G.R. No.
L-9637             April 30, 1957 paid to the defendant under protest the said permit and license fees
AMERICAN BIBLE SOCIETY, plaintiff-appellant,
vs.
CITY OF MANILA, defendant-appellee.
City Fiscal Eugenio Angeles and Juan Nabong for appellant.
Assistant City Fiscal Arsenio Nañawa 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.
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. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364,
and 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).
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
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.
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, 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.
Before trial the parties submitted the following stipulation of facts:
COME NOW the parties in the above-entitled case, thru
their undersigned attorneys and respectfully submit the
following stipulation of facts:
1. That the plaintiff sold for the use of the purchasers at its
principal 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, 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 were as follows:
Quarter Amount of Sales 1st quarter 1951 37,841.21

4th quarter 1945 P1,244.21 2nd quarter 1951 29,103.98

1st quarter 1946 2,206.85 3rd quarter 1951 20,181.10

2nd quarter 1946 1,950.38 4th quarter 1951 22,968.91

3rd quarter 1946 2,235.99 1st quarter 1952 23,002.65

4th quarter 1946 3,256.04 2nd quarter 1952 17,626.96

1st quarter 1947 13,241.07 3rd quarter 1952 17,921.01

2nd quarter 1947 15,774.55 4th quarter 1952 24,180.72

3rd quarter 1947 14,654.13 1st quarter 1953 29,516.21

4th quarter 1947 12,590.94

2. That the parties hereby reserve the right to present
1st quarter 1948 11,143.90 evidence of other facts not herein stipulated.

2nd quarter 1948 14,715.26 WHEREFORE, it is respectfully prayed that this case be set
for hearing so that the parties may present further evidence
3rd quarter 1948 38,333.83 on their behalf. (Record on Appeal, pp. 15-16).
4th quarter 1948 16,179.90
When the case was set for hearing, plaintiff proved, among other
1st quarter 1949 23,975.10 things, that it has been in existence in the Philippines since 1899,
and that its parent society is in New York, United States of
2nd quarter 1949 17,802.08 America; that its, contiguous real properties located at Isaac Peral
are exempt from real estate taxes; and that it was never required to
3rd quarter 1949 16,640.79 pay any municipal license fee or tax before the war, nor does the
4th quarter 1949 15,961.38 American Bible Society in the United States pay any license fee or
sales tax for the sale of bible therein. Plaintiff further tried to
1st quarter 1950 18,562.46 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
2nd quarter 1950 21,816.32 in order to maintain its operating cost it obtains substantial
remittances from its New York office and voluntary contributions
3rd quarter 1950 25,004.55 and gifts from certain churches, both in the United States and in
the Philippines, which are interested in its missionary work.
4th quarter 1950 45,287.92
Regarding plaintiff's contention of 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 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 here at P15 each; and those
bearing the price of $11 each are sold here at P22 each, clearly
show that plaintiff's contention that it never makes any profit from
the sale of its bible, is evidently untenable.
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).
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.
Appellant contends that the lower Court erred:
1. In holding that Ordinances Nos. 2529 and 3000, as
respectively amended, are not unconstitutional;
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;
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; and
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.
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.
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.
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     xxx
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.
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.
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.
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.
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.
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.
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.
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.
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.
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". (Tañada
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.
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:
"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 on property
used or employed in connection with activities. It is one
thing to impose a tax on the income or property of a
preacher. It is quite another to exact a tax from him for the
privilege of delivering a sermon. The tax imposed by the
City of Jeannette is a flat license tax, payment of which is a
condition of the exercise of these constitutional privileges.
The power to tax the exercise of a privilege is the power to
control or suppress its enjoyment. . . . Those who can tax
the exercise of this religious practice can make its exercise
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 ancient and honorable manner
would thus be denied the needy. . . .
It is contended however that the fact that the license tax can
suppress or control this activity is unimportant if it does not
do so. But that is to disregard the nature of this tax. It is a
license tax — a flat tax imposed on the exercise of a
privilege granted by the Bill of Rights . . . The power to
impose a license tax on the exercise of 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 tax levied and collected as a
condition to the pursuit of activities 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."
Nor could dissemination of religious information be
conditioned upon the approval of an official or manager
even if the town were owned by a corporation as held in the
 case of Marsh vs. State of Alabama (326 U.S. 501), or by
the United States itself as held in the case of Tucker vs.
Texas (326 U.S. 517). In the former case the Supreme
Court expressed the opinion that the right to enjoy freedom
of the press and religion occupies a preferred position as
against the constitutional right of property owners.
"When we balance the constitutional rights of owners of
property against those of the people to enjoy freedom of
press and religion, 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 public, is not
sufficient to justify the State's permitting a corporation to
govern a community of citizens so as to restrict their
fundamental liberties and the enforcement of such restraint
by the application of a State statute." (Tañada and Fernando
on the Constitution of the Philippines, Vol. 1, 4th ed., p.
304-306).
Section 27 of Commonwealth Act No. 466, otherwise known as
the National Internal Revenue Code, provides:
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 —
(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.
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.
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.

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.
[G.R. No. L-10405. December 29, 1960.]
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.)
Needless to say, this Court is fully in accord with the foregoing
views which, apart from being patently sound, are a necessary
corollary to our democratic system of government, which, as such,
exists primarily for the promotion of the general welfare. Besides,
reflecting as they do, the established jurisprudence in the United
States, after whose constitutional system ours has been patterned,
said views and jurisprudence are, likewise, part and parcel of our
own constitutional law.
This notwithstanding, the lower court felt constrained to uphold the
appropriation in question, upon the ground that petitioner may not
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
donation cured the constitutional infirmity of the aforementioned
appropriation; (2) that the latter may not be annulled without a
previous declaration of unconstitutionality of the said donation;
and (3) that the rule set forth in Article 1421 of the Civil Code is
absolute, and admits of no exception. We do not agree with these
premises.
The validity of a statute depends upon the powers of Congress at
the time of its passage or approval, not upon events occupying, 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.
Referring to the P85,000.00 appropriation for the projected feeder
roads in question, the legality thereof depended upon whether said
roads were public or private property when the bill, which, later
on, became Republic Act No. 920, was passed by Congress, or
when said bill was approved by the President and the disbursement
of said sum became effective, or on June 20, 1953 (see section 13
of said Act). Inasmuch as the land on which the projected feeder
roads were to be constructed belonged then to respondent Zulueta,
the result is that said appropriation sought a private purpose, and,
hence, was null and void. 4 The donation to the Government, over
five (5) months after the approval and effectivity of said Act, made
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 of said donation need not precede the declaration of
unconstitutionality of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory
enactments, 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, therefore, 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.
Again, it is well settled that the validity of a statute may be
contested only by one who will sustain a direct injury in
consequence of its enforcement. Yet, there are many decisions
nullifying, at the instance of taxpayers, laws providing for the
disbursement of public funds, 5 upon the theory that "the
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 contesting the price being paid to the owner thereof, as unduly
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
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 taxpayers impugning the validity of certain
appropriations of public funds, and invalidated the same.
Moreover, the reason that impelled this Court to take such position
in said two (2) cases — the importance of the issues therein raised
— is present in the case at bar. Again, like the petitioners in the
Rodriguez and Barredo cases, 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 substantial portion of the burden
of taxation, in the Philippines.

Hence, it is our considered opinion that the circumstances

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.

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

records are remanded to the lower court for further proceedings not
inconsistent with this decision, with the costs of this instance
against respondent Jose C. Zulueta. It is so ordered.

Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes,

J.B.L., Barrera, Gutierrez David, Paredes and Dizon, JJ., concur.
G.R. No. L-7859        December 22, 1955
WALTER LUTZ, as Judicial Administrator of the Intestate
Estate of the deceased Antonio Jayme Ledesma, plaintiff-
appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal
Revenue, defendant-appellee.
Ernesto J. Gonzaga for appellant.
Office of the Solicitor General Ambrosio Padilla, First Assistant
Solicitor General Guillermo E. Torres and Solicitor Felicisimo R.
Rosete for appellee.
REYES, J.B L., J.:
This case was initiated in the Court of First Instance of Negros
Occidental to test the legality of the taxes imposed by
Commonwealth Act No. 567, otherwise known as the Sugar
Adjustment Act.
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).
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.

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
[G.R. No. 137377. December 18, 2001.] an ammonia storage complex also at the Leyte Industrial
Development Estate.
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v.
MARUBENI CORPORATION, Respondent. On March 1, 1986, petitioner’s revenue examiners recommended
an assessment for deficiency income, branch profit remittance,
DECISION contractor’s and commercial broker’s taxes. Respondent
questioned this assessment in a letter dated June 5, 1986.

PUNO, J.: 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,
In this petition for review, the Commissioner of Internal Revenue inclusive of surcharge and interest, were as follows:chanrob1es
assails the decision dated January 15, 1999 of the Court of Appeals virtua1 1aw 1ibrary
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 I. DEFICIENCY INCOME TAX
tax court ordered the Commissioner of Internal Revenue to desist
from collecting the 1985 deficiency income, branch profit FY ended March 31, 1985
remittance and contractor’s taxes from Marubeni Corporation after
finding the latter to have properly availed of the tax amnesty under Undeclared gross income (Philphos
Executive Orders Nos. 41 and 64, as amended.
and NDC construction projects) P967,269,811.14
Respondent Marubeni Corporation is a foreign corporation
organized and existing under the laws of Japan. It is engaged in Less: Cost and expenses (50%) 483,634,905.57
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.
Net undeclared income 483,634,905.57
Sometime in November 1985, petitioner Commissioner of Internal
Revenue issued a letter of authority to examine the books of Income tax due thereon 169,272,217.00
accounts of the Manila branch office of respondent corporation for
the fiscal year ending March 1985. In the course of the Add: 50% surcharge 84,636,108.50
examination, petitioner found respondent to have undeclared
income from two (2) contracts in the Philippines, both of which 20% int. p.a.fr. 7-15-85
were completed in 1984. One of the contracts was with the
National Development Company (NDC) in connection with the to 8-15-86 36,675,646.90
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 TOTAL AMOUNT DUE P290,583,972.40
 Philphos and NDC construction projects P967,269,811.14
============
———————
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
Contractor’s tax due thereon (4%) 38,690,792.00
FY ended March 31, 1985
Add: 50% surcharge for non-declaration 19,345,396.00
Undeclared gross income from
20% surcharge for late payment 9,672,698.00
Philphos and NDC construction projects P483,634,905.57
———————
Less: Income tax thereon 169,272,217.00
Sub-total 67,708,886.00
———————
Add: 20% int. p.a.fr. 4-21-85
Amount subject to Tax 314,362,688.57
to 8-15-86 17,854,739.46
———————
———————
Tax due thereon 47,154,403.00
TOTAL AMOUNT DUE P85,563,625.46
Add: 50% surcharge 23,577,201.50
============
20% int. p.a.fr. 4-26-85
IV. DEFICIENCY COMMERCIAL BROKER’S TAX
to 8-15-86 12,305,360.66
FY ended March 31, 1985
———————
Undeclared share from commission income
TOTAL AMOUNT DUE P83,036,965.16
(denominated as "subsidy from Home
============
Office") P24,683,114.50
III. DEFICIENCY CONTRACTOR’S TAX
———————
FY ended March 31, 1985
Tax due thereon 1,628,569.00
Undeclared gross receipts/gross income from
Add: 50% surcharge for non-declaration 814,284.50
 remittance and contractor’s tax assessments in petitioner’s
20% surcharge for late payment 407,142.25 assessment letter. The second, CTA Case No. 4110, questioned the
deficiency commercial broker’s assessment in the same
——————— letter.cralaw : red

