Introduction to taxation

A. Taxation, taxes defined

Pepsi vs Municipality of Tanauan, 69 SCRA 460

PEPSI-COLA BOTTLING CO. OF THE PHILS., INC. vs. MUNICIPALITY OF TANAUAN69

SCRA 460 GR No. L-31156, February 27, 1976
"Legislative power to create political corporations for purposes of local self-government
carries with it the power to confer on such local governmental agencies the power to tax.

FACTS: Plaintiff-appellant Pepsi-Cola commenced a complaint with preliminary injunction to

declare Section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy Act,
unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances
Nos. 23 and 27 denominated as "municipal production tax" of the Municipality of Tanauan,
Leyte, null and void. Ordinance 23 levies and collects from soft drinks producers and
manufacturers a tax of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked,
and Ordinance 27 levies and collects on soft drinks produced or manufactured within the
territorial jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128
fluid ounces, U.S.) of volume capacity. Aside from the undue delegation of authority, appellant
contends that it allows double taxation, and that the subject ordinances are void for they
impose percentage or specific tax.

ISSUE: Are the contentions of the appellant tenable?

HELD: No. On the issue of undue delegation of taxing power, it is settled that the power of
taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to
every independent government, without being expressly conferred by the people.  It is a
power that is purely legislative and which the central legislative body cannot delegate either to
the executive or judicial department of the government without infringing upon the theory of
separation of powers. The exception, however, lies in the case of municipal corporations, to
which, said theory does not apply. Legislative powers may be delegated to local governments
in respect of matters of local concern. By necessary implication, the legislative power to
create political corporations for purposes of local self-government carries with it the power to
confer on such local governmental agencies the power to tax.
   Also, there is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes over which local taxation may not
be exercised. The reason is that the State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law,
so that double taxation becomes obnoxious only where the taxpayer is taxed twice for the
benefit of the same governmental entity or by the same jurisdiction for the same purpose, but
not in a case where one tax is imposed by the State and the other by the city or municipality.
   On the last issue raised, the ordinances do not partake of the nature of a percentage tax on
sales, or other taxes in any form based thereon. The tax is levied on the produce (whether
sold or not) and not on the sales. The volume capacity of the taxpayer's production of soft
drinks is considered solely for purposes of determining the tax rate on the products, but there
is not set ratio between the volume of sales and the amount of the tax.

Tio vs Videogram Regulatory Board GR No L-75697 18 June 1987

Facts: Petition assails the constitutionality of Presidential Decree No. 1987 entitled “An Act
Creating the Videogram Regulatory Board” with broad powers to regulate and supervise the
videogram industry (hereinafter briefly referred to as the BOARD). A month after the
promulgation of the abovementioned decree, Presidential Decree No. 1994 amended the
National Internal Revenue Code providing for an annual tax on   processed video-tape
cassette and a sales tax on blank video tapes.
Petitioner alleges that taxes are excessive and confiscatory, there is over-regulation of the
industry, undue delegation of authority and there is no legal or factual basis for the exercise of
Presidential decree.

Issue:  Whether or not Presidential Decree No. 1987 is unconstitutional?

Decision: NO. Presidential Decree No. 1987 is not unconstitutional.

Tax does not cease to be valid merely because it regulates, discourages, or even definitely
deters the activities taxed. The power to impose taxes is a sovereign right and it is inherent in
the power to tax that a state be free to select the subjects of taxation. The tax imposed by the
decree is not only a regulatory but also a revenue measure. The public purpose of a tax may
legally exist even if the motive which impelled the legislature to impose the tax was to favor
one industry over another. Decree of authority to the Board is not a delegation of the power to
legislate but merely a conferment of authority or discretion as to its execution, enforcement,
and implementation. Only congressional power or competence, not the wisdom of the action
taken, may be the basis for declaring a statute invalid.

-----Taxation; security against oppressive taxation –  it is true that The power to impose taxes
is one so unlimited in force and so searching in extent, that the courts scarcely venture to
declare that it is subject to any restrictions whatever, except such as rest in the discretion of
the authority which exercises it. In imposing a tax, the legislature acts upon its constituents.
This is, in general, a sufficient security against erroneous and oppressive taxation.

Taxation as a revenue and regulatory measure – The tax imposed by the DECREE is not only
a regulatory but also a revenue measure prompted by the realization that earnings of
videogram establishments of around P600 million per annum have not been subjected to tax,
thereby depriving the Government of an additional source of revenue. . . . The levy of the
30% tax is for a public purpose. It was imposed primarily to answer the need for
regulating the video industry, particularly because of the rampant film piracy, the
flagrant violation of intellectual property rights, and the proliferation of pornographic
video tapes. And while it was also an objective of the DECREE to protect the movie industry,
the tax remains a valid imposition.

