G.R. No. 169234. October 2, 2013.
* tax exemptions, and the rule that doubts should be resolved in favor of provincial corporations,
CAMP JOHN HAY DEVELOPMENT CORPORATION, petitioner, vs. CENTRAL BOARD OF
ASSESSMENT APPEALS, REPRESENTED BY ITS CHAIRMAN HON. CESAR S. GUTIERREZ, ADELINA
A. TABANGIN, IN HER CAPACITY AS CHAIRMAN OF THE BOARD OF TAX (ASSESSMENT) APPEALS
OF BAGUIO CITY, AND HON. ESTRELLA B. TANO, IN HER CAPACITY AS THE CITY ASSESSOR OF
THE CITY OF BAGUIO, respondents.
Taxation; Local Taxation; Local Government Code of 1991 (R.A. No. 7160); Section 252 of
the Local Government Code emphatically directs that the taxpayer/real property owner
questioning the assessment should first pay the tax due before his protest can be entertained.—
Section 252 of the Local Government Code emphatically directs that the taxpayer/real property
owner questioning the assessment should first pay the tax due before his protest can be
entertained. As a matter of fact, the words “paid under protest” shall be annotated on the tax
receipts. Consequently, only after such payment has been made by the taxpayer may he file a
protest in writing (within thirty [30] days from said payment of tax) to the provincial, city, or
municipal treasurer, who shall decide the protest within sixty (60) days from its receipt. In no
case is the local treasurer obliged to entertain the protest unless the tax due has been paid.
Same; Same; Payment Under Protest; The requirement of “payment under protest” is a
condition sine qua non before a protest or an appeal questioning the correctness of an assessment
of real property tax may be entertained.—It is clear that the requirement of “payment under
protest” is a condition sine qua non before a protest or an appeal questioning the correctness of
an assessment of real property tax may be entertained. Moreover, a claim for exemption from
payment of real property taxes does not actually question the assessor’s authority to assess and
collect such taxes, but pertains to the reasonableness or correctness of the assessment by the
local assessor, a question of fact which should be resolved, at the very first instance, by the LBAA.
Same; Same; The burden of proving exemption from local taxation is upon whom the
subject real property is declared; thus, said person shall be considered by law as the taxpayer
thereof.—Section 206 of RA No. 7160 or the LGC of 1991, categorically provides that every
person by or for whom real property is declared, who shall claim exemption from
payment of real property taxes imposed against said property, shall file with the
provincial, city or municipal assessor sufficient documentary evidence in support of such claim.
Clearly, the burden of proving exemption from local taxation is upon whom the subject real
property is declared; thus, said person shall be considered by law as the taxpayer thereof. Failure
to do so, said property shall be listed as taxable in the assessment roll.
Same; Same; The duty to declare the true value of real property for taxation purposes is
imposed upon the owner, or administrator, or their duly authorized representatives. —It is an
accepted principle in taxation that taxes are paid by the person obliged to declare the same for
taxation purposes. As discussed above, the duty to declare the true value of real property for
taxation purposes is imposed upon the owner, or administrator, or their duly authorized
representatives. They are thus considered the taxpayers. Hence, when these persons fail or refuse
to make a declaration of the true value of their real property within the prescribed period, the
provincial or city assessor shall declare the property in the name of the defaulting owner and
assess the property for taxation. In this wise, the taxpayer assumes the character of a defaulting
owner, or defaulting administrator, or defaulting authorized representative, liable to pay back
taxes. For that reason, since petitioner herein is the declared owner of the subject buildings being
assessed for real property tax, it is therefore presumed to be the person with the obligation to
shoulder the burden of paying the subject tax in the present case; and accordingly, in questioning
the reasonableness or correctness of the assessment of real property tax, petitioner is mandated
by law to comply with the requirement of payment under protest of the tax assessed, particularly
Section 252 of RA No. 7160 or the LGC of 1991.
Same; Same; Time and again, the Supreme Court has stated that taxation is the rule and
exemption is the exception.—Time and again, the Supreme Court has stated that taxation is the
rule and exemption is the exception. The law does not look with favor on tax exemptions and the
entity that would seek to be thus privileged must justify it by words too plain to be mistaken and
too categorical to be misinterpreted. Thus applying the rule of strict construction of laws granting
this Court holds that petitioner is considered a taxable entity in this case.
Same; Same; The right of local government units to collect taxes due must always be
upheld to avoid severe erosion.—The restriction upon the power of courts to impeach tax
assessment without a prior payment, under protest, of the taxes assessed is consistent with the
doctrine that taxes are the lifeblood of the nation and as such their collection cannot be curtailed
by injunction or any like action; otherwise, the state or, in this case, the local government unit,
shall be crippled in dispensing the needed services to the people, and its machinery gravely
disabled. The right of local government units to collect taxes due must always be upheld to avoid
severe erosion. This consideration is consistent with the State policy to guarantee the autonomy
of local governments and the objective of RA No. 7160 or the LGC of 1991 that they enjoy genuine
and meaningful local autonomy to empower them to achieve their fullest development as self-
reliant communities and make them effective partners in the attainment of national goals.
CARPIO, JR., J., Concurring Opinion:
Taxation; Local Taxation; View that there is no showing that Camp John Hay Development
Corporation ever complied with the requirements of Section 206 of the Local Government Code in
claiming tax exemption; hence, the City Assessor of Baguio acted well within her power to assess
the subject properties.—There is no showing that CJHDC ever complied with the requirements of
Section 206 of the Local Government Code in claiming tax exemption; hence, the City Assessor of
Baguio acted well within her power to assess the subject properties. There was no need for CJHDC
to wait for an assessment before submission of its proofs of tax exemption. Had CJHDC submitted
proofs of its tax exemption to the City Assessor, there would have been no need for CJHDC to pay
under protest. CJHDC could question in court any adverse decision of the City Assessor, the Local
Board of Assessment Appeals, and the Central Board of Assessment Appeals denying its tax
exemption, without paying any tax assessment under protest, due to its claim of tax exemption
under Proclamation No. 420.
Same; Same; View that once the non-tax-exempt status of the taxpayer is settled with
finality, or if the same is not in issue, any dispute on the realty assessment only raises questions
on the correctness of the amount of the assessment, thus necessitating prior payment of the
assessment under protest.—Once the non-tax-exempt status of the taxpayer is settled with
finality, or if the same is not in issue, any dispute on the realty assessment only raises questions
on the correctness of the amount of the assessment, thus necessitating prior payment of the
assessment under protest. To repeat, any protest that CJHDC files or pursues after 17 November
2005 necessarily refers only to the correctness of the amount of the assessment, in which case
CJHDC must pay the assessed tax under protest. The present petition should be denied because
JHSEZ can no longer claim tax exemption, with the finality of this Court’s ruling in John Hay.
CJHDC’s doctrine of operative fact argument is a defense it may raise before the Local Board of
Assessment Appeals, to where this case is being remanded.
PETITION for review on certiorari of a decision of the Court of Tax Appeals En Banc.
The facts are stated in the opinion of the Court.
Rodrigo, Berenguer & Guno for petitioner.
The Solicitor General for respondents.
PEREZ, J.:
A claim for tax exemption, whether full or partial, does not deal with the authority of local
assessor to assess real property tax. Such claim questions the correctness of the assessment and
compliance with the applicable provisions of Republic Act (RA) No. 7160 or the Local Government
Code (LGC) of 1991, particularly as to requirement of payment under protest, is mandatory.
Before the Court is a Petition for Review on Certiorari seeking to reverse and set aside the 27
July 2005 Decision1 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B. No. 48 which
affirmed the Resolutions dated 23 May 2003 and 8 September 2004 issued by the Central Board
of Assessment Appeals (CBAA) in CBAA Case No. L-37 remanding the case to the Local Board of
Assessment Appeals (LBAA) of Baguio City for further proceedings.
The Facts
 The factual antecedents of the case as found by the CTA En Banc are as follows:
In a letter dated 21 March 2002, respondent City Assessor of Baguio City notified petitioner
Camp John Hay Development Corporation about the issuance against it of thirty-six (36) Owner’s
Copy of Assessment of Real Property (ARP), with ARP Nos. 01-07040-008887 to 01-07040-008922
covering various buildings of petitioner and two (2) parcels of land owned by the Bases Conversion
Development Authority (BCDA) in the John Hay Special Economic Zone (JHSEZ), Baguio City,
which were leased out to petitioner.
In response, petitioner questioned the assessments in a letter dated 3 April 2002 for lack of
legal basis due to the City Assessor’s failure to identify the specific properties and its corresponding
assessed values. The City Assessor replied in a letter dated 11 April 2002 that the subject ARPs
(with an additional ARP on another building bringing the total number of ARPs to thirty-seven
[37]) against the buildings of petitioner located within the JHSEZ were issued on the basis of the
approved building permits obtained from the City Engineer’s Office of Baguio City and pursuant
to Sections 201 to 206 of RA No. 7160 or the LGC of 1991.
Consequently, on 23 May 2002, petitioner filed with the Board of Tax Assessment Appeals
(BTAA) of Baguio City an appeal under Section 226 2 of the LGC of 1991 challenging the validity
and propriety of the issuances of the City Assessor. The appeal was docketed as Tax Appeal Case
No. 2002-003. Petitioner claimed that there was no legal basis for the issuance of the assessments
because it was allegedly exempted from paying taxes, national and local, including real property
taxes, pursuant to RA No. 7227, otherwise known as the Bases Conversion and Development Act
of 1992.3
The Ruling of the BTAA
In a Resolution dated 12 July 2002,4 the BTAA cited Section 7, 5 Rule V of the Rules of
Procedure Before the LBAA, and enjoined petitioner to first comply therewith, particularly as to
the payment under protest of the subject real property taxes before the hearing of its appeal.
Subsequently, the BTAA dismissed petitioner’s Motion for Reconsideration in the 20 September
2002 Resolution6 for lack of merit.
Aggrieved, petitioner elevated the case before the CBAA through a Memorandum on Appeal
docketed as CBAA Case No. L-37.
The Ruling of the CBAA
The CBAA denied petitioner’s appeal in a Resolution dated 23 May 2003, 7 set aside the BTAA’s
order of deferment of hearing, and remanded the case to the LBAA of Baguio City for further
proceedings subject to a full and up-to-date payment of the realty taxes on subject properties as
assessed by the respondent City Assessor of Baguio City, either in cash or in bond.
Citing various cases it previously decided, 8 the CBAA explained that the deferment of hearings
by the LBAA was merely in compliance with the mandate of the law. The governing provision in
this case is Section 231, not Section 226, of RA No. 7160 which provides that “[a]ppeal on
assessments of real property made under the provisions of this Code shall, in no case, suspend
the collection of the corresponding realty taxes on the property involved as assessed by the
provincial or city assessor, without prejudice to subsequent adjustment depending upon the final
outcome of the appeal.” In addition, as to the issue raised pertaining to the propriety of the
subject assessments issued against petitioner, allegedly claimed to be a tax-exempt entity, the
CBAA expressed that it has yet to acquire jurisdiction over it since the same has not been resolved
by the LBAA.
On 8 September 2004, the CBAA denied petitioner’s Motion for Reconsideration for lack of
merit.9
Undaunted by the pronouncements in the abovementioned Resolutions, petitioner appealed
to the CTA En Banc by filing a Petition for Review under Section 11 of RA No. 1125, as amended
by Section 9 of RA No. 9282, on 24 November 2004, docketed as C.T.A. EB No. 48, and raised
the following issues for its consideration: (1) whether or not respondent City Assessor of the City
of Baguio has legal basis to issue against petitioner the subject assessments with serial nos. 01-
07040-008887 to 01-07040-008922 for real property taxation of the buildings of the petitioner, a
tax-exempt entity, or land owned by the BCDA under lease to the petitioner; and (2) whether or
not the CBAA, in its Resolutions dated 23 May 2003 and 8 September 2004, has legal basis to
order the remand of the case to the LBAA of Baguio City for further proceedings subject to a full
and up-to-date payment, in cash or bond, of the realty taxes on the subject properties as assessed
by the City Assessor of the City of Baguio. 10
The Ruling of the CTA En Banc
In the assailed Decision dated 27 July 2005,11 the CTA En Banc found that petitioner has
indeed failed to comply with Section 252 of RA No. 7160 or the LGC of 1991. Hence, it dismissed
the petition and affirmed the subject Resolutions of the CBAA which remanded the case to the
LBAA for further proceedings subject to compliance with said Section, in relation to Section 7,
Rule V of the Rules of Procedure before the LBAA.
Moreover, adopting the CBAA’s position, the court a quo ruled that it could not resolve the
issue on whether petitioner is liable to pay real property tax or whether it is indeed a tax-exempt
entity considering that the LBAA has not decided the case on the merits. To do otherwise would
not only be procedurally wrong but legally wrong. It therefore concluded that before a protest
may be entertained, the tax should have been paid first without prejudice to subsequent
adjustment depending upon the final outcome of the appeal and that the tax or portion thereof
paid under protest, shall be held in trust by the treasurer concerned.
Consequently, this Petition for Review wherein petitioner on the ground of lack of legal basis
seeks to set aside the 27 July 2005 Decision, and to nullify the assessments of real property tax
issued against it by respondent City Assessor of Baguio City. 12
The Issue
The issue before the Court is whether or not respondent CTA En Banc erred in dismissing for
lack of merit the petition in C.T.A. EB No. 48, and accordingly affirmed the order of the CBAA to
remand the case to the LBAA of Baguio City for further proceedings subject to a full and up-to-
date payment of realty taxes, either in cash or in bond, on the subject properties assessed by the
City Assessor of Baguio City.
In support of the present petition, petitioner posits the following grounds: ( a) Section 225
(should be Section 252) of RA No. 7160 or the LGC of 1991 does not apply when the person
assessed is a tax-exempt entity; and (b) Under the doctrine of operative fact, petitioner is not
liable for the payment of the real property taxes subject of this petition. 13
Our Ruling
The Court finds the petition unmeritorious and therefore rules against petitioner.
Section 252 of RA No. 7160, also known as the LGC of 1991, 14 categorically provides:
SEC. 252. Payment Under Protest.—(a) No protest shall be entertained unless
the taxpayer first pays the tax. There shall be annotated on the tax receipts
the words “paid under protest.” The protest in writing must be filed within
thirty (30) days from payment of the tax to the provincial, city treasurer or
municipal treasurer, in the case of a municipality within Metropolitan Manila
Area, who shall decide the protest within sixty (60) days from receipt.
(b) The tax or a portion thereof paid under protest, shall be held in trust by the
treasurer concerned.
(c) In the event that the protest is finally decided in favor of the taxpayer, the
amount or portion of the tax protested shall be refunded to the protestant, or applied as
tax credit against his existing or future tax liability.
(d) In the event that the protest is denied or upon the lapse of the sixty-
day period prescribed in subparagraph (a), the taxpayer may avail of the
remedies as provided for in Chapter 3, Title Two, Book II of this Code. (Emphasis
and underlining supplied)
Relevant thereto, the remedies referred to under Chapter 3, Title Two, Book II of RA No.
7160 or the LGC of 1991 are those provided for under Sections 226 to 231. Significant provisions
pertaining to the procedural and substantive aspects of appeal before the LBAA and CBAA,
including its effect on the payment of real property taxes, follow:
SEC. 226. Local Board of Assessment Appeals.—Any owner or person having
legal interest in the property who is not satisfied with the action of the
provincial, city or municipal assessor in the assessment of his property may,
within sixty (60) days from the date of receipt of the written notice of
assessment, appeal to the Board of Assessment Appeals of the province or city
 by filing a petition under oath in the form prescribed for the purpose, together
with copies of the tax declarations and such affidavits or documents submitted
in support of the appeal.
SEC. 229. Action by the Local Board of Assessment Appeals .—(a) The Board shall
decide the appeal within one hundred twenty (120) days from the date of receipt of such
appeal. The Board, after hearing, shall render its decision based on substantial evidence
or such relevant evidence on record as a reasonable mind might accept as adequate to
support the conclusion.
(b) In the exercise of its appellate jurisdiction, the Board shall have the powers to
summon witnesses, administer oaths, conduct ocular inspection, take depositions, and
issue subpoena and subpoena duces tecum. The proceedings of the Board shall be
conducted solely for the purpose of ascertaining the facts without necessarily adhering
to technical rules applicable in judicial proceedings.
(c) The secretary of the Board shall furnish the owner of the property or the person
having legal interest therein and the provincial or city assessor with a copy of the decision
of the Board. In case the provincial or city assessor concurs in the revision or the
assessment, it shall be his duty to notify the owner of the property or the person having
legal interest therein of such fact using the form prescribed for the purpose. The owner
of the property or the person having legal interest therein or the assessor who
is not satisfied with the decision of the Board may, within thirty (30) days after
receipt of the decision of said Board, appeal to the Central Board of
Assessment Appeals, as herein provided. The decision of the Central Board
shall be final and executory.