Sub-total 2,849,995.75 Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2

declaring a one-time amnesty covering unpaid income taxes for the
Add: 20% int. p.a.fr. 4-21-85 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
to 8-15-86 751,539.98 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
TOTAL AMOUNT DUE P3,600,535.68 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.
The 50% surcharge was imposed for your client’s failure to report
for tax purposes the aforesaid taxable revenues while the 25% In accordance with the terms of E.O. No. 41, respondent filed its
surcharge was imposed because of your client’s failure to pay on tax amnesty return dated October 30, 1986 and attached thereto its
time the above deficiency percentage taxes. 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
x       x       x" 1 on November 3, 1986 and respondent paid the amount of
P2,891,273.00 equivalent to ten percent (10%) of its net worth
Petitioner found that the NDC and Philphos contracts were made increase between 1981 and 1986.
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 The period of the amnesty in E.O. No. 41 was later extended from
piece of work and since the projects called for the construction and October 31, 1986 to December 5, 1986 by E.O. No. 54 dated
installation of facilities in the Philippines, the entire income November 4, 1986.
therefrom constituted income from Philippine sources, hence,
subject to internal revenue taxes. The assessment letter further On November 17, 1986, the scope and coverage of E.O. No. 41
stated that the same was petitioner’s final decision and that if was expanded by Executive Order (E.O.) No. 64. In addition to the
respondent disagreed with it, respondent may file an appeal with income tax amnesty granted by E.O. No. 41 for the years 1981 to
the Court of Tax Appeals within thirty (30) days from receipt of 1985, E.O. No. 64 3 included estate and donor’s taxes under Title
the assessment. 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.
On September 26, 1986, respondent filed two (2) petitions for No. 64 further provided that the immunities and privileges under
review with the Court of Tax Appeals. The first petition, CTA E.O. No. 41 were extended to the foregoing tax liabilities, and the
Case No. 4109, questioned the deficiency income, branch profit 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 exist upon a vague implication. If a doubt arises as to the intent of
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
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 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 Region.
x       x       x 43
Under the afore-quoted provision, an independent contractor is a
person 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 word
"contractor" refers to a person who, in the pursuit of independent
business, undertakes to do a specific job or piece of work for other
persons, using his own means and methods without submitting
himself to control as to the petty details. 44
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
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 taxes, it cannot be imposed on an occupation or privilege
outside the taxing district. 49
In the case at bar, it is undisputed that respondent was an
independent contractor under the terms of the two subject
contracts. Respondent, however, argues that the work therein were
not all performed in the Philippines because some of them were
completed in Japan in accordance with the provisions of the
contracts.
An examination of Annex III to the two contracts reveals that the
materials and equipment to be made and the works and services to
be performed by respondent are indeed classified into two. The
first part, entitled "Breakdown of Japanese Yen Portion I"
provides:chanrob1es virtua1 1aw 1ibrary
"Japanese Yen Portion I of the Contract Price has been subdivided
according to discrete portions of materials and equipment which
will be shipped to Leyte as units and lots. This subdivision of price
is 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
x       x       x 50
The subdivision of Japanese Yen Portion I covers materials and
equipment while Japanese Yen Portion II and the Philippine Pesos
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. L-15270             September 30, 1961
(ABANDONED)
JOSE V. HERRERA and ESTER OCHANGCO
HERRERA, petitioners,
vs.
THE QUEZON CITY BOARD OF ASSESSMENT
APPEALS, respondent.
Angel A. Sison for petitioners.
Jaime Agloro for respondent.
CONCEPCION, J.:
Appeal, by petitioners Jose V. Herrera and Ester Ochangco
Herrera, from a decision of the Court of Tax Appeals affirming
that of the Board of Assessment Appeals of Quezon City, which
held that certain properties of said petitioners are subject to
assessment for purposes of real estate tax.
The facts and the issue are set forth in the aforementioned decision
of the Court of Tax Appeals, from which we quote:
On July 24, 1952, the Director of the Bureau of Hospitals
authorized the petitioners to establish and operate the "St.
Catherine's Hospital", located at 58 D. Tuazon, Sta. Mesa
Heights, Quezon City (Exhibit "F-1", p. 7, BIR rec.). On or
about January 3, 1953, the petitioners sent a letter to the
Quezon City Assessor requesting exemption from payment
of real estate tax on the lot, building and other
improvements comprising the hospital stating that the same
was established for charitable and humanitarian purposes
and not for commercial gain (Exhibit "F-2", pp. 8-9, BIR
rec.). After an inspection of the premises in question and
after a careful study of the case, the exemption from real
property taxes was granted effective the years 1953, 1954
and 1955.
Subsequently, however, in a letter dated August 10, 1955
(Exhibit "E", p. 65, CTA rec.) the Quezon City Assessor
notified the petitioners that the aforesaid properties were re-
classified from exempt to "taxable" and thus assessed for
real property taxes effective 1956, enclosing therewith
copies of Tax Declarations Nos. 19321 to 19322 covering
the said properties. The petitioners appealed the assessment
to the Quezon City Board of Assessment Appeals, which,
in a decision dated March 31, 1956 and received by the
former on May 17, 1956, affirmed the decision of the City
Assessor. A motion for reconsideration thereof was denied
on March 8, 1957. From this decision, the petitioners
instituted the instant appeal.1awphîl.nèt
The building involved in this case is principally used as a
hospital. It is mainly a surgical and orthopedic hospital with
emphasis on obstetrical cases, the latter constituting 90% of
the total number of cases registered therein. The hospital
has thirty-two (32) beds, of which twenty (20) are for
charity-patients and twelve (12) for pay-patients. From the
evidence presented by petitioners, it is made to appear that
there are two kinds of charity patients — (a) those who
come for consultation only ("out-charity patients"); and (b)
those who remain in the hospital for treatment ("lying-in-
patients"). The out-charity patients are given free
consultation and prescription, although sometimes they are
furnished with free medicines which are not costly like
aspirin, sulfatiazole, etc. The charity lying-in-patients are
given free medical service and medicine although the food
served to the pay-patients is very much better than that
given to the former. Although no condition is imposed by
the hospital on the admission of charity lying-in-patients,
they however, usually give donations to the hospital. On
the other hand, the pay-patients are required to pay for
hospital services ranging from the minimum charge of
P5.00 to the maximum of P40.00 for each day of stay in the (Exhibits "A", "A-1" and "A-2")
hospital. The income realized from pay-patients is spent for
the improvement of the charity wards. The hospital
personnel is composed of three nurses, two graduate 1955
midwives, a resident physician receiving a salary of Income Expenses Deficit
P170.00 a month and the petitioner, Dr. Ester Ochangco
Herrera, as directress. As such directress, the latter does not P 6,859.32
receive any salary. Charity Ward 14,038.92
P17,433.30 P3,464.94
Pay Ward
Petitioners also operate within the premises of the hospital P20,898.24
the "St. Catherine's School of Midwifery" which was (Exhibits "B", "B-1" and "B-2")
granted government recognition by the Secretary of
Education on February 1, 1955 (Exhibit "F-3", p. 10, BIR
rec.) This school has an enrollment of about two hundred 1956
students. The students are charged a matriculation fee of
Income Expenses Deficit
P300.00 for 1-½ years, plus P50.00 a month for board and
lodging, which includes transportation to the St. Mary's P 5,559.89 P 341.53
Hospital. The students practice in the St. Catherine's Charity Ward 16,249.04
P21,467.40
Hospital, as well as in the St. Mary's Hospital, which is also Pay Ward
owned by the petitioners. A separate set of accounting P21,809.93
books is maintained by the school for midwifery distinct
(Exhibits "C", "C-1" and "C-2")
from that kept by the hospital. The petitioners alleged that
the accounts of the school are not included in Exhibits "A",
"A-1", "A-2", "B", "B-1", "B-2", "C", "C-1" and "C-2" Aside from the St. Catherine and St. Mary hospitals, the petitioners
which relate to the hospital only. However, the petitioners declared that they also own lands and coconut plantations in
have refused to submit a separate statement of accounts of Quezon Province, and other real estate in the City of Manila
the school. A brief tabulation indicating the amount of consisting of apartments for rent. The petitioner, Jose V. Herrera,
income of the hospital for the years 1954, 1955 and 1956, is an architect, actively engaged in the practice of his profession,
and its operational expenses, is as follows: with office at Tuason Building, Escolta, Manila. He was formerly
Chairman, Board of Examiners for Architects and Chairman,
Board of Architects connected with the United Nations. He was
also connected with the Allied Technologists which constructed
1954
the Veterans Hospital in Quezon City.
Income Expenses Deficit
The only issue raised, is whether or not the lot, building and other
P 5,280.04 P1,303.80
improvements occupied by the St. Catherine Hospital are exempt
Charity Ward P10,803.26
P14,779.50 from the real property tax. The resolution of this question boils
Pay Ward
down to the corollary issue as to whether or not the said properties
P16,083.30
are used exclusively for charitable or educational purposes.
(Petitioners' brief, pp. 24-29).
The Court of Tax Appeals decided the issue in the negative, upon
the ground that the St. Catherine's Hospital "has a pay ward for ...
pay-patients, who are charged for the use of the private rooms,
operating room, laboratory room, delivery room, etc., like other
hospitals operated for profit" and that "petitioners and their family
occupy a portion of the building for their residence." With respect
to petitioners' claim for exemption based upon the operation of the
school of midwifery, the Court conceded that "the proposition
might be proper if the property used for the school of midwifery
were separate and distinct from the hospital." It added, however,
that, "in the instant case, the portions of the building used for
classrooms of the school of midwifery have not been shown to be
exclusively for school purposes"; that said portions "rather ... have
a dual use, i.e., for classroom and for hospital use, the latter not
being a purpose that renders the property tax exempt;" that part of
the building and lot in question "is used as a hospital, part as
residence of the petitioners, part as garage, part as dormitory and
part as school"; and that "the portion dedicated to educational and
charitable purposes can not be identified from those destined to
other uses; and the building is itself an indivisible unit of
property."
It should be noted, however, that, according to the very statement
of facts made in the decision appealed from, of the thirty-two (32)
beds in the hospital, twenty (20) are for charity-patients; that "the
income realized from pay-patients is spent for improvement of the
charity wards;" and that "petitioners, Dr. Ester Ochangco Herrera,
as directress" of said hospital, "does not receive any salary,"
although its resident physician gets a monthly salary of P170.00. It
is well settled, in this connection, that the admission of pay-
patients does not detract from the charitable character of a hospital,
if all its funds are devoted "exclusively to the maintenance of the
institution" as a "public charity" (84 C.J.S., 617; see, also, 51 Am.
Jur. 607; Cooley on Taxation, Vol. 2, p. 1562; 144 A.L.R., 1489-
1492). "In other words, where rendering charity is its primary
object, and the funds derived from payments made by patients able
to pay are devoted to the benevolent purposes of the institution, the
mere fact that a profit has been made will not deprive the hospital
of its benevolent character" (Prairie Du Chien Sanitarium Co. vs.
City of Prairie Du Chien, 242 Wis. 262, 7 NW [2d] 832, 144
A.L.R. 1480).
Thus, we have held that the U.S.T. Hospital was not established for
profit-making purposes, although it had 140 paying beds
maintained only to partly finance the expenses of the free wards,
containing 203 beds for charity patients (U.S.T. Hospital
Employees Association vs. Sto. Tomas University Hospital, L-
6988, May 24, 1954), that St. Paul's Hospital of Iloilo, a
corporation organized for "charitable educational and religious
purposes" can not be considered as engaged in business merely
because its pharmacy department charges paying patients the cost
of their medicine, plus 10% thereof, to partly offset the cost of
medicines supplied free of charge to charity patients (Collector of
Internal Revenue vs. St. Paul's Hospital of Iloilo, L-12127, May
25, 1959), and that the amendment of the original articles of
incorporation of the University of Visayas to convert it from a non-
stock to a stock corporation and the increase of its assets from
P9,000 to P50,000, distributed among the members of the original
non-stock corporation in terms of shares of stock, as well as the
subsequent move of its board of trustees to double the stock
dividends of the corporation, in view of a gain of P200,000.00 in
property, besides good-will, which was not carried out, does not
justify the inference that the corporation has become one for
business and profit, none of its profits having inured to the benefit
of any stockholder or individual (Collector of Internal Revenue vs.
University of Visayas, L-13554, February 28, 1961).
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 St. Catherine's Hospital, but, also, in St. Mary's Hospital, and were
and residents" (84 C.J.S., 621), such as "athletic fields," including entitled to transportation thereto — for Mrs. Herrera received no
"a farm used for the inmates of the institution" (Cooley on compensation as directress of St. Catherine's Hospital — were
Taxation, Vol. 2, p. 1430). incidental to the operation of the latter and of said school, and,
accordingly, did not affect the charitable character of said hospital
Within the purview of the Constitutional exemption from taxation, and the educational nature of said school.
the St. Catherine's Hospital is, therefore, a charitable institution,
and the fact that it admits pay-patients does not bar it from WHEREFORE, the decision of the Court of Tax Appeals, as well
claiming that it is devoted exclusively to benevolent purposes, it as that of the Assessment Board of Appeals of Quezon City, are
being admitted that the income derived from pay-patients is hereby reversed and set aside, and another one entered declaring
devoted to the improvement of the charity wards, which represent that the lot, building and improvements constituting the St.
almost two-thirds (2/3) of the bed capacity of the hospital, aside Catherine's Hospital are exempt from taxation under the provisions
from "out-charity patients" who come only for consultation. of the Constitution, without special pronouncement as to costs. It is
so ordered.
Again, the existence of "St. Catherine's School of Midwifery", with
an enrollment of about 200 students, who practice partly in St. Bengzon, C.J., Padilla, Labrador, Reyes, J.B.L., Paredes and De
Catherine's Hospital and partly in St. Mary's Hospital, which, Leon, JJ., concur.
likewise, belongs to petitioners herein, does not, and cannot, affect
the exemption to which St. Catherine's Hospital is entitled under
our fundamental law. On the contrary, it furnishes another ground
for exemption. Seemingly, the Court of Tax Appeals was
impressed by the fact that the size of said enrollment and the
matriculation fee charged from the students of midwifery, aside
from the amount they paid for board and lodging, including
transportation to St. Mary's Hospital, warrants the belief that
petitioners derive a substantial profit from the operation of the
school aforementioned. Such factor is, however, immaterial to the
issue in the case at bar, for "all lands, building and improvements
used exclusively for religious, charitable or educational purposes
shall be exempt from taxation," pursuant to the Constitution,
regardless of whether or not material profits are derived from the
operation of the institutions in question. In other words, Congress
may, if it deems fit to do so, impose taxes upon such "profits", but
said "lands, buildings and improvements" are beyond its taxing
power.

Similarly, the garage in the building above referred to — which

was obviously essential to the operation of the school of
midwifery, for the students therein enrolled practiced, not only in
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, eugenic and
physiological aspects of lung or pulmonary diseases
and their control; and to collect and publish the
findings of such research for public consumption;
4. To facilitate the dissemination of ideas and public
acceptance of information on lung consciousness or
awareness, and the development of fact-finding,
information and reporting facilities for 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;
5. To encourage the training of physicians, nurses,
health officers, social workers and medical and
technical personnel in the practical and scientific
implementation of services to lung patients;
6. To assist universities and research institutions in
their studies about lung diseases, to encourage
advanced training in matters of the lung and related
fields and to support educational programs of value
to general health;
7. To encourage the formation of other
organizations on the national, provincial and/or city
and local levels; and to coordinate their various
efforts and activities for the purpose of achieving a
more effective programmatic approach on the
common problems relative to the objectives
enumerated herein;
8. To seek and obtain assistance in any form from
both international and local foundations and
organizations; and to administer grants and funds
that may be given to the organization;
9. To extend, whenever possible and expedient,
medical services to the public and, in general, to
promote and protect the health of the masses of our
 people, which has long been recognized as an
economic asset and a social blessing;
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
discrimination, because of race, creed, color or
political belief of the persons helped; and to enable
them to obtain treatment when such disorders occur;
11. To participate, as circumstances may warrant, in
any activity designed and carried on to promote the
general health of the community;
12. To acquire and/or borrow funds and to own all
funds or equipment, educational materials and
supplies by purchase, donation, or otherwise and to
dispose of and distribute the same in such manner,
and, on such basis as the Center shall, from time to
time, deem proper and best, under the particular
circumstances, to 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
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
Under P.D. No. 1823, the petitioner is entitled to receive
donations. 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 Utah in Yorgason v. County Board of
Equalization of Salt Lake County:24
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 Intermountain Health Care and the
present case, the crux is the presence or absence of material
reciprocity. It is entirely irrelevant to this analysis that the
government, rather than a private benefactor, chose to make
up the deficit resulting from the exchange between St.
Mark’s Tower and the tenants by making a contribution to
the landlord, just as it would have been irrelevant
in Intermountain Health Care if the patients’ income
supplements had come from private individuals rather than
the government.
Therefore, the fact that subsidization of part of the cost of
furnishing such housing is by the government rather than
private charitable contributions does not dictate the denial
of a charitable exemption if the facts otherwise support
such an exemption, as they do here.25
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.
It even incurred a net loss in 1991 and 1992 from its operations.
Even as we find that the petitioner is a charitable institution, we
hold, anent the second issue, that those portions of its real property
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.
The settled rule in this jurisdiction is that laws granting exemption
from tax are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception. The effect of an exemption is
equivalent to an appropriation. Hence, a claim for exemption from
tax payments must be clearly shown and based on language in the
law too plain to be mistaken.26 As held in Salvation Army v.
Hoehn:27
An intention on the part of the legislature to grant an
exemption from the taxing power of the state will never be
implied from language which will admit of any other
reasonable construction. 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.

IN LIGHT OF ALL THE FOREGOING, the petition

is PARTIALLY GRANTED. The respondent Quezon City
Assessor is hereby DIRECTED to determine, after due hearing,
the precise portions of the land and the area thereof which are
leased to private persons, and to compute the real property taxes
due thereon as provided for by law.

