Pascual vs Secretary of Public Works Case Digest

WENCESLAU PASCUAL, AS PROVINCIAL GOVERNOR VS. SECRETARY OF PUBLIC WORKS

FACTS: On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal,
instituted this action for declaratory relief, with injunction, upon the ground that Republic Act
No. 920, entitled "An Act Appropriating Funds for Public Works", approved on June 20, 1953, an
item of P85,000.00, "for the construction, reconstruction, repair, extension and improvement"
of "Pasig feeder road terminals"; that, at the time of the passage and approval of said Act, the
aforementioned feeder roads were "nothing but projected and planned subdivision roads, not
yet constructed, within the Antonio Subdivision situated at Pasig, Rizal" which projected feeder
roads "do not connect any government property or any important premises to the main
highway"; that the aforementioned Antonio Subdivision were private properties of respondent
Jose C. Zulueta, who, at the time of the passage and approval of said Act, was a member of the
Senate of the Philippines; that on May 29, 1953, respondent Zulueta, addressed a letter to the
Municipal Council of Pasig, Rizal, offering to donate said projected feeder roads to the
municipality of Pasig, Rizal; that, on June 13, 1953, the offer was accepted by the council,
subject to the condition "that the donor would submit a plan of the said roads and agree to
change the names of two of them"; that no deed of donation in favor of the municipality of
Pasig was, however, executed; that on July 10, 1953, respondent Zulueta wrote another letter
to said council, calling attention to the approval of Republic Act No. 920, and the sum of
P85,000.00 appropriated therein for the construction of the projected feeder roads in question;
that the municipal council of Pasig endorsed said letter of respondent Zulueta to the District
Engineer of Rizal, who, up to the present "has not made any endorsement thereon"; that
inasmuch as the projected feeder roads in question were private property at the time of the
passage and approval of Republic Act No. 920, the appropriation of P85,000.00 therein made,
for the construction, reconstruction, repair, extension and improvement of said projected
feeder roads, was "illegal and, therefore, void ab initio"; that said appropriation of P85,000.00
was made by Congress because its members were made to believe that the projected feeder
roads in question were "public roads and not private streets of a private subdivision'"; that, "in
order to give a semblance of legality, when there is absolutely none, to the aforementioned
appropriation", respondent Zulueta executed, on December 12, 1953, while he was a member
of the Senate of the Philippines, an alleged deed of donation—copy of which is annexed to the
petition—of the four (4) parcels of land constituting said projected feeder roads, in favor of the
Government of the Republic of the Philippines; that said alleged deed of donation was, on the
same date, accepted by the then Executive Secretary; that being subject to an onerous
condition, said donation partook of the nature of a contract; that, as such, said donation
violated the provision of our fundamental law prohibiting members of Congress from being
directly or indirectly financially interested in any contract with the Government, and, hence, is
unconstitutional, as well as null and void ab initio, for the construction of the projected feeder
roads in question with public funds would greatly enhance or increase the value of the
aforementioned subdivision of respondent Zulueta, "aside from relieving him from the burden
of constructing his subdivision streets or roads at his own expense"; that the construction of
said projected feeder roads was then being undertaken by the Bureau of Public Highways; and
that, unless restrained by the court, the respondents would continue to execute, comply with,
follow and implement the aforementioned illegal provision of law, "to the irreparable damage,
detriment and prejudice not only to the petitioner but to the Filipino nation."

ISSUE: Whether or not the statute is unconstitutional and void?

HELD: "It is a general rule that the legislature is without power to appropriate public revenue
for anything but a public purpose. * * * It is the essential character of the direct object of the
expenditure which must determine its validity as justifying a tax, and not the magnitude of the
interests to be affected nor the degree to which the general advantage of the community, and
thus the public welfare, may be ultimately benefited by their promotion. Incidental advantage
to the public or to the state, which results from the promotion of private interests and the
prosperity of private enterprises or business, does not justify their aid by the use of public
money." (25 R.L.C. pp. 398-400; Italics supplied.)

The rule is set forth in Corpus Juris Secundum in the following language:

"In accordance with the rule that the taxing power must be exercised for public purposes only,
money raised by taxation can be expended only for public purposes and not for the advantage
of private individuals."