SEC. 231. Effect of Appeal on the Payment of Real Property Tax.—Appeal on
assessments of real property made under the provisions of this Code shall, in
no case, suspend the collection of the corresponding realty taxes on the
property involved as assessed by the provincial or city assessor, without
prejudice to subsequent adjustment depending upon the final outcome of the
appeal. (Emphasis supplied)
The above-quoted provisions of RA No. 7160 or the LGC of 1991, clearly sets forth the
administrative remedies available to a taxpayer or real property owner who does not agree with
the assessment of the real property tax sought to be collected.
The language of the law is clear. No interpretation is needed. The elementary rule in statutory
construction is that if a statute is clear, plain and free from ambiguity, it must be given its literal
meaning and applied without attempted interpretation. Verba legis non est recedendum . From
the words of a statute there should be no departure. 15
To begin with, Section 252 emphatically directs that the taxpayer/real property owner
questioning the assessment should first pay the tax due before his protest can be entertained. As
a matter of fact, the words “paid under protest” shall be annotated on the tax receipts.
Consequently, only after such payment has been made by the taxpayer may he file a protest in
writing (within thirty [30] days from said payment of tax) to the provincial, city, or municipal
treasurer, who shall decide the protest within sixty (60) days from its receipt. In no case is the
local treasurer obliged to entertain the protest unless the tax due has been paid.
Secondly, within the period prescribed by law, any owner or person having legal interest in
the property not satisfied with the action of the provincial, city, or municipal assessor in the
assessment of his property may file an appeal with the LBAA of the province or city concerned,
as provided in Section 226 of RA No. 7160 or the LGC of 1991. Thereafter, within thirty (30) days
from receipt, he may elevate, by filing a notice of appeal, the adverse decision of the LBAA with
the CBAA, which exercises exclusive jurisdiction to hear and decide all appeals from the decisions,
orders, and resolutions of the Local Boards involving contested assessments of real properties,
claims for tax refund and/or tax credits, or overpayments of taxes. 16
Significantly, in Dr. Olivares v. Mayor Marquez ,17 this Court had the occasion to extensively
discuss the subject provisions of RA No. 7160 or the LGC of 1991, in relation to the impropriety
of the direct recourse before the courts on issue of the correctness of assessment of real estate
taxes. The pertinent articulations follow:
x x x A perusal of the petition before the RTC plainly shows that what is actually being
assailed is the correctness of the assessments made by the local assessor of
Parañaque on petitioners’ properties. The allegations in the said petition
purportedly questioning the assessor’s authority to assess and collect the
taxes were obviously made in order to justify the filing of the petition with the
RTC. In fact, there is nothing in the said petition that supports their claim
regarding the assessor’s alleged lack of authority. What petitioners raise are
the following: (1) some of the taxes being collected have already prescribed and may
no longer be collected as provided in Section 194 of the Local Government Code of 1991;
(2) some properties have been doubly taxed/assessed; (3) some properties being taxed
are no longer existent; (4) some properties are exempt from taxation as they are
being used exclusively for educational pur-
poses; and (5) some errors are made in the assessment and collection of taxes due on
petitioners’ properties, and that respondents committed grave abuse of discretion in
making the “improper, excessive and unlawful the collection of taxes against the
petitioner[s].” Moreover, these arguments essentially involve questions of fact.
Hence, the petition should have been brought, at the very first instance, to the
LBAA.
Under the doctrine of primacy of administrative remedies, an error in the
assessment must be administratively pursued to the exclusion of ordinary
courts whose decisions would be void for lack of jurisdiction. But an appeal
shall not suspend the collection of the tax assessed without prejudice to a later
adjustment pending the outcome of the appeal.
Even assuming that the assessor’s authority is indeed an issue, it must be pointed
out that in order for the court a quo to resolve the petition, the issues of the correctness
of the tax assessment and collection must also necessarily be dealt with.
xxxx
In the present case, the authority of the assessor is not being questioned.
Despite petitioners’ protestations, the petition filed before the court a quo
primarily involves the correctness of the assessments, which are questions of
fact, that are not allowed in a petition for certiorari , prohibition
and mandamus . The court a quo is therefore precluded from entertaining the
petition, and it appropriately dismissed the petition.18 (Emphasis and underlining
supplied)
By analogy, the rationale of the mandatory compliance with the requirement of “payment
under protest” similarly provided under Section 64 of the Real Property Tax Code (RPTC) 19 was
earlier emphasized in Meralco v. Barlis,20 wherein the Court held:
We find the petitioner’s arguments to be without merit. The trial court has no
jurisdiction to entertain a Petition for Prohibition absent petitioner’s payment under
protest, of the tax assessed as required by Sec. 64 of the RPTC. Payment of the tax
assessed under protest, is a condition sine qua non before the trial court could
assume jurisdiction over the petition and failure to do so, the RTC has no
jurisdiction to entertain it.
The restriction upon the power of courts to impeach tax assessment
without a prior payment, under protest, of the taxes assessed is consistent
with the doctrine that taxes are the lifeblood of the nation and as such their
collection cannot be curtailed by injunction or any like action; otherwise, the
state or, in this case, the local government unit, shall be crippled in dispensing
the needed services to the people, and its machinery gravely disabled.
xxxx
There is no merit in petitioner’s argument that the trial court could take cognizance
of the petition as it only questions the validity of the issuance of the warrants of
garnishment on its bank deposits and not the tax assessment. Petitioner MERALCO in
filing the Petition for Prohibition before the RTC was in truth assailing the validity of the
tax assessment and collection. To resolve the petition, it would not only be the question
 of validity of the warrants of garnishments that would have to be tackled, but in addition
the issues of tax assessment and collection would necessarily have to be dealt with too.
As the warrants of garnishment were issued to collect back taxes from petitioner, the
petition for prohibition would be for no other reason than to forestall the collection of
back taxes on the basis of tax assessment arguments. This, petitioner cannot do
without first resorting to the proper administrative remedies, or as previously
discussed, by paying under protest the tax assessed, to allow the court to
assume jurisdiction over the petition.
xxxx
It cannot be gainsaid that petitioner should have addressed its arguments
to respondent at the first opportunity — upon receipt of the 3 September 1986
notices of assessment signed by Municipal Treasurer Norberto A. San Mateo.
Thereafter, it should have availed of the proper administrative remedies in
protesting an erroneous tax assessment, i.e., to question the correctness of
the assessments before the Local Board of Assessment Appeals (LBAA), and
later, invoke the appellate jurisdiction of the Central Board of Assessment
Appeals (CBAA). Under the doctrine of primacy of administrative remedies, an error in
the assessment must be administratively pursued to the exclusion of ordinary courts
whose decisions would be void for lack of jurisdiction. But an appeal shall not suspend
the collection of the tax assessed without prejudice to a later adjustment pending the
outcome of the appeal. The failure to appeal within the statutory period shall render the
assessment final and unappealable. Petitioner having failed to exhaust the
administrative remedies available to it, the assessment attained finality and
collection would be in order. (Emphasis and underscoring supplied)
From the foregoing jurisprudential pronouncements, it is clear that the requirement of
“payment under protest” is a condition sine qua non before a protest or an appeal questioning
the correctness of an assessment of real property tax may be entertained.564
Moreover, a claim for exemption from payment of real property taxes does not actually
question the assessor’s authority to assess and collect such taxes, but pertains to the
reasonableness or correctness of the assessment by the local assessor, a question of fact which
should be resolved, at the very first instance, by the LBAA. This may be inferred from Section 206
of RA No. 7160 or the LGC of 1991 which states that:
SEC. 206. Proof of Exemption of Real Property from Taxation.—Every person by or
for whom real property is declared, who shall claim tax exemption for such
property under this Title shall file with the provincial, city or municipal assessor within
thirty (30) days from the date of the declaration of real property sufficient documentary
evidence in support of such claim including corporate charters, title of ownership, articles
of incorporation, bylaws, contracts, affidavits, certifications and mortgage deeds, and
similar documents.
If the required evidence is not submitted within the period herein
prescribed, the property shall be listed as taxable in the assessment roll.
However, if the property shall be proven to be tax exempt, the same shall be
dropped from the assessment roll. (Emphasis supplied)
In other words, by providing that real property not declared and proved as tax-exempt shall
be included in the assessment roll, the above-quoted provision implies that the local assessor has
the authority to assess the property for realty taxes, and any subsequent claim for exemption
shall be allowed only when sufficient proof has been adduced supporting the claim. 21 Therefore,
if the property being taxed has not been dropped from the assessment roll, taxes must be paid
under protest if the exemption from taxation is insisted upon.
In the case at bench, records reveal that when petitioner received the letter dated 21 March
2002 issued by respondent City Assessor, including copies of ARPs (with ARP Nos. 01-07040-
008887 to 01-07040-008922) attached thereto, it filed its protest through a letter dated 3 April
2002 seeking clarification as to the legal basis of said assessments, without payment of the
assessed real property taxes. Afterwards, respondent City Assessor replied thereto in a letter
dated 11 April 2002 which explained the legal basis of the subject assessments and even included
an additional ARP against another real property of petitioner. Subsequently, petitioner then filed
before the BTAA its appeal questioning the validity and propriety of the subject ARPs.
Clearly from the foregoing factual backdrop, petitioner considered the 11 April 2002 letter as
the “action” referred to in Section 226 which speaks of the local assessor’s act of denying the
protest filed pursuant to Section 252. However, applying the above-cited jurisprudence in the
present case, it is evident that petitioner’s failure to comply with the mandatory requirement of
payment under protest in accordance with Section 252 of the LGC of 1991 was fatal to its appeal.
Notwithstanding such failure to comply therewith, the BTAA elected not to immediately dismiss
the case but instead took cognizance of petitioner’s appeal subject to the condition that payment
of the real property tax should first be made before proceeding with the hearing of its appeal, as
provided for under Section 7, Rule V of the Rules of Procedure Before the LBAA. Hence, the BTAA
simply recognized the importance of the requirement of “payment under protest” before an appeal
may be entertained, pursuant to Section 252, and in relation with Section 231 of the same Code
as to non-suspension of collection of the realty tax pending appeal.566
Notably, in its feeble attempt to justify non-compliance with the provision of Section 252,
petitioner contends that the requirement of paying the tax under protest is not applicable when
the person being assessed is a tax-exempt entity, and thus could not be deemed a “taxpayer”
within the meaning of the law. In support thereto, petitioner alleges that it is exempted from
paying taxes, including real property taxes, since it is entitled to the tax incentives and exemptions
under the provisions of RA No. 7227 and Presidential Proclamation No. 420, Series of 1994, 22 as
stated in and confirmed by the lease agreement it entered into with the BCDA. 23
This Court is not persuaded.
First, Section 206 of RA No. 7160 or the LGC of 1991, as quoted earlier, categorically provides
that every person by or for whom real property is declared, who shall claim exemption
from payment of real property taxes imposed against said property, shall file with the
provincial, city or municipal assessor sufficient documentary evidence in support of such claim.
Clearly, the burden of proving exemption from local taxation is upon whom the subject real
property is declared; thus, said person shall be considered by law as the taxpayer thereof. Failure
to do so, said property shall be listed as taxable in the assessment roll.
In the present case, records show that respondent City Assessor of Baguio City notified
petitioner, in the letters dated 21 March 2002 24 and 11 April 2002,25 about the subject ARPs
covering various buildings owned by petitioner and parcels of land (leased out to petitioner) all
located within the JHSEZ, Baguio City. The subject letters expressed that the assessments were
based on the approved building permits obtained from the City Engineer’s Office of Baguio City
and pursuant to Sections 201 to 206 of RA No. 7160 or the LGC of 1991 which pertains to whom
the subject real properties were declared.
Noticeably, these factual allegations were neither contested nor denied by petitioner. As a
matter of fact, it expressly admitted ownership of the various buildings subject of the assessment
and thereafter focused on the argument of its exemption under RA No. 7227. But petitioner did
not present any documentary evidence to establish that the subject properties being tax exempt
have already been dropped from the assessment roll, in accordance with Section 206.
Consequently, the City Assessor acted in accordance with her mandate and in the regular
performance of her official function when the subject ARPs were issued against petitioner
herein, being the owner of the buildings, and therefore considered as the person with the
obligation to shoulder tax liability thereof, if any, as contemplated by law.
It is an accepted principle in taxation that taxes are paid by the person obliged to declare the
same for taxation purposes. As discussed above, the duty to declare the true value of real property
for taxation purposes is imposed upon the owner, or administrator, or their duly authorized
representatives. They are thus considered the taxpayers. Hence, when these persons fail or refuse
to make a declaration of the true value of their real property within the prescribed period, the
provincial or city assessor shall declare the property in the name of the defaulting owner and
assess the property for taxation. In this wise, the taxpayer assumes the character of a defaulting
owner, or defaulting administrator, or defaulting authorized representative, liable to pay back
taxes. For that reason, since petitioner herein is the declared owner of the subject buildings being
assessed for real property tax, it is therefore presumed to be the person with the obligation to All told, We go back to what was at the outset stated, that is, that a claim for tax exemption,
shoulder the burden of paying the subject tax in the present case; and accordingly, in questioning whether full or partial, does not question the authority of local assessor to assess real property
the reasonableness or correctness of the assessment of real property tax, petitioner is mandated tax, but merely raises a question of the reasonableness or correctness of such assessment, which
by law to comply with the requirement of payment under protest of the tax assessed, particularly requires compliance with Section 252 of the LGC of 1991. Such argument which may involve a
Section 252 of RA No. 7160 or the LGC of 1991. question of fact should be resolved at the first instance by the LBAA.
Time and again, the Supreme Court has stated that taxation is the rule and exemption is the The CTA En Banc was correct in dismissing the petition in C.T.A. EB No. 48, and affirming the
exception. The law does not look with favor on tax exemptions and the entity that would seek to CBAA’s position that it cannot delve on the issue of petitioner’s alleged non-taxability on the
be thus privileged must justify it by words too plain to be mistaken and too categorical to be ground of exemption since the LBAA has not decided the case on the merits. This is in compliance
misinterpreted.26 Thus applying the rule of strict construction of laws granting tax exemptions, with the procedural steps prescribed in the law.
and the rule that doubts should be resolved in favor of provincial corporations, this Court holds WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of Tax
that petitioner is considered a taxable entity in this case. Appeals En Banc in C.T.A. EB No. 48 is AFFIRMED. The case is remanded to the Local Board of
Second, considering that petitioner is deemed a taxpayer within the meaning of law, the issue Assessment Appeals of Baguio City for further proceedings. No costs.
on whether or not it is entitled to exemption from paying taxes, national and local, including real SO ORDERED.
property taxes, is a matter which would be better resolved, at the very instance, before the LBAA, Brion, Del Castillo and Perlas-Bernabe, JJ., concur.
for the following grounds: (a) petitioner’s reliance on its entitlement for exemption under the Carpio (Chairperson), J., See Concurring Opinion.
provisions of RA No. 7227 and Presidential Proclamation No. 420, was allegedly confirmed by
Section 18, 27 Article XVI of the Lease Agreement dated 19 October 1996 it entered with the BCDA.
However, it appears from the records that said Lease Agreement has yet to be presented nor
formally offered before any administrative or judicial body for scrutiny; (b) the subject provision
of the Lease Agreement declared a condition that in order to be allegedly exempted from the
payment of taxes, petitioner should have first paid and remitted 5% of the gross income earned
by it within ninety (90) days from the close of the calendar year through the JPDC. Unfortunately,
petitioner has neither established nor presented any evidence to show that it has indeed paid and
remitted 5% of said gross income tax; (c) the right to appeal is a privilege of statutory origin,
meaning a right granted only by the law, and not a constitutional right, natural or inherent.
Therefore, it follows that petitioner may avail of such opportunity only upon strict compliance with
the procedures and rules prescribed by the law itself, i.e., RA No. 7160 or the LGC of 1991; and
(d) at any rate, petitioner’s position of exemption is weakened by its own admission and
recognition of this Court’s previous ruling that the tax incentives granted in RA No. 7227 are
exclusive only to the Subic Special Economic [and Free Port] Zone; and thus, the extension of the
same to the JHSEZ (as provided in the second sentence of Section 3 of Presidential Proclamation
No. 420)28 finds no support therein and therefore declared null and void and of no legal force and
effect.29 Hence, petitioner needs more than mere arguments and/or allegations contained in its
pleadings to establish and prove its exemption, making prior proceedings before the LBAA a
necessity.