SO ORDERED.
G.R. No. L-39086 June 15, 1988
ABRA VALLEY COLLEGE, INC., represented by PEDRO V.
BORGONIA, petitioner,
vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance,
Abra; ARMIN M. CARIAGA, Provincial Treasurer, Abra;
GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra;
HEIRS OF PATERNO MILLARE, respondents.
PARAS, J.:
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,
1974, rendered in Civil Case No. 656, entitled "Abra Valley Junior
College, Inc., represented by Pedro V. Borgonia, plaintiff vs.
Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar V.
Bosque as Municipal Treasurer of Bangued, Abra and Paterno
Millare, defendants," the decretal portion of which reads:
IN VIEW OF ALL THE FOREGOING, the Court
hereby declares:
That the distraint seizure and sale by the Municipal
Treasurer of Bangued, Abra, the Provincial
Treasurer of said province against the lot and
building of the Abra Valley Junior College, Inc.,
represented by Director Pedro Borgonia located at
Bangued, Abra, is valid;
That since the school is not exempt from paying
taxes, it should 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 plaintaff him the
sum of 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;
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;
And finally the case is hereby ordered dismissed
with costs against the plaintiff.
SO ORDERED. (Rollo, pp. 22-23)
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 respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on July
10, 1972 in the court a quo to annul and declare void the "Notice
of Seizure' and the "Notice of Sale" of its lot and building located
at Bangued, Abra, for non-payment of real estate taxes and
penalties amounting to P5,140.31. Said "Notice of Seizure" of the
college lot and building covered by Original Certificate of Title
No. Q-83 duly registered in the name of petitioner, plaintiff below,
on July 6, 1972, by respondents Municipal Treasurer and
Provincial Treasurer, defendants below, was issued for the
satisfaction of the said taxes thereon. The "Notice of Sale" was
caused to be served upon the petitioner by the respondent
treasurers on July 8, 1972 for the sale at public auction of said
college lot and building, which sale was held on the same date. Dr.
Paterno Millare, then Municipal Mayor of Bangued, Abra, offered
the highest bid of P6,000.00 which was duly accepted. The
certificate of sale was correspondingly issued to him.
On August 10, 1972, the respondent Paterno Millare (now
deceased) filed through counstel a motion to dismiss the complaint.
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 Heirs of Patemo 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.
On September 1, 1972 the respondent Paterno Millare filed his
answer (Annex "5," ibid; Rollo, pp. 106-108).
On October 12, 1972, with the aforesaid sale of the school
premises at public auction, the respondent Judge, Hon. Juan P.
Aquino of the Court of First Instance of Abra, Branch I, ordered
(Annex "6," ibid; Rollo, pp. 109-110) the respondents provincial
and municipal treasurers to deliver to the Clerk of Court the
proceeds of the auction sale. Hence, on December 14, 1972,
petitioner, through Director Borgonia, deposited with the trial court
the sum of P6,000.00 evidenced by PNB Check No. 904369.
On April 12, 1973, the parties entered into a stipulation of facts
adopted and embodied by the trial court in its questioned decision.
Said Stipulations reads:
STIPULATION OF FACTS
COME NOW the parties, assisted by counsels, and
to this Honorable Court respectfully enter into the
following agreed stipulation of facts:
1. That the personal circumstances of the parties as
stated in paragraph 1 of the complaint is admitted;
but the particular person of Mr. Armin M. Cariaga
is to be substituted, however, by anyone who is
actually holding the position of Provincial Treasurer
of the Province of Abra;
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;
3. That the defendant Gaspar V. Bosque, as
Municipal treasurer of 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 Seizure
being the one attached to the complaint as Exhibit
A;
4. That on June 8, 1972 the above properties of the
Abra Valley 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 and a Certificate of Sale in his
favor was issued by the defendant Municipal
Treasurer.
5. That all other matters not particularly and
specially covered by this stipulation of facts will be
the subject of evidence by the parties.
WHEREFORE, it is respectfully prayed of the
Honorable Court to consider and admit this
stipulation of facts on the point agreed upon by the
parties.
Bangued, Abra, April 12, 1973.
Aside from the Stipulation of Facts, the trial court
among others, found the following: (a) that the
school is recognized by the government and is
offering Primary, High School and College Courses,
 and has a school population of more than one
thousand students all in all; (b) that it is located
right in the heart of the town of Bangued, a few
meters from the plaza and about 120 meters from
the Court of First Instance building; (c) that the
elementary pupils are housed in a two-storey
building across the street; (d) that 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 reaches more
than one hundred thousand pesos.
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 in question are used exclusively for educational
purposes. (Rollo, p. 20)
The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his
Assistant, Hon. Eustaquio Z. Montero, filed a Memorandum for
the 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 building and school lot used for
educational purposes of the Abra Valley College, Inc., are
exempted from the payment of taxes." (Annexes "B," "B-1" of
Petition; Rollo, pp. 24-49; 44 and 49).
Nonetheless, the trial court disagreed because of the use of the
second floor by the Director of petitioner school for residential
purposes. He thus ruled for the government and rendered the
assailed decision.
After having been granted by the trial court ten (10) days from
August 6, 1974 within which to perfect its appeal (Per Order dated
August 6, 1974; Annex "G" of Petition; Rollo, p. 57) petitioner
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).
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).
Petitioner raised the following assignments of error:
I
THE COURT A QUO ERRED IN SUSTAINING AS VALID
THE SEIZURE AND SALE OF THE COLLEGE LOT AND
BUILDING USED FOR EDUCATIONAL PURPOSES OF THE
PETITIONER.
II
THE COURT A QUO ERRED IN DECLARING THAT THE
COLLEGE LOT AND BUILDING OF THE PETITIONER ARE
NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES
MERELY BECAUSE THE COLLEGE PRESIDENT RESIDES
IN ONE ROOM OF THE COLLEGE BUILDING.
III
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 AS REALTY
TAXES.
IV
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."
Petitioner contends that the primary use of the lot and building for
educational purposes, and not the incidental use thereof,
determines and exemption from property taxes under Section 22
(3), Article VI of the 1935 Constitution. Hence, the seizure and
sale of subject college lot and building, which are contrary thereto
as well as to the provision of Commonwealth Act No. 470,
otherwise known as the Assessment Law, are without legal basis
and therefore void.
On the other hand, private respondents maintain that the college lot
and building in question which were subjected to seizure and sale
to answer for the unpaid tax are used: (1) for the 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 ...
Relative thereto, Section 54, paragraph c, Commonwealth Act No.
470 as amended by Republic Act No. 409, otherwise known as the
Assessment Law, provides:
The following are exempted from real property tax
under the Assessment Law:
xxx xxx xxx
(c) churches and parsonages or convents
appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious,
charitable, scientific or educational purposes.
xxx xxx xxx
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 vs. Collector of lnternal
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.
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 vs. Quezon City
Board of assessment Appeals, 3 SCRA 186 [1961]
and Commissioner of Internal Revenue vs. 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]).
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
residential purposes of the Director and his family, may find
justification under the concept of incidental use, which is
complimentary to the main or primary purpose—educational, the
lease of the first floor thereof to the Northern Marketing
Corporation cannot by any stretch of the imagination be considered
incidental to the purpose of education.
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 not taken up in the to court is really apparent in the decision of
respondent Judge. No mention thereof was made in the stipulation
of facts, not even in the description of the school building by the
trial judge, both embodied in the decision nor as one of the issues
to resolve in order to determine whether or not said properly may
be exempted from payment of real estate taxes (Rollo, pp. 17-23).
On the other hand, it is noteworthy that such fact was not disputed
even after it was raised in this Court.
Indeed, it is axiomatic that facts not raised in the lower court
cannot be taken up for the first time on appeal. Nonetheless, as an
exception to the rule, this Court has held that although a factual
issue is not squarely raised below, still in the interest of substantial
justice, this Court is not prevented from considering a pivotal
factual matter. "The Supreme Court is clothed with ample
authority to review palpable errors not assigned as such if it finds
that their consideration is necessary in arriving at a just decision."
(Perez vs. Court of Appeals, 127 SCRA 645 [1984]).
Under the 1935 Constitution, the trial court correctly arrived at the
conclusion that the school building as well as the lot where it is
built, should be taxed, not because the second floor of the same is
being used by the Director and his family for residential purposes,
but because the first floor thereof is being used for commercial
purposes. However, since only a portion is used for purposes of
commerce, it is only fair that half of the assessed tax be returned to
the school involved.
PREMISES CONSIDERED, the decision of the Court of First
Instance of Abra, Branch I, is hereby AFFIRMED subject to the
modification that half of the assessed tax be returned to the
petitioner.
SO ORDERED.
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
RESOLUTION
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
12
On 18 September 2014, the CIR issued RMO No. 34-2014,  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:
x x x           x x x          x x x
(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 stands, and there is no longer any practical value in resolving the
Exemption Rulings or Certificates of Tax Exemption of non-stock, issues raised in this petition.
nonprofit educational institutions shall remain valid and effective,
unless recalled for valid grounds. They are not required to renew or WHEREFORE, we DENY the petition on the ground of
revalidate the Tax exemption rulings previously issued to them. mootness. We SET ASIDE the Decision dated 25 July 2014 and
Joint Resolution dated 29 October 2014 of the Regional Trial
The Tax Exemption Ruling shall be subject to revocation if there Court, Branch 143, Makati City, declaring Revenue Memorandum
are material changes in the character, purpose or method of Order No. 20-2013 unconstitutional. The writ of preliminary
operation of the corporation which are inconsistent with the basis injunction is superseded by this Resolution.
for its income tax exemption.
SO ORDERED.
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
G.R. No. 196596 3. G.R. No. 198941 filed by the Commissioner to assail the June 8,
2011 decision and October 4, 2011 resolution in CTA En
COMMISSIONER OF INTERNAL REVENUE, Petitioner Banc Case No. 671.4
vs.
DE LA SALLE UNIVERSITY, INC., Respondent G.R. Nos. 196596, 198841 and 198941 all originated from CTA
Special First Division (CTA Division)  Case No. 7303. G.R. No.
x-----------------------x 196596 stemmed from CTA En Banc Case No. 622 filed by the
Commissioner to challenge CTA Case No. 7303. G.R. No. 198841
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.
DE LA SALLE UNIVERSITY INC., Petitioner,
vs. The Factual Antecedents
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to
x-----------------------x DLSU Letter of Authority (LOA) No. 2794 authorizing its revenue
officers to examine the latter's books of accounts and other
G.R. No. 198941 accounting records for all internal revenue taxes for the
period Fiscal Year Ending 2003 and Unverified Prior Years.5
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs. On May 19, 2004, BIR issued a Preliminary Assessment Notice to
DE LA SALLE UNIVERSITY, INC., Respondent. DLSU.6

DECISION Subsequently on August 18, 2004, the BIR through a Formal

Letter of Demand  assessed DLSU the following deficiency taxes:
BRION, J.: (1) income tax on rental earnings from restaurants/canteens and
bookstores operating within the campus; (2) value-added tax
Before the Court are consolidated petitions for review (VAI) on business income; and (3) documentary stamp tax
on certiorari:1 (DSI) on loans and lease contracts. The BIR demanded the
payment of ₱17,303,001.12, inclusive of surcharge, interest and
1. G.R. No. 196596 filed by the Commissioner of Internal penalty for taxable years 2001, 2002 and 2003.7
Revenue (Commissioner) to assail the December 10, 2010 decision
and March 29, 2011 resolution of the Court of Tax Appeals DLSU protested the assessment. The Commissioner failed to act
(CTA)  in En Banc  Case No. 622;2 on the protest; thus, DLSU filed on August 3, 2005 a petition for
review with the CTA Division.8
2. G.R. No. 198841 filed by De La Salle University,
Inc. (DLSU) to assail the June 8, 2011 decision and October 4, DLSU, a non-stock, non-profit educational institution,  principally
2011 resolution in CTA En Banc Case No. 671;3 and anchored its petition on Article XIV, Section 4 (3) of the
Constitution, which reads:
(3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. xxx.
On January 5, 2010, the CTA Division partially granted DLSU's
petition for review. The dispositive portion of the decision reads:
WHEREFORE, the Petition for Review is PARTIALLY
GRANTED. The DST assessment on the loan transactions of
[DLSU] in the amount of ₱1,1681,774.00 is
hereby CANCELLED. However, [DLSU] is ORDERED TO
PAY deficiency income tax, VAT and DST on its lease contracts,
plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the
total amount of ₱18,421,363.53 ... xxx.
In addition, [DLSU] is hereby held liable to pay 20% delinquency
interest on the total amount due computed from September 30,
2004 until full payment thereof pursuant to Section 249(C)(3) of
the [National Internal Revenue Code]. Further, the compromise
penalties imposed by [the Commissioner] were excluded, there
being no compromise agreement between the parties.
SO ORDERED.9
Both the Commissioner and DLSU moved for the reconsideration
of the January 5, 2010 decision.10 On April 6, 2010, the CTA
Division denied the Commissioner's motion for reconsideration
while it held in abeyance the resolution on DLSU's motion for
reconsideration.11
On May 13, 2010, the Commissioner appealed to the CTA En
Banc (CTA En Banc Case No. 622) arguing that DLSU's use of its
revenues and assets for non-educational or commercial purposes
removed these items from the exemption coverage under the
Constitution.12
On May 18, 2010, DLSU formally offered to the CTA Division
supplemental pieces of documentary evidence to prove that its
rental income was used actually, directly and exclusively for
educational purposes.13 The Commissioner did not promptly object
to the formal offer of supplemental evidence despite notice.14
On July 29, 2010, the CTA Division, in view of the supplemental
evidence submitted, reduced the amount of DLSU's tax
deficiencies. The dispositive portion of the amended
decision reads:
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is
hereby PARTIALLY GRANTED. [DLSU] is
hereby ORDERED TO PAY for deficiency income tax, VAT and
DST plus 25% surcharge for the fiscal years 2001, 2002 and 2003
in the total adjusted amount of ₱5,506,456.71 ... xxx.
In addition, [DLSU] is hereby held liable to pay 20% per
annum deficiency interest on the ... basic deficiency taxes ... until
full payment thereof pursuant to Section 249(B) of the [National
Internal Revenue Code] ... xxx.
Further, [DLSU] is hereby held liable to pay 20% per
annum delinquency interest on the deficiency taxes, surcharge and
deficiency interest which have accrued ... from September 30,
2004 until fully paid.15
Consequently, the Commissioner supplemented its petition with
the CTA En Banc and argued that the CTA Division erred in
admitting DLSU's additional evidence.16
Dissatisfied with the partial reduction of its tax liabilities, DLSU
filed a separate petition for review with the CTA En
Banc (CTA En Banc  Case No. 671) on the following grounds: (1)
the entire assessment should have been cancelled because it was
based on an invalid LOA; (2) assuming the LOA was valid, the
CTA Division should still have cancelled the entire assessment
because DLSU submitted evidence similar to those submitted by
Ateneo De Manila University (Ateneo) in a separate case where
the CTA cancelled Ateneo's tax assessment;17 and (3) the CTA
Division erred in finding that a portion of DLSU's rental income
was not proved to have been used actually, directly and exclusively
for educational purposes.18
The CTA En Banc Rulings
CTA En Banc Case No. 622
The CTA En Banc dismissed the Commissioner's petition for
review and sustained the findings of the CTA Division.19
Tax on rental income
Relying on the findings of the court-commissioned Independent
Certified Public Accountant (Independent CPA), the CTA En
Banc found that DLSU was able to prove that a portion of the
assessed rental income was used actually, directly and exclusively
for educational purposes; hence, exempt from tax.20 The CTA En
Banc was satisfied with DLSU's supporting evidence confirming
that part of its rental income had indeed been used to pay the loan
it obtained to build the university's Physical Education – Sports
Complex.21
Parenthetically, DLSU's unsubstantiated claim for
exemption, i.e., the part of its income that was not shown by
supporting documents to have been actually, directly and
exclusively used for educational purposes, must be subjected to
income tax and VAT.22
DST on loan and mortgage transactions
Contrary to the Commissioner's contention,
DLSU froved its remittance of the DST due on its loan and
mortgage documents.23 The CTA En Banc found that DLSU's DST
payments had been remitted to the BIR, evidenced by the stamp on
the documents made by a DST imprinting machine, which is
allowed under Section 200 (D) of the National Internal Revenue
Code (Tax Code)24 and Section 2 of Revenue Regulations (RR) No.
15-2001.25
Admissibility of DLSU's supplemental evidence
The CTA En Banc held that the supplemental pieces of
documentary evidence were admissible even if DLSU formally
offered them only when it moved for reconsideration of the CTA
Division's original decision. Notably, the law creating the CTA
provides that proceedings before it shall not be governed strictly by
the technical rules of evidence.26
The Commissioner moved but failed to obtain a reconsideration of
the CTA En Banc's December 10, 2010 decision.27 Thus, she came
to this court for relief through a petition for review
on certiorari (G.R. No. 196596).
CTA En Banc Case No. 671
The CTA En Banc partially granted DLSU's petition for review
and further reduced its tax liabilities to ₱2,554,825.47 inclusive of
surcharge.28
On the validity of the Letter of Authority
The issue of the LOA' s validity was raised during trial; 29 hence,
the issue was deemed properly submitted for decision and
reviewable on appeal.
Citing jurisprudence, the CTA En Banc held that a LOA should
cover only one taxable period and that the practice of issuing a
LOA covering audit of unverified prior years  is prohibited.30 The
prohibition is consistent with Revenue Memorandum Order
(RMO) No. 43-90, which provides that if the audit includes more
than one taxable period, the other periods or years shall be
specifically indicated in the LOA.31
In the present case, the LOA issued to DLSU is for Fiscal Year
Ending 2003 and Unverified Prior Years. Hence, the assessments
for deficiency income tax, VAT and DST for taxable years 2001
and 2002 are void, but the assessment for taxable
year 2003 is valid.32
On the applicability of the Ateneo case
The CTA En Banc held that the Ateneo case is not a valid
precedent because it involved different parties, factual settings,
bases of assessments, sets of evidence, and defenses.33
On the CTA Division's appreciation of the evidence
The CTA En Banc affirmed the CTA Division's appreciation of
DLSU' s evidence. It held that while DLSU successfully proved
that a portion of its rental income was transmitted and used to pay
the loan obtained to fund the construction of the Sports Complex,
the rental income from other sources were not shown to have been
actually, directly and exclusively used for educational purposes.34
Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No.
198841) and the Commissioner (G.R. No. 198941) came to this
Court for relief.
The Consolidated Petitions
G.R. No. 196596
The Commissioner submits the following arguments:
First, DLSU's rental income is taxable regardless of how such
income is derived, used or disposed of.35 DLSU's operations of
canteens and bookstores within its campus even though exclusively
serving the university community do not negate income tax
liability.36
The Commissioner contends that Article XIV, Section 4 (3) of the
Constitution must be harmonized with Section 30 (H) of the Tax
Code, which states among others, that the income of whatever kind
and character of [a non-stock and non-profit educational
institution] from any of [its] properties, real or personal, or from
any of [its] activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed
by this Code.37
The Commissioner argues that the CTA En Banc misread and
misapplied the case of Commissioner of Internal Revenue v.
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
G.R. No. 198841
DLSU argues as that:
First, RMO No. 43-90 prohibits the practice of issuing a LOA
with any indication of unverified prior years. A LOA issued
contrary to RMO No. 43-90 is void, thus, an assessment issued
based on such defective LOA must also be void.46
DLSU points out that the LOA issued to it covered the Fiscal Year
Ending 2003 and Unverified Prior Years.  On the basis of this
defective LOA, the Commissioner assessed DLSU for deficiency
income tax, VAT and DST for taxable years 2001, 2002 and
2003.47 DLSU objects to the CTA En Banc's conclusion that the
LOA is valid for taxable year 2003. According to DLSU, when
RMO No. 43-90 provides that:
The practice of issuing [LOAs] covering audit of 'unverified prior
years' is hereby prohibited.
it refers to the LOA which has the format "Base Year + Unverified
Prior Years."  Since the LOA issued to DLSU follows this format,
then any assessment arising from it must be entirely voided.48
Second, DLSU invokes the principle of uniformity in
taxation, which mandates that for similarly situated parties,
the same set of evidence should be appreciated and weighed in the
same manner.49 The CTA En Banc erred when it did not similarly
appreciate DLSU' s evidence as it did to the pieces of evidence
submitted by Ateneo, also a non-stock, non-profit educational
institution.50
G.R. No. 198941
The issues and arguments raised by the Commissioner in G.R. No.
198941 petition are exactly the same as those she raised in her: (1)
petition docketed as G.R. No. 196596 and (2) comment on DLSU's
petition docketed as G.R. No. 198841.51
Counter-arguments
DLSU's Comment on G.R.  No. 196596
First, DLSU questions the defective verification attached to the
petition.52
Second, DLSU stresses that Article XIV, Section 4 (3) of the
Constitution is clear that all assets and revenues  of non-stock,
non-profit educational institutions used actually, directly and
exclusively for educational purposes are exempt from taxes and
duties.53
On this point, DLSU explains that: (1) the tax exemption of non-
stock, non-profit educational institutions is novel to the 1987
Constitution and that Section 30 (H) of the 1997 Tax
Code cannot amend the 1987 Constitution;54 (2) Section 30 of the
1997 Tax Code is almost an exact replica of Section 26 of the 1977
Tax Code -with the addition of non-stock, non-profit educational
institutions to the list of tax-exempt entities; and (3) that the 1977
Tax Code was promulgated when the 1973 Constitution was still
in place.
DLSU elaborates that the tax exemption granted to a private
educational institution under the 1973 Constitution was only
for real property tax.  Back then, the special tax treatment
on income of private educational institutions only emanates from
statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution
that exemption from tax of all the assets and revenues of non-
stock, non-profit educational institutions used actually, directly and
exclusively for educational purposes, was expressly and
categorically enshrined.55
DLSU thus invokes the doctrine of constitutional supremacy,
which renders any subsequent law that is contrary to the
Constitution void and without any force and effect.56 Section 30
(H) of the 1997 Tax Code insofar as it subjects to tax the income of
whatever kind and character of a non-stock and non-profit
educational institution from any of its properties, real or personal,
or from any of its activities conducted for profit regardless of the
disposition made of such income, should be declared without force
and effect  in view of the constitutionally granted tax exemption on
"all revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes."57
DLSU further submits that it complies with the requirements
enunciated in the YMCA case, that for an exemption to be granted
under Article XIV, Section 4 (3) of the Constitution, the taxpayer
must prove that: (1) it falls under the classification non-stock, non-
profit educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly and exclusively
for educational purposes.58 Unlike YMCA, which is not an
educational institution, DLSU is undisputedly a non-stock, non-
profit educational institution. It had also submitted evidence to
prove that it actually, directly and exclusively used its income for
educational purposes.59
DLSU also cites the deliberations of the 1986 Constitutional
Commission where they recognized that the tax exemption was
granted "to incentivize private educational institutions to share
with the State the responsibility of educating the youth."60
Third,  DLSU highlights that both the CTA En Banc and Division
found that the bank that handled DLSU' s loan and mortgage
transactions had remitted to the BIR the DST through an
imprinting machine, a method allowed under RR No. 15-2001.61 In
any case, DLSU argues that it cannot be held liable for DST owing
to the exemption granted under the Constitution.62
Finally, DLSU underscores that the Commissioner, despite notice,
did not oppose the formal offer of supplemental evidence. Because
of the Commissioner's failure to timely object, she became bound
by the results of the submission of such supplemental evidence.63
The CIR's Comment on G.R. No. 198841
The Commissioner submits that DLSU is estopped from
questioning the LOA's validity because it failed to raise this issue
in both the administrative and judicial proceedings.64 That it was
asked on cross-examination during the trial does not make it an
issue that the CTA could resolve.65 The Commissioner also
maintains that DLSU's rental income is not tax-exempt because an
educational institution is only exempt from property tax but not
from tax on the income earned from the property.66
DLSU's Comment on G.R. No. 198941
DLSU puts forward the same counter-arguments discussed
above.67 In addition, DLSU prays that the Court award attorney's
fees in its favor because it was constrained to unnecessarily retain
the services of counsel in this separate petition.68
Issues
Although the parties raised a number of issues, the Court shall
decide only the pivotal issues, which we summarize as follows:
I. Whether DLSU' s income and revenues proved to have
been used actually, directly and exclusively for educational
purposes are exempt from duties and taxes;
II. Whether the entire assessment should be voided because
of the defective LOA;
III. Whether the CTA correctly admitted DLSU's
supplemental pieces of evidence; and
IV. Whether the CTA's appreciation of the sufficiency of
DLSU's evidence may be disturbed by the Court.
Our Ruling
As we explain in full below, we rule that:
 I. The income, revenues and assets of non-stock, non-profit educational purposes shall
educational institutions proved to have been used actually, be exempt from taxes and duties. Upon the dissolution or
directly and exclusively for educational purposes are cessation of the corporate existence of such institutions, their assets
exempt from duties and taxes. shall be disposed of in the manner provided by law.

