparel for export and gross receipts of or from
pioneer industry registered with the Board of Investment under R.A.
No. 5186;chanroblesvirtual|awlibrary
b. Individuals occupation tax under Section 12 of the Local Tax Code
(under the old Section 182 [b] of the Tax Code); and
c. Regional or area headquarters established in the Philippines by
multinational corporations, including their alien executives, and
which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communication and
coordinating centers for their affiliates, subsidiaries or branches in
the Asia Pacific Region (Section 205 of the Tax Code).’
Petitioner thus submits that since private respondent falls under the
definition of an "independent contractor" and is not among the
aforementioned exceptions, private respondent is therefore subject
to the 3% contractor’s tax imposed under the same Code." 4
The Court of Appeals disagreed with the Petitioner Commissioner of
Internal Revenue and affirmed the assailed decision of the Court of
Tax Appeals. Unfazed, petitioner now asks us to reverse the CA
through this petition for review.
The Issues
Petitioner submits before us the following
issues:jgc:chanrobles.com.ph
"1. Whether or not private respondent falls under the purview of
independent contractor pursuant to Section 205 of the Tax Code
2. Whether or not private respondent is subject to 3% contractor’s
tax under Section 205 of the Tax Code." 5
In fine, these may be reduced to a single issue: Is Ateneo de Manila
University, through its auxiliary unit or branch — the Institute of
Philippine Culture — performing the work of an independent
contractor and, thus, subject to the three percent contractor’s tax
levied by then Section 205 of the National Internal Revenue Code?
The Court’s Ruling

The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue Code
germane to the case before us read:jgc:chanrobles.com.ph
"SEC. 205. Contractors, proprietors or operators of dockyards, and
others. — A contractor’s tax of three per centum of the gross
receipts is hereby imposed on the following:chanrob1es virtual 1aw
library
x x x Region.
(16) Business agents and other independent contractors, except
persons, associations and corporations under contract for
embroidery and apparel for export, as well as their agents and
contractors, and except gross receipts of or from a pioneer industry
registered with the Board of Investments under the provisions of
Republic Act No. 5186;
x x x
The term ‘independent contractors’ include persons (juridical or
natural) not enumerated above (but not including individuals
subject to the occupation tax under Section 12 of the Local Tax
Code) whose activity consists essentially of the sale of all kinds of
services for a fee regardless of whether or not the performance of
the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees.
The term ‘independent contractor’ shall not include regional or area
headquarters established in the Philippines by multinational
corporations, including their alien executives, and which
headquarters do not earn or derive income from the Philippines and
which act as supervisory, communications and coordinating centers
for their affiliates, subsidiaries or branches in the Asia-Pacific
The term ‘gross receipts’ means all amounts received by the prime
or principal contractor as the total contract price, undiminished by
amount paid to the subcontractor, shall be excluded from the
taxable gross receipts of the subcontractor."cralaw virtua1aw
library
Petitioner Commissioner of Internal Revenue contends that Private
Respondent Ateneo de Manila University "falls within the
definition" of an independent contractor and "is not one of those
mentioned as excepted" ; hence, it is properly a subject of the three
percent contractor’s tax levied by the foregoing provision of law. 6
Petitioner states that the "term ‘independent contractor’ is not
specifically defined so as to delimit the scope thereof, so much so
that any person who . . . renders physical and mental service for a
fee, is now indubitably considered an independent contractor liable
to 3% contractor’s tax." 7 According to petitioner, Ateneo has the
burden of proof to show its exemption from the coverage of the
law.chanrobles virtual lawlibrary
We disagree. Petitioner Commissioner of Internal Revenue erred in
applying the principles of tax exemption without first applying the
well-settled doctrine of strict interpretation in the imposition of
taxes. It is obviously both illogical and impractical to determine who
are exempted without first determining who are covered by the
aforesaid provision. The Commissioner should have determined first
if private respondent was covered by Section 205, applying the rule
of strict interpretation of laws imposing taxes and other burdens on
the populace, before asking Ateneo to prove its exemption
therefrom. The Court takes this occasion to reiterate the hornbook
doctrine in the interpretation of tax laws that" (a) statute will not be
construed as imposing a tax unless it does so clearly, expressly, and
unambiguously. . . . (A) tax cannot be imposed without clear and
express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with
peculiar strictness to tax laws and the provisions of a taxing act are
not to be extended by implication." 8 Parenthetically, in answering
the question of who is subject to tax statutes, it is basic that "in case
of doubt, such statutes are to be construed most strongly against
the government and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be imposed
beyond what statutes expressly and clearly import." 9
To fall under its coverage, Section 205 of the National Internal
Revenue Code requires that the independent contractor be engaged
in the business of selling its services. Hence, to impose the three
percent contractor’s tax on Ateneo’s Institute of Philippine Culture,
it should be sufficiently proven that the private respondent is
indeed selling its services for a fee in pursuit of an independent
business. And it is only after private respondent has been found
clearly to be subject to the provisions of Sec. 205 that the question
of exemption therefrom would arise. Only after such coverage is
shown does the rule of construction — that tax exemptions are to
be strictly construed against the taxpayer — come into play,
contrary to petitioner’s position. This is the main line of reasoning of
the Court of Tax Appeals in its decision, 10 which was affirmed by
the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Services of its Institute of Philippine Culture
After reviewing the records of this case, we find no evidence that
Ateneo’s Institute of Philippine Culture ever sold its services for a
fee to anyone or was ever engaged in a business apart from and
independently of the academic purposes of the university.
Stressing that "it is not the Ateneo de Manila University per se
which is being taxed," Petitioner Commissioner of Internal Revenue
Exhibit 1 BIR letter of authority no. 331844
contends that "the tax is due on its activity of conducting researches
for a fee. The tax is due on the gross receipts made in favor of IPC
pursuant to the contracts the latter entered to conduct researches
for the benefit primarily of its clients. The tax is imposed on the 2 Examiner’s Field Audit Report
exercise of a taxable activity. . . . [T]he sale of services of private
respondent is made under a contract and the various contracts
entered into between private respondent and its clients are almost 3 Adjustments to Sales/Receipts
of the same terms, showing, among others, the compensation and
terms of payment." 11 (Emphasis supplied.)
4 Letter-decision of BIR Commissioner

In theory, the Commissioner of Internal Revenue may be correct.

