G.R. No. 147188             September 14, 2004 Stocks.

9 Three and a half years later, or on 16 January 1994, Toda

COMMISSIONER OF INTERNAL REVENUE, petitioner, died.
vs. On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special assessment notice10 and demand letter to the CIC for deficiency
Co-administrators Lorna Kapunan and Mario Luza income tax for the year 1989 in the amount of ₱79,099,999.22.
Bautista, respondents. The new CIC asked for a reconsideration, asserting that the
DECISION assessment should be directed against the old CIC, and not against
DAVIDE, JR., C.J.: the new CIC, which is owned by an entirely different set of
This Court is called upon to determine in this case whether the tax stockholders; moreover, Toda had undertaken to hold the buyer of his
planning scheme adopted by a corporation constitutes tax evasion that stockholdings and the CIC free from all tax liabilities for the fiscal
would justify an assessment of deficiency income tax. years 1987-1989.11
The petitioner seeks the reversal of the Decision1 of the Court of On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented
Appeals of 31 January 2001 in CA-G.R. SP No. 57799 affirming the 3 by special co-administrators Lorna Kapunan and Mario Luza Bautista,
January 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. received a Notice of Assessment12 dated 9 January 1995 from the
Case No. 5328,3 which held that the respondent Estate of Benigno P. Commissioner of Internal Revenue for deficiency income tax for the
Toda, Jr. is not liable for the deficiency income tax of Cibeles year 1989 in the amount of ₱79,099,999.22, computed as follows:
Insurance Corporation (CIC) in the amount of ₱79,099,999.22 for the
year 1989, and ordered the cancellation and setting aside of the Income Tax – 1989
assessment issued by Commissioner of Internal Revenue Liwayway
Vinzons-Chato on 9 January 1995. Net Income per return ₱75,987,725.
   
The case at bar stemmed from a Notice of Assessment sent to CIC by 00
the Commissioner of Internal Revenue for deficiency income tax Add: Additional gain on sale of real
arising from an alleged simulated sale of a 16-storey commercial property taxable under ordinary
building known as Cibeles Building, situated on two parcels of land on corporate income but were substituted 100,000,000
Ayala Avenue, Makati City. with individual capital gains(₱200M – .00
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and 100M)
owner of 99.991% of its issued and outstanding capital stock, to sell
the Cibeles Building and the two parcels of land on which the building Total Net Taxable Income per ₱175,987,72
stands for an amount of not less than ₱90 million.4 investigation 5.00
On 30 August 1989, Toda purportedly sold the property for ₱100 Tax Due thereof at
million to Rafael A. Altonaga, who, in turn, sold the same property on ₱ 61,595,703.75
35%
the same day to Royal Match Inc. (RMI) for ₱200 million. These two
transactions were evidenced by Deeds of Absolute Sale notarized on Less: Payment
the same day by the same notary public.5 already made
For the sale of the property to RMI, Altonaga paid capital gains tax in 1. Per return ₱26,595,704.00
the amount of ₱10 million.6
On 16 April 1990, CIC filed its corporate annual income tax return7 for 2. Thru Capital
the year 1989, declaring, among other things, its gain from the sale of Gains Tax made 36,595,704. Balance of
real property in the amount of ₱75,728.021. After crediting     by R.A. Altonaga 10,000,000.00 00 tax due
withholding taxes of ₱254,497.00, it paid ₱26,341,2078 for its net
taxable income of ₱75,987,725.
₱
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun
24,999,999.
T. Choa for ₱12.5 million, as evidenced by a Deed of Sale of Shares of
 75 as capital gains tax of Altonaga, instead of at the rate of 35% as
corporate income tax of CIC. The income tax return filed by CIC for
Add: 50% 1989 with intent to evade payment of the tax was thus false or
12,499,999.88
Surcharge fraudulent. Since such falsity or fraud was discovered by the BIR only
25% Surcharge 6,249,999.9 on 8 March 1991, the assessment issued on 9 January 1995 was well
4 within the prescriptive period prescribed by Section 223 (a) of the
National Internal Revenue Code of 1986, which provides that tax may
be assessed within ten years from the discovery of the falsity or fraud.
₱ With the sale being tainted with fraud, the separate corporate
Total 43,749,999. personality of CIC should be disregarded. Toda, being the registered
57 owner of the 99.991% shares of stock of CIC and the beneficial owner
of the remaining 0.009% shares registered in the name of the
Add: Interest 20%
individual directors of CIC, should be held liable for the deficiency
from
income tax, especially because the gains realized from the sale were
4/16/90-4/30/94 withdrawn by him as cash advances or paid to him as cash dividends.
35,349,999.65
(.808) Since he is already dead, his estate shall answer for his liability.
In its decision18 of 3 January 2000, the CTA held that the
Commissioner failed to prove that CIC committed fraud to deprive the
₱ government of the taxes due it. It ruled that even assuming that a
79,099,999. pre-conceived scheme was adopted by CIC, the same constituted mere
TOTAL AMT. DUE & COLLECTIBLE
22 tax avoidance, and not tax evasion. There being no proof of fraudulent
======== transaction, the applicable period for the BIR to assess CIC is that
====== prescribed in Section 203 of the NIRC of 1986, which is three years
The Estate thereafter filed a letter of protest.13 after the last day prescribed by law for the filing of the return. Thus,
In the letter dated 19 October 1995,14 the Commissioner dismissed the the government’s right to assess CIC prescribed on 15 April 1993. The
protest, stating that a fraudulent scheme was deliberately perpetuated assessment issued on 9 January 1995 was, therefore, no longer valid.
by the CIC wholly owned and controlled by Toda by covering up the The CTA also ruled that the mere ownership by Toda of 99.991% of
additional gain of ₱100 million, which resulted in the change in the the capital stock of CIC was not in itself sufficient ground for piercing
income structure of the proceeds of the sale of the two parcels of land the separate corporate personality of CIC. Hence, the CTA declared
and the building thereon to an individual capital gains, thus evading that the Estate is not liable for deficiency income tax of
the higher corporate income tax rate of 35%. ₱79,099,999.22 and, accordingly, cancelled and set aside the
On 15 February 1996, the Estate filed a petition for review 15 with the assessment issued by the Commissioner on 9 January 1995.
CTA alleging that the Commissioner erred in holding the Estate liable In its motion for reconsideration,19 the Commissioner insisted that the
for income tax deficiency; that the inference of fraud of the sale of the sale of the property owned by CIC was the result of the connivance
properties is unreasonable and unsupported; and that the right of the between Toda and Altonaga. She further alleged that the latter was a
Commissioner to assess CIC had already prescribed. representative, dummy, and a close business associate of the former,
In his Answer16 and Amended Answer,17 the Commissioner argued that having held his office in a property owned by CIC and derived his
the two transactions actually constituted a single sale of the property salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda
by CIC to RMI, and that Altonaga was neither the buyer of the for representation services rendered. The CTA denied20 the motion for
property from CIC nor the seller of the same property to RMI. The reconsideration, prompting the Commissioner to file a petition for
additional gain of ₱100 million (the difference between the second review21 with the Court of Appeals.
simulated sale for ₱200 million and the first simulated sale for ₱100 In its challenged Decision of 31 January 2001, the Court of Appeals
million) realized by CIC was taxed at the rate of only 5% purportedly affirmed the decision of the CTA, reasoning that the CTA, being more
advantageously situated and having the necessary expertise in
matters of taxation, is "better situated to determine the correctness,
propriety, and legality of the income tax assessments assailed by the
Toda Estate."22
Unsatisfied with the decision of the Court of Appeals, the
Commissioner filed the present petition invoking the following
grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT
COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE
SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE
SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE
CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF
PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX
FOR THE YEAR 1989 HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings
and insists that the sale by CIC of the Cibeles property was in
connivance with its dummy Rafael Altonaga, who was financially
incapable of purchasing it. She further points out that the documents
themselves prove the fact of fraud in that (1) the two sales were done
simultaneously on the same date, 30 August 1989; (2) the Deed of
Absolute Sale between Altonaga and RMI was notarized ahead of the
alleged sale between CIC and Altonaga, with the former registered in
the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91, Page
20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20,
Book I, Series of 1989, of the same Notary Public; (3) as early as 4
May 1989, CIC received ₱40 million from RMI, and not from Altonaga.
The said amount was debited by RMI in its trial balance as of 30 June
1989 as investment in Cibeles Building. The substantial portion of ₱40
million was withdrawn by Toda through the declaration of cash
dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to
present the income tax return of Altonaga to prove that the latter is
financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following
questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year
1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax
of CIC for the year 1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used
by taxpayers in escaping from taxation. Tax avoidance is the tax
saving device within the means sanctioned by law. This method should
be used by the taxpayer in good faith and at arms length. Tax evasion,
on the other hand, is a scheme used outside of those lawful means
and when availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities.23
Tax evasion connotes the integration of three factors: (1) the end to
be achieved, i.e., the payment of less than that known by the taxpayer
to be legally due, or the non-payment of tax when it is shown that a
tax is due; (2) an accompanying state of mind which is described as
being "evil," in "bad faith," "willfull," or "deliberate and not accidental";
and (3) a course of action or failure of action which is unlawful.24
All these factors are present in the instant case. It is significant to note
that as early as 4 May 1989, prior to the purported sale of the Cibeles
property by CIC to Altonaga on 30 August 1989, CIC received ₱40
million from RMI,25 and not from Altonaga. That ₱40 million was
debited by RMI and reflected in its trial balance26 as "other inv. –
Cibeles Bldg." Also, as of 31 July 1989, another ₱40 million was
debited and reflected in RMI’s trial balance as "other inv. – Cibeles
Bldg." This would show that the real buyer of the properties was RMI,
and not the intermediary Altonaga.lavvphi1.net
The investigation conducted by the BIR disclosed that Altonaga was a
close business associate and one of the many trusted corporate
executives of Toda. This information was revealed by Mr. Boy Prieto,
the assistant accountant of CIC and an old timer in the company.27 But
Mr. Prieto did not testify on this matter, hence, that information
remains to be hearsay and is thus inadmissible in evidence. It was not
verified either, since the letter-request for investigation of Altonaga
was unserved,28 Altonaga having left for the United States of America
in January 1990. Nevertheless, that Altonaga was a mere conduit finds
support in the admission of respondent Estate that the sale to him was
part of the tax planning scheme of CIC. That admission is borne by the
records. In its Memorandum, respondent Estate declared:
Petitioner, however, claims there was a "change of structure" of the
proceeds of sale. Admitted one hundred percent. But isn’t this
precisely the definition of tax planning? Change the structure of the
funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code
exists, allowing tax free transfers of property for stock, changing the
structure of the property and the tax to be paid. As long as it is done
legally, changing the structure of a transaction to achieve a lower tax
is not against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a
tax. Surely petitioner [sic] cannot be faulted for wanting to reduce
the tax from 35% to 5%.29 [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were
two sales of the subject properties, i.e., from CIC to Altonaga, and
then from Altonaga to RMI cannot be considered a legitimate tax
planning. Such scheme is tainted with fraud.
Fraud in its general sense, "is deemed to comprise anything calculated
to deceive, including all acts, omissions, and concealment involving a
breach of legal or equitable duty, trust or confidence justly reposed,
resulting in the damage to another, or by which an undue and
unconscionable advantage is taken of another."30
Here, it is obvious that the objective of the sale to Altonaga was to
reduce the amount of tax to be paid especially that the transfer from
him to RMI would then subject the income to only 5% individual
capital gains tax, and not the 35% corporate income tax. Altonaga’s
sole purpose of acquiring and transferring title of the subject
properties on the same day was to create a tax shelter. Altonaga
never controlled the property and did not enjoy the normal benefits
and burdens of ownership. The sale to him was merely a tax ploy, a
sham, and without business purpose and economic substance.
Doubtless, the execution of the two sales was calculated to mislead
the BIR with the end in view of reducing the consequent income tax
liability.lavvphi1.net
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga,
which was prompted more on the mitigation of tax liabilities than for
legitimate business purposes constitutes one of tax evasion.31
Generally, a sale or exchange of assets will have an income tax
incidence only when it is consummated.32 The incidence of taxation
depends upon the substance of a transaction. The tax consequences
arising from gains from a sale of property are not finally to be
determined solely by the means employed to transfer legal title.
Rather, the transaction must be viewed as a whole, and each step
from the commencement of negotiations to the consummation of the
sale is relevant. A sale by one person cannot be transformed for tax
purposes into a sale by another by using the latter as a conduit
through which to pass title. To permit the true nature of the
transaction to be disguised by mere formalisms, which exist solely to
alter tax liabilities, would seriously impair the effective administration
of the tax policies of Congress.33
To allow a taxpayer to deny tax liability on the ground that the sale
was made through another and distinct entity when it is proved that
the latter was merely a conduit is to sanction a circumvention of our
tax laws. Hence, the sale to Altonaga should be disregarded for income
tax purposes.34 The two sale transactions should be treated as a single
direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of
the NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of
1997), which stated as follows:
Sec. 24. Rates of tax on corporations. – (a) Tax on domestic
corporations.- A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines,
and partnerships, no matter how created or organized but not
including general professional partnerships, in accordance with the
following:
Twenty-five percent upon the amount by which the taxable net income
does not exceed one hundred thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income
exceeds one hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net
income in 1989. The 5% individual capital gains tax provided for in
Section 34 (h) of the NIRC of 198635 (now 6% under Section 24 (D)
(1) of the Tax Reform Act of 1997) is inapplicable. Hence, the
assessment for the deficiency income tax issued by the BIR must be
upheld.
Has the period of assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax
Reform Act of 1997) read:
Sec. 269. 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 after 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: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud
shall be judicially taken cognizance of in the civil or criminal action for
collection thereof… .
Put differently, in cases of (1) fraudulent returns; (2) false returns
with intent to evade tax; and (3) failure to file a return, the period
within which to assess tax is ten years from discovery of the fraud,
falsification or omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his
counsel, asked the Opinion of the BIR on the tax consequence of the
two sale transactions.36 Thus, the BIR was amply informed of the
transactions even prior to the execution of the necessary documents to
effect the transfer. Subsequently, the two sales were openly made
with the execution of public documents and the declaration of taxes for
1989. However, these circumstances do not negate the existence of
fraud. As earlier discussed those two transactions were tainted with
fraud. And even assuming arguendo that there was no fraud, we find
that the income tax return filed by CIC for the year 1989 was false. It
did not reflect the true or actual amount gained from the sale of the
Cibeles property. Obviously, such was done with intent to evade or
reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in
case of false returns is ten years from the discovery of the falsity. The
false return was filed on 15 April 1990, and the falsity thereof was
claimed to have been discovered only on 8 March 1991.37 The
assessment for the 1989 deficiency income tax of CIC was issued on 9
January 1995. Clearly, the issuance of the correct assessment for
deficiency income tax was well within the prescriptive period.
Is respondent Estate liable for the 1989 deficiency income tax of
Cibeles Insurance Corporation?
A corporation has a juridical personality distinct and separate from the
persons owning or composing it. Thus, the owners or stockholders of a
corporation may not generally be made to answer for the liabilities of a
corporation and vice versa. There are, however, certain instances in
which personal liability may arise. It has been held in a number of
cases that personal liability of a corporate director, trustee, or officer
along, albeit not necessarily, with the corporation may validly attach
when:
1. He assents to the (a) patently unlawful act of the corporation, (b)
bad faith or gross negligence in directing its affairs, or (c) conflict of
interest, resulting in damages to the corporation, its stockholders, or
other persons;
2. He consents to the issuance of watered down stocks or, having
knowledge thereof, does not forthwith file with the corporate secretary
his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the
corporation; or
4. He is made, by specific provision of law, to personally answer for his
corporate action.38
It is worth noting that when the late Toda sold his shares of stock to
Le Hun T. Choa, he knowingly and voluntarily held himself personally
liable for all the tax liabilities of CIC and the buyer for the years 1987,
1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks
specifically provides:
g. Except for transactions occurring in the ordinary course of business,
Cibeles has no liabilities or obligations, contingent or otherwise, for
taxes, sums of money or insurance claims other than those reported in
its audited financial statement as of December 31, 1989, attached
hereto as "Annex B" and made a part hereof. The business of Cibeles
has at all times been conducted in full compliance with all applicable
laws, rules and regulations. SELLER undertakes and agrees to hold
the BUYER and Cibeles free from any and all income tax
liabilities of Cibeles for the fiscal years 1987, 1988 and
1989.39 [Underscoring Supplied].
When the late Toda undertook and agreed "to hold the BUYER and
Cibeles free from any all income tax liabilities of Cibeles for the fiscal
years 1987, 1988, and 1989," he thereby voluntarily held himself
personally liable therefor. Respondent estate cannot, therefore, deny
liability for CIC’s deficiency income tax for the year 1989 by invoking
the separate corporate personality of CIC, since its obligation arose
from Toda’s contractual undertaking, as contained in the Deed of Sale
of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is
hereby GRANTED. The decision of the Court of Appeals of 31 January
2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and
another one is hereby rendered ordering respondent Estate of Benigno
P. Toda Jr. to pay ₱79,099,999.22 as deficiency income tax of Cibeles
Insurance Corporation for the year 1989, plus legal interest from 1
May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.
G.R. No. L-9193             May 29, 1957
EUGENIO PEREZ, petitioner,
vs.
COURT OF TAX APPEALS, and J. ANTONIO ARANETA, Acting
Collector of Internal Revenue, respondents.
Florentino Amansec for petitioner.
Office of the Solicitor General Ambrosio Padilla and Solicitor Jose P.
Alejandro for respondents.
FELIX, J.:
This is a petition for certiorari filed by Eugenio Perez to review a
resolution of the Court of Tax Appeals dated April 15, 1955, denying
petitioner's motion that he be allowed to present additional evidence
after counsel for the Collector of Internal Revenue shall have rested
his case. The facts of the case may be briefly stated as follows:
Petitioner Eugenio Perez filed his income tax returns for the years
1946, 1947, 1948, 1949 and 1950 within the time prescribed by laws
based on his declared net income. On September 3, 1952, after an
investigation conducted by an examiner of the Bureau of Internal
Revenue, the respondent Collector demanded of said taxpayer the
payment of P369,708.27, inclusive of surcharge and compromise, as
deficiency income tax for the years 1946 to 1950. The taxpayer then
requested that he be given full opportunity to present his side before
the Conference Staff of the Bureau of Internal Revenue, which was
granted, and as a result of which his income tax deficiency, was
reduced to P197,179.85, exclusive of surcharge and interests. Then
the Collector of Internal Revenue required said petitioner to pay the
same not later than February 28, 1954.
On March 18, 1954 after the taxpayer's motion to reconsider said
decision was denied by the Collector of Internal Revenue, Eugenio
Perez filed a petition for review of said assessment with the defunct
Board of Tax Appeals, which was docketed as Case No. BTA 189, but
pursuant to Section 21 of Republic Act No. 1125, the Court of Tax
Appeals took cognizance of the case. In that instance, the parties
entered into an agreed stipulation of facts, with reservation to present
further or additional evidence, which was duly approved by the Court
of Tax Appeals on August 23, 1954, and in accordance therewith,
petitioner presented expert witnesses and documentary evidence in
support of his petition. Inasmuch as petitioner was at that time
confined at the Johns Hopkins Hospital in Baltimore, Maryland, U.S.A.,
where he was under going treatment, and as counsel for said
petitioner wanted to get his deposition to be submitted as part of the
oral evidence, the Court issued letters Rogatory on December 13,
1954, after the Collector of Internal Revenue had submitted written
cross interrogatories. But before said written interrogatories could be
served upon petitioner, he left the hospital for the Philippines. Counsel
for petitioner then orally manifested in open court that petitioner
would be presented as a witness. Respondent was then proceeding
with the presentation of his evidence, and during the hearing of
January 19, 1955, due to the inability of respondent's witness to
appear and in virtue of the fact that petitioner had already returned to
the Philippines, counsel for respondent manifested that they would
continue with the presentation of his evidence after petitioner would
have testified on his behalf, to which manifestation, counsel for
petitioner offered no objection.
At the hearing of March 22, 1955, after the case had been postponed
several times at the request of petitioner, the latter's counsel moved
that he be allowed to present his additional evidence after respondent
rests his case. The lower Court denied this verbal motion in a
resolution dated April 15,1955, on the ground that to allow the prayer
of counsel for petitioner would be most irregular and would create
confusion in the proceedings; that it would not prejudice the interest
of petitioner if he would be allowed to testify in his behalf as agreed
upon by the parties, to be recalled later as rebuttal witness after
respondent were through with the presentation of his evidence in
chief; that there exists the presumption of regularity in favor of
respondent's deficiency tax assessment against petitioner and the
burden of proving the same to be illegal lies in the latter; and that
although the Court of Tax Appeals is not required to follow strictly the
technical rules of procedure, such discretion would not be exercised by
the Court if it would unnecessarily prolong the case instead of
expediting its early adjudication. A motion for the reconsideration of
said ruling filed by petitioner on April 28, 1955, having been denied,
petitioner filed the present action and in this instance alleged that the
Court of Tax Appeals erred:
1. In holding that the petitioner is a party plaintiff and ordering him to
open and close the case at the trial for the review of the deficiency
income tax assessments of the respondent Collector of Internal
Revenue against the petitioner despite the fact that said assessments
were made after the lapse of the three (3) years prescriptive period
fixed by Section 51 (d) of the National Internal Revenue Code;
2. In not ordering the respondent Collector of Internal Revenue as
party plaintiff to open and close the case at the trial despite the fact
that the latter, merely to justify his deficiency income tax assessments
which have already prescribed, alleged that the petitioner committed
fraud in filing his income tax return which the law presumes  prima
facie  correct; and
3. In allowing the respondent Collector of Internal Revenue to
discontinue, without resting his case, with the presentation of his
evidence in chief, which he had already begun and almost completed,
and in ordering the petitioner to testify in his behalf and present his
evidence in chief, if he so desires, and close his case first before said
respondent Collector of Internal Revenue would resume the
presentation of his evidence in chief and rest his case.
Within the period for the filing of respondents' brief, the Solicitor
General filed a motion to dismiss this action on the ground that the
main issue, that is whether or not petitioner should be allowed to
present additional evidence in chief after the respondent shall have
rested his case, has become moot, because the parties have already
closed their evidence and submitted the case for decision of the trial
Court on October 19, 1955, by virtue of an agreed stipulation of fact
which was admitted by the Court on November 10, 1955. Said motion
to dismiss was opposed by petitioner for the reason, among others,
that:
The appeal interposed by petitioner does not cover only the issue of
whether or not said petitioner should be "allowed to present additional
evidence in chief after the respondent shall have rested his case" but
includes the fundamental issue of who should open and close the case
at the trial before the respondent Court of Tax Appeals covering
deficiency income tax assessment of the respondent Collector of
Internal Revenue made after the lapse of 3 years prescriptive period
fixed by section 51-d of the National Internal Revenue Code; and
which assessment could no longer be collected through the summary
methods of distraint and levy; that this question raised in this appeal
has not as yet been decided by this Honorable Supreme Court;
and by resolution of December 12, 1955, this Court ruled that the
question raised by respondent will be acted upon when the case is
decided on the merits.
The prayer of the petition for certiorari filed in this instance, reads as
follows:
PREMISES considered, it is respectfully prayed that this Honorable
Supreme Court, in the interest of justice and to afford fair and equal
opportunity to both parties to prove their case in appropriate and
judicious proceedings, annul the resolution of respondent Court of Tax
Appeals denying petitioner's motion and issue an order directing the
respondent Collector of Internal Revenue shall continue with the
presentation of his evidence in chief, which he has already begun,
before petitioner testify in his behalf and rest his case.
This being the only and leit motiv of the remedy sought for in this
case, and even assuming that since October 19, 1955, when the
parties herein submitted their case for decision of the lower court, this
tribunal has not taken any action on the matter, for We have not been
informed that any decision has been rendered thereon, it seems clear
to Us that any other point that might have been raised in the course of
the proceedings must be subordinate to the question of whether or not
the lower court erred in denying the motion We have now under
consideration. In this respect, there is no dispute that petitioner as
well as the respondent Collector of Internal Revenue had already
presented part of their respective evidence and the controversy is only
circumscribed as to who of the parties should be the last to present
evidence, the petitioner claiming that respondent Collector of Internal
Revenue is in truth and in fact the "petitioner", because he has the
burden of proving his case against the petitioner herein and hence
he(the Collector) should close his evidence ahead of the taxpayer,
whereas said respondent claims otherwise. As there is no showing of
any specific rules governing the presentation of evidence in the Court
of Tax Appeals, the general rules of procedure concerning the order of
trial outlined in the Rules of Court shall govern. Petitioner in this case
assails the deficiency assessment made by the Collector of Internal
Revenue; consequently, it is incumbent upon him to prove that said
assessment is erroneous. The fact that the of Tax Appeals decided not
to alter the ordinary order of trial does not militate against its ruling,
for although it could have done so, its power to deviate from technical
rules of evidence is discretionary and hence not subject to review by
this Court. Aside from this fact, respondent Collector of Internal
Revenue was able to show that the parties had already come to an
understanding as to the evidence that was to be presented to the
Court a quo and had agreed to and filed an amended stipulation of
facts which was admitted by the trial court to which the case was
submitted for decision. In such state of affairs the question of who,
between the parties herein has the right to rest his case last becomes
entirely moot, for a decision on this case would serve no purpose.
WHEREFORE, the Court hereby resolves to declare that the present
recourse of certiorari filed by petitioner Eugenio Perez has become
moot and to dismiss the petition, without pronouncement as to costs.
It is so ordered.
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN
PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES
PHILIPPINES, INC., respondents.
GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate Appellate
Court which sustained the private respondent's contention that the
deed of exchange whereby Delfin Pacheco and Pelagia Pacheco
conveyed a parcel of land to Delpher Trades Corporation in exchange
for 2,500 shares of stock was actually a deed of sale which violated a
right of first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the
owners of 27,169 square meters of real estate Identified as Lot. No.
1095, Malinta Estate, in the Municipality of Polo (now Valenzuela),
Province of Bulacan (now Metro Manila) which is covered by Transfer
Certificate of Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction
Components International Inc. the same property and providing that
during the existence or after the term of this lease the lessor should he
decide to sell the property leased shall first offer the same to the
lessee and the letter has the priority to buy under similar conditions
(Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International,
Inc. assigned its rights and obligations under the contract of lease in
favor of Hydro Pipes Philippines, Inc. with the signed conformity and
consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6
inclusive)
The contract of lease, as well as the assignment of lease were
annotated at he back of the title, as per stipulation of the parties
(Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between
lessors Delfin and Pelagia Pacheco and defendant Delpher Trades
Corporation whereby the former conveyed to the latter the leased
property (TCT No.T-4240) together with another parcel of land also
located in Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) for
2,500 shares of stock of defendant corporation with a total value of
P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased
property pursuant to the proviso in the lease agreement, respondent
Hydro Pipes Philippines, Inc., filed an amended complaint for
reconveyance of Lot. No. 1095 in its favor under conditions similar to
those whereby Delpher Trades Corporation acquired the property from
Pelagia Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the
plaintiff. The dispositive portion of the decision reads:
ACCORDINGLY, the judgment is hereby rendered declaring the valid
existence of the plaintiffs preferential right to acquire the subject
property (right of first refusal) and ordering the defendants and all
persons deriving rights therefrom to convey the said property to
plaintiff who may offer to acquire the same at the rate of P14.00 per
square meter, more or less, for Lot 1095 whose area is 27,169 square
meters only. Without pronouncement as to attorney's fees and costs.
(Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134,
Rollo)
The lower court's decision was affirmed on appeal by the Intermediate
Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for
certiorari to review the appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we
set aside the resolution denying the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in
that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will
acquire from petitioners a parcel of industrial land consisting of 27,169
square meters or 2.7 hectares (located right after the Valenzuela,
Bulacan exit of the toll expressway) for only P14/sq. meter, or a total
of P380,366, although the prevailing value thereof is approximately
P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal
even if there is no "sale" or transfer of actual ownership interests by
petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual
ownership interests, private respondent will acquire the land  not  under
"similar conditions" by which it was transferred to petitioner Delpher
Trades Corporation, as provided in the same contractual provision
invoked by private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of
Exchange" of the properties executed by the Pachecos on the one hand
and the Delpher Trades Corporation on the other was meant to be a
contract of sale which, in effect, prejudiced the private respondent's
right of first refusal over the leased property included in the "deed of
exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late
Pelagia Pacheco testified that Delpher Trades Corporation is a family
corporation; that the corporation was organized by the children of the
two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and
spouses Delfin Pacheco and Pilar Angeles) who owned in common the
parcel of land leased to Hydro Pipes Philippines in order to perpetuate
their control over the property through the corporation and to avoid
taxes; that in order to accomplish this end, two pieces of real estate,
including Lot No. 1095 which had been leased to Hydro Pipes
Philippines, were transferred to the corporation; that the leased
property was transferred to the corporation by virtue of a deed of
exchange of property; that in exchange for these properties, Pelagia
and Delfin acquired 2,500 unissued no par value shares of stock which
are equivalent to a 55% majority in the corporation because the other
owners only owned 2,000 shares; and that at the time of
incorporation, he knew all about the contract of lease of Lot. No. 1095
to Hydro Pipes Philippines. In the petitioners' motion for
reconsideration, they refer to this scheme as "estate planning." (p.
252, Rollo)
Under this factual backdrop, the petitioners contend that there was
actually no transfer of ownership of the subject parcel of land since the
Pachecos remained in control of the property. Thus, the petitioners
allege: "Considering that the beneficial ownership and control of
petitioner corporation remained in the hands of the original co-owners,
there was no transfer of actual ownership interests over the land when
the same was transferred to petitioner corporation in exchange for the
latter's shares of stock. The transfer of ownership, if anything, was
merely in form but not in substance. In reality, petitioner corporation
is a mere alter ego or conduit of the Pacheco co-owners; hence the
corporation and the co-owners should be deemed to be the same,
there being in substance and in effect an Identity of interest." (p. 254,
Rollo)
The petitioners maintain that the Pachecos did not sell the property.
They argue that there was no sale and that they exchanged the land
for shares of stocks in their own corporation. "Hence, such transfer is
not within the letter, or even spirit of the contract. There is a sale
when ownership is transferred for a price certain in money or its
equivalent (Art. 1468, Civil Code) while there is a barter or exchange
when one thing is given in consideration of another thing (Art. 1638,
Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades
Corporation is a corporate entity separate and distinct from the
Pachecos. Thus, it contends that it cannot be said that Delpher Trades
Corporation is the Pacheco's same alter ego or conduit; that petitioner
Delfin Pacheco, having treated Delpher Trades Corporation as such a
separate and distinct corporate entity, is not a party who may allege
that this separate corporate existence should be disregarded. It
maintains that there was actual transfer of ownership interests over
the leased property when the same was transferred to Delpher Trades
Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by
subscription or by purchasing stock directly from the corporation or
from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47
Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at
bar, in exchange for their properties, the Pachecos acquired 2,500
original unissued no par value shares of stocks of the Delpher Trades
Corporation. Consequently, the Pachecos became stockholders of the
corporation by subscription "The essence of the stock subscription is
an agreement to take and pay for original unissued shares of a
corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of the
Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the
Pachecos took no par value shares in exchange for their properties.
A no-par value share does not purport to represent any stated
proportionate interest in the capital stock measured by value, but only
an aliquot part of the whole number of such shares of the issuing
corporation. The holder of no-par shares may see from the certificate
itself that he is only an aliquot sharer in the assets of the corporation.
But this character of proportionate interest is not hidden beneath a
false appearance of a given sum in money, as in the case of par value
shares. The capital stock of a corporation issuing only no-par value
shares is not set forth by a stated amount of money, but instead is
expressed to be divided into a stated number of shares, such as, 1,000
shares. This indicates that a shareholder of 100 such shares is an
aliquot sharer in the assets of the corporation, no matter what value
they may have, to the extent of 100/1,000 or 1/10. Thus, by removing
the par value of shares, the attention of persons interested in the
financial condition of a corporation is focused upon the value of assets
and the amount of its debts. (Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Vol. III,
1980 Edition, p. 107).
Moreover, there was no attempt to state the true or current market
value of the real estate. Land valued at P300.00 a square meter was
turned over to the family's corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares
of stock, the Pachecos have control of the corporation. Their equity
capital is 55% as against 45% of the other stockholders, who also
belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the
Pachecos. What they really did was to invest their properties and
change the nature of their ownership from unincorporated to
incorporated form by organizing Delpher Trades Corporation to take
control of their properties and at the same time save on inheritance
taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to
the spouses Hernandez and Pacheco in connection with their execution
of a deed of exchange on the properties for no par value shares of the
defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in
the deed of exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these benefits to
the spouses of this deed of exchange?