Philippine Health Care Providers vs. CIR

Petitioner Philippine Health Care Providers, Inc. is a domestic corporation engaged in  value-added
providing the medical services enumerated below to individuals who enter into health care tax (VAT) is a
consumption tax p
agreements with it: laced on a product
– Preventive medical services such as periodic monitoring of health problems, family planning whenever value is
counseling, consultation and advices on diet, exercise and other healthy habits, and added at each
stage of the supply
immunization; chain, from
– Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, production to the
fecalysis, complete blood count, and the like and point of sale
– Curative medical services which pertain to the performing of other remedial and therapeutic
processes in the event of an injury or sickness on the part of the enrolled member. documentary
stamp tax (DST)
On January 27, 2000, respondent Commissioner of Internal Revenue (CIR) sent petitioner a is imposed upon
formal demand letter and the corresponding assessment notices demanding the payment of documents,
deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in instruments, loan
agreements and
the total amount of P224,702,641.18. papers, and upon
The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioner’s acceptances,
health care agreement with the members of its health care program pursuant to Section 185 assignments, sales
and transfers of
of the 1997 Tax Code the obligation,
Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did right or property
not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) incident thereto,
there shall be
seeking the cancellation of the deficiency VAT and DST assessments. levied, collected
CTA’s decision: Cancelled the DST assessment. Ordered the payment of VAT deficiency. and paid for,
CIR appealed the decision to the CA contending that petitioner’s health care agreement was
a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.
CA’s decision: The health care agreement was in the nature of a non-life insurance contract
subject to DST.
SC’s decision on Petition for Review: Denied on the ground that petitioner’s health care
agreement during the pertinent period was in the nature of non-life insurance which is a
contract of indemnity, citing Blue Cross Healthcare, Inc. v. Olivares and Philamcare Health
Systems, Inc. v. CA. It ruled that petitioner’s contention that it is a health maintenance
organization (HMO) and not an insurance company is irrelevant because contracts between
companies like petitioner and the beneficiaries under their plans are treated as insurance
contracts. Moreover, DST is not a tax on the business transacted but an excise on the
privilege, opportunity or facility offered at exchanges for the transaction of the business.
Petitioner filed a motion for reconsideration and supplemental motion for reconsideration.
ISSUES:
1. Whether or not petitioner as an HMO is engaged in an insurance business.
2. Whether or not petitioner is liable for the payment of DST on Health Care Agreement of
HMOS in accordance with Section 185.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) – Stamp tax on
fidelity bonds and other insurance policies. – On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or liability made or renewed by any
person, association or company or corporation transacting the business of accident, fidelity,
employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine, inland, and fire insurance), and all bonds,
undertakings, or recognizances, conditioned for the performance of the duties of any office or
position, for the doing or not doing of anything therein specified, and on all obligations
guaranteeing the validity or legality of any bond or other obligations issued by any province,
city, municipality, or other public body or organization, and on all obligations guaranteeing the
title to any real estate, or guaranteeing any mercantile credits, which may be made or
renewed by any such person, company or corporation, there shall be collected a documentary
stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of
the premium charged.
RULING:
1. No. Health Maintenance Organizations are not engaged in the insurance business. Under
RA 7875 (or “The National Health Insurance Act of 1995”), an HMO is an entity that provides,
offers or arranges for coverage of designated health services needed by plan members for a
fixed prepaid premium. To determine whether an HMO is an insurance business or not, one
test – principal object and purpose test – may be applied, that is to determine whether the
assumption of risk and indemnification of loss (which are elements of an insurance business)
are the principal object and purpose of the organization or whether they are merely incidental
to its business. If these are the principal objectives, the business is that of insurance. But if
they are merely incidental and service is the principal purpose, then the business is not
insurance. HMO’s principal object and purpose is service rather than indemnity.
Additionally, petitioner is not supervised by the Insurance Commission but by the Department
of Health.
2. No. Health care agreements are not subject to DST. From the language of Section 185, it is
evident that two requisites must concur before the DST can apply, namely: (1) the document
must be a policy of insurance or an obligation in the nature of indemnity and (2) the maker
should be transacting the business of accident, fidelity, employer’s liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine,
inland, and fire insurance).
NOTES:
Even if a contract contains all the elements of an insurance contract, if its primary purpose is
the rendering of service, it is not a contract of insurance.
Distinctions between a minute resolution and a decision
The constitutional requirement under the first paragraph of Section 14, Article VIII of the
Constitution that the facts and the law on which the judgment is based must be expressed
clearly and distinctly applies only to decisions, not to minute resolutions. A minute resolution
is signed only by the clerk of court by authority of the justices, unlike a decision. It does not
require the certification of the Chief Justice. Moreover, unlike decisions, minute resolutions
are not published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII
speaks of a decision. Indeed, as a rule, this Court lays down doctrines or principles of law
which constitute binding precedent in a decision duly signed by the members of the Court and
certified by the Chief Justice.
Related Jurisprudence:
In Blue Cross and Philamcare, the Court pronounced that a health care agreement is in the
nature of non-life insurance, which is primarily a contract of indemnity. However, those cases
did not involve the interpretation of a tax provision. Instead, they dealt with the liability of a
health service provider to a member under the terms of their health care agreement. Such
contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly
against the HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare
are applicable here.

CIR VS. SM PRIME HOLDINGS- VALUE ADDED TAX ON CINEMAS

FACTS:
In a number of CTA cases, the BIR sent SM Prime and First Asia a Preliminary Assessment
Notice (PAN) for VAT deficiency on cinema ticket sales for taxable year 2000 (SM). 1999
(First Asia), 2000 (First Asia), 2002 (First Asia) , and 2003 (First Asia).
---SM First Asia filed for protest but the BIR just denied them and sent them a Letter of
Demand subsequesntly.
--- All the PANs were subjected to a petition for reviews filed by SM and First Asia to the CTA.
The CTA First Division ruled that there should only be one business tax applicable to theater
and movie houses, the 30% amusement tax. Hence the CIR is wrong in collecting VAT from
the ticket sales.
---CIR En Banc affirmed the ruling of the CTA First Division

ISSUE:
Whether or not the gross receipts derived by operators or proprietors of  cinema/theater
houses from admission tickets are subject to VAT?