However, the records do not show that Ateneo’s IPC in fact
contracted to sell its research services for a fee. Clearly then, as
found by the Court of Appeals and the Court of Tax Appeals,
petitioner’s theory is inapplicable to the established factual milieu
obtaining in the instant case.
Bienvenido A. Tan Jr.
None of the foregoing evidence even comes close to purport to be
contracts between private respondent and third parties." 12

In the first place, the petitioner has presented no evidence to prove
its bare contention that, indeed contracts for sale of services were
ever entered into by the private Respondent. As appropriately
pointed out by the latter:jgc:chanrobles.com.ph
"An examination of the Commissioner’s Written Formal Offer of
Evidence in the Court of Tax Appeals shows that only the following
documentary evidence was presented:chanrob1es virtual 1aw
library
Moreover, the Court of Tax Appeals accurately and correctly
declared that the" funds received by the Ateneo de Manila
University are technically not a fee. They may however fall as gifts
or donations which are tax-exempt" as shown by private
respondent’s compliance with the requirement of Section 123 of
the National Internal Revenue Code providing for the exemption of
such gifts to an educational institution. 13
Respondent Court of Appeals elucidated on the ruling of the Court
of Tax Appeals:jgc:chanrobles.com.ph
 records do not show that in accepting sponsorship of research work,
IPC realized profits from such work. On the contrary, the evidence
"To our mind, private respondent hardly fits into the definition of an
shows that for about 30 years, IPC had continuously operated at a
‘independent contractor’.chanrobles.com : virtual law library
loss, which means that sponsored funds are less than actual
expenses for its research projects. That IPC has been operating at a
loss loudly bespeaks of the fact that education and not profit is the
For one, the established facts show that IPC, as a unit of the private motive for undertaking the research projects.
respondent, is not engaged in business. Undisputedly, private
respondent is mandated by law to undertake research activities to
maintain its university status. In fact, the research activities being
Then, too, granting arguendo that IPC made profits from the
carried out by the IPC is focused not on business or profit but on
sponsored research projects, the fact still remains that there is no
social sciences studies of Philippine society and culture. Since it can
proof that part of such earnings or profits was ever distributed as
only finance a limited number of IPC’s research projects, private
dividends to any stockholder, as in fact none was so distributed
respondent occasionally accepts sponsorship for unfunded IPC
because they accrued to the benefit of the private respondent
research projects from international organizations, private
which is a non-profit educational institution. "14
foundations and governmental agencies. However, such
sponsorships are subject to private respondent’s terms and
conditions, among which are, that the research is confined to topics
Therefore, it is clear that the funds received by Ateneo’s Institute of
consistent with the private respondent’s academic agenda; that no
Philippine Culture are not given in the concept of a fee or price in
proprietary or commercial purpose research is done; and that
exchange for the performance of a service or delivery of an object.
private respondent retains not only the absolute right to publish but
Rather, the amounts are in the nature of an endowment or
also the ownership of the results of the research conducted by the
donation given by IPC’s benefactors solely for the purpose of
IPC. Quite clearly, the aforementioned terms and conditions belie
sponsoring or funding the research with no strings attached. As
the allegation that private respondent is a contractor or is engaged
found by the two courts below, such sponsorships are subject to
in business.
IPC’s terms and conditions. No proprietary or commercial research
is done, and IPC retains the ownership of the results of the research,
including the absolute right to publish the same. The copyrights
For another, it bears stressing that private respondent is a non-
over the results of the research are owned by Ateneo and,
stock, non-profit educational corporation. The fact that it accepted
consequently, no portion thereof may be reproduced without its
sponsorship for IPC’s unfunded projects is merely incidental. For,
permission.15 The amounts given to IPC, therefore, may not be
the main function of the IPC is to undertake research projects under
deemed, it bears stressing, as fees or gross receipts that can be
the academic agenda of the private Respondent. Moreover, the
subjected to the three percent contractor’s tax.
It is also well to stress that the questioned transactions of Ateneo’s
Institute of Philippine Culture cannot be deemed either as a
contract of sale or a contract for a piece of work. "By the contract of
sale, one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to
pay therefor a price certain in money or its equivalent." 16 By its
very nature, a contract of sale requires a transfer of ownership.
Thus, Article 1458 of the Civil Code "expressly makes the obligation
to transfer ownership as an essential element of the contract of
sale, following modern codes, such as the German and the Swiss.
Even in the absence of this express requirement, however, most
writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero,
Colin and Capitant, have considered such transfer of ownership as
the primary purpose of sale. Perez and Alguer follow the same view,
stating that the delivery of the thing does not mean a mere physical
transfer, but is a means of transmitting ownership. Transfer of title
or an agreement to transfer it for a price paid or promised to be
paid is the essence of sale." 17 In the case of a contract for a piece
of work, "the contractor binds himself to execute a piece of work
for the employer, in consideration of a certain price or
compensation. . . . If the contractor agrees to produce the work
from materials furnished by him, he shall deliver the thing produced
to the employer and transfer dominion over the thing. . . ." 18
Ineludably, whether the contract be one of sale or one for a piece of
work, a transfer of ownership is involved and a party necessarily
walks away with an object. 19 In the case at bench, it is clear from
the evidence on record that there was no sale either of objects or
services because, as adverted to earlier, there was no transfer of
ownership over the research data obtained or the results of
research projects undertaken by the Institute of Philippine Culture.
Furthermore, it is clear that the research activity of the Institute of
Philippine Culture is done in pursuance of maintaining Ateneo’s
university status and not in the course of an independent business
of selling such research with profit in mind. This is clear from a
reading of the regulations governing universities:chanrob1es virtual
1aw library
‘31. In addition to the legal requisites an institution must meet,
among others, the following requirements before an application for
university status shall be considered:chanroblesvirtuallawlibrary:red
x x x
(e) The institution must undertake research and operate with a
competent qualified staff at least three graduate departments in
accordance with the rules and standards for graduate education.
One of the departments shall be science and technology. The
competence of the staff shall be judged by their effective teaching,
scholarly publications and research activities published in its school
journal as well as their leadership activities in the profession.
(f) The institution must show evidence of adequate and stable
financial resources and support, a reasonable portion of which
should be devoted to institutional development and research.
(Emphasis supplied)
x x x’
‘32. University status may be withdrawn, after due notice and
hearing, for failure to maintain satisfactorily the standards and
requirements therefor." 20
Petitioner’s contention that it is the Institute of Philippine Culture
that is being taxed and not the Ateneo is patently erroneous
because the former is not an independent juridical entity that is
separate and distinct from the latter.
Factual Findings and Conclusions of the Court of Tax Appeals
Affirmed by the Court of Appeals Generally Conclusive
In addition, we reiterate that the "Court of Tax Appeals is a highly
specialized body specifically created for the purpose of reviewing
tax cases. Through its expertise, it is undeniably competent to
determine the issue of whether" 21 Ateneo de Manila University
may be deemed a subject of the three percent contractor’s tax
"through the evidence presented before it." Consequently, "as a
matter of principle, this Court will not set aside the conclusion
reached by . . . the Court of Tax Appeals which is, by the very nature
of its function, dedicated exclusively to the study and consideration
of tax problems and has necessarily developed an expertise on the
subject unless there has been an abuse or improvident exercise of
authority . . ." 22 This point becomes more evident in the case
before us where the findings and conclusions of both the Court of
Tax Appeals and the Court of Appeals appear untainted by any
abuse of authority, much less grave abuse of discretion. Thus, we
find the decision of the latter affirming that of the former free from
any palpable error.
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture conducted
its research activities at a huge deficit of P1,624,014.00 as shown in
its statements of fund and disbursements for the period 1972 to
1985. 23 In fact, it was Ateneo de Manila University itself that had
funded the research projects of the institute, and it was only when
Ateneo could no longer produce the needed funds that the institute
sought funding from outside. The testimony of Ateneo’s Director for
Accounting Services, Ms. Leonor Wijangco, provides significant
insight on the academic and nonprofit nature of the institute’s
research activities done in furtherance of the university’s purposes,
as follows:jgc:chanrobles.com.ph
"Q Now it was testified to earlier by Miss Thelma Padero (Office
Manager of the Institute of Philippine Culture) that as far as grants
from sponsored research it is possible that the grant sometimes is
less than the actual cost. Will you please tell us in this case when
the actual cost is a lot less than the grant who shoulders the
additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development program as a university,
because a university has to have its own research institute." 24
So, why is it that Ateneo continues to operate and conduct
researches through its Institute of Philippine Culture when it
undisputedly loses not an insignificant amount in the process? The
plain and simple answer is that private respondent is not a
contractor selling its services for a fee but an academic institution
conducting these researches pursuant to its commitments to
education and, ultimately, to public service. For the institute to have
tenaciously continued operating for so long despite its accumulation
of significant losses, we can only agree with both the Court of Tax
Appeals and the Court of Appeals that "education and not profit is
[IPC’s] motive for undertaking the research projects."25cralaw:red
WHEREFORE, premises considered, the petition is DENIED and the
assailed Decision of the Court of Appeals is hereby AFFIRMED in
full.chanroblesvirtuallawlibrary
SO ORDERED.
[G.R. No. L-29485. November 21, 1980.]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. AYALA
SECURITIES CORPORATION and THE HONORABLE COURT OF TAX
APPEALS, Respondents.
DECISION
TEEHANKEE, J.:
Before the court is petitioner Commissioner of Internal Revenue’s
motion for reconsideration of the Court’s decision of April 8, 1976
wherein the Court affirmed in toto the appealed decision of
respondent Court of Tax Appeals, the dispositive portion of which
provides as follows:chanrobles.com.ph : virtual law library
"WHEREFORE, the decision of the respondent Commissioner of
Internal Revenue assessing petitioner the amount of P758,687.04 as
25% surtax and interest is reversed. Accordingly, said assessment of
respondent for 1955 is hereby cancelled and declared of no force
and effect. Without pronouncement as to costs."cralaw virtua1aw
library