A Continuous control of the property, tax exemption benefits, and
other inherent benefits in a corporation.
Q What are these advantages to the said spouses from the point of
view of taxation in entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for
tax free exchange of property, they were able to execute the deed of
exchange free from income tax and acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under
par. C-sub-par. (2) Exceptions regarding the provision which I quote:
"No gain or loss shall also be recognized if a person exchanges his
property for stock in a corporation of which as a result of such
exchange said person alone or together with others not exceeding four
persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time you executed
the deed of exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have
no par value share in the defendant corporation was for the purpose of
flexibility. Can you explain flexibility in connection with the ownership
of the property in question?
A There is flexibility in using no par value shares as the value is
determined by the board of directors in increasing capitalization. The
board can fix the value of the shares equivalent to the capital
requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the
holding by the corporation of the property in question?
A Yes, since a corporation does not die it can continue to hold on to
the property indefinitely for a period of at least 50 years. On the other
hand, if the property is held by the spouse the property will be tied up
in succession proceedings and the consequential payments of estate
and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to ownership by a
particular person of certain properties in respect to taxation?
A The property is not subjected to taxes on succession as the
corporation does not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about this
"estate planning" scheme resorted to by the Pachecos. "The legal right
of a taxpayer to decrease the amount of what otherwise could be his
taxes or altogether avoid them, by means which the law permits,
cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal
Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L.
ed. 596).
The "Deed of Exchange" of property between the Pachecos and
Delpher Trades Corporation cannot be considered a contract of sale.
There was no transfer of actual ownership interests by the Pachecos to
a third party. The Pacheco family merely changed their ownership from
one form to another. The ownership remained in the same hands.
Hence, the private respondent has no basis for its claim of a light of
first refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned
decision and resolution of the then Intermediate Appellate Court are
REVERSED and SET ASIDE. The amended complaint in Civil Case No.
885-V-79 of the then Court of First Instance of Bulacan is DISMISSED.
No costs.
SO ORDERED.
G.R. No. 197590               November 24, 2014 2.36 191,915.1 325,447.4 00< 269,613.46
BUREAU OF INTERNAL REVENUE, as represented by the 0 6
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs. 1999 142,550.5 260,961.7 403,512.2 79,254.00 324,258.28
COURT OF APPEALS, SPOUSES ANTONIO VILLAN MANLY, and 0 8 8
RUBY ONG MANLY, Respondents. 2000 141,450.0 213,740.6 355,190.6 64,757.21 290,433.46
DECISION 0 7 7
DEL CASTILLO, J.:
There is grave abuse of discretion when the determination of probable 2001 151,500.0 233,396.6 384,896.6 73,669.00 311,227.62
cause is exercised in an arbitrary or despotic manner, due to passion 0 2 2
or personal hostility, so patent and gross as to amount to an evasion
2002 148,500.0 186,106.6 334,606.6 58,581.00 276,025.62
of a positive duty or a virtual refusal to perform a duty enjoined by
0 2 2
law.1 This Petition for Certiorari2 under Rule 65 of the Rules of Court
assails the Decision3 dated October 28, 2010 and the Resolution4 dated 2003 148,100.0 152,817.5 300.917.9 48,729.00 252,188.93
May 10, 2011 of the Court of Appeals (CA) in CA-G.R. SP No. 112479. 0 3 3
Factual Antecedents
Respondent Antonio Villan Manly (Antonio) is a stockholder and the
Executive Vice-President of Standard Realty Corporation, a family- [Tot ₱865,633. ₱1,238,93 ₱2,104,57 ₱380,824. ₱1,723,747.
owned corporation.5 He is also engaged in rental business.6 His spouse, al] 26 8.32 1.58 21 3712
respondent Ruby Ong Manly, is a housewife.7
On April 27, 2005, petitioner Bureau of Internal Revenue (BIR) issued and that despite his modest income for the said years, respondent
Letter of Authority No. 2001 000123878 authorizing its revenue officers spouses were able to purchase in cash the following properties:
to investigate respondent spouses’ internal revenue tax liabilities for 1) a luxurious vacation house in Tagaytay City value dat
taxable year 2003 and prior years. ₱17,511,010.0013 in the year 2000, evidenced by a Deed of Absolute
On June 6, 2005, petitioner issued a letter9 to respondent spouses Sale14 dated October 24, 2000;
requiring them to submit documentary evidence to substantiate the 2) a Toyota RAV4 for ₱1,350,000.00 in the year 2001, evidenced by a
source of their cash purchase of a 256-square meter log cabin in Sales Invoice15 dated June 28, 2001; and
Tagaytay City worth ₱17,511,010.00. Respondent spouses, however, 3) a Toyota Prado for ₱2,000,000.00 in 2003, evidenced by a Deed of
failedto comply with the letter.10 Sale16 dated July 9, 2003.17
On June 23, 2005, the revenue officers executed a Joint Since respondent spouses failed to show the source of their cash
Affidavit11 alleging that respondent Antonio’s reported or declared purchases, the revenue officers concluded that respondent Antonio’s
annual income for the taxable years 1998-2003 are as follows: Income Tax Returns (ITRs) for taxable years 2000, 2001,and 2003
Net Profit were underdeclared.18 And since the under declaration exceeded 30%
Rental of the reported or declared income, it was considered a prima facie
Business evidence of fraud with intent to evade the payment of proper taxes
Taxable due to the government.19 The revenue officers, thus, recommended
(1169-73 Total
Compensa Tax the filing of criminal cases against respondent spouses for failing to
  G. sources CASH
tion Due/paid supply correct and accurate information intheir ITRs for the years
Masangkay of Funds
Income 2000, 2001, and 2003, punishable under Sections 25420 and 25521 in
St.,
Tondo, relation to Section 248(B)22 of Republic Act No. 8424 or the "Tax
Manila Reform Act of 1997," hereinafter referred to as the National Internal
Revenue Code (NIRC).23
1998 [P]133,53 [P] [P] [P]55,834. [P]
Respondent spouses, in their Joint Counter-Affidavit, 24 denied the
accusations hurled against them and alleged that they used their
accumulated savings from their earnings for the past24 years in
purchasing the properties.25 They also contended that the criminal
complaint should be dismissed because petitioner failed to issue a
deficiency assessment against them.26
In response, the revenue officers executed a Joint Reply-
Affidavit.27 Respondent spouses, in turn, executed a Joint Rejoinder-
Affidavit.28
Ruling of the State Prosecutor
On August 31, 2006, State ProsecutorMa. Cristina A. Montera-Barot
issued a Resolution29 in I.S. No. 2005-573 recommending the filing of
criminal charges30 against respondent spouses, to wit:
WHEREFORE, premises considered, it is respectfully recommended that
[respondent] spouses ANTONIO VILLAN MANLY and RUBY ONG MANLY
be charged [with] the following:
(1) Three (3) counts of Violation of Section 254 – Attempt to Evade or
Defeat Tax of the NIRC for taxable years 2000, 2001, and 2003;
(2) Three (3) counts for Violation of Section 255 of the NIRC – Failure
to Supply Correct and Accurate Information for taxable years 2000,
2001 and 2003;
(3) Three counts of Violation ofSection 255 of the NIRC – Failure to
Pay, as a consequence of [respondent spouses’] failure to supply
correct and accurate information on their tax returns for taxable years
2000, 2001, and 2003.31
Respondent spouses moved for reconsideration32 but the State
Prosecutor denied the same in a Resolution33 dated November 29,
2007.
Ruling of the Secretary of Justice
On appeal to the Secretary of Justice via a Petition for Review, 34 Acting
Justice Secretary Agnes VST Devanadera (Devanadera) reversed the
Resolution of the State Prosecutor. She found no willfulfailure to pay or
attempt to evade or defeat the tax on the part of respondent spouses
as petitioner allegedly failed to specify the amount of tax due and the
likely source of income from which the same was based. 35 She also
pointed out petitioner’s failure to issue a deficiency tax assessment
against respondent spouses which is a prerequisite to the filing of a
criminal case for tax evasion.36 The dispositive portion of the
Resolution37 dated July 27, 2009 reads:
WHEREFORE, the assailed Resolution is hereby REVERSED and SET
ASIDE. The Chief State Prosecutor is hereby directed to withdraw the
Information filed against [respondent spouses] Antonio Villan Manly
and Ruby Ong Manly, if one has been filed, and report the action taken
thereon within ten (10) days from receipt hereto.
SO ORDERED.38
Petitioner sought reconsideration39 but Acting Justice Secretary
Devanadera denied the same in a Resolution40 dated November 5,
2009.
Ruling of the Court of Appeals
Unfazed, petitioner filed a Petition for Certiorari41 with the CA imputing
grave abuse of discretion on the part of Acting Justice Secretary
Devanadera in finding no probable cause to indict respondent spouses
for willfulattempt to evade or defeat tax and willful failure to supply
correct and accurate information for taxable years 2000, 2001 and
2003.
On October 28, 2010, the CA rendered the assailed
Decision42 dismissing the Petition for Certiorari. Although it disagreed
that anassessment is a condition sine qua nonin filing a criminal case
for tax evasion, the CA, nevertheless, ruled that there was no probable
cause to charge respondent spouses as petitioner allegedly failed to
state their exact tax liability and to show sufficient proof of their likely
source of income.43 The CA further said that before one could be
prosecuted for tax evasion,the fact that a tax is due must first be
proved.44 Thus:
IN LIGHT OF ALL THE FOREGOING, the instant petition is hereby
DENIED, and the assailed Resolution of the Secretary of Justice dated
July 27, 2009 dismissing I.S. No. 2005-573 against private
respondents, AFFIRMED. However, the dismissal of the instant case is
without prejudice to the refiling by the BIR of a complaint sufficient in
form and substance before the appropriate tribunal.
SO ORDERED.45
The CA likewise denied petitioner’s Motion for Reconsideration46 in its
Resolution47 dated May 10, 2011.
Issues
Hence, petitioner filed the instant Petition contending that the CA
committed grave abuse of discretion amounting to lackor excess of
jurisdiction in holding that:
I. A CATEGORICAL FINDING OF THE EXACT AMOUNT OF TAX DUE
FROM THE PRIVATE RESPONDENT SHOULD BE SPECIFICALLY ALLEGED
[AND THAT] SINCE THE BIR FAILED TO MAKE SUCH FINDINGS
THEYCONSEQUENTLYFAILED TO BUILD A CASE FOR TAX EVASION
AGAINST [RESPONDENT SPOUSES] DESPITE THE WELL ESTABLISHED
DOCTRINE THAT IN TAX EVASION CASES, A PRECISE COMPUTATION
OF THE [TAX] DUE IS NOT NECESSARY.
II. THE BIR FAILED TO SHOW SUFFICIENT PROOF OF A LIKELY
SOURCE OF [RESPONDENT SPOUSES’] INCOME DESPITE THE FACT
THAT THE BIR WAS SUFFICIENTLY ABLE TO SHOW PROOF OF SUCH
INCOME.48
Petitioner’s Arguments
Petitioner imputes grave abuse of discretion on the part of the CA in
affirming the dismissal of the criminal cases against respondent
spouses. Petitioner contends that in filing a criminal case for tax
evasion, a prior computation or assessment of tax is not required
because the crime is complete when the violator knowingly and
willfully filed a fraudulent return with intentto evade a part or all of the
tax.49 In this case, an analysis of respondent spouses’ income and
expenditure shows that their cash expenditure is grossly
disproportionate to their reported or declared income, leading
petitioner to believe that they under declared their income.50 In
computing the unreported or undeclared income, which was likely
sourced from respondent Antonio’s rental business, 51 petitioner used
the expenditure method of reconstructing income, a method used to
determine a taxpayer’s income tax liability when his records are
inadequate or inaccurate.52 And since respondent spouses failed to
explain the alleged unreported or undeclared income, petitioner
asserts that criminal charges for tax evasion should be filed against
them.
Respondent spouses’ Arguments
Respondent spouses, on the other hand, argue that the instant Petition
should be dismissed as petitioner availed of the wrong remedy in filing
a Petition for Certiorari under Rule 65 of the Rules of Court.53 And
even if the Petition is given due course, the same should still be
dismissed because no grave abuse of discretion can be attributed
to the CA.54 They maintain that petitioner miserably failed to
prove that a tax is actually due.55 Neither was it able to show the
source of the alleged unreported or undeclared income as
required by Revenue Memorandum Order No. 15-95, Guidelines
and Investigative Procedures in the Development of Tax Fraud
Cases for Internal Revenue Officers.56 As to the method used by
petitioner, they claim that it completely ignored their lifetime
savings because it was limited to the years 1998-2003.57
Our Ruling
The Petition is meritorious.
Before discussing the merits of thiscase, we shall first discuss the
procedural matter raised by respondent spouses that petitioner
availed of the wrong remedy in filing a Petition for Certiorari
under Rule 65 of the Rules of Court, instead of a Petition for Review on
Certiorari under Rule 45.
Indeed, the remedy of a party aggrieved by a decision, final order, or
resolution of the CA is to file a Petition for Review on Certiorari under
Rule 45 of the Rules of Court, which is a continuation of the appellate
process over the original case.58 And as a rule, if the remedy of an
appeal is available, an action for certiorari under Rule 65 of the Rules
of Court, which is anoriginal or independent action based on grave
abuse of discretion amounting to lack or excess of jurisdiction, will not
prosper59 because it is not a substitute for a lost appeal.60
There are, however, exceptions to this rule, to wit: 1) when public
welfare and the advancement of public policy dictate; 2) when the
broader interest of justice so requires; 3) when the writs issued are
null and void; 4) when the questioned order amounts to an oppressive
exercise of judicial authority; 5) when, for persuasive reasons, the
rules may be relaxed to relieve a litigant of an injustice not
commensurate with his failure to comply with the prescribed
procedure; 6) when the judgment or order is attended by grave abuse
of discretion; or 7) in other meritorious cases.61
In this case, after considering the arguments raised by the parties, we
find that there is reason to give due course to the instant Petition for
Certiorari as petitioner was able to convincingly show that the CA
committed grave abuse of discretion when it affirmed the dismissal of
the criminal charges against respondent spouses despite the fact that
there isprobable cause toindict them.
Although the Court has consistently adopted the policy of non-
interference in the conduct and determination of probable
cause,62 which is exclusively within the competence of the Executive
Department, through the Secretary of Justice,63 judicial intrusion, in
the form of judicial review, is allowed when there is proof that the
Executive Department gravely abused its discretion in making its
determination and in arriving atthe conclusion it reached.64
Grave abuse of discretion is defined as a capricious and whimsical
exercise of judgment tantamount to lack or excess of jurisdiction, a
blatant abuse of authority so grave and so severe as to deprive the
court of its very power to dispense justice, or an exercise of powerin
an arbitrary and despotic manner, due to passion, prejudice or
personal hostility, sopatent and gross as to amount to an evasion or to
a unilateral refusal to perform the duty enjoined or to act in
contemplation of the law.65 Such is the situation in this case.
Having resolved the foregoing procedural matter, we shall now
proceed to determine the main issue in this case.
Sections 254 and 255 of the NIRC pertinently provide:
SEC. 254. Attempt to Evade or Defeat Tax. – Any person who willfully In the case at bar, petitioner used this method to determine
attempts in any manner to evade or defeat any tax imposed under this respondent spouses’ tax liability.1âwphi1 Petitioner deducted
Code or the payment thereof shall, in addition to other penalties respondent spouses’ major cash acquisitions from their available
provided by law, upon conviction thereof, be punished by a fine of not funds. Thus:
less than Thirty thousand pesos (₱30,000.00) but not more than One
hundred thousand pesos (₱100,000.00) and suffer imprisonment of
not less than two (2) years but not more than four (4) years: Particulars 2000 2001 2003
Provided, That the conviction or acquittal obtained under this Section
shall not be a bar to the filing of a civil suit for the collection of taxes. Unexplained Funds [P]15,854,758.98 [P]632,462.68 [P]1,142,525.45
SEC. 255. Failure to File Return, Supply Correct and Accurate [Under declaration]
Information, Pay Tax, Withhold and Remit Tax and Refund Excess Sources of Funds as [P]1,656,251.02 [P]717,537.32 [P]817,474.55
Taxes Withheld on Compensation. – Any person required under this per Financial
Code or by rules and regulations promulgated thereunder to pay any Statements as
tax, make a return, keep any record, or supply correct and accurate attached to the
information, who willfully fails to pay such tax, make such return, keep Income Tax Return
such record, or supply such correct and accurate information, or
withhold or remit taxes withheld, or refund excess taxes withheld on Percentage of under 957.27% 88.14% 133.24%77
compensation at the time or times required by law or rules and declaration
regulations shall, in addition to other penalties provided by law, upon And since the under declaration is more than 30%of respondent
conviction thereof, be punished by a fine of not less than Ten thousand spouses’ reported or declared income, which under Section 248(B) of
pesos (₱10,000.00) and suffer imprisonment of not less than one (1) the NIRC constitutes as prima facie evidence of false or fraudulent
year but not more than ten (10) years. return, petitioner recommended the filing of criminal cases against
In Ungab v. Judge Cusi, Jr.,66 we ruled that tax evasion is deemed respondent spouses under Sections 254 and 255, in relation to Section
complete when the violator has knowingly and willfully filed a 248(B) of the NIRC.
fraudulent return with intent to evade and defeat a part or all of the The CA, however, found no probable cause to indict respondent
tax.67 Corollarily, an assessment of the tax deficiency is notrequired in spouses for tax evasion. It agreed with Acting Justice Secretary
a criminal prosecution for tax evasion.68 However, in Commissioner of Devanadera that petitioner failed to make "a categorical finding of the
Internal Revenue v. Court of Appeals,69 we clarified that although a exact amount of tax due from [respondent spouses]" and "to show
deficiency assessment is not necessary, the fact that a tax is due must sufficient proof of a likely source of [respondent spouses’] income that
first be proved before one can be prosecuted for tax evasion.70 enabled them to purchase the real and personal properties adverted to
In the case of income, for it to be taxable, there must be a gain x x x."78 We find otherwise.
realized or received by the taxpayer, which is not excluded by law or The amount of tax due from respondent spouses was specifically
treaty from taxation.71 The government is allowed to resort to all alleged in the Complaint-Affidavit.79 The computation, as wellas the
evidence or resources available to determine a taxpayer’s income and method used in determining the tax liability, was also clearly
to use methods to reconstruct his income.72 A method commonly used explained. The revenue officers likewise showed that the under
by the government isthe expenditure method, which is a method of declaration exceeded 30% of the reported or declared income.
reconstructing a taxpayer’s income by deducting the aggregate yearly The revenue officers alsoidentified the likely source of the unreported
expenditures from the declared yearly income.73 The theory of this or undeclared income intheir Reply-Affidavit. The pertinent portion
method is that when the amount of the money that a taxpayer spends reads:
during a given year exceeds his reported or declared income and the 7. x x x x
source of such money is unexplained, it may be inferred that such [Respondent spouses] are into rental business and the net profit for
expenditures represent unreported or undeclared income.74 six (6) years before tax summed only to ₱1,238,938.32 (an average of
more or less Php200,000.00 annually). We asked respondent
[Antonio] if we can proceed to his rented property to [appraise] the
earning capacity of the building [for] lease/ rent, but he declined our
proposition. Due to such refusal made by the respondent, [petitioner],
thru its examiners, took pictures of the subject property and came up
with the findings that indeed the unexplained funds sought to have
been used in acquiring the valuable property in Tagaytay x x x came
from the under declaration of rental income.80
Apparently, the revenue officers considered respondent Antonio’s
rental business to be the likely source of their unreported or
undeclared income due to his unjustified refusal to allow the revenue
officers to inspect the building.
Respondent spouses’ defense that they had sufficient savings to
purchase the properties remains self-serving at this point since they
have not yet presented any evidence to support this. And since there
is no evidence yet to suggest that the money they used to buy the
properties was from an existing fund, it is safe to assume that that
money is income or a flow of wealth other than a mere return on
capital. It is a basic concept in taxation that income denotes a flow of
wealth during a definite period of time, while capital is a fund or
property existing at one distinct point in time.81
Moreover, by just looking at the tables presented by petitioner, there
is a manifest showing that respondent spouses had under declared
their income. The huge disparity between respondent Antonio’s
reported or declared annual income for the past several years and
respondent spouses’ cash acquisitions for the years 2000, 2001, and
2003 cannot be ignored. Infact, it makes uswonder how they were
able to purchase the properties in cash given respondent Antonio’s
meager income.
In view of the foregoing, we are convinced that there is probable cause
to indict respondent spouses for tax evasion as petitioner was able to
show that a tax is due from them. Probable cause, for purposes of
filing a criminal information, is defined as such facts that are sufficient
to engender a well-founded belief that a crime has been committed,
that the accused is probably guilty thereof, and that he should be held
for trial.82 It bears stressing that the determination of probable cause
does not require actual or absolute certainty, nor clear and convincing
evidence of guilt; it only requires reasonable belief or probability that
more likely than not a crime has been committed by the accused.83
In completely disregarding the evidence presented and in affirming the
ruling of the Acting Justice Secretary Devanadera that no probable
cause exists, we find that the CA committed grave abuse of discretion
amounting to lack or excess of jurisdiction. As we have said, if there is
grave abuse of discretion, the court may step in and proceed to make
its own independent determination of probable cause as judicial review
is allowed to ensure that the Executive Department acts within the
permissible bounds of its authority or does not gravely abuse the
same.84
We must make it clear, however, that we are only here to determine
probable cause.1âwphi1 As to whether respondent spouses are guilty
of tax evasion is an issue that must be resolved during the trial of the
criminal case, where the quantum of proof required is proof beyond
reasonable doubt.
Before we close, we must stress that our ruling in this case should not
be interpreted as an unbridled license for our tax officials to engage in
fishing expeditions and witch-hunting. They should not abuse their
investigative powers, instead they should exercise the same within the
bounds of the law. They must properly observe the guidelines in
making assessments and investigative procedures to ensure that the
constitutional rights of the taxpayers are well protected as we cannot
allow the floodgates to be opened for frivolous and malicious tax suits.
WHEREFORE, the Petition is hereby GRANTED. The Decision dated
October 28, 2010 and the Resolution dated May 10, 2011 of the Court
of Appeals in CA-G.R. SP No. 112479 are hereby REVERSED and SET
ASIDE. The Resolutions dated August 31, 2006 and November 29,
2007 of State Prosecutor Ma. Cristina A. Montera-Barot in LS. No.
2005-573 finding probable cause to indict respondent spouses Antonio
Villan Manly and Ruby Ong Manly for Violation of Sections 254 and 255
of the National Internal Revenue Code are hereby REINSTATED.
SO ORDERED.
G.R. No. 156            September 27, 1946
MILTON GREENFIELD, plaintiff-appellant,
vs.
BIBIANO L. MEER, defendant-appellee.
Francisco Dalupan for appellant.
First Assistant Solicitor General Reyes and Solicitor Arguelles for
appellee.
FERIA, J.:
This is an appeal from the decision of the Court of First Instance of
Manila which dismisses the complaint of the plaintiff and appellant
containing two causes of action; one to recover the sum of P9,008.14
paid as income tax for the year 1939 by plaintiff to defendant under
protest, by reason of defendant having disallowed a deduction of
P67,307.80 alleged by plaintiff to be losses in his trade or business;
and the other to reclaim, in the event the first cause of action is
dismissed, the sum of P475 collected by defendant from plaintiff
illegally according to the latter, because the former has erroneously
computed the tax on personal and additional exemptions.
The following are the pertinent facts stipulated and submitted by the
parties to the lower court:
2. That since the year 1933 up to the present time, the plaintiff has
been continuously engaged in the embroidery business located at 385
Cristobal, City of Manila and carried on under his name;
3. That in 1935 the plaintiff began engaging in buying and selling
mining stocks and securities for his own exclusive account and not for
the account of others . . .;
4. That Exhibit A attached to the complaint and made a part hereof
represents plaintiff's purchases and sales of each class of stock and
security as well as the profits and losses resulting on each class during
the year 1939;
5. That the plaintiff has not been a dealer in securities as defined in
section 84 (t) of Commonwealth Act No. 466; that he has no
established place of business for the purchase and sale of mining
stocks and securities; and that he was never a member of any stock
exchange;
6. That the plaintiff filed an income tax return for the calendar year
1939 showing that he made a net profit amounting to P52,449.29 on
embroidery business and P17,850 on dividends from various
corporations; and that from the purchase and sales of mining stocks
and securities he made a profit of P10,741.30 and incurred losses in
the amount of P78,049.10, thereby sustaining a net loss of
P67,307.80, which income tax return is hereto attached and marked
Exhibit B;
7. That in said income tax return for 1939, the plaintiff declared the
results of his stock transactions under Schedule B (Income from
Business);but the defendant ruled that they should be declared in the
income tax return, Exhibit B, under Schedule D (Gains and Losses
from Sales or Exchanges of Capital Assets, real or personal);
8. That in said income tax return, said plaintiff claims his deduction of
P67,307.80 representing the net loss sustained by him in mining
stocks securities during the year 1939; and that the defendant
disallowed said item of deduction on the ground that said losses were
sustained by the plaintiff from the sale of mining stocks and securities
which are capital assets, and that the loss arising from the sale of the
same should be allowed only to the extent of the gains from such
sales, which gains were already taken into consideration in the
computation of the alleged net loss of P67,307.80;
9. That the defendant assessed plaintiff's income tax return for the
year 1939 at P13,771.06 as shown in the following computation
appearing in the audit sheet of the defendant hereto attached and
marked Exhibit C;
Net income as per return of plaintiff for
1939 P70,299.29
Add: Net Loss on sale of mining stocks and
securities disallowed in audit   67,307.80
P137,607.09
Total net income as per office audit =========
Amount of tax on net income as per office
audit P13,821.06
Less: Tax on exemptions:
Personal exemption P2,500.00
Additional exemption 1,000.00
Total P3,500.00
Tax on exemption         50.00
P13,771.06
Net amount of tax due =========
10. That the defendant computed the graduated rate of income tax
due on the entire net income as per office audit, without first
deducting therefrom the amount of personal and additional
exemptions to which the plaintiff is entitled, allowing said plaintiff a
deduction from the assessed tax the amount of P50 corresponding to
the exemption of P3,500;
11. That the plaintiff, objecting and excepting to all the ruling of the
defendant above mentioned and in assessing plaintiff with P13,771.06,
claimed from the defendant the refund of P9,008.14 or in the
alternative case P475, which claim of plaintiff was overruled by the
defendant;
The questions raised by appellant in his four (4) assignments of error
may be reduced into the following: (1) Whether the losses sustained
by the plaintiff from the buying and selling of mining securities during
the year 1939 are losses incurred in trade and business, deductible
under section 30 (d) (1)(A) of Commonwealth Act No. 466 from his
gains in his embroidery business and other income; or whether they
are capital losses from sales of capital assets which shall be allowed
only to the extent of the gains from such sales under section 34 of the
same Commonwealth Act No. 466. And (2) whether, under the present
law, the personal and additional exemptions granted by section 23 of
the same Act, should be considered as a credit against or be deducted
from the net income, or whether it is the tax on such exemptions that
should be deducted from the tax on the total net income.
1. As to the first question, it is agreed in the above-quoted stipulation
of facts that the plaintiff was not a dealer in securities or share of
stock as defined in section 84 (t) of Commonwealth Act No. 466. The
question for determination is whether appellant, though not a dealer in
mining securities, may be considered as engaged in the business of
buying and selling them under section 30 (d), (1) (A) of said Act No.
466.
It is evident that, taking into consideration the nature of mining
securities, which may be bought or sold either as a business or for
speculation purposes only, the National Assembly of the Philippines
has deemed it necessary to define or determine beforehand in section
84 (t) of Commonwealth Act No. 466 who may be considered as
persons engaged in the trade or business of buying and selling
securities within the meaning of the phrase "incurred in trade or
business" used in section 30 (d) (1) (A) of the same Act, in order to
avoid any question or doubt as to deductibility of all losses incurred by
a merchant in securities from his net income from whatever source.
The definition of dealer or merchant in securities given in said section
84 (t) includes persons, natural or juridical, who are engaged in the
purchase and sale of securities whether for his their own account or for
others, provided they have a place of business and are regularly
engaged therein. There was formerly some doubt or question as to
whether a person engaged in buying or selling securities for his own
account might be considered as engaged in that trade or business, and
several cases involving such question had been submitted to the
United States Federal Courts for ruling, and to the Income Tax Units of
the United States Bureau of Internal Revenue for opinion. But with the
inclusive definition of the term "dealer" or merchant of securities given
in section 84 (t) of Act No. 466, such doubt can no longer arise.
Said section 84 (t) reads as follows:
(t) The term "dealer in securities" means a merchant of stocks or
securities, whether an individual, partnership, or corporation, with an
established place of business, regularly engaged in the purchase of
securities and their resale of customers; that is, one who as a
merchant buys securities and sells them to customers with a view to
the gains and profits that may be derived therefrom.
Appellant assumes, however, that the above-quoted definition does
not cover or include all persons engaged in the trade or business of
buying and selling securities within the meaning of said section 30 (d)
(1) (A). He contends that, although he is not a dealer in mining
securities, he may be considered as having been engaged in the trade
or business of buying and selling securities. And in support of his
contention appellant quotes Opinion No. 1818 of the Income Tax Unit
of the United States Bureau of Internal Revenue(I.T. No. 1818, C.B. II,
pp. 39-41), in which opinion the following was said:
The taxpayer is not a member of any stock exchange, has no place of
business, and does not make purchase and sales of securities for
customers. Much of his trading is done on margin. He devotes the
greater part of the time in his broker's office keeping in touch with the
market. He has no other trade or business, his income consisting
entirely of interest bonds, dividends on stocks, and profits from the
sale or disposition of securities.
Advice is requested (1) whether this taxpayer is entitled to the benefit
of section 204 of the Revenue Act of 1921, with reference to a net loss
incurred in 1921, from the sale of stocks; (2) whether he is entitled to
the benefit of section 206 of the Revenue Act of 1921, with regard to
gains derived in 1922 from the sale of two blocks of stock held more
than two years.
1. Section 204 (a) provides in part:
That as used in this section the term "net loss" means only net losses
resulting from the operation of any trade or business regularly carried
on by the taxpayer . . .
The question is, than, whether the taxpayer was regularly engaged in
the trade or business of buying and selling securities.
The interpretation placed upon the term "business or trade" by the
courts and the department may be indicated by a few illustrative
decisions. In two early cases (In re  Marson [1871], Fed. Cas. No.
9142, and In re  Woodward [1876], Fed. Cas. No. 18001) it was held
that a speculator in stocks was not a "merchant or tradesman" within
the meaning of the Bankruptcy Act of 1867. It was said in the former
case:
"The only business he was engaged in was what is called speculating in
stocks, that is, buying and selling them, with a view to his own profit,
to be made by the excess of the selling price over the buying price . . .
The fact that the bankrupt was engaged in no other business can not
have the effect to make him a merchant or a tradesman, because he
carried on the business he did carry on in the way which he carried it
on."
That is, although his business was buying and selling, since this
business was simply with a view to his own profit and not for others,
has was not a merchant or tradesman. Compare In re  Surety
Guarantee & Trust Co. ([1902], 121 Fed., 73) and In re  H.R. Leighton
& Co. ([1906], 147 Fed., 311).
With this background, the Department, in Treasury Decisions 1989,
2005, 2090, and 2135 (not published in Bulletin service), held that the
provision of paragraph B of the 1913 Act, allowing as a deduction for
the purpose of the normal tax "losses actually sustained during the
year, incurred in trade . . .", did not include losses from isolated
transactions; for instance, in stocks and bonds. In Mente vs. Eisner
([1920], 266 Fed., 161) (certiorari denied, 254 U.S., 635), these
rulings were upheld in a case in which a manufacturer of bagging was
denied deductions for losses in buying and selling cotton on the cotton
exchange for his individual account, not connected with his
manufacturing business. (Cf. Black vs. Bolen [1920], 268 Fed., 427.)
Likewise, in L.O. 601 (not published in Bulletin service), it was held
that "losses sustained by a person in buying and selling securities in
his own account, he not being a licensed stock and bond broker buying
and selling for others as well as for himself, are not deductible as
losses in trade within the meaning of paragraph B of the Act of
October 3, 1913." The basis of these opinions is thus seen to be (1)
that dealing in securities on one's own account is not technically a
"trade"; (2) that isolated transactions in securities, not connected with
the tax payer's regular business do not constitute a "trade."