HELD:
NO. While (1) the enumeration under Section 108 on the VAT-taxable services is not
exhaustive and (2) the said list includes “the lease of motion picture films, films, tapes and
discs”, the said activity however is not the same as showing or exhibition of motion pictures or
films. Thus, since the showing or exhibition of motion pictures or films is not in the
enumeration, the CIR must show that it falls under the phrase “similar services”.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of
VAT on the gross receipts of cinema/theater operators or proprietors derived from admission
tickets. The removal of the prohibition (on the national government to tax certain activities)
under the Local Tax Code did not grant nor restore to the national government the power to
impose amusement tax on cinema/theater operators or proprietors. Neither did it expand the
coverage of VAT.

REPUBLIC OF THE PHILIPPINES et al. v. HONORABLE RAMON S. CAGUIOA et al. 536

SCRA 193 (2007), EN BANC

Congress enacted Republic Act (R.A) No. 7227 or the Bases Conversion and Development
Act of 1992 which created the Subic Special Economic and Freeport Zone (SBF) and the
Subic Bay Metropolitan Authority (SBMA). Section 12 of R.A No. 7227 of the law provides that
no taxes, local and national, shall be imposed within the Subic Special Economic Zone.
Pursuant to the law, Indigo Distribution Corporation, et al., which are all domestic corporations
doing business at the SBF, applied for and were granted Certificates of Registration and Tax
Exemption by the SBMA.

Congress subsequently passed R.A. No. 9334, which provides that all applicable taxes,
duties, charges, including excise taxes due thereon shall be applied to cigars and cigarettes,
distilled spirits, fermented liquors and wines brought directly into the duly chartered or
legislated freeports of the Subic Economic Freeport Zone. On the basis of Section 6 of R.A.
No. 9334, SBMA issued a Memorandum declaring that, all importations of cigars, cigarettes,
distilled spirits, fermented liquors and wines into the SBF, shall be treated as ordinary
importations subject to all applicable taxes, duties and charges, including excise taxes.

Upon its implementation, Indigo et al., sought for a reconsideration of the directives on the
imposition of duties and taxes, particularly excise taxes by the Collector of Customs and the
SBMA Administrator. Their request was subsequently denied prompting them to file with the
RTC of Olongapo City a special civil action for declaratory relief to have certain provisions of
R.A. No. 9334 declared as unconstitutional. They prayed for the issuance of a writ
of preliminary injunction and/or Temporary Restraining Order (TRO)
and preliminary mandatory injunction. The same was subsequently granted by Judge Ramon
Caguioa. The injunction bond was approved at One Million pesos (P1,000,000).

ISSUES: Whether or not public respondent judge committed grave abuse of discretion
amounting to lack or excess in jurisdiction in peremptorily and unjustly issuing the injunctive
writ in favor of private respondents despite the absence of the legal requisites for its issuance

HELD: One such case of grave abuse obtained in this case when Judge Caguioa issued his
Order of May 4, 2005 and the Writ of Preliminary Injunction on May 11, 2005 despite the
absence of a clear and unquestioned legal right of private respondents. In holding that the
presumption of constitutionality and validity of R.A. No. 9334 was overcome by private
respondents for the reasons public respondent cited in his May 4, 2005 Order, he disregarded
the fact that as a condition sine qua non to the issuance of a writ of preliminary injunction,
private respondents needed also to show a clear legal right that ought to be protected. That
requirement is not satisfied in this case. To stress, the possibility of irreparable damage
without proof of an actual existing right would not justify an injunctive relief.

Indeed, Sections 204 and 229 of the NIRC provide for the recovery of erroneously or illegally
collected taxes which would be the nature of the excise taxes paid by private respondents
should Section 6 of R.A. No. 9334 be declared unconstitutional or invalid.

The Court finds that public respondent had also ventured into the delicate area which courts
are cautioned from taking when deciding applications for the issuance of the writ
of preliminary injunction. Having ruled preliminarily against the prima facie validity of R.A. No.
9334, he assumed in effect the proposition that private respondents in their petition for
declaratory relief were duty bound to prove, thereby shifting to petitioners the burden of
proving that R.A. No. 9334 is not unconstitutional or invalid.

In the same vein, the Court finds Judge Caguioa to have overstepped his discretion when he
arbitrarily fixed the injunction bond of the SBF enterprises at only P1million. Rule 58, Section
4(b) provides that a bond is executed in favor of the party enjoined to answer for all damages
which it may sustain by reason of the injunction. The purpose of the injunction bond is to
protect the defendant against loss or damage by reason of the injunction in case the court
finally decides that the plaintiff was not entitled to it, and the bond is
usually conditioned accordingly.

Whether this Court must issue the writ of prohibition, suffice it to stress that being possessed
of the power to act on the petition for declaratory relief, public respondent can proceed to
determine the merits of the main case. Moreover, lacking the requisite proof of public
respondent‘s alleged partiality, this Court has no ground to prohibit him from proceeding with
the case for declaratory relief. For these reasons, prohibition does not lie.

COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS,

petitioners, vs. HON. APOLINARIO B. SANTOS, in his capacity as Presiding Judge of
the Regional Trial Court, et al, respondents. G.R. No. 119252. August 18, 1997

Facts:
Petitioner in this case, the Commissioner of Internal Revenue and the Commissioner of
Customs jointly seek the reversal of the Decision of herein public respondent, Hon. Apolinario
B. Santos, Presiding Judge of RTC Pasig City, declaring Section 150(a) of Executive Order
No. 273 inoperative and without force and effect insofar as petitioners are concerned.
This EO subjected jewelry to a 20% excise tax in addition to a 10% value-added tax under the
old law.

Private respondent Guild of Philippine Jewelers, Inc., is an association of Filipino jewelers

engaged in the manufacture of jewelries and allied undertakings, with private respondent
Antonio M. Marco is the President of the Guild.

Some of the members of the Guild of Philippine Jewelers were given a Mission Order not to
sell the jewelries and other articles displayed in their respective establishments until it can be
proven that the necessary taxes thereon have been paid. In response, Private Respondent
prayed that Regional Trial Court declare Sections 126, 127(a) and (b) and 150(a) of the
National Internal Revenue Code and Hdg. No. 71.01, 71.02, 71.03, and 71.04, Chapter 71 of
the Tariff and Customs Code of the Philippines unconstitutional and void, and that the
Commissioner of Internal Revenue and Customs be prevented or enjoined from issuing
mission orders and other orders of similar nature. It even submitted a position paper
purporting to be an exhaustive study of the tax rates on jewelry prevailing in other Asian
countries, in comparison to tax rates levied on the same in the Philippines.

Issue:
Can the Regional Trial Courts declare a law inoperative and without force and effect or
otherwise unconstitutional?

Held:
No. This is a matter on which the RTC is not competent to rule. As Cooley observed:
“Debatable questions are for the legislature to decide. The courts do not sit to resolve the
merits of conflicting issues.” In Angara vs. Electoral Commission, Justice Laurel made it clear
that “the judiciary does not pass upon questions of wisdom, justice or expediency of
legislation.” And fittingly so, for in the exercise of judicial power, we are allowed only “to settle
actual controversies involving rights which are legally demandable and enforceable,” and may
not annul an act of the political departments simply because we feel it is unwise or
impractical. This is not to say that Regional Trial Courts have no power whatsoever to declare
a law unconstitutional. In J.M. Tuason and Co. v. Court of Appeals, we said that “[p]lainly the
Constitution contemplates that the inferior courts should have jurisdiction in cases involving
constitutionality of any treaty or law, for it speaks of appellate review of final judgments of
inferior courts in cases where such constitutionality happens to be in issue.”

This authority of lower courts to decide questions of constitutionality in the first instance
was reaffirmed in Ynot v. Intermediate Appellate Court. But this authority does not extend
to deciding questions which pertain to legislative policy.
The trial court is not the proper forum for the ventilation of the issues raised by the private
respondents. The arguments they presented focus on the wisdom of the provisions of law
which they seek to nullify. Regional Trial Courts can only look into the validity of a
provision, that is , whether or not it has been passed according to the procedures laid
down by law, and thus cannot inquire as to the reasons for its
existence. Granting arguendothat the private respondents may have provided convincing
arguments why the jewelry industry in the Philippines should not be taxed as it is, it is to the
legislature that they must resort to for relief, since with the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects)
and situs(place) of taxation. This Court cannot freely delve into those matters which, by
constitutional fiat, rightly rest on legislative judgment.

As succinctly put in Lim vs. Pacquing: “Where a controversy may be settled on a platform

other than one involving constitutional adjudication, the court should exercise becoming
modesty and avoid the constitutional question.” As judges, we can only interpret and apply
the law and, despite our doubts about its wisdom, cannot repeal or amend it.

The respondents presented an exhaustive study on the tax rates on jewelry levied by
different Asian countries. This is meant to convince us that compared to other countries, the
tax rates imposed on said industry in the Philippines is oppressive and confiscatory. This
Court, however, cannot subscribe to the theory that the tax rates of other countries
should be used as a yardstick in determining what may be the proper subjects of
taxation in our own country. It should be pointed out that in imposing the
aforementioned taxes and duties, the State, acting through the legislative and
executive branches, is exercising its sovereign prerogative. It is inherent in the power
to tax that the State be free to select the subjects of taxation, and it has been
repeatedly held that “inequalities which result from a singling out of one particular
class for taxation, or exemption, infringe no constitutional limitation.”

B.Nature of the taxing power

ABAKADA GURO PARTY LIST VS EXECUTIVE SECRETARY

G.R. No. 168056     September 1, 2005 ABAKADA GURO PARTY LIST (Formerly
AASJAS) OFFICERS SAMSON S. ALCANTARA and ED VINCENT S. ALBANO,
Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE
SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and
HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR.,
Respondent.
  
 
Facts:
Petitioners ABAKADA GURO Party List challenged the constitutionality of R.A. No. 9337
particularly Sections 4, 5 and 6, amending Sections 106, 107 and 108, respectively, of the
National Internal Revenue Code (NIRC). These questioned provisions contain a
uniform proviso authorizing the President, upon recommendation of the Secretary of Finance,
to raise the VAT rate to 12%, effective January 1, 2006, after any of the following conditions
have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress
of its exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987
Philippine Constitution. They further argue that VAT is a tax levied on the sale or exchange of
goods and services and cannot be included within the purview of tariffs under the exemption
delegation since this refers to customs duties, tolls or tribute payable upon merchandise to
the government and usually imposed on imported/exported goods. They also said that the
President has powers to cause, influence or create the conditions provided by law to bring
about the conditions precedent. Moreover, they allege that no guiding standards are made by
law as to how the Secretary of Finance will make the recommendation. They claim,
nonetheless, that any recommendation of the Secretary of Finance can easily be brushed
aside by the President since the former is a mere alter ego of the latter, such that, ultimately,
it is the President who decides whether to impose the increased tax rate or not.
 