With the above-enumerated reasons, it is obvious that in order for a complete determination
of petitioner’s alleged exemption from payment of real property tax under RA No. 7160 or the
LGC of 1991, there are factual issues needed to be confirmed. Hence, being a question of fact,
petitioner cannot do without first resorting to the proper administrative remedies, or as previously
discussed, by paying under protest the tax assessed in compliance with Section 252 thereof.
Accordingly, the CBAA and the CTA En Banc correctly ruled that real property taxes should
first be paid before any protest thereon may be considered. It is without a doubt that such
requirement of “payment under protest” is a condition sine qua non before an appeal may be
entertained. Thus, remanding the case to the LBAA for further proceedings subject to a full and
up-to-date payment, either in cash or surety, of realty tax on the subject properties was proper.
To reiterate, the restriction upon the power of courts to impeach tax assessment without a
prior payment, under protest, of the taxes assessed is consistent with the doctrine that taxes are
the lifeblood of the nation and as such their collection cannot be curtailed by injunction or any
like action; otherwise, the state or, in this case, the local government unit, shall be crippled in
dispensing the needed services to the people, and its machinery gravely disabled. 30 The right of
local government units to collect taxes due must always be upheld to avoid severe erosion. This
consideration is consistent with the State policy to guarantee the autonomy of local governments
and the objective of RA No. 7160 or the LGC of 1991 that they enjoy genuine and meaningful
local autonomy to empower them to achieve their fullest development as self-reliant communities
and make them effective partners in the attainment of national goals. 31

G.R. No. 187485. February 12, 2013. *
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SAN ROQUE POWER CORPORATION,
respondent.
G.R. No. 196113. February 12, 2013.*
TAGANITO MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,
respondent.
G.R. No. 197156. February 12, 2013. *
PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,
respondent.
Taxation; Tax Refund; Tax Credit; Waiting Period; It is indisputable that compliance with
the 120-day waiting period is mandatory and jurisdictional. The waiting period, originally fixed at
60 days only, was part of the provisions of the first Value-Added Tax (VAT) law, Executive Order
No. 273, which took effect on 1 January 1988. The waiting period was extended to 120 days
effective 1 January 1998 under RA 8424 or the Tax Reform Act of 1997. —Clearly, San Roque
failed to comply with the 120-day waiting period, the time expressly given by law to the
Commissioner to decide whether to grant or deny San Roque’s application for tax refund or credit.
It is indisputable that compliance with the 120-day waiting period is mandatory and
jurisdictional. The waiting period, originally fixed at 60 days only, was part of the provisions of
the first VAT law, Executive Order No. 273, which took effect on 1 January 1988. The waiting
period was extended to 120 days effective 1 January 1998 under RA 8424 or the Tax Reform Act
of 1997. Thus, the waiting period has been in our statute books for more than fifteen
(15) years before San Roque filed its judicial claim. Failure to comply with the 120-day
waiting period violates a mandatory provision of law. It violates the doctrine of exhaustion of
administrative remedies and renders the petition premature and thus without a cause of action,
with the effect that the CTA does not acquire jurisdiction over the taxpayer’s petition. Philippine
jurisprudence is replete with cases upholding and reiterating these doctrinal principles.
Same; Court of Tax Appeals; Jurisdiction; The charter of the Court of Tax Appeals expressly
provides that its jurisdiction is to review on appeal decisions of the Commissioner of Internal
Revenue in cases involving refunds of internal revenue taxes.—The charter of the CTA expressly
provides that its jurisdiction is to review on appeal “decisions of the Commissioner of Internal
Revenue in cases involving x x x refunds of internal revenue taxes.” When a taxpayer prematurely
files a judicial claim for tax refund or credit with the CTA without waiting for the decision of the
Commissioner, there is no “decision” of the Commissioner to review and thus the CTA as a court
of special jurisdiction has no jurisdiction over the appeal. The charter of the CTA also expressly
provides that if the Commissioner fails to decide within “a specific period” required by law, such
“inaction shall be deemed a denial” of the application for tax refund or credit. It is the
Commissioner’s decision, or inaction “deemed a denial,” that the taxpayer can take to the CTA for
review. Without a decision or an “inaction x x x deemed a denial” of the Commissioner, the CTA
has no jurisdiction over a petition for review.
Civil Law; Human Relations; It is hornbook doctrine that a person committing a void act
contrary to a mandatory provision of law cannot claim or acquire any right from his void act. A
right cannot spring in favor of a person from his own void or illegal act. ―It is hornbook doctrine
that a person committing a void act contrary to a mandatory provision of law cannot claim or
acquire any right from his void act. A right cannot spring in favor of a person from his own void
or illegal act. This doctrine is repeated in Article 2254 of the Civil Code, which states, “No vested
or acquired right can arise from acts or omissions which are against the law or which infringe
upon the rights of others.” For violating a mandatory provision of law in filing its petition with the
CTA, San Roque cannot claim any right arising from such void petition. Thus, San Roque’s petition
with the CTA is a mere scrap of paper.338
Taxation; Tax Refund; Tax Credit; The Supreme Court should not establish the precedent
that non-compliance with mandatory and jurisdictional conditions can be excused if the claim is
otherwise meritorious, particularly in claims for tax refunds or credit. —This Court cannot disregard
mandatory and jurisdictional conditions mandated by law simply because the Commissioner chose
not to contest the numerical correctness of the claim for tax refund or credit of the taxpayer. Non-
compliance with mandatory periods, non-observance of prescriptive periods, and non-adherence
to exhaustion of administrative remedies bar a taxpayer’s claim for tax refund or credit, whether
or not the Commissioner questions the numerical correctness of the claim of the taxpayer. This
Court should not establish the precedent that non-compliance with mandatory and jurisdictional
conditions can be excused if the claim is otherwise meritorious, particularly in claims for tax
refunds or credit. Such precedent will render meaningless compliance with mandatory and
jurisdictional requirements, for then every tax refund case will have to be decided on the numerical
correctness of the amounts claimed, regardless of non-compliance with mandatory and
jurisdictional conditions.
Same; Appeals; The taxpayer may, if he wishes, appeal the decision of the Commissioner
to the Court of Tax Appeals within 30 days from receipt of the Commissioner’s decision, or if the
Commissioner does not act on the taxpayer’s claim within the 120-day period, the taxpayer may
appeal to the Court of Tax Appeals within 30 days from the expiration of the 120-day period.—
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the
decision or inaction of the Commissioner, thus: x x x the taxpayer affected may, within thirty
(30) days from the receipt of the decision denying the claim or after the expiration of
the one hundred twenty day-period, appeal the decision or the unacted claim with the Court
of Tax Appeals. (Emphasis supplied) This law is clear, plain, and unequivocal. Following the well-
settled verba legis doctrine, this law should be applied exactly as worded since it is clear, plain,
and unequivocal. As this law states, the taxpayer may, if he wishes, appeal the decision of the
Commissioner to the CTA within 30 days from receipt of the Commissioner’s decision, or if the
Commissioner does not act on the taxpayer’s claim within the 120-day period, the taxpayer may
appeal to the CTA within 30 days from the expiration of the 120-day period.
Same; Tax Refund; Tax Credit; The taxpayer may, within two (2) years after the close of
the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or
refund of the creditable input tax due or paid to such sales .—Section 112(A) clearly, plainly, and
unequivocally provides that the taxpayer “may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the issuance of a tax credit certificate
or refund of the creditable input tax due or paid to such sales.” In short, the law states that the
taxpayer may apply with the Commissioner for a refund or credit “within two (2) years,” which
means at anytime within two years. Thus, the application for refund or credit may be filed
by the taxpayer with the Commissioner on the last day of the two-year prescriptive period and it
will still strictly comply with the law. The two-year prescriptive period is a grace period in favor of
the taxpayer and he can avail of the full period before his right to apply for a tax refund or credit
is barred by prescription.
Same; Same; Same; The two-year prescriptive period in Section 112(A) refers to the period
within which the taxpayer can file an administrative claim for tax refund or credit. Stated
otherwise, the two-year prescriptive period does not refer to the filing of the judicial claim with
the Court of Tax Appeals but to the filing of the administrative claim with the Commissioner.—
Section 112(C) provides that the Commissioner shall decide the application for refund or credit
“within one hundred twenty (120) days from the date of submission of complete documents in
support of the application filed in accordance with Subsection (A).” The reference in Section
112(C) of the submission of documents “in support of the application filed in accordance with
Subsection A” means that the application in Section 112(A) is the administrative claim that the
Commissioner must decide within the 120-day period. In short, the two-year prescriptive period
in Section 112(A) refers to the period within which the taxpayer can file an administrative claim
for tax refund or credit. Stated otherwise, the two-year prescriptive period does not refer
to the filing of the judicial claim with the CTA but to the filing of the administrative
claim with the Commissioner. As held in Aichi, the “phrase ‘within two years x x x apply for
the issuance of a tax credit or refund’ refers to applications for refund/credit with the CIR
and not to appeals made to the CTA.”340
 Same; Same; Same; If the 30-day period, or any part of it, is required to fall within the
two-year prescriptive period (equivalent to 730 days), then the taxpayer must file his
administrative claim for refund or credit within the first 610 days of the two-year prescriptive
period.—If the 30-day period, or any part of it, is required to fall within the two-year prescriptive
period (equivalent to 730 days), then the taxpayer must file his administrative claim for refund or
credit within the first 610 days of the two-year prescriptive period. Otherwise, the filing of the
administrative claim beyond the first 610 days will result in the appeal to the CTA
being filed beyond the two-year prescriptive period. Thus, if the taxpayer files his
administrative claim on the 611th day, the Commissioner, with his 120-day period, will have until
the 731st day to decide the claim. If the Commissioner decides only on the 731st day, or does
not decide at all, the taxpayer can no longer file his judicial claim with the CTA because the two-
year prescriptive period (equivalent to 730 days) has lapsed. The 30-day period granted by law
to the taxpayer to file an appeal before the CTA becomes utterly useless, even if the taxpayer
complied with the law by filing his administrative claim within the two-year prescriptive period.
Same; Value-Added Tax; Input Value-Added Tax (VAT); Words and Phrases; The input
Value-Added Tax (VAT) is a tax liability of, and legally paid by, a VAT-registered seller of goods,
properties or services used as input by another VAT-registered person in the sale of his own
goods, properties, or services.—The input VAT is not “excessively” collected as understood under
Section 229 because at the time the input VAT is collected the amount paid is correct and
proper. The input VAT is a tax liability of, and legally paid by, a VAT-registered seller of goods,
properties or services used as input by another VAT-registered person in the sale of his own
goods, properties, or services. This tax liability is true even if the seller passes on the input VAT
to the buyer as part of the purchase price. The second VAT-registered person, who is not legally
liable for the input VAT, is the one who applies the input VAT as credit for his own output VAT. If
the input VAT is in fact “excessively” collected as understood under Section 229, then it is the first
VAT-registered person―the taxpayer who is legally liable and who is deemed to have legally paid
for the input VAT―who can ask for a tax refund or credit under Section 229 as an ordinary refund
or credit outside of the VAT System. In such event, the second VAT-registered taxpayer will have
no input VAT to offset against his own output VAT.
Same; Same; For simplicity and efficiency in tax collection, the Value-Added Tax (VAT) is
imposed not just on the value added by the taxpayer, but on the entire selling price of his goods,
properties or services.—As its name implies, the Value-Added Tax system is a tax on the value
added by the taxpayer in the chain of transactions. For simplicity and efficiency in tax collection,
the VAT is imposed not just on the value added by the taxpayer, but on the entire selling price of
his goods, properties or services. However, the taxpayer is allowed a refund or credit on the VAT
previously paid by those who sold him the inputs for his goods, properties, or services. The net
effect is that the taxpayer pays the VAT only on the value that he adds to the goods, properties,
or services that he actually sells.
Same; Same; Input Value-Added Tax (VAT); A taxpayer can apply his input Value-Added
Tax (VAT) only against his output VAT. The only exception is when the taxpayer is expressly “zero-
rated or effectively zero-rated” under the law, like companies generating power through
renewable sources of energy.―Under Section 110(B), a taxpayer can apply his input VAT only
against his output VAT. The only exception is when the taxpayer is expressly “zero-rated or
effectively zero-rated” under the law, like companies generating power through renewable sources
of energy. Thus, a non zero-rated VAT-registered taxpayer who has no output VAT because he
has no sales cannot claim a tax refund or credit of his unused input VAT under the VAT System.
Even if the taxpayer has sales but his input VAT exceeds his output VAT, he cannot seek a tax
refund or credit of his “excess” input VAT under the VAT System. He can only carry-over and
apply his “excess” input VAT against his future output VAT. If such “excess” input VAT is
an “excessively” collected tax, the taxpayer should be able to seek a refund or credit for such
“excess” input VAT whether or not he has output VAT. The VAT System does not allow such
refund or credit. Such “excess” input VAT is not an “excessively” collected tax under Section 229.
The “excess” input VAT is a correctly and properly collected tax. However, such “excess” input
VAT can be applied against the output VAT because the VAT is a tax imposed only on the value
added by the taxpayer. If the input VAT is in fact “excessively” collected under Section 229, then
it is the person legally liable to pay the input VAT, not the person to whom the tax was passed on
as part of the purchase price and claiming credit for the input VAT under the VAT System, who
can file the judicial claim under Section 229.
Same; Tax Refund; Tax Credit; It is clear that what can be refunded or credited is a tax
that is “erroneously, illegally, excessively or in any manner wrongfully collected.” —From the plain
text of Section 229, it is clear that what can be refunded or credited is a tax that is “erroneously,
x x x illegally, x x x excessively or in any manner wrongfully collected.” In short, there must
be a wrongful payment because what is paid, or part of it, is not legally due. As the Court held
in Mirant, Section 229 should “apply only to instances of erroneous payment or illegal
collection of internal revenue taxes.” Erroneous or wrongful payment includes excessive
payment because they all refer to payment of taxes not legally due. Under the VAT System,
there is no claim or issue that the “excess” input VAT is “excessively or in any manner wrongfully
collected.” In fact, if the “excess” input VAT is an “excessively” collected tax under Section 229,
then the taxpayer claiming to apply such “excessively” collected input VAT to offset his output
VAT may have no legal basis to make such offsetting. The person legally liable to pay the input
VAT can claim a refund or credit for such “excessively” collected tax, and thus there will no longer
be any “excess” input VAT. This will upend the present VAT System as we know it.
Same; Same; Same; A claim for tax refund or credit, like a claim for tax exemption, is
construed strictly against the taxpayer.―A claim for tax refund or credit, like a claim for tax
exemption, is construed strictly against the taxpayer. One of the conditions for a judicial claim of
refund or credit under the VAT System is compliance with the 120+30 day mandatory and
jurisdictional periods. Thus, strict compliance with the 120+30 day periods is necessary for such
a claim to prosper, whether before, during, or after the effectivity of the Atlas doctrine, except for
the period from the issuance of BIR Ruling No. DA-489-03 on 10 December 2003 to 6 October
2010 when the Aichi doctrine was adopted, which again reinstated the 120+30 day periods as
mandatory and jurisdictional.
Same; A reversal of a Bureau of Internal Revenue (BIR) regulation or ruling cannot
adversely prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior to its
reversal.— Since the Commissioner has exclusive and original jurisdiction to interpret tax
laws, taxpayers acting in good faith should not be made to suffer for adhering to general
interpretative rules of the Commissioner interpreting tax laws, should such interpretation later
turn out to be erroneous and be reversed by the Commissioner or this Court. Indeed, Section 246
of the Tax Code expressly provides that a reversal of a BIR regulation or ruling cannot adversely
prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior to its reversal.
Same; Statutory Construction; Taxpayers should not be prejudiced by an erroneous
interpretation by the Commissioner, particularly on a difficult question of law. —Taxpayers should
not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a difficult
question of law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that the
reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of
law. The abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly
situated, being made to return the tax refund or credit they received or could have received
under Atlas prior to its abandonment. This Court is applying Mirant and Aichi prospectively.
Absent fraud, bad faith or misrepresentation, the reversal by this Court of a general interpretative
rule issued by the Commissioner, like the reversal of a specific BIR ruling under Section 246,
should also apply prospectively.
Same; Judgments; Court of Tax Appeals decisions do not constitute precedents, and do
not bind the Supreme Court or the public.—There is also the claim that there are numerous CTA
decisions allegedly supporting the argument that the filing dates of the administrative and judicial
claims are inconsequential, as long as they are within the two-year prescriptive period. Suffice it
to state that CTA decisions do not constitute precedents, and do not bind this Court or the public.