In the Act of September 8, 1916, the wording of the 1913 Act was
slightly changed (section 5 [a], fourth) to permit a deduction of "losses
actually sustained during the year, incurred in his business or
trade . . ." Under this more liberal provision, it has been uniformly held
that where a taxpayer devoted all his time, or the major portion of it,
to buying and selling securities on his own account, this occupation
was his "business"; and therefore he was permitted to deduct losses
sustained in such dealings as being "incurred in his business." A. R. R.
404 (C.B. 4, p. 157); semble L. O.601. These rulings are inferentially
supported by the definitions of trade or business to comprehend "all
his activities for gain, profit, or livelihood, entered into with sufficient
frequency, or occupying such portion of his time or attention as to
constitute a vocation," contained in article 8 of Regulations 41, relative
to the war excess-profits tax (approved in Woods vs. Lewellyn [1921],
289 Fed., 498). . .
It is submitted that these decisions are a sound interpretation of the
accepted definition of business: "Business is a very comprehensive
term and embraces everything about which a person can be
employed." Black's Law Dictionary, 158, citing People vs.
Commissioners of Taxes (23 New York, 242, 244). "That which
occupies the time, attention and labor of men for the purpose of a
livelihood or profit." Bouvier's Law Dictionary, Vol. 1, p. 273. Fling vs.
Stone Tracy Co. (1910), 220 U. S., 107 at 171; 31 Sup Ct., 342; 55
Law. ed., 389; Ann. Cas. 1912-B, 1312; cited with approval in Von
Baumbach vs. Sargent Land Company (1916), 242 U. S., 503, at 515.
If they are sound, the facts of the instant case require a ruling that the
taxpayer was regularly engaged in the business of buying and selling
securities on his own account and was, therefore, entitled to the
benefit of the provisions of section 204(a). (I. T. No. 1818; C. B. II-2,
pp. 39-41.)
But, assuming arguendo  that the above-quoted opinion may be
applied to the present case, it is evident that the appellant can not be
considered as having been engaged in the business of buying and
selling securities within the meaning of section 30 (d) (1) (A) of Act
No. 466 According to said opinion, in order that he may so be
considered, it is necessary that he must devote all his time or at least
a major portion thereof to said business and that the latter must be
regularly carried on by him.
In the stipulation of facts presented in this case it is agreed that "since
the year 1933 up to the present time, the plaintiff has been
continuously engaged in the embroidery business," and that "in 1935,
the plaintiff began engaging in buying and selling  mining stocks and
securities for his own exclusive account." There is nothing therein to
show that plaintiff and appellant has regularly devoted all his time or
the major portion thereof to the business of buying and selling mining
securities for his own account. On the contrary, it having been
stipulated that he has been continuously engaged in the embroidery
business during the same time, it necessarily follows that he has not
and could not have devoted regularly all his time or a major portion
thereof to the buying and selling of mining securities.
Furthermore, from Exhibit A attached to the complaint and made a
part of said stipulation of facts, which represents plaintiff's purchases
and sales of each class of stocks and securities as well as the profits
and losses resulting therefrom during the year 1939, it appears that
he made purchases and sales of securities only on several days of
some months and nothing on others. As shown in said exhibit, during
the month of January, 1939, appellant purchased shares of stock of
different mining corporations on January 2, 3, 4, 6, 13, 19, 20, 25, 30,
and sold some of them on January 4, 10, 13 and 31. During February
he made purchases on the dates 1, 8, 13, 14, 25, and 27; and sales
on 6, 9, 10, 16, 22, and 30, and sold some on March 9 only. During
April he made two purchases on April 3 and 5, and one sale on April 4.
During May he purchased mining shares of stock on May 9, 10, 13, 19,
24, and 25; and sold some of them on May 9, 10, 12, 13, and 31.
During June appellant made purchases on 1, 3, 5, 8, 13, 15, and 17,
and sales on 22, 23, 24, and 28. During July, purchases on 1, 3, 6,
19; and sales on July 24, 25, 26, and 27. During August he purchased
shares of stock on some mining corporations on 5,7, 16, and 18 and
sold shares of one mining corporation on August 10 only. During
September appellant did not purchase or sell any securities. During
October he sold securities only on the 12th of said month, and he
made no purchase at all. And during November and December he did
not purchase or sell any.
Appellant contends that as from Exhibit A it appears that the mining
securities were inventoried in order to arrive at his profits and losses,
they cannot be considered as capital assets, because, according to
section 34, the term capital assets does not include property which
would properly be included in the inventory. But it is to be observed
that the law refers not to property merely included, but to that which
would be properly included in the inventory. Section 148 of the Income
Tax Regulations No. 2 of February 10, 1940 (39 Off. Gaz., 325),
provides that "the securities (to be) inventoried as here provided may
include only those held for purposes of resale and not for investment,"
and that "the taxpayers who buy and sell or hold securities for
investment or speculation, . . . are not dealers insecurities within the
meaning of this rule." And the General Counsel of the Federal Bureau
of Internal Revenue, after quoting Article 105 of United States
Regulations 74 from which said section 148 of our Income Tax
Regulations was taken, said that a person not a dealer in securities is
precluded from the use of inventories in computing his net income."(C.
B. X-2, p. 128, G. C. M., 9656.)
The lower court has not therefore erred in dismissing appellant's first
cause of action, on the ground that the losses sustained by appellant
from the buying and selling of mining securities are not losses incurred
in business or trade but are capital losses from sales of capital assets,
as contended by appellee.
2. With regard to the second point, the lower court held that, as the
new law does not provide that the personal exemptions shall be
allowed in the nature of a deduction from the net income, as
prescribed in the old law, and there is a distinction between exemption
and deduction, the tax due on said exemptions must be deducted from
the tax due on the whole net income, instead of deducting the total
amount of the exemptions from the net income.
The argument of the appellee in support of the lower court's decision is
that the omission in section 23 of Act No. 466 of the phrase "in the
nature of a deduction" found in section 7 of the old law, shows that it
was the intention of the National Assembly to adopt the innovation
proposed by the Tax Commission which prepared the draft of the new
law, an innovation based on what is known as the "Wisconsin Plan"
now in operation in several American states. Under said plan, the
cumulative amount of the tax is fixed on any given amount of net
income without regard to the status of the taxpayer, and then this
amount is reduced by the tax credit fixed in the law according to the
status of the taxpayer and the number of his dependents as follows:
for single individuals, there is allowed a tax credit of P10; for married
persons or heads of family, P30; and for each dependent below 21
years of age, P10.
Section 7 of the old law provided: "For the purpose of the normal tax
only, there shall be allowed as an exemption in the nature of a
deduction from the amount of the net income . . ."; while section 23 of
the new law provides: "For the purpose of the tax provided for in this
Title there shall be allowed the following exemptions." Now, the
question to be determined or answered is: Does this change in the
phraseology of the law show the intention of the National Assembly to
change the theory or policy of the old law so as to deduct now the tax
on the personal and additional exemptions from the tax fixed on the
amount of the net income, instead of deducting the amount of
personal and additional exemptions from that of the net income,
before determining the tax due on the latter?
It is a well-settled rule of statutory construction that where a statue
has been enacted which is susceptible of several interpretations there
is no better means for ascertaining the will and intention of the
legislature than that which is afforded by the history of the statue.
Taking into consideration the history of section 23 of the
Commonwealth Act No. 466, the answer to the above-propounded
question must obviously be in the negative. Section 22 of the bill
entitled "An Act to revise, amend and codify the Internal Revenue
Laws of the Philippines," prepared by the Tax Commission and
submitted to the National Assembly of the Philippines, in substitution
of section 7 of the old Income Tax Law, reads as follows:
SEC. 22. Amount of tax credit allowable to individuals.—There shall be
allowed as a credit in the nature of a deduction from the amount of the
tax payable by each citizen or resident of the Philippines under section
20:
(a) Tax credit of single individuals.—The sum of P10  if the person
making the return is a single person or a married person legally
separated from his or her spouse.
(b) Tax credit of a married person or head of family.—The sum of P30
if the person making the return is a married man with a wife not
legally separated from him, or a married woman with a husband not
legally separated from her, or the head of the family; Provided, That
from the tax due on the aggregate income of both husband and wife
when not legally separated only one tax credit of P30 shall be
deducted. For the purpose of this section, the term "head of a family"
includes an unmarried man or a woman with one or both parents, or
one or more brothers or sisters, or one or more legitimate, recognized
natural or adopted children dependent upon him or her for their
chief  support where such brothers, sisters, or children are less than
twenty-one years of age.
(c) Additional tax credit for dependents.—The sum of P10 for each
legitimate, recognized natural, or adopted child wholly dependent upon
the taxpayer, if such dependents are under twenty-one years of age,
or incapable of self-support because mentally or physically defective.
The additional tax credit under this paragraph shall be allowed only if
the person making the return is the head of the family.
But the National Assembly, instead of adopting or incorporating said
proposed section 22 in the National Internal Revenue Code, C. A. No.
466, copied substantially in section 23 of the latter provision of section
7 of the old law relating to personal and additional exemptions, with
the only modification that the amount of personal exemption of single
individuals has been reduced from two thousand to one thousand
pesos, and that of married persons or heads of family from four
thousand to two thousand five hundred pesos.
If it were the intention of the National Assembly to adopt the
"Wisconsin plan" proposed by the tax Commission, it would have
adopted literally, or at least substantially, the provisions of said section
22 as section 23 of Commonwealth Act No. 466, instead of
substantially incorporating section 7 of the old Income Tax Law as
section 23 of the new, except the first paragraph thereof which reads:
"For the purpose of the normal tax only, there shall be allowed as an
exemption in the nature of a deduction from the amount of the net
income." This was changed in said section 23, which provides: "For the
purpose of the tax provided for in this Title, there shall be allowed the
following exemptions:" From the fact that the National Assembly
discarded completely section 22 of the bill drafted in accordance with
the "Wisconsin Plan" and submitted by the Tax Commission, it is to be
presumed that the National Assembly of the Philippines did not intend
to introduce any substantial change in the old law in so far as the
effect of personal and additional exemptions on the income tax is
concerned.
The mere fact that the phrase "in the nature of a deduction" found in
section 7 of the old law was omitted in section 23 of the new or
National Internal Revenue Code did not and could not effect any
change in the law. It is evident that said phrase was added or inserted
in said section 7 only out of extreme caution, because, even without it,
the exemption would have to be deducted from the gross income in
order to determine the net income subject to tax. Had the provision in
the old law been drafted in exactly the same term as that of said
section 23, the same construction should have been adopted. Because
"Exception is an immunity or privilege; it is freedom from a charge or
burden to which others are subjected." (Florar vs. Sherifan, 137 Ind.,
28; 36 N. E., 365, 369.) If the amounts of personal and additional
exemptions fixed in section 23 are exempt from taxation, they should
not be included as part of the net income, which is taxable. There is
nothing in said section 23 to justify the contention that the tax on
personal exemptions (which are exempt from taxation) should first be
fixed, and then deducted from the tax on the net income.
The change of phraseology alone does not lead to the conclusion that
it was the intention of the lawmaker to amend or change the
constructions of the old law as contended by the appellee. For it is a
well-established rule, recognized by the Supreme Court of Ohio in the
case of Conger vs. Barker's Adm'r (11 Ohio St., 1); "that in the
revision of statutes, neither an alteration in phraseology nor the
omission or addition of words in the latter statute, shall be held,
necessarily, to alter the construction of the former act. And the court is
only warranted in holding the construction of a statute, when revised,
to be changed, where the intent of the legislature to make such
change is clear, or the language used in the new act plainly requires
such change of construction. It should be remembered that In view of all the foregoing, the decision of the lower court is affirmed
condensation  is a necessity in the work of compilation or in so far as it dismisses appellant's first cause of action, and is
codification. Very frequently words which do not materially affect the reversed in so far as it dismissed his second cause of action. Appellee
sense will be omitted from the statutes as incorporated in the code, or is sentenced to refund to appellant the sum of P475 claimed in the
that same general idea will be expressed in briefer phrases. No design second cause of action of the complaint. Without pronouncement as to
of altering the law itself could rightly be predicated upon such costs. So ordered.
modifications of the language." (Emphasis ours.) (See Black on the
construction and Interpretation of the Laws, Second Edition, pp. 594,
595.)
Our Income Tax Law is patterned after the United States Revenue or
Income Tax Laws. the United States Revenue Laws of 1916, 1918,
1921, 1924, 1926, 1928 and 1932 considered the personal and
additional exemptions as credits against the net income for the
purpose of the normal tax; and subsequently, the United States
Revenue Acts of 1934, 1936 and 1938 amended the former acts by
making said exemptions as credits against the net income for the
purpose of both the normal tax and surtax. Section 7 of our old
Income Tax Law, instead of providing that the personal and additional
exemptions shall be allowed as a credit against the net income, as in
the United States Revenue Acts, prescribed that the amounts specified
therein shall be allowed as an exemption in a nature of deduction from
the amount of the net income. Which has exactly the same effect as
the provision regarding personal and additional exemptions in the said
United States Revenue Acts. For, as it was explained in the Ways and
Means Committee Report No. 764, 73d Congress, 2d Session, pages 6,
23:
To carry out the policy of retaining practically the same tax burden on
ordinary income, it is necessary in connection with the proposed plan
to allow the personal exemption and credits for dependents as an
offset against surtax as well as normal tax. The personal exemption
and credits for defendants would appear to be in lieu of deductions for
necessary living expenses. They may well apply to both taxes as do all
other ordinary deductions.
And Paul and Mertens, Law of Federal Taxation, Vol. 3, p. 509, state
regarding the change in the United States Revenue Act of 1934: "The
practical effect of this statutory change is to convert the personal
exemption and credit for dependents into deductions  . . ." (Emphasis
ours.)
The lower court, therefore, erred in not declaring that personal and
additional exemptions claimed by appellant should be credited against
or deducted from the net income, and consequently in not sentencing
appellee to refund to appellant the sum of P475.
Separate Opinions both under the new Code (section 31) and under the old Income Tax
PARAS, J.,  concurring and dissenting: Law (section 5), no deduction is allowed in respect of living expenses.
I concur in the majority opinion in so far as it affirms the dismissal of Of course, neither an alteration in phraseology nor the omission or
appellant's first cause of action, but I dissent from so much thereof as addition of words in a later statute will necessarily alter the
reverses the dismissal of appellant's second cause of action. construction of the former act, but, in the present case, the eliminated
The elimination from section 23 of the National Internal Revenue Code words were the very basis for the prior construction. The alternation
of the words "in the nature of a deduction from the amount of the net here is one of substance, and not merely of form.
income"(which appeared in section 7 of the old Income Tax Law), Besides, the majority, by their position, are their position, are
could not have been effected without a purpose; and said purpose (unwittingly I hope) playing favorite to the taxpayers in the upper
certainly is not to retain the meaning and effect of the suppressed brackets, — a situation which undoubtedly could not have been
words. If the legislative department did not intend to make an intended by the legislators. The following remarks of counsel for the
essential change, the logical and clear way of doing so was to recopy Government are in point:
the old provision. Said elimination was undoubtedly in answer to, and Lastly, the action of the appellee Collector, in allowing merely a tax
an acceptance of, the innovation proposed by the Tax Commission, credit upon the amount of the personal exemptions, gives all
namely, that the amount payable under the present law should be the taxpayers entitled to the same exemptions, an equal privilege. The tax
difference between the tax due on the entire net income and that due saving is the same for taxpayers having equal number of the
on the exemptions, thereby doing away with the former practice of dependents, whether rich or poor, just as the amount of exemptions
allowing the exemptions to be deducted from the net income and remains the same for all taxpayers under analogous circumstances.
basing the tax on the difference. We cannot say that the failure of the On the contrary, the method advocated by appellant (of deducting the
law makers to incorporate in the new Code the provision regarding tax exemption from the total taxable income) benefits the rich taxpayers,
credits allowable to individuals, as prepared and submitted by the Tax rather than the poor ones. To convince us of the fact, it is enough to
Commission to the National Assembly in substitution of section 7 of compute the tax on an income lesser than appellant's; say of P15,000.
the old Income Tax Law, suggests a rejection of the new plan and the
Appellant's Method Appellees
retention of the old policy, since the desired aim had equally been
accomplished by mere elimination of the words above referred to. Net income. . . . . . 15,000.00 Net income . . . . . . .
Indeed, at the rates fixed in section 21 of the new Code, the amounts
of personal and additional exemptions granted to individuals under
section 23 are exactly the amounts specified in the provision Less exemption . . . 3,500.00 Taxable income . . . .
recommended by the Tax Commission, namely, P10 for single
individuals, P30 for married persons or heads of family, and P10 for Taxable income . . . P11,500.00
each dependent. Section 23 should thus be construed not as an Taxed as follows:
original provision, but as one which is the result of a revision.
Income Rate Tax Income Tax
The interpretation now pursued by the Government is further
consistent with the circumstance that the tax is levied upon the "entire P2,000.00 1% P20.00 P2,000.00  Exempt.
net income" (section 21), which means "the gross income computed
under section 29, less the deductions allowed by section 30" (section 2,000.00 2% 40.00 2,000.00 P   10.00
28). It is significant that section 30 fails to make any reference to exempt)
"personal exemptions." The explanation contained in the Ways and
Means Committee Report No. 764, 73rd Congress, 2nd Session, to the 2,000.00 3% 60.00 2,000.00      60.00
effect that the "personal exemption and credits for dependents would
4,000.00 4% 160.00 4,000.00    160.00
appear to be in lieu of deductions for necessary living expenses,"
cannot have controlling force because, in computing the net income    1,500.00 5%       5,000.00    250.00

75.00
P11,500.0 P355.00 P15,000.00 P480.00
0 disallowed in the computation for purposes of determining the income
A comparison of this computation with that of the tax on appellant's
income, page 19 of this brief, reveals that, in appellant's case, the
deduction of the exemption results in a saving of 15 per cent tax on
P3,500 (P525) while in the case just discussed, where the taxpayer's
income is much less, the deduction method saves the taxpayer only 5
per cent tax on P3,500 (P175), because in this case the highest
bracket of the taxpayer's income is only subject to 5 per cent. So that
the appellant, with an income of P137,607.09, economizes by the
deduction three  times more than the second taxpayer whose income is
merely P15,000. It requires little argument to show that a method of
computing taxes whereby the same exemption results in
a higher  benefit for the taxpayer with the bigger income can neither
be just nor equitable.
My vote is to affirm the judgment appealed from in toto.
PERFECTO, J.,  dissenting and concurring:
We dissent from the majority of affirming the decision of the lower
court in so far as it dismisses appellant's first cause of action.
Plaintiff "filed an income tax return for the calendar year 1939 showing
that he made a net profit amounting to P52,449.29 on embroidery
business and P17,850 on dividends from various corporations; and
that from the purchase and sales of minings stock and securities he
made a profit of P10,741.30 and incurred losses in the amount of
P78,049.10, thereby sustaining a net loss of P67,307.80. . .
Defendant disallowed the deduction of the loss of P67,307.18, on the
theory that the loss was sustained by plaintiff from the sale of mining
stocks and securities which are capital assets and that the loss arising
from the same should be allowed only to the extent of the gain from
such sales.
The question is whether the loss was incurred in trade and business.
"Business" is a very comprehensive term and embraces everything
about which a person can be employed. Black's Law Dictionary, 158,
citing People vs. Commissioners of Taxes (23 New York, 242, 244).
"That which occupies the time, attention, and labor of men for the
purpose of a livelihood or profit." Bouvier's Law Dictionary, Vol. 1, p.
273. Flint vs. Stone Tracy co. (1910), 220 U. S., 107 at 171; 31 Sup.
Ct., 342; 55 Law. Ed., 389; Ann. Cas. 1912-B, Law. 1312, cited with
approval in Von Baumbach vs. Sargent Land Company. (1916) 242 U.
S., 503 at 515.
We do not have any doubt the plaintiff engaged in the business and
trade of buying and selling mining stocks and securities. We do not see
any reason why the losses sustained by him in said business should be
tax he has to pay.
We are of opinion that the lower court's decision should be reversed
and that, as to plaintiff's first cause of action, defendant should be
ordered to reimburse the plaintiff the amount of P9,008.14 paid by
plaintiff to defendant under protest.
In regards to the second cause of action of plaintiff, we agree with the
theory of the majority as explained in the opinion, but we can not
concur in the dispositive part thereof ordering the refund of the sum of
P475, in view of the conclusion we have arrived at regarding plaintiff's
first cause of action, it appearing that plaintiff only prays for the
refund of P475 as an alternative in the event his first cause of action is
dismissed.
PADILLA, J.,  concurring and dissenting:
I dissent from the opinion of the majority on the second cause of
action only.
It must be borne in mind that an exemption is neither an exclusion
provided for in section 29 (b) nor a deduction provided for in section
30, C. A. No. 466. Not being a deduction, the amount constituting an
exemption must not be excluded or deducted from the gross or net
income. Exemption means condonation, remission, or, as the trial
court aptly calls, waiver of the tax by the government. The amount of
exemption being fixed (section 23, C. A. No. 466), the tax condoned,
remitted or waived must also fixed. The exemption provided for in
Income Tax Law is for personal, living, or family expenses of the
taxpayer. It is the same amount regardless of the amount of net
income subject to tax. The law makes no distinction between small
and large incomes. The collector's computation accomplishes the aim
of the law, for the tax on the amount exempted would be the same for
every net income, large or small, subject to tax. To illustrate, let us
take the case of two married persons with spouses not legally
separated from them and each with three dependent children, whose
net incomes are P10,000 and P30,000, respectively. Under the
Collector's interpretation of the law, the computation would be, as
follows:
P10,000.00 net income P30,000.00 net income P2,000.00 1% P20.00
P2,000.00 1% P20.00 2,000.00 2% 40.00 2,000.00 2% 40.00
2,000.00 3% 60.00 2,000.00 3% 60.00 4,000.00 4% 160.00 4,000.00
4% 160.00------------------------------ 10,000.00 5%
500.00P10,000.00 Tax P220.00 10,000.00 6% 600.00 Exemption
P60.00 ---------------------------------- P30,000.00 Tax P1,320.00
Exemption P60.00.
Under appellant's interpretation of the law, the computation would be,
as follows:.
P10,000.00 net income P30,000.00 net income 4,000.00 less
exemption 4,000.00 less exemption---------- ---------- P6,000.00
taxable net P26,000.00 taxable net P2,000.00 1% P20.00 P2,000.00
1% P20.00 2,000.00 2% 40.00 2,000.00 2% 40.00 2,000.00 3%
60.00 2,000.00 3% 60.00------------------------------ 4,000.00 4%
160.00 P6,000.00 Tax P120.00 10,000.00 5% 500.00 6,000.00 6%
360.00 -------------------------------- P26,000.00 Tax P1,140.00.
or under appellant's other interpretation of the law, the computation
would be, as follows:
P2,000.00 1% P20.00 P2,000.00 1% P20.00 2,000.00 2% 40.00
2,000.00 2% 40.00 2,000.00 3% 60.00 2,000.00 3% 60.00 4,000.00
4% 160.00 4,000.00 4% 160.00--------------------------------
10,000.00 5% 500.00P10,000.00 Tax P120.00 6,000.00 6% 360.00
Exemption P160.00 4,000.00 6% 240.00
--------------------------------------- P26,000.00 Tax P1,140.00
Exemption P240.00.
The result under appellant's computation is that a large net income
would enjoy a bigger amount of tax exemption than a small net
income, when the law is clear that such exemption is of fixed amount
regardless of the amount of net income subject to tax.
It is not correct to say that the "Wisconsin Plan" referred to in the
majority opinion was not adopted. It was adopted not in form but in
substance.
I am of the opinion that the judgment under review should be
affirmed.
G.R. No. 146984             July 28, 2006
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM
LIMITED OF THE MARDEN GROUP (HK) and NATIONAL
DEVELOPMENT COMPANY, respondents.
DECISION
TINGA, J.:
The issue in this present petition is whether the sale by the National
Development Company (NDC) of five (5) of its vessels to the private
respondents is subject to value-added tax (VAT) under the National
Internal Revenue Code of 1986 (Tax Code) then prevailing at the time
of the sale. The Court of Tax Appeals (CTA) and the Court of Appeals
commonly ruled that the sale is not subject to VAT. We affirm, though
on a more unequivocal rationale than that utilized by the rulings under
review. The fact that the sale was not in the course of the trade or
business of NDC is sufficient in itself to declare the sale as outside the
coverage of VAT.
The facts are culled primarily from the ruling of the CTA.
Pursuant to a government program of privatization, NDC decided to
sell to private enterprise all of its shares in its wholly-owned subsidiary
the National Marine Corporation (NMC). The NDC decided to sell in one
lot its NMC shares and five (5) of its ships, which are 3,700 DWT
Tween-Decker, "Kloeckner" type vessels.1 The vessels were
constructed for the NDC between 1981 and 1984, then initially leased
to Luzon Stevedoring Company, also its wholly-owned subsidiary.
Subsequently, the vessels were transferred and leased, on a bareboat
basis, to the NMC.2
The NMC shares and the vessels were offered for public bidding.
Among the stipulated terms and conditions for the public auction was
that the winning bidder was to pay "a value added tax of 10% on the
value of the vessels."3 On 3 June 1988, private respondent Magsaysay
Lines, Inc. (Magsaysay Lines) offered to buy the shares and the
vessels for P168,000,000.00. The bid was made by Magsaysay Lines,
purportedly for a new company still to be formed composed of itself,
Baliwag Navigation, Inc., and FIM Limited of the Marden Group based
in Hongkong (collectively, private respondents).4 The bid was approved
by the Committee on Privatization, and a Notice of Award dated 1 July
1988 was issued to Magsaysay Lines.
On 28 September 1988, the implementing Contract of Sale was
executed between NDC, on one hand, and Magsaysay Lines, Baliwag
Navigation, and FIM Limited, on the other. Paragraph 11.02 of the
contract stipulated that "[v]alue-added tax, if any, shall be for the
account of the PURCHASER."5 Per arrangement, an irrevocable
confirmed Letter of Credit previously filed as bidders bond was
accepted by NDC as security for the payment of VAT, if any. By this
time, a formal request for a ruling on whether or not the sale of the
vessels was subject to VAT had already been filed with the Bureau of
Internal Revenue (BIR) by the law firm of Sycip Salazar Hernandez &
Gatmaitan, presumably in behalf of private respondents. Thus, the
parties agreed that should no favorable ruling be received from the
BIR, NDC was authorized to draw on the Letter of Credit upon written
demand the amount needed for the payment of the VAT on the
stipulated due date, 20 December 1988.6
In January of 1989, private respondents through counsel received VAT
Ruling No. 568-88 dated 14 December 1988 from the BIR, holding that
the sale of the vessels was subject to the 10% VAT. The ruling cited
the fact that NDC was a VAT-registered enterprise, and thus its
"transactions incident to its normal VAT registered activity of leasing
out personal property including sale of its own assets that are
movable, tangible objects which are appropriable or transferable are
subject to the 10% [VAT]."7
Private respondents moved for the reconsideration of VAT Ruling No.
568-88, as well as VAT Ruling No. 395-88 (dated 18 August 1988),
which made a similar ruling on the sale of the same vessels in
response to an inquiry from the Chairman of the Senate Blue Ribbon
Committee. Their motion was denied when the BIR issued VAT Ruling
Nos. 007-89 dated 24 February 1989, reiterating the earlier VAT
rulings. At this point, NDC drew on the Letter of Credit to pay for the
VAT, and the amount of P15,120,000.00 in taxes was paid on 16
March 1989.
On 10 April 1989, private respondents filed an Appeal and Petition for
Refund with the CTA, followed by a Supplemental Petition for Review
on 14 July 1989. They prayed for the reversal of VAT Rulings No. 395-
88, 568-88 and 007-89, as well as the refund of the VAT payment
made amounting to P15,120,000.00.8 The Commissioner of Internal
Revenue (CIR) opposed the petition, first arguing that private
respondents were not the real parties in interest as they were not the
transferors or sellers as contemplated in Sections 99 and 100 of the
then Tax Code. The CIR also squarely defended the VAT rulings
holding the sale of the vessels liable for VAT, especially citing Section
3 of Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided that
"[VAT] is imposed on any sale or transactions ‘deemed sale’ of taxable
goods (including capital goods, irrespective of the date of acquisition)."
The CIR argued that the sale of the vessels were among those
transactions "deemed sale," as enumerated in Section 4 of R.R. No. 5-
87. It seems that the CIR particularly emphasized Section 4(E)(i) of
the Regulation, which classified "change of ownership of business" as a
circumstance that gave rise to a transaction "deemed sale."
In a Decision dated 27 April 1992, the CTA rejected the CIR’s
arguments and granted the petition.9 The CTA ruled that the sale of a
vessel was an "isolated transaction," not done in the ordinary course of
NDC’s business, and was thus not subject to VAT, which under Section
99 of the Tax Code, was applied only to sales in the course of trade
or business. The CTA further held that the sale of the vessels could
not be "deemed sale," and thus subject to VAT, as the transaction did
not fall under the enumeration of transactions deemed sale as listed
either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-
87. Finally, the CTA ruled that any case of doubt should be resolved in
favor of private respondents since Section 99 of the Tax Code which
implemented VAT is not an exemption provision, but a classification
provision which warranted the resolution of doubts in favor of the
taxpayer.
The CIR appealed the CTA Decision to the Court of Appeals,10 which on
11 March 1997, rendered a Decision reversing the CTA. 11 While the
appellate court agreed that the sale was an isolated transaction, not
made in the course of NDC’s regular trade or business, it nonetheless
found that the transaction fell within the classification of those
"deemed sale" under R.R. No. 5-87, since the sale of the vessels
together with the NMC shares brought about a change of ownership in
NMC. The Court of Appeals also applied the principle governing tax
exemptions that such should be strictly construed against the
taxpayer, and liberally in favor of the government.12
However, the Court of Appeals reversed itself upon reconsidering the
case, through a Resolution dated 5 February 2001. 13 This time, the
appellate court ruled that the "change of ownership of business" as
contemplated in R.R. No. 5-87 must be a consequence of the
"retirement from or cessation of business" by the owner of the goods,
as provided for in Section 100 of the Tax Code. The Court of Appeals
also agreed with the CTA that the classification of transactions
"deemed sale" was a classification statute, and not an exemption
statute, thus warranting the resolution of any doubt in favor of the
taxpayer.14
To the mind of the Court, the arguments raised in the present petition
have already been adequately discussed and refuted in the rulings
assailed before us. Evidently, the petition should be denied. Yet the
Court finds that Section 99 of the Tax Code is sufficient reason for
upholding the refund of VAT payments, and the subsequent
disquisitions by the lower courts on the applicability of Section 100 of
the Tax Code and Section 4 of R.R. No. 5-87 are ultimately irrelevant.
A brief reiteration of the basic principles governing VAT is in order.
VAT is ultimately a tax on consumption, even though it is assessed on
many levels of transactions on the basis of a fixed percentage. 15 It is
the end user of consumer goods or services which ultimately shoulders
the tax, as the liability therefrom is passed on to the end users by the
providers of these goods or services16 who in turn may credit their own
VAT liability (or input VAT) from the VAT payments they receive from
the final consumer (or output VAT).17 The final purchase by the end
consumer represents the final link in a production chain that itself
involves several transactions and several acts of consumption. The
VAT system assures fiscal adequacy through the collection of taxes on
every level of consumption,18 yet assuages the manufacturers or
providers of goods and services by enabling them to pass on their
respective VAT liabilities to the next link of the chain until finally the
end consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level. Its
assessment bears direct relevance to the taxpayer’s role or link in the
production chain. Hence, as affirmed by Section 99 of the Tax Code
and its subsequent incarnations,19 the tax is levied only on the sale,
barter or exchange of goods or services by persons who engage in
such activities, in the course of trade or business. These
transactions outside the course of trade or business may invariably
contribute to the production chain, but they do so only as a matter of
accident or incident. As the sales of goods or services do not occur
within the course of trade or business, the providers of such goods or
services would hardly, if at all, have the opportunity to appropriately
credit any VAT liability as against their own accumulated VAT
collections since the accumulation of output VAT arises in the first
place only through the ordinary course of trade or business.