Issues:
Whether or not R.A. No. 9337 has violated the provisions in Article VI, Section 24, and Article
VI, Section 26 (2) of the Constitution.
Whether or not there was an undue delegation of legislative power in violation of Article VI
Sec 28 Par 1 and 2 of the Constitution.
Whether or not there was a violation of the due process and equal protection under Article III
Sec. 1 of the Constitution.
 
Discussions:
Basing from the ruling of Tolentino case, it is not the law, but the revenue bill which is
required by the Constitution to “originate exclusively” in the House of Representatives, but
Senate has the power not only to propose amendments, but also to propose its own version
even with respect to bills which are required by the Constitution to originate in the House. the
Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills
authorizing an increase of the public debt, private bills and bills of local application must come
from the House of Representatives on the theory that, elected as they are from the districts,
the members of the House can be expected to be more sensitive to the local needs and
problems. On the other hand, the senators, who are elected at large, are expected to
approach the same problems from the national perspective. Both views are thereby made to
bear on the enactment of such laws.
In testing whether a statute constitutes an undue delegation of legislative power or not, it is
usual to inquire whether the statute was complete in all its terms and provisions when it left
the hands of the legislature so that nothing was left to the judgment of any other appointee or
delegate of the legislature.
The equal protection clause under the Constitution means that “no person or class of persons
shall be deprived of the same protection of laws which is enjoyed by other persons or other
classes in the same place and in like circumstances.”
 
Rulings:
R.A. No. 9337 has not violated the provisions. The revenue bill exclusively originated in the
House of Representatives, the Senate was acting within its constitutional power to introduce
amendments to the House bill when it included provisions in Senate Bill No. 1950 amending
corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24
of the Constitution does not contain any prohibition or limitation on the extent of the
amendments that may be introduced by the Senate to the House revenue bill.
There is no undue delegation of legislative power but only of the discretion as to the
execution of a law. This is constitutionally permissible. Congress does not abdicate its
functions or unduly delegate power when it describes what job must be done, who must do it,
and what is the scope of his authority; in our complex economy that is frequently the only way
in which the legislative process can go forward.
Supreme Court held no decision on this matter. The power of the State to make
reasonable and natural classifications for the purposes of taxation has long been established.
Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the
amounts to be raised, the methods of assessment, valuation and collection, the State’s power
is entitled to presumption of validity. As a rule, the judiciary will not interfere with such power
absent a clear showing of unreasonableness, discrimination, or arbitrariness.

CIR vs. Fortune Tobacco Corporation Commissioner of Internal Revenue vs. Fortune

Tobacco CorporationG.R. Nos. 167274-75, July 21, 2008

FACTS:
Fortune Tobacco is a manufacturer and producer of some cigarette brands. Prior to January
1, 1997, its cigarette brands were subject to ad valorem tax but on January 1, 1997, R.A. No.
8240 took effect whereby a shift from the ad valorem tax (AVT) system to the specific tax
system was made and subjecting its cigarette brands to specific tax.
For the period covering January 1-31, 2000, Fortune Tobacco paid specific taxes on all
brands manufactured so it filed a claim for refund or tax credit of its overpaid excise tax for the
month of January 2000.
The Court of Tax Appeals (CTA) and the Court of Appeals, granted the tax refund or tax credit
representing specific taxes erroneously collected from its tobacco products. However, the
Commissioner of Internal Revenue reclaims the grant of tax refund. Hence, this petition.
ISSUE:
Whether or not Fortune Tobacco is entitled to tax refund.
RULING:
Yes. Although tax refund partakes the nature of a tax exemption, this rule does not apply to
Fortune Tobacco’s claim. The parity between tax refund and tax exemption exists only when
the former is based either on a tax exemption statute or a tax refund statute. In the present
case, Fortune Tobacco’s claim for refund is premised on its erroneous payment of the tax, or
the government’s exaction in the absence of a law.
Tax exemption is granted by the legislature thus, the one who claims an exemption from the
burden of taxation must justify his claim by showing that the legislature intended to exempt
him by words too plain to be mistaken. In the same manner, a claim for tax refund may also
be based on statutes granting tax exemption or tax refund. In this case, the rule of strict
interpretation against the taxpayer is applicable as the claim for refund partakes of the nature
of an exemption.
However, tax refunds (or tax credits) are not founded principally on legislative grant but on the
legal principle of solutio indebiti, the government cannot unjustly enrich itself at the expense
of the taxpayers. Under the Tax Code, in recognition of the pervasive quasi-contract principle,
a claim for tax refund may be based on the following:
(a) erroneously or illegally assessed or collected internal revenue taxes;
(b) penalties imposed without authority; and
(c) any sum alleged to have been excessive or in any manner wrongfully collected.

Manila Electric Company v. Province of Laguna (G.R. No. 131359. May 5, 1999)
18 AUG

FACTS:
MERALCO was granted a franchise by several municipal councils and the National
Electrification Administration to operate an electric light and power service in the Laguna.
Upon enactment of Local Government Code, the provincial government issued ordinance
imposing franchise tax. MERALCO paid under protest and later claims for refund because of
the duplicity with Section 1 of P.D. No. 551. This was denied by the governor (Joey Lina)
relying on a more recent law (LGC). MERALCO filed with the RTC a complaint for refund, but
was dismissed. Hence, this petition.