That is why CTA decisions are appealable to this Court, which may affirm, reverse or modify the
CTA decisions as the facts and the law may warrant. Only decisions of this Court constitute binding
precedents, forming part of the Philippine legal system.
Same; Tax Refund; Tax Credit; Under the novel amendment introduced by RA 7716, mere
inaction by the Commissioner during the 60-day period is deemed a denial of the claim. Thus,
Section 4.106-2(c) states that “if no action on the claim for tax refund/credit has been taken by
the Commissioner after the sixty (60) day period,” the taxpayer “may” already file the judicial
claim even long before the lapse of the two-year prescriptive period. —Under the novel
amendment introduced by RA 7716, mere inaction by the Commissioner during the 60-day
period is deemed a denial of the claim. Thus, Section 4.106-2(c) states that “if no action on the
claim for tax refund/credit has been taken by the Commissioner after the sixty (60) day
period,” the taxpayer “may” already file the judicial claim even long before the lapse of the two-
year prescriptive period. Prior to the amendment by RA 7716, the taxpayer had to wait until the
two-year prescriptive period was about to expire if the Commissioner did not act on the claim.
With the amendment by RA 7716, the taxpayer need not wait until the two-year prescriptive
period is about to expire before filing the judicial claim because mere inaction by the Commissioner
during the 60-day period is deemed a denial of the claim. This is the meaning of the phrase
“but before the lapse of the two (2) year period” in Section 4.106-2(c). As Section 4.106-
2(c) reiterates that the judicial claim can be filed only “ after the sixty (60) day period ,” this
period remains mandatory and jurisdictional. Clearly, Section 4.106-2(c) did not amend Section
106(d) but merely faithfully implemented it.
Same; Taxes are the lifeblood of the nation.—Taxes are the lifeblood of the nation. The
Philippines has been struggling to improve its tax efficiency collection for the longest time with
minimal success. Consequently, the Philippines has suffered the economic adversities arising from
poor tax collections, forcing the government to continue borrowing to fund the budget deficits.
This Court cannot turn a blind eye to this economic malaise by being unduly liberal to taxpayers
who do not comply with statutory requirements for tax refunds or credits. The tax refund claims
in the present cases are not a pittance. Many other companies stand to gain if this Court were to
rule otherwise. The dissenting opinions will turn on its head the well-settled doctrine that tax
refunds are strictly construed against the taxpayer.
SERENO, C.J., Separate Dissenting Opinion:
Taxation; Judgments; View that in Miranda, et al. v. Imperial, et al., 77 Phil. 1073 (1947),
while the Supreme Court had ruled: “only decisions of this Honorable Court establish jurisprudence
or doctrines in this jurisdiction,” decisions of the Court of Appeals (CA) which cover points of law
still undecided in the Philippines may still serve as judicial guides or precedents to lower courts;
If unreversed decisions of the CA are given weight in applying and interpreting the law, Court of
Tax Appeals (CTA) decisions must also be accorded the same treatment considering they are both
appellate courts, apart from the fact that the CTA is a highly specialized body specifically created
for the purpose of reviewing tax cases.—In Miranda, et al. v. Imperial, et al., 77 Phil. 1073 (1947),
(Miranda case) while the Court had ruled: “only decisions of this Honorable Court establish
jurisprudence or doctrines in this jurisdiction,” decisions of the Court of Appeals (CA) which cover
points of law still undecided in the Philippines may still serve as judicial guides or precedents to
lower courts. Indeed, decisions of the CA have a persuasive juridical effect. And they may attain
the status of doctrines if after having been subjected to test in the crucible of analysis and revision,
the Supreme Court should find the same to have merits and qualities sufficient for their
consecration as rules of jurisprudence. If unreversed decisions of the CA are given weight in
applying and interpreting the law, Court of Tax Appeals (CTA) decisions must also be accorded
the same treatment considering they are both appellate courts, apart from the fact that the CTA
is a highly specialized body specifically created for the purpose of reviewing tax cases. This is
especially the case when the doctrine and practice in the CTA has to do only with a procedural
step.
Same; Tax Refund; Tax Credit; View that although tax refunds or credit, just like tax
exemptions, are strictly construed against taxpayers, reason dictates that such strict construction
properly applies only when what is being construed is the substantive right to refund of
taxpayers.—Although I recognize the well-settled rule in taxation that tax refunds or credit, just
like tax exemptions, are strictly construed against taxpayers, reason dictates that such strict
construction properly applies only when what is being construed is the substantive right to refund
of taxpayers. When courts themselves have allowed for procedural liberality, then they should not
be so strict regarding procedural lapses that do not really impair the proper administration of
justice. After all, the higher objective of procedural rule is to insure that the substantive rights of
the parties are protected.346
Same; View that it is violative of the right to procedural due process of taxpayers when the Court
itself allowed the taxpayers to believe that they were observing the proper procedural periods
and, in a sudden jurisprudential turn, deprived them of the relief provided for and earlier relied
on by the taxpayers.—We find it violative of the right to procedural due process of taxpayers when
the Court itself allowed the taxpayers to believe that they were observing the proper procedural
periods and, in a sudden jurisprudential turn, deprived them of the relief provided for and earlier
relied on by the taxpayers. It is with this reason and in the interest of substantial justice that the
strict application of the 120+<30 day period should be applied prospectively to claims for refund
or credit of excess input VAT. To apply these rules retroactively would be tantamount to punishing
the public for merely following interpretations of the law that have the imprimatur of this Court.
To do so creates a tear in the public order and sow more distrust in public institutions. We would
be fostering uncertainty in the minds of the public, especially in the business community, if we
cannot guarantee our own obedience to these rules.
VELASCO, J., Dissenting Opinion:
Taxation; Tax Revenue Regulations; View that tax revenue regulations are “issuances
signed by the Secretary of Finance, upon recommendation of the Commissioner of Internal
Revenue, that specify, prescribe or define rules and regulations for the effective enforcement of
the provisions of the [NIRC] and related statutes.” —Tax revenue regulations are “issuances signed
by the Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, that
specify, prescribe or define rules and regulations for the effective enforcement of the
provisions of the [NIRC] and related statutes.” As these issuances are mandated by the Tax
Code itself, they are in the nature of a subordinate legislation that is as compelling as the
provisions of the NIRC it implements. RR 7-95, therefore, provides a binding set of rules in the
filing of claims for the refund/credit of input VAT and prevails over all other rulings and issuances
of the BIR in all matters concerning the interpretation and proper application of the VAT provisions
of the NIRC.
Same; Prescription; View that applying Section 112(A) of the 1997 National Internal
Revenue Code (NIRC), this Court, in Mirant, modified the Atlas doctrine and set the
commencement of the 2-year prescriptive period from the date of the close of the relevant taxable
quarter. —Mirant was decided under the aegis of the 1997 NIRC and resolved a claim for
refund/credit of input VAT for the period April 1993 to September 1996. However, it likewise did
not set forth the period prescribed in Sec. 112(D) of the 1997 NIRC in filing the judicial claim
after the administrative claim has been filed. Like in Atlas, the issue resolved in Mirant is the date
from which the 2-year prescriptive period to file the claim should be counted. Applying Sec.
112(A) of the 1997 NIRC, this Court, in Mirant, modified the Atlas doctrine and set the
commencement of the 2-year prescriptive period from the date of the close of the relevant taxable
quarter. In so ruling, this Court declared in Mirant that the provisions of Sec. 229 of the 1997
NIRC do not apply to claims for refund/credit of input taxes because these taxes are not
erroneously or illegally collected taxes: To be sure, MPC cannot avail itself of the provisions of
either Sec. 204(C) or 229 of the NIRC which, for the purpose of refund, prescribes a different
starting point for the two-year prescriptive limit for the filing of a claim therefor. Secs. 204(C) and
229 respectively provide: x x x x Notably, the above provisions also set a two-year prescriptive
period, reckoned from date of payment of the tax or penalty, for the filing of a claim of refund or
tax credit. Notably too, both provisions apply only to instances of erroneous payment or illegal
collection of internal revenue taxes. Ergo, the 2-year period set forth in Sec. 229 does not apply
to judicial claims for the refund/credit of input VAT.
Same; Statutory Construction; View that in Commissioner of Internal Revenue v. American
Express, 462 SCRA 197 (2005), the Supreme Court ruled that when the legislature reenacts a law
that has been construed by an executive agency using substantially the same language, it is an
indication of the adoption by the legislature of the prior construction by the agency. —
In Commissioner of Internal Revenue v. American Express , 462 SCRA 197 (2005), We ruled that
when the legislature reenacts a law that has been construed by an executive agency using
substantially the same language, it is an indication of the adoption by the legislature of the prior
construction by the agency: [U]pon the enactment of RA 8424, which substantially carries over
the particular provisions on zero rating of services under Section 102(b) of the Tax Code, the
principle of legislative approval of administrative interpretation by reenactment clearly obtains.
This principle means that “the reenactment of a statute substantially unchanged is persuasive
indication of the adoption by Congress of a prior executive construction.” The legislature is
presumed to have reenacted the law with full knowledge of the contents of the revenue
regulations then in force regarding the VAT, and to have approved or confirmed them because
they would carry out the legislative purpose. The particular provisions of the regulations we have
mentioned earlier are, therefore, re-enforced. “When a statute is susceptible of the meaning
placed upon it by a ruling of the government agency charged with its enforcement and the
[l]egislature thereafter [reenacts] the provisions [without] substantial change, such action is to
some extent confirmatory that the ruling carries out the legislative purpose.”
Same; Prescription; View that if it is the Supreme Court’s position that the prescribed
periods of 120 days for administrative claim and 30 days for judicial claims are jurisdictional at
the time the judicial claims were filed in these cases, then the cases should have been decided
adversely against the taxpayers for filing the claim in breach of Sec. 112 of the 1997 National
Internal Revenue Code (NIRC) .—The common thread that runs through these cases is the cavalier
treatment of the 120 and 30-day periods prescribed by Sec. 112 of the 1997 NIRC. If it is the
Court’s position that the prescribed periods of 120 days for administrative claim and 30 days for
judicial claims are jurisdictional at the time the judicial claims were filed in these cases, then the
cases should have been decided adversely against the taxpayers for filing the claim in breach of
Sec. 112 of the 1997 NIRC. When these cases were entertained by the Court despite the clear
departure from Sec. 112, the Court, wittingly or unwittingly, led the taxpayers to believe that the
120 and 30-day periods are dispensable as long as both the administrative and judicial claims for
refund/credit of input VAT were filed within 2 years from the close of the relevant taxable quarter.
Simply put, the taxpayers relied in good faith on RR 7-95 and honestly believed and
regarded the 120 and 30-day periods as merely discretionary and dispensable. Hence, noted tax
experts and commentators, Victor A. Deoferio, Jr. and Victorino Mamalateo, recommended that
for safe measure and to avert the forfeiture of the right to avail of the judicial remedies, taxpayers
should “file an appeal with the Court of Tax Appeals, without waiting for the expiration of the 120-
day period, if the two-year period is about to lapse.”
Same; Same; Operative Fact Doctrine; View that while Court of Tax Appeals (CTA)
Decisions are not binding on the Supreme Court, the actual manner in which the Bureau of Internal
Revenue and the Court of Tax Appeals themselves regarded the 120 and 30-day periods––in the
course of handling administrative and judicial claims for refund/tax credit during the period in
question, as evidenced by the factual recitals in the CTA Decisions––constitutes an operative fact
that cannot simply be ignored. —I hasten to state that, while CTA Decisions are not binding on the
Court, the actual manner in which the BIR and the CTA themselves regarded the 120
and 30-day periods―in the course of handling administrative and judicial claims for refund/tax
credit during the period in question, as evidenced by the factual recitals in the CTA
Decisions―constitutes an operative fact that cannot simply be ignored. The truth of the
matter is that, whatever may have been the law and the regulation in force at the
time, taxpayers took guidance from and relied heavily upon the manner in which the
BIR and the CTA viewed the 120- and 30-day periods, as reflected in their treatment
of claims for input VAT refund/credit, and these taxpayers acted accordingly by filing
their claims in the manner permitted and encouraged by the BIR and the CTA. This is
a reality that even this Court cannot afford to turn a blind eye to.
Same; Same; Tax Refund; View that historically speaking, in order to enable refund-seeking
taxpayers to file their judicial claims within the two-year prescriptive period, the Bureau of Internal
Revenue and the Court of Tax Appeals did in actual practice treat the 120-day and 30-day periods
provided in Sec. 112(D) as merely discretionary and dispensable; and this served as guidance for
the taxpayers. ―It is exceedingly clear that, historically speaking, in order to enable refund-seeking
taxpayers to file their judicial claims within the two-year prescriptive period, the BIR and the CTA
did in actual practice treat the 120-day and 30-day periods provided in Sec. 112(D) as merely
discretionary and dispensable; and this served as guidance for the taxpayers. The taxpaying
public took heed of the prevailing practices of the BIR and CTA and acted accordingly.
This is a matter which this Court must acknowledge and accept.
Same; Same; View that the Supreme Court is definite and categorical that the prescriptive
period of 120 and 30 days under Sec. 112 of the 1997 National Internal Revenue Code (NIRC) is
mandatory and jurisdictional.—All doubts on whether or not the 120 and 30-day periods are
merely discretionary and dispensable were erased when the Court promulgated Aichi on October
6, 2010. There, the Court is definite and categorical that the prescriptive period of 120 and 30
days under Sec. 112 of the 1997 NIRC is mandatory and jurisdictional. Aichi explained that the 2-
year period provided in Sec. 112(A) of the 1997 NIRC refers only to the prescription period for
the filing of an administrative claim with the CIR. Meanwhile, the judicial claim contemplated
under said Sec. 112(C) must be filed within a mandatory and jurisdictional period of thirty
(30) days after the taxpayer’s receipt of the CIR’s decision denying the claim, or within thirty (30)
days after the CIR’s inaction for a period of 120 days from the submission of the complete
documents supporting the claim. Hence, the period for filing the judicial claim under Sec. 112(C)
may stretch out beyond the 2-year threshold provided in Sec. 112(A) as long as the administrative
claim is filed within the said 2-year period.
Same; Same; View that the Supreme Court should not turn a blind eye to the subordinate
legislations issued by the Secretary of Finance (and RMCs issued by the CIR) and the various
decisions of this Court as well as the then prevailing practices of the Bureau of Internal Revenue
and the Court of Tax Appeals suggesting that the taxpayers can dispense with the 120 and 30
day-periods in filing their judicial claim for refund/credit of input Value-Added Tax (VAT) so long
as both the administrative and judicial claims are filed within two (2) years from the close of the
relevant taxable quarter.—The Court should not turn a blind eye to the subordinate legislations
issued by the Secretary of Finance (and RMCs issued by the CIR) and the various decisions of this
Court as well as the then prevailing practices of the BIR and the CTA suggesting that the taxpayers
can dispense with the 120 and 30 day-periods in filing their judicial claim for refund/credit of input
VAT so long as both the administrative and judicial claims are filed within two (2) years from the
close of the relevant taxable quarter. I humbly submit that in deciding claims for refund/credit of
input VAT, the following guideposts should be observed: (1) For judicial claims for refund/credit
of input VAT filed from January 1, 1996 (effectivity of RR 7-95) up to October 31, 2005 (prior to
effectivity of RR 16-2005), the Court may treat the filing of the judicial claim within the 120 day
(or 60-day, for judicial claims filed before January 1, 1998), or beyond the 120+30 day-period (or
60+30 day-period) as permissible provided that both the administrative and judicial claims are
filed within two (2) years from the close of the relevant taxable quarter. Thus, the 120 and 30-
day periods under Sec. 112 may be considered merely discretionary and may be dispensed with.
(2) For judicial claims filed from November 1, 2005 (date of effectivity of RR 16-2005), the
prescriptive period under Sec. 112(C) is mandatory and jurisdictional. Hence, judicial claims for
refund/credit of input VAT must be filed within a mandatory and jurisdictional period of thirty (30)
days after the taxpayer’s receipt of the CIR’s decision denying the claim, or within thirty (30) days
after the CIR’s inaction for a period of 120 days from the submission of the complete documents
supporting the claim. The judicial claim may be filed even beyond the 2-year threshold in Sec.
112(A) as long as the administrative claim is filed within said 2-year period. (3) RR 16-2005, as
fortified by our ruling in Aichi, must be applied PROSPECTIVELY in the same way that the ruling
in Atlas and Mirant must be applied prospectively.