That the sale of the vessels was not in the ordinary course of trade or
business of NDC was appreciated by both the CTA and the Court of
Appeals, the latter doing so even in its first decision which it eventually
reconsidered.20 We cite with approval the CTA’s explanation on this
point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924,
September 30, 1955 (97 Phil. 992), the term "carrying on business"
does not mean the performance of a single disconnected act, but
means conducting, prosecuting and continuing business by performing
progressively all the acts normally incident thereof; while "doing
business" conveys the idea of business being done, not from time to
time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL
REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. "Course of
business" is what is usually done in the management of trade or
business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65,
cited in Words & Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited jurisprudence, is that
"course of business" or "doing business" connotes regularity of
activity. In the instant case, the sale was an isolated transaction. The
sale which was involuntary and made pursuant to the declared policy
of Government for privatization could no longer be repeated or carried
on with regularity. It should be emphasized that the normal VAT-
registered activity of NDC is leasing personal property.21
This finding is confirmed by the Revised Charter22 of the NDC which
bears no indication that the NDC was created for the primary purpose
of selling real property.23
The conclusion that the sale was not in the course of trade or
business, which the CIR does not dispute before this Court,24 should
have definitively settled the matter. Any sale, barter or exchange of
goods or services not in the course of trade or business is not
subject to VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i)
of R.R. No. 5-87 now relied upon by the CIR, is captioned "Value-
added tax on sale of goods," and it expressly states that "[t]here shall
be levied, assessed and collected on every sale, barter or exchange of
goods, a value added tax x x x." Section 100 should be read in light of
Section 99, which lays down the general rule on which persons are
liable for VAT in the first place and on what transaction if at all. It may
even be noted that Section 99 is the very first provision in Title IV of
the Tax Code, the Title that covers VAT in the law. Before any portion
of Section 100, or the rest of the law for that matter, may be applied
in order to subject a transaction to VAT, it must first be satisfied that
the taxpayer and transaction involved is liable for VAT in the first place
under Section 99.
It would have been a different matter if Section 100 purported to
define the phrase "in the course of trade or business" as expressed in
Section 99. If that were so, reference to Section 100 would have been
necessary as a means of ascertaining whether the sale of the vessels
was "in the course of trade or business," and thus subject to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of
R.R. No. 5-87 elaborate on is not the meaning of "in the course of
trade or business," but instead the identification of the transactions
which may be deemed as sale. It would become necessary to ascertain
whether under those two provisions the transaction may be deemed a
sale, only if it is settled that the transaction occurred in the course of
trade or business in the first place. If the transaction transpired
outside the course of trade or business, it would be irrelevant for the
purpose of determining VAT liability whether the transaction may be
deemed sale, since it anyway is not subject to VAT.
Accordingly, the Court rules that given the undisputed finding that the
transaction in question was not made in the course of trade or
business of the seller, NDC that is, the sale is not subject to VAT
pursuant to Section 99 of the Tax Code, no matter how the said sale
may hew to those transactions deemed sale as defined under Section
100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to
find application in this case, the Court finds the discussions offered on
this point by the CTA and the Court of Appeals (in its subsequent
Resolution) essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does
classify as among the transactions deemed sale those involving
"change of ownership of business." However, Section 4(E) of R.R. No.
5-87, reflecting Section 100 of the Tax Code, clarifies that such
"change of ownership" is only an attending circumstance to
"retirement from or cessation of business[, ] with respect to all goods
on hand [as] of the date of such retirement or cessation."25 Indeed,
Section 4(E) of R.R. No. 5-87 expressly characterizes the "change of
ownership of business" as only a "circumstance" that attends those
transactions "deemed sale," which are otherwise stated in the same
section.26
WHEREFORE, the petition is DENIED. No costs.
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
C-4 (27) fixed tax (1954) 10.00
C-4 (37) fixed tax (1953-1954) 20.00
TOTAL P69.699.56
Respondent also suggested the payment of the amount of P3,300.00
as penalties in extrajudicial settlement of petitioner's violations of
Sections 182, 183, 185, 186 and 191 of the Tax Code and of the
Bookkeeping Regulations (p. 25, B.I.R. rec.).
In G.R. No. L-27858, respondent Commissioner of Internal Revenue
caused the investigation of petitioner for the purpose of ascertaining
its tax liability on August 10, 1960, as a result of which on December
7, 1960, Revenue Examiner Pedro Cabigao reported that "petitioner
had manufactured and sold steel chairs without paying the 30% sales
tax imposed by Section 185(c) of the Tax Code; accepted job orders
without paying the 3% tax in gross receipts imposed by Section 191 of
the same Code; manufactured and sold other articles subject to 7%
sales tax under Section 186 of the same Code but not covered by the
tax exemption privilege; failed to register with the Bureau of Internal
Revenue books of accounts and sales invoices as required by the
Bookkeeping Regulations; failed to indicate in the sales invoices the
Residence Certificate number of customers who purchased articles
worth P50.00 or over, in violation of the Bookkeeping Regulation; and
failed to produce its books of accounts and business records for
inspection and examination when required to do so by the revenue
examiner in violation of the Bookkeeping Regulations (pp. 17-18 B.I.R.
rec.)".
Based on the foregoing, the respondent Commissioner of Internal
Revenue on October 6, 1961, assessed against the petitioner "the
payment of P25,080.91 as deficiency percentage taxes and 25%
surcharge for 1957 to 1960 and suggested the payment of P5,020.00
as total compromise penalty in extrajudicial settlement of the various
violations of the Tax Code and Bookkeeping Regulation (pp. 28-29
B.I.R. rec.).1äwphï1.ñët  "
Regarding the compromise penalty suggested by respondent Bureau of
Internal Revenue in both G.R. L-22805 and L-27858, it does not
appear that petitioner accepted the imposition of the compromise
amounts. Hence We find no compelling reasons to alter the decision of
respondent Court of Tax Appeals in L-27858 that —
With respect to the compromise penalty in the total amount of
P5,020.00 suggested by respondent to be paid by petitioner, it is now
a well settled doctrine that compromise penalty cannot be imposed or
collected without the agreement or conformity of the tax
payer  (Collector of Internal Revenue vs. University of Santo Tomas, et
al., G.R. Nos. L-11274 & L-11280, November 28, 1958; the Collector
of Internal Revenue v. Bautista, et al., G.R. Nos. L-12250 & 12259,
May 27, 1959; the Philippines International Fair, Inc. v. Collector of
Internal Revenue, G.R. Nos. L-12928 & L-12932, March 31, 1962).
(Emphasis for emphasis)
Inasmuch as the figures appearing in the Bureau of Internal Revenue's
tax delinquency assessments in both cases (L-22805 and L-27858) are
not in dispute, and the respondent Court of Tax Appeals ruled in its
decision in G.R. No. L-27858 on the lone issue presented in both cases
that the tax assessment of "P25,080.91 as deficiency sales and
percentage taxes from 1957 to June 30, 1960" must be paid by
petitioner as the sale of other manufactured items did not come within
the purview, of the tax exemption granted petitioner. We find it no
longer necessary to make a definite stand on the question raised in L-
22805 as to the alleged error committed by respondent Court of Tax
Appeals in dismissing the appeal in C.T.A. 1036 (subject matter of L-
22805) for lack of jurisdiction, the same having been filed beyond the
30-day period prescribed in Section 11 of Republic Act 1126. Suffice it
to say on that issue that appellants must perfect their appeal from the
decision of the Commissioner of Internal Revenue to the Court of Tax
Appeals within the statutory period of 30 days, otherwise said Court
acquires no jurisdiction.
We turn Our attention on the vital issue of tax exemption claimed by
petitioner as basis for questioning the tax assessments made by
respondent Bureau of Internal Revenue in both cases (G.R. L-22805
and 27858). There is no doubt that petitioner was given a Certificate
of Tax Exemption By the Secretary of Finance on July 7,1954, as
follows:
Be it known that upon application filed by Wonder Mechanical
Engineering Corporation, 1310 M. Hizon, Sta. Cruz, Manila, in respect
to the manufacture of machines for making cigarette paper, pails, lead
washers, nails, rivets, candies, etc., the said industry/industries have
been determined to be new and necessary under the provisions of
Republic Act No. 901 (or of Republic Act No. 35), in view of which this
Certificate of Tax Exemption has been issued entitling the abovenamed
firm/person to tax exemption from the payment of taxes directly
payable by it/him in respect to the said industry/industries until
December 31, 1958, and thereafter to a diminishing exemption until
June 20, 1959, as provided in section 1 of Republic Act No. 901,
except the exemption from the income tax which will wholly terminate
on June 20, 1955 (B.I.R. rec., page 13). (Emphasis for emphasis)
Republic Act 35, approved on September 30, 1946, grants to persons
"who or which shall engage in a new and necessary industry", for a
period of four years from the date of the organization of such industry,
exemption "from the payment of all internal revenue taxes directly
payable by such person". Republic Act 901, approved on June 20,
1953, which amended Republic Act 35 by extending the period of tax
exemption, elaborated on the meaning of "new and necessary
industry" as follows:
Sec. 2. For the purposes of this Act, a "new industry is one not
existing or operating on a commercial scale prior to January first,
nineteen hundred and forty-five.  Where several applications for
exemption are filed in connection with the same kind of industry, the
Secretary of Finance shall approve them in the order in which they
have been filed until the total output or production of those already
granted exemption for that particular kind of industry is sufficient to
meet local demand or consumption:  Provided, That the limitation shall
not apply to products intended for export. (Emphasis for emphasis)
Sec. 3. For the purposes of this Act, a "necessary" industry is one
complying with the following requirements:
(1) Where the establishment of the industry will contribute to the
attainment of a stable and balanced national economy.
(2) Where the industry will operate on a commercial scale in
conformity with up-to-date practices and will make its products
available to the general public in quantities and at prices which justify
its operation with a reasonable degree of permanency.
(3) Where the imported raw materials represent a value not exceeding
sixty percentum of the manufacturing cost plus reasonable selling
price and administrative expenses: Provided, That a grantee of tax
exemption shall use materials of domestic origin, growth, or
manufacture wherever the same are available or could be made
available in reasonable quantity and quality and at reasonable
prices. ... (Emphasis for emphasis) .
From the above-quoted provisions of the law, it is clear that an
industry to be entitled to tax exemption must be "new and necessary"
and that the tax exemption was granted to new and necessary
industries as an incentive to greater and adequate production of
products made scarce by the second world war which wrought havoc
on our national economy, a production "sufficient to meet local
demand or consumption"; that will contribute "to the attainment of a
stable and balanced national economy"; an industry that "will make its
products available to the general public in quantities and at prices
which will justify its operation."
Viewed in the light of the foregoing reasons for the State grant of tax
exemption, We are firmly convinced that petitioner was granted tax
exemption in the manufacture and sale  "of machines for making
cigarette paper, pails, lead washers, nails, rivets, candies, etc.", as
explicitly stated in the Certificate of Exemption (Annex A of the
petition in G.R. No. L-22805), but certainly not for the manufacture
and sale of the articles produced by those machines.
That such was the intention of the State when it granted tax
exemption to the petitioner in the manufacture of machines  for
making certain products could be deduced from the following:
Before the approval of the original grant of tax exemption to Petitioner
for engaging in a new and necessary industry under Republic Act No.
35, the then Secretary of Finance submitted a memorandum to the
Cabinet, dated March 3, 1949, the pertinent portions of which read as
follows:
"... If (petitioner) turns out machines whenever orders therefore are
received. Among its products are a medicine tablet wrapping
machine for Dr. Agustin Liboro, photographs of which are attached, a
loud speaker for the Manila Supply, and a "Lompia
wrapping"  machine  for a certain Chinese. ...
The manufacture of the above-mentioned machines can be considered
a new and necessary industry for the purpose of Republic Act No. 35.
It is recommended that the benefits of said Act be extended to this
corporation in respect to said industry.
Respectfully submitted:
(SGD.) PIO PEDROSA
Secretary"
The letter of the Executive Secretary to the petitioner dated May 30,
1949, reads as follows:
"Sirs:
I have the honor to advise you that His Excellency, the President, has
today, upon recommendation of the Honorable, the Secretary of
Finance, approved your application for exemption from the payment of
internal revenue taxes on your business of manufacturing
machines  for making a number of products, such as cigarette paper,
pails, lead washers, rivets, nails, candies, chairs, etc., under the
provisions of Section 2 of Republic Act No. 35.
Very respectfully,
(SGD.) TEODORO EVANGELISTA
Executive Secretary"
(Emphasis for emphasis)
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
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).
WHEREFORE, the decisions of respondent Court of Tax Appeals in
these two cases are affirmed. Costs against the petitioner in both
cases.
G.R. No. 180043               July 14, 2009
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
PHILIPPINE AIRLINES, INC., Respondent.
DECISION
CHICO-NAZARIO, J.:
In this Petition for Review on Certiorari, under Rule 45 of the Revised
Rules of Court, petitioner Commissioner of Internal Revenue assails
the Decision1 of the Court of Tax Appeals (CTA) En Banc dated 9
August 2007 in CTA EB No. 221, affirming the Decision2 dated 14 June
2006 of the CTA First Division in CTA Case No. 6735, which granted
the claim of respondent Philippine Airlines, Inc. (PAL) for the refund of
its Overseas Communications Tax (OCT) for the period April to
December 2001.
Petitioner, as the Commissioner of the Bureau of Internal Revenue
(BIR), is responsible for the assessment and collection of all national
internal revenue taxes, fees, and charges, including the 10% Overseas
Communications Tax (OCT), imposed by Section 120 of the National
Internal Revenue Code (NIRC) of 1997, which reads:
SEC. 120. Tax on Overseas Dispatch, Message or Conversation
Originating from the Philippines. -
(A) Persons Liable—There shall be collected upon every overseas
dispatch, message or conversation transmitted from the Philippines by
telephone, telegraph, telewriter exchange, wireless and other
communication equipment service, a tax of ten percent (10%) on the
amount paid of [the transaction involving overseas dispatch, message
or conversation] such services. The tax imposed in this Section shall
be payable by the person paying for the services rendered and shall be
paid to the person rendering the services who is required to collect and
pay the tax within twenty (20) days after the end of each quarter.
On the other hand, respondent is a domestic corporation organized
under the corporate laws of the Republic of the Philippines; declared
the national flag carrier of the country; and the grantee under
Presidential Decree No. 15903 of a franchise to establish, operate, and
maintain transport services for the carriage of passengers, mail, and
property by air, in and between any and all points and places
throughout the Philippines, and between the Philippines and other
countries.41avvphi1
For the period January to December 2001, the Philippine Long
Distance Telephone Company (PLDT) collected from respondent the
10% OCT on the amount paid by the latter for overseas telephone
calls it had made through the former. In all, PLDT collected from
respondent the amount of ₱202,471.18 as OCT for 2001, summarized
as follows5:
PERIOD AMOUNT
January to March 2001 ₱ 75,332.26
April to June 2001 50,271.43
July to September 2001 43,313.96
October to December
33,553.53
2001
Total ₱ 202,471.18
On 8 April 2003, respondent filed with the BIR an administrative claim
for refund of the ₱202,471.18 OCT it alleged to have erroneously paid
in 2001. In a letter6 dated 4 April 2003, addressed to petitioner, Ma.
Stella L. Diaz (Diaz), the Assistant Vice-President for Financial Planning
& Analysis of respondent, explained that the claim for refund of
respondent was based on its franchise, Section 13 of Presidential
Decree No. 1590, which granted it (1) the option to pay either the
basic corporate income tax on its annual net taxable income or the two
percent franchise tax on its gross revenues, whichever was lower; and
(2) the exemption from all other taxes, duties, royalties, registration,
license and other fees and charges imposed by any municipal, city,
provincial or national authority or government agency, now or in the
future, except only real property tax. Also invoking BIR Ruling No. 97-
947 dated 13 April 1994, Diaz maintained that, other than being liable
for basic corporate income tax or the franchise tax, whichever was
lower, respondent was clearly exempted from all other taxes, including
OCT, by virtue of the "in lieu of all taxes" clause in Section 13 of
Presidential Decree No. 1590.
Petitioner failed to act on the request for refund of respondent, which
prompted respondent to file on 4 June 2003, with the CTA in Division,
a Petition for Review, docketed as CTA Case No. 6735. Respondent
sought the refund of the amount ₱127,138.92, representing OCT,
which PLDT erroneously collected from respondent for the second,
third and fourth quarters of 2001.8 The claim of respondent for the
refund of the OCT for the first quarter of 2001, amounting to
₱75,323.26, had already prescribed after the passing of more than two
years since said amount was paid.
Respondent alleged in its Petition that per its computation, reflected in
its annual income tax return, it incurred a net loss in 2001 resulting in
zero basic corporate income tax liability, which was necessarily lower
than the franchise tax due on its gross revenues. Respondent argued
that in opting for the basic corporate income tax, regardless of
whether or not it actually paid any amount as tax, it was already
entitled to the exemption from all other taxes granted to it by Section
13 of Presidential Decree No. 1590. 9
After a hearing on the merits, the CTA First Division rendered a
Decision10 dated 14 June 2006, the dispositive part of which reads:
WHEREFORE, the Petition for Review is hereby GRANTED. Respondent
is ORDERED to refund to the petitioner the substantiated amount of
₱126,243.80 representing the erroneously collected 10% Overseas
Communications Tax for the period April to December 2001.
The CTA First Division reasoned that under Section 13 of Presidential
Decree No. 1590, respondent had the option to choose between two
alternatives: the basic corporate income tax and the franchise tax,
whichever would result in a lower amount of tax, and this would be in
lieu of all other taxes, with the exception only of tax on real property.
In the event that respondent incurred a net loss for the taxable year
resulting in zero basic corporate income tax liability, respondent could
not be required to pay the franchise tax before it could avail itself of
the exemption from all other taxes under Section 13 of Presidential
Decree No. 1590. The possibility that respondent would incur a net
loss for a given taxable period and, thus, have zero liability for basic
corporate income tax, was already anticipated by Section 13 of
Presidential Decree No. 1590, the very same section granting
respondent tax exemption, since it authorized respondent to carry
over its excess net loss as a deduction for the next five taxable years.
However, the CTA First Division held that out of the total amount of
₱127,138.92 respondent sought to refund, only the amount of
₱126,243.80 was supported by either original or photocopied PLDT
billing statements, original office receipts, and original copies of check
vouchers of respondent. Respondent was also able to prove, through
testimonial evidence, that the OCT collected by PLDT from it was
included in the quarterly percentage tax returns of PLDT for the
second, third, and fourth quarters of 2001, which were submitted to
and received by an authorized agent bank of the BIR.11
Not satisfied with the foregoing Decision dated 14 June 2006,
petitioner filed a Motion for Reconsideration, which was denied by the
CTA First Division in a Resolution dated 17 October 2006. 12
Petitioner filed an appeal with the CTA en banc, docketed as CTA EB
No. 221. The latter promulgated its Decision13 on 9 August 2007
denying petitioner’s appeal. The CTA En Banc found that Presidential
Decree No. 1590 does not provide that only the actual payment of
basic corporate income tax or franchise tax by respondent would
entitle it to the tax exemption provided under Section 13 of the latter’s
franchise. Like the CTA First Division, the CTA en banc ruled that by
providing for net loss carry-over, Presidential Decree No. 1590
recognized the possibility that respondent would end up with a net loss
in the computation of its taxable income, which would mean zero
liability for basic corporate income tax. The CTA En Banc further cited
Commissioner of Internal Revenue v. Philippine Airlines, Inc. 14 (PAL
case) to support its conclusions. In the said case, this Court declared
that despite the fact that respondent did not pay any basic corporate
income tax, given its net loss position for the taxable years concerned,
it was still exempted from paying all other taxes, including final
withholding tax on interest income, pursuant to Section 13 of
Presidential Decree No. 1590. Lastly, the CTA en banc sustained the
finding of the CTA First Division that respondent was only able to
establish its claim for OCT refund in the amount of ₱126,243.80.
The CTA En Banc denied petitioner’s Motion for Reconsideration in a
Resolution dated 11 October 2007.15
Hence, the present Petition for Review where the petitioner raises the
following issues:
I
THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT THE
PHRASE "IN LIEU OF ALL OTHER TAXES" IN SECTIONS 13 AND 14 OF
PRESIDENTIAL DECREE NO. 1590 DOES NOT CONTEMPLATE THE
FULFILLMENT OF A CONDITION BEFORE THE EXEMPTION FROM ALL
OTHER TAXES MAY BE APPLIED; AND
II
TAX REFUNDS ARE IN THE NATURE OF TAX EXEMPTIONS. AS SUCH,
THEY SHOULD BE CONSTRUED STRICTISSIMI JURIS AGAINST THE
PERSON OR ENTITY CLAIMING THE EXEMPTION.16
The present Petition is without merit.
Petitioner argues that the PAL case is not applicable to the case at bar,
since the former involves final withholding tax on interest income,
while the latter concerns another type of tax, the OCT.17
Petitioner’s argument is untenable.
Pertinent portions of Section 13 of Presidential Decree No. 1590 are
quoted hereunder:
Section 13. In consideration of the franchise and rights hereby
granted, the grantee shall pay to the Philippine Government during the
life of this franchise, whichever of subsections (a) and (b) hereunder
will result in a lower tax:
(a) The basic corporate income tax based on the grantee’s annual net
taxable income computed in accordance with the provisions of the
National Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues,
derived by the grantee from all sources, without distinction as to
transport or non-transport operations; provided, that with respect to
international air-transport service, only the gross passenger, mail and
freight revenues from its outgoing flights shall be subject to this tax.
The tax paid by grantee under either of the above alternatives shall be
in lieu of all other taxes, duties, royalties, registration, license, and
other fees and charges of any kind, nature, or description imposed,
levied, established, assessed or collected by any municipal, city,
provincial, or national authority or government agency, now or in the
future x x x
xxxx
The grantee, shall, however, pay the tax on its real property in
conformity with existing law.
The language used in Section 13 of Presidential Decree No. 1590,
granting respondent tax exemption, is clearly all-inclusive. The basic
corporate income tax or franchise tax paid by respondent shall be "in
lieu of all other taxes, duties, royalties, registration, license, and other
fees and charges of any kind, nature, or description imposed, levied,
established, assessed or collected by any municipal, city, provincial, or
national authority or government agency, now or in the future x x x,"
except only real property tax. Even a meticulous examination of
Presidential Decree No. 1590 will not reveal any provision therein
limiting the tax exemption of respondent to final withholding tax on
interest income or excluding from said exemption the OCT.
Moreover, although the PAL case may involve a different type of tax,
certain pronouncements made by the Court therein are still significant
in the instant case.
In the PAL case, petitioner likewise opposed the claim for refund of
respondent based on the argument that the latter was not exempted
from final withholding tax on interest income, because said tax should
be deemed part of the basic corporate income tax, which respondent
had opted to pay. This Court was unconvinced by petitioner’s
argument, ratiocinating that "basic corporate income tax," under
Section 13(a) of Presidential Decree No. 1590, relates to the general
rate of 35% (reduced to 32% by the year 2000) imposed on taxable
income by Section 27(A) of the NIRC. Although the definition of "gross
income" is broad enough to include all passive incomes, the passive
incomes already subjected to different rates of final tax to be withheld
at source shall no longer be included in the computation of gross
income, which shall be used in the determination of taxable income.
The interest income of respondent is already subject to final
withholding tax of 20%, and no longer to the basic corporate income
tax of 35%. Having established that final tax on interest income is not
part of the basic corporate income tax, then the former is considered
as among "all other taxes" from which respondent is exempted under
Section 13 of Presidential Decree No. 1590.
It is true that the discussion in the PAL case on "gross income" is
immaterial to the case at bar. OCT is not even an income tax. It is a
business tax, which the government imposes on the gross annual sales
of operators of communication equipment sending overseas
dispatches, messages or conversations from the Philippines. According
to Section 120 of the NIRC, the person paying for the services
rendered (respondent, in this case) shall pay the OCT to the person
rendering the service (PLDT); the latter, in turn, shall remit the
amount to the BIR. If this Court deems that final tax on interest
income – which is also an income tax, but distinct from basic corporate
income tax – is included among "all other taxes" from which
respondent is exempt, then with all the more reason should the Court
consider OCT, which is altogether a different type of tax, as also
covered by the said exemption.
Petitioner further avers that respondent cannot avail itself of the
benefit of the "in lieu of all other taxes" proviso in Section 13 of
Presidential Decree No. 1590 when it made no actual payment of
either the basic corporate income tax or the franchise tax.
Petitioner made the same averment in the PAL case, which the Court
rejected for the following reasons:
A careful reading of Section 13 rebuts the argument of the CIR that
the "in lieu of all other taxes" proviso is a mere incentive that applies
only when PAL actually pays something. It is clear that PD 1590
intended to give respondent the option to avail itself of Subsection (a)
or (b) as consideration for its franchise. Either option excludes the
payment of other taxes and dues imposed or collected by the national
or the local government. PAL has the option to choose the alternative
that results in lower taxes. It is not the fact of tax payment that
exempts it, but the exercise of its option.
Under Subsection (a), the basis for the tax rate is respondent’s annual
net taxable income, which (as earlier discussed) is computed by
subtracting allowable deductions and exemptions from gross income.
By basing the tax rate on the annual net taxable income, PD 1590
necessarily recognized the situation in which taxable income may
result in a negative amount and thus translate into a zero tax liability.
xxxx
The fallacy of the CIR’s argument is evident from the fact that the
payment of a measly sum of one peso would suffice to exempt PAL
from other taxes, whereas a zero liability arising from its losses would
not. There is no substantial distinction between a zero tax and a one-
peso tax liability.18 (Emphases ours.)
In insisting that respondent needs to actually pay a certain amount as
basic corporate income tax or franchise tax, before it can enjoy the tax
exemption granted to it, petitioner places too much reliance on the use
of the word "pay" in the first line of Section 13 of Presidential Decree
No. 1590.
It must do well for petitioner to remember that a statute’s clauses and
phrases should not be taken as detached and isolated expressions, but
the whole and every part thereof must be considered in fixing the
meaning of any of its parts. 19 A strict interpretation of the word "pay"
in Section 13 of Presidential Decree No. 1590 would effectively render
nugatory the other rights categorically conferred upon the respondent
by its franchise.
Section 13 of Presidential Decree No. 1590 clearly gives respondent
the option to "pay" either basic corporate income tax on its net taxable
income or franchise tax on its gross revenues, whichever would result
in lower tax. The rationale for giving respondent such an option is
explained in the PAL case, to wit:
Notably, PAL was owned and operated by the government at the time
the franchise was last amended. It can reasonably be contemplated
that PD 1590 sought to assist the finances of the government
corporation in the form of lower taxes. When the respondent operates
at a loss (as in the instant case), no taxes are due; in this [sic]
instances, it has a lower tax liability than that provided by Subsection
(b).20
In the event that respondent incurs a net loss, it shall have zero
liability for basic corporate income tax, the lowest possible tax liability.
There being no qualification to the exercise of its options under Section
13 of Presidential Decree No. 1590, then respondent is free to choose
basic corporate income tax, even if it would have zero liability for the
same in light of its net loss position for the taxable year. Additionally,
a ruling by this Court compelling respondent to pay a franchise tax
when it incurs a net loss and is, thus, not liable for any basic corporate
income tax would be contrary to the evident intent of the law to give
respondent options and to make the latter liable for the least amount
of tax.
Moreover, then President Ferdinand E. Marcos, the author of
Presidential Decree No. 1590, was mindful of the possibility that
respondent would incur a net loss for a taxable year, resulting in zero
tax liability for basic corporate income tax, when he included in the
franchise of respondent the following provisions:
For the purposes of computing the basic corporate income tax as
provided herein, the grantee is authorized:
xxxx
(2) To carry over as a deduction from taxable income any net loss
incurred in any year up to five years following the year of such loss.
In allowing respondent to carry over its net loss for five consecutive
years following the year said loss was incurred, Presidential Decree No.
1590 takes into account the possibility that respondent shall be in a
net loss position for six years straight, during which it shall have zero
basic corporate income tax liability. The Court also notes that net loss
carry-over may only be used in the computation of basic corporate
income tax. Hence, if respondent is required to pay a franchise tax
every time it has zero basic corporate income tax liability due to net
loss, then it shall never have the opportunity to avail itself of the
benefit of net loss carry-over.
Finally, petitioner contends that according to well-established doctrine,
a tax refund, which is in the nature of a tax exemption, should be
construed strictissimi juris against the taxpayer.21 However, when the
claim for refund has clear legal basis and is sufficiently supported by
evidence, as in the present case, then the Court shall not hesitate to
grant the same.
In its previous discussion, the Court has already established that by
merely exercising its option to pay for basic corporate income tax –
even if it had zero liability for the same due to its net loss position in
2001 – respondent was already exempted from all other taxes,
including the OCT. Therefore, respondent is entitled to recover the
amount of OCT erroneously collected from it in 2001. Also, the CTA,
both in Division and en banc, found that respondent submitted ample
evidence to prove its payment of OCT to PLDT during the second,
third, and fourth quarters of 2001, in the total amount of ₱126,243.80,
which, in turn, was paid by PLDT to the BIR. Said finding by the CTA,
being factual in nature, is already conclusively binding upon this Court.
Under our tax system, the CTA acts as a highly specialized body
specifically created for the purpose of reviewing tax cases.
Accordingly, its findings of fact are generally regarded as final,
binding, and conclusive on this Court, and will not ordinarily be
reviewed or disturbed on appeal when supported by substantial
evidence, in the absence of gross error or abuse on its part.22
WHEREFORE, the instant Petition for Review is DENIED. The Decision
of the Court of Tax Appeals En Banc dated 9 August 2007 in CTA EB
No. 221, affirming the Decision dated 14 June 2006 of the CTA First
Division in CTA Case No. 6735, which granted the claim of Philippine
Airlines, Inc. for a refund of Overseas Communications Tax
erroneously collected from it for the period April to December 2001, in
the amount of ₱126,243.80, is AFFIRMED. No costs.
SO ORDERED.
G.R. No. L-3538             May 28, 1952
JUAN LUNA SUBDIVISION, INC., plaintiff-appellee,
vs.
M. SARMIENTO, ET AL., defendants-appellants.
Gibbs, Gibbs, Chuidian and Quasha for appellee.
City Fiscal Eugenio Angeles and Assistant Fiscal Cornelio S. Ruperto for
appellant.
La O and Feria for defendant Philippine Trust Co.
TUASON, J.:
This is an appeal by the City Treasure of the City of Manila from the
following judgment handed down in the above-entitled cause:
POR TODAS CONSIDERACIONES, el Jugado dicta sentencia ordenado:
que el demandado Tesorero de la Ciudad de Manila pague a la
demandante la cantidad de P2,210.52 sin intereses; que la demandada
Philippine Trust Companypague a la demandante la suma de P105 sin
intereses.
The Philippine Trust Company did not appeal.
The facts of the case, in so far as they are not in controversy, are
these: The plaintiff was a corporation duly organized and existing
under the laws of the Philippines with principal office in Manila. On
December 29, 1941 it issued to the City Treasurer of Manila, and the
City Treasurer accepted checks No. 628334 for P2,210.52 drawn upon
the Philippine Trust Company with which it had a credit balance of
P4,940.17 on its account. This check was to be applied to plaintiff's
land tax for the second semester of 1941 the exact amount of which
was yet undetermine and so it was entered in the ledger, Exhibit "F",
as deposit by the taxpayer. On February 20, 1942, presumably after
the exact amount had been verified, which was P341.60, the balance
of P1,868.92, covered by voucher No. 1487 of the City Treasure's
office, was noted in the ledger as a credit to the Juan Luna
Subdivision, Inc.
Further than this, the records of the City Treasurer's office do not
show what was done with the check. But the books of the Philippine
Trust Company do reveal that it was deposited with the Philippine
National Bank, the City Treasurer's sole depository, on December 29,
1941, and that it was presented by that Bank to the Philippine Trust
Company on May 1, 1944 and was cashed by the drawee. Manuel F.
Garcia, Assistant Treasurer of the Philippine Trust Company, testified
that soon after his bank was authorized in March, 1942, to reopen for
business (it had been closed by order of the Japanese military
authorities,) it received from the Philippine National Bank a bundle of
checks, including appellees check No. 628334, drawn upon the
Philippine Trust Company before the Japanese occupation and held in
abeyance by the Philippine National Bank pending resumption of
operation by the Philippine Trust Company; that these checks,
including the appellee's check, were accepted and the amounts thereof
debited against the respective drawer's accounts; that with respect to
check No. 628334, the operation was effected on May 1, 1944.
The City refused after liberation to refund the plaintiff's deposit or
apply it to such future taxes as might be found due, while the
Philippine Trust Company was unwilling to reverse its debit entry
against the Juan Luna Subdivision, Inc. It was upon this predicament
that the Juan Luna Subdivision, Inc. brought this suit against the City
Treasurer and the Philippine Trust Company as defendants in the
alternative. The purpose of the action is determine which of the two
defendants is liable for plaintiff's check. There is a separate cause of
action which concerns the plaintiff and the City Treasurer alone.