ISSUE:
Whether or not the imposition of franchise tax under the provincial ordinance is violative of the
non-impairment clause of the Constitution and of P.D. 551.

HELD:
No. There is no violation of the non-impairment clause for the same must yield to the inherent
power of the state (taxation). The provincial ordinance is valid and constitutional.

RATIO:
The Local Government Code of 1991 has incorporated and adopted, by and large, the
provisions of the now repealed Local Tax Code. The 1991 Code explicitly authorizes
provincial governments, notwithstanding “any exemption granted by any law or other special
law, . . . (to) impose a tax on businesses enjoying a franchise.” A franchise partakes the
nature of a grant which is beyond the purview of the non-impairment clause of the
Constitution. Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in
the 1935 and the 1973 Constitutions, is explicit that no franchise for the operation of a public
utility shall be granted except under the condition that such privilege shall be subject to
amendment, alteration or repeal by Congress as and when the common good so requires.

Garcia vs Executive Secretary GR No 101273 03 July 1992

Facts: Executive Order no 475 imposed an additional duty of 9% on crude oil and oil products
while Executive Order 478 imposed a special duty on crude oil and oil products. Petitioners
claimed that both EOs are unconstitutional because all revenue measures must originate from
the House of Representatives and the Tariff and Customs Code authorized the president to
increase the tariff duties only to protect local industries but not to raise additional revenue for
the government.

Issue: Whether or not the tariff rates imposed are valid?

Decision: Petition dismissed for lack of merit. The assailed Executive Orders are valid.
Congress may by law authorize the president to fit tariff rates and other duties within specified
limits. The issuance of these EOs authorized by Sections 104 and 401 of the Tariff and
Customs Code. There is nothing in the law that suggests that the authority may only be
exercised to protect local industries. Custom duties may be designated to achieve more than
one policy objective the protection of local industries and to raise revenue for the government.

FILM DEVELOPMENT COUNCIL OF PHILIPPINES v. COLON HERITAGE REALTY

CORPORATION, GR No. 203754, 2015-06-16
Facts:
Sometime in 1993, respondent City of Cebu, in its exercise of its power to impose amusement
taxes under Section 140 of the Local Government Code[2] (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.
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:
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:
For grade “A” films – 100% of the amusement tax collected on such film; and
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.
In said letters, the proprietors and cinema operators, including private respondent Colon
Heritage Realty Corp. (Colon Heritage), operator of the Oriente theater, were given ten (10)
days from receipt thereof to pay the aforestated amounts to FDCP... the city finally filed on
May 18, 2009 before the RTC, Branch 14 a petition for... declaratory relief with application for
a writ of preliminary injunction, docketed as Civil Case No. CEB-35529 (City of Cebu v.
FDCP). In said petition, Cebu City sought the declaration of Secs. 13 and 14 of RA 9167 as
invalid and unconstitution
Colon Heritage filed before the RTC, Branch 5 Civil Case No. CEB-35601 (Colon Heritage v.
FDCP), seeking to declare Sec. 14 of RA 9167 as unconstitutional.
Issues:
whether or not the RTC (Branches 5 and 14) gravely erred in declaring Secs. 13 and 14 of RA
9167 invalid for being unconstitutional.
Ruling:
RA 9167 violates local fiscal autonomy
Principles:
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 turn have to work
within the constraints thereof.”
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 taxeswas
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) Inco
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.
Section 130. Fundamental Principles. - The following fundamental principles shall govern the
exercise of the taxing and other revenue-raising powers of local government units:... x xx x
(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 spe
, 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.