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
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]

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.
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.

I. The revenues and assets of non-stock, Fourth, there is a marked distinction between the treatment of non-
non-profit educational institutions stock, non-profit educational institutions and proprietary
proved to have been used actually, educational institutions. The tax exemption granted to non-stock,
directly, and exclusively for educational non-profit educational institutions is conditioned only on the
purposes are exempt from duties and actual, direct and exclusive use of their revenues and assets for
taxes. educational purposes. While tax exemptions may also be granted to
proprietary educational institutions, these exemptions may be
DLSU rests it case on Article XIV, Section 4 (3) of the 1987 subject to limitations imposed by Congress.
Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational

institutions used actually, directly, and exclusively for
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 "[a]ll revenues and assets ... used actually, directly, and
the school system (synonymous with formal education); it includes exclusively for educational purposes shall be exempt from taxes
a college or an educational establishment; it refers to the and duties."
hierarchically structured and chronologically graded learnings
organized and provided by the formal school system.76 The addition and express use of the word revenues in Article XIV,
Section 4 (3) of the Constitution is not without significance.
The Court then significantly laid down the requisites for availing
the tax exemption under Article XIV, Section 4 (3), namely: (1) We find that the text demonstrates the policy of the 1987
the taxpayer falls under the classification non-stock, non-profit Constitution, discernible from the records of the 1986
educational institution; and (2) the income it seeks to be Constitutional Commission79 to provide broader tax privilege to
exempted from taxation is used actually, directly and exclusively non-stock, non-profit educational institutions as recognition of
for educational purposes.77 their role in assisting the State provide a public good. The tax
exemption was seen as beneficial to students who may otherwise
We now adopt YMCA  as precedent and hold that: be charged unreasonable tuition fees if not for the tax exemption
extended to all revenues and assets of non-stock, non-profit
1. The last paragraph of Section 30 of the Tax Code is without educational institutions.80
force and effect with respect to non-stock, non-profit educational
institutions, provided,  that the non-stock, non-profit educational Further, a plain reading of the Constitution would show that
institutions prove that its assets and revenues are used actually, Article XIV, Section 4 (3) does not require that the revenues and
directly and exclusively for educational purposes. income must have also been sourced from educational activities or
activities related to the purposes of an educational institution. The
2. The tax-exemption constitutionally-granted to non-stock, non- phrase all revenues is unqualified by any reference to the source of
profit educational institutions, is not subject to limitations imposed revenues. Thus, so long as the revenues and income are used
by law. actually, directly and exclusively for educational purposes, then
said revenues and income shall be exempt from taxes and duties.81
The tax exemption granted by the
Constitution to non-stock, non-profit We find it helpful to discuss at this point the taxation
educational institutions is conditioned only of revenues versus the taxation of assets.
on the actual, direct and exclusive use of
78
their assets, revenues and income  for Revenues  consist of the amounts earned by a person or entity from
educational purposes. the conduct of business operations.82 It may refer to the sale of
goods, rendition of services, or the return of an investment.
We find that unlike Article VI, Section 28 (3) of the Constitution Revenue is a component of the tax base in income
(pertaining to charitable institutions, churches, parsonages or tax,83 VAT,84 and local business tax (LBT).85
convents, mosques, and non-profit cemeteries), which exempts
from tax only the assets, Assets, on the other hand, are the tangible and intangible properties
i.e., "all lands, buildings, and improvements, actually, directly, owned by a person or entity.86 It may refer to real estate, cash
and exclusively used for religious, charitable, or educational deposit in a bank, investment in the stocks of a corporation,
purposes ... ," Article XIV, Section 4 (3) categorically states that inventory of goods, or any property from which the person or
entity may derive income or use to generate the same. In Philippine accomplishment of the main purpose of a university, which is to
taxation, the fair market value of real property is a component of educate its students.
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 However, if the university actually, directly and exclusively uses
importation88 and tariff duties.89 for educational purposes the revenues  earned from the lease of its
school building, such revenues shall be exempt from taxes and
Thus, when a non-stock, non-profit educational institution proves duties. The tax exemption no longer hinges on the use of the asset
that it uses its revenues actually, directly, and exclusively for from which the revenues were earned, but on the actual, direct and
educational purposes, it shall be exempted from income tax, VAT, exclusive use of the revenues for educational purposes.
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 Parenthetically, income and revenues of non-stock, non-profit
shall be exempted from RPT. educational institution not used actually, directly and exclusively
for educational purposes are not exempt from duties and taxes. To
To be clear, proving the actual use of the taxable item will result in avail of the exemption, the taxpayer must factually prove that it
an exemption, but the specific tax from which the entity shall be used actually, directly and exclusively for educational purposes the
exempted from shall depend on whether the item is an item of revenues or income sought to be exempted.
revenue or asset.
The crucial point of inquiry then is on the use of the assets or on
To illustrate, if a university leases a portion of its school building the use of the revenues.  These are two things that must be viewed
to a bookstore or cafeteria, the leased portion is not actually, and treated separately. But so long as the assets or  revenues
directly and exclusively  used for educational purposes, even if the are used actually, directly and exclusively for educational
bookstore or canteen caters only to university students, faculty and purposes, they are exempt from duties and taxes.
staff.
The tax exemption granted by the
The leased portion of the building may be subject to real property Constitution to non-stock, non-profit
tax, as held in Abra Valley College, Inc. v. Aquino. 90 We ruled in educational institutions, unlike the exemption
that case that the test of exemption from taxation is the use of the that may be availed of by proprietary
property for purposes mentioned in the Constitution. We also held educational institutions, is not subject to
that the exemption extends to facilities which are incidental to and limitations imposed by law.
reasonably necessary for the accomplishment of the main
purposes. That the Constitution treats non-stock, non-profit educational
institutions differently from proprietary educational institutions
In concrete terms, the lease of a portion of a school building for cannot be doubted. As discussed, the privilege granted to the
commercial purposes, removes such asset  from the property former is conditioned only on the actual, direct and exclusive use
tax exemption granted under the Constitution.91 There is no of their revenues and assets for educational purposes. In clear
exemption because the asset is  not  used actually, directly and contrast, the tax privilege granted to the latter may be subject to
exclusively for educational purposes.  The commercial use of the limitations imposed by law.
property is also not incidental to and reasonably necessary for the
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 duty 93 to uphold the
primacy of the Constitution.94
Finally, we stress that our holding here pertains only to non-stock,
non-profit educational institutions and does not cover the other
exempt organizations under Section 30 of the Tax Code.
For all these reasons, we hold that the income and revenues of
DLSU proven to have been used actually, directly and exclusively
for educational purposes are exempt from duties and taxes.
II. The LOA issued to DLSU is
not entirely void. The
assessment for taxable year
2003 is valid.
DLSU objects to the CTA En Banc 's conclusion that the LOA is
valid for taxable year 2003 and insists that the entire LOA should
be voided for being contrary to RMO No. 43-90, which provides
that if tax audit includes more than one taxable period, the other
periods or years shall be specifically indicated in the LOA.
A LOA is the authority given to the appropriate revenue officer to
examine the books of account and other accounting records of the
taxpayer in order to determine the taxpayer's correct internal
revenue liabilities95 and for the purpose of collecting the correct
amount of tax,96 in accordance with Section 5 of the Tax Code,
which gives the CIR the power to obtain information, to
summon/examine, and take testimony of persons. The LOA
commences the audit process97 and informs the taxpayer that it is
under audit for possible deficiency tax assessment.
Given the purposes of a LOA, is there basis to completely nullify
the LOA issued to DLSU, and consequently, disregard the BIR and
the CTA's findings of tax deficiency for taxable year 2003?
We answer in the negative.
The relevant provision is Section C of RMO No. 43-90, the
pertinent portion of which reads:
3. A Letter of Authority [LOA] should cover a taxable period not
exceeding one taxable year. The practice of issuing [LO As]
covering audit of unverified prior years is hereby prohibited. If the
audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the
[LOA].98
What this provision clearly prohibits is the practice of issuing
LOAs covering audit of unverified prior years. RMO 43-90 does
not say that a LOA which contains unverified prior years is void. It
merely prescribes that if the audit includes more than one taxable
period, the other periods or years must be specified. The provision
read as a whole requires that if a taxpayer is audited for more than
one taxable year, the BIR must specify each taxable year or taxable
period on separate LOAs.
Read in this light, the requirement to specify the taxable period
covered by the LOA is simply to inform the taxpayer of the extent
of the audit and the scope of the revenue officer's authority.
Without this rule, a revenue officer can unduly burden the taxpayer
by demanding random accounting records from random unverified
years,  which may include documents from as far back as ten years
in cases of fraud audit.99
In the present case, the LOA issued to DLSU is for Fiscal Year
Ending 2003 and Unverified Prior Years. The LOA does not
strictly comply with RMO 43-90 because it includes unverified
prior years. This does not mean, however, that the entire LOA is
void.
As the CTA correctly held, the assessment for taxable year 2003 is
valid because this taxable period is specified in the LOA. DLSU
was fully apprised that it was being audited for taxable year 2003.
Corollarily, the assessments for taxable years 2001 and 2002 are
void for having been unspecified on separate LOAs as required
under RMO No. 43-90.
Lastly, the Commissioner's claim that DLSU failed to raise the
issue of the LOA' s validity at the CTA Division, and thus, should
not have been entertained on appeal, is not accurate.
On the contrary, the CTA En Banc found that the issue of the
LOA's validity came up during the trial.100 DLSU then raised the
issue in its memorandum and motion for partial
reconsideration with the CTA Division. DLSU raised it again on
appeal to the CTA En Banc.  Thus, the CTA En Banc  could, as it
did, pass upon the validity of the LOA.101 Besides, the
Commissioner had the opportunity to argue for the validity of the
LOA at the CTA En Banc but she chose not to file her comment
and memorandum despite notice.102
III.The CTA correctly admitted
the supplemental evidence
formally offered by DLSU.
The Commissioner objects to the CTA Division's admission of
DLSU's supplemental pieces of documentary evidence.
To recall, DLSU formally offered its supplemental evidence upon
filing its motion for reconsideration with the CTA Division. 103 The
CTA Division admitted the supplemental evidence, which proved
that a portion of DLSU's rental income was used actually, directly
and exclusively for educational purposes. Consequently, the CTA
Division reduced DLSU's tax liabilities.
We uphold the CTA Division's admission of the supplemental
evidence on distinct but mutually reinforcing grounds, to wit:
(1) the Commissioner failed to timely object to the formal offer of
supplemental evidence; and (2) the CTA is not governed strictly by
the technical rules of evidence.
First, the failure to object to the offered evidence renders it
admissible, and the court cannot, on its own, disregard such
evidence.104
The Court has held that if a party desires the court to reject the
evidence offered, it must so state in the form of a timely objection
and it cannot raise the objection to the evidence for the first time
on appeal.105 Because of a party's failure to timely object, the
evidence offered becomes part of the evidence in the case. As a
consequence, all the parties are considered bound by any outcome
arising from the offer of evidence properly presented.106
As disclosed by DLSU, the Commissioner did not oppose the
supplemental formal offer of evidence despite notice.107 The
Commissioner objected to the admission of the supplemental
evidence only when the case was on appeal to the CTA En
Banc. By the time the Commissioner raised her objection, it was
too late; the formal offer, admission  and evaluation  of the
supplemental evidence were all fait accompli.
We clarify that while the Commissioner's failure to promptly
object had no bearing on the materiality or sufficiency of the
supplemental evidence admitted, she was bound by the outcome of
the CTA Division's assessment of the evidence.108
Second, the CTA is not governed strictly by the technical rules of
evidence. The CTA Division's admission of the formal offer of
supplemental evidence, without prompt objection from the
Commissioner, was thus justified.
Notably, this Court had in the past admitted and considered
evidence attached to the taxpayers' motion for
reconsideration.1âwphi1
In the case of BPI-Family Savings Bank v. Court of Appeals,109 the
tax refund claimant attached to its motion for reconsideration with
the CT A its Final Adjustment Return. The Commissioner, as in
the present case, did not oppose the taxpayer's motion for