On the main cause of action the burden of the City Treasurer's defense
is that his office was not benefited why the check. He denies that the
said check was cashed "or rather there was no proof that it was." It is
pointed out that Mr. Gibbs, testifying in open court, admitted that he
had never received nor could he have received the cancelled checks;"
that "the courts finding that sum P2,210.52 was in fact and in truth
added to the actual cash of the Treasurer of the City of Manila is based
on conjectures and surprises without any support of pertinent and
competent proof;" that "special ledger sheet of the City Treasurer . . .
simply showed that some accounting transaction in the book value was
done or accomplished but these accounting processes did not show
that actual payment had been made (by the Philippine National Bank)
to the City Treasurer, and that the City Treasurer had in effect
received said amount represented by said checks;" that "the burden of
proving that the check in question was in fact paid rest on the
defendant Philippine Trust Company." It is further argued that "there
is a lot of difference between the book value and the cash value of this
check," that the acceptance by the City Treasurer and the issuance of
the Official Receipt No. 755402 on December 29, 1941 in favor of Juan
Luna Subdivision, Inc. did not simultaneously and automatically place
in the hands of the City Treasurer the cash value represented by the
said checks in the amount of P2,210.52".
That the plaintiff's check was deposited by the City Treasurer with the
Philippine National Bank, and the latter was paid the cash equivalent
thereof by the Philippine Trust Company, admits of no doubt. The
entries in the books of the latter bank are not in the least impugned.
Whether the City Treasurer was paid that amount by the Philippine
National Bank or given credit for it, the City Treasurer would neither
admit nor deny. He said:
A. Not that I am not willing (to admit); I am willing, but I am not the
right party to admit that the check was actually collected by the City of
Manila from the Philippine Trust Company, The Philippine Trust
Company never submitted any financial statement. To my knowledge,
the City Treasurer of Manila has never been informed by the Philippine
Trust Company or by the Philippine National Bank, which is the
depository of the City of Manila, that same check was collected by the
City Manila from the Philippine National Bank; by that I am not trying
to say that the check was not actually collected by the City.
xxx     xxx     xxx
Q. This particular check in question pertains to the revenue account of
the City of Manila, is that right?
A. Yes, sir.
Q. Ordinarily it would be deposited with the Philippine National Bank, is
that right?
A. That is right.
Q. And the Philippine National Bank has not rendered you any account
of its collections?
A. I would not say that; they probably gave us statement, but as we
have lost our records pertaining to the occupation and the pre-war
years, I could not make a categorial statement.
From the fact that the Philippine National Bank was open throughout
the Japanese occupation and the other facts heretofore admitted or
not denied, it is to be presumed that the Philippine National Bank
credited the City Treasurer with the amount of the check in question,
and that the City Treasurer, taking ordinary care of his concerns,
withdrew that amount. This is in accordance with the presumption that
things happened according to the ordinary course of business and
habits. The burden is on the City Treasurer, not on the plaintiff, to
rebut these presumptions.
But the point is not material at all as far as the plaintiff is concerned.
What became of the check or where the money went is a matter
between the City Treasurer and the Philippine National Bank. The
drawer of the check had funds on deposit to meet it; the City
Treasurer accepted it and deposited it with the Philippine National
Bank, and the Philippine National Bank, collected the equivalent
amount from the drawee Bank. In the light of these circumstances, the
City Treasurer became the Philippine National Bank's creditor and the
Juan Luna Subdivision, Inc. was released from liability on its checks. If
the City Treasurer did not collect his credit from the Philippine National
Bank or otherwise make use of it, he alone was to blame and should
suffer the consequences of his neglect. That the City Treasurer held
the check merely in trust for plaintiff does not alter the situation as far
as his branch of the case goes.
The amount to be refunded to the plaintiff is the subject of another
disagreement between the Juan Luna Subdivision, Inc. and the City
Treasurer. This is the ground of other cause of action heretofore
referred to.
The plaintiff claims the whole amount of the check contending that
taxes for the last semester of 1941 have been remitted by
Commonwealth Act No. 703.
Section 1 of this Act, which was approved on November 1, 1945,
provides:
All land taxes and penalties due and payable for the years nineteen
hundred and forty-two nineteen hundred and forty-three nineteen
hundred and forty-four and fifty per cent of the tax due for nineteen
hundred and forty-five, are hereby remitted. The land taxes and
penalties due and payable for the second semester of the year
nineteen hundred and forty-one shall also be remitted the if the
remaining fifty per cent corresponding to the year nineteen hundred
and forty-five shall been paid on or before December thirty-first,
nineteen hundred and forty-five.
Does this provision cover taxes paid before its enactment as the
plaintiff maintains and the court below held, or does it refer, as the
City Treasurer believes, only to taxes which were still unpaid?
There is no ambiguity in the language of the law. It says "taxes and
penalties due and payable," the literal meaning of which taxes owned
or owing. (See Webster's New International Dictionary) Note that the
provision speaks of penalties, and note that penalties accrue only
when taxes are not paid on time. The word "remit" underlined by the
appellant does not help its theory, for to remit to desist or refrain from
exacting, inflicting, or enforcing something as well as to restore what
has already been taken. (Webster's New International Dictionary.)
We do not see that literal interpretation of Commonwealth Act No. 703
runs counter and does violence to its spirit and intention , nor do we
think that such interpretation would be "constitutionally bad" in that "it
would unduly discriminate against taxpayers who had paid in favor of
delinquent taxpayers."
The remission of taxes due and payable to the exclusion of taxes
already collected does not constitute unfair discrimination. Each set of
taxes is a class by itself, and the law would be open to attack as class
legislation only if all taxpayers belonging to one class were not treated
alike. They are not.
As to the justice of the measure, the confinement of the condonation
to deliquent taxes was not without good reason. The property owners
who had paid their taxes before liberation and those who had not were
not on the same footing on the need of material relief. It is true that
the ravages and devastations wrought by was operations had rendered
the bulk of the people destitute or impoverished and that it was this
situation which prompted the passage of Commonwealth Act No. 703.
But it is also true that the taxpayers who had been in arrears in their
obligation would have to satisfy their liability with genuine currency,
while the taxes paid during the occupation had been satisfied in
Japanese military notes, many of them at a time when those notes
were well-nigh worthless. To refund those taxes with the restored
currency, even if the Government could afford to do so, would be
unduly to enrich many of the payers at a greater expense to the
people at large. What is more, the process of refunding would entail a
tremendous amount of work and difficulties, what with the destruction
of tax records and the great number of claimants who would take
advantage of such grace.
It is said that the plaintiff's check was in the nature of deposit, held
trust by the City Treasurer, and that for this reason, plaintiff's taxes
are to be regarded as still due and payable. This argument is well
taken but only to the extent of P1,868.92. The amount of P341.60 as
early as February 20, 1942, had been applied to the second half of
plaintiff's 1941 tax and become part of the general funds of the city
treasury. From that date that tax was legally and actually paid and
settled.
The appealed judgment should, therefore, be modified so that the
defendant City Treasurer shall refund to the plaintiff the sum of
P1,868.92 instead P2,210.52, without costs. It is so ordered.
G.R. No. L-69344             April 26, 1991
REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and SPOUSES ANTONIO and
CLARA PASTOR, respondents.
Roberto L. Bautista for private respondents.
GRIÑO-AQUINO, J.:
The legal issue presented in this petition for review is whether or not
the tax amnesty payments made by the private respondents on
October 23, 1973 bar an action for recovery of deficiency income taxes
under P.D.'s Nos. 23, 213 and 370.
On April 15, 1980, the Republic of the Philippines, through the Bureau
of Internal Revenue, commenced an action in the Court of First
Instance (now Regional Trial Court) of Manila, Branch XVI, to collect
from the spouses Antonio Pastor and Clara Reyes-Pastor deficiency
income taxes for the years 1955 to 1959 in the amount of P17,117.08
with a 5% surcharge and 1% monthly interest, and costs.
The Pastors filed a motion to dismiss the complaint, but the motion
was denied.1âwphi1 On August 2, 1975, they filed an answer
admitting there was an assessment against them of P17,117.08 for
income tax deficiency but denying liability therefor. They contended
that they had availed of the tax amnesty under P.D.'s Nos. 23, 213
and 370 and had paid the corresponding amnesty taxes amounting to
P10,400 or 10% of their reported untaxed income under P.D. 23,
P2,951.20 or 20% of the reported untaxed income under P.D. 213,
and a final payment on October 26, 1973 under P.D. 370 evidenced by
the Government's Official Receipt No. 1052388. Consequently, the
Government is in estoppel to demand and compel further payment of
income taxes by them.
The parties agreed that there were no issues of fact to be litigated,
hence, the case was submitted for decision upon the pleadings and
memoranda on the lone legal question of: whether or not the payment
of deficiency income tax under the tax amnesty, P.D. 23, and its
acceptance by the Government operated to divest the Government of
the right to further recover from the taxpayer, even if there was an
existing assessment against the latter at the time he paid the amnesty
tax.
It is not disputed that as a result of an investigation made by the
Bureau of Internal Revenue in 1963, it was found that the private
respondents owed the Government P1,283,621.63 as income taxes for
the years 1955 to 1959, inclusive of the 50% surcharge and 1%
monthly interest. The defendants protested against the assessment. A
reinvestigation was conducted resulting in the drastic reduction of the
assessment to only P17,117.08.
It appears that on April 27, 1978, the private respondents offered to
pay the Bureau of Internal Revenue the sum of P5,000 by way of
compromise settlement of their income tax deficiency for the
questioned years, but Assistant Commissioner Bernardo Carpio, in a
letter addressed to the Pastor spouses, rejected the offer stating that
there was no legal or factual justification for accepting it. The
Government filed the action against the spouses in 1980, ten (10)
years after the assessment of the income tax deficiency was made.
On a motion for judgment on the pleadings filed by the Government,
which the spouses did not oppose, the trial court rendered a decision
on February 28, 1980, holding that the defendants spouses had settled
their income tax deficiency for the years 1955 to 1959, not under P.D.
23 or P.D. 370, but under P.D. 213, as shown in the Amnesty Income
Tax Returns' Summary Statement and the tax Payment Acceptance
Order for P2,951.20 with its corresponding official receipt, which
returns also contain the very assessment for the questioned years. By
accepting the payment of the amnesty income taxes, the Government,
therefore, waived its right to further recover deficiency incomes taxes
"from the defendants under the existing assessment against them
because:
1. the defendants' amnesty income tax returns' Summary Statement
included therein the deficiency assessment for the years 1955 to
1959;
2. tax amnesty payment was made by the defendants under
Presidential Decree No. 213, hence, it had the effect of remission of
the income tax deficiency for the years 1955 to 1959;
3. P.D. No. 23 as well as P.D. No. 213 do not make any exceptions nor
impose any conditions for their application, hence, Revenue Regulation
No. 7-73 which excludes certain taxpayers from the coverage of P.D.
No. 213 is null and void, and
4. the acceptance of tax amnesty payment by the plaintiff-appellant
bars the recovery of deficiency taxes. (pp. 3-4, IAC Decision, pp. 031-
032, Rollo.)
The Government appealed to the Intermediate Appellant Court (AC
G.R. CV No. 68371 entitled, "Republic of the Philippines vs. Antonio
Pastor, et al."), alleging that the private respondents were not
qualified to avail of the tax amnesty under P.D. 213 for the benefits of
that decree are available only to persons who had no pending
assessment for unpaid taxes, as provided in Revenue Regulations Nos.
8-72 and 7-73. Since the Pastors did in fact have a pending
assessment against them, they were precluded from availing of the
amnesty granted in P.D.'s Nos. 23 and 213. The Government further
argued that "tax exemptions should be interpreted strictissimi
juris against the taxpayer."
The respondent spouses, on the other hand, alleged that P.D. 213
contains no exemptions from its coverage and that, under Letter of
Instruction LOI 129 dated September 18, 1973, the immunities
granted by P.D. 213 include:
II-Immunities Granted.
Upon payment of the amounts specified in the Decree, the following
shall be observed:
1. . . . .
2. The taxpayer shall not be subject to any investigation, whether
civil, criminal or administrative, insofar as his declarations in the
income tax returns are concerned nor shall the same be used as
evidence against, or to the prejudice of the declarant in any
proceeding before any court of law or body, whether judicial, quasi-
judicial or administrative, in which he is a defendant or respondent,
and he shall be exempt from any liability arising from or incident to his
failure to file his income tax return and to pay the tax due thereon, as
well as to any liability for any other tax that may be due as a result of
business transactions from which such income, now voluntarily
declared may have been derived. (Emphasis supplied; p. 040, Rollo.)
There is nothing in the LOI which can be construed as authority for the
Bureau of Internal Revenue to introduce exceptions and/or conditions
to the coverage of the law.
On November 23, 1984, the Intermediate Appellate Court (now Court
of Appeals) rendered a decision dismissing the Government's appeal
and holding that the payment of deficiency income taxes by the
Pastors under PD. No. 213, and the acceptance thereof by the
Government, operated to divest the latter of its right to further recover
deficiency income taxes from the private respondents pursuant to the
existing deficiency tax assessment against them. The appellate court
held that if Revenue Regulation No. 7-73 did provide an exception to
the coverage of P.D. 213, such provision was null and void for being
contrary to, or restrictive of, the clear mandate of P.D. No. 213 which
the regulation should implement. Said revenue regulation may not
prevail over the provisions of the decree, for it would then be an act of
administrative legislation, not mere implementation, by the Bureau of
Internal Revenue.
On February 4, 1986, the Republic of the Philippines, through the
Solicitor General, filed this petition for review of the decision dated
November 23, 1984 of the Intermediate Appellate Court affirming the
dismissal, by the Court of First Instance of Manila, of the
Government's complaint against the respondent spouses.
The petition is devoid of merit.
Even assuming that the deficiency tax assessment of P17,117.08
against the Pastor spouses were correct, since the latter have already
paid almost the equivalent amount to the Government by way of
amnesty taxes under P.D. No. 213, and were granted not merely an
exemption, but an amnesty, for their past tax failings, the Government
is estopped from collecting the difference between the deficiency tax
assessment and the amount already paid by them as amnesty tax.
A tax amnesty, being 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, partakes of an
absolute forgiveness or waiver by the Government of its right to collect
what otherwise would be due it, and in this sense, prejudicial thereto,
particularly to give tax evaders, who wish to relent and are willing to
reform a chance to do so and thereby become a part of the new
society with a clean slate (Commission of Internal Revenue vs. Botelho
Corp. and Shipping Co., Inc., 20 SCRA 487).
The finding of the appellate court that the deficiency income taxes
were paid by the Pastors, and accepted by the Government, under
P.D. 213, granting amnesty to persons who are required by law to file
income tax returns but who failed to do so, is entitled to the highest
respect and may not be disturbed except under exceptional
circumstances which have already become familiar (Rule 45, Sec. 4,
Rules of Court; e.g., where: (1) the conclusion is a finding grounded
entirely on speculation, surmise and conjecture; (2) the inference
made is manifestly mistaken; (3) there is grave abuse of discretion;
(4) the judgment is based on misapprehension of facts; (5) the Court
of Appeals went beyond the issues of the case and its findings are
contrary to the admissions of both the appellant and the appellee; (6)
the findings of fact of the Court of Appeals are contrary to those of the
trial court; (7) said findings of fact are conclusions without citation of
specific evidence in which they are based; (8) the facts set forth in the
petition as well as in the petitioner's main and reply briefs are not
disputed by the respondents; and (9) when the finding of fact of the
Court of Appeals is premised on the absense of evidence and is
contradicted by the evidence on record (Thelma Fernan vs. CA, et al.,
181 SCRA 546, citing Tolentino vs. de Jesus, 56 SCRA 67; People vs.
Traya, 147 SCRA 381), none of which is present in this case.
The rule is that in case of doubt, tax statutes are to be construed
strictly against the Government and liberally in favor of the taxpayer,
for taxes, being burdens, are not to be presumed beyond what the
applicable statute (in this case P.D. 213) expressly and clearly declares
(Commission of Internal Revenue vs. La Tondena, Inc. and CTA, 5
SCRA 665, citing Manila Railroad Company vs. Collector of Customs,
52 Phil, 950).
WHEREFORE, the petition for review is denied. No costs.
SO ORDERED.
G.R. No. 137377            December 18, 2001 Undeclared gross income (Philphos and
COMMISSIONER OF INTERNAL REVENUE, petitioner, NDC construction projects) P967,269,811.14
vs.
Less: Cost and expenses (50%) 483,634,905.57
MARUBENI CORPORATION, respondent.
PUNO, J.: Net undeclared income 483,634,905.57
In this petition for review, the Commissioner of Internal Revenue Income tax due thereon 169,272,217.00
assails the decision dated January 15, 1999 of the Court of Appeals in Add: 50% surcharge 84,636,108.50
CA-G.R. SP No. 42518 which affirmed the decision dated July 29, 1996
of the Court of Tax Appeals in CTA Case No. 4109. The tax court 20% int. p.a.fr. 7-15-85 to 8-
ordered the Commissioner of Internal Revenue to desist from 15-86 36,675,646.90
collecting the 1985 deficiency income, branch profit remittance and TOTAL AMOUNT DUE P290,583,972.40
contractor's taxes from Marubeni Corporation after finding the latter to II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
have properly availed of the tax amnesty under Executive Orders Nos.
      FY ended March 31, 1985
41 and 64, as amended.
Respondent Marubeni Corporation is a foreign corporation organized Undeclared gross income from Philphos
and existing under the laws of Japan. It is engaged in general import and NDC construction projects P483,634,905.57
and export trading, financing and the construction business. It is duly Less: Income tax thereon 169,272,217.00
registered to engage in such business in the Philippines and maintains Amount subject to Tax 314,362,688.57
a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Tax due thereon 47,154,403.00
Revenue issued a letter of authority to examine the books of accounts Add: 50% surcharge 23,577,201.50
of the Manila branch office of respondent corporation for the fiscal year 20% int. p.a.fr. 4-26-85 to 8-
ending March 1985. In the course of the examination, petitioner found 15-86 12,305,360.66
respondent to have undeclared income from two (2) contracts in the
TOTAL AMOUNT DUE P83,036,965.16
Philippines, both of which were completed in 1984. One of the
contracts was with the National Development Company (NDC) in III. DEFICIENCY CONTRACTOR'S TAX
connection with the construction and installation of a wharf/port       FY ended March 31, 1985
complex at the Leyte Industrial Development Estate in the municipality
Undeclared gross receipts/gross income
of Isabel, province of Leyte. The other contract was with the Philippine
from Philphos and NDC construction
Phosphate Fertilizer Corporation (Philphos) for the construction of an
projects P967,269,811.14
ammonia storage complex also at the Leyte Industrial Development
Estate. Contractor's tax due thereon (4%) 38,690,792.00
On March 1, 1986, petitioner's revenue examiners recommended an 50% surcharge for non-
assessment for deficiency income, branch profit remittance, Add: declaration 19,345,396.00
contractor's and commercial broker's taxes. Respondent questioned 20% surcharge for late payment 9,672,698.00
this assessment in a letter dated June 5, 1986.
Sub-total 67,708,886.00
On August 27, 1986, respondent corporation received a letter dated
August 15, 1986 from petitioner assessing respondent several 20% int. p.a.fr. 4-21-85 to 8-
deficiency taxes. The assessed deficiency internal revenue taxes, Add: 15-86 17,854,739.46
inclusive of surcharge and interest, were as follows: TOTAL AMOUNT DUE P85,563,625.46
I. DEFICIENCY INCOME TAX IV. DEFICIENCY COMMERCIAL BROKER'S TAX
      FY ended March 31, 1985       FY ended March 31, 1985
 Undeclared share from commission
income
(denominated as "subsidy from Home
Office") P24,683,114.50
Tax due thereon 1,628,569.00
50% surcharge for non-
Add: declaration 814,284.50
20% surcharge for late payment    407,142.25
Sub-total 2,849,995.75
20% int. p.a.fr. 4-21-85 to 8-
Add: 15-86    751,539.98
TOTAL AMOUNT DUE      P3,600,535.68
The 50% surcharge was imposed for your client's failure to report for
tax purposes the aforesaid taxable revenues while the 25% surcharge
was imposed because of your client's failure to pay on time the above
deficiency percentage taxes.
xxx           xxx           xxx"1
Petitioner found that the NDC and Philphos contracts were made on a
"turn-key" basis and that the gross income from the two projects
amounted to P967,269,811.14. Each contract was for a piece of work
and since the projects called for the construction and installation of
facilities in the Philippines, the entire income therefrom constituted
income from Philippine sources, hence, subject to internal revenue
taxes. The assessment letter further stated that the same was
petitioner's final decision and that if respondent disagreed with it,
respondent may file an appeal with the Court of Tax Appeals within
thirty (30) days from receipt of the assessment.
On September 26, 1986, respondent filed two (2) petitions for review
with the Court of Tax Appeals. The first petition, CTA Case No. 4109,
questioned the deficiency income, branch profit remittance and
contractor's tax assessments in petitioner's assessment letter. The
second, CTA Case No. 4110, questioned the deficiency commercial
broker's assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring a
one-time amnesty covering unpaid income taxes for the years 1981 to
1985 was issued. Under this E.O., a taxpayer who wished to avail of
the income tax amnesty should, on or before October 31, 1986: (a)
file a sworn statement declaring his net worth as of December 31,
1985; (b) file a certified true copy of his statement declaring his net
worth as of December 31, 1980 on record with the Bureau of Internal
Revenue (BIR), or if no such record exists, file a statement of said net
worth subject to verification by the BIR; and (c) file a return and pay a
tax equivalent to ten per cent (10%) of the increase in net worth from
December 31, 1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax
amnesty return dated October 30, 1986 and attached thereto its sworn
statement of assets and liabilities and net worth as of Fiscal Year (FY)
1981 and FY 1986. The return was received by the BIR on November
3, 1986 and respondent paid the amount of P2,891,273.00 equivalent
to ten percent (10%) of its net worth increase between 1981 and
1986.
The period of the amnesty in E.O. No. 41 was later extended from
October 31, 1986 to December 5, 1986 by E.O. No. 54 dated
November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was
expanded by Executive Order (E.O.) No. 64. In addition to the income
tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O.
No. 64 3 included estate and donor's taxes under Title III and the tax
on business under Chapter II, Title V of the National Internal Revenue
Code, also covering the years 1981 to 1985. E.O. No. 64 further
provided that the immunities and privileges under E.O. No. 41 were
extended to the foregoing tax liabilities, and the period within which
the taxpayer could avail of the amnesty was extended to December
15, 1986. Those taxpayers who already filed their amnesty return
under E.O. No. 41, as amended, could avail themselves of the
benefits, immunities and privileges under the new E.O. by filing an
amended return and paying an additional 5% on the increase in net
worth to cover business, estate and donor's tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31,
1987 by E.O No. 95 dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty
return under the benefit of E.O. No. 64 and paid a further amount of
P1,445,637.00 to the BIR equivalent to five percent (5%) of the
increase of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the
Court of Tax Appeals rendered a decision in CTA Case No. 4109. The
tax court found that respondent had properly availed of the tax
amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes
subject of said case as deemed cancelled and withdrawn. The Court of
Tax Appeals disposed of as follows:
"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:
"(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:
"Sec. 4. Exceptions. — The following taxpayers may not avail
themselves of the amnesty herein granted:
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;
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."
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:
"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."
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41
not contrary to or inconsistent with the amendatory act were
reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the
exceptions to amnesty coverage also applied to E.O. No. 64. With
respect to Section 4 (b) in particular, this provision excepts from tax
amnesty coverage a taxpayer who has "income tax cases already filed
in court as of the effectivity hereof." As to what Executive Order the
exception refers to, respondent argues that because of the words
"income" and "hereof," they refer to Executive Order No. 41.8
In view of the amendment introduced by E.O. No. 64, Section 4 (b)
cannot be construed to refer to E.O. No. 41 and its date of effectivity.
The general rule is that an amendatory act operates
prospectively.9 While an amendment is generally construed as
becoming a part of the original act as if it had always been contained
therein,10 it may not be given a retroactive effect unless it is so
provided expressly or by necessary implication and no vested right or
obligations of contract are thereby impaired.11
There is nothing in E.O. No. 64 that provides that it should retroact to
the date of effectivity of E.O. No. 41, the original issuance. Neither is it
necessarily implied from E.O. No. 64 that it or any of its provisions
should apply retroactively. Executive Order No. 64 is a substantive
amendment of E.O. No. 41. It does not merely change provisions in
E.O. No. 41. It supplements the original act by adding other taxes not
covered in the first.12 It has been held that where a statute amending
a tax law is silent as to whether it operates retroactively, the
amendment will not be given a retroactive effect so as to subject to
tax past transactions not subject to tax under the original act.13 In an
amendatory act, every case of doubt must be resolved against its
retroactive effect.14
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax
amnesty is a general pardon or intentional overlooking by the State of
its authority to impose penalties on persons otherwise guilty of evasion
or violation of a revenue or tax law.15 It partakes of an absolute
forgiveness or waiver by the government of its right to collect what is
due it and to give tax evaders who wish to relent a chance to start
with a clean slate.16 A tax amnesty, much like a tax exemption, is
never favored nor presumed in law.17 If granted, the terms of the
amnesty, like that of a tax exemption, must be construed strictly
against the taxpayer and liberally in favor of the taxing authority. 18 For
the right of taxation is inherent in government. The State cannot strip
itself of the most essential power of taxation by doubtful words. He
who claims an exemption (or an amnesty) from the common burden
must justify his claim by the clearest grant of organic or state law. It
cannot be allowed to exist upon a vague implication. If a doubt arises
as to the intent of the legislature, that doubt must be resolved in favor
of the state.19
In the instant case, the vagueness in Section 4 (b) brought about by
E.O. No. 64 should therefore be construed strictly against the
taxpayer. The term "income tax cases" should be read as to refer to
estate and donor's taxes and taxes on business while the word
"hereof," to E.O. No. 64. Since Executive Order No. 64 took effect on
November 17, 1986, consequently, insofar as the taxes in E.O. No. 64
are concerned, the date of effectivity referred to in Section 4 (b) of
E.O. No. 41 should be November 17, 1986.
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:
". . . 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."25
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 ammonia31 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:
". . . 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:
"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:
(a) General engineering, general building and specialty contractors, as
defined in Republic Act No. 4566;
xxx           xxx           xxx
(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.
xxx           xxx           xxx43
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:
"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:
xxx           xxx           xxx50
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 equipment67 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 supplied and installed centralized air-conditioning systems for clients
Department, Engineering & Construction Division, Kawasaki Steel who contracted its services. Engineering, however, did not
Corporation, testified that the equipment and supplies for the two manufacture all the materials for the air-conditioning system. It
projects provided by Kawasaki under Japanese Yen Portion I were paid imported some items for the system it designed and installed.74 The
by Marubeni in Japan. Receipts for such payments were duly issued by issues in that case dealt with services performed within the local
Kawasaki in Japanese and English.69 Yashima & Co. Ltd. and B.S. taxing jurisdiction. There was no foreign element involved in the
Japan were likewise paid by Marubeni in Japan.70 supply of materials and services.
Between Marubeni and the two Philippine corporations, payments for With the foregoing discussion, it is unnecessary to discuss the other
all materials and equipment under Japanese Yen Portion I were made issues raised by the parties.
to Marubeni by NDC and Philphos also in Japan. The NDC, through the IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP
Philippine National Bank, established letters of credit in favor of No. 42518 is affirmed.
respondent through the Bank of Tokyo. The letters of credit were SO ORDERED.
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.
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,
G.R. No. L-28739 and L-28902 March 29, 1972
DAVAO LIGHT and POWER CO., INC., petitioner-appellant, vs. THE
COMMISSIONER OF CUSTOMS and COURT OF TAX
APPEALS, Respondents-Appellees.
Abelardo P. Cecilio for petitioner-appellant.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor
General Isidro C. Borromeo and Solicitor Sumilang V. Bernardo for
respondents-appellees.
REYES, J.B.L., J.:
These are appeals from the decision of the Court of Tax Appeals in CTA
Cases Nos. 1337 and 1551, denying the claim of Davao Light & Power
Co., Inc., for refund of the amount paid by said company as customs
duties, special import taxes, compensating taxes and wharfage fees on
the importations of electrical supplies and materials for installation and
use at its power plant.chanroblesvirtualawlibrarychanrobles virtual law
library
The Davao Light & Power Co., Inc., hereafter referred to as Davao
Light, is the grantee of a legislative franchise to install, operate and
maintain an electric light, heat and power plant in the city (then
Municipality) of Davao, for a period of 50 years. On two different
occasions in 1962, it imported electrical supplies, materials and
equipment for installation in its power plant. The importations arrived
in the port of Cebu City, on which the Collector of Customs imposed,
and Davao light paid under protest, customs duties and taxes in the
total amount of P9,928.00. As the Collector of Customs later ruled
unfavorably on the protests (Nos. 267, 268, 269 and 278) and denied
its claim for refund of the taxes and duties paid on the imported
articles, Davao Light appealed to the Commissioner of Customs. And
when said official sued the action of the Collector, Davao Light went to
the Court of Tax Appeals, maintaining its claim to exemption from the
taxes and duties imposable on the aforementioned
motions.chanroblesvirtualawlibrarychanrobles virtual law library
In the Court of Tax Appeals, the parties entered into a stipulation of
facts, the pertinent provisions of which read as follows:
6. - That the petitioner (Davao Light) is a grantee of a legislative
franchise under Philippine Legislature Act No. 3760, ...;chanrobles
virtual law library
7. - That the petitioner was granted by the Public Service Commission
its Certificate of Public Convenience and Necessity in 1931 and by
virtue of said franchise has established and has been maintaining and
operating a power plant generating electric light, heat and power and
distributing the same for sale within the municipality (now City) of
Davao;chanrobles virtual law library
8. - That the National Power Corporation was created by virtue of
Commonwealth Act No. 120, and under Section 2, par. (g) it was
empowered and granted authority: chanrobles virtual law library
"To construct, operate and maintain power plants, auxiliary plants,
dams, reservoirs, pipes, mains, transmission lines, power stations and
substations and other works, for the purpose of developing hydraulic
power from any river, creek, lake, spring and waterfalls in the
Philippines and supplying such power to the inhabitants thereof; to
acquire, construct, install, maintain and operate and improve gas, oil
or steam engines and/or other prime movers, generators and other
machinery in plants and/or auxiliary plants for the production of
electric power; to establish, develop, operate and maintain and
administer power and lighting systems for the use of the Government
and the general public; to sell electric power and to fix the rates and
provide for the collection of the charges for any service rendered:
Provided, that the rates of charges shall not be subject to revision by
the Public Service Commission."chanrobles virtual law library
9. - That by virtue of this authority given the National Power
Corporation, it established and constructed a power plant, power
stations and transmission lines in Davao City, for the purpose of
generating electric light, heat and power for the inhabitants of Davao
City and its surrounding areas and that it is presently operating and
maintaining said power plant, power station and transmission lines and
selling electric power, heat and light in the City of Davao; chanrobles
virtual law library
10. - That Section 17 of (pre-Commonwealth) Act No. 3636 (Standard
Electric Power & Light Franchises Law) provides: chanrobles virtual law
library
"In the event of any competing individual, association of persons or
corporation receiving either a franchise or permission from the
Government of the Philippine Islands, or from any province, city or
municipality thereof, to conduct a similar business in all or any
substantial portion of the territory covered by this franchise to that of
the grantee, in which franchise or permission there shall be any term
or terms more favorable than those herein granted or tending to place
the herein grantee at any disadvantage, then such term or terms
shall ipso facto become a part of the terms hereof and shall operate
equally in favor of the grantee as in the case of said competing
individual asssociation of persons or corporations."chanrobles virtual
law library
xxx xxx xxxchanrobles virtual law library
12 - That under Section 2 of Republic Act No. 358, as amended by
Republic Act No. 937, it is provided that "to facilitate payment of its
indebtedness, the National Power Corporation shall exempt from all
taxes, except real property tax, and from all duties, fees, imposts,
charges and restrictions of the Republic of the Philippines, its
provinces, cities and municipalities."
It was therein petitioner's contention that pursuant to Section 17 of
Act 3636, the provision of Republic Act 987 granting tax exemption
privileges to the National Power Corporation ipso facto became part of
its franchise; hence, its claim to exemption from taxes and customs
duties on the importations in question.