Same; Statutory Construction; View that the Supreme Court has previously held that “in
declaring a law or executive action null and void, or, by extension, no longer without force and
effect, undue harshness and resulting unfairness must be avoided.” —This Court, I maintain, is
duty-bound to sustain and give due credit to the taxpayers’ bona fide reliance on RR
Nos. 7-95 and 14-2005, RMC Nos. 42-03 and 49-03, along with guidance provided by the
then prevailing practices of the BIR and the CTA, prior to their modification by RR 16-2005. Such
prospective application of the latter revenue regulation comports with the simplest notions of what
is fair and just––the precepts of due process. The Court has previously held that “in declaring a
law or executive action null and void, or, by extension, no longer without force and effect, undue
harshness and resulting unfairness must be avoided.” Such pronouncement can be applied
to a change in the implementing rules of the law. The reliance on the previous rules, in particular
RR Nos. 7-95 and 14-2005, along with RMC Nos. 42-03 and 49-03, and the guidance provided by
the then prevailing practices of the BIR and the CTA, most certainly have had irreversible
consequences that cannot just be ignored; the past cannot always be erased by a new judicial
declaration.
LEONEN, J., Separate Opinion:
Courts; Supreme Court; View that the Supreme Court does not make law. Its duty is to
construe: i.e., declare authoritatively the meaning of existing text.—I am however unable to agree
with the conclusion that the interpretation we have just put on these provisions take effect only
when we pronounce them. Thus, in the view of the ponencia, that it is to be applied
“prospectively.” My disagreement stems from the idea that we do not make law. Ours is a duty to
construe: i.e., declare authoritatively the meaning of existing text. I can grant that words are
naturally open textured and do have their own degrees of ambiguity. This can be based on their
intrinsic text, language structure, context, and the interpreter’s standpoint.
Statutory Construction; Statutes; View that an “erroneous application and enforcement of
the law by public officers do not preclude a subsequent correct application of the statute, and the
Government is never estopped by mistake or error on the part of its agents”; Accordingly, while
the Bureau of Internal Revenue (BIR) Commissioner is given the power and authority to interpret
tax laws pursuant to Section 4 of the National Internal Revenue Code (NIRC), it cannot legislate
guidelines contrary to the law it is tasked to implement .—Settled is the principle that an “erroneous
application and enforcement of the law by public officers do not preclude a subsequent correct
application of the statute, and the Government is never estopped by mistake or error on the part
of its agents.” Accordingly, while the BIR Commissioner is given the power and authority to
interpret tax laws pursuant to Section 4 of the NIRC, it cannot legislate guidelines contrary to the
law it is tasked to implement. Hence, its interpretation is not conclusive and will be ignored if
judicially found to be erroneous. Concededly, under Section 246 of the NIRC, “[a]ny revocation,
modification or reversal of any BIR ruling or circular shall not be given retroactive application if
the revocation, modification or reversal will be prejudicial to the taxpayers.” However, if it is
patently clear that the ruling is contrary to the text of the law, there can be no reliance in good
faith by the practitioners.
PETITIONS for review on certiorari of the decisions and resolutions of the Court of Tax Appeals.
The facts are stated in the opinion of the Court.
The Office of the Solicitor General for petitioner.
Ilao & Ilao Law Offices for San Roque Power Corp. and Taganito Mining Corporation.
Tirso A. Tejada for Philex Mining Corporation.
CARPIO, J.:
The Cases
G.R. No. 187485 is a petition for review 1 assailing the Decision2 promulgated on 25 March
2009 as well as the Resolution 3 promulgated on 24 April 2009 by the Court of Tax Appeals En
Banc (CTA EB) in CTA EB No. 408. The CTA EB affirmed the 29 November 2007 Amended
Decision4 as well as the 11 July 2008 Resolution5 of the Second Division of the Court of Tax
Appeals (CTA Second Division) in CTA Case No. 6647. The CTA Second Division ordered the
Commissioner of Internal Revenue (Commissioner) to refund or issue a tax credit for
P483,797,599.65 to San Roque Power Corporation (San Roque) for unutilized input value-added
tax (VAT) on purchases of capital goods and services for the taxable year 2001.
G.R. No. 196113 is a petition for review 6 assailing the Decision7 promulgated on 8 December
2010 as well as the Resolution8 promulgated on 14 March 2011 by the CTA EB in CTA EB No. 624.
In its Decision, the CTA EB reversed the 8 January 2010 Decision 9 as well as the 7 April 2010
Resolution10 of the CTA Second Division and granted the CIR’s petition for review in CTA Case No.
7574. The CTA EB dismissed, for having been prematurely filed, Taganito Mining Corporation’s
(Taganito) judicial claim for P8,365,664.38 tax refund or credit.
G.R. No. 197156 is a petition for review 11 assailing the Decision12 promulgated on 3 December
2010 as well as the Resolution13 promulgated on 17 May 2011 by the CTA EB in CTA EB No. 569.
The CTA EB affirmed the 20 July 2009 Decision as well as the 10 November 2009 Resolution of
the CTA Second Division in CTA Case No. 7687. The CTA Second Division denied, due to
prescription, Philex Mining Corporation’s (Philex) judicial claim for P23,956,732.44 tax refund or
credit.
On 3 August 2011, the Second Division of this Court resolved 14 to consolidate G.R. No. 197156
with G.R. No. 196113, which were pending in the same Division, and with G.R. No. 187485, which
was assigned to the Court En Banc. The Second Division also resolved to refer G.R. Nos. 197156
and 196113 to the Court En Banc, where G.R. No. 187485, the lower-numbered case, was
assigned.
G.R. No. 187485
CIR v. San Roque Power Corporation
The Facts
The CTA EB’s narration of the pertinent facts is as follows:
[CIR] is the duly appointed Commissioner of Internal Revenue, empowered, among others,
to act upon and approve claims for refund or tax credit, with office at the Bureau of Internal
Revenue (“BIR”) National Office Building, Diliman, Quezon City.
[San Roque] is a domestic corporation duly organized and existing under and by virtue of the
laws of the Philippines with principal office at Barangay San Roque, San Manuel, Pangasinan. It
was incorporated in October 1997 to design, construct, erect, assemble, own, commission and
operate power-generating plants and related facilities pursuant to and under contract with the
Government of the Republic of the Philippines, or any subdivision, instrumentality or agency
thereof, or any government-owned or controlled corporation, or other entity engaged in the
development, supply, or distribution of energy.
As a seller of services, [San Roque] is duly registered with the BIR with TIN/VAT No. 005-
017-501. It is likewise registered with the Board of Investments (“BOI”) on a preferred pioneer
status, to engage in the design, construction, erection, assembly, as well as to own, commission,
and operate electric power-generating plants and related activities, for which it was issued
Certificate of Registration No. 97-356 on February 11, 1998.
On October 11, 1997, [San Roque] entered into a Power Purchase Agreement (“PPA”) with
the National Power Corporation (“NPC”) to develop hydro-potential of the Lower Agno River and
generate additional power and energy for the Luzon Power Grid, by building the San Roque Multi-
Purpose Project located in San Manuel, Pangasinan. The PPA provides, among others, that [San
Roque] shall be responsible for the design, construction, installation, completion, testing and
commissioning of the Power Station and shall operate and maintain the same, subject to NPC
instructions. During the cooperation period of twenty-five (25) years commencing from the
completion date of the Power Station, NPC will take and pay for all electricity available from the
Power Station.
On the construction and development of the San Roque MultiPurpose Project which comprises
of the dam, spillway and power plant, [San Roque] allegedly incurred, excess input VAT in the
amount of P559,709,337.54 for taxable year 2001 which it declared in its Quarterly VAT Returns
filed for the same year. [San Roque] duly filed with the BIR separate claims for refund, in the total
amount of P559,709,337.54, representing unutilized input taxes as declared in its VAT returns for
taxable year 2001.
However, on March 28, 2003, [San Roque] filed amended Quarterly VAT Returns for the year
2001 since it increased its unutilized input VAT to the amount of P560,200,283.14. Consequently,
[San Roque] filed with the BIR on even date, separate amended claims for refund in the aggregate
amount of P560,200,283.14.
[CIR’s] inaction on the subject claims led to the filing by [San Roque] of the Petition for
Review with the Court [of Tax Appeals] in Division on April 10, 2003.
Trial of the case ensued and on July 20, 2005, the case was submitted for decision. 15
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division initially denied San Roque’s claim. In its Decision16 dated 8 March
2006, it cited the following as bases for the denial of San Roque’s claim: lack of recorded zero-
rated or effectively zero-rated sales; failure to submit documents specifically identifying the
purchased goods/services related to the claimed input VAT which were included in its Property,
Plant and Equipment account; and failure to prove that the related construction costs were
capitalized in its books of account and subjected to depreciation.
The CTA Second Division required San Roque to show that it complied with the following
requirements of Section 112(B) of Republic Act No. 8424 (RA 8424) 17 to be entitled to a tax refund
or credit of input VAT attributable to capital goods imported or locally purchased: (1) it is a VAT-
registered entity; (2) its input taxes claimed were paid on capital goods duly supported by VAT
invoices and/or official receipts; (3) it did not offset or apply the claimed input VAT payments on
capital goods against any output VAT liability; and (4) its claim for refund was filed within the
two-year prescriptive period both in the administrative and judicial levels.
The CTA Second Division found that San Roque complied with the first, third, and fourth
requirements, thus:
The fact that [San Roque] is a VAT registered entity is admitted ( par. 4, Facts Admitted, Joint
Stipulation of Facts, Records, p. 157). It was also established that the instant claim of
P560,200,823.14 is already net of the P11,509.09 output tax declared by [San Roque] in its
amended VAT return for the first quarter of 2001. Moreover, the entire amount of
P560,200,823.14 was deducted by [San Roque] from the total available input tax reflected in its
amended VAT returns for the last two quarters of 2001 and first two quarters of 2002 ( Exhibits M-
6, O-6, OO-1 & QQ-1). This means that the claimed input taxes of P560,200,823.14 did not form
part of the excess input taxes of P83,692,257.83, as of the second quarter of 2002 that was to
be carried-over to the succeeding quarters. Further, [San Roque’s] claim for refund/tax credit
certificate of excess input VAT was filed within the two-year prescriptive period reckoned from the
dates of filing of the corresponding quarterly VAT returns.
For the first, second, third, and fourth quarters of 2001, [San Roque] filed its VAT returns on
April 25, 2001, July 25, 2001, October 23, 2001 and January 24, 2002, respectively ( Exhibits “H,
J, L, and N”). These returns were all subsequently amended on March 28, 2003 ( Exhibits “I, K, M,
and O”). On the other hand, [San Roque] originally filed its separate claims for refund on July 10,
2001, October 10, 2001, February 21, 2002, and May 9, 2002 for the first, second, third, and
fourth quarters of 2001, respectively, ( Exhibits “EE, FF, GG, and HH”) and subsequently filed
amended claims for all quarters on March 28, 2003 (Exhibits “II, JJ, KK, and LL”). Moreover, the
Petition for Review was filed on April 10, 2003. Counting from the respective dates when [San
Roque] originally filed its VAT returns for the first, second, third and fourth quarters of 2001, the
administrative claims for refund (original and amended) and the Petition for Review fall within the
two-year prescriptive period.18
San Roque filed a Motion for New Trial and/or Reconsideration on 7 April 2006. In its 29
November 2007 Amended Decision,19 the CTA Second Division found legal basis to partially grant
San Roque’s claim. The CTA Second Division ordered the Commissioner to refund or issue a tax
credit in favor of San Roque in the amount of P483,797,599.65, which represents San Roque’s
unutilized input VAT on its purchases of capital goods and services for the taxable year 2001. The
CTA based the adjustment in the amount on the findings of the independent certified public
accountant. The following reasons were cited for the disallowed claims: erroneous computation;
failure to ascertain whether the related purchases are in the nature of capital goods; and the
purchases pertain to capital goods. Moreover, the reduction of claims was based on the following:
the difference between San Roque’s claim and that appearing on its books; the official receipts
covering the claimed input VAT on purchases of local services are not within the period of the
claim; and the amount of VAT cannot be determined from the submitted official receipts and
invoices. The CTA Second Division denied San Roque’s claim for refund or tax credit of its
unutilized input VAT attributable to its zero-rated or effectively zero-rated sales because San
Roque had no record of such sales for the four quarters of 2001.
The dispositive portion of the CTA Second Division’s 29 November 2007 Amended Decision
reads:
WHEREFORE, [San Roque’s] “Motion for New Trial and/or Reconsideration” is hereby
PARTIALLY GRANTED and this Court’s Decision promulgated on March 8, 2006 in the instant case
is hereby MODIFIED.
Accordingly, [the CIR] is hereby ORDERED to REFUND or in the alternative, to ISSUE A TAX
CREDIT CERTIFICATE in favor of [San Roque] in the reduced amount of Four Hundred Eighty
Three Million Seven Hundred Ninety Seven Thousand Five Hundred Ninety Nine Pesos and Sixty
Five Centavos (P483,797,599.65) representing unutilized input VAT on purchases of capital goods
and services for the taxable year 2001.
SO ORDERED. 20
The Commissioner filed a Motion for Partial Reconsideration on 20 December 2007. The CTA
Second Division issued a Resolution dated 11 July 2008 which denied the CIR’s motion for lack of
merit.
The Court of Tax Appeals’ Ruling: En Banc
The Commissioner filed a Petition for Review before the CTA EB praying for the denial of San
Roque’s claim for refund or tax credit in its entirety as well as for the setting aside of the 29
November 2007 Amended Decision and the 11 July 2008 Resolution in CTA Case No. 6647.
The CTA EB dismissed the CIR’s petition for review and affirmed the challenged decision and
resolution.
The CTA EB cited Commissioner of Internal Revenue v. Toledo Power, Inc.21 and Revenue
Memorandum Circular No. 49-03, 22 as its bases for ruling that San Roque’s judicial claim was not
prematurely filed. The pertinent portions of the Decision state:
More importantly, the Court En Banc has squarely and exhaustively ruled on this issue in this
wise:
It is true that Section 112(D) of the abovementioned provision applies to
the present case. However, what the petitioner failed to consider is Section
112(A) of the same provision. The respondent is also covered by the two (2) year
prescriptive period. We have repeatedly held that the claim for refund with the BIR and
the subsequent appeal to the Court of Tax Appeals must be filed within the two-year
period.
Accordingly, the Supreme Court held in the case of Atlas Consolidated Mining and
Development Corporation vs. Commissioner of Internal Revenue that the two-year
prescriptive period for filing a claim for input tax is reckoned from the date of the filing
of the quarterly VAT return and payment of the tax due. If the said period is about to
expire but the BIR has not yet acted on the application for refund, the taxpayer
may interpose a petition for review with this Court within the two year period.
In the case of Gibbs vs. Collector, the Supreme Court held that if, however, the
Collector (now Commissioner) takes time in deciding the claim, and the period of two
years is about to end, the suit or proceeding must be started in the Court of Tax Appeals
before the end of the two-year period without awaiting the decision of the Collector.
Furthermore, in the case of Commissioner of Customs and Commissioner of Internal
Revenue vs. The Honorable Court of Tax Appeals and Planters Products, Inc. , the
Supreme Court held that the taxpayer need not wait indefinitely for a decision
or ruling which may or may not be forthcoming and which he has no legal right
to expect. It is disheartening enough to a taxpayer to keep him waiting for an indefinite
period of time for a ruling or decision of the Collector (now Commissioner) of Internal
Revenue on his claim for refund. It would make matters more exasperating for the
taxpayer if we were to close the doors of the courts of justice for such a relief until after
the Collector (now Commissioner) of Internal Revenue, would have, at his personal
convenience, given his go signal.