reconsideration and the admission of the Final Adjustment
Return.110 We thus admitted and gave weight to the Final
Adjustment Return although it was only submitted upon motion for
reconsideration.
We held that while it is true that strict procedural rules generally
frown upon the submission of documents after the trial, the law
creating the CTA specifically provides that proceedings before it
shall not be governed strictly by the technical rules of
evidence111 and that the paramount consideration remains the
ascertainment of truth. We ruled that procedural rules should not
bar courts from considering undisputed facts  to arrive at a just
determination of a controversy.112
We applied the same reasoning in the subsequent cases of Filinvest
Development Corporation v. Commissioner of Internal
Revenue113 and Commissioner of Internal Revenue v. PERF Realty
Corporation,114 where the taxpayers also submitted the
supplemental supporting document only upon filing their motions
for reconsideration.
Although the cited cases involved claims for tax refunds, we also
dispense with the strict application of the technical rules of
evidence in the present tax assessment case. If anything, the liberal
application of the rules assumes greater force and significance in
the case of a taxpayer who claims a constitutionally granted tax
exemption. While the taxpayers in the cited cases
claimed refund of excess tax payments based on the Tax
Code,115 DLSU is claiming tax exemption based on the
Constitution. If liberality is afforded to taxpayers who paid more
than they should have under a statute, then with more reason that
we should allow a taxpayer to prove its exemption from tax based
on the Constitution.
Hence, we sustain the CTA's admission of DLSU's supplemental
offer of evidence not only because the Commissioner failed to
promptly object, but more so because the strict application of the
technical rules of evidence may defeat the intent of the
Constitution.
IV. The CTA's appreciation of
evidence is generally binding on
the Court unless compelling
reasons justify otherwise.
It is doctrinal that the Court will not lightly set aside the
conclusions reached by the CTA which, by the very nature of its
function of being dedicated exclusively to the resolution of tax
problems, has developed an expertise on the subject, unless there
has been an abuse or improvident exercise of authority.116 We thus
accord the findings of fact by the CTA with the highest respect.
These findings of facts can only be disturbed on appeal if they are
not supported by substantial evidence or there is a showing of
gross error or abuse on the part of the CTA. In the absence of any
clear and convincing proof to the contrary, this Court must
presume that the CTA rendered a decision which is valid in every
respect.117
We sustain the factual findings of the CTA.
The parties failed to raise credible basis for us to disturb the CTA's
findings that DLSU had used actually, directly and exclusively for
educational purposes a portion of its assessed income and that it
had remitted the DST payments though an online imprinting
machine.
a. DLSU used actually, directly, and exclusively for educational
purposes a portion of its assessed income.
To see how the CTA arrived at its factual findings, we review the
process undertaken, from which it deduced that DLSU successfully
proved that it used actually, directly and exclusively for
educational purposes a portion of its rental income.
The CTA reduced DLSU' s deficiency income tax and VAT
liabilities in view of the submission of the supplemental evidence,
which consisted of statement of receipts, statement of
disbursement and fund balance and statement of fund changes.118
These documents showed that DLSU borrowed ₱93.86
Million,119 which was used to build the university's Sports
Complex. Based on these pieces of evidence, the CTA found that
DLSU' s rental income from its concessionaires were indeed
transmitted and used for the payment of this loan. The CTA held
that the degree of preponderance of evidence was sufficiently met
to prove actual, direct and exclusive use for educational purposes.
The CTA also found that DLSU's rental income
from other concessionaires, which were allegedly deposited to
a fund (CF-CPA Account),120 intended for the university's capital
projects, was not proved to have been used actually, directly and
exclusively for educational purposes.  The CTA observed that
"[DLSU] ... failed to fully account for and substantiate all the
disbursements from the [fund]." Thus, the CTA "cannot ascertain
whether rental income from the [other] concessionaires was indeed
used for educational purposes."121
To stress, the CTA's factual findings were based on and supported
by the report of the Independent CPA who reviewed, audited and
examined the voluminous documents submitted by DLSU.
Under the CTA Revised Rules, an Independent CPA's functions
include: (a) examination and verification of receipts, invoices,
vouchers and other long accounts; (b) reproduction of, and
comparison of such reproduction with, and certification that the
same are faithful copies of original documents, and pre-marking of
documentary exhibits consisting of voluminous documents; (c)
preparation of schedules or summaries containing a chronological
listing of the numbers, dates and amounts covered by receipts or
invoices or other relevant documents and the amount(s) of taxes
paid; (d) making findings as to compliance with substantiation
requirements under pertinent tax laws, regulations and
jurisprudence; (e) submission of a formal report with certification
of authenticity and veracity of findings and conclusions in the
performance of the audit; (f) testifying on such formal report; and
(g) performing such other functions as the CTA may direct.122
Based on the Independent CPA's report and on its own
appreciation of the evidence, the CTA held that only the portion of
the rental income pertaining to the substantiated disbursements
(i.e., proved by receipts, vouchers, etc.) from the CF-CPA Account
was considered as used actually, directly and exclusively for
educational purposes. Consequently, the unaccounted and
unsubstantiated disbursements must be subjected to income tax and
VAT.123
The CTA then further reduced  DLSU's tax liabilities by cancelling
the assessments for taxable years 2001 and 2002 due to the
defective LOA.124
The Court finds that the above fact-finding process undertaken by
the CTA shows that it based its ruling on the evidence on record,
which we reiterate, were examined and verified by the Independent
CPA. Thus, we see no persuasive reason to deviate from these
factual findings.
However, while we generally respect the factual findings of the
CTA, it does not mean that we are bound by its conclusions. In the
present case, we do not agree with the method used by the CTA to
arrive at DLSU' s unsubstantiated rental income (i.e., income not
proved to have been actually, directly and exclusively used for
educational purposes).
To recall, the CTA found that DLSU earned a rental
income of ₱l0,610,379.00 in taxable year 2003.125 DLSU earned
this income from leasing a portion of its premises to: 1) MTG-
Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food
Corp., 5) Capri International,  and 6) MTO Bookstore.126
To prove that its rental income was used for educational purposes,
DLSU identified the transactions where the rental income was
expended, viz.: 1) ₱4,007,724.00127 used to pay the loan obtained
by DLSU to build the Sports Complex; and
2) ₱6,602,655.00 transferred to the CF-CPA Account.128
DLSU also submitted documents to the Independent CPA to prove
that the ₱6,602,655.00 transferred to the CF-CPA Account was
used actually, directly and exclusively for educational purposes.
According to the Independent CPA' findings, DLSU was able to
substantiate disbursements from the CF-CPA Account amounting
to ₱6,259,078.30.
Contradicting the findings of the Independent CPA, the CTA
concluded that out of the ₱l0,610,379.00 rental
income, ₱4,841,066.65 was unsubstantiated,  and thus, subject to
income tax and VAT.129
The CTA then concluded that the ratio of substantiated
disbursements to the total disbursements from the CF-CPA
Account for taxable year 2003 is only 26.68%.130 The CTA held as
follows:
However, as regards petitioner's rental income from Alarey, Inc.,
Zaide Food Corp., Capri International and MTO Bookstore, which
were transmitted to the CF-CPA Account, petitioner again failed to
fully account for and substantiate all the disbursements from the
CF-CPA Account; thus failing to prove that the rental income
derived therein were actually, directly and exclusively used for
educational purposes. Likewise, the findings of the Court-
Commissioned Independent CPA show that the disbursements
from the CF-CPA Account for fiscal year 2003 amounts to
₱6,259,078.30 only. Hence, this portion of the rental income, being
the substantiated disbursements of the CF-CPA Account, was
considered by the Special First Division as used actually, directly
and exclusively for educational purposes. Since for fiscal year
2003, the total disbursements per voucher is ₱6,259,078.3 (Exhibit
"LL-25-C"), and the total disbursements per subsidiary ledger
amounts to ₱23,463,543.02 (Exhibit "LL-29-C"), the ratio of
substantiated disbursements for fiscal year 2003 is 26.68%
(₱6,259,078.30/₱23,463,543.02). Thus, the substantiated portion of
CF-CPA Disbursements for fiscal year 2003, arrived at by
multiplying the ratio of 26.68% with the total rent income added to
and used in the CF-CPA Account in the amount of ₱6,602,655.00
is ₱1,761,588.35.131 (emphasis supplied)
For better understanding, we summarize the CTA's computation as
follows:
1. The CTA subtracted the rent income used in the construction of
the Sports Complex (₱4,007,724.00) from the rental income
(₱10,610,379.00) earned from the abovementioned
concessionaries. The difference (₱6,602,655.00) was the portion
claimed to have been deposited to the CF-CPA Account.
2. The CTA then subtracted the supposed substantiated portion of
CF-CPA disbursements (₱1,761,308.37) from the ₱6,602,655.00 to
arrive at the supposed unsubstantiated portion of the rental income
(₱4,841,066.65).132
3. The substantiated  portion of CF-CPA disbursements
(₱l,761,308.37)133 was derived by multiplying the rental income
claimed to have been added to the CF-CPA Account
(₱6,602,655.00) by 26.68% or the ratio
of substantiated  disbursements to total
disbursements (₱23,463,543.02).
4. The 26.68% ratio134 was the result of dividing the substantiated
disbursements from the CF-CPA Account as found by the
Independent CPA (₱6,259,078.30) by the total disbursements
(₱23,463,543.02) from the same account.
We find that this system of calculation is incorrect and does not
truly give effect to the constitutional grant of tax exemption to
non-stock, non-profit educational institutions. The CTA's
reasoning is flawed because it required DLSU to substantiate an
amount that is greater than the rental income deposited in the CF-
CPA Account in 2003.
To reiterate, to be exempt from tax, DLSU has the burden of
proving that the proceeds of its rental income (which amounted to
a total of ₱10.61 million)135 were used for educational purposes.
This amount was divided into two parts: (a) the ₱4.0l million,
which was used to pay the loan obtained for the construction of the
Sports Complex; and (b) the ₱6.60 million,136 which was
transferred to the CF-CPA account.
For year 2003, the total disbursement from the CF-CPA account
amounted to ₱23 .46 million.137 These figures, read in light of the
constitutional exemption, raises the question: does DLSU claim
that the whole total CF-CPA disbursement of ₱23.46 million is
tax-exempt so that it is required to prove that all these
disbursements had been made for educational purposes?
We answer in the negative.
The records show that DLSU never claimed that the total CF-CPA
disbursements of ₱23.46 million had been for educational purposes
and should thus be tax-exempt; DLSU only claimed ₱10.61 million
for tax-exemption and should thus be required to prove that this
amount had been used as claimed.
Of this amount, ₱4.01 had been proven to have been used for
educational purposes, as confirmed by the Independent CPA. The
amount in issue is therefore the balance of ₱6.60 million which
was transferred to the CF-CPA which in turn made disbursements
of ₱23.46 million for various general purposes, among them the
₱6.60 million transferred by DLSU.
Significantly, the Independent CPA confirmed that the CF-CPA
made disbursements for educational purposes in year 2003 in the
amount ₱6.26 million. Based on these given figures, the CT A
concluded that the expenses for educational purposes that had been
coursed through the CF-CPA should be prorated so that only the
portion that ₱6.26 million bears to the total CF-CPA disbursements
should be credited to DLSU for tax exemption.
This approach, in our view, is flawed given the constitutional
requirement that revenues actually and directly used  for
educational purposes should be tax-exempt. As already mentioned
above, DLSU is not claiming that the whole ₱23.46 million CF-
CPA disbursement had been used for educational purposes; it only
claims that ₱6.60 million transferred to CF-CPA had been used for
educational purposes. This was what DLSU needed to prove to
have actually and directly used for educational purposes.
That this fund had been first deposited into a separate fund (the CF
-CPA established to fund capital projects) lends peculiarity to the
facts of this case, but does not detract from the fact that the
deposited funds were DLSU revenue funds that had been
 confirmed and proven to have been actually and directly used for
educational purposes via the CF-CPA. That the CF-CPA might
have had other sources of funding is irrelevant because the
assessment in the present case pertains only to the rental income
which DLSU indisputably earned as revenue in 2003. That the
proven CF-CPA funds used for educational purposes should not be
prorated as part of its total CF-CPA disbursements for purposes of
crediting to DLSU is also logical because no claim whatsoever had
been made that the totality of the CF-CPA disbursements had been
for educational purposes. No prorating is necessary; to state the
obvious, exemption is based on actual and direct use  and this
DLSU has indisputably proven.
Based on these considerations, DLSU should therefore be liable
only for the difference between what it claimed and what it has
proven. In more concrete terms, DLSU only had to prove that its
rental income for taxable year 2003 (₱10,610,379.00) was used for
educational purposes. Hence, while the total disbursements from
the CF-CPA Account amounted to ₱23,463,543.02, DLSU only
had to substantiate its Pl0.6 million rental income, part of which
was the ₱6,602,655.00 transferred to the CF-CPA account. Of this
latter amount, ₱6.259 million was substantiated to have been used
for educational purposes.
To summarize, we thus revise the tax base for deficiency income
tax and VAT for taxable year 2003 as follows:
  CTA
Decision138 Revised
Rental income 10,610,379.00 10,610,379.00
Less: Rent income used in 4,007,724.00 4,007,724.00
construction of the Sports Complex
     