Explaining the reason underlying said rule, Corpus Juris Secundum states:

"Generally, under the express or implied provisions of the constitution, public funds may be
used only for a public purpose. The right of the legislature to appropriate funds is correlative
with its right to tax, and, under constitutional provisions against taxation except for public
purposes and prohibiting the collection of a tax for one purpose and the devotion thereof to
another purpose, no appropriation of state funds can be made for other than a public purpose.
***

"The test of the constitutionality of a statute requiring the use of public funds is whether the
statute is designed to promote the public interests, as opposed to the furtherance of the
advantage of individuals, although each advantage to individuals might incidentally serve the
public. * * * ." (81 C.J.S. p. 1147; italics supplied.)

The validity of a statute depends upon the powers of Congress at the time of its passage or
approval, not upon events occurring, or acts performed, subsequently thereto. Referring to the
P85,000.00 appropriation for the projected feeder roads in question, the legality thereof
depended upon whether said roads were public or private property when the bill, which, later
on, became Republic Act No. 920, was passed by Congress, or, when said bill was approved by
the President and the disbursement of said sum became effective, or on June 20, 1953.
Inasmuch as the land on which the projected feeder roads were to be constructed belonged
then to respondent Zulueta, the result is that said appropriation sought a private purpose, and,
hence, was null and void.4 The donation to the Government, over five (5) months after the
approval and effectivity of said Act, made, according to the petition, for the purpose of giving a
"semblance of legality", or legalizing, the appropriation in question, did not cure its
aforementioned basic defect. Consequently, a judicial nullification of said donation need not
precede the declaration of unconstitutionality of said appropriation.

VICTORIAS MILLING CO. V PPA

153 SCRA 317; August 27, 1987

FACTS:

This is a petition for review on certiorari of the July 27, 1984 Decision of the Office of the
Presidential Assistant For Legal Affairs dismissing the appeal from the adverse ruling of the
Philippine Ports Authority on the sole ground that the same was filed beyond the reglementary
period.
On April 28, 1981, the Iloilo Port Manager of respondent Philippine Ports Authority (PPA for
short) wrote petitioner Victorias Milling Co., requiring it to have its tugboats and barges
undergo harbor formalities and pay entrance/clearance fees as well as berthing fees effective
May 1, 1981. PPA, likewise, requiring petitioner to secure a permit for cargo handling
operations at its Da-an Banua wharf and remit 10% of its gross income for said operations as
the government's share.
Victorias Milling Co. maintained that it is except from paying PPA any fee or charge because: 1.
The wharf and its facilities are built and installed on it’s own land; 2. Repairs and maintenance
are solely paid by it; 3. Maintenance and dredging of the channel are done by the Company
personnel; 4. At not time has the government paid any centavo for such activities.

ISSUE: WON the Victorias Milling Co. claim of exception for PPA fees is meritorious.

HELD: No, the petitioners claim that there is no basis for the PPA to assess and impose the dues
and charge is devoid of merit.
As correctly stated by the Solicitor General, the fees and charges PPA collects are not for the
use of the wharf that petitioner owns but for the privilege of navigating in public waters, of
entering and leaving public harbours and berthing on public streams or waters.
As to the requirement to remit 10% of the handling charges, Section 6B-(ix) of the Presidential
Decree No. 857 authorized the PPA "To levy dues, rates, or charges for the use of the premises,
works, appliances, facilities, or for services provided by or belonging to the Authority, or any
organization concerned with port operations." This 10% government share of earnings of
arrastre and stevedoring operators is in the nature of contractual compensation to which a
person desiring to operate arrastre service must agree as a condition to the grant of the permit
to operate.
LUZON STEVEDORING CORPORATION vs. COURT OF TAX APPEALS and the COMMISSIONER
OF INTERNAL REVENUE GR No. L-30232 July 29, 1988

FACTS:

Petitioner-appellant Luzon Stevadoring Corporation (LSC), in 1961 and 1962, for the repair and
maintenance of its tugboats, imported various engine parts and other equipment for which it
paid, under protest, the assessed compensating tax. Unable to secure a tax refund from the CIR,
on January 2, 1964, it filed a Petition for Review with the CTA, praying among others, that it be
granted the refund of the amount of P33,442.13.

Petitioner contends that tugboats are embraced and included in the term cargo vessel under
the tax exemption provisions of Section 190 of the Revenue Code, as amended by Republic Act.
No. 3176. He argues that in legal contemplation, the tugboat and a barge loaded with cargoes
with the former towing the latter for loading and unloading of a vessel in part, constitute a
single vessel. Accordingly, it concludes that the engines, spare parts and equipment imported
by it and used in the repair and maintenance of its tugboats are exempt from compensating
tax.