In its decision of 15 December 1967, the Court of Tax Appeals
affirmed the ruling of the Customs Commissioner, the Court holding
that the tax exemption privileges granted to the National Power
Corporation were intended to benefit only said government corporation
and did not extend to other bodies or entities. Davao Light thus
brought the present petition for review in this Court, raising the same
issue of the correctness of the imposition of taxes and customs duties
on its importations of electrical supplies and materials for use in its
electric plant.
Petitioner in this instance reiterates the contention that is legislative
franchise to construct, maintain and operate an electric light, heat and
power system (granted by Act 3760) was specifically made subject to
Act 3636, which Act, in its Section 17, provides that any favorable
terms granted to any "competing individual, association of persons or
corporation" shall ipso facto become part of a franchise earlier issued.
As the National Power Corporation (NPC) is actually operating a power
plant, power stations and transmission lines in Davao City and selling
electric power, heat and light in said locality, and said corporation is
enjoying exemption from all taxes, duties, fees, imposts and charges
collectible by the government, it is argued that such tax exemption
benefits ipso facto became part of its franchise and are not available to
petitioner.
There is no merit in petitioner's contention. Firstly, the aforecited
provision of Section 17 of Act 3636 makes mention of franchise or
permit issued to "competing" individuals, associations or corporations.
In short, by express provision of law favorable terms contained in a
subsequent franchise issued to an individual, association, etc. shall
automatically be considered incorporated in the franchise or permit
earlier issued to another individual, association, etc. engaged in the
same business. The idea is to place both competing groups or entities
on equal footing and not to give one an advantage over the other. This
principle of fair play, which is the basic idea behind the provision, does
not find operation in the present case.
It is undeniable that petitioner's purpose in securing a franchise to
establish and operate an electric plant and power stations was to
engage in a business or profit-making venture. The NPC, on the other
hand, was specifically created to undertake the development of
hydraulic power throughout the country and the production of power
from other sources, for use of the government and the general
public. 1 As envisioned by the law creating it, the activity to be pursued
by the NPC can hardly be motivated by profit or income.
In operating and maintaining a power plant, power stations and
transmission lines in Davao City, as duly authorized in its charter, the
NPC can not be considered as posing competition to petitioner's
business. In fact, there is evidence on record that the NPC does not
sell electric lower directly to the general public; instead, it did sell
lower to petitioner for resale to the latter's customers. 2 In other
words, the NPC is even the source of petitioner's merchandise; it is
aiding petitioner in its business operations, not competing with it.
Nor would the fact that the NPC supplies electric power to the National
Development Company (NDC) plant in Davao justify the claim that the
NPC is a competitor to petitioner's business, because Section 10 of
Commonwealth Act 120 (NPC charter) made it NPC's duty to supply
power to the NDC.
Sec. 10. At any time that the Board certifies that the Corporation is
able to furnish electric power for lighting an other purposes to any
office, shop, or establishment operated and/or owned or controlled by
the National Government or by any city, province, municipality or
other political subdivision of the Commonwealth of the Philippines, the
National Government and the government of said city, province,
municipality or other political subdivision shall be compelled to secure
from the Corporation as soon as practicable such electric power as it
may need for lighting and the operation of its offices, shops or
establishments or for any work undertaken by it.
The provisions of this section shall also apply to firms or business
owned or controlled by the National Government or by the government
of any city, province, municipality or other political subdivisions.
Be that as it may, such an isolated case of sale of electric power to one
government-owned plant would not be enough to classify the NPC as a
"competing" concern to petitioner's enterprise, which must be
assumed to be catering to the general public to which the NPC has no
dealing.
Secondly, petitioner can not rely on the provisions of Republic Act 358,
as amended by Republic Act 987 3, to support its claim for tax
exemption.
Section 1 of Republic Act 358, approved on 4 June 1949, amended
Section 2 (k) of Commonwealth Act 120, which authorized the NPC to
"contract indebtedness and issue bonds subject to the approval of the
President of the Philippines, upon recommendation of the Secretary of
Finance" in an amount not to exceed one hundred seventy million five
hundred pesos. Then in its Section 2, the same law provided:
SEC 2. To facilitate payment of its indebtedness, the National Power
Corporation shall be exempt from all taxes, duties, fees, imposts,
charges, and restrictions of the Republic of the Philippines, its
provinces, cities, and municipalities." (emphasis supplied).
On the same day, 4 June 1949, Republic Act 357 was approved,
authorizing the President of the Philippines to negotiate and contract
loans from time to time from the International Bank for Reconstruction
and Development, on behalf of the NPC, and  to guarantee, absolutely
and unconditionally, as primary obligator and not merely as
surety, the payment of loans therefore contracted. 4 The provisions of
Section 2 of Republic Act 358 granting tax exemption to the NPC,
taken in the light of the existing legislation affecting the NPC, notably
Republic Act 357, must be construed as intended to benefit only the
NPC, the lawmakers expecting (as so unequivocally expressed in the
law) that by relieving said corporation of tax obligations, the NPC
would be enabled to pay easily its indebtedness or whatever
indebtedness it is certain to incur. In granting such tax exemption, the
government actually waived its right to collect taxes from the NPC in
order to facilitate the liquidation by said corporation of its liabilities,
and the consequential release by the government itself from its
obligation (as principal obligor) in the transactions entered into by the
President on behalf of the NPC. Such condition, peculiar only to the
NPC, cannot be said to exist in petitioner's case; hence, the absolute
lack of basis for awarding of equal privileges (granted to the NPC) to
said petitioner.
Similarly, petitioner can not lay claim to the enjoyment of the tax
exemption benefits given to NPC because said corporation happened to
be operating a power plant in the same locality where petitioner has a
franchise. The legal principle on the matter is firmly established and
well-observed: exemption from taxation is never presumed; 5 for tax
exemption to be recognized, the grant must be clear and expressed; it
cannot be made to rest on vague implications.  6 The possession by
petitioner of a permit to operate an electric plant in Davao City does
not entitle it to the same exemption privileges enjoyed by another
operator without an express provision of the law to that effect.
FOR THE FOREGOING CONSIDERATIONS, the decision of the Court of
Tax Appeals is hereby affirmed, with costs against the petitioner.
G.R. No. L-18080             April 22, 1963
TAN KIM KEE, petitioner,
vs.
THE COURT OF TAX APPEALS, ET AL., respondents.
Rafael A. Lim, Oscar V. Breva and Benjamin V. Guiang for petitioner.
Office of the Solicitor General for respondents.
REYES, J.B.L., J.:
Appeal from the majority decision of the Court of Tax Appeals
affirming the denial of a claim for refund of the fixed and sales taxes.
The case was submitted before the tax court under a stipulation of
facts, as follows:
1. The petitioner is a producer of copra exporters in Davao City.
2. Petitioner produces copra in two ways, namely, the sun-dried
method and the kiln-dried method.
3. Under the sun-dried method employed by petitioner, the nuts are
first split into halves and are dried under the sun to partly loosen the
meat from the shell. After one or two days of drying in that state, the
meat is removed from the shell with an instrument designed for the
purpose. To facilitate drying and handling, the meat so removed is
chopped into small pieces and the same is dried under the sun for at
least three days or until its moisture content is reduced to a minimum
acceptable in the market.
4. The processes involved in copra-making under the kiln-dried
method employed by the petitioner are the same as the sun-dried
method described above except that in the latter method, the nuts are
first unhusked before being split into halves and the meat is dried in a
kiln or oven heated with fuel. Further, the drying process (18-23
hours) under the kiln-dried method is shorter than the sun-dried
method.
5. For the period from August 24, 1956 to December 31, 1956,
petitioner's gross sales of copra produced by him amounted to
P17,917.53 on which he paid to the treasurer of Davao City, on
January 10, 1957, the sum of P1,254.24 as the 7% sales tax imposed
by section 186 of the National Internal Revenue Code as amended by
Republic Act No. 1612.
6. Petitioner paid also to the same official on the same date, fixed
taxes(c-14) of P40.00 for the years 1956 and 1957, pursuant to
section 182 of the said code.
7. For the payment of the above-mentioned sales and fixed taxes, BIR
official receipts Nos. C-146545, respectively, were issued to the
petitioner.
8. On September 6, 1957, petitioner filed with respondent a claim for
the aforesaid taxes which claim was denied by the latter on November
22, 1957.
9. On February 7, 1958, petitioner filed with respondent a request for
reconsideration of the denial of his claim for refund but said request
was denied on February 13, 1958.
Wherefore, the parties respectfully pray that the foregoing stipulation
of facts be admitted and approved by this Honorable Court, without
prejudice to the parties adducing other evidence to prove their case
not covered by this stipulation of facts. 1äwphï1.ñët
10. Petitioner filed on April 30, 1958 his second request for
reconsideration which was denied on July 1, 1958.
11. On August 12, 1958 petitioner filed with his Honorable Court the
present petition for review which was answered by respondent on
September 26, 1958.
Not stipulated but nevertheless admitted in the pleadings is the
additional fact that the petitioner is a producer of copra out of his
coconut plantation in Sta. Cruz, Davao.
The petitioner ascribes the following errors against the lower court:
I. The Tax Appeals Court erred in holding that the mere drying out
process by which the coconuts produced from petitioner's plantation
are converted into copra (dried coconut), constitutes manufacturing as
defined in section 194(x) of the Tax Code.
II. The Tax Appeals Court erred in failing to consider the absurd,
illogical and mischievous results that would necessarily follow from its
interpretation of section 194(x) of said code, contrary to the consistent
legislative policy of encouraging farmers by exempting their products
from taxation.
This case involves an interpretation of Section 188(b) of the Tax Code,
as amended by the shortlived revenue statute, Republic Act No. 1612,
when applied to copra making. Said Act took effect on 24 August 1956
until it was superseded by Republic Act 1856 on 22 June 1957. This
section, as it stood before and during the effectivity of Republic Act
No. 1612, and after subsequent amendment by Republic Act 1856,
provides (all emphasis supplied):
Before effectivity of RA No. 1612
(b) Agricultural products and the ordinary salt when sold, bartered, or
exchanged in this country by the producers or owner of the land where
produced, as well as fish and its by-products when sold, bartered, or
exchanged by the fisherman or fishing operator, whether in their
original state or not.
During the eleven-month effectivity of RA No. 1612
(b) Agricultural products and the ordinary salt in their original form
when sold, bartered, or exchanged by the producer or owner of the
land where produced. The term "agricultural products" as used herein
shall not include cultured fish and other products raised or produced in
fishponds, and those which have undergone the process of
manufacturing as defined in section one hundred ninety-four (x) of this
Code.
After repeal of RA No. 1612 by RA No. 1856
(b) Agricultural products and the ordinary salt whether in their original
form or not when sold, bartered, or exchanged in this country by the
producer or owner of the land where produced, as well as all kinds of
fish and its by-products when sold, bartered or exchanged by the
fisherman or fishing operator whether in their original state or not.
The majority of the Tax Court was of the view that before the passage
of Republic Act No. 1612, copra making was not taxable because the
law then exempted agricultural products "whether in their original
state or not" but that it became taxable during the effectivity of the
Republic Act No. 1612 because the agricultural products that were
exempted under it were those "in their original form", and said law
excluded from the exemption "those which have undergone the
process of manufacturing as defined in section one hundred ninety-
four (x) of this Code", that provides:
(x) "Manufacturer" includes every person (1) who by physical or
chemical process alters the exterior texture or form of inner substance
of any raw material or manufactured or partially manufactured product
in such a manner as to prepare it for a special use or uses to which it
could not have been put in its original condition, or (2) who by any
such process alters the quality of any such raw material or
manufactured or partially manufactured product so as to reduce it to
marketable shape or prepare it for any of the uses of industry, or (3)
who by any such process combines any such raw material or
manufactured or partially manufactured products with other materials
or products of the same or of different kinds and in such manner that
the finished products of such process of manufacture can be put to a
special use or uses to which such raw material or manufactured or
partially manufactured products in their original condition could not
have been put and who in addition alters such raw material or
manufactured or partially manufactured products, or combines the
same to produce such finished products for the purpose of their sale or
distribution to others and for his own use or consumption.
The majority of the Tax Court further held that because of the
unhusking and halving of the coconut fruit, removal and cutting into
several pieces of its meat, and dehydrating by sun or kiln, the fruit in
its original form underwent a process of manufacturing, and,
therefore, became taxable; but after the repeal of Republic Act 1612
by Republic Act 1856, the exempt agricultural products included once
more those products "whether in their original state or not". It
decided, therefore, that the taxability of copra making under Republic
Act No. 1612 is in accordance with the legislative intent to increase
revenue by imposing taxes on "greater coverage of subjects of
taxation", as expressed in the explanatory note of the House Bill 5809,
the source of Republic Act 1612; and that the said section being an
exempting provision, the same should be construed strictissimi
juris against the party claiming exemption.
Contrary to the above views of the respondents, the petitioner would
consider copra as the agricultural product in its original form and the
coconut fruit merely the crop of the producer and because copra is the
only product that may be produced from coconut lands while the
process of manufacture involved in the conversion of the coconut fruit
to copra is a part of the genuine agricultural labor of the farmer. The
petitioner adopted the dissenting opinion that the enactment of
Republic Act 1612 did not change anything; because the processes
that constitute manufacturing under Section 194 (x)have not been
enlarged or extended, and that the ruling of the respondents would be
a radical departure from the time-honored policy of Congress to give
preferential treatment to farmers; furthermore, the respondents'
interpretation would lead to absurd, illogical, and mischievous results,
like the following: coconut planters, abaca planters and rice farmers
would be liable for 7% tax while operators of coconut oil mills and
dessicated coconut factories, rope factories, and rice mill operators are
taxable only at 2% under Section 189 of the Code; likewise, the
coconut planter is not taxable for producing coconuts, but the moment
he unhusks them he is obliged to pay 7% on sales tax. The petitioner
insists that the legislative intent in enacting Republic Act 1612 was to
exclude copra making, as shown in the explanatory note of House Bill
6094, a bill intended to amend Republic Act 1612, and that this
intention to exclude copra making is also reflected in the speeches and
debates delivered in the floor of Congress in its session on 30 January
1957 (Congressional Records, Vol. IV, No. 3).
The flaw in petitioner-appellant's argument is that it ignores the
legislative change in the phraseology of the exemption of agricultural
products. The original statute excepted from the tax "Agricultural
products xxx whether in their original state or not", but under the
shortlived R.A. No. 1612 it was altered and reduced to "agricultural
products in their original form" exclusively. The change in scope was
further emphasized by the qualification in the same Act that
"agricultural products xxx shall not include cultured fish . . . and those manufacture." (Philippine Packing Corporation vs. Collector of Internal
which have undergone the process of manufacturing . . . ." Plainly, Revenue, L-9040, Res. of Jan. 22, 1957).
R.A. No. 1612 was intended to restrict the exemption and broaden the WHEREFORE, the decision appealed from is affirmed, with costs
subject of taxation, in order to increase the state revenues; and this against petitioner-appellant.
purpose becomes indubitable when we consider that ordinary salt and
fish were also originally exempt, but the exemption was not restated in
R.A. No. 1612.
If, as contended by the petitioner, there was no intention to limit the
exemption of agricultural products, then it may well be wondered why
the Legislature found it necessary to change at all the terms of the
exemption; and even further, it may be asked why, barely a year
later, it was found proper to restore (by R.A. No. 1856) the primitive
terms of the exemption of agricultural products "whether in
their original form or not". It is not to be presumed that the
Legislature, in making such changes, was indulging in mere semantic
exercise. There must have been some purpose in making them, and
the rational explantion is that the coverage of the exemption was
being broadened by R.A. No. 1612, as expressly stated in the original
House Bill No. 5819 that later became said Act; and that the policy
change was later found inadvisable, so that the statute was reworded
by R.A. 1856 to corresponded to the original terminology so as to
restore the original exemption..
Stress is laid on the explanatory note to House Bill No. 6094 that it
was "never the intention of Congress to impose such heavy burden
upon our agricultural producers"; but these statements did not go
beyond a personal opinion of the proponents of House Bill No. 6094,
since the true source of Republic Act 1856 (repealing R.A. No.
1612)was not Bill No. 6094, but House Bill No. 5819.
We find no weight in the argument that under the interpretation given
to Republic Act 1612 the planters and farmers would pay a higher tax
than rice mills and coconut factories. The rule of uniform taxation does
not deprive Congress of the power to classify subjects of taxation, and
only demands uniformity within the particular class.
The legislative intent to increase revenue by widening the coverage of
taxable subjects is evident under Republic Act 1612, and by it the
exempt agricultural products were only those that remain in their
original form, and have not undergone the process of manufacture.
This Court has had occasion to observe that —
By the very nature of the changes made in the original statute, it is
clear that the amendment is intended, not to clarify the doubtful
meaning of the former law, xxx, but to withdraw from the scope of the
former exemption the agricultural products that are no longer in their
original form because they have undergone the process of
G.R. No. L-26686 & L-26698 October 30, 1980
ATLAS FERTILIZER CORPORATION, Petitioner, vs. COMMISSION
OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents;
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. ATLAS
FERTILIZER CORPORATION and COURT OF TAX
APPEALS, Respondents.
DE CASTRO,  J.:
These two (2) cases are appeals by way of certiorari  from the decision
dated August 24, 1966 of the Court of Tax Appeals granting Atlas
Fertilizer Corporation a tax credit in the sum of P81,899.00 which may
be applied by said corporation in pay - of its outstanding and/or future
liability for internal revenue
taxes.chanroblesvirtualawlibrary chanrobles virtual law library
For the material facts, We could very well quote from the decision of
the Court of Tax Appeals, the
following.chanroblesvirtualawlibrarychanrobles virtual law library
Petitioner Atlas Fertilizer Corporation was formerly a department of
Atlas Mining z Development Corporation. The latter was granted by the
Secretary of Finance a certificate of tax exemption under Republic Act
No. 901 as a new and necessary industry for engaging in the
manufacture of fertilizer namely, sulphuric acid, phosphoric acid,
superphosphate, triple superphosphate and sun the tax exemption
privileges of Atlas Consolidated Mining and Development Corporation
were later transferred to the petitioner under the written authority of
the Department of Finance dated November 27, 1957. During the
period from June 26, 1961 to October 24, 1962, petitioner imported
raw materials, equipment, spare parts, containers and other supplies
on which it paid one-half or 60% of the compensating taxes due
thereon (Exhs. 1 and G, pp. 98-100, BIR
rec.).chanroblesvirtualawlibrary chanrobles virtual law library
While petitioner was still enjoying partial tax exemption of 50% as a
new and necessary industry under Republic Act No. 901, Republic Act
No. 3050, which took effect on June 17, 1961, granted tax exemption
to any person, partnership, company or corporation engaged or which
shall engage in the manufacture of of whatever nature from the
payment, among others, of compensating taxes on their importation of
capital goods, equipment, snare raw materials, supplies containers and
fuel To implement z Republic Act No. 3050, the Department of Finance
issued Department Order No. 105, dated September 15, 1961, which
provides, among others, as follows:chanrobles virtual law library
Any ... corporation ... which shall engage in the manufacture of
fertilizer and desiring to enjoy the privileges grandted under the
provisions of Republic Act No. 3050 may file its application therefore
with the Secretary of Finance.chanroblesvirtualawlibrarychanrobles
virtual law library
Fertilizer manufacturer ... which are granted tax exemption under
Republic Act No. should likewise file appellant com/implications for tax
exemption under Republic Act No. 3050, indicating therein, among
other things, that the applicant waives the benefits of tax exemption
authorized under Republic Act No.
3127.chanroblesvirtualawlibrarychanrobles virtual law library
In compliance with the above regulation, petitioner filed on January
25, 1962 with the Department of Finance an application for tax
exemption under the provisions of Republic Act No. 3050, which
application was approved by the Secretary of Finance on February 19,
1962. The tax exemption granted by the said official to petitioner was
made retroactive commencing on June 17, 1961, the date of the
effectivity of Republic Act No. 3050 (pp. 93-94, BIR
rec.).chanroblesvirtualawlibrary chanrobles virtual law library
On the basis of the tax exemption granted by the Secretary of Finance
under Republic Act No. 3050, petitioner filed with responded on June
21, 1963 a claim for tax at of the compensating taxes amounting to P
83,629.00 which petitioner allegedly paid to the Bureau of Customs on
petitioner's importations of tax exempt goods, equipment, materials
and supplies during the period from June 26, 1961 to October 24,
1962 (pp. 88-90, BIR rec.). On June 22, 1963, the day after petitioner
had filed its for tax credit with respondent, petitioner filed a petition
for review with this Court seek an order to compel respondent to issue
the corresponding letter of tax
credit.chanroblesvirtualawlibrary chanrobles virtual law library
During the pendency of this case, petitioner's claim for tax credit of P
83,629.00 filed with respondent was referred on June 26, 1963 to the
Regional Director of Manila, BIR Regional District No. 3, for
investigation, report and recommendation. On July 15, 1963, the case
was assigned to Revenue Examiner Benjamin Fernandez. Shortly
thereafter, the Manila Regional Office (District No. 3) was divided into
two (2) districts - North Manila and South Manila (District Nos. 5 and
6). As a consequence thereof and the confusion which ensued as a
result of the sorting and transfer of revenue dockets and records,
allocation and assignment of personnel, and the division and transfer
of supplies, equipment and furniture, the papers bearing on the tax
credit of petitioner were misplaced. It was only on January 25, 1965
when the investigating examiner submitted his report and
recommended therein that petitioner be granted a tax credit of
P76,935.00, instead of P83, 629.00 as because the importations and
payment of the compensating taxes under Item Nos. 1, 17, 35, 50, 58,
61, 62, 64, 65, 67 and 68 were not supported with import entry
declarations and receipts of tax payment
After hearing, the Court of Tax Appeals rendered its decision on
August 24, 1966 from which both parties have appealed to this
Court.chanroblesvirtualawlibrarychanrobles virtual law library
In his appeal, the Commissioner of Internal Revenue (Commission
Commissioner for short) assigns the following errors:
Ichanrobles virtual law library
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
PETITIONER NEED NOT PROVE THAT THE RAW MATERIALS,
EQUIPMENT, SPARE PARTS, CONTAINERS AND OTHER SUPPLIES IT
IMPORTED WERE USED BY IT IN THE MANUFACTURE OF FERTILIZER
TO BE ENTITLED TO TAX EXEMPTION UNDER REPUBLIC ACT NO. 3050.
IIchanrobles virtual law library
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT IT IS
INCUMBENT UPON RESPONDENT TO PROVE THAT THE IMPORTATIONS
IN QUESTION WERE NOT USED BY THE PETITIONER IN THE
MANUFACTURE OF FERTILIZER NOTWITHSTANDING THE FACT THAT
THERE WAS ABSOLUTELY NO EVIDENCE INTRODUCED BY PETITIONER
SHOWING THAT THE SAID IMPORTATIONS WERE USED BY IT IN THE
MANUFACTURE OF FERTILIZER.
IIIchanrobles virtual law library
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
PETITIONER NEED NOT PROVE THAT IT HAD PREVIOUSLY SECURED A
SPECIFIC AUTHORITY FROM THE SECRETARY OF FINANCE TO IMPORT
THE GOODS IN QUESTION AS A PREREQUISITE FOR THE ENJOYMENT
OF ITS RIGHT TO TAX EXEMPTION UNDER REPUBLIC ACT NO. 3050.
IVchanrobles virtual law library
THE COURT OF FAX APPEALS ERRED IN HOLDING THAT THE
PETITIONER HAS IN EFFECT ABANDONED AND GIVEN UP ITS PARTIAL
EXEMPTION PRIVILEGE UNDER REPUBLIC ACT NO. 901 BY SEEKING
TO APPLY ITS TAX EXEMPTION UNDER REPUBLIC ACT NO. 3050.
Vchanrobles virtual law library
THE COURT OF TAX APPEALS ERRED IN ORDERING RESPONDENT TO
GRANT PETITIONER A TAX CREDIT OF P81,899.00 IN SPITE OF THE
FACT THAT PETITIONER IS NOT ENTITLED THERETO.
On the other hand, Atlas Fertilizer Corporation (AFC for short), as
appellant has also assigned the following errors:
Ichanrobles virtual law library
THE COURT OF TAX APPEALS ERRED IN DENYING THE AWARD OF
INTEREST TO THE PETITIONER ON THE AMOUNT OF P81,899.00
FOUND TO BE DUE AS TAX CREDIT IN FAVOR OF PETITIONER.
IIchanrobles virtual law library
THE COURT OF TAX APPEALS ERRED IN CONCLUDING INCLUDING
THAT PETITIONER FILED ITS CLAIM FOR TAX CREDIT QUITE LATE OR
ALMOST TWO YEARS FROM THE FIRST PAYMENT OF THE
COMPENSATING TAX AND EIGHT MONTHS FROM THE LAST PAYMENT
THEREOF.
IIIchanrobles virtual law library
THE COURT OF TAX APPEALS ERRED IN CONCLUDING INCLUDING
THAT THE DELAY IN PROCESSING THE CLAIM FOR TAX CREDIT WAS
NOT PREMEDITATED AND INTENTIONAL BUT CAUSED BY
CIRCUMSTANCES BEYOND THE CONTROL OF RESPONDENT.
IVchanrobles virtual law library
THE COURT OF TAX APPEALS ERRED IN APPLYING THE EXISTING
DOCTRINE THAT INTEREST ON REFUND (OR TAX CREDIT) IS
AWARDED ONLY WHERE COLLECTIVE TION OF THE TAXES WAS
ATTENDED WITH ARBITRARINESS.
Vchanrobles virtual law library
THE COURT OF TAX APPEALS ERRED IN NOT APPLYING THE
APPLICABLE PROVISIONS OF THE NEW CIVIL CODE, NAMELY,
ARTICLES 2154, 2155 AND 2209, GOVERNMENT ING THE RETURN OF
PAYMENT'S BY REASON OF MISTAKE AND THE AWARD OF INTEREST
WHEN THE OBLIGOR INCURS DELAY.
Appeal by the Commissioner
The pertinent section upon which AFC based its claim for exemption
reads:chanrobles virtual law library
Sec. 1. Notwithstanding any provisions of law to the contrary, subject
to the conditions hereinafter provided, any person, partnership,
company or corporation engaged or which shall engage in the
manufacture of fertilizer of whatever nature be entitled to exemption
until December 31, 1965 from the payment of special port tax, margin
fee on foreign exchange, sales and compensating taxes and customs
duties payable by such person, partnership, company or corporation,
in respect to the importation of capital goods, equipment, spare parts,
raw materials, supplies, containers and fuel by any of those engaged
in the above industry, ... 1chanrobles virtual law library
Anent the first and second assignment of errors, the Commission
Commissioner points out that it is well settled that exemptions are
strictly construed and are never presumed. And the burden of proof is
on the claimant to establish clearly his right to exempt Being an
essential and indispensable requisite for the enjoyment of its tax
exemption, the fact that the AFC used the goods for the manufacture
of fertilizer must be shown by it.chanroblesvirtualawlibrarychanrobles
virtual law library
In refutation to the above contention, AFC claims that since the
Secretary of Finance, on February 19, 1962, approved its application
for tax exemption under R.A. 3050, it may be assumed that among
the matters considered by the Secretary of Finance in processing the
claim for exemption was the fact of actual use for the manufacture of
fertilizer by AFC of the importations made. It is, therefore, the position
of AFC that the certificate of exemption granted by the Secretary of
Finance was sufficient proof that it used the imported articles in the
manufacture of fertilizer.chanroblesvirtualawlibrarychanrobles virtual
law library
That the burden of proof is on the claimant to establish his right to
exemption cannot be gainsaid. In the instant case, however, We feel
that AFC need not adduce further evidence to show that it is entitled to
exemption. It is to be observed that there is no dispute that AFC is
engaged in the manufacturing capture of fertilizer, as the very name of
AFC suggests the nature of its business. It is also pertinent to state
that when R. A. 3050 took effect, AFC was already enjoying partial
exemption under R.A. 901 as a new and necessary industry engaged
in the manufacture of fertilizer. Furthermore, when the Secretary of
Finance, on February 19, 1962, approved AFC's application for tax
exemption under R. A. 3050, We believe that he already considered
that the importations were needed by AFC for the manufacture of
fertilizer. This may be inferred from the fact that before the Secretary
of Finance approves an application, he requires applicants to submit an
application which "shall be in the form prescribed by the Secretary of
Finance and contain detailed and complete information caged for in
such form. It shall contain a complete of raw materials, supplies, con-
re/containers, and fuel needed and for the exclusive use in the
manufacture of fertilizer. There shall be attached to the appellant
com/implication a firm quotation of the complete machinery equipment
and spare parts thereof needed by and for the exclusive use of the
applicant in the manufacture of fertilizer. The appellant
com/implication shall be sworn to before a notary public and filed in
quadruplicate. 2Likewise, since it is presumed that official duty has
been regularly performed 3 it can be assumed that the Secretary of
Finance in approving the application, was satisfied that those
importations were not only needed for exclusive use in the
manufacture of fertilizer but that they were actually used therefor, for
otherwise, the Secretary would have not approved the
application.chanroblesvirtualawlibrarychanrobles virtual law library
We, therefore, agree with the position of AFC that
the certiorari  certificate of exemption granted by the Secretary of
Finance on February 19, 1962 was sufficient proof that it used the
importations in question in the manufacture of fertilizer. This is
bolstered by the fact that the certificate of exemption was granted
after the imported goods have already
arrived.chanroblesvirtualawlibrarychanrobles virtual law library
The Commissioner also argues that AFC failed to secure first an
authority from the Secretary of Finance to import the goods which AFC
wanted to be exempt from tax before said goods were actually
imported. According to the Commissioner, such an authority is a
prerequisite for the enjoyment of tax exemption, since in the letter of
the Secretary of Finance dated February 19, 1962 granting AFC tax
exemption under R.A. 3050, the Secretary stated:chanrobles virtual
law library
As a bonafide fertilizer manufacturer under the provisions of the
aforesaid Act, you are entitled to exemption from the payment of the
special import tax, margin fee on foreign exchange, sales and
compensating taxes, and customs duties directly payable by you in
respect to the importation of capital goods, equipment spare part. run
materials, supplies, containers and fuel which this office may
specifically authorize  until December 31, 1965 unless sooner
let/lat/after terminated for failure to comply with the requirements of
the law and existing regulations.
Indeed, it would be illogical for the AFC to produce the acquired
specific authority to import because when the tax exemption was
granted on February 19, 1962, sixty-one (61) of the imported goods
have already arrived, and the AFC has paid the corresponding
compensating taxes pursuant P. A. 901 granting manufacturer of
fertilizer partial exemption from payment of compensating taxes. With
respect to the seven (7) importation which arrived after the grant of
exemption, it should be noted that AFC was able to withdraw them
from customs custody. We must not lose sight of the fact that before
goods may be withdrawn from customs custody, it is necessary that "a
true or photostat copy of the letter-grant authorizing the tax-free
importation of the articles applied to be withdrawn from customs
custody" be presented, pursuant to paragraph of the implementing
rules and regulations which is Department Order No. 105-A 4 issued by
the Secretary of Finance. Since AFC has successfully withdrawn all the
seven (7) imported articles from customs custody, after payment of
the compensating taxes, it may be inferred that AFC has complied with
the above provision of Department Order No. 105-A - to produce AFC's
authority to import.chanroblesvirtualawlibrarychanrobles virtual law
library
On the fourth issue, the Commissioner contends that respondent court
erred in ruling that AFC, by seeking to avail of its exemption under R.
A. No. 3050, has in effect abandoned and given up its partial
exemption privilege under R.A. No. 901. According to the
Commissioner, AFC could not have abandoned or given up its
exemption under R. A. No. 901 because it has already applied the
same to the importations involved herein, and that one cannot
abandon or give up what he has already taken advantage of
Furthermore, tax exemptions under R.A. 901 and R.A. 3050 cannot be
enjoyed simultaneous
simultaneously.chanroblesvirtualawlibrary chanrobles virtual law
library
The Commissioner's contention is without merit. Department, Order
No. 105 issued by the Secretary of Finance expressly directed fertilizer
manufacturers enjoying benefits under R.A. No. 901 to likewise apply
for the benefits of R.A. No. 3050. Said Department Order No. 105
provides:chanrobles virtual law library
Fertilizer manufacturers who or which are granted tax exempt under
R. A. No. 901 should likewise file applications for tax exemption under
R. A. No. 3050. ...
In compliance with said directive, AFC filed its application for total
exemption under R. A. No. 3050 which was granted by the Secretary
of Finance. The Commissioner's argument that AFC enjoyed
simultaneous exemption under R. A. No. 901 and R. A. No. 3050, is
without factual basis. R. A. No. 901 grants partial exemption while R.