Rental income deposited to the CF-
6,602,655.00 6,602,655.00
CPA Account
     
Less: Substantiated portion of CF- 1,761,588.35 6,259,078.30
CPA disbursements
     
Tax base for deficiency income
4,841,066.65 343.576.70
tax and VAT
On DLSU' s argument that the CTA should have appreciated its
evidence in the same way as it did with the evidence submitted by
Ateneo in another separate case, the CTA explained that the issue
in the Ateneo case was not the same as the issue in the present
case.
The issue in the Ateneo case was whether or not Ateneo could be
held liable to pay income taxes and VAT under certain BIR and
Department of Finance 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.
On this point, we remind DLSU that the rule on uniformity of
taxation does not  mean that subjects of taxation similarly situated
are treated in literally the same way in all and every occasion. The
fact that the Ateneo and DLSU are both non-stock, non-profit
educational institutions, does not mean that the CTA or this Court
would similarly decide every case for (or against) both universities.
Success in tax litigation, like in any other litigation, depends to a
large extent on the sufficiency of evidence. DLSU's evidence was
wanting, thus, the CTA was correct in not fully cancelling its tax
liabilities.
b. DLSU proved its payment of the DST
The CTA affirmed DLSU's claim that the DST due on its mortgage
and loan transactions were paid and remitted through its
bank's On-Line Electronic DST Imprinting Machine. The
Commissioner argues that DLSU is not allowed to use this method
of payment because an educational institution is excluded from the
class of taxpayers who can use the On-Line Electronic DST
Imprinting Machine.
We sustain the findings of the CTA. The Commissioner's argument
lacks basis in both the Tax Code and the relevant revenue
regulations.
DST on documents, loan agreements, and papers shall be levied,
collected and paid for by the person making, signing, issuing,
accepting, or transferring the same.150 The Tax Code provides that
whenever one party to the document enjoys exemption from DST,
the other party not exempt from DST shall be directly liable for the
tax. Thus, it is clear that DST shall be payable by any party to the
document, such that the payment and compliance by one shall
mean the full settlement of the DST due on the document.
In the present case, DLSU entered into mortgage and loan
agreements with banks. These agreements are subject to
DST.151 For the purpose of showing that the DST on the loan
agreement has been paid, DLSU presented its agreements bearing
the imprint showing that DST on the document has been paid by
the bank, its counterparty. The imprint should be sufficient proof
that DST has been paid. Thus, DLSU cannot be further assessed
for deficiency DST on the said documents.
Finally, it is true that educational institutions are not included in
the class of taxpayers who can pay and remit DST through the On-
Line Electronic DST Imprinting Machine under RR No. 9-2000.
As correctly held by the CTA, this is irrelevant because it was not
DLSU who used the On-Line Electronic DST Imprinting
Machine but the bank that handled its mortgage and loan
transactions. RR No. 9-2000 expressly includes banks in the class
of taxpayers that can use the On-Line Electronic DST Imprinting
Machine.
Thus, the Court sustains the finding of the CTA that DLSU proved
the
payment of the assessed DST deficiency, except for the unpaid
balance of
₱13,265.48.152
WHEREFORE, premises considered, we DENY the petition of
the Commissioner of Internal Revenue in G.R. No. 196596
and AFFIRM the December 10, 2010 decision and March 29,
2011 resolution of the Court of Tax Appeals En Banc in CTA En
Banc Case No. 622, except for the total amount of deficiency tax
liabilities of De La Salle University, Inc., which had been reduced.
We also DENY both the petition of De La Salle University, Inc. in
G.R. No. 198841 and the petition of the Commissioner of Internal
Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011
decision and October 4, 2011 resolution of the Court of Tax
Appeals En Banc in CTA En Banc Case No. 671, with
the MODIFICATION that the base for the deficiency income tax
and VAT for taxable year 2003 is ₱343,576.70.
SO ORDERED.
[G.R. No. 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.:
This is a petition for review on certiorari of the July 27, 1984
Decision of the Office of the Presidential Assistant For Legal
Affairs 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 April 28, 1981, the Iloilo Port Manager of respondent
Philippine Ports Authority (PPA for short) wrote petitioner
Victorias Milling 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 permit for cargo handling operations at its
Da-an Banua wharf and remit 10% of its gross income for said
operations as the government’s share.
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
In reply, on November 3, 1981, PPA Iloilo sent petitioner a
memorandum of PPA’s Executive Officer, Maximo Dumlao,
which justified the PPA’s demands. Further request for
reconsideration was denied on January 14, 1982.
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 Court, entitled "Victorias Milling Co., Inc. v. Philippine Ports
Authority," and docketed therein as CTA Case No. 3466.
On January 10, 1984, the Court of Tax Appeals dismissed
petitioner’s action on the ground that it has no jurisdiction. It
recommended that the appeal be addressed to the Office of the
President.
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), which do not and can not include the power to legislate on
procedural matters, much less to effectively take away from the
Court of Tax Appeals the latter’s appellate jurisdiction.
These contentions are untenable for 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:jgc:chanrobles.com.ph
"x       x       x.
(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.
"x       x       x."
Pursuant to the aforequoted provision, PPA enacted Administrative
Order No. 13-77 precisely to govern, among others, appeals from
PPA decisions. 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.chanrobles.com.ph : virtual law
library
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
observation of the Solicitor General that petitioner misleads the
Court. Said Section 131 provides — accordance with the provision of law (United CMC Textile
"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,
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
shall be subject to further affirmation by the PPA Board before it
shall become effective; Provided, however, that if within thirty
(30) 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 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
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.
 marine risks, for which the corresponding insurance policies
were issued. From January, 1952 to 1956, documentary
[G.R. No. L-30644. March 9, 1987.] stamps were bought and affixed to the monthly statements
of policies issued; and from 1957 to 1958 documentary
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. stamps were bought and affixed to the corresponding pages
FIREMAN’S FUND INSURANCE COMPANY and the of the policy register, instead of on the insurance policies
COURT OF TAX APPEALS, Respondents. issued. On July 3, 1959, respondent company discovered
that its monthly statements of business and policy register
B.V . Abela, M.C. Gutierrez & F.J . Malate, Jr., were lost. The loss was reported to the Building
for Respondents. Administration of Ayala Building and the National Bureau of
Investigation on July 6, 1959. Herein petitioner was also
informed of such loss by respondent company, through the
latter’s auditors, Sycip, Gorres and Velayo, in a letter dated
DECISION July, 14, 1959. After conducting an investigation of said loss,
petitioner’s examiner’s examiner ascertained that
respondent company failed to affix the required
PARAS, J.: documentary stamps to the insurance policies issued by it
and failed to preserve its accounting records within the time
prescribed by Section 337 of the Revenue Code by using
This is an appeal from the decision of the respondent Court loose leaf forms as registers of documentary stamps without
of Tax Appeals dated May 24, 1969, in C.T.A. Case No. written authority from the Commissioner of Internal
1629, entitled "FIREMAN’S FUND INSURANCE COMPANY v. Revenue as required by Section 4 of Revenue Regulations
COMMISSIONER OF INTERNAL REVENUE," which reversed No. V-1. As a consequence of these findings, Petitioner, in a
the decision of petitioner Commissioner of Internal Revenue letter dated December 7, 1962, assessed and demanded
holding private respondent Fireman’s Fund Insurance from petitioner the payment of documentary stamp taxes for
Company liable for the payment of the amount of the years 1952 to 1958 in the total amount of P79,806.87
P81,406.87 as documentary stamp taxes and compromise and plus compromise penalties, a total of P81,406.87.
penalties for the years 1952 to 1958. chanroblesvirtualawlibrary

A breakdown of the amount of taxes due and collectible are

Private respondent is a resident foreign insurance as follows: chanrob1es virtual 1aw library

corporation organized under the laws of the United States,

authorized and duly licensed to do business in the YEAR AMOUNT
Philippines. It is a member of the American Foreign
Insurance Association, through which its business is cleared 1952 P6,500.00
(Brief for Respondents, pp. 1-2).
1953 9,977.72
The antecedent facts of this case are as follows: chanrob1es virtual 1aw library

1954 10,908.89
From January, 1952 to December, 1958, herein private
respondent Fireman’s Fund Insurance Company entered into 1955 14,204.52
various insurance contracts involving casualty, fire and
1956 12,108.26
In a letter dated January 14, 1963, respondent company
1957 7,880.68 contested the assessment. After petitioner denied the
protest in a decision dated March 17, 1965, respondent
1958 16,257.60 company appealed to the respondent Court of Tax Appeals
on May 8, 1965. After hearing respondent court rendered its
Total stamp taxes due on decision dated May 24, 1969 (Rollo, pp. 16-21) reversing
the decision of the Commissioner of Internal Revenue. The
policies issued from 1952 to 1958 77,837.67 assailed decision reads in part: jgc:chanrobles.com.ph

Add: Stamp taxes on monthly "The affixture of documentary stamps to papers other than
those authorized by law is not tantamount to failure to pay
statements during: chanrob1es virtual 1aw library the same. It is true that the mode of affixing the stamps as
prescribed by law was not followed, but the fact remains
1957 1,218.35 that the documentary stamps corresponding to the various
insurance policies were purchased and paid by petitioner.
1958 3,264.39 There is no legal justification for respondent to require
petitioner to pay again the documentary stamp tax which it
———— had already paid. To sustain respondent’s stand would
require petitioner to pay the same tax twice. If at all,
Total P82,320.41 petitioner should be proceeded against for failure to comply
with the requirement of affixing the documentary stamps to
Less: Stamp taxes paid per voucher shown: chanrob1es virtual 1aw library the taxable insurance policies and not for failure to pay the
tax. (See Sec. 239 and 332, Rev. Code).
1957 P 416.82
"It should be observed that the law allows the affixture of
1958 2,096.72 2,513.54 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
AMOUNT DUE & COLLECTIBLE P79,906.87 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
(CTA Decision, Rollo, pp. 16-17). only on the strength of his ruling given to Wise & Company
(see Petitioner’s Memorandum, p. 176, CTA rec.; p. 24,
The compromise penalties consisted of the sum of P1,000.00 t.s.n.), one of the general agents of petitioner, however,
as penalty for the alleged failure to affix documentary considering that petitioner actually purchased the
stamps and the further sum of P600.00 as penalty for an documentary stamps, affixed them to the business
alleged violation of Revenue Regulations No. V-1 otherwise statements and policy register and cancelled the stamps by
known as the Bookkeeping Regulations (Brief for perforating them, we hold that petitioner cannot be held
Respondents, p. 4). 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
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
virtual lawlibrary 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.
[G.R. No. L-24754. July 18, 1975.]
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.
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 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.
5. ID.; ID.; INTERPRETATION OF STIPULATIONS. — 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.
Thus, an ambiguity in the tax exemption provision in the
Military Bases Agreement and in the "Aide Memoire" in a
accordance with which a contract was entered into, 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 exception contained in tax statutes must
be strictly construed against the one claiming exemption 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."cralaw virtua1aw library
6. ID.; ID.; ID.; FINDINGS OF COURT OF TAX APPEALS
BINDING. — 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 accorded deference, such being
well-nigh conclusive upon the Supreme Court.
DECISION
MARTIN, J.:
This is a case that draws Us to the tax exemption provision
written in the Military Bases Agreement 1 celebrated by the
Republic of the Philippines and the United States of America
on March 14, 1947, and pursued in the "Aide Memoire" 2
between the two Governments on April 27, 1955.
A quo a decision was rendered by respondent Court of Tax
Appeals ordering the Commissioner of Internal Revenue "to
give tax credit to [private respondents] the amount of
P18,272.21, without pronouncement as to costs." The Tax
Court modified the ruling of 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 review of
said judgment.
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 I
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 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
After trial, the Tax Court rendered the judgment appealed
from. It 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 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.
". . . IN HOLDING THAT UNDER THE MUTUAL DEFENSE
AGREEMENT BETWEEN THE UNITED STATES OF AMERICA
AND THE REPUBLIC OF THE PHILIPPINES THE PETROLEUM
PRODUCTS IN QUESTION ARE EXEMPT FROM THE PAYMENT
OF THE SPECIFIC TAX.
II
". . . 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 EXEMPT FROM THE PAYMENT
OF SPECIFIC TAX.
III
". . . 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
WAS MADE AN INTEGRAL PART OF THE CONTRACT
BETWEEN THE PHILIPPINE GOVERNMENT AND THE
RESPONDENTS P.J. KIENER COMPANY, LTD.,
INTERNATIONAL CONSTRUCTION CORPORATION AND
GAVINO T. UNCHUAN.
IV
". . . 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 any material, equipment or supplies which may be
". . . 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
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 This Court, in a Resolution dated March 13, 1969, gave due course
to the petition (Ibid., p. 40). Petitioner-appellant raised three (3)
LUZON STEVEDORING CORPORATION, petitioner-appellant, assignments of error, to wit:
vs.
COURT OF TAX APPEALS and the HONORABLE I
COMMISSIONER OF INTERNAL REVENUE, respondents-
appellees. The lower court erred in holding that the petitioner-
appellant is engaged in business as stevedore, the
H. San Luis & V.L. Simbulan for petitioner-appellant. work of unloading and loading of a vessel in port,
contrary to the evidence on record.

II
PARAS, J.:
The lower court erred in not holding that the business
This is a petition for review of the October 21, 1968 Decision * of the Court of Tax Appeals in in which petitioner-appellant is engaged, is part and
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,
parcel of the shipping industry.
1969 Resolution of the same court denying the motion for reconsideration.
III
Herein petitioner-appellant, in 1961 and 1962, for the repair and
maintenance of its tugboats, imported various engine parts and other The lower court erred in not allowing the refund
equipment for which it paid, under protest, the assessed sought by petitioner-appellant.
compensating tax. Unable to secure a tax refund from the
Commissioner of Internal Revenue, on January 2, 1964, it filed a The instant petition is without merit.
Petition for Review (Rollo, pp. 14-18) with the Court of Tax Appeals,
docketed therein as CTA Case No. 1484, praying among others, that
The pivotal issue in this case is whether or not petitioner's tugboats"
it be granted the refund of the amount of P33,442.13. The Court of
can be interpreted to be included in the term "cargo vessels" for
Tax Appeals, however, in a Decision dated October 21, 1969 (Ibid.,
purposes of the tax exemption provided for in Section 190 of the
pp. 22-27), denied the various claims for tax refund. The decretal
National Internal Revenue Code, as amended by Republic Act No.
portion of the said decision reads:
3176.
WHEREFORE, finding petitioner's various claims for
Said law provides:
refund amounting to P33,442.13 without sufficient
legal justification, the said claims have to be, as they
are hereby, denied. With costs against petitioner. Sec. 190. Compensating tax. — ... And Provided
further, That the tax imposed in this section shall not
apply to articles to be used by the importer himself in
On January 24, 1969, petitioner-appellant filed a Motion for
the manufacture or preparation of articles subject to
Reconsideration (Ibid., pp. 28-34), but the same was denied in a
specific tax or those for consignment abroad and are
Resolution dated February 20, 1969 (Ibid., p. 35). Hence, the instant
to form part thereof or to articles to be used by the
petition.
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 compensating tax to imported items to be used by the importer
term cargo vessel under the tax exemption provisions of Section 190 himself as operator of passenger and/or cargo vessel (Ibid., p. 25).
of the Revenue Code, as amended by Republic Act. No. 3176. He
argues that in legal contemplation, the tugboat and a barge loaded As quoted in the decision of the Court of Tax Appeals, a tugboat is
with cargoes with the former towing the latter for loading and defined as follows:
unloading of a vessel in part, constitute a single vessel. Accordingly,
it concludes that the engines, spare parts and equipment imported by A tugboat is a strongly built, powerful steam or power
it and used in the repair and maintenance of its tugboats are exempt vessel, used for towing and, now, also used for
from compensating tax (Rollo, p. 23). attendance on vessel. (Webster New International
Dictionary, 2nd Ed.)
On the other hand, respondents-appellees counter that petitioner-
appellant's "tugboats" are not "Cargo vessel" because they are A tugboat is a diesel or steam power vessel designed
neither designed nor used for carrying and/or transporting persons or primarily for moving large ships to and from piers for
goods by themselves but are mainly employed for towing and pulling towing barges and lighters in harbors, rivers and
purposes. As such, it cannot be claimed that the tugboats in question canals. (Encyclopedia International Grolier, Vol. 18, p.
are used in carrying and transporting passengers or cargoes as a 256).
common carrier by water, either coastwise or oceangoing and,
therefore, not within the purview of Section 190 of the Tax Code, as
A tug is a steam vessel built for towing, synonymous
amended by Republic Act No. 3176 (Brief for Respondents-
with tugboat. (Bouvier's Law Dictionary.) (Rollo, p.
Appellees, pp. 45).
24).
This Court has laid down the rule that "as the power of taxation is a
Under the foregoing definitions, petitioner's tugboats clearly do not
high prerogative of sovereignty, the relinquishment is never
fall under the categories of passenger and/or cargo vessels. Thus, it
presumed and any reduction or dimunition thereof with respect to its
is a cardinal principle of statutory construction that where a provision
mode or its rate, must be strictly construed, and the same must be
of law speaks categorically, the need for interpretation is obviated, no
coached in clear and unmistakable terms in order that it may be
plausible pretense being entertained to justify non-compliance. All
applied." (84 C.J.S. pp. 659-800), More specifically stated, the
that has to be done is to apply it in every case that falls within its
general rule is that any claim for exemption from the tax statute
terms (Allied Brokerage Corp. v. Commissioner of Customs, L-27641,
should be strictly construed against the taxpayer (Acting
40 SCRA 555 [1971]; Quijano, etc. v. DBP, L-26419, 35 SCRA 270
Commissioner of Customs v. Manila Electric Co. et al., 69 SCRA 469
[1970]).
[1977] and Commissioner of Internal Revenue v. P.J. Kiener Co. Ltd.,
et al., 65 SCRA 142 [1975]).
And, even if construction and interpretation of the law is insisted
upon, following another fundamental rule that statutes are to be
As correctly analyzed by the Court of Tax Appeals, in order that the
construed in the light of purposes to be achieved and the evils sought
importations in question may be declared exempt from the
to be remedied (People v. Purisima etc., et al., L-42050-66, 86 SCRA
compensating tax, it is indispensable that the requirements of the
544 [1978], it will be noted that the legislature in amending Section
amendatory law be complied with, namely: (1) the engines and spare
190 of the Tax Code by Republic Act 3176, as appearing in the
parts must be used by the importer himself as a passenger and/or
records, intended to provide incentives and inducements to bolster
cargo, vessel; and (2) the said passenger and/or cargo vessel must
the shipping industry and not the business of stevedoring, as
be used in coastwise or oceangoing navigation (Decision, CTA Case
manifested in the sponsorship speech of Senator Gil Puyat (Rollo, p.
No. 1484; Rollo, p. 24).
26).
As pointed out by the Court of Tax Appeals, the amendatory
provisions of Republic Act No. 3176 limit tax exemption from the
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.
L-22805
Sarte and Espinosa for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B.
Afurong and Special Attorney Augusto A. Lim for respondents.
L-27858
Jose Sarte for petitioner.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor
General Felicisimo R. Rosete, Solicitor Lolita O. Gal-lang and Special
Attorney Elpidio C. Cid for 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 amounts. Hence We find no compelling reasons to alter the decision
of respondent Court of Tax Appeals in L-27858 that —
C-4 (27) fixed tax (1954) 10.00
With respect to the compromise penalty in the total
C-4 (37) fixed tax (1953-1954) 20.00 amount of P5,020.00 suggested by respondent to be
paid by petitioner, it is now a well settled doctrine that
TOTAL P69.699.56 compromise penalty cannot be imposed or collected
without the agreement or conformity of the tax
payer (Collector of Internal Revenue vs. University of
Respondent also suggested the payment of the amount of P3,300.00
Santo Tomas, et al., G.R. Nos. L-11274 & L-11280,
as penalties in extrajudicial settlement of petitioner's violations of
November 28, 1958; the Collector of Internal Revenue
Sections 182, 183, 185, 186 and 191 of the Tax Code and of the
v. Bautista, et al., G.R. Nos. L-12250 & 12259, May
Bookkeeping Regulations (p. 25, B.I.R. rec.).
27, 1959; the Philippines International Fair, Inc. v.
Collector of Internal Revenue, G.R. Nos. L-12928 & L-
In G.R. No. L-27858, respondent Commissioner of Internal Revenue 12932, March 31, 1962). (Emphasis for emphasis)
caused the investigation of petitioner for the purpose of ascertaining
its tax liability on August 10, 1960, as a result of which on December
Inasmuch as the figures appearing in the Bureau of Internal
7, 1960, Revenue Examiner Pedro Cabigao reported that "petitioner
Revenue's tax delinquency assessments in both cases (L-22805 and
had manufactured and sold steel chairs without paying the 30% sales
L-27858) are not in dispute, and the respondent Court of Tax Appeals
tax imposed by Section 185(c) of the Tax Code; accepted job orders
ruled in its decision in G.R. No. L-27858 on the lone issue presented
without paying the 3% tax in gross receipts imposed by Section 191
in both cases that the tax assessment of "P25,080.91 as deficiency
of the same Code; manufactured and sold other articles subject to
sales and percentage taxes from 1957 to June 30, 1960" must be
7% sales tax under Section 186 of the same Code but not covered by
paid by petitioner as the sale of other manufactured items did not
the tax exemption privilege; failed to register with the Bureau of
come within the purview, of the tax exemption granted petitioner. We
Internal Revenue books of accounts and sales invoices as required
find it no longer necessary to make a definite stand on the question
by the Bookkeeping Regulations; failed to indicate in the sales
raised in L-22805 as to the alleged error committed by respondent
invoices the Residence Certificate number of customers who
Court of Tax Appeals in dismissing the appeal in C.T.A. 1036 (subject
purchased articles worth P50.00 or over, in violation of the
matter of L-22805) for lack of jurisdiction, the same having been filed
Bookkeeping Regulation; and failed to produce its books of accounts
beyond the 30-day period prescribed in Section 11 of Republic Act
and business records for inspection and examination when required
1126. Suffice it to say on that issue that appellants must perfect their
to do so by the revenue examiner in violation of the Bookkeeping
appeal from the decision of the Commissioner of Internal Revenue to
Regulations (pp. 17-18 B.I.R. rec.)".
the Court of Tax Appeals within the statutory period of 30 days,
otherwise said Court acquires no jurisdiction.
Based on the foregoing, the respondent Commissioner of Internal
Revenue on October 6, 1961, assessed against the petitioner "the
We turn Our attention on the vital issue of tax exemption claimed by
payment of P25,080.91 as deficiency percentage taxes and 25%
petitioner as basis for questioning the tax assessments made by
surcharge for 1957 to 1960 and suggested the payment of P5,020.00
respondent Bureau of Internal Revenue in both cases (G.R. L-22805
as total compromise penalty in extrajudicial settlement of the various
and 27858). There is no doubt that petitioner was given a Certificate
violations of the Tax Code and Bookkeeping Regulation (pp. 28-29
of Tax Exemption By the Secretary of Finance on July 7,1954, as
B.I.R. rec.). "
follows:
1äwphï1.ñët 