This Court’s decision under reconsideration held that the
assessment made on February 21, 1961 by petitioner against
respondent corporation (and received by the latter on March 22,
1961) in the sum of P758,687.04 on its surplus of P2,758,442.37 for
its fiscal year ending September 30, 1955 fell under the five-year
prescriptive period provided in section 331 of the National Internal
Revenue Code and that the assessment had, therefore, been made
after the expiration of the said five-year prescriptive period and was
of no binding force and effect.
Petitioner has urged that
"A perusal of Sections 331 and 332(a) will reveal that they refer to a
tax, the basis of which is required by law to be reported in a return
such as for example, income tax or sales tax. However, the surtax
imposed by Section 25 of the Tax Code is not one such tax.
Accumulated surplus are never returned for tax purposes, as there
is no law requiring that such surplus be reported in a return for
purposes of the 25% surtax. In fact, taxpayers resort to all means
and devices to cover up the fact that they have unreasonably
accumulated surplus."cralaw virtua1aw library
Petitioner, therefore, submits that
"As there is no law requiring taxpayers to file returns of their
accumulated surplus, it is obvious that neither Section 331 nor
Section 332(a) of the Tax Code applies in a case involving the 25%
surtax imposed by Section 25 of the Tax Code . . ."cralaw virtua1aw
library
Petitioner cites the Court of Tax Appeals’ ruling in the earlier case of
United Equipment & Supply Company v. Commissioner of Internal
Revenue (CTA Case No. 1795, October 30, 1971) which was
appealed by petitioner taxpayer to this Court in G. R. No. L-35653
bearing the same title, which appeal was denied by this Court en
banc for lack of merit as per its Resolution of October 25, 1972. In
said case, the tax court squarely ruled that the provisions of
sections 331 and 332 of the National Internal Revenue Code for
prescriptive periods of five (5) and ten (10) years after the filing of
the return do not apply to the tax on the taxpayer’s unreasonably
accumulated surplus under section 25 of the Tax Code since no
return is required to be filed by law or by regulation on such unduly
accumulated surplus on earnings, reasoning as follows:chanrobles
virtualawlibrary chanrobles.com:chanrobles.com.ph
"In resisting the assessment amounting to P10,864.26 as
accumulated earnings tax for 1957, petitioner also invoked the
defense of prescription against the right of respondent to assess the
said tax. It is contended that since its income tax return for 1957
was filed in 1958, and with the clarification by respondent in his
letter dated May 14, 1963, that the amount sought to be collected
was petitioner’s surtax liability under Section 25 rather than
deficiency corporate income tax under Section 24 of the National
Internal Revenue Code, the assessment has already prescribed
under Section 331 of the same Code.
 nature of a penalty. (Helvering v. National Grocery Co., 304 U.S.
282). It would not be proper for the law to compel a corporation to
"Section 331 of the Revenue Code provides:jgc:chanrobles.com.ph
report improper accumulation of surplus. Accordingly, Section 331
limiting the right to assess internal revenue taxes within five years
from the date the return was filed or was due does not apply.
"SEC. 331. Period of limitation upon assessment and collection. —
Except as provided in the succeeding section, internal revenue taxes
shall be assessed within five years after the return was filed, and no
"Neither does Section 332 apply. Said Section
proceeding in court without assessment for the collection of such
provides:jgc:chanrobles.com.ph
taxes shall be begun after the expiration of such period. For the
purpose 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
"SEC. 332. Exceptions as to period of limitation of assessment and
day; Provided, That this limitation shall not apply to cases already
collection of taxes. — (a) In the case of a false or fraudulent return
investigated prior to the approval of this Code.
with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax may
be begun without assessment, at any time within ten years after the
"Obviously, Section 331 applies to assessment of National Internal
discovery of the falsity, fraud, or omission.
Revenue Taxes which requires the filing of returns. A return the
filing of which is necessary to start the running of the five-year
period for making an assessment, must be one which is required for
"(b) Where before the expiration of the time prescribed in the
the particular tax. Consequently, it has been held that the filing of
preceding section for the assessment of the tax, both the
an income tax return does not start the running of the statute of
Commissioner of Internal Revenue and the taxpayer have consented
limitation for assessment of the sales tax. (Butuan Sawmill, Inc. v.
in writing to its assessment after such time, the tax may be assessed
Court of Tax Appeals, G.R. No. L-20601, Feb. 28, 1966, 16 SCRA 277).
at any time prior to the expiration of the period agreed upon. The
period so agreed upon may be extended by subsequent agreements
in writing made before the expiration of the period previously
"Although petitioner filed an income tax return, no return was filed
agreed upon.
covering its surplus profits which were improperly accumulated. In
fact, no return could have been filed, and the law could not possibly
require, for obvious reasons, the filing of a return covering
"(c) Where the assessment of any internal revenue tax has been
unreasonable accumulation of corporate surplus profits. A tax
made within the period of limitation above prescribed such tax may
imposed upon unreasonable accumulation of surplus is in the
be collected by distraint or levy by a proceeding in court, but only if
begun (1) within five years after the assessment of the tax, or (2)
prior to the expiration of any period for collection agreed upon in
writing by the Commissioner of Internal Revenue and the taxpayer
before the expiration of such five-year period. The period so agreed
upon may be extended by subsequent agreements in writing made
before the expiration of the period previously agreed upon.
"It will be noted that Section 332 has reference to national internal
revenue taxes which require the filing of returns. This is Implied
from the provision that the ten-year period for assessment specified
therein treats of the filing of a false or fraudulent return or of a
failure to file a return. There can be no failure or omission to file a
return where no return is required to be filed by law or by
regulations. It is, therefore, our opinion that the ten-year period for
making an assessment under Section 332 does not apply to internal
revenue taxes which do not require the filing of a return.
"It is well settled limitations upon the right of the government to
assess and collect taxes will not be presumed in the absence of clear
legislation to the contrary. The existence of a time limit beyond
which the government may recover unpaid taxes is purely
dependent upon some express statutory provision, (51 Am. Jur. 867;
10 Mertens Law on Federal Income Taxation, par. 57. 02.). It follows
that in the absence of express statutory provision, the right of the
government to assess unpaid taxes is imprescriptible. Since there is
no express statutory provision limiting the right of the
Commissioner of Internal Revenue to assess the tax on
unreasonable accumulation of surplus provided in Section 25 of the
Revenue Code, said tax may be assessed at any time." (Emphasis
copied)
Such ruling was in effect upheld by this Court en banc upon its
dismissal of the taxpayer’s appeal for lack of merit as above
stated.chanrobles law library : red
The Court is persuaded by the fundamental principle invoked by
petitioner that limitations upon the right of the government to
assess and collect taxes will not be presumed in the absence of clear
legislation to the contrary and that where the government has not
by express statutory provision provided a limitation upon its right to
assess unpaid taxes, such right is imprescriptible.
The Court, therefore, reconsiders its ruling in its decision’ under
reconsideration that the right to assess and collect the assessment
in question had prescribed after five years, and instead rules that
there is no such time limit on the right of the Commissioner of
Internal Revenue to assess the 25% tax on unreasonably
accumulated surplus provided in section 25 of the Tax Code, since
there is no express statutory provision limiting such right or
providing for its prescription. The underlying purpose of the
additional tax in question on a corporation’s improperly
accumulated profits or surplus is as set forth in the text of section
25 of the Tax Code itself 1 to avoid the situation where a
corporation unduly retains its surplus earnings instead of declaring
and paying dividends to its shareholders or members who would
then have to pay the income tax due on such dividends received by
them. The record amply shows that respondent corporation is a
mere holding company of its shareholders through its mother
company, a registered co-partnership then set up by the individual
What is the materiality of the question?
shareholders belonging to the same family and that the prima facie
evidence and presumption set up by the Tax Code, therefore,
applied without having been adequately rebutted by the
respondent corporation.chanrobles.com : virtual law library "Atty. Garces