SECRETARY OF FINANCE CESAR V. PURISIMA v. PHILIPPINE TOBACCO INSTITUTE,

GR No. 210251, 2017-04-17
Facts:
On 20 December 2012, President Benigno S. Aquino III signed Republic Act No. 10351[5]
(RA 10351), otherwise known as the Sin Tax Reform Law. RA 10351 restructured the excise
tax on alcohol and tobacco products by amending pertinent provisions of Republic Act No.
8424,[6] known as the Tax Reform Act of 1997 or the National Internal Revenue Code of
1997 (NIRC).
Section 5 of RA 10351, which amended Section 145(C) of the NIRC, increased the excise tax
rate of cigars and cigarettes and allowed cigarettes packed by machine to be packed in other
packaging combinations of not more than 20.
On 21 December 2012, the Secretary of Finance, upon the recommendation of the
Commissioner of Internal Revenue (CIR), issued RR 17-2012. Section 11 of RR 17-2012
imposes an excise tax on individual cigarette pouches of 5's and 10's even if they are bundled
or packed in packaging combinations not exceeding 20 cigarettes.
Pursuant to Section 11 of RR 17-2012, the CIR issued RMC 90-2012 dated 27 December
2012. Annex "D-1" of RMC 90-2012 provides for the initial classifications in tabular form,
effective 1 January 2013, of locally-manufactured cigarette brands packed by machine
according to the tax rates prescribed under RA 10351 based on the (1) 2010 Bureau of
Internal Revenue (BIR) price survey of these products, and (2) suggested net retail price
declared in the latest sworn statement filed by the local manufacturer or importer.
PMFTC, Inc., a member of respondent Philippine Tobacco Institute, Inc. (PTI), paid the excise
taxes required under RA 10351, RR 17-2012, and RMC 90-2012 in order to withdraw
cigarettes from its manufacturing facilities. However, on 16 January 2012, PMFTC wrote the
CIR prior to the payment of the excise taxes stating that payment was being made under
protest and without prejudice to its right to question said issuances through remedies
available under the law.
As a consequence, on 26 February 2013, PTI filed a petition[7] for declaratory relief with an
application for writ of preliminary injunction with the RTC.
In a Decision dated 7 October 2013, the RTC granted the petition for declaratory relief.
Issues:
Whether or not the RTC erred in nullifying Section 11 of RR 17-2012 and Annex "D-1" of
RMC 90-2012 in imposing excise tax to packaging combinations of 5's, 10's, etc. not
exceeding 20 cigarette sticks packed by machine.
Ruling:
The petition lacks merit.
Section 145(C) of the NIRC is clear that the excise tax on cigarettes packed by machine is
imposed per pack. "Per pack" was not given a clear definition by the NIRC. However, a "pack"
would normally refer to a number of individual components packaged as a unit.[10] Under the
same provision, cigarette manufacturers are permitted to bundle cigarettes packed by
machine in the maximum number of 20 sticks and aside from 20's, the law also allows
packaging combinations of not more than 20's - it can be 4 pouches of 5 cigarette sticks in a
pack (4 x 5's), 2 pouches of 10 cigarette sticks in a pack (2 x 10's), etc.
The RTC, in its Decision dated 7 October 2013, ruled in favor of PTI and declared that RA
10351 intends to tax the packs of 20's as a whole, regardless of whether they are further
repacked by 10's or 5's, as long as they total 20 sticks in all. Thus, the tax rate to be imposed
shall only be either for a net retail price of (1) less than P11.50, or (2) more than P11.50,
applying the two excise tax rates from 2013 until 2016 as mentioned under RA 10351. The
RTC added "that the fact the law allows 'packaging combinations,' as long as they will not
exceed a total of 20 sticks, is indicative of the lawmakers' foresight that these combinations
shall be sold at retail individually. Yet, the lawmakers did not specify in the law that the tax
rate shall be imposed on each packaging combination." Thus, the RTC concluded that the
interpretation made by the Secretary of Finance and the CIR has no basis in the law.
We agree.
the lawmakers intended to impose the excise tax on every pack of cigarettes that come in 20
sticks. Individual pouches or packaging combinations of 5's and 10's for retail purposes are
allowed and will be subjected to the same excise tax rate as long as they are bundled
together by not more than 20 sticks. Thus, by issuing Section 11 of RR 17-2012 and Annex
"D-1" on Cigarettes Packed by Machine of RMC 90-2012, the BIR went beyond the express
provisions of RA 10351.
It is an elementary rule in administrative law that administrative rules and regulations enacted
by administrative bodies to implement the law which they are entrusted to enforce have the
force of law and are entitled to great weight and respect. However, these implementations of
the law must not override, supplant, or modify the law but must remain consistent with the law
they intend to implement. It is only Congress which has the power to repeal or amend the law.
In sum, we agree with the ruling of the RTC that Section 11 of RR 17-2012 and Annex "D-1"
on Cigarettes Packed by Machine of RMC 90-2012 are null and void. Excise tax on cigarettes
packed by machine shall be imposed on the packaging combination of 20 cigarette sticks as a
whole and not to individual packaging combinations or pouches of 5's, 10's, etc.
WHEREFORE, we DENY the petition.
Principles:
Taxation
Section 145(C) of the NIRC is clear that the excise tax on cigarettes packed by machine is
imposed per pack. "Per pack" was not given a clear definition by the NIRC. However, a "pack"
would normally refer to a number of individual components packaged as a unit.[10] Under the
same provision, cigarette manufacturers are permitted to bundle cigarettes packed by
machine in the maximum number of 20 sticks and aside from 20's, the law also allows
packaging combinations of not more than 20's - it can be 4 pouches of 5 cigarette sticks in a
pack (4 x 5's), 2 pouches of 10 cigarette sticks in a pack (2 x 10's), etc.

C. Situs of income
Situs of taxation literally means place of taxation. The general rule is that the taxing power
cannot go beyond the territorial limits of the taxing authority. ... Thus, resident citizens and
domestic corporations are taxable on all income derived from sources within or without the
Philippines