Regarding the compromise penalty suggested by respondent Bureau

Be it known that upon application filed by Wonder Mechanical
of Internal Revenue in both G.R. L-22805 and L-27858, it does not
Engineering Corporation, 1310 M. Hizon, Sta. Cruz, Manila, in
appear that petitioner accepted the imposition of the compromise
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 WHEREFORE, the decisions of respondent Court of Tax Appeals in
considered a new and necessary industry for the purpose of Republic these two cases are affirmed. Costs against the petitioner in both
Act No. 35. It is recommended that the benefits of said Act be cases.
extended to this corporation in respect to said industry.

"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.

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
authorized representatives in the Executive branch of the
government, it is quite difficult for Us to believe that the manufacture
of steel chairs, jeep parts, and other articles not constituting
machines for making certain products would fall under the
classification of "new and necessary" industries envisioned in
Republic Acts 35 and 901 as to entitle the petitioner to tax exemption.

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

äwphï1.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).
G.R. No. 115349. April 18, 1997.]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS
and ATENEO DE MANILA UNIVERSITY, Respondents.
The Solicitor General for Petitioner.
Bengzon Zarraga Narciso Cudala Pecson and Bengson
for Private Respondent.
SYLLABUS
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, P46,516.41, exclusive of surcharge and interest.
1994 affirming that of the Court of Tax Appeals. 3
On July 12, 1993, the respondent court rendered the
The Antecedent Facts questioned decision which dispositively reads: chanrob1es virtual 1aw library

The antecedents as found by the Court of Appeals are ‘WHEREFORE, in view of the foregoing, respondent’s decision
reproduced hereinbelow, the same being largely undisputed is SET ASIDE. The deficiency contractor’s tax assessment in
by the parties. cdtech the amount of P46,516.41 exclusive of surcharge and
interest for the fiscal year ended March 31, 1978 is hereby
"Private respondent is a non-stock, non-profit educational CANCELED. No pronouncement as to cost.
institution with auxiliary units and branches all over the
Philippines. One such auxiliary unit is the Institute of SO ORDERED.’
Philippine Culture (IPC), which has no legal personality
separate and distinct from that of private Respondent. The Not in accord with said decision, petitioner has come to this
IPC is a Philippine unit engaged in social science studies of Court via the present petition for review raising the following
Philippine society and culture. Occasionally, it accepts issues: chanrob1es virtual 1aw library

sponsorships for its research activities from international

organizations, private foundations and government ‘1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER
agencies. THE PURVIEW OF INDEPENDENT CONTRACTOR PURSUANT
TO SECTION 205 OF THE TAX CODE; and
On July 8, 1983, private respondent received from petitioner
Commissioner of Internal Revenue a demand letter dated 2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT
June 3, 1983, assessing private respondent the sum of TO 3% CONTRACTOR’S TAX UNDER SECTION 205 OF THE
P174,043.97 for alleged deficiency contractor’s tax, and an TAX CODE’.
assessment dated June 27, 1983 in the sum of P1,141,837
for alleged deficiency income tax, both for the fiscal year The pertinent portions of Section 205 of the National
ended March 31, 1978. Denying said tax liabilities, private Internal Revenue Code, as amended, provide: chanrob1es virtual 1aw library

respondent sent petitioner a letter-protest and subsequently

filed with the latter a memorandum contesting the validity of ‘Sec. 205. Contractor, proprietors or operators of dockyards,
the assessments. and others. — A contractor’s tax of three per centum of the
gross receipts is hereby imposed on the following: chanrob1es virtual 1aw library

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
x           x          x
(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 Republic Act No. 5186: chanrob1es virtual 1aw library

for deficiency contractor’s tax from P193,475.55 to

x           x          x not among the aforementioned exceptions, private
respondent is therefore subject to the 3% contractor’s tax
imposed under the same Code." 4
The term ‘independent contractors’ include persons (juridical
or natural) not enumerated above (but not including The Court of Appeals disagreed with the Petitioner
individuals subject to the occupation tax under Section 12 of Commissioner of Internal Revenue and affirmed the assailed
the Local Tax Code) whose activity consists essentially of the decision of the Court of Tax Appeals. Unfazed, petitioner
sale of all kinds of services for a fee regardless of whether or now asks us to reverse the CA through this petition for
not the performance of the service calls for the exercise or review.
use of the physical or mental faculties of such contractors or
their employees. The Issues

x           x          x
Petitioner submits before us the following issues: jgc:chanrobles.com.ph

Petitioner contends that the respondent court erred in "1. Whether or not private respondent falls under the
holding that private respondent is not an "independent purview of independent contractor pursuant to Section 205
contractor" within the purview of Section 205 of the Tax of the Tax Code
Code. To petitioner, the term "independent contractor", as
defined by the Code, encompasses all kinds of services 2. Whether or not private respondent is subject to 3%
rendered for a fee and that the only exceptions are the contractor’s tax under Section 205 of the Tax Code." 5
following: chanrob1es virtual 1aw library

In fine, these may be reduced to a single issue: Is Ateneo de

‘a. Persons, association and corporations under contract for Manila University, through its auxiliary unit or branch — the
embroidery and apparel for export and gross receipts of or Institute of Philippine Culture — performing the work of an
from pioneer industry registered with the Board of independent contractor and, thus, subject to the three
Investment under R.A. No. 5186; chanroblesvirtual|awlibrary percent contractor’s tax levied by then Section 205 of the
National Internal Revenue Code?
b. Individuals occupation tax under Section 12 of the Local
Tax Code (under the old Section 182 [b] of the Tax Code); The Court’s Ruling
and

c. Regional or area headquarters established in the The petition is unmeritorious.

Philippines by multinational corporations, including their
alien executives, and which headquarters do not earn or Interpretation of Tax Laws
derive income from the Philippines and which act as
supervisory, communication and coordinating centers for The parts of then Section 205 of the National Internal
their affiliates, subsidiaries or branches in the Asia Pacific Revenue Code germane to the case before us read: jgc:chanrobles.com.ph

Region (Section 205 of the Tax Code).’

"SEC. 205. Contractors, proprietors or operators of
Petitioner thus submits that since private respondent falls dockyards, and others. — A contractor’s tax of three per
under the definition of an "independent contractor" and is
centum of the gross receipts is hereby imposed on the
following: chanrob1es virtual 1aw library
x           x          x
(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 Region.
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
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
library
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 In the first place, the petitioner has presented no evidence
selling its services for a fee in pursuit of an independent to prove its bare contention that, indeed contracts for sale of
business. And it is only after private respondent has been services were ever entered into by the private Respondent.
found clearly to be subject to the provisions of Sec. 205 that As appropriately pointed out by the latter: jgc:chanrobles.com.ph

the question of exemption therefrom would arise. Only after

such coverage is shown does the rule of construction — that "An examination of the Commissioner’s Written Formal Offer
tax exemptions are to be strictly construed against the of Evidence in the Court of Tax Appeals shows that only the
taxpayer — come into play, contrary to petitioner’s position. following documentary evidence was presented: chanrob1es virtual 1aw library

This is the main line of reasoning of the Court of Tax Appeals

in its decision, 10 which was affirmed by the CA. Exhibit 1 BIR letter of authority no. 331844

The Ateneo de Manila University Did Not Contract 2 Examiner’s Field Audit Report

for the Sale of the Services of its Institute of Philippine 3 Adjustments to Sales/Receipts
Culture
4 Letter-decision of BIR Commissioner
After reviewing the records of this case, we find no evidence
that Ateneo’s Institute of Philippine Culture ever sold its Bienvenido A. Tan Jr.
services for a fee to anyone or was ever engaged in a
business apart from and independently of the academic None of the foregoing evidence even comes close to purport
purposes of the university. to be contracts between private respondent and third
parties." 12
Stressing that "it is not the Ateneo de Manila University per
se which is being taxed," Petitioner Commissioner of Internal Moreover, the Court of Tax Appeals accurately and correctly
Revenue contends that "the tax is due on its activity of declared that the" funds received by the Ateneo de Manila
conducting researches for a fee. The tax is due on the gross University are technically not a fee. They may however fall
receipts made in favor of IPC pursuant to the contracts the as gifts or donations which are tax-exempt" as shown by
latter entered to conduct researches for the benefit primarily private respondent’s compliance with the requirement of
of its clients. The tax is imposed on the exercise of a taxable Section 123 of the National Internal Revenue Code providing
activity. . . . [T]he sale of services of private respondent is for the exemption of such gifts to an educational institution.
made under a contract and the various contracts entered 13
into between private respondent and its clients are almost of
the same terms, showing, among others, the compensation Respondent Court of Appeals elucidated on the ruling of the
and terms of payment." 11 (Emphasis supplied.) Court of Tax Appeals: jgc:chanrobles.com.ph

In theory, the Commissioner of Internal Revenue may be "To our mind, private respondent hardly fits into the
correct. However, the records do not show that Ateneo’s IPC definition of an ‘independent contractor’. chanrobles.com : virtual law library

in fact contracted to sell its research services for a fee.

Clearly then, as found by the Court of Appeals and the Court For one, the established facts show that IPC, as a unit of the
of Tax Appeals, petitioner’s theory is inapplicable to the private respondent, is not engaged in business.
established factual milieu obtaining in the instant case. Undisputedly, private respondent is mandated by law to
undertake research activities to maintain its university
status. In fact, the research activities being carried out by
the IPC is focused not on business or profit but on social
sciences studies of Philippine society and culture. Since it
can only finance a limited number of IPC’s research projects,
private respondent occasionally accepts sponsorship for
unfunded IPC research projects from international
organizations, private 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 consistent with the private
respondent’s academic agenda; that no proprietary or
commercial purpose research is done; and that private
respondent retains not only the absolute right to publish but
also the ownership of the results of the research conducted
by the IPC. Quite clearly, the aforementioned terms and
conditions belie the allegation that private respondent is a
contractor or is engaged in business.
For another, it bears stressing that private respondent is a
non-stock, non-profit educational corporation. The fact that
it accepted sponsorship for IPC’s unfunded projects is merely
incidental. For, the main function of the IPC is to undertake
research projects under the academic agenda of the
private Respondent. Moreover, the records do not show that
in accepting sponsorship of research work, IPC realized
profits from such work. On the contrary, the evidence shows
that for about 30 years, IPC had continuously operated at a
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 motive for undertaking the research
projects.
Then, too, granting arguendo that IPC made profits from the
sponsored research projects, the fact still remains that there
is no proof that part of such earnings or profits was ever
distributed as dividends to any stockholder, as in fact none
was so distributed because they accrued to the benefit of
the private respondent which is a non-profit educational
institution. "14
Therefore, 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.15 The amounts 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.
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
‘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
library 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.] reported in a return such as for example, income tax or
sales tax. However, the surtax imposed by Section 25 of the
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Tax Code is not one such tax. Accumulated surplus are
AYALA SECURITIES CORPORATION and THE never returned for tax purposes, as there is no law requiring
HONORABLE COURT OF TAX APPEALS, Respondents. 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

DECISION
Petitioner, therefore, submits that

TEEHANKEE, J.: "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
Before the court is petitioner Commissioner of Internal involving the 25% surtax imposed by Section 25 of the Tax
Revenue’s motion for reconsideration of the Court’s decision Code . . ." cralaw virtua1aw library

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:
"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
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,
Petitioner cites the Court of Tax Appeals’ ruling in the earlier
chanrobles.com.ph : virtual law library
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
virtua1aw library
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

1955 fell under the five-year prescriptive period provided in

section 331 of the National Internal Revenue Code and that "In resisting the assessment amounting to P10,864.26 as
the assessment had, therefore, been made after the accumulated earnings tax for 1957, petitioner also invoked
expiration of the said five-year prescriptive period and was the defense of prescription against the right of respondent to
of no binding force and effect. assess the said tax. It is contended that since its income tax
return for 1957 was filed in 1958, and with the clarification
Petitioner has urged that by respondent in his letter dated May 14, 1963, that the
amount sought to be collected was petitioner’s surtax
"A perusal of Sections 331 and 332(a) will reveal that they liability under Section 25 rather than deficiency corporate
refer to a tax, the basis of which is required by law to be income tax under Section 24 of the National Internal
Revenue Code, the assessment has already prescribed under
Section 331 of the same Code.
"Section 331 of the Revenue Code provides: jgc:chanrobles.com.ph
"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 proceeding in court
without assessment for the collection of such 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 day; Provided, That this limitation shall not apply to
cases already investigated prior to the approval of this Code.
"Obviously, Section 331 applies to assessment of National
Internal 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 the particular tax. Consequently, it
has been held that the filing of an income tax return does
not start the running of the statute of limitation for
assessment of the sales tax. (Butuan Sawmill, Inc. v. Court
of Tax Appeals, G.R. No. L-20601, Feb. 28, 1966, 16 SCRA
277).
"Although petitioner filed an income tax return, no return
was filed 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 unreasonable accumulation of
corporate surplus profits. A tax imposed upon unreasonable
accumulation of surplus is in the 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 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.
"Neither does Section 332 apply. Said Section provides: jgc:chanrobles.com.ph
"SEC. 332. Exceptions as to period of limitation of
assessment and collection of taxes. — (a) In the case of a
false or fraudulent return with intent to evade tax or of
failure to file a return, the tax may be assessed, or a
proceeding in court for the collection of such tax may be
begun without assessment, at any time within ten years
after the discovery of the falsity, fraud, or omission.
"(b) Where before the expiration of the time prescribed in
the preceding section for the assessment of the tax, both
the Commissioner of Internal Revenue and the taxpayer
have consented in writing to its assessment after such time,
the tax may be assessed 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 agreed upon.
"(c) Where the assessment of any internal revenue tax has
been made within the period of limitation above prescribed
such tax may 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
holding company of its shareholders through its mother
company, a registered co-partnership then set up by the
individual 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

that in the absence of express statutory provision, the right

of the government to assess unpaid taxes is imprescriptible. Thus, Mr. Lamberto J. Cabral, the accountant of the
Since there is no express statutory provision limiting the corporation, testified before the court as follows: jgc:chanrobles.com.ph

right of the Commissioner of Internal Revenue to assess the

tax on unreasonable accumulation of surplus provided in "Atty. Garces
Section 25 of the Revenue Code, said tax may be assessed
at any time." (Emphasis copied) The investigation Your Honor, shows that for the year 1955,
the Ayala Securities Corporation had 175,000 outstanding
Such ruling was in effect upheld by this Court en banc upon shares of stock and out of these shares of Ayala Securities
its dismissal of the taxpayer’s appeal for lack of merit as Corporation, the Ayala and Company owned 174,996 shares
above stated.chanrobles law library : red of stock.