This Court ruled in several cases that once the petition is filed, the Court has already
acquired jurisdiction over the claims and the Court is not bound to wait indefinitely for no
reason for whatever action respondent (herein petitioner) may take. At stake are
claims for refund and unlike disputed assessments, no decision of respondent
(herein petitioner) is required before one can go to this Court. (Emphasis
supplied and citations omitted)
Lastly, it is apparent from the following provisions of Revenue Memorandum Circular
No. 49-03 dated August 18, 2003, that [the CIR] knows that claims for VAT refund or tax
credit filed with the Court [of Tax Appeals] can proceed simultaneously with the ones
 filed with the BIR and that taxpayers need not wait for the lapse of the subject 120-day telephone lines, and other communication media, as may be needed by the corporation
period, to wit: for its own purpose, and to purchase, import, construct, machine, fabricate, or otherwise
acquire, and maintain and operate bridges, piers, wharves, wells, reservoirs, plumes,
In response to [the] request of selected taxpayers for adoption of procedures in watercourses, waterworks, aqueducts, shafts, tunnels, furnaces, cook ovens, crushing
handling refund cases that are aligned to the statutory requirements that refund cases works, gasworks, electric lights and power plants and compressed air plants, chemical
should be elevated to the Court of Tax Appeals before the lapse of the period prescribed works of all kinds, concentrators, smelters, smelting plants, and refineries, matting plants,
by law, certain provisions of RMC No. 42-2003 are hereby amended and new provisions warehouses, workshops, factories, dwelling houses, stores, hotels or other buildings,
are added thereto. engines, machinery, spare parts, tools, implements and other works, conveniences and
In consonance therewith, the following amendments are being introduced to RMC properties of any description in connection with or which may be directly or indirectly
No. 42-2003, to wit: conducive to any of the objects of the corporation, and to contribute to, subsidize or
I.) A-17 of Revenue Memorandum Circular No. 42-2003 is hereby revised to read otherwise aid or take part in any operations;
as follows: and is a VAT-registered entity, with Certificate of Registration (BIR Form No. 2303) No. OCN
In cases where the taxpayer has filed a “Petition for Review” with the 8RC0000017494. Likewise, [Taganito] is registered with the Board of Investments (BOI) as an
Court of Tax Appeals involving a claim for refund/TCC that is pending at the exporter of beneficiated nickel silicate and chromite ores, with BOI Certificate of Registration No.
administrative agency (Bureau of Internal Revenue or OSS-DOF), the EP-88-306.
administrative agency and the tax court may act on the case separately. While Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue
the case is pending in the tax court and at the same time is still under process by the vested with authority to exercise the functions of the said office, including inter alia, the power to
administrative agency, the litigation lawyer of the BIR, upon receipt of the summons from decide refunds of internal revenue taxes, fees and other charges, penalties imposed in relation
the tax court, shall request from the head of the investigating/processing office for the thereto, or other matters arising under the National Internal Revenue Code (NIRC) or other laws
docket containing certified true copies of all the documents pertinent to the claim. The administered by Bureau of Internal Revenue (BIR) under Section 4 of the NIRC. He holds office
docket shall be presented to the court as evidence for the BIR in its defense on the tax at the BIR National Office Building, Diliman, Quezon City.
credit/refund case filed by the taxpayer. In the meantime, the investigating/processing [Taganito] filed all its Monthly VAT Declarations and Quarterly Vat Returns for the period
office of the administrative agency shall continue processing the refund/TCC case until January 1, 2005 to December 31, 2005. For easy reference, a summary of the filing dates of the
such time that a final decision has been reached by either the CTA or the administrative original and amended Quarterly VAT Returns for taxable year 2005 of [Taganito] is as follows:
agency.
If the CTA is able to release its decision ahead of the evaluation of the
Exhibit(s) Quarter Nature of Mode of filing Filing Date
administrative agency, the latter shall cease from processing the claim. On the
other hand, if the administrative agency is able to process the claim of the taxpayer ahead the Return
of the CTA and the taxpayer is amenable to the findings thereof, the concerned taxpayer
L to L-4 1st Original Electronic April 15, 2005
must file a motion to withdraw the claim with the CTA. 23 (Emphasis supplied)
G.R. No. 196113 M to M-3 Amended Electronic July 20, 2005
Taganito Mining Corporation v. CIR
N to N-4 Amended Electronic October 18, 2006
The Facts
The CTA Second Division’s narration of the pertinent facts is as follows: Q to Q-3 2nd Original Electronic July 20, 2005
Petitioner, Taganito Mining Corporation, is a corporation duly organized and existing under
R to R-4 Amended Electronic October 18, 2006
and by virtue of the laws of the Philippines, with principal office at 4th Floor, Solid Mills Building,
De La Rosa St., Lega[s]pi Village, Makati City. It is duly registered with the Securities and U to U-4 3rd Original Electronic October 19, 2005
Exchange Commission with Certificate of Registration No. 138682 issued on March 4, 1987 with
V to V-4 Amended Electronic October 18, 2006
the following primary purpose:
To carry on the business, for itself and for others, of mining lode and/or placer Y to Y-4 4th Original Electronic January 20, 2006
mining, developing, exploiting, extracting, milling, concentrating, converting, smelting,
Z to Z-4 Amended Electronic October 18, 2006
treating, refining, preparing for market, manufacturing, buying, selling, exchanging,
As can be gleaned from its amended Quarterly VAT Returns, [Taganito] reported zero-rated
shipping, transporting, and otherwise producing and dealing in nickel, chromite, cobalt,
sales amounting to P1,446,854,034.68; input VAT on its domestic purchases and importations of
gold, silver, copper, lead, zinc, brass, iron, steel, limestone, and all kinds of ores, metals
goods (other than capital goods) and services amounting to P2,314,730.43; and input VAT on its
and their by-products and which by-products thereof of every kind and description and
domestic purchases and importations of capital goods amounting to P6,050,933.95, the details of
by whatsoever process the same can be or may hereafter be produced, and generally
which are summarized as follows:
and without limit as to amount, to buy, sell, locate, exchange, lease, acquire and deal in
lands, mines, and mineral rights and claims and to conduct all business appertaining
thereto, to purchase, locate, lease or otherwise acquire, mining claims and rights, timber
rights, water rights, concessions and mines, buildings, dwellings, plants machinery, spare
parts, tools and other properties whatsoever which this corporation may from time to
time find to be to its advantage to mine lands, and to explore, work, exercise, develop or
turn to account the same, and to acquire, develop and utilize water rights in such manner
as may be authorized or permitted by law; to purchase, hire, make, construct or
otherwise, acquire, provide, maintain, equip, alter, erect, improve, repair, manage, work
and operate private roads, barges, vessels, aircraft and vehicles, private telegraph and
 administrative claim for refund, the administrative claim thereof being
Period Zero-Rated Input VAT on Input VAT on Total
mere pro-forma , which is a condition sine qua non prior to the filing of judicial
Covere Sales Domestic Domestic Input claim in accordance with the provision of Section 229 of the 1997 Tax Code. Further,
Section 112 (D) of the Tax Code, as amended, requires the submission of complete
d Purchases Purchases VAT
documents in support of the application filed with the BIR before the 120-day audit
and and period shall apply, and before the taxpayer could avail of judicial remedies as
provided for in the law. Hence, [Taganito’s] failure to submit proof of compliance with
Importations Importations
the above-stated requirements warrants immediate dismissal of the petition for review.
of Goods and of Capital 8. [Taganito] must prove that it has complied with the invoicing requirements
mentioned in Sections 110 and 113 of the 1997 Tax Code, as amended, in relation to
Services Goods
provisions of Revenue Regulations No. 7-95.
01/01/05 P551,179,871.58 P1,491,880.56 P239,803.22 P1,731,683.78 9. In an action for refund/credit, the burden of proof is on the taxpayer to establish
its right to refund, and failure to sustain the burden is fatal to the claim for
-
refund/credit (Asiatic Petroleum Co. vs. Llanes, 49 Phil. 466 cited in Collector of
03/31/05 Internal Revenue vs. Manila Jockey Club, Inc. , 98 Phil. 670);
10. Claims for refund are construed strictly against the claimant for the same
04/01/05 64,677,530.78 204,364.17 5,811,130.73 6,015,494.90
partake the nature of exemption from taxation ( Commissioner of Internal Revenue
- vs. Ledesma , 31 SCRA 95) and as such, they are looked upon with disfavor (Western
Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 1211).
06/30/05
SPECIAL AND AFFIRMATIVE DEFENSES
07/01/05 480,784,287.30 144,887.67 - 144,887.67 11. The Court of Tax Appeals has no jurisdiction to entertain the instant petition for
review for failure on the part of [Taganito] to comply with the provision of Section 112
-
(D) of the 1997 Tax Code which provides, thus:
09/30/05 Section 112. Refunds or Tax Credits of Input Tax.―
10/01/05 350,212,345.02 473,598.03 - 473,598.03 xxx xxx xxx
(D) Period within which refund or Tax Credit of Input Taxes shall be
- Made. ―In proper cases, the Commissioner shall grant a refund or issue the tax
12/31/05 credit certificate for creditable input taxes within one hundred (120) days
from the date of submission of complete documents in support of the
TOTAL P1,446,854,034.6 P2,314,730.4 P6,050,933.9 P8,365,664.3 application filed in accordance with Subsections (A) and (B) hereof.
8 3 5 8 In cases of full or partial denial for tax refund or tax credit, or the failure on
the part of the Commissioner to act on the application within the period
On November 14, 2006, [Taganito] filed with [the CIR], through BIR’s Large Taxpayers Audit
prescribed above, the taxpayer affected may, within thirty (30) days from
and Investigation Division II (LTAID II), a letter dated November 13, 2006 claiming a tax
the receipt of the decision denying the claim or after the expiration of
credit/refund of its supposed input VAT amounting to P8,365,664.38 for the period covering
the one hundred twenty day-period, appeal the decision or the unacted
January 1, 2004 to December 31, 2004. On the same date, [Taganito] likewise filed an Application
claim with the Court of Tax Appeals. (Emphasis supplied.)
for Tax Credits/Refunds for the period covering January 1, 2005 to December 31, 2005 for the
12. As stated, [Taganito] filed the administrative claim for refund with the Bureau
same amount.
of Internal Revenue on November 14, 2006. Subsequently on February 14, 2007, the
On November 29, 2006, [Taganito] sent again another letter dated November 29, 2004 to
instant petition was filed. Obviously the 120 days given to the Commissioner to decide
[the CIR], to correct the period of the above claim for tax credit/refund in the said amount of
on the claim has not yet lapsed when the petition was filed. The petition was prematurely
P8,365,664.38 as actually referring to the period covering January 1, 2005 to December 31, 2005.
filed, hence it must be dismissed for lack of jurisdiction.
As the statutory period within which to file a claim for refund for said input VAT is about to
During trial, [Taganito] presented testimonial and documentary evidence primarily aimed at
lapse without action on the part of the [CIR], [Taganito] filed the instant Petition for Review on
proving its supposed entitlement to the refund in the amount of P8,365,664.38, representing input
February 17, 2007.
taxes for the period covering January 1, 2005 to December 31, 2005. [The CIR], on the other
In his Answer filed on March 28, 2007, [the CIR] interposes the following defenses:
hand, opted not to present evidence. Thus, in the Resolution promulgated on January 22, 2009,
4. [Taganito’s] alleged claim for refund is subject to administrative
this case was submitted for decision as of such date, considering [Taganito’s] “Memorandum”
investigation/examination by the Bureau of Internal Revenue (BIR);
filed on January 19, 2009 and [the CIR’s] “Memorandum” filed on December 19, 2008. 24
5. The amount of P8,365,664.38 being claimed by [Taganito] as alleged unutilized
input VAT on domestic purchases of goods and services and on importation of capital The Court of Tax Appeals’ Ruling: Division
goods for the period January 1, 2005 to December 31, 2005 is not properly documented; The CTA Second Division partially granted Taganito’s claim. In its Decision 25 dated 8 January
6. [Taganito] must prove that it has complied with the provisions of Sections 112 2010, the CTA Second Division found that Taganito complied with the requirements of Section
(A) and (D) and 229 of the National Internal Revenue Code of 1997 (1997 Tax Code) on 112(A) of RA 8424, as amended, to be entitled to a tax refund or credit of input VAT attributable
the prescriptive period for claiming tax refund/credit; to zero-rated or effectively zero-rated sales.26
7. Proof of compliance with the prescribed checklist of requirements to be submitted The pertinent portions of the CTA Second Division’s Decision read:
involving claim for VAT refund pursuant to Revenue Memorandum Order No. 53- Finally, records show that [Taganito’s] administrative claim filed on November 14, 2006,
98, otherwise there would be no sufficient compliance with the filing of which was amended on November 29, 2006, and the Petition for Review filed with this Court on
February 14, 2007 are well within the two-year prescriptive period, reckoned from March 31,
2005, June 30, 2005, September 30, 2005, and December 31, 2005, respectively, the close of
each taxable quarter covering the period January 1, 2005 to December 31, 2005.
In fine, [Taganito] sufficiently proved that it is entitled to a tax credit certificate in the amount
of P8,249,883.33 representing unutilized input VAT for the four taxable quarters of 2005.
WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, [the CIR] is hereby ORDERED to REFUND to [Taganito] the amount of
EIGHT MILLION TWO HUNDRED FORTY NINE THOUSAND EIGHT HUNDRED EIGHTY THREE
PESOS AND THIRTY THREE CENTAVOS (P8,249,883.33) representing its unutilized input taxes
attributable to zero-rated sales from January 1, 2005 to December 31, 2005.
SO ORDERED. 27
The Commissioner filed a Motion for Partial Reconsideration on 29 January 2010. Taganito,
in turn, filed a Comment/Opposition on the Motion for Partial Reconsideration on 15 February
2010.
In a Resolution28 dated 7 April 2010, the CTA Second Division denied the CIR’s motion. The
CTA Second Division ruled that the legislature did not intend that Section 112 (Refunds or Tax
Credits of Input Tax) should be read in isolation from Section 229 (Recovery of Tax Erroneously
or Illegally Collected) or vice versa. The CTA Second Division applied the mandatory statute of
limitations in seeking judicial recourse prescribed under Section 229 to claims for refund or tax
credit under Section 112.
The Court of Tax Appeals’ Ruling: En Banc
On 29 April 2010, the Commissioner filed a Petition for Review before the CTA EB assailing
the 8 January 2010 Decision and the 7 April 2010 Resolution in CTA Case No. 7574 and praying
that Taganito’s entire claim for refund be denied.
In its 8 December 2010 Decision,29 the CTA EB granted the CIR’s petition for review and
reversed and set aside the challenged decision and resolution.
The CTA EB declared that Section 112(A) and (B) of the 1997 Tax Code both set forth the
reckoning of the two-year prescriptive period for filing a claim for tax refund or credit over input
VAT to be the close of the taxable quarter when the sales were made. The CTA EB also relied on
this Court’s rulings in the cases of Commissioner of Internal Revenue v. Aichi Forging Company
of Asia, Inc. (Aichi)30 and Commissioner of Internal Revenue v. Mirant Pagbilao Corporation
(Mirant).31 Both Aichi and Mirant ruled that the two-year prescriptive period to file a refund for
input VAT arising from zero-rated sales should be reckoned from the close of the taxable quarter
when the sales were made. Aichi further emphasized that the failure to await the decision of the
Commissioner or the lapse of 120-day period prescribed in Section 112(D) amounts to a premature
filing.
The CTA EB found that Taganito filed its administrative claim on 14 November 2006, which
was well within the period prescribed under Section 112(A) and (B) of the 1997 Tax Code.
However, the CTA EB found that Taganito’s judicial claim was prematurely filed. Taganito filed its
Petition for Review before the CTA Second Division on 14 February 2007. The judicial claim was
filed after the lapse of only 92 days from the filing of its administrative claim before the CIR, in
violation of the 120-day period prescribed in Section 112(D) of the 1997 Tax Code.
The dispositive portion of the Decision states:
WHEREFORE, the instant Petition for Review is hereby GRANTED. The assailed Decision dated
January 8, 2010 and Resolution dated April 7, 2010 of the Special Second Division of this Court
are hereby REVERSED and SET ASIDE. Another one is hereby entered DISMISSING the Petition
for Review filed in CTA Case No. 7574 for having been prematurely filed.
SO ORDERED. 32
In his dissent,33 Associate Justice Lovell R. Bautista insisted that Taganito timely filed its claim
before the CTA. Justice Bautista read Section 112(C) of the 1997 Tax Code (Period within which
Refund or Tax Credit of Input Taxes shall be Made) in conjunction with Section 229 (Recovery of
Tax Erroneously or Illegally Collected). Justice Bautista also relied on this Court’s ruling in Atlas
Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue
(Atlas),34 which stated that refundable or creditable input VAT and illegally or erroneously collected
national internal revenue tax are the same, insofar as both are monetary amounts which are
currently in the hands of the government but must rightfully be returned to the taxpayer. Justice
Bautista concluded:
Being merely permissive, a taxpayer claimant has the option of seeking judicial redress for refund
or tax credit of excess or unutilized input tax with this Court, either within 30 days from receipt of
the denial of its claim, or after the lapse of the 120-day period in the event of inaction by the
Commissioner, provided that both administrative and judicial remedies must be undertaken within
the 2-year period. 35
Taganito filed its Motion for Reconsideration on 29 December 2010. The Commissioner filed
an Opposition on 26 January 2011. The CTA EB denied for lack of merit Taganito’s motion in a
Resolution36 dated 14 March 2011. The CTA EB did not see any justifiable reason to depart from
this Court’s rulings in Aichi and Mirant.