CIR vs. BAIER-NICKEL

Facts:
CIR appeals the CA decision, which granted the tax refund of respondent and reversed that of
the CTA. Juliane Baier-Nickel, a non-resident German, is the president of Jubanitex, a
domestic corporation engaged in the manufacturing, marketing and selling of embroidered
textile products. Through Jubanitex’s general manager, Marina Guzman, the company
appointed respondent as commission agent with 10% sales commission on all sales actually
concluded and collected through her efforts.
In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex
deducted the 10% withholding tax of P170, 777.26 and remitted to BIR. Respondent filed her
income tax return but then claimed a refund from BIR for the P170K, alleging this was
mistakenly withheld by Jubanitex and that her sales commission income was compensation
for services rendered in Germany not Philippines and thus not taxable here.
She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim
but decision was reversed by CA on appeal, holding that the commission was received as
sales agent not as President and that the “source” of income arose from marketing activities
in Germany.
Issue: W/N respondent is entitled to refund
Held:
No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or
business, are subject to the Philippine income taxation on their income received from all
sources in the Philippines. In determining the meaning of “source”, the Court resorted to origin
of Act 2833 (the first Philippine income tax law), the US Revenue Law of 1916, as amended in
1917.
US SC has said that income may be derived from three possible sources only: (1) capital
and/or (2) labor; and/or (3) the sale of capital assets. If the income is from labor, the place
where the labor is done should be decisive; if it is done in this country, the income should be
from “sources within the United States.” If the income is from capital, the place where the
capital is employed should be decisive; if it is employed in this country, the income should be
from “sources within the United States.” If the income is from the sale of capital assets, the
place where the sale is made should be likewise decisive. “Source” is not a place, it is an
activity or property. As such, it has a situs or location, and if that situs or location is within the
United States the resulting income is taxable to nonresident aliens and foreign corporations.
The source of an income is the property, activity or service that produced the income. For the
source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines.
The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest
the burden of proving that the transaction subjected to tax is actually exempt from taxation.
In the instant case, respondent failed to give substantial evidence to prove that she performed
the incoming producing service in Germany, which would have entitled her to a tax exemption
for income from sources outside the Philippines. Petition granted.
ILO-ILO BOTTLERS v. ILO-ILO CITY (164 SCRA 607)

Facts: The tax ordinance imposes a tax on persons, firms, and corporations engaged in the
business of:
1. distribution of soft-drinks
2. manufacture of soft-drinks, and
3. bottling of softdrinks within the territorial jurisdiction of the City of Iloilo.

Ilo-ilo Bottlers was already paying a business tax on manufacturing under §143(A) to the city
government by virtue of a tax ordinance. Later on, they are obliged to pay by virtue of another
tax ordinance imposing business tax on wholesaling. Naturally, Ilo-ilo Bottlers argued, “how
could it be, if you manufacture, it necessary follows that you sell the commodity so, with the
payment of the business tax on manufacturing, it carries with it the business of wholesaling”.

ISSUE: Whether or not Ilo-ilo Bottlers is liable of tax imposed under Ordinance No. 5-excise
tax.

Held:

YES. Iloilo Bottlers, Inc. falls under the second category system. That is, the corporation was
engaged in the separate business of selling or distributing soft-drinks, independently of its
business of bottling them.
In the case at bar, the company distributed its softdrinks by means of a fleet of delivery trucks
which went directly to customers in the different places in lloilo province. The delivery trucks
were not used solely for the purpose of delivering softdrinks, they served as selling units
known as "rolling stores".
They fall under the Second system Entities operating under the second system which is
considered engaged in the separate business of selling. Where, Sales transactions are
entered into and perfected at stores or warehouses maintained by the company. Any one who
desires to purchase the product may go to the store or warehouse and there purchase the
merchandise. The stores and warehouses serve as selling centers. Thus liable of the tax
imposed under Ordinance No. 5-- an excise tax.

It is a tax on the privilege of distributing, manufacturing or bottling softdrinks. Being an excise

tax, it can be levied by the taxing authority only when the acts, privileges or businesses are
done or performed within the jurisdiction of said authority [Commissioner of Internal Revenue
v. British Overseas Airways Corp. and Court of Appeals, G.R. Nos. 65773-74, April 30, 1987,
149 SCRA 395, 410.] Specifically, the situs of the act of distributing, bottling or manufacturing
softdrinks must be within city limits, before an entity engaged in any of the activities may be
taxed in Iloilo City.

As stated above, sales were made by Iloilo Bottlers, Inc. in Iloilo City. Thus, We have no
option but to declare the company liable under the tax ordinance.

To determine whether an entity engaged in the principal business of manufacturing, is

likewise engaged in the separate business of selling, its marketing system or sales operations
must be looked into.

Under the first system, the manufacturer enters into sales transactions and invoices the sales
at its main office where purchase orders are received and approved before delivery orders
are sent to the company's warehouses, where in turn actual deliveries are made. No
warehouse sales are made; nor are separate stores maintained where products may be sold
independently from the main office. First system are NOT considered engaged in the
separate business of selling or dealing in their products, independent of their manufacturing
business.

Entities operating under the second system are considered engaged in the separate business
of selling sales transactions are entered into and perfected at stores or warehouses
maintained by the company. Any one who desires to purchase the product may go to the
store or warehouse and there purchase the merchandise. The stores and warehouses serve
as selling centers.

CIR vs BOAC GR L-65773-74 April 30, 1987

FACTS:

British overseas airways corp. (BOAC) a wholly owned British Corporation, is engaged in
international airlines business. From 1959to 1972, it has no loading rights for traffic purposes
in the Philippines but maintained a general sales agent in the Philippines which was
responsible for selling, BOAC tickets covering passengers and cargoes the CIR assessed
deficiency income taxes against.

ISSUE: Is BOAC liable to pay taxes?

RULING: 
Yes. For purposes of income taxation, it is well to bear in mind that the "source of income"
relates not to the physical sourcing of a flow of money or the physical situs of payment but
rather to the "property, activity or service which produced the income. The source of income is
the property, activity of service that produces the income. For the source of income to be
considered coming from the Philippines, it is sufficient that the income is derived from the
activity coming from the Philippines. The tax code provides that for revenue to be taxable, it
must constitute income from Philippine sources. In this case, the sale of tickets is the source
of income. The situs of the source of payments is the Philippines. Thus liable to pay tax.