Thus, Mr. Lamberto J. Cabral, the accountant of the corporation, We want to prove to this Honorable Court that Ayala Securities
testified before the court as follows:jgc:chanrobles.com.ph Corporation is a holding or investment company, the parent
company being Ayala and Company.

"Atty. Garces
"Judge Alvarez

The investigation Your Honor, shows that for the year 1955, the
Ayala Securities Corporation had 175,000 outstanding shares of Witness may answer.
stock and out of these shares of Ayala Securities Corporation, the
Ayala and Company owned 174,996 shares of stock.
"A. I think so; yes.

"Q. Is that right, Mr. Cabral?

"Q. And Ayala and Company is owned almost wholly by the Zobel
Family and the Ayala Family?
"Atty. Ong

"Atty. Ong
Objection, Your Honor, on the materiality of the question.

If Your Honor please, objection again on the materiality. What

"Judge Alvarez would counsel for the respondent prove on this point?
"Atty. Garces

"Q. As of September 30, 1955 when the Ayala Securities

Corporation filed its income tax return, were the officers of the
Same purpose, Your Honor; to prove that Ayala Securities
Ayala Securities Corporation and the Ayala and Company housed in
Corporation is a mere investment or holding company.
the same building?

"Atty. Ong
"A. Yes, sir; they were.