A. 3050 grants total exemption. Once a manufacturer of fertilizer
chose to come under R. A. 3050, his partial exemption under R. A. 901
ceased. In effect, he enjoyed only one exemption benefit, the full
exemption under R. A. No. 3050. As correctly ruled by the respondent
court, when AFC availed of the total exemption under R. A. No. 3050,
it has in effect given up the partial exemption which it was enjoying
under R. A. No. 901.
Appeal by AFC
The assignment of errors of AFC may be synthesized to the sole issue
as to whether or not the Government is liable for the payment of
interest on refunds (on tax credit) of taxes erroneously or illegally paid
to it on the ground that the commission Commissioner is guilty of
unjust and unreasonable delay in performing an obligation of the
Government .chanroblesvirtualawlibrarychanrobles virtual law library
AFC points out that the Commissioner received the claim for tax credit
on June 21, 1963 but it was only on January 11, 1965 or more than
eighteen (18) months later that a BIR examiner came to the premises
of the taxpayer to investigate the claim. In other words, the
Commissioner did not act on the claim of AFC and this inaction is the
essence of the delay incur red by the Commissioner in the
performance of an obligation which entitled AFC to reparation in the
form of interest payment.chanroblesvirtualawlibrarychanrobles virtual
law library
On the alleged delay, the Commissioner in his brief explaining the
following:chanrobles virtual law library
The records of this case show that petitioner's claim for tax credit was
received by the Records Control Section of the Bureau of Internal
Revenue on June 21, 1963 (Memorandum for Petitioner, STA Case No.
1410, p. 2, p. 121 STA par. 5 of Answer, CTA Case No. 1410, P. 14
STA and was received by the Appellate Division of the said Bureau
which processes claims of that nature on June 25, 1963. The following
day, or on June 26, 1963, the said claim was indorsed to then BIR
Regional District No. 3, Manila, for investigation and report and, on the
same date, petitioner was duly notified of the said indorsement. (Exh.
D, p. 101, CTA rec.).chanroblesvirtualawlibrary chanrobles virtual law
library
However, shortly after the claim for tax credit was referred to Regional
District No. 3 for investigation and report, the said district was divided
into two districts to become Regional District Nos. 5 and
6.chanroblesvirtualawlibrary chanrobles virtual law library
As a consequence of the division, revenue dockets and records then
handled by Region No. 3 had to be sorted and apportioned between
the two new districts. Office supplies, equipment and furniture were
likewise divided and transferred and personnel had to be allocated and
assigned to each of the new districts. Unfortunately, in the process,
the papers bearing on petitioner's claim for tax credit was
misplaced.chanroblesvirtualawlibrary chanrobles virtual law library
This was discovered when the report previously requested on the said
claim was called up in a memorandum of the Deputy Com-
Commissioner dated Nov. 23, 1964. As the fieldmen of the Bureau of
In- internal Revenue are grounded during the month of December of
each year, the investigation could not be immediately undertaken after
the said call-up but had to wait until January. On January 27, 1965,
the desired report contained in an indorsement dated January 25,
1965 was submitted (Exh. 1, supra).
Finding the above explanation meritorious, We agree with respondent
court that the delay in processing the claim of AFC for tax credit was
neither premeditated nor intentional. The Commissioner did not sit on
the claim of AFC. If there was any delay, it was due to the splitting
into two (2) districts of Regional District No. 3 where the claim was
filed, as a result of which the documents requesting for refund was
misplaced. But the more important consideration is the when settled
rule that in the absence of a statutory provision clearly or expressly
directing or authorizing payment of interest on the amount to be
refunded to taxpayer, the Government cannot be acquired to pay
interest. 5 Likewise, it is the rule that interest may be awarded only
when the collection of tax sought to be refunded was attended with
arbitrariness. 6 Such circumstance is not present in the case at bar as
the payment of compensation taxes in question was made freely and
voluntarily and conformably with the partial exemption granted by
Republic Act No. 901.chanroblesvirtualawlibrary chanrobles virtual law
library
WHEREFORE, judgment is hereby rendered affirmed the decision of the
Court of Tax Appeals. Without special pro-announcement as to
cost.chanroblesvirtualawlibrary chanrobles virtual law library
SO ORDERED.
G.R. No. L-20960-61            October 31, 1968
COMMlSSIONER OF INTERNAL REVENUE and COMMISSIONER
OF CUSTOMS, petitioners-appellants,
vs.
PHILIPPINE ACE LINES, INC., respondent-appellee.
Office of the Solicitor General Antonio Barredo, Assistant Solicitor
General Felicisimo R. Rosete and Special Attorney Francisco J. Malate,
Jr. for petitioners-appellants.
Dakila F. Castro & Associates for respondent-appellee.
ANGELES, J.:
On appeal by the Government from the decision — rendered jointly in
Tax Cases Nos. 964 & 984 — of the Court of Tax Appeals, reversing
the rulings of the Commissioner of Internal Revenue holding the
Philippine Ace Lines, Inc. liable to pay the aggregate amount of
P1,407,724.57 as compensating taxes on four (4) ocean-going cargo
vessels acquired by said company from the Reparations Commission of
the Philippines, and of the Commissioner of Customs to place the four
vessels under customs custody until the aforementioned amount
claimed by the Government was first paid.
The antecedent facts of the case are not in dispute and may be
summarized briefly as follows:
Under date of January 23, 1959, the Reparations Commission agreed
to sell to the Philippine Ace Lines the cargo vessel M/S YAKAL and M/S
MOLAVE which were procured by the former from Japan for the end-
use of the latter under the Philippine- Japanese Reparations
Agreement of May 9, 1956, at the agreed prices of P4,283,241.48 and
P4,292,457.48, respectively. Similar agreements involving two (2)
other ocean-going cargo vessels were subsequently entered into by
and between the same parties: one, dated November 11, 1959,
referring to the purchase and sale of M/S TINDALO for the price of
P7,054.177.78 and, the other, concerning the purchase and sale of
M/S NARRA under date of December 14, 1959, for the price of
P3,599,995.44. All these agreements — invariably denominated as
"Contract of Conditional Purchase and Sale of Reparations Goods" —
stipulated, among others, that the Reparations Commission retains
title and ownership of the above-described vessels until they were fully
paid for and that the purchase prices of the vessels were to be paid by
Philippine Ace Lines to the Reparations Commission under deferred
payment plans in ten (10) equal annual installments.
The four (4) vessels referred to were thereafter delivered to Philippine
Ace Lines in Japan; they were taken to the Philippines where they
were registered in the Bureau of Customs in the name of the
Reparations Commission; and thereafter, the vessels were operated
and utilized by Philippine Ace Lines in its shipping business, plying
between ports of foreign countries and the Philippines.
Sometime later, however, the Commissioner of Internal Revenue
assessed against the Philippine Ace lines the amounts of P304,428.00,
P256,275.00, P499,948.10 and P305.073.47 as compensating taxes on
the M/S YAKAL, M/S NARRA, M/S TINDALO and M/S MOLAVE,
respectively, and demanded payment of the said amounts. The
Commisioner of Customs, joining the Commissioner of Internal
Revenue, then placed the vessels under customs custody at the
different ports of the Philippines where they were found at the time,
and refused to give due course to the "clearance" of said vessels as
requested by their respective owner and operator — Reparations
Commission and Philippine Ace Lines — unless the compensating taxes
assessed against the latter were first paid to the Commissioner of
Internal Revenue. Philippine Ace Lines protested said actions of the
Commissioners of Internal Revenue and of Customs, alleging that the
legal title and ownership of the vessels operated by it were still vested
with the Reparations Commission which, under Section 14 of the
Reparations Act,1 was exempt from payment of all duties, fees and
taxes on all reparations goods obtained by it; but the said officials
rejected the protest and ruled that the compensating taxes should first
be paid, per directive to that effect by the Secretary of Finance.
Subsequent protests — calling the attention of the Commissioner of
Internal Revenue and the Commissioner of Customs to the substantial
loss and irreparable injury it has suffered by the tying up of the four
ships in port — also proved futile. Offshoots of the controversy,
Philippine Ace Lines interposed two (2) separate appeals (petitions for
review) from the above rulings or decisions of the Commissioner of
Internal Revenue and the Commissioner of Customs, to the Court of
Tax Appeals where they were docketed as C.T.A. Case No. 964,
involving M/S YAKAL and M/S NARRA, and C.T.A. Case No. 984,
concerning M/S TINDALO and M/S MOLAVE.
While the cases were pending trial, Philippine Ace Lines petitioned the
court a quo to enjoin the collection of the compensating tax assessed
against it and after hearing, writs of preliminary injunction were issued
upon the filing of surety bonds to guarantee payment of the amounts
claimed.
In the meantime, Congress enacted Republic Act No. 3079 (effective
June 17, 1961) which amended Republic Act No. 1789, otherwise
known as the Reparations Act, and provided as follows:
SEC. 14. Exemption from tax. — All reparations goods obtained by the
Government shall be exempt from the payment of all duties, fees and
taxes. Reparations goods obtained by private parties shall be exempt
from the payment of customs duties, compensating tax, consular fees
and the special import tax.
xxx           xxx           xxx
SEC. 20. This Act shall take effect upon its approval, except that the
amendment contained in section seven hereof relating to the
requirements for procurement orders including the requirement of
downpayment by private applicant end-users shall not apply to
procurement orders already duly issued and verified at the time of the
passage of this amendatory Act, and except further that the
amendment contained in section ten relating to the insurance of the
reparations goods by the end-users upon delivery shall apply also to
goods covered by contracts already entered into by the Commission
and the end-user prior to the approval of this amendatory Act as well
as goods already delivered to the end-user, and except further that
the amendments contained in sections eleven and twelve hereof
relating to the terms of the installment payments on capital goods
disposed of to private parties, and the execution of a performance
bond before delivery of reparations goods, shall not apply to contract
for the utilization of reparations goods already entered into by the
Commission and the end-users prior to the approval of thisamendatory
Act:  Provided, That any end-user may apply the renovation of his
utilization contract with the commission in order to avail of any
provision of this amendatory Act which is more favorable to an
applicant end-user than has heretofore been granted in like manner
and to the same extent as an end-user filing his application after the
approval of this amendatory Act, and the Commission may agree to
such renovation on condition that the end-user shall voluntarily
assume all the new obligations provided for in this amendatory Act.
[Emphasis supplied]
Invoking the favorable provisions of the new law (Republic Act No.
3079, above quote Philippine Ace Lines then entered into "Renovated
Contract(s) of Conditional Purchase and Sale of Reparations Goods"
with the Reparations Commission, covering the four (4) cargo vessels.
It had previously acquired from the latter under the Reparations Act.
Thereafter, the said company filed a "Supplement to the Petition for
Review" in each of the above entitled cases before the Court of Tax
Appeals, submitting therewith copies of the said renovated contracts it
had entered with the Reparations Commission regarding the purchase
and sale of M/S MOLAVE, M/S TINDALO, M/S YAKAL and M/S NARRA,
with the allegation that "expressly implementing section 14 of Republic
Act No. 3079 in the aforesaid renovated contracts," the Reparations
Commission and the Philippine Ace Lines have agreed as follows:
NOW THEREFORE, for and in consideration of the premises above
stated and of the payments to be made by the herein Conditional
Vendee as stipulated in Annex "B" hereof which is made an integral
part of this contract, the parties herein agree to execute this
renovation of contract of Conditional Purchase and Sale and the
Conditional Vendor hereby transfers and conveys unto the herein
Conditional Vendee the ocean-going vessels above-described ...;
subject further to the pertinent provisions of Republic Act No. 1789 as
amended, including particularly the exempting provisions of Section 14
thereof relative to the exemption from payment of compensating tax
which the herein Conditional Vendee, as an implemented machinery,
do hereby, by these presents, implement. ...
In their "Answer to Supplement to Petition for Review" filed with the
court below by counsel for the Commissioner of Internal Revenue and
the Commissioner of Customs, the foregoing allegation was admitted.
They claimed, however, that even if Philippine Ace Lines and the
Reparations Commission have agreed to implement the provisions of
Section 14 of Republic Act No. 1789, as amended by Republic Act No.
3079, in the "Renovated Contract of Conditional Purchase and Sale of
Reparations Goods" entered into between them, such implementation
did not relieve the Philippine Ace Lines from the payment of the
compensating taxes in question. The parties thereafter submitted the
cases for decision upon a stipulation of facts containing, substantially,
the facts as above set forth.
On January 25, 1963, the Court of Tax Appeals rendered a joint
decision in the two cases, reversing the rulings of the Commissioner of
Internal Revenue and the Commissioner of Customs, in the following
rationale:
The sole issue presented for our consideration is whether or not
petitioner is liable for the compensating tax on the four ocean-going
vessels in question. Petitioner claims that it is not liable on the
grounds that said vessels are still owned by the Reparations
Commission and that, assuming that it was liable therefor under
Section 190 of the National Internal Revenue Code, in relation to
Section 14 of Republic Act 1789 before its amendment, it is now
exempt from said tax by virtue of Section 20 of Republic Act No. 3079
in relation to Section 14 of Republic Act No. 1789, as amended. On the
other hand, respondent claims that petitioner is liable and that the
latter's liability is not affected by the exemption provision of the new
law.
xxx           xxx           xxx
The Government does not deny the fact that petitioner has complied
with all the requirements of law in order that it may avail itself of all
the favorable provisions granted in Republic Act No. 3079. It is,
however, contended that the favorable provisions mentioned in
Section 20 of said Act which may be availed of by an applicant for
renovation of his utilization contract with the Reparations Commission
do not include exemption from compensating tax because such
exemption is not expressly stated in the law. In providing that the
favorable provisions of Republic Act No. 3079 shall be available to
applicants for renovation of their utilization contracts, on condition that
said applicants shall voluntarily assume all the new obligations
provided in the new law, the law intends to place persons who
acquired reparations goods before the enactment of the amendatory
Act on the same footing as those who acquire reparations goods after
its enactment. This is so because of the provision that once an
application for renovation of a utilization contract has been approved,
the favorable provisions of said Act shall be available to the applicant
"in like manner and to the same extent as an end-user filing his
application after the approval of this amendatory Act." To deny
exemption from compensating tax to one whose utilization contract
has been renovated, while granting the exemption to one who files an
application for acquisition of reparations goods after the approval of
the new law, would be contrary to the express mandate of the law that
they both be subject to the same obligations and they both enjoy the
same privileges in like manner and to the same extent. It would be a
manifest distortion of the literal meaning and purpose of the law.
FOR THE FOREGOING CONSIDERATIONS, the decisions appealed from
in both cases are hereby reversed. Accordingly, the surety bonds filed
by petitioner to guarantee payment of the tax in question are thereby
cancelled. No pronouncement as to costs.
Not satisfied with the foregoing decision of the Court of Tax Appeals,
the Government has interposed the instant appeal therefrom to this
Court.
Appellant now charges that the lower court had erred in holding that
the renovation of the contracts of purchase and sale of the vessels
involved in these cases, after the approval of Republic Act No. 3079,
entitled Philippine Ace Lines to the exemption from payment of
compensating tax under the provisions of the said law,
notwithstanding the fact that the vessels referred to were acquired
from the Reparations Commission long before the approval of said
amendatory Act which, by the way, did not expressly authorize such
exemption. It is argued that the favorable provisions of Republic Act
No. 3079 invoked by Philippine Ace Lines and relied upon by the
decision of the court below cannot include exemption from
compensating tax, otherwise, had Congress intended so, it would have
provided for such exemption in clear and explicit terms; that the tax
exemption contained in Section 14 of the amendatory Act cannot have
retroactive application in the absence of any provision for retroactivity;
and that to grant such exemption to end-users who have acquired
reparations goods before the approval of Republic Act No. 3079 would
be prejudicial to the Government.
Appellant's position calls to mind Commissioner of Internal Revenue
vs. Bothelo Shipping Corporation,2 the factual setting of which is on all
fours with the case at bar, and where this Court, speaking through
Chief Justice Roberto Concepcion, disposed of the same charge and
contentions in clear and unequivocal terms, in the following wise:
The inherent weakness of the last ground becomes manifest when we
consider that, if true, there could be no tax exemption of any kind
whatsoever, even if Congress should wish to create one, because
every such exemption implies a waiver of the right to collect what
otherwise would be due to the Government, and, in this sense, is
prejudicial thereto. In fact, however, tax exemptions may and do
exist, such as the one prescribed in section 14 of Republic Act No.
1789, as amended by Republic Act No. 3079, which, by the way, is
"clear and explicit," thus, meeting the first ground of appellant's
contention. It may not be amiss to add that no tax exemption — like
any other legal exemption or exception — is given without any reason
therefor. In much the same way as other statutory commands, its
avowed purpose is some public benefit or interest, which the law-
making body considers sufficient to offset the monetary loss entailed
in the grant of the exemption. Indeed, section 20 of Republic Act No.
3079 exacts a valuable consideration for the retroactivity of its
favorable provision, namely, the voluntary assumption, by the end-
user, who bought reparations goods prior to June 17, 1961, of "all
the new obligations provided for in" said Act.
The argument adduced in support of the third ground is that the view
adopted by the Tax Court would operate to grant exemption to
particular persons, the Buyers therein. It should be noted, however,
that there is no constitutional injunction against granting tax
exemptions to particular persons. In fact, it is not unusual to grant
legislative franchises to specific individuals or entities, conferring tax
exemptions thereto. What the fundamental law forbids is the denial of
equal protection such as through unreasonable discrimination or
classification.
Furthermore, Section 14 of the Law on Reparations, as amended,
exempts from the compensating tax, not particular  persons but
persons belonging to a particular class. Indeed, appellants do not
assail the Constitutionality of said section 14, insofar as it grants
exemptions to end-users who, after the approval of Republic Act No.
3079, on June 17, 1961, purchased reparations goods procured by the
Commission. From the view point of Constitutional Law, especially the
equal protection clause, there is no difference between the grant of
exemption to said end-users, and the extension of the grant to those
whose contracts of purchase and sale were made before said date,
under Republic Act No. 1789.
It is true that Republic Act No. 3079 does not explicitly declare that
those who purchased reparations goods prior to June 17, 1961, are
exempt from the compensating tax. It does not say so, because they
do not really enjoy such exemption, unless they comply with the
proviso in Section 20 of said Act, by applying for the renovation of
their respective utilization contracts, "in order to avail of any provision
of the Amendatory Act which is more favorable" to the applicant. In
other words, it is manifest, from the language of said section 20, that
the same intended to give such buyers the opportunity to be treated
"in like manner and to the same extent as an end-user filing his
application after the approval of this Amendatory Act." Like the "most
favored nation clause" in international agreements, the
aforementioned section 20 thus seeks, not to discriminate or to create
an exemption or exceptions, but to abolish the discrimination,
exemption or exception that would otherwise result, in favor of the
end-user who bought after June 17, 1961 and against one who bought
prior thereto. Indeed, it is difficult to find substantial justification for
the distinction between the one and the other. ...
We find no cogent reason to modify, much less depart from the
conclusion reached in Bothelo, as expressed in the above-quoted
opinion of the Court there, and the same should resolve the identical
problem now brought before Us in this proceeding.
WHEREFORE, the decision of the Court of Tax Appeals appealed from
in these cases is affirmed; no pronouncement as to costs.
G.R. No. 203754               June 16, 2015
FILM DEVELOPMENT COUNCIL OF THE PHILIPPINES, Petitioner,
vs.
COLON HERITAGE REALTY CORPORATION, operator of Oriente
Group Theaters, represented by ISIDORO A.
CANIZARES, Respondent.
x-----------------------x
FILM DEVELOPMENT COUNCIL OF THE PHILIPPINES, Petitioner,
vs.
CITY OF CEBU and SM PRIME HOLDINGS, INC., Respondents.
DECISION
VELASCO, JR., J.:
The Constitution is the basic law to which all laws must conform; no
act shall be valid if it conflicts with the Constitution. In the discharge
of their defined functions, the three departments of government have
no choice but to yield obedience to the commands of the Constitution.
Whatever limits it imposes must be observed.1
The Case
Once again, We are called upon to resolve a clash between the
Inherent taxing power of the legislature and the constitutionally-
delegated power to tax of local governments in these consolidated
Petitions for Review on Certiorari under Rule 45 of the Rules of Court
seeking the reversal of the Decision dated September 25, 2012 of the
Regional Trial Court (RTC), Branch 5 in Cebu City, in Civil Case No.
CEB-35601, entitled Colon Heritage Realty Corp., represented by
Isidoro Canizares v. Film Development Council of the' Philippines, and
Decision dated October 24, 2012 of the RTC, Branch 14 in Cebu City,
in Civil Case No. CEB-35529, entitled City of Cebu v. Film Development
Council of the Philippines, collectively declaring Sections 13 and 14 of
Republic Act No. (RA) 9167 invalid and unconstitutional.
The Facts
The facts are simple and undisputed.
Sometime in 1993, respondent City of Cebu, in its exercise of its
power to impose amusement taxes under Section 140 of the Local
Government Code2 (LGC) anchored on the constitutional policy on local
autonomy,3 passed City Ordinance No. LXIX otherwise known as the
"Revised Omnibus Tax Ordinance of the City of Cebu (tax ordinance)."
Central to the case at bar are Sections 42 and 43, Chapter XI thereof
which require proprietors, lessees or operators of theatres, cinemas,
concert halls, circuses, boxing stadia, and other places of amusement,
to pay an amusement tax equivalent to thirty percent (30%) of the
gross receipts of admission fees to the Office of the City Treasurer of
Cebu City. Said provisions read:
CHAPTER XI - Amusement Tax
Section 42. Rate of Tax. - There shall be paid to the Office of the City
Treasurer by the proprietors, lessees, or operators of theaters,
cinemas, concert halls, circuses, boxing stadia and other places of
amusement, an amusement tax at the rate of thirty percent (30%) of
the gross receipts from admission fees.4
Section 43. Manner of Payment. - In the case of theaters or cinemas,
the tax shall first be deducted and withheld by their proprietors,
lessees, or operators and paid to the city treasurer before the gross
receipts are divided between said proprietor, lessees, operators, and
the distributors of the cinematographic films.
Almost a decade later, or on June 7, 2002, Congress passed RA
9167,5 creating the Film Development Council qf the Philippines
(FDCP) and abolishing the Film Development Foundation of the
Philippines, Inc. and the Film Rating Board. Secs. 13 and 14 of RA
9167 provided for the tax treatment of certain graded films as follows:
Section 13. Privileges of Graded Films. - Films which have obtained
an "A" or "B" grading from the Council pursuant to Sections 11 and 12
of this Act shall be entitled to the following privileges:
a. Amusement tax reward. - A grade "A" or "B" film shall entitle its
producer to an incentive equivalent to the amusement tax imposed
and collected on the graded films by cities and municipalities in Metro
Manila and other highly urbanized and independent component cities
in the Philippines pursuant to Sections 140 to 151 of Republic Act No.
7160 at the following rates:
1. For grade "A" films - 100% of the amusement tax collected on such
film; and
2. For grade "B" films - 65% of the amusement tax collected on such
films. The remaining thirty-five (35%) shall accrue to the funds of the
Council.
Section 14. Amusement Tax Deduction and Remittance. - All revenue
from the amusement tax on the graded film which may otherwise
accrue to the cities and municipalities in Metropolitan Manila and
highly urbanized and independent component cities in the Philippines
pursuant to Section 140 of Republic Act. No. 7160 during the period
the graded film is exhibited, shall be deducted and withheld by the
proprietors, operators or lessees of theaters or cinemas and remitted
within thirty (30) days from the termination of the exhibition to the
Council which shall reward the corresponding amusement tax to the
producers of the graded film within fifteen (15) days from receipt
thereof.
Proprietors, operators and lessees of theaters or cinemas who fail to
remit the amusement tax proceeds within the prescribed period shall
 be liable to a surcharge equivalent to five percent (5%) of the amount pay the aforestated amounts to FDCP. The demand, however, fell on
due for each month of delinquency which shall be paid to the Council. deaf ears.
(emphasis added) Meanwhile, on March 25, 2009, petitioner received a letter from Regal
According to petitioner, from the time RA 9167 took effect up to the Entertainment, Inc., inquiring on the status of its receivables for tax
present, all the cities and municipalities in Metro Manila, as well as rebates in Cebu cinemas for all their A and B rate films along with
urbanized and independent component cities, with the sole exception those which it co-produced with GMA films. This was followed by a
of Cebu City, have complied with the mandate of said law. letter from
Accordingly, petitioner, through the Office of the Solicitor General, sent Star Cinema ABS-CBN Film Productions, Inc., requesting the
on January 2009 demand letters for unpaid amusement tax reward immediate remittance of its amusement tax rewards for its graded
(with 5% surcharge for each month of delinquency) due to the films for the years 2004-2008.
producers of the Grade "A" or "B" films to the following cinema Because of the persistent refusal of the proprietors and cinema
proprietors and operators in Cebu City: operators to remit the said amounts as FDCP demanded, on one hand,
Amusement and Cebu City's assertion of a claim on the amounts in question, the
Tax Reward Number city finally filed on May 18, 2009 before the RTC, Branch 14 a petition
Cinema (with 5% of CEB for declaratory relief with application for a writ of preliminary
Period Covered injunction, docketed as Civil Case No. CEB-35529 (City of Cebu v.
Proprietor/Operator surcharge for Graded
each moth of Films FDCP). In said petition, Cebu City sought the declaration of Secs. 13
delinquency) and 14 of RA 9167 as invalid and unconstitutional.
Similarly, Colon Heritage filed before the RTC, Branch 5 Civil Case No.
SM Prime Holdings 76,836,807.08 89 Sept. 11, 2003 - Nov. CEB-35601 (Colon Heritage v. FDCP), seeking to declare Sec. 14 of RA
Inc. 4, 2008 9167 as unconstitutional.
Ayala Center 43,435,718.23 70 May 14, 2003 - Nov. 4, On May 25, 2010, the RTC, Branch 14 issued a temporary restraining
Cinemas 2008 order (TRO) restraining and enjoining FDCP, et al. from, inter alia:
(a) Collecting amusement tax incentive award in the City of Cebu and
Colon Heritage Realty 8,071,267.00 50 Aug. 11, 2004-Nov. 4, from imposing surcharges thereon;
Corp. 2008 (b) Demanding from the owners, proprietors, and lessees of theaters
and cinemas located and operated within Cebu City, payment of said
Eden Theater 428,938.25 4 May 5, 2005 - Sept. 2,
amusement tax incentive award which should have been deducted,
2008
withheld, and remitted to FDCP, etc. by the owners, etc., or being
Cinema Theater 3,100,354.80 22 Feb. 18, 2004-Oct. 7, operated within Cebu City and imposing surcharges on the unpaid
2008 amount; and
(c) Filing any suit due to or arising from the failure of the owners, etc.,
Visaya Cineplex Corp. 17,582,521.89 86 June 25, 2005 - Oct.
of theaters or cinemas within Cebu City, to deduct, withhold, and remit
21, 2008
the incentive to FDCP.
Ultra Vistarama 68,821.60 2 July 2 - 22, 2008 Meanwhile, on August 13, 2010, SM Prime Holdings, Inc. moved for
Cinema leave to file and admit attached comment-in-intervention and was
later granted.6
Cebu Central Realty 9,853,559.69 48 Jan. 1, 2004 - Oct. 21,
Rulings of the Trial Courts
Corp. 2008
In City of Cebu v. FDCP, the RTC, Branch 14 issued the challenged
In said letters, the proprietors and cinema operators, including private Decision7 declaring Secs. 13 and 14 of RA 9167 unconstitutional,
respondent Colon Heritage Realty Corp. (Colon Heritage), operator of disposing as follows:
the Oriente theater, were given ten (10) days from receipt thereof to
WHEREFORE, in view of all the disquisitions, judgment is rendered in
favor of petitioner City of Cebu against respondent Film Development
Council of the Philippines, as follows:
1. Declaring Sections 13 and 14 of the (sic) Republic Act No. 9167
otherwise known as an Act Creating the Film Development Council of
the Philippines, Defining its Powers and Functions, Appropriating Funds
Therefor and for other purposes, as violative of Section 5 Article X of
the 1997 (sic) Philippine Constitution; Consequently
2. Declaring that defendant Film Development Council of the
Philippines (FDCP) cannot collect under Sections 13 and 14 of R.A.
9167 as of the finality of the decision in G.R. Nos. 203754 and
204418;
3. Declaring that Intervenor SM Cinema Corporation has the obligation
to remit the amusement taxes, withheld on graded cinema films to
respondent FDCP under Sections 13 and 14 of R.A. 9167 for taxes due
prior to the finality of the decision in G.R. Nos. 203754 and 204418;
4. Declaring that after the finality of the decision in G.R. Nos. 203 754
and 204418, all amusement taxes withheld and those which may be
collected by Intervenor SM on graded films shown in SM Cinemas in
Cebu City shall be remitted to petitioner Cebu City pursuant to City
Ordinance LXIX, Chapter XI, Section 42.
As to the sum of PhP 76,836,807.08 remitted by the Intervenor SM to
petitioner City of Cebu, said amount shall be remitted by the City of
Cebu to petitioner FDCP within thirty (30) days from finality of this
decision in G.R. Nos. 203754 and 204418 without interests and
surcharges.
SO ORDERED.
According to the court, what RA 9167 seeks to accomplish is the
segregation of the amusement taxes raised and collected by Cebu City
and its subsequent transfer to FDCP. The court concluded that this
arrangement cannot be classified as a tax exemption but is a
confiscatory measure where the national government extracts money
from the local government's coffers and transfers it to FDCP, a private
agency, which in turn, will award the money to private persons, the
film producers, for having produced graded films.
The court further held that Secs. 13 and 14 of RA 9167 are contrary to
the basic policy in local autonomy that all taxes, fees, and charges
imposed by the LGUs shall accrue exclusively to them, as articulated in
A1iicle X,. Sec. 5 of the 1987 Constitution. This edict, according to the
court, is a limitation upon the rule-making power of Congress when it
provides guidelines and limitations on the local government unit's
(LGU's) power of taxation. Therefore, when Congress passed this
"limitation," if went beyond its legislative authority, rendering the
questioned provisions unconstitutional.
By the same token, in Colon Heritage v. FDCP, the RTC, Branch 5, in
its Decision of September 25, 2012, also ruled against the
constitutionality of said Secs. 13 and 14 of RA 9167 for the following
reasons: (a) while Congress, through the enactment of RA 9167, may
have amended Secs. 140(a)8 and 1519 of the LGC, in the exercise of
its plenary power to amend laws, such power must be exercised within
constitutional parameters; (b) the assailed provision violates the
constitutional directive that taxes should accrue exclusively to the LGU
concerned; (c) the Constitution, through its Art. X, Sec. 5, 10 directly
conferred LGUs with authority to levy taxes-the power is no longer
delegated by the legislature; (d) In CIR v. SM Prime Holdings, 11 the
Court ruled that amusement tax on cinema/theater operators or
proprietors remain with the LGU, amusement tax, being, by nature, a
local tax. The fallo of the questioned judgment reads:
WHEREFORE, in view of all the foregoing, Judgment is hereby
rendered in favor of petitioner, as follows:
(1) Declaring Republic Act No. 9167 as invalid and unconstitutional;
(2) The obligation to remit amusement taxes for the graded films to
respondent is ordered extinguished;
(3) Directing respondent to refund all the amounts paid by petitioner,
by way of amusement tax, plus the legal rate of interest thereof, until
the whole amount is paid in full.
Notify parties and counsels of this order.
SO ORDERED.
The Issue
Undeterred by two defeats, petitioner has come directly to this Court,
presenting the singular issue: whether or not the RTC (Branches 5 and
14) gravely erred in declaring Secs. 13 and 14 of RA 9167 invalid for
being unconstitutional.
Anent Sec. 13,12 FDCP concedes that the amusement taxes assessed in
RA 9167 are to be given to the producers of graded films who are
private persons. Nevertheless, according to FDCP, this particular tax
arrangement is not a violation of the rule on the use of public funds for
RA 9167 was enacted for a public purpose, that is, the promotion and
support of the "development and growth of the local film industry as a
medium for the upliftment of aesthetic, cultural, and social values for
the better understanding and appreciation of the Filipino identity" as
well as the "encouragement of the production of quality films that will
promote the growth and development' of the local film
industry."13 Moreover, FDCP suggests that "even if the resultant effect
would be a certain loss of revenue, [LGUs] do not feel deprived nor
bitter for they realize that the benefits for the film industry, the
fortification of our values system, and the cultural boost for the nation
as a whole, far outweigh the pecuniary cost they would shoulder by
backing this law."14 Finally, in support of its stance, FDCP invites
attention to the following words of former Associate Justice Isagani A.