The CTA, however, in a Decision dated October 21, 1969 denied the various claims for tax
refund. Its Motion for Reconsideration was also denied.

ISSUES:

Whether or not petitioner’s tugboats can be interpreted to be included in the term “cargo
vessels” for purposes of the tax exemption provided for in Section 190 of the National Internal
Revenue Code, as amended by Republic Act No. 3176.

HELD:

Petition without merit. Section 190 of NIRC provides that the tax imposed in this section shall
not apply to articles to be used by the importer himself in the manufacture or preparation of
articles subject to specific tax or those for consignment abroad and are to form part thereof or
to articles to be used by the importer himself as passenger and/or cargo vessel, whether
coastwise or oceangoing, including engines and spare parts of said vessel.

This Court has laid down the rule that “as the power of taxation is a high prerogative of
sovereignty, the relinquishment is never presumed and any reduction or dimunition thereof
with respect to its mode or its rate, must be strictly construed, and the same must be coached
in clear and unmistakable terms in order that it may be applied. More specifically stated, the
general rule is that any claim for exemption from the tax statute should be strictly construed
against the taxpayer.
As correctly analyzed by the Court of Tax Appeals, in order that the importations in question
may be declared exempt from the compensating tax, it is indispensable that the requirements
of the amendatory law be complied with, namely: (1) the engines and spare parts must be used
by the importer himself as a passenger and/or cargo, vessel; and (2) the said passenger and/or
cargo vessel must be used in coastwise or oceangoing navigation.

As pointed out by the CTA, the amendatory provisions of RA 3176 limit tax exemption from the
compensating tax to imported items to be used by the importer himself as operator of
passenger and/or cargo vessel.

As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as follows:

A tugboat is a strongly built, powerful steam or power vessel, used for towing and, now, also
used for attendance on vessel. (Webster New International Dictionary, 2nd Ed.)

A tugboat is a diesel or steam power vessel designed primarily for moving large ships to and
from piers for towing barges and lighters in harbors, rivers and canals. (Encyclopedia
International Grolier, Vol. 18, p. 256).

A tug is a steam vessel built for towing, synonymous with tugboat. (Bouvier’s Law Dictionary.).

Under the foregoing definitions, petitioner’s tugboats clearly do not fall under the categories of
passenger and/or cargo vessels. Thus, it is a cardinal principle of statutory construction that
where a provision of law speaks categorically, the need for interpretation is obviated, no
plausible pretense being entertained to justify non-compliance. All that has to be done is to
apply it in every case that falls within its terms (Allied Brokerage Corp. v. Commissioner of
Customs, L-27641, 40 SCRA 555 [1971]; Quijano, etc. v. DBP, L-26419, 35 SCRA 270 [1970]).

And, even if construction and interpretation of the law is insisted upon, following another
fundamental rule that statutes are to be construed in the light of purposes to be achieved and
the evils sought to be remedied (People v. Purisima etc., et al., L-42050-66, 86 SCRA 544 [1978],
it will be noted that the legislature in amending Section 190 of the Tax Code by Republic Act
3176, as appearing in the records, intended to provide incentives and inducements to bolster
the shipping industry and not the business of stevedoring, as manifested in the sponsorship
speech of Senator Gil Puyat.

CIR v. CA, CTA, Ateneo DMU

GR No.115349; 18 April 1997

F A C T S:
Private respondent, Ateneo de Manila University, is a non-stock, non-profit educational
institution with auxiliary units and branches all over the country. The Institute of Philippine
Culture (IPC) is an auxiliary unit with no legal personality separate and distinct from private
respondent. The IPC is a Philippine unit engaged in social science studies of Philippine society
and culture. Occasionally, it accepts sponsorships for its research activities from international
organizations, private foundations and government agencies.

On 8 July 1983, private respondent received from CIR a demand letter dated 3 June 1983,
assessing private respondent the sum of P174,043.97 for alleged deficiency contractor’s tax,
and an assessment dated 27 June 1983 in the sum of P1,141,837 for alleged deficiency income
tax, both for the fiscal year ended 31 March 1978. Denying said tax liabilities, private
respondent sent petitioner a letter-protest and subsequently filed with the latter a
memorandum contesting the validity of the assessments.