What is the materiality of the case if it is a mere investment

"Q. And also are the employees of the Ayala Securities Corporation
company. In fact, we are here in court to prove the reasonableness
and the Ayala and Company the same — meaning that the
or unreasonableness of the accumulation of profit. I think counsel
employees of the Ayala Securities Corporation are also the
for the respondent is trying to harp on presumption; but actually we
employees of the Ayala and Company?
will not be delving on presumption but on actual facts proving the
reasonableness of the accumulation based on actual evidence.

"A. At the time, if I remember right, Ayala and Company was the
operating company and the employees were the employees of the
"Judge Alvarez.
Ayala and Company; (t.s.n., pp. 32-37)

In order to determine the reasonableness or unreasonableness,

Another witness, Mr. Salvador J. Lorayes, the Secretary and head of
there must be a basis. Witness will have to answer the question.
the Legal Department of the corporation, also testified
that:chanrob1es virtual 1aw library

"A. Yes.
Judge Alvarez questions

x x x
"Q. May we know from you whether Ayala Securities Corporation is
an affiliate of Ayala and Company?
"A. Yes, Your Honor.
"Q. Do we understand from you that Ayala and Company is the
mother corporation of this affiliate?
"A. That is correct.
"Q. And that the policy of Ayala Securities Corporation is practically
governed by the officers or partners of Ayala and Company?
"A. They have a strong influence over the policy of Ayala Securities
Corporation.
"Q. So that whatever is decided by the partners of Ayala and
Company for a certain investment or project would also be followed
by Ayala Securities Corporation?
"A. If the project is assigned to Ayala Securities Corporation, it will
be followed by Ayala Securities Corporation; if to another affiliate,
no (t.s.n., pp. 149-150). . . ." chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph
Respondent corporation was therefore fully shown to fall under
Revenue Regulation No. 2 implementing the provisions of the
income tax law which provides on holding and investment
companies that
"SEC. 20. Holding and Investment Companies. — A corporation
having practically no activities except holding property, and
collecting the income therefrom or investing therein shall be
considered a holding company within the meaning of section
25."cralaw virtua1aw library
Petitioner commissioner’s plausible alternative contention is that
even if the 25% surtax were to be deemed subject to prescription,
computed from the filing of the income tax return in 1955, the
intent to evade payment of the surtax is an inherent quality of the
violation and the return filed must necessarily partake of a false and
or fraudulent character which would make applicable the 10-year
prescriptive period provided in section 332(a) of the Tax Code and
since the assessment was made in 1961 (the sixth year), the
assessment was clearly within the 10-year prescriptive period. The
Court sees no necessity, however, for ruling on this point in view of
its adherence to the ruling in the earlier case of United Equipment &
Supply Co., supra, holding that the 25% surtax is not subject to any
statutory prescriptive period.
ACCORDINGLY, the Court’s decision of April 8, 1976 is set aside and
in lieu thereof, judgment is hereby rendered ordering respondent
corporation to pay the assessment in the sum of P758,687.04 as
25% surtax on its unreasonably accumulated surplus, plus the 5%
surcharge and 1% monthly interest thereon, pursuant to section 51
(e) of the National Internal Revenue Code, as amended by R. A.
2343. With Costs.chanrobles virtual lawlibrary
Makasiar, Fernandez, Guerrero and De Castro, *, JJ., concur.
Melencio-Herrera, J., took no part.
[G.R. No. L-31092. February 27, 1987.]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN
GOTAMCO & SONS, INC. and THE COURT OF TAX APPEALS,
Respondents.
SYLLABUS
1. POLITICAL AND INTERNATIONAL LAW; HOST AGREEMENTS MAY
BE ENTERED INTO BY THE CHIEF EXECUTIVE WITHOUT THE
CONCURRENCE OF THE LEGISLATURE. — While treaties are required
to be ratified by the Senate under the Constitution, less formal
types of international agreements may be entered into by the Chief
Executive and become binding without the concurrence of the
legislative body. The Host Agreement comes within the latter
category; it is a valid and binding international agreement even
without the concurrence of the Philippine Senate. The privileges
and immunities granted to the WHO under the Host Agreement
have been recognized by this Court as legally binding on Philippine
authorities.
2. TAXATION; CONTRACTOR’S TAX; AN INDIRECT TAX PAYABLE BY
THE OWNER OF THE BUILDING. — In context, direct taxes are those
are demanded from the very person who, it is intended or desired,
should pay them; while indirect taxes are those that are demanded
in the first instance from one person in the expectation and
intention that he can shift the burden to someone else (Pollock v.
Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39 Law. 759.) The
contractor’s tax is of course payable by the contractor but in the last
analysis it is the owner of the building that shoulders the burden of
the tax because the same is shifted by the contractor to the owner
as a matter of self-preservation. Thus, it is an indirect tax. And it is
an indirect tax on the WHO because, although it is payable by the
petitioner, the latter can shift its burden on the WHO. In the last
analysis the contractor and it certainly cannot be said that ‘this tax
has no bearing upon the World Health Organization.
3. ID.; ID.; ID.; The Host Agreement, in specifically exempting to
WHO form "indirect taxes", contemplates taxes which, although not
imposed upon or paid by the Organization directly, form part of the
price paid or to be paid by it. This is made clear in Section 12 of the
Host Agreement which provides: "While the Organization will not,
as general rule, in the case of minor purchases, claim exemption
from excise duties, and from taxes on the sale of movable and
immovable property which from part of the price to be paid,
nevertheless, when the Organization is making important purchases
for official use of property on which such duties and taxes have
been charged or are chargeable the Government of the Republic of
the Philippines shall make appropriate administrative arrangements
for the remission or return of the amount of duty or tax." (Emphasis
supplied). The above-quoted provision, although referring only to
purchases made by the WHO, elucidates the clear intention of the
Agreement to exempt the WHO from "indirect" taxation. The
certification issued by the WHO, dated January 20, 1960, sought
exemption of the contractor, Gotamco, from any taxes in
connection of the construction of the WHO office building. The 3%
contractor’s tax would be within the category and should be viewed
as a form of an "direct tax" on the Organization, as the payment
thereof or its inclusion in the bid price would have meant an
increase in the construction cost of the building.
DECISION
YAP, J.:
The question involved in this petition is whether respondent John
Gotamco & Sons, Inc. should pay the 3% contractor’s tax under
Section 191 of the National Internal Revenue Code on the gross
receipts it realized from the construction of the World Health
Organization office building in Manila.chanrobles law library : red
The World Health Organization (WHO for short) is an international
organization which has a regional office in Manila. As an
international organization, it enjoys privileges and immunities which
are defined more specifically in the Host Agreement entered into
between the Republic of the Philippines and the said Organization
on July 22,1951. Section 11 of that Agreement provides, inter alia,
that "the Organization, its assets, income and other properties shall
be: (a) exempt from all direct and indirect taxes. It is understood,
however, that the Organization will not claim exemption from taxes
which are, in fact, no more than charges for public utility services; . .
."cralaw virtua1aw library
When the WHO decided to construct a building to house its own
offices, as well as the other United Nations offices stationed in
Manila, it entered into a further agreement with the Government of
the Republic of the Philippines on November 26, 1957. This
agreement contained the following provision (Article III, paragraph
2):jgc:chanrobles.com.ph
"The Organization may import into the country materials and
fixtures required for the construction free from all duties and taxes
and agrees not to utilize any portion of the international reserves of
the Government."cralaw virtua1aw library
Article VIII of the above-mentioned agreement referred to the Host
Agreement concluded on July 22, 1951 which granted the
Organization exemption from all direct and indirect taxes.
In inviting bids for the construction of the building, the WHO
informed the bidders that the building to be constructed belonged
to an international organization with diplomatic status and thus
exempt from the payment of all fees, licenses, and taxes, and that
therefore their bids "must take this into account and should not
include items for such taxes, licenses and other payments to
Government agencies."cralaw virtua1aw library
The construction contract was awarded to respondent John
Gotamco & Sons, Inc. (Gotamco for short) on February 10, 1958 for
the stipulated price of P370,000.00, but when the building was
completed the price reached a total of P452,544.00.chanrobles law
library : red
Sometime in May 1958, the WHO received an opinion from the
Commissioner of the Bureau of Internal Revenue stating that "as the
3% contractor’s tax is an indirect tax on the assets and income of
the Organization, the gross receipts derived by contractors from
their contracts with the WHO for the construction of its new
building, are exempt from tax in accordance with . . . the Host
Agreement." Subsequently, however, on June 3, 1958, the
Commissioner of Internal Revenue reversed his opinion and stated
that "as the 3% contractor’s tax is not a direct nor an indirect tax on
the WHO, but a tax that is primarily due from the contractor, the
same is not covered by . . . the Host Agreement."cralaw virtua1aw
library
On January 2, 1960, the WHO issued a certification stating, inter
alia,:jgc:chanrobles.com.ph
"When the request for bids for the construction of the World Health
Organization office building was called for, contractors were
informed that there would be no taxes or fees levied upon them for
their work in connection with the construction of the building as
this will be considered an indirect tax to the Organization caused by
the increase of the contractor’s bid in order to cover these taxes.
This was upheld by the Bureau of Internal Revenue and it an be
stated that the contractors submitted their bids in good faith with
the exemption in mind.
The undersigned, therefore, certifies that the bid of John Gotamco
& Sons, made under the condition stated above, should be
exempted from any taxes in connection with the construction of the
World Health Organization office building."cralaw virtua1aw library
On January 17, 1961, the Commissioner of Internal Revenue sent a
letter of demand to Gotamco demanding payment of P16,970.40,
representing the 3% contractor’s tax plus surcharges on the gross
receipts it received from the WHO in the construction of the latter’s
building.chanrobles virtual lawlibrary
Respondent Gotamco appealed the Commissioner’s decision to the
Court of Tax Appeals, which after trial rendered a decision, in favor
We agree with the Court of Tax Appeals in rejecting this contention
of Gotamco and reversed the Commissioner’s decision. The Court of
of the petitioner. Said the respondent court:chanrobles
Tax Appeal’s decision is now before us for review on certiorari.
virtualawlibrary chanrobles.com:chanrobles.com.ph