The Court is persuaded by the fundamental principle invoked "Q. Is that right, Mr. Cabral?
by petitioner that limitations upon the right of the
government to assess and collect taxes will not be presumed "Atty. Ong
in the absence of clear legislation to the contrary and that
where the government has not by express statutory Objection, Your Honor, on the materiality of the question.
provision provided a limitation upon its right to assess
unpaid taxes, such right is imprescriptible. "Judge Alvarez

The Court, therefore, reconsiders its ruling in its decision’ What is the materiality of the question?
under reconsideration that the right to assess and collect the
assessment in question had prescribed after five years, and "Atty. Garces
instead rules that there is no such time limit on the right of
the Commissioner of Internal Revenue to assess the 25% We want to prove to this Honorable Court that Ayala
tax on unreasonably accumulated surplus provided in section Securities Corporation is a holding or investment company,
25 of the Tax Code, since there is no express statutory the parent company being Ayala and Company.
provision limiting such right or providing for its prescription.
The underlying purpose of the additional tax in question on a "Judge Alvarez
corporation’s improperly accumulated profits or surplus is as
set forth in the text of section 25 of the Tax Code itself 1 to Witness may answer.
avoid the situation where a corporation unduly retains its
surplus earnings instead of declaring and paying dividends "A. I think so; yes.
to its shareholders or members who would then have to pay
the income tax due on such dividends received by them. The "Q. And Ayala and Company is owned almost wholly by the
record amply shows that respondent corporation is a mere Zobel Family and the Ayala Family?
 Corporation are also the employees of the Ayala and
"Atty. Ong Company?

If Your Honor please, objection again on the materiality.
What would counsel for the respondent prove on this point?
"Atty. Garces
Same purpose, Your Honor; to prove that Ayala Securities
Corporation is a mere investment or holding company.
"A. At the time, if I remember right, Ayala and Company
was the operating company and the employees were the
employees of the Ayala and Company; (t.s.n., pp. 32-37)
Another witness, Mr. Salvador J. Lorayes, the Secretary and
head of the Legal Department of the corporation, also
testified that: chanrob1es virtual 1aw library

"Atty. Ong Judge Alvarez questions

What is the materiality of the case if it is a mere investment "Q. May we know from you whether Ayala Securities
company. In fact, we are here in court to prove the Corporation is an affiliate of Ayala and Company?
reasonableness or unreasonableness of the accumulation of
profit. I think counsel for the respondent is trying to harp on "A. Yes, Your Honor.
presumption; but actually we will not be delving on
presumption but on actual facts proving the reasonableness "Q. Do we understand from you that Ayala and Company is
of the accumulation based on actual evidence. the mother corporation of this affiliate?

"Judge Alvarez. "A. That is correct.

In order to determine the reasonableness or "Q. And that the policy of Ayala Securities Corporation is
unreasonableness, there must be a basis. Witness will have practically governed by the officers or partners of Ayala and
to answer the question. Company?

"A. Yes. "A. They have a strong influence over the policy of Ayala
Securities Corporation.
x           x          x
"Q. So that whatever is decided by the partners of Ayala and
Company for a certain investment or project would also be
"Q. As of September 30, 1955 when the Ayala Securities followed by Ayala Securities Corporation?
Corporation filed its income tax return, were the officers of
the Ayala Securities Corporation and the Ayala and Company "A. If the project is assigned to Ayala Securities Corporation,
housed in the same building? 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

"A. Yes, sir; they were.

Respondent corporation was therefore fully shown to fall
"Q. And also are the employees of the Ayala Securities under Revenue Regulation No. 2 implementing the
Corporation and the Ayala and Company the same — provisions of the income tax law which provides on holding
meaning that the employees of the Ayala Securities 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
[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
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):
"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
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
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
library 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
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
library 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
library 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 of Gotamco and reversed the
Commissioner’s decision. The Court of Tax Appeal’s decision
is now before us for review on certiorari.
In his first assignment of error, petitioner questions the
entitlement of the WHO to tax exemption, contending that
the Host Agreement is null and void, not having been ratified
by the Philippine Senate as required by the Constitution. We
find no merit in this contention. 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. 1 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
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 its purview. Petitioner’s position
is that the contractor’s tax "is in the nature of an excise tax
which is a charge imposed upon the performance of an act,
the enjoyment of a privilege or the engaging in an
occupation . . . It is a tax due primarily and directly on the
contractor, not on the owner of the building. Since this tax
has no bearing upon the WHO, it cannot be deemed an
indirect taxation upon it."
cralaw virtua1aw
We agree with the Court of Tax Appeals in rejecting this
contention of the petitioner. Said the respondent court:
chanrobles.com:chanrobles.com.ph
chanrobles
"In context, direct taxes are those that 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. Ed. 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 it is the WHO 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 claims that under the authority of the Philippine
Acetylene Company versus Commissioner of Internal
Revenue, Et Al., 3 the 3% contractor’s tax falls directly on
Gotamco and cannot be shifted to the WHO. The Court of
Tax Appeals, however, held that the said case is not
controlling in this case, since the Host Agreement specifically
exempts the WHO from "indirect taxes." We agree. The
Philippine Acetylene case involved a tax on sales of 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
library 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
virtualawlibrary 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 47,312,353.94 11,828,088.48
8,988,362.97 68,128,805.39
PHILEX MINING CORPORATION, petitioner,
vs. ————— ————— —————— ——————
COMMISSIONER OF INTERNAL REVENUE, COURT OF
APPEALS, and THE COURT OF TAX APPEALS, respondents. 1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82
30,887,982.25

2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18

24,805,194.88
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. 43,013,541.70 10,753,385.43
36975   affirming the Court of Tax Appeals decision in CTA Case No.
1
1,926,250.00 55,693,177.13
4872 dated March 16, 1995   ordering it to pay the amount of
2

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 249 90,325,895.64 22,581,473.91
of the Tax Code of 1977. 10,914,612.97 123,821,982.52  3

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 of
P123,821.982.52 computed as follows:
In a letter dated August 20, 1992,   Philex protested the demand for
4

PERIOD COVERED BASIC
INTEREST TOTAL EXCISE
TAX DUE
payment of the tax liabilities stating that it has pending claims for VAT
TAX 25% SURCHARGE 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

2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16

19,517,021.91 In reply, the BIR, in a letter dated September 7, 1992,   found no merit
6

in Philex's position. Since these pending claims have not yet been
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 established or determined with certainty, it follows that no legal
21,721,845.60 compensation can take place. Hence, the BIR reiterated its demand
that Philex settle the amount plus interest within 30 days from the
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 receipt of the letter.
26,889,937.88
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.   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.
7
WHEREFORE, the appeal by way of petition for
review is hereby DISMISSED and the decision dated
March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which was, nevertheless,
denied in a Resolution dated July 11, 1996.  13

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
However, a few days after the denial of its motion for reconsideration,
Philex was able to obtain its VAT input credit/refund not only for the
taxable year 1989 to 1991 but also for 1992 and 1994, computed as
follows: 
14

obligations must be liquidated and demandable.

"Liquidated" debts are those where the exact amount Period Covered Tax Credit Date
has already been determined (PARAS, Civil Code of
the Philippines, Annotated, Vol. IV, Ninth Edition, p. By Claims For Certificate of
259). In the instant case, the claims of the Petitioner
for VAT refund is still pending litigation, and still has to
VAT refund/credit Number Issue Amount
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 1994 (2nd Quarter) 007730 11 July 1996
the unliquidated claim which Petitioner conceived to P25,317,534.01
exist in its favor (see Compañia General de Tabacos
vs. French and Unson, No. 14027, November 8, 1994 (4th Quarter) 007731 11 July 1996
1918, 39 Phil. 34). 8 P21,791,020.61

Moreover, the Court of Tax Appeals ruled that "taxes cannot be 1989 007732 11 July 1996 P37,322,799.19
subject to set-off on compensation since claim for taxes is not a debt
or contract."   The dispositive portion of the CTA decision   provides:
9 10 1990-1991 007751 16 July 1996 P84,662,787.46

In all the foregoing, this Petition for Review is hereby 1992 (1st-3rd Quarter) 007755 23 July 1996
DENIED for lack of merit and Petitioner is hereby P36,501,147.95
ORDERED to PAY the Respondent the amount of
P110,677,668.52 representing excise tax liability for In view of the grant of its VAT input credit/refund, Philex now
the period from the 2nd quarter of 1991 to the 2nd contends that the same should, ipso jure, off-set its excise tax
quarter of 1992 plus 20% annual interest from August liabilities   since both had already become "due and demandable, as
15

6, 1994 until fully paid pursuant to Section 248 and well as fully liquidated;"   hence, legal compensation can properly
16

249 of the Tax Code, as amended. take place.

Aggrieved with the decision, Philex appealed the case before the We see no merit in this contention.
Court of Appeals docketed as CA-GR. CV No. 36975.   Nonetheless,
11

on April 8, 1996, the Court of Appeals a Affirmed the Court of Tax In several instances prior to the instant case, we have already made
Appeals observation. The pertinent portion of which reads:  12
the pronouncement that taxes cannot be subject to compensation for
the simple reason that the government and the taxpayer are not
creditors and debtors of each other.   There is a material distinction
17
between a tax and debt. Debts are due to the Government in its
corporate capacity, while taxes are due to the Government in its
sovereign capacity.   We find no cogent reason to deviate from the
18
aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate
Court,   we categorically held that taxes cannot be subject to set-off
19
or compensation, thus:
We have consistently ruled that there can be no off-
setting of taxes against the claims that the taxpayer
may have against the government. A person cannot
refuse to pay a tax on the ground that the government
owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await
the results of a lawsuit against the government.
The ruling in Francia has been applied to the subsequent case
of Caltex Philippines, Inc. v. Commission on Audit,   which reiterated
20
that:
. . . a taxpayer may not offset taxes due from the
claims that he may have against the government.
Taxes cannot be the subject of compensation
because the government and taxpayer are not
mutually creditors and debtors of each other and a
claim for taxes is not such a debt, demand, contract
or judgment as is allowed to be set-off.
Further, Philex's reliance on our holding in Commissioner of Internal
Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a pending
refund may be set off against an existing tax liability even though the
refund has not yet been approved by the Commissioner,   is no 21
longer without any support in statutory law.
It is important to note, that the premise of our ruling in the
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 upon which
the Itogon-Suyoc pronouncement was based was
omitted.   Accordingly,
22
the doctrine enunciated in Itogon-
Suyoc cannot be invoked by Philex.
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
unjustified. Philex posits the theory that it had no obligation to pay the
excise tax liabilities within the prescribed period since, after all, it still
has pending claims for VAT input credit/refund with BIR.  23
We fail to see the logic of Philex's claim for this is an outright
disregard of the basic principle in tax law that taxes are the lifeblood
of the government and so should be collected without unnecessary
hindrance.   Evidently, to countenance Philex's whimsical reason
24
would render ineffective our tax collection system. Too simplistic, it
finds no support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax
liabilities on the ground that it has a pending tax claim for refund or
credit against the government which has not yet been granted. It
must be noted that a distinguishing feature of a tax is that it is
compulsory rather than a matter of bargain.   Hence, a tax does not
25
depend upon the consent of the taxpayer.   If any taxpayer can defer
26
the payment of taxes by raising the defense that it still has a pending
claim for refund or credit, this would adversely affect the government
revenue system. A taxpayer cannot refuse to pay his taxes when they
fall due simply because he has a claim against the government or
that the collection of the tax is contingent on the result of the lawsuit it
filed against the government.   Moreover, Philex's theory that would
27
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.   The same cannot be condoned for flimsy reasons,   similar
28 29
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)   of the30
National Internal Revenue Code of 1977, which requires the refund of
input taxes within 60 days,   when it took five years for the latter to
31
grant its tax claim for VAT input credit/refund.  32
In this regard, we agree with Philex. While there is no dispute that a Art. 27 of the Civil Code provides:
claimant has the burden of proof to establish the factual basis of his
or her claim for tax credit or refund,   however, once the claimant has
33
Art. 27. Any person suffering material or moral loss
submitted all the required documents it is the function of the BIR to because a public servant or employee refuses or
assess these documents with purposeful dispatch. After all, since neglects, without just cause, to perform his official
taxpayers owe honestly to government it is but just that government duty may file an action for damages and other relief
render fair service to the taxpayers.  34
against the latter, without prejudice to any disciplinary
action that may be taken.
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 More importantly, Section 269 (c) of the National Internal Revenue
in 1996. Obviously, had the BIR been more diligent and judicious with Act of 1997 states:
their duty, it could have granted the refund earlier. We need not
remind the BIR that simple justice requires the speedy refund of x x x           x x x          x x x
wrongly-held taxes.   Fair dealing and nothing less, is expected by
35

the taxpayer from the BIR in the latter's discharge of its function. As
(c) Wilfully neglecting to give receipts, as by law
aptly held in Roxas v. Court of Tax Appeals:  36

required for any sum collected in the performance of

duty or wilfully neglecting to perform, any other duties
The power of taxation is sometimes called also the enjoyed by law.
power to destroy. Therefore it should be exercised
with caution to minimize injury to the proprietary rights
Simply put, both provisions abhor official inaction, willful neglect and
of a taxpayer. It must be exercised fairly, equally and
unreasonable delay in the performance of official duties.   In no39

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.   Again, while we understand Philex's predicament, it must
37
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.

be stressed that the same is not a valid reason for the non-payment
In sum, while we can never condone the BIR's apparent callousness
of its tax liabilities.
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
To be sure, this is not to state that the taxpayer is devoid of remedy into his own hands" should have guided Philex's action.
against public servants or employees, especially BIR examiners who,
in investigating tax claims are seen to drag their feet needlessly. First,
WHEREFORE, in view of the foregoing, the instant petition is hereby
if the BIR takes time in acting upon the taxpayer's claim for refund,
DISMISSED. The assailed decision of the Court of Appeals dated
the latter can seek judicial remedy before the Court of Tax Appeals in
April 8, 1996 is hereby AFFIRMED.
the manner prescribed by law.   Second, if the inaction can be
38

characterized as willful neglect of duty, then recourse under the Civil

Code and the Tax Code can also be availed of. SO ORDERED.