G.R. No. 197156
Philex Mining Corporation v. CIR
The Facts
The CTA EB’s narration of the pertinent facts is as follows:
[Philex] is a corporation duly organized and existing under the laws of the Republic of the
Philippines, which is principally engaged in the mining business, which includes the exploration
and operation of mine properties and commercial production and marketing of mine products,
with office address at 27 Philex Building, Fairlaine St., Kapitolyo, Pasig City.
[The CIR], on the other hand, is the head of the Bureau of Internal Revenue (“BIR”), the
government entity tasked with the duties/functions of assessing and collecting all national internal
revenue taxes, fees, and charges, and enforcement of all forfeitures, penalties and fines connected
therewith, including the execution of judgments in all cases decided in its favor by [the Court of
Tax Appeals] and the ordinary courts, where she can be served with court processes at the BIR
Head Office, BIR Road, Quezon City.
On October 21, 2005, [Philex] filed its Original VAT Return for the third quarter of taxable
year 2005 and Amended VAT Return for the same quarter on December 1, 2005.
On March 20, 2006, [Philex] filed its claim for refund/tax credit of the amount of
P23,956,732.44 with the One Stop Shop Center of the Department of Finance. However, due to
[the CIR’s] failure to act on such claim, on October 17, 2007, pursuant to Sections 112 and 229
of the NIRC of 1997, as amended, [Philex] filed a Petition for Review, docketed as C.T.A. Case
No. 7687.
In [her] Answer, respondent CIR alleged the following special and affirmative defenses:
4. Claims for refund are strictly construed against the taxpayer as the same partake
the nature of an exemption;
5. The taxpayer has the burden to show that the taxes were erroneously or illegally
paid. Failure on the part of [Philex] to prove the same is fatal to its cause of action;
6. [Philex] should prove its legal basis for claiming for the amount being refunded. 37
The Court of Tax Appeals’ Ruling: Division
The CTA Second Division, in its Decision dated 20 July 2009, denied Philex’s claim due to
prescription. The CTA Second Division ruled that the two-year prescriptive period specified in
Section 112(A) of RA 8424, as amended, applies not only to the filing of the administrative claim
with the BIR, but also to the filing of the judicial claim with the CTA. Since Philex’s claim covered
the 3rd quarter of 2005, its administrative claim filed on 20 March 2006 was timely filed, while its
judicial claim filed on 17 October 2007 was filed late and therefore barred by prescription.
On 10 November 2009, the CTA Second Division denied Philex’s Motion for Reconsideration.
The Court of Tax Appeals’ Ruling: En Banc
Philex filed a Petition for Review before the CTA EB praying for a reversal of the 20 July 2009
Decision and the 10 November 2009 Resolution of the CTA Second Division in CTA Case No. 7687.
The CTA EB, in its Decision38 dated 3 December 2010, denied Philex’s petition and affirmed
the CTA Second Division’s Decision and Resolution.
The pertinent portions of the Decision read:
In this case, while there is no dispute that [Philex’s] administrative claim for refund was filed
within the two-year prescriptive period; however, as to its judicial claim for refund/credit, records
show that on March 20, 2006, [Philex] applied the administrative claim for refund of unutilized
input VAT in the amount of P23,956,732.44 with the One Stop Shop Center of the Department of
Finance, per Application No. 52490. From March 20, 2006, which is also presumably the date
[Philex] submitted supporting documents, together with the aforesaid application for refund, the
CIR has 120 days, or until July 18, 2006, within which to decide the claim. Within 30 days from
the lapse of the 120-day period, or from July 19, 2006 until August 17, 2006, [Philex] should have
elevated its claim for refund to the CTA. However, [Philex] filed its Petition for Review only on
October 17, 2007, which is 426 days way beyond the 30-day period prescribed by law.
Evidently, the Petition for Review in CTA Case No. 7687 was filed 426 days late. Thus, the
Petition for Review in CTA Case No. 7687 should have been dismissed on the ground that the
Petition for Review was filed way beyond the 30-day prescribed period; thus, no jurisdiction was
acquired by the CTA in Division; and not due to prescription.
WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED DUE
COURSE, and accordingly, DISMISSED. The assailed Decision dated July 20, 2009, dismissing the
Petition for Review in CTA Case No. 7687 due to prescription, and Resolution dated November 10,
2009 denying [Philex’s] Motion for Reconsideration are hereby AFFIRMED, with modification that
the dismissal is based on the ground that the Petition for Review in CTA Case No. 7687 was filed
way beyond the 30-day prescribed period to appeal.
SO ORDERED. 39
The Issues
G.R. No. 187485
CIR v. San Roque Power Corporation
The Commissioner raised the following grounds in the Petition for Review:
I. The Court of Tax Appeals En Banc erred in holding that [San Roque’s] claim for refund
was not prematurely filed.
II. The Court of Tax Appeals En Banc erred in affirming the amended decision of the
Court of Tax Appeals (Second Division) granting [San Roque’s] claim for refund of
alleged unutilized input VAT on its purchases of capital goods and services for the
taxable year 2001 in the amount of P483,797,599.65. 40
G.R. No. 196113
Taganito Mining Corporation v. CIR
Taganito raised the following grounds in its Petition for Review:
I. The Court of Tax Appeals En Banc committed serious error and acted with grave
abuse of discretion tantamount to lack or excess of jurisdiction n erroneously
applying the Aichi doctrine in violation of [Taganito’s] right to due process.
II. The Court of Tax Appeals committed serious error and acted with grave abuse of
discretion amounting to lack or excess of jurisdiction in erroneously interpreting
the provisions of Section 112 (D).41
G.R. No. 197156
Philex Mining Corporation v. CIR
Philex raised the following grounds in its Petition for Review:
I. The CTA En Banc erred in denying the petition due to alleged prescription. The fact
is that the petition was filed with the CTA within the period set by prevailing court
rulings at the time it was filed.
II. The CTA En Banc erred in retroactively applying the Aichi ruling in denying the
petition in this instant case.42
The Court’s Ruling
For ready reference, the following are the provisions of the Tax Code applicable to the present
cases:
Section 105:
Persons Liable .―Any person who, in the course of trade or business, sells,
barters, exchanges, leases goods or properties, renders services, and any person
who imports goods shall be subject to the value-added tax (VAT) imposed in
Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted
or passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing contracts of sale or lease of goods,
properties or services at the time of the effectivity of Republic Act No. 7716.
xxxx
Section 110(B):
Sec. 110. Tax Credits.― (B) Excess Output or Input Tax.―If at the end of any taxable
quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered
person. If the input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters: [Provided, That the input tax inclusive of input VAT carried
over from the previous quarter that may be credited in every quarter shall not exceed seventy
percent (70%) of the output VAT:] 43 Provided, however, That any input tax attributable to
zero-rated sales by a VAT-registered person may at his option be refunded or credited
against other internal revenue taxes, subject to the provisions of Section 112.
Section 112:44
_______________
43 Bracketed proviso was deleted by RA 9361, which took effect on 13 December 2006.
44 RA 9337 amended Section 112 to read:
Sec. 112. Refunds or Tax Credits of Input Tax.―
(A) Zero-Rated or Effectively Zero-Rated Sales.―Any VAT-registered person, whose
sales are zero-rated or effectively zero-rated may, within two (2) years after the close
of the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales,
except transitional input tax, to the extent that such input tax has not been applied against output
tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2)
and (b) and Section 108(B)(1) and (2), the acceptable foreign currency exchange proceeds thereof
had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services,
and the amount of creditable input tax due or paid cannot be directly and entirely attributed to
any one of the transactions, it shall be allocated proportionately on the basis of the volume of
sales. Provided, finally, That for a person making sales that are zero-rated under Section
108(B)(6), the input taxes shall be allocated ratably between his zero-rated and non-zero-rated
sales.
(B) Cancellation of VAT Registration. ―x x x x
378
378 SUPREME COURT REPORTS ANNOTATED
Commissioner of Internal Revenue vs. San Roque Power Corporation
Sec. 112. Refunds or Tax Credits of Input Tax.―
(A) Zero-Rated or Effectively Zero-Rated Sales.―Any VAT-registered person,
whose sales are zero-rated or effectively zero-rated may, within two (2) years
after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input
tax has not been applied against output tax: Provided, however, That in the case of zero-
rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108(B)(1) and (2),
the acceptable foreign currency exchange proceeds thereof had been duly accounted for
in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively
zero-rated sale and also in taxable or exempt sale of goods or properties or services, and
the amount of creditable input tax due or paid cannot be directly and entirely attributed
 to any one of the transactions, it shall be allocated proportionately on the basis of the
volume of sales.
(B) Capital Goods.―A VAT–registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased,
to the extent that such input taxes have not been applied against output taxes. The
application may be made only within two (2)
_______________
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. ―In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the
part of the Commissioner to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of the decision denying
the claim or after the expiration of the one hundred twenty day-period, appeal the
decision or the unacted claim with the Court of Tax Appeals.
(D) Manner of Giving Refund.―x x x x
379
VOL. 690, FEBRUARY 12, 2013 379
Commissioner of Internal Revenue vs. San Roque Power Corporation
years after the close of the taxable quarter when the importation or purchase was made.
(C) Cancellation of VAT Registration. ―A person whose registration has been cancelled
due to retirement from or cessation of business, or due to changes in or cessation of
status under Section 106(C) of this Code may, within two (2) years from the date of
cancellation, apply for the issuance of a tax credit certificate for any unused input tax
which may be used in payment of his other internal revenue taxes.
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. ―In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for
creditable input taxes within one hundred twenty (120) days from the date of
submission of complete documents in support of the application filed in accordance
with Subsection (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on
the part of the Commissioner to act on the application within the period prescribed above,
the taxpayer affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one hundred twenty day-
period, appeal the decision or the unacted claim with the Court of Tax Appeals.
(E) Manner of Giving Refund.―Refunds shall be made upon warrants drawn by the
Commissioner or by his duly authorized representative without the necessity of being
countersigned by the Chairman, Commission on Audit, the provisions of the
Administrative Code of 1987 to the contrary notwithstanding: Provided, that refunds
under this paragraph shall be subject to post audit by the Commission on Audit.
Section 229:
Recovery of Tax Erroneously or Illegally Collected .―No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have
been excessively or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2)
years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment: Provided, however, That the Commissioner may,
even without a written claim therefor, refund or credit any tax, where on the face of the
return upon which payment was made, such payment appears clearly to have been
erroneously paid.
(All emphases supplied)
I. Application of the 120+30 Day Periods
a. G.R. No. 187485 — CIR v. San Roque Power Corporation
On 10 April 2003, a mere 13 days after it filed its amended administrative claim with the
Commissioner on 28 March 2003, San Roque filed a Petition for Review with the CTA docketed as
CTA Case No. 6647. From this we gather two crucial facts: first, San Roque did not wait for the
120-day period to lapse before filing its judicial claim; second, San Roque filed its judicial claim
more than four (4) years before the Atlas45 doctrine, which was promulgated by the Court on 8
June 2007.
Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given
by law to the Commissioner to decide whether to grant or deny San Roque’s application for tax
refund or credit. It is indisputable that compliance with the 120-day waiting period is mandatory
and jurisdictional. The waiting period, originally fixed at 60 days only, was part of the provisions
of the first VAT law, Executive Order No. 273, which took effect on 1 January 1988. The waiting
period was extended to 120 days effective 1 January 1998 under RA 8424 or the Tax Reform Act
of 1997. Thus, the waiting period has been in our statute books for more than fifteen
(15) years before San Roque filed its judicial claim.
Failure to comply with the 120-day waiting period violates a mandatory provision of law. It
violates the doctrine of exhaustion of administrative remedies and renders the petition premature
and thus without a cause of action, with the effect that the CTA does not acquire jurisdiction over
the taxpayer’s petition. Philippine jurisprudence is replete with cases upholding and reiterating
these doctrinal principles.46
The charter of the CTA expressly provides that its jurisdiction is to review on appeal
“decisions of the Commissioner of Internal Revenue in cases involving x x x refunds of internal
revenue taxes.”47 When a taxpayer prematurely files a judicial claim for tax refund or credit with
the CTA without waiting for the decision of the Commissioner, there is no “decision” of the
Commissioner to review and thus the CTA as a court of special jurisdiction has no jurisdiction over
the appeal. The charter of the CTA also expressly provides that if the Commissioner fails to decide
within “a specific period” required by law, such “inaction shall be deemed a denial”48 of the
application for tax refund or credit. It is the Commissioner’s decision, or inaction “deemed a
denial,” that the taxpayer can take to the CTA for review. Without a decision or an “inaction x x x
deemed a denial” of the Commissioner, the CTA has no jurisdiction over a petition for review. 49
San Roque’s failure to comply with the 120-day mandatory period renders its petition for
review with the CTA void. Article 5 of the Civil Code provides, “Acts executed against provisions
of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity.”
San Roque’s void petition for review cannot be legitimized by the CTA or this Court because Article
5 of the Civil Code states that such void petition cannot be legitimized “except when the law itself
authorizes [its] validity.” There is no law authorizing the petition’s validity.
It is hornbook doctrine that a person committing a void act contrary to a mandatory provision
of law cannot claim or acquire any right from his void act. A right cannot spring in favor of a
person from his own void or illegal act. This doctrine is repeated in Article 2254 of the Civil Code,
which states, “No vested or acquired right can arise from acts or omissions which are against the
law or which infringe upon the rights of others.” 50 For violating a mandatory provision of law in
filing its petition with the CTA, San Roque cannot claim any right arising from s uch void petition.
Thus, San Roque’s petition with the CTA is a mere scrap of paper.
This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of
the 120-day period just because the Commissioner merely asserts that the case was prematurely
filed with the CTA and does not question the entitlement of San Roque to the refund. The mere
fact that a taxpayer has undisputed excess input VAT, or that the tax was admittedly illegally,
erroneously or excessively collected from him, does not entitle him as a matter of right to a tax
refund or credit. Strict compliance with the mandatory and jurisdictional conditions prescribed by
law to claim such tax refund or credit is essential and necessary for such claim to prosper. Well-
settled is the rule that tax refunds or credits, just like tax exemptions, are strictly
construed against the taxpayer.51 The burden is on the taxpayer to show that he has strictly
complied with the conditions for the grant of the tax refund or credit.
This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply
because the Commissioner chose not to contest the numerical correctness of the claim for tax
refund or credit of the taxpayer. Non-compliance with mandatory periods, non-observance of
prescriptive periods, and non-adherence to exhaustion of administrative remedies bar a
taxpayer’s claim for tax refund or credit, whether or not the Commissioner questions the numerical
correctness of the claim of the taxpayer. This Court should not establish the precedent that non-
compliance with mandatory and jurisdictional conditions can be excused if the claim is otherwise
meritorious, particularly in claims for tax refunds or credit. Such precedent will render meaningless
compliance with mandatory and jurisdictional requirements, for then every tax refund case will
have to be decided on the numerical correctness of the amounts claimed, regardless of non-
compliance with mandatory and jurisdictional conditions.
San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine
because San Roque filed its petition for review with the CTA more than four years
before Atlas was promulgated. The Atlas doctrine did not exist at the time San Roque failed
to comply with the 120-day period. Thus, San Roque cannot invoke the Atlas doctrine as an excuse
for its failure to wait for the 120-day period to lapse. In any event, the Atlas doctrine merely
stated that the two-year prescriptive period should be counted from the date of payment of the
output VAT, not from the close of the taxable quarter when the sales involving the input VAT were
made. The Atlas doctrine does not interpret, expressly or impliedly, the 120+30 52 day
periods.
In fact, Section 106(b) and (e) of the Tax Code of 1977 as amended, which was the law cited
by the Court in Atlas as the applicable provision of the law did not yet provide for the 30-day
period for the taxpayer to appeal to the CTA from the decision or inaction of the
Commissioner.53 Thus, the Atlas doctrine cannot be invoked by anyone to disregard
compliance with the 30-day mandatory and jurisdictional period. Also, the difference
between the Atlas doctrine on one hand, and the Mirant54 doctrine on the other hand, is a mere
20 days. The Atlas doctrine counts the two-year prescriptive period from the date of payment of
the output VAT, which means within 20 days after the close of the taxable quarter. The output
VAT at that time must be paid at the time of filing of the quarterly tax returns, which were to be
filed “within 20 days following the end of each quarter.”