In his first assignment of error, petitioner questions the entitlement

"In context, direct taxes are those that are demanded from the very
of the WHO to tax exemption, contending that the Host Agreement
person who, it is intended or desired, should pay them; while
is null and void, not having been ratified by the Philippine Senate as
indirect taxes are those that are demanded in the first instance
required by the Constitution. We find no merit in this contention.
from one person in the expectation and intention that he can shift
While treaties are required to be ratified by the Senate under the
the burden to someone else. (Pollock v. Farmers, L & T Co., 1957 US
Constitution, less formal types of international agreements may be
429,15 S. Ct. 673, 39 Law. Ed. 759.) The contractor’s tax is of course
entered into by the Chief Executive and become binding without the
payable by the contractor but in the last analysis it is the owner of
concurrence of the legislative body. 1 The Host Agreement comes
the building that shoulders the burden of the tax because the same
within the latter category; it is a valid and binding international
is shifted by the contractor to the owner as a matter of self-
agreement even without the concurrence of the Philippine Senate.
preservation. Thus, it is an indirect tax. And it is an indirect tax on
The privileges and immunities granted to the WHO under the Host
the WHO because, although it is payable by the petitioner, the latter
Agreement have been recognized by this Court as legally binding on
can shift its burden on the WHO. In the last analysis it is the WHO
Philippine authorities. 2
that will pay the tax indirectly through the contractor and it
certainly cannot be said that `this tax has no bearing upon the
World Health Organization.’"
Petitioner maintains that even assuming that the Host Agreement
granting tax exemption to the WHO is valid and enforceable, the 3%
contractor’s tax assessed on Gotamco is not an "indirect tax" within
Petitioner claims that under the authority of the Philippine
its purview. Petitioner’s position is that the contractor’s tax "is in
Acetylene Company versus Commissioner of Internal Revenue, Et
the nature of an excise tax which is a charge imposed upon the
Al., 3 the 3% contractor’s tax falls directly on Gotamco and cannot
performance of an act, the enjoyment of a privilege or the engaging
be shifted to the WHO. The Court of Tax Appeals, however, held
in an occupation . . . It is a tax due primarily and directly on the
that the said case is not controlling in this case, since the Host
contractor, not on the owner of the building. Since this tax has no
Agreement specifically exempts the WHO from "indirect taxes." We
bearing upon the WHO, it cannot be deemed an indirect taxation
agree. The Philippine Acetylene case involved a tax on sales of
upon it."cralaw virtua1aw library
goods which under the law had to be paid by the manufacturer or
producer; the fact that the manufacturer or producer might have
added the amount of the tax to the price of the goods did not make
the sales tax "a tax on the purchaser." The Court held that the sales
tax must be paid by the manufacturer or producer even if the sale is
made to tax-exempt entities like the National Power Corporation,
an agency of the Philippine Government, and to the Voice of
America, an agency of the United States Government.
The Host Agreement, in specifically exempting the WHO from
"indirect taxes," contemplates taxes which, although not imposed
upon or paid by the Organization directly, form part of the price
paid or to be paid by it. This is made clear in Section 12 of the Host
Agreement which provides:jgc:chanrobles.com.ph
"While the Organization will not, as a general rule, in the case of
minor purchases, claim exemption from excise duties, and from
taxes on the sale of movable and immovable property which form
part of the price to be paid, nevertheless, when the Organization is
making important purchases for official use of property on which
such duties and taxes have been charged or are chargeable the
Government of the Republic of the Philippines shall make
appropriate administrative arrangements for the remission or
return of the amount of duty or tax." (Emphasis supplied).
The above-quoted provision, although referring only to purchases
made by the WHO, elucidates the clear intention of the Agreement
to exempt the WHO from "indirect" taxation.
The certification issued by the WHO, dated January 20, 1960, sought
exemption of the contractor, Gotamco, from any taxes in
connection with the construction of the WHO office building. The
3% contractor’s tax would be within this category and should be
viewed as a form of an "indirect tax" on the Organization, as the
payment thereof or its inclusion in the bid price would have meant
an increase in the construction cost of the building.
Accordingly, finding no reversible error committed by the
respondent Court of Tax Appeals, the appealed decision is hereby
affirmed.
SO ORDERED.
G.R. No. 125704 August 28, 1998
PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and
THE COURT OF TAX APPEALS, respondents.
ROMERO, J.:
Petitioner Philex Mining Corp. assails the decision of the Court of
Appeals promulgated on April 8, 1996 in CA-G.R. SP No. 36975 1
affirming the Court of Tax Appeals decision in CTA Case No. 4872
dated March 16, 1995 2 ordering it to pay the amount of ————— ————— —————— ——————
P110,677,668.52 as excise tax liability for the period from the 2nd
quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest
from August 6, 1994 until fully paid pursuant to Sections 248 and 47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39
249 of the Tax Code of 1977.