After some time petitioner issued a final decision dated 3 August 1988 reducing the assessment
for deficiency contractor’s tax from P193,475.55 to P46,516.41, exclusive of surcharge and
interest.

The lower courts ruled in favor of respondent. Hence this petition.

Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de

Manila University "falls within the definition" of an independent contractor and "is not one of
those mentioned as excepted"; hence, it is properly a subject of the three percent contractor's
tax levied by the foregoing provision of law. Petitioner states that the "term 'independent
contractor' is not specifically defined so as to delimit the scope thereof, so much so that any
person who . . . renders physical and mental service for a fee, is now indubitably considered an
independent contractor liable to 3% contractor's tax."

I S S U E:

Whether or not private respondent falls under the purview of independent contractor pursuant
to Section 205 of the Tax Code and is subject to a 3% contractors tax.

H E LD: The petition is unmeritorious.

The term "independent contractors" include persons (juridical or natural) not enumerated
above (but not including individuals subject to the occupation tax under Section 12 of the Local
Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee
regardless of whether or not the performance of the service calls for the exercise or use of the
physical or mental faculties of such contractors or their employees.
Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption
without first applying the well-settled doctrine of strict interpretation in the imposition of taxes.
It is obviously both illogical and impractical to determine who are exempted without first
determining who are covered by the aforesaid provision. The Commissioner should have
determined first if private respondent was covered by Section 205, applying the rule of strict
interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo
to prove its exemption therefrom.

Interpretation of Tax Laws. The doctrine in the interpretation of tax laws is that “(a) statute will
not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. . . .
(A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the
general rule of requiring adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be extended by implication.”
In case of doubt, such statutes are to be construed most strongly against the government and
in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be
imposed beyond what statutes expressly and clearly import.

Ateneo’s Institute of Philippine Culture never sold its services for a fee to anyone or was ever
engaged in a business apart from and independently of the academic purposes of the
university. Funds received by the Ateneo de Manila University are technically not a fee. They
may however fall as gifts or donations which are “tax-exempt” as shown by private
respondent’s compliance with the requirement of Section 123 of the National Internal Revenue
Code providing for the exemption of such gifts to an educational institution.
Transaction of IPC not a contract of sale nor a contract for a piece of work. The transactions of
Ateneo’s Institute of Philippine Culture cannot be deemed either as a contract of sale or a
contract for a piece of work. By the contract of sale, one of the contracting parties obligates
himself to transfer the ownership of and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent. In the case of a contract for a piece of work,
“the contractor binds himself to execute a piece of work for the employer, in consideration of a
certain price or compensation. . . . If the contractor agrees to produce the work from materials
furnished by him, he shall deliver the thing produced to the employer and transfer dominion
over the thing. . . .” In the case at bench, it is clear from the evidence on record that there was
no sale either of objects or services because, as adverted to earlier, there was no transfer of
ownership over the research data obtained or the results of research projects undertaken by
the Institute of Philippine Culture.

Commissioner of Internal Revenue v Ayala Securities Corporation

Facts:

Ayala Securities Corp. (Ayala) failed to file returns of their accumulated surplus so Ayala was
charged with 25% surtax by the Commissioner of internal Revenue. The CTA (Court of Tax
Appeals) reversed the Commissioner’s decision and held that the assessment made against
Ayala was beyond the 5-yr prescriptive period as provided in section 331 of the National
Internal Revenue Code. Commissioner now files a motion for reconsideration of this decision.
Ayala invokes the defense of prescription against the right of the Commissioner to assess the
surtax.
Issue:

Whether or not the right to assess and collect the 25% surtax has prescribed after five years.

Held:
No. There is no such time limit on the right of the Commissioner to assess the 25% surtax since
there is no express statutory provision limiting such right or providing for its prescription.
Hence, the collection of surtax is imprescriptible. The underlying purpose of the surtax is to
avoid a situation where the corporation unduly retains its surplus earnings instead of declaring
and paying dividends to its shareholders. SC reverses the ruling of the CTA.

G.R. No. L-31092 February 27, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. JOHN GOTAMCO & SONS, INC. and
THE COURT OF TAX APPEALS, respondents.