Cruz: "[t]he mere fact that the tax will be directly enjoyed by a private
individual does not make it invalid so long as some link to the public
welfare is established."15
As regards Sec. 1416 of RA 9167, FDCP is of the position that Sec. 5,
Article X of the Constitution does not change the doctrine that
municipal corporations only possess delegated, not inherent, powers of
taxation and that the power to tax is still primarily vested in the
Congress. Thus, wielding its power to impose limitations on this
delegated power, Congress further restricted the LGU's power to
impose amusement taxes via Secs. 13 and 14 of RA 9167-an express
and real intention of Congress to further contain the LGU's delegated
taxing power. It, therefore, cannot be construed as an undue limitation
since it is well within the power of Congress to make such restriction.
Furthermore, the LGC is a mere statute which Congress can amend,
which it in fact did when it enacted RA 916417 and, later, the
questioned law, RA 9167.18
This, according to FDCP, evinces the overriding intent of Congress to
remove from the LGU' s delegated taxing power all revenues from
amusement taxes on grade "A" or "B" films which would otherwise
accrue to the cities and municipalities in Metropolitan Manila and
highly urbanized and independent component cities in the Philippines
pursuant to Secs. 140 and 151 of the LGC.
In fine, it is petitioner's posture that the inclusion in RA 9167 of the
questioned provisions was a valid exercise of the legislature's power to
amend laws and an assertion of its constitutional authority to set
limitations on the LGU' s authority to tax.
The Court's Ruling
We find no reason to disturb the assailed rulings.
Local fiscal autonomy and the constitutionally-delegated power to tax
The power of taxation, being an essential and inherent attribute of
sovereignty, belongs, as a matter of right, to every independent
government, and needs no express conferment by the people before it
can be exercised. It is purely legislative and, thus, cannot be
delegated to the executive and judicial branches of government
without running afoul to the theory of separation of powers. It,
however, can be delegated to municipal corporations, consistent with
the principle that legislative powers may be delegated to local
governments in respect of matters of local concern.19 The authority of
provinces, cities, and municipalities to create their own sources of
revenue and to levy taxes, therefore, is not inherent and may be
exercised only to the extent that such power might be delegated to
them either by the basic law or by statute.20 Under the regime of the
1935 Constitution, there was no constitutional provision on the
delegation of the power to tax to municipal corporations. They only
derived such under a limited statutory authority, outside of which, it
was deemed withheld.21 Local governments, thus, had very restricted
taxing powers which they derive from numerous tax laws. This highly-
centralized government structure was later seen to have arrested the
growth and efficient operations of LG Us, paving the way for the
adoption of a more decentralized system which granted LGUs local
autonomy, both administrative and fiscal autonomy.22
Material to the case at bar is the concept and scope of local fiscal
autonomy. In Pimentel v. Aguirre,23 fiscal autonomy was defined as
"the power [of LGUs] to create their own sources of revenue in
addition to their equitable share in the national taxes released by the
national government, as well as the power to allocate their resources
in accordance with their own priorities. It extends to the preparation of
their budgets, and local officials in tum have to work within the
constraints thereof."
With the adoption of the 1973 Constitution,24 and later the 1987
Constitution, municipal corporations were granted fiscal autonomy via
a general delegation of the power to tax.25 Section 5, Article XI of the
1973 Constitution gave LGUs the "power to create its own sources of
revenue and to levy taxes, subject to such limitations as may be
provided by law.'' This authority was further strengthened in the 1987
Constitution, through the inclusion in Section 5, Article X thereof of the
condition that " [s]uch taxes, fees, and charges shall accrue
exclusively to local governments."26
Accordingly, under the present Constitution, where there is neither a
grant nor a prohibition by statute, the tax power of municipal
corporations must be deemed to exist although Congress may provide
statutory limitations and guidelines.27 The basic rationale for the
current rule on local fiscal autonomy is the strengthening of LGUs and
the safeguarding of their viability and self-sufficiency through a direct
grant of general and broad tax powers. Nevertheless, the fundamental
law did not intend the delegation to be absolute and unconditional. The
legislature must still see to it that (a) the taxpayer will not be over-
burdened or saddled with multiple and unreasonable impositions; (b)
each LGU will have its fair share of available resources; ( c) the
resources of the national government will not be unduly disturbed; and
( d) local taxation will be fair, uniform, and just.28
In conformity to the dictate of the fundamental law for the legislature
to "enact a local government code which shall provide for a more
responsive and accountable local government structure instituted
through a system of decentralization,"29 consistent with the basic
policy of local autonomy, Congress enacted the LGC, Book II of which
governs local taxation and fiscal matters and sets forth the guidelines
and limitations for the exercise of this power. In Pelizloy Realty
Corporation v. The Province of Benguet,30 the Court alluded to the
fundamental principles governing the taxing powers of LGUs as laid
out in Section 130 of the LGC, to wit:
1. Taxation shall be uniform in each LGU.
2. Taxes, fees, charges and other impositions shall:
a. be equitable and based as far as practicable on the taxpayer's
ability to pay;
b. be levied and collected only for public purposes;
c. not be unjust, excessive, oppressive, or confiscatory;
d. not be contrary to law, public policy, national economic policy, or in
the restraint of trade.
3. The collection of local taxes, fees, charges and other impositions
shall in no case be let to any private person.
4. The revenue collected pursuant to the provisions of the LGC shall
inure solely to the benefit of, and be subject to the disposition by, the
LGU levying the tax, fee, charge or other imposition unless otherwise
specifically provided by the LGC.
5. Each LGU shall, as far as practicable, evolve a progressive system
of taxation.
It is in the application of the adverted fourth rule, that is-all revenue
collected pursuant to the provisions of the LGC shall inure solely to the
benefit of, and be subject to the disposition by, the LGU levying the
tax, fee, charge or other imposition unless otherwise specifically
provided by the LGC-upon which the present controversy grew.
RA 9167 violates local fiscal autonomy
It is beyond cavil that the City of Cebu had the authority to issue its
City Ordinance No. LXIX and impose an amusement tax on cinemas
pursuant to Sec. 140 in relation to Sec. 151 of the LGC. Sec. 140
states, among other things, that a "province may levy an amusement
tax to be collected from the proprietors, lessees, or operators of
theaters, cinemas, concert halls, circuses, boxing stadia, and other
places of amusement at a rate of not more than thirty percent (30%)
of the gross receipts from admission fees." By operation of said Sec.
151,31 extending to them the authority of provinces and municipalities
to levy certain taxes, fees, and charges, cities, such as respondent city
government, may therefore validly levy amusement taxes subject to
the parameters set forth under the law. Based on this authority, the
City of Cebu passed, in 1993, its Revised Omnibus Tax
Ordinance,32 Chapter XI, Secs. 42 and 43 of which reads:
CHAPTER XI - Amusement Tax
Section 42. Rate of Tax. - There shall be paid to the Office of the City
Treasurer by the proprietors, lessees, or operators of theaters,
cinemas, concert halls, circuses, boxing stadia and other places of
amusement, an amusement tax at the rate of thirty percent (30%) of
the gross receipts from admission fees.33
Section 43. Manner of Payment. - In the case of theaters or cinemas,
the tax shall first be deducted and withheld by their proprietors,
lessees, or operators and paid to the city treasurer before the gross
receipts are divided between said proprietor, lessees, operators, and
the distributors of the cinematographic films.
Then, after almost a decade of cities reaping benefits from this
imposition, Congress, through RA 9167, amending Section 140 of the
LGC,34 among others, transferred this income from the cities and
municipalities in Metropolitan Manila and highly urbanized and
independent component cities, such as respondent City of Cebu, to
petitioner FDCP, which proceeds will ultimately be rewarded to the
producers of graded films. We reproduce anew Secs. 13 and 14 of RA
9167, thus:
Section 13. Privileges of Graded Films. - Films which have obtained an
"A" or "B" grading from the Council pursuant to Sections 11 and 12 of
this Act shall be entitled to the following privileges: a. Amusement tax
reward. - A grade "A" or "B" film shall entitle its producer to an
incentive equivalent to the amusement tax imposed and collected on
the graded films by cities and municipalities in Metro Manila and other
highly urbanized and independent component cities in the Philippines
pursuant to Sections 140 to 151 of Republic Act No. 7160 at the
following rates:
1. For grade "A" films - 100% of the amusement tax collected on such
film; and
2. For grade "B" films - 65% of the amusement tax collected on such
films. The remaining thirty-five (35%) shall accrue to the funds of the
Council.
Section 14. Amusement Tax Deduction and Remittance. -All revenue
from the amusement tax on the graded film which may otherwise
accrue to the cities and municipalities in Metropolitan Manila and
highly urbanized and independent component cities in the Philippines
pursuant to Section 140 of Republic Act. No. 7160 during the period
the graded film is exhibited, shall be deducted and withheld by the
proprietors, operators or lessees of theaters or cinemas and remitted
within thirty (30) days from the termination of the exhibition to the
Council which shall reward the corresponding amusement tax to the
producers of the graded film within fifteen (15) days from receipt
thereof.
Proprietors, operators and lessees of theaters or cinemas who fail to
remit the amusement tax proceeds within the prescribed period shall
be liable to a surcharge equivalent to five percent (5%) of the amount
due for each month of delinquency which shall be paid to the Council.
Considering the amendment, the present rule is that ALL amusement
taxes levied by covered cities and municipalities shall be 2iven by
proprietors, operators or lessees of theatres and cinemas to FDCP,
which shall then reward said amount to the producers of graded films
in this wise:
1. For grade "A" films, ALL amusement taxes collected by ALL covered
LGUs on said films shall be given to the producer thereof. The LGU,
therefore, is entitled to NOTHING from its own imposition.
2. For grade "B" films, SIXTY FIVE PERCENT (65%) of ALL amusement
taxes derived by ALL covered LGUs on said film shall be given to the
producer thereof. In this case, however, the LGU is still NOT entitled to
any portion of the imposition, in view of Sec. 16 of RA 9167 which
provides that the remaining 35% may be expended for the Council's
operational expenses. Thus: Section 16. Funding. - The Executive
Secretary shall immediately include in the Office of the President's
program the implementation of this Act, the funding of which shall be
included in the annual General Appropriations Act.
To augment the operational expenses of the Council, the Council may:
a. Utilize the remaining thirty-five (35%) percent of the amusement
tax collected during the period of grade "B" film is exhibited, as
provided under Sections 13 and 14 hereof x x x.
For petitioner, the amendment is a valid legislative manifestation of
the intention to remove from the grasp of the taxing power of the
covered LGUs all revenues from amusement taxes on grade "A" or "B"
films which would otherwise accrue to them. An evaluation of the
provisions in question, however, compels Us to disagree.
RA 9167, Sec. 14 states:
Section 14. Amusement Tax Deduction and Remittance. - All revenue
from the amusement tax on the graded film which may otherwise
accrue to the cities and municipalities in Metropolitan Manila and
highly urbanized and independent component cities in the Philippines
pursuant to Section 140 of Republic Act. No. 7160 during the period
the graded film is exhibited, shall be deducted and withheld by the
proprietors, operators or lessees of theaters or cinemas and remitted
within thirty (30) days from the termination of the exhibition to the
Council which shall reward the corresponding amusement tax to the
producers of the graded film within fifteen (15) days from receipt
thereof.
A reading of the challenged provision reveals that the power to impose
amusement taxes was NOT removed from the covered LGUs, unlike
what Congress did for the taxes enumerated in Sec. 133, Article X of
the LGC,35 which lays down the common limitations on the taxing
powers of LGUs. Thus:
Section 133. Common Limitations on the Taxing Powers of Local
Government Units. -Unless otherwise provided herein, the exercise of
the taxing powers of provinces, cities, municipalities, and barangays
shall not extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial
institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions
mortis causa, except as otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharfage on
wharves, tonnage dues, and all other kinds of customs fees, charges
and dues except wharfage on wharves constructed and maintained by
the local government unit concerned;
(e) Taxes, fees, and charges and other impositions upon goods carried
into or out of, or passing through, the territorial jurisdictions of local
government units in the guise of charges for wharfage, tolls for bridges
or otherwise, or other taxes, fees, or charges in any form whatsoever
upon such goods or merchandise;
(f) Taxes, fees or charges on agricultural and aquatic products when
sold by marginal farmers or fishermen;
(g) Taxes on business enterprises certified to by the Board of
Investments as pioneer or non-pioneer for a period of six (6) and four
(4) years, respectively from the date of registration;
(h) Excise taxes on articles enumerated under the national Internal
Revenue Code, as amended, and taxes, fees or charges on petroleum
products;
(i) Percentage or value-added tax (VAT) on sales, barters or
exchanges or similar transactions on goods or services except as
otherwise provided herein;
(j) Taxes on the gross receipts of transportation contractors and
persons engaged in the transportation of passengers or freight by hire
and common carriers by air, land or water, except as provided in this
Code;
(k) Taxes on premiums paid by way or reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of motor vehicles and for
the issuance of all kinds of licenses or permits for the driving thereof,
except tricycles;
(m) Taxes, fees, or other charges on Philippine products actually
exported, except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business
Enterprises and cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No.
6938) otherwise known as the "Cooperative Code of the Philippines"
respectively; and
(o) Taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities, and local government units. (emphasis
ours)
From the above, the difference between Sec. 133 and the questioned
amendment of Sec. 140 of the LGC by RA 9167 is readily revealed. In
Sec. · 133, what Congress did was to prohibit the levy by LGUs of the
enumerated taxes. For RA 9167, however, the covered LGUs were
deprived of the income which they will otherwise be collecting should
they impose amusement taxes, or, in petitioner's own words, "Section
14 of [RA 9167] can be viewed as an express and real intention on the
part of Congress to remove from the LGU's delegated taxing power, all
revenues from the amusement taxes on graded films which would
otherwise accrue to [them] pursuant to Section 140 of the [LGC]."36
In other words, per RA 9167, covered LGUs still have the power to
levy amusement taxes, albeit at the end of the day, they will derive no
revenue therefrom. The same, however, cannot be said for FDCP and
the producers of graded films since the amounts thus levied by the
LGUs which should rightfully accrue to them, they being the taxing
authority-will be going to their coffers. As a matter of fact, it is only
through the exercise by the LGU of said power that the funds to be
used for the amusement tax reward can be raised. Without said
imposition, the producers of graded films will receive nothing from the
owners, proprietors and lessees of cinemas operating within the
territory of the covered LGU.
Taking the resulting scheme into consideration, it is apparent that
what Congress did in this instance was not to exclude the authority to
levy amusement taxes from the taxing power of the covered LGUs, but
to earmark, if not altogether confiscate, the income to be received by
the LGU from the taxpayers in favor of and for transmittal to FDCP,
instead of the taxing authority. This, to Our mind, is in clear
contravention of the constitutional command that taxes levied by LGUs
shall accrue exclusively to said LGU and is repugnant to the power of
LGUs to apportion their resources in line with their priorities.
It is a basic precept that the inherent legislative powers of Congress,
broad as they may be, are limited and confined within the four walls of
the Constitution.37 Accordingly, whenever the legislature exercises its
power to enact, amend, and repeal laws, it should do so without going
beyond the parameters wrought by the organic law.
In the case at bar, through the application and enforcement of Sec. 14
of RA 9167, the income from the amusement taxes levied by the
covered LGUs did not and will under no circumstance accrue to them,
not even partially, despite being the taxing authority therefor.
Congress, therefore, clearly overstepped its plenary legislative power,
the amendment being violative of the fundamental law's guarantee on
local autonomy, as echoed in Sec. 130(d) of the LGC, thus: Section
130. Fundamental Principles. - The following fundamental principles
shall govern the exercise of the taxing and other revenue-raising
powers of local government units:
xxxx
(d) The revenue collected pursuant to the provisions of this Code shall
inure solely to the benefit of, and be subject to the disposition by, the
local government unit levying the tax, fee, charge or other imposition
unless otherwise specifically provided herein x x x.
Moreover, in Pimentel,38 the Court elucidated that local fiscal autonomy
includes the power of LGUs to allocate their resources in accordance
with their own priorities. By earmarking the income on amusement
taxes imposed by the LGUs in favor of FDCP and the producers of
graded films, the legislature appropriated and distributed the LGUs'
funds-as though it were legally within its control-under the guise of
setting a limitation on the LGUs' exercise of their delegated taxing
power. This, undoubtedly, is a usurpation of the latter's exclusive
prerogative to apportion their funds, an impermissible intrusion into
the LGUs' constitutionally-protected domain which puts to naught the
guarantee of fiscal autonomy to municipal corporations enshrined in
our basic law.
Grant of amusement tax reward incentive:
not a tax exemption
It was argued that subject Sec. 13 is a grant by Congress of an
exemption from amusement taxes in favor of producers of graded
films. Without question, this Court has previously upheld the power of
Congress to grant exemptions over the power of LGUs to impose
taxes.39 This amusement tax reward, however, is not, as the lower
court posited, a tax exemption. Exempting a person or entity from tax
is to relieve or to excuse that person or entity from the burden of the
imposition. Here, however, it cannot be said that an exemption from
amusement taxes was granted by Congress to the producers of graded
films. Take note that the burden of paying the amusement tax in
question is on the proprietors, lessors, and operators of the theaters
and cinemas that showed the graded films. Thus, per City Ordinance
No. LXIX: CHAPTER XI - Amusement Tax
Section 42. Rate of Tax. - There shall be paid to the Office of the City
Treasurer by the proprietors, lessees, or operators of theaters,
cinemas, concert halls,, circuses, boxing stadia and other places of
amusement, an amusement tax at the rate of thirty percent (30%) of
the gross receipts from admission fees.
Section 43. Manner of Payment. - In the case of theaters or cinemas,
the tax shall first be deducted and withheld by their proprietors,
lessees, or operators and paid to the city treasurer before the gross
receipts are divided between said proprietor, lessees, operators, and
the distributors of the cinematographic films.
Similarly, the LGC provides as follows:
Section 140. Amusement Tax. –
(a) The province may levy an amusement tax to be collected from the
proprietors, lessees, or operators of theaters, cinemas, concert halls,
circuses, boxing stadia, and other places of amusement at a rate of
not more than thirty percent (30%) of the gross receipts from
admission fees.
(b) In the case of theaters or cinemas, the tax shall first be deducted
and withheld by their proprietors, lessees, or operators and paid to the
provincial treasurer before the gross receipts are divided between said
proprietors, lessees, or operators and the distributors of the
cinematographic films.
Simply put, both the burden and incidence of the amusement tax are
borne by the proprietors, lessors, and operators, not by the producers
of the graded films. The transfer of the amount to the film producers is
actually a monetary reward given to them for having produced a
graded film, the funding for which was taken by the national
government from the coffers of the covered LGUs. Without a doubt,
this is not an exemption from payment of tax.
Declaration by the RTC, Branch 5 of the
entire RA 9167 as unconstitutional
Noticeably, the RTC, Branch 5, in its September 25, 2012 Decision in
Colon Heritage v. FDCP, ruled against the constitutionality of the entire
law, not just the assailed Sec. 14. The fallo of the judgment reads:
WHEREFORE, in view of all the foregoing, Judgment is hereby
rendered in favor of petitioner, as follows:
(1) Declaring Republic Act No. 9167 as invalid and unconstitutional;
(2) The obligation to remit amusement taxes for the graded films to
respondent is ordered extinguished;
(3) Directing respondent to refund all the amounts paid by petitioner,
by way of amusement tax, plus the legal rate of interest thereof, until
the whole amount is paid in full.
In this regard, it is well to emphasize that if it appears that the rest of
the law is free from the taint of unconstitutionality, then it should
remain in force and effect if said law contains a separability clause. A
separability clause is a legislative expression of intent that the nullity
of one provision shall not invalidate the other provisions of the act.
Such a clause is not, however, controlling and the courts, in spite of it,
may invalidate the whole statute where what is left, after the void
part, is not complete and workable.40
In this case, not only does RA 9167 have a separability clause,
contained in Section 23 thereof which reads:
Section 23. Separability Clause. -If, for any reason, any provision of
this Act, or any part thereof, is declared invalid or unconstitutional, all
other sections or provisions not affected thereby shall remain in force
and effect.
it is also true that the constitutionality of the entire law was not put m
question in any of the said cases.
Moreover, a perusal of RA 9167 easily reveals that even with the
removal of Secs. 13 and 14 of the law, the remaining provisions can
survive as they mandate other matters like a cinema evaluation
system, an incentive and reward system, and local and international
film festivals and activities that "will promote the growth and
development of the local film industry and promote its participation in
both domestic and foreign markets," and to "enhance the skills and
expertise of Filipino talents."41
Where a part of a statute is void as repugnant to the Constitution,
while another part is valid, the valid portion, if separable from the
invalid, may stand-and be enforced. The exception to this is when the
parts of a statute are so mutually dependent and connected, as
conditions, considerations, inducements, or compensations for each
other, as to warrant a belief that the legislature intended them as a
whole, in which case, the nullity of one part will vitiate the rest.42
Here, the constitutionality of the rest of the provisions of RA 9167 was
never put in question. Too, nowhere in the assailed judgment of the
RTC was it explicated why the entire law was being declared as
unconstitutional.
It is a basic tenet that courts cannot go beyond the issues in a
case,43 which the RTC, Branch 5 did when it declared RA 9167
unconstitutional. This being the case, and in view of the elementary
rule that every statute is presumed valid,44 the declaration by the R
TC, Branch 5 of the entirety of RA 9167 as unconstitutional, is
improper.
Amounts paid by Colon Heritage
need not be returned
Having ruled that the questioned provisions are unconstitutional, the
RTC, Branch 5, in Colon Heritage v. FDCP, ordered the return of all
amounts paid by respondent Colon Heritage to FDCP by way of
amusement tax. Thus:
WHEREFORE, in view of all the foregoing, Judgment is hereby
rendered in favor of petitioner, as follows:
(1) Declaring Republic Act No. 9167 as invalid and unconstitutional;
(2) The obligation to remit amusement taxes for the graded films to
respondent is ordered extinguished;
(3) Directing respondent to refund all the amounts paid by petitioner,
by way of amusement tax, plus the legal rate of interest thereof, until
the whole amount is paid in full.
As regards the refund, the Court cannot subscribe to this position.
It is a well-settled rule that an unconstitutional act is not a law; it .
confers no rights; it imposes no duties; it affords no protection; it
creates no office; it is inoperative as if it has not been passed at all.
Applying this principle, the logical conclusion would be to order the
return of all the amounts remitted to FDCP and given to the producers
of graded films, by all of the covered cities, which actually amounts to
hundreds of millions, if not billions. In fact, just for Cebu City, the
aggregate deficiency claimed by FDCP is ONE HUNDRED FIFTY NINE
MILLION THREE HUNDRED SEVENTY SEVEN THOUSAND NINE
HUNDRED EIGHTY-EIGHT PESOS AND FIFTY FOUR CENTAVOS
(₱159,377,988.54). Again, this amount represents the unpaid amounts
to FDCP by eight cinema operators or proprietors in only one covered
city.
An exception to the above rule, however, is the doctrine of operative
fact, which applies as a matter of equity and fair play. This doctrine
nullifies the effects of an unconstitutional law or an executive act by
recognizing that the existence of a statute prior to a determination of
unconstitutionality is an operative fact and may have consequences
that cannot always be ignored. It applies when a declaration of
unconstitutionality will impose an undue burden on those who have
relied on the invalid law.45
In Hacienda Luisita v. PARC, the Court elucidated the meaning and
scope of the operative fact doctrine, viz:
The "operative fact" doctrine is embodied in De Agbayani v. Court of
Appeals, wherein it is stated that a legislative or executive act, prior to
its being declared as unconstitutional by the courts, is valid and must
be complied with, thus:
x x x           x x x          x x x
This doctrine was reiterated in the more recent case of City of Makati
v. Civil Service Commission, wherein we ruled that:
Moreover, we certainly cannot nullify the City Government's order of
suspension, as we have no reason to do so, much less retroactively
apply such nullification to deprive private respondent of a compelling
and valid reason for not filing the leave application. For as we have
held, a void act though in law a mere scrap of paper nonetheless
confers legitimacy upon past acts or omissions done in reliance
thereof. Consequently, the existence of a statute or executive order
prior to its being adjudged void is an operative fact to which legal
consequences are attached. It would indeed be ghastly unfair to
prevent private respondent from relying upon the order of suspension
in lieu of a formal leave application.
The applicability of the operative fact doctrine to executive acts was
further explicated by this Court in Rieta v. People, thus:
Petitioner contends that his arrest by virtue of Arrest . Search and
Seizure Order (ASSO) No. 4754 was invalid, as the law upon which it
was predicated-General Order No. 60, issued by then President
Ferdinand E. Marcos - was subsequently declared by the Court, in
Tanada v. Tuvera, 33 to have no force and effect. Thus, he asserts,
any evidence obtained pursuant thereto is inadmissible in evidence.
We do not agree. In Tanada, the Court addressed the possible effects
of its declaration of the invalidity of various presidential
issuances.1a\^/phi1 Discussing therein how such a declaration might
affect acts done on a presumption of their validity, the Court said:
" ... In similar situations in the past this Court had taken the pragmatic
and realistic course set forth in Chicot County Drainage District vs.
Baxter Bank to wit:
'The courts below have proceeded on the theory that the Act of
Congress, having been found to be unconstitutional, was not a law;
that it was inoperative, conferring no rights and imposing no duties,
and hence affording no basis for the challenged decree. . . . It is quite
clear, however, that such broad statements as to the effect of a
determination of unconstitutionality must be taken with qualifications.
The actual existence of a statute, prior to [the determination of its
invalidity], is an operative fact and may have consequences which
cannot justly be ignored. The past cannot always be erased by a new
judicial declaration. The effect of the subsequent ruling as to invalidity
may have to be considered in various aspects – with respect to
particular conduct, private and official. Questions of rights claimed to
have become vested, of status, of prior determinations deemed to
have finality and acted upon accordingly, of public policy in the light of
the nature both of the statute and of its previous application, demand
examination. These questions are among the most difficult of those
which have engaged the attention of courts, state and federal, and it is
manifest from numerous decisions that an all-inclusive statement of a
principle of absolute retroactive invalidity cannot be justified.'
x x x           x x x          x x x
"Similarly, the implementation/ enforcement of presidential decrees
prior to their publication in the Official Gazette is 'an operative fact
which may have consequences which cannot be justly ignored. The
past cannot always be erased by a new judicial declaration ... that an
all-inclusive statement of a principle of absolute retroactive invalidity
cannot be justified."
The Chicot doctrine cited in Tanada advocates that, prior to the
nullification of a statute, there is an imperative necessity of taking into
account its actual existence as an operative fact negating the
acceptance of "a principle of absolute retroactive invalidity." Whatever
was done while the legislative or the executive act was in operation
should be duly recognized and presumed to be valid in all respects.
The ASSO that was issued in 1979 under General Order No. 60 - long
before our Deeision n Taiiada and the arrest of petitioner - is an
operative fact that can no longer be disturbed or simply ignored.
(citations omitted; emphasis in the original.)
Bearing in mind that PARC Resolution No. 89-12-2-an executive act-
was declared invalid in the instant case, the operative fact doctrine is
clearly applicable.46
Here, to order FDCP and the producers of graded films which may
have already received the amusement tax incentive reward pursuant
to the questioned provisions of RA 9167, to return the amounts
received to the respective taxing authorities would certainly impose a
heavy, and possibly crippling, financial burden upon them who merely,
and presumably in good faith, complied with the legislative fiat subject
of this case. For these reasons, We are of the considered view that the
application of the doctrine of operative facts in the case at bar is
proper so as not to penalize FDCP for having complied with the
legislative command in RA 9167, and the producers of graded films
who have already received their tax cut prior to this Decision for
having produced top-quality films.
With respect to the amounts retained by the cinema proprietors due to
petitioner FDCP, said proprietors are required under the law to remit
the same to petitioner. Obeisance to the rule of law must always be
protected and preserved at all times and the unjustified refusal of said
proprietors cannot be tolerated. The operative fact doctrine equally
applies to the non-remittance by said proprietors since the law
produced legal effects prior to the declaration of the nullity of Secs. 13
and 14 in these instant petitions. It can be surmised, however, that
the proprietors were at a loss whether or not to remit said amounts to
FDCP considering the position of the City of Cebu for them to remit the
amusement taxes directly to the local government. For this reason, the
proprietors shall not be liable for surcharges.
In view of the declaration of nullity of unconstitutionality of Secs. 13
and 14 of RA 9167, all amusement taxes remitted to petitioner FDCP
prior to the date of the finality of this decision shall remain legal and
valid under the operative fact doctrine. Amusement taxes due to
petitioner but unremitted up to the finality of this decision shall be
remitted to petitioner within thirty (30) days from date of finality.
Thereafter, amusement taxes previously covered by RA 9167 shall be
remitted to the local governments.
WHEREFORE, premises considered, the consolidated petitions are
hereby PARTIALLY GRANTED. The questioned Decision of the RTC,
Branch 5 of Cebu City in Civil Case No. CEB-35601 dated September
25, 2012 and that of the R TC, Branch 14, Cebu City in Civil Case No.
CEB-35529 dated October 24, 2012, collectively declaring Sections 13
and 14 of Republic Act No. 9167 invalid and unconstitutional, are
hereby AFFIRMED with MODIFICATION.
As modified, the decisions of the lower courts shall read:
1. Civil Case No. CEB-35601 entitled Colon Heritage Realty Corp. v.
Film Development Council of the Philippines:
WHEREFORE, in view of all the foregoing, Judgment is hereby
rendered in favor of Colon Heritage Realty Corp. and against the Film
Development council of the Philippines, as follows: 1. Declaring
Sections 13 and 14 of Republic Act No. 9167 otherwise known as an
Act Creating the Film Development Council of the Philippines, Defining
its Powers and Functions, Appropriating Funds therefor arid for other
purposes, as invalid and unconstitutional;
2. Declaring that the Film Development Council of the Philippines
cannot collect under Sections 13 and 14 of R.A. 9167 as of the finality
of the decision in G.R. Nos. 203754 and 204418;
3. Declaring that Colon Heritage Realty Corp. has the obligation to
remit the amusement taxes withheld on graded cinema films to FDCP
under Sections 13 and 14 of R.A. 9167 for taxes due prior to the
finality of this Decision, without surcharges;
4. Declaring that upon the finality of this decision, all amusement
taxes withheld and those which may be collected by Colon Heritage
Realty Corp. on graded films shown in its cinemas in Cebu City shall be
remitted to Cebu City pursuant to City Ordinance LXIX, Chapter XI,
Section 42.
2. Civil Case No. CEB-35529 entitled City of Cebu v. Film Development
Council of the Philippines:
WHEREFORE, in view of all the disquisitions, judgment is rendered in
favor of the City of Cebu against the Film development Council of the
Philippines, as follows:
1. Declaring Sections 13 and 14 of Republic Act No. 9167 otherwise
known as an Act Creating the Film Development Council of the
Philippines, Defining its Powers and Functions, Appropriating Funds
therefor and for other purposes, void and unconstitutional;
2. Declaring that the Film Development Council of the Philippines
cannot collect under Sections 13 and 14 of R.A. 9167 as of the finality
of this Decision;
3. Declaring that Intervenor SM Cinema Corporation has the obligation
to remit the amusement taxes, withheld on graded cinema films to
respondent FDCP under Sections 13 and 14 of R.A. 9167 for taxes due
prior to the finality of this Decision, without surcharges;
4. Declaring that after the finality of this Decision, all amusement
taxes withheld and those which may be collected by Intervenor SM on
graded films shown in SM Cinemas in Cebu City shall be remitted to
petitioner Cebu City pursuant to City Ordinance LXIX, Chapter XI,
Section 42.
As to the sum of PhP 76,836,807.08 remitted by the Intervenor SM to
petitioner City of Cebu, said amount shall be remitted by the City of
Cebu to petitioner FDCP within thirty (30) days from finality of this
decision in G.R. Nos. 203754 and 204418 without interests and
surcharges. Since Sections 13 and 14 of Republic Act No. 9167 were
declared void and unconstitutional, all remittances of amusement
taxes pursuant to said Sections 13 and 14 of said law prior to the date
of finality of this Decision shall remain valid and legal. Cinema
proprietors who failed to remit said amusement taxes to petitioner
FDCP prior to the date of finality of this Decision are obliged to remit
the same, without surcharges, to petitioner FDCP under the doctrine of
operative fact.
SO ORDERED.