————— ————— —————— ——————

The facts show that on August 5, 1992, the BIR sent a letter to Philex
asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of
1991 as well as the 1st and 2nd quarter of 1992 in the total amount 1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82
of P123,821.982.52 computed as follows: 30,887,982.25

PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL 2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18
EXCISE 24,805,194.88

TAX DUE ————— ————— —————— ——————

2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13
19,517,021.91

————— ————— —————— ——————

3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09
21,721,845.60
90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 3

4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72

26,889,937.88 ========= ========= ========= =========
In a letter dated August 20, 1992, 4 Philex protested the demand for
payment of the tax liabilities stating that it has pending claims for
VAT input credit/refund for the taxes it paid for the years 1989 to
1991 in the amount of P119,977,037.02 plus interest. Therefore
these claims for tax credit/refund should be applied against the tax
liabilities, citing our ruling in Commissioner of Internal Revenue v.
Itogon-Suyoc Mines, Inc. 5
In reply, the BIR, in a letter dated September 7, 1992, 6 found no
merit in Philex's position. Since these pending claims have not yet
been established or determined with certainty, it follows that no
legal compensation can take place. Hence, the BIR reiterated its
demand that Philex settle the amount plus interest within 30 days
from the receipt of the letter.
In view of the BIR's denial of the offsetting of Philex's claim for VAT
input credit/refund against its excise tax obligation, Philex raised
the issue to the Court of Tax Appeals on November 6, 1992. 7 In the
course of the proceedings, the BIR issued Tax Credit Certificate SN
001795 in the amount of P13,144,313.88 which, applied to the total
tax liabilities of Philex of P123,821,982.52; effectively lowered the
latter's tax obligation to P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered
Philex to pay the remaining balance of P110,677,688.52 plus
interest, elucidating its reason, to wit:
Thus, for legal compensation to take place, both obligations must be
liquidated and demandable. "Liquidated" debts are those where the
exact amount has already been determined (PARAS, Civil Code of
the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the
instant case, the claims of the Petitioner for VAT refund is still
pending litigation, and still has to be determined by this Court
(C.T.A. Case No. 4707). A fortiori, the liquidated debt of the
Petitioner to the government cannot, therefore, be set-off against
the unliquidated claim which Petitioner conceived to exist in its
favor (see Compañia General de Tabacos vs. French and Unson, No.
14027, November 8, 1918, 39 Phil. 34). 8
Moreover, the Court of Tax Appeals ruled that "taxes cannot be
subject to set-off on compensation since claim for taxes is not a
debt or contract." 9 The dispositive portion of the CTA decision 10
provides:
In all the foregoing, this Petition for Review is hereby DENIED for
lack of merit and Petitioner is hereby ORDERED to PAY the
Respondent the amount of P110,677,668.52 representing excise tax
liability for the period from the 2nd quarter of 1991 to the 2nd
quarter of 1992 plus 20% annual interest from August 6, 1994 until
fully paid pursuant to Section 248 and 249 of the Tax Code, as
amended.
Aggrieved with the decision, Philex appealed the case before the
Court of Appeals docketed as CA-GR. CV No. 36975. 11 Nonetheless,
on April 8, 1996, the Court of Appeals a Affirmed the Court of Tax
Appeals observation. The pertinent portion of which reads: 12
1989 007732 11 July 1996 P37,322,799.19

WHEREFORE, the appeal by way of petition for review is hereby

1990-1991 007751 16 July 1996 P84,662,787.46
DISMISSED and the decision dated March 16, 1995 is AFFIRMED.

1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

Philex filed a motion for reconsideration which was, nevertheless,
denied in a Resolution dated July 11, 1996. 13

In view of the grant of its VAT input credit/refund, Philex now

contends that the same should, ipso jure, off-set its excise tax
However, a few days after the denial of its motion for
liabilities 15 since both had already become "due and demandable,
reconsideration, Philex was able to obtain its VAT input
as well as fully liquidated;" 16 hence, legal compensation can
credit/refund not only for the taxable year 1989 to 1991 but also for
properly take place.
1992 and 1994, computed as follows: 14

We see no merit in this contention.

Period Covered Tax Credit Date

In several instances prior to the instant case, we have already made

By Claims For Certificate of
VAT refund/credit Number Issue Amount
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01
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. 17 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. 18 We find no cogent reason
to deviate from the aforementioned distinction.