Facts:

The World Health Organization (WHO), an international organization, entered into a Host
Agreement with the Republic of the Philippines on July 22, 1951. In the agreement, WHO’S
assets, income and other properties shall be exempt from all direct and indirect taxes. WHO
decided to construct a building to house its own offices, as well as the other United Nations
offices stationed in Manila. In inviting bids for the construction of the building, WHO informed
the bidders that the building to be constructed belonged to an international organization with
diplomatic status and thus exempt from the payment of all fees, licenses, and taxes, and that
therefore their bids “must take this into account and should not include items for such taxes,
licenses and other payments to Government agencies.” The construction contract was awarded
to respondent John Gotamco & Sons, Inc. on February 10, 1958.

On June 3, 1958, the Commissioner of Internal Revenue stated that “as the 3% contractor’s tax
is not a direct nor an indirect tax on the WHO, but a tax that is primarily due from the
contractor, the same is not covered by . . . the Host Agreement.”
On January 2, 1960, the WHO issued a certification that the bid of Gotamco should be
exempted from any taxes in connection with the construction of the WHO office building
because taxes or fees in connection with the construction of the building is an indirect tax to
WHO.

On January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand to
Gotamco demanding payment of P 16,970.40, representing the 3% contractor’s tax plus
surcharges on the gross receipts it received from the WHO in the construction of the latter’s
building.

Respondent Gotamco appealed the Commissioner’s decision to the Court of Tax Appeals, which
after trial rendered a decision, in favor of Gotamco and reversed the Commissioner’s decision.

ISSUES:

Whether or not the 3% contractor’s tax assessed on Gotamco is an “indirect tax”.

Whether respondent John Gotamco & Sons, Inc. should pay the 3% contractor’s tax under
Section 191 of the National Internal Revenue Code on the gross receipts it realized from the
construction of the World Health Organization office building in Manila.

RULING:

The Petitioner’s position is that the contractor’s tax “is in the nature of an excise tax which is a
charge imposed upon the performance of an act, the enjoyment of a privilege or the engaging
in an occupation. . . It is a tax due primarily and directly on the contractor, not on the owner of
the building. Since this tax has no bearing upon the WHO, it cannot be deemed an indirect
taxation upon it.”

The Court agreed with the Court of Tax Appeals in rejecting this contention of the petitioner.
The CA stated: The contractor’s tax is of course payable by the contractor but in the last
analysis it is the owner of the building that shoulders the burden of the tax because the same is
shifted by the contractor to the owner as a matter of self-preservation. Thus, it is an indirect
tax. And it is an indirect tax on the WHO because, although it is payable by the petitioner, the
latter can shift its burden on the WHO. In the last analysis it is the WHO that will pay the tax
indirectly through the contractor and it certainly cannot be said that ‘this tax has no bearing
upon the World Health Organization.

The Host Agreement, in specifically exempting the WHO from “indirect taxes,” contemplates
taxes which, although not imposed upon or paid by the Organization directly, form part of the
price paid or to be paid by it. The 3% contractor’s tax would be within this category and should
be viewed as a form of an “indirect tax” On the Organization, as the payment thereof or its
inclusion in the bid price would have meant an increase in the construction cost of the building.
Philex Mining Corporation vs. CIR, G.R. No. 125704 August 28, 1998

FACTS:
The Court of Tax Appeals ordered Philex to pay the amount of P110, 677,668.52 as
excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus
20% annual interest from August 6, 1994 until fully paid.
Philex refused to pay and argued that it had pending claims for VAT input credit/refund
for the taxes it paid for the years 1989-1991 in the amount of P119,977,037.02 plus interest
and therefore should be applied against the said excise tax liabilities in a manner of a set-off or
legal compensation.

ISSUE:
WON taxes could be the subject of a set-off or legal compensation?

RULING:
No. Taxes could not be the subject of a set-off or legal compensation for the simple
reason that the government and the taxpayer are not mutual creditors and debtors of each
other. Claims for taxes are neither debts nor contracts. A taxpayer cannot refuse to pay his
taxes when they fall due simply because he has a claim against the government that the
collection of the tax is contingent on the result of the lawsuit it filed against the government. In
the case at bar, the claims of Philex for VAT refund is still pending litigation. Moreover, taxes
are the lifeblood of the government and should be collected without unnecessary hindrance.

Citing Francia v. Intermediate Appellate Court, the SC categorically held that taxes
cannot be subject to set-off or compensation, thus:

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