1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61

Prescinding from this premise, in Francia v. Intermediate Appellate
Court, 19 we categorically held that taxes cannot be subject to set-
It is important to note, that the premise of our ruling in the
off or compensation, thus:
aforementioned case was anchored on Section 51 (d) of the
National Revenue Code of 1939. However, when the National
Internal Revenue Code of 1977 was enacted, the same provision
We have consistently ruled that there can be no off-setting of taxes
upon which the Itogon-Suyoc pronouncement was based was
against the claims that the taxpayer may have against the
omitted. 22 Accordingly, the doctrine enunciated in Itogon-Suyoc
government. A person cannot refuse to pay a tax on the ground that
cannot be invoked by Philex.
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.
Despite the foregoing rulings clearly adverse to Philex's position, it
asserts that the imposition of surcharge and interest for the non-
payment of the excise taxes within the time prescribed was
The ruling in Francia has been applied to the subsequent case of
unjustified. Philex posits the theory that it had no obligation to pay
Caltex Philippines, Inc. v. Commission on Audit, 20 which reiterated
the excise tax liabilities within the prescribed period since, after all,
that:
it still has pending claims for VAT input credit/refund with BIR. 23

. . . a taxpayer may not offset taxes due from the claims that he may
We fail to see the logic of Philex's claim for this is an outright
have against the government. Taxes cannot be the subject of
disregard of the basic principle in tax law that taxes are the lifeblood
compensation because the government and taxpayer are not
of the government and so should be collected without unnecessary
mutually creditors and debtors of each other and a claim for taxes is
hindrance. 24 Evidently, to countenance Philex's whimsical reason
not such a debt, demand, contract or judgment as is allowed to be
would render ineffective our tax collection system. Too simplistic, it
set-off.
finds no support in law or in jurisprudence.

Further, Philex's reliance on our holding in Commissioner of Internal

To be sure, we cannot allow Philex to refuse the payment of its tax
Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a
liabilities on the ground that it has a pending tax claim for refund or
pending refund may be set off against an existing tax liability even
credit against the government which has not yet been granted. It
though the refund has not yet been approved by the Commissioner,
must be noted that a distinguishing feature of a tax is that it is
21 is no longer without any support in statutory law.
compulsory rather than a matter of bargain. 25 Hence, a tax does
not depend upon the consent of the taxpayer. 26 If any taxpayer
can defer the payment of taxes by raising the defense that it still has
a pending claim for refund or credit, this would adversely affect the
government revenue system. A taxpayer cannot refuse to pay his
taxes when they fall due simply because he has a claim against the
government or that the collection of the tax is contingent on the
result of the lawsuit it filed against the government. 27 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.
Corollarily, the fact that Philex has pending claims for VAT input
claim/refund with the government is immaterial for the imposition
of charges and penalties prescribed under Section 248 and 249 of
the Tax Code of 1977. The payment of the surcharge is mandatory
and the BIR is not vested with any authority to waive the collection
thereof. 28 The same cannot be condoned for flimsy reasons, 29
similar to the one advanced by Philex in justifying its non-payment
of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the
National Internal Revenue Code of 1977, which requires the refund
of input taxes within 60 days, 31 when it took five years for the
latter to grant its tax claim for VAT input credit/refund. 32
In this regard, we agree with Philex. While there is no dispute that a
claimant has the burden of proof to establish the factual basis of his
or her claim for tax credit or refund, 33 however, once the claimant
has submitted all the required documents it is the function of the
BIR to assess these documents with purposeful dispatch. After all,
since taxpayers owe honestly to government it is but just that
government render fair service to the taxpayers. 34
In the instant case, the VAT input taxes were paid between 1989 to
1991 but the refund of these erroneously paid taxes was only
granted in 1996. Obviously, had the BIR been more diligent and
judicious with their duty, it could have granted the refund earlier.
We need not remind the BIR that simple justice requires the speedy
refund of wrongly-held taxes. 35 Fair dealing and nothing less, is
expected by the taxpayer from the BIR in the latter's discharge of its
function. As aptly held in Roxas v. Court of Tax Appeals: 36
The power of taxation is sometimes called also the power to
destroy. Therefore it should be exercised with caution to minimize
injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that
lays the golden egg" And, in order to maintain the general public's
trust and confidence in the Government this power must be used
justly and not treacherously.
Despite our concern with the lethargic manner by which the BIR
handled Philex's tax claim, it is a settled rule that in the
performance of governmental function, the State is not bound by
the neglect of its agents and officers. Nowhere is this more true
than in the field of taxation. 37 Again, while we understand Philex's
predicament, it must be stressed that the same is not a valid reason
for the non-payment of its tax liabilities.
To be sure, this is not to state that the taxpayer is devoid of remedy
against public servants or employees, especially BIR examiners who,
in investigating tax claims are seen to drag their feet needlessly.
First, if the BIR takes time in acting upon the taxpayer's claim for
refund, the latter can seek judicial remedy before the Court of Tax
Appeals in the manner prescribed by law. 38 Second, if the inaction
can be characterized as willful neglect of duty, then recourse under
the Civil Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides:
Art. 27. Any person suffering material or moral loss because a public
servant or employee refuses or neglects, without just cause, to
perform his official duty may file an action for damages and other
relief against the latter, without prejudice to any disciplinary action
that may be taken.
More importantly, Section 269 (c) of the National Internal Revenue
Act of 1997 states:
xxx xxx xxx
(c) Wilfully neglecting to give receipts, as by law required for any
sum collected in the performance of duty or wilfully neglecting to
perform, any other duties enjoyed by law.
Simply put, both provisions abhor official inaction, willful neglect
and unreasonable delay in the performance of official duties. 39 In
no uncertain terms must we stress that every public employee or
servant must strive to render service to the people with utmost
diligence and efficiency. Insolence and delay have no place in
government service. The BIR, being the government collecting arm,
must and should do no less. It simply cannot be apathetic and
laggard in rendering service to the taxpayer if it wishes to remain
true to its mission of hastening the country's development. We take
judicial notice of the taxpayer's generally negative perception
towards the BIR; hence, it is up to the latter to prove its detractors
wrong.
In sum, while we can never condone the BIR's apparent callousness
in performing its duties, still, the same cannot justify Philex's non-
payment of its tax liabilities. The adage "no one should take the law
into his own hands" should have guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED. The assailed decision of the Court of Appeals dated
April 8, 1996 is hereby AFFIRMED.
SO ORDERED.