Thus, in Atlas, the three tax refund claims listed below were deemed timely filed because the
administrative claims filed with the Commissioner, and the petitions for review filed with the CTA,
were all filed within two years from the date of payment of the output VAT, following Section 229:
Period Covered Date of Filing Date of Filing Date of
Return Administrative Filing
& Payment Claim Petition
of Tax With CTA
2nd Quarter, 1990 20 July 1990 21 August 1990 20 July 1992
Close of Quarter
30 June 1990
3rd Quarter, 1990 18 October 1990 21 November 1990 9 October 1992
Close of Quarter
30 September 1990
4th Quarter, 1990 20 January 1991 19 February 1991 14 January
Close of Quarter 1993
31 December 1990
Atlas paid the output VAT at the time it filed the quarterly tax returns on the 20th, 18th, and 20th
day after the close of the taxable quarter. Had the two-year prescriptive period been counted
from the “close of the taxable quarter” as expressly stated in the law, the tax refund claims of
Atlas would have already prescribed. In contrast, the Mirant doctrine counts the two-year
prescriptive period from the “close of the taxable quarter when the sales were made” as expressly
stated in the law, which means the last day of the taxable quarter. The 20-day
difference55 between the Atlas doctrine and the later Mirant doctrine is not material
to San Roque’s claim for tax refund.
Whether the Atlas doctrine or the Mirant doctrine is applied to San Roque is immaterial
because what is at issue in the present case is San Roque’s non-compliance with the 120-day
mandatory and jurisdictional period, which is counted from the date it filed its administrative claim
with the Commissioner. The 120-day period may extend beyond the two-year prescriptive period,
as long as the administrative claim is filed within the two-year prescriptive period. However, San
Roque’s fatal mistake is that it did not wait for the Commissioner to decide within the 120-day
period, a mandatory period whether the Atlas or the Mirant doctrine is applied.
At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory
periods were already in the law. Section 112(C) 56 expressly grants the Commissioner 120 days
within which to decide the taxpayer’s claim. The law is clear, plain, and unequivocal: “x x x the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input
taxes within one hundred twenty (120) days from the date of submission of complete
documents.” Following the verba legis doctrine, this law must be applied exactly as worded since
it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA without
waiting for the Commissioner’s decision within the 120-day mandatory and jurisdictional period.
The CTA will have no jurisdiction because there will be no “decision” or “deemed a denial” decision
of the Commissioner for the CTA to review. In San Roque’s case, it filed its petition with the CTA
a mere 13 days after it filed its administrative claim with the Commissioner. Indisputably, San
Roque knowingly violated the mandatory 120-day period, and it cannot blame anyone but itself.
Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the
decision or inaction of the Commissioner, thus:
x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision
denying the claim or after the expiration of the one hundred twenty day-period, appeal
the decision or the unacted claim with the Court of Tax Appeals. (Emphasis supplied)
This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law
should be applied exactly as worded since it is clear, plain, and unequivocal. As this law states,
the taxpayer may, if he wishes, appeal the decision of the Commissioner to the CTA within 30
days from receipt of the Commissioner’s decision, or if the Commissioner does not act on the
taxpayer’s claim within the 120-day period, the taxpayer may appeal to the CTA within 30 days
from the expiration of the 120-day period.
b. G.R. No. 196113 — Taganito Mining Corporation v. CIR
Like San Roque, Taganito also filed its petition for review with the CTA without waiting for
the 120-day period to lapse. Also, like San Roque, Taganito filed its judicial claim before the
promulgation of the Atlas doctrine. Taganito filed a Petition for Review on 14 February 2007 with
the CTA. This is almost four months before the adoption of the Atlas doctrine on 8 June 2007.
Taganito is similarly situated as San Roque―both cannot claim being misled, misguided, or
confused by the Atlas doctrine.
However, Taganito can invoke BIR Ruling No. DA-489-03 57 dated 10 December 2003, which
expressly ruled that the “taxpayer-claimant need not wait for the lapse of the 120-day
period before it could seek judicial relief with the CTA by way of Petition for Review.”
Taganito filed its judicial claim after the issuance of BIR Ruling No. DA-489-03 but before the
adoption of the Aichi doctrine. Thus, as will be explained later, Taganito is deemed to have filed
its judicial claim with the CTA on time.
c. G.R. No. 197156 – Philex Mining Corporation v. CIR
Philex (1) filed on 21 October 2005 its original VAT Return for the third quarter of taxable
year 2005; (2) filed on 20 March 2006 its administrative claim for refund or credit; (3) filed on 17
October 2007 its Petition for Review with the CTA. The close of the third taxable quarter in 2005
is 30 September 2005, which is the reckoning date in computing the two-year prescriptive period
under Section 112(A).
Philex timely filed its administrative claim on 20 March 2006, within the two-year prescriptive
period. Even if the two-year prescriptive period is computed from the date of payment of the
output VAT under Section 229, Philex still filed its administrative claim on time. Thus,
the Atlas doctrine is immaterial in this case. The Commissioner had until 17 July 2006, the
last day of the 120-day period, to decide Philex’s claim. Since the Commissioner did not act on
Philex’s claim on or before 17 July 2006, Philex had until 17 August 2006, the last day of the 30-
day period, to file its judicial claim. The CTA EB held that 17 August 2006 was indeed the
last day for Philex to file its judicial claim. However, Philex filed its Petition for Review with
the CTA only on 17 October 2007, or four hundred twenty-six (426) days after the last day of
filing. In short, Philex was late by one year and 61 days in filing its judicial claim. As
the CTA EB correctly found:
Evidently, the Petition for Review in C.T.A. Case No. 7687 was filed 426 days late.
Thus, the Petition for Review in C.T.A. Case No. 7687 should have been dismissed on the ground
that the Petition for Review was filed way beyond the 30-day prescribed period; thus, no
jurisdiction was acquired by the CTA Division; x x x58 (Emphasis supplied)
Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing.
Philex did not file any petition with the CTA within the 120-day period. Philex did not also file any
petition with the CTA within 30 days after the expiration of the 120-day period. Philex filed its
judicial claim long after the expiration of the 120-day period, in fact 426 days after the lapse of
the 120-day period. In any event, whether governed by jurisprudence before, during, or
after the Atlas case, Philex’s judicial claim will have to be rejected because of late
filing. Whether the two-year prescriptive period is counted from the date of payment of the
output VAT following the Atlas doctrine, or from the close of the taxable quarter when the sales
attributable to the input VAT were made following the Mirant and Aichi doctrines, Philex’s judicial
claim was indisputably filed late.
The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of
the Commissioner on Philex’s claim during the 120-day period is, by express provision of law,
“deemed a denial” of Philex’s claim. Philex had 30 days from the expiration of the 120-day period
to file its judicial claim with the CTA. Philex’s failure to do so rendered the “deemed a denial”
decision of the Commissioner final and inappealable. The right to appeal to the CTA from a
decision or “deemed a denial” decision of the Commissioner is merely a statutory privilege, not a
constitutional right. The exercise of such statutory privilege requires strict compliance with the
conditions attached by the statute for its exercise.59 Philex failed to comply with the statutory
conditions and must thus bear the consequences.
II. Prescriptive Periods under Section 112(A) and (C)
There are three compelling reasons why the 30-day period need not necessarily fall within
the two-year prescriptive period, as long as the administrative claim is filed within the two-year
prescriptive period.
First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer
“may, within two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of the creditable input
tax due or paid to such sales.” In short, the law states that the taxpayer may apply with the
Commissioner for a refund or credit “within two (2) years,” which means at anytime within
two years. Thus, the application for refund or credit may be filed by the taxpayer with the
Commissioner on the last day of the two-year prescriptive period and it will still strictly comply
with the law. The two-year prescriptive period is a grace period in favor of the taxpayer and he
can avail of the full period before his right to apply for a tax refund or credit is barred by
prescription.
Second, Section 112(C) provides that the Commissioner shall decide the application for refund
or credit “within one hundred twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with Subsection (A).” The reference
in Section 112(C) of the submission of documents “in support of the application filed in accordance
with Subsection A” means that the application in Section 112(A) is the administrative claim that
the Commissioner must decide within the 120-day period. In short, the two-year prescriptive
period in Section 112(A) refers to the period within which the taxpayer can file an administrative
claim for tax refund or credit. Stated otherwise, the two-year prescriptive period does not
refer to the filing of the judicial claim with the CTA but to the filing of the
administrative claim with the Commissioner. As held in Aichi, the “phrase ‘within two years
x x x apply for the issuance of a tax credit or refund’ refers to applications for refund/credit
with the CIR and not to appeals made to the CTA.”
Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive
period (equivalent to 730 days60), then the taxpayer must file his administrative claim for refund
or credit within the first 610 days of the two-year prescriptive period. Otherwise, the filing of
the administrative claim beyond the first 610 days will result in the appeal to the CTA
being filed beyond the two-year prescriptive period. Thus, if the taxpayer files his
administrative claim on the 611th day, the Commissioner, with his 120-day period, will have until
the 731st day to decide the claim. If the Commissioner decides only on the 731st day, or does
not decide at all, the taxpayer can no longer file his judicial claim with the CTA because the two-
year prescriptive period (equivalent to 730 days) has lapsed. The 30-day period granted by law
to the taxpayer to file an appeal before the CTA becomes utterly useless, even if the taxpayer
complied with the law by filing his administrative claim within the two-year prescriptive period.
The theory that the 30-day period must fall within the two-year prescriptive period adds a
condition that is not found in the law. It results in truncating 120 days from the 730 days that the
law grants the taxpayer for filing his administrative claim with the Commissioner. This Court
cannot interpret a law to defeat, wholly or even partly, a remedy that the law expressly grants in
clear, plain, and unequivocal language.
Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal
language. The taxpayer can file his administrative claim for refund or credit at anytime within
the two-year prescriptive period. If he files his claim on the last day of the two-year prescriptive
period, his claim is still filed on time. The Commissioner will have 120 days from such filing to
decide the claim. If the Commissioner decides the claim on the 120th day, or does not decide it
on that day, the taxpayer still has 30 days to file his judicial claim with the CTA. This is not only
the plain meaning but also the only logical interpretation of Section 112(A) and (C).
III. “Excess” Input VAT and “Excessively” Collected Tax
The input VAT is not “excessively” collected as understood under Section 229 because at
the time the input VAT is collected the amount paid is correct and proper. The input VAT
is a tax liability of, and legally paid by, a VAT-registered seller61 of goods, properties or services
used as input by another VAT-registered person in the sale of his own goods, properties, or
services. This tax liability is true even if the seller passes on the input VAT to the buyer as part of
the purchase price. The second VAT-registered person, who is not legally liable for the input VAT,
is the one who applies the input VAT as credit for his own output VAT. 62 If the input VAT is in fact
“excessively” collected as understood under Section 229, then it is the first VAT-registered
person―the taxpayer who is legally liable and who is deemed to have legally paid for the input
VAT―who can ask for a tax refund or credit under Section 229 as an ordinary refund or credit
outside of the VAT System. In such event, the second VAT-registered taxpayer will have no input
VAT to offset against his own output VAT.
In a claim for refund or credit of “excess” input VAT under Section 110(B) and Section 112(A),
the input VAT is not “excessively” collected as understood under Section 229. At the time of
payment of the input VAT the amount paid is the correct and proper amount. Under the VAT
System, there is no claim or issue that the input VAT is “excessively” collected, that is, that the
input VAT paid is more than what is legally due. The person legally liable for the input VAT cannot
claim that he overpaid the input VAT by the mere existence of an “excess” input VAT. The term
“excess” input VAT simply means that the input VAT available as credit exceeds the output VAT,
not that the input VAT is excessively collected because it is more than what is legally due. Thus,
the taxpayer who legally paid the input VAT cannot claim for refund or credit of the input VAT as
“excessively” collected under Section 229.
Under Section 229, the prescriptive period for filing a judicial claim for refund is two years
from the date of payment of the tax “erroneously, x x x illegally, x x x excessively or in any manner
wrongfully collected.” The prescriptive period is reckoned from the date the person liable for the
tax pays the tax. Thus, if the input VAT is in fact “excessively” collected, that is, the person liable
for the tax actually pays more than what is legally due, the taxpayer must file a judicial claim for
refund within two years from his date of payment. Only the person legally liable to pay the
tax can file the judicial claim for refund. The person to whom the tax is passed on as
part of the purchase price has no personality to file the judicial claim under Section
229.63
Under Section 110(B) and Section 112(A), the prescriptive period for filing a judicial claim for
“excess” input VAT is two years from the close of the taxable quarter when the sale was made by
the person legally liable to pay the output VAT. This prescriptive period has no relation to the
date of payment of the “excess” input VAT. The “excess” input VAT may have been paid for more
than two years but this does not bar the filing of a judicial claim for “excess” VAT under Section
112(A), which has a different reckoning period from Section 229. Moreover, the person claiming
the refund or credit of the input VAT is not the person who legally paid the input VAT. Such person
seeking the VAT refund or credit does not claim that the input VAT was “excessively” collected
from him, or that he paid an input VAT that is more than what is legally due. He is not the taxpayer
who legally paid the input VAT.
As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer
in the chain of transactions. For simplicity and efficiency in tax collection, the VAT is imposed not
just on the value added by the taxpayer, but on the entire selling price of his goods, properties or
services. However, the taxpayer is allowed a refund or credit on the VAT previously paid by those
who sold him the inputs for his goods, properties, or services. The net effect is that the taxpayer
pays the VAT only on the value that he adds to the goods, properties, or services that he actually
sells.
Under Section 110(B), a taxpayer can apply his input VAT only against his output VAT. The
only exception is when the taxpayer is expressly “zero-rated or effectively zero-rated” under the
law, like companies generating power through renewable sources of energy. 64 Thus, a non zero-
rated VAT-registered taxpayer who has no output VAT because he has no sales cannot claim a
tax refund or credit of his unused input VAT under the VAT System. Even if the taxpayer has sales
but his input VAT exceeds his output VAT, he cannot seek a tax refund or credit of his “excess”
input VAT under the VAT System. He can only carry-over and apply his “excess” input VAT
against his future output VAT. If such “excess” input VAT is an “excessively” collected tax, the
taxpayer should be able to seek a refund or credit for such “excess” input VAT whether or not he
has output VAT. The VAT System does not allow such refund or credit. Such “excess” input VAT
is not an “excessively” collected tax under Section 229. The “excess” input VAT is a correctly and
properly collected tax. However, such “excess” input VAT can be applied against the output VAT
because the VAT is a tax imposed only on the value added by the taxpayer. If the input VAT is in
fact “excessively” collected under Section 229, then it is the person legally liable to pay the input
VAT, not the person to whom the tax was passed on as part of the purchase price and claiming
credit for the input VAT under the VAT System, who can file the judicial claim under Section 229.
Any suggestion that the “excess” input VAT under the VAT System is an “excessively”
collected tax under Section 229 may lead taxpayers to file a claim for refund or credit for such
“excess” input VAT under Section 229 as an ordinary tax refund or credit outside of the VAT
System. Under Section 229, mere payment of a tax beyond what is legally due can be claimed as
a refund or credit. There is no requirement under Section 229 for an output VAT or subsequent
sale of goods, properties, or services using materials subject to input VAT.
From the plain text of Section 229, it is clear that what can be refunded or credited is a tax
that is “erroneously, x x x illegally, x x x excessively or in any manner wrongfully collected.”
In short, there must be a wrongful payment because what is paid, or part of it, is not legally
due. As the Court held in Mirant, Section 229 should “apply only to instances of erroneous
payment or illegal collection of internal revenue taxes.” Erroneous or wrongful payment
includes excessive payment because they all refer to payment of taxes not legally due.
Under the VAT System, there is no claim or issue that the “excess” input VAT is “excessively or in
any manner wrongfully collected.” In fact, if the “excess” input VAT is an “excessively” collected
tax under Section 229, then the taxpayer claiming to apply such “excessively” collected input VAT
to offset his output VAT may have no legal basis to make such offsetting. The person legally liable
to pay the input VAT can claim a refund or credit for such “excessively” collected tax, and thus
there will no longer be any “excess” input VAT. This will upend the present VAT System as we
know it.
IV. Effectivity and Scope of the Atlas, Mirant and Aichi Doctrines
The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with
the two-year prescriptive period under Section 229, should be effective only from its
promulgation on 8 June 2007 until its abandonment on 12 September 2008 in Mirant.
The Atlas doctrine was limited to the reckoning of the two-year prescriptive period from the date
of payment of the output VAT. Prior to the Atlas doctrine, the two-year prescriptive period for
claiming refund or credit of input VAT should be governed by Section 112(A) following the verba
legis rule. The Mirant ruling, which abandoned the Atlas doctrine, adopted the verba legis rule,
thus applying Section 112(A) in computing the two-year prescriptive period in claiming refund or
credit of input VAT.
The Atlas doctrine has no relevance to the 120+30 day periods under Section 112(C) because
the application of the 120+30 day periods was not in issue in Atlas. The application of the 120+30
day periods was first raised in Aichi, which adopted the verba legis rule in holding that the 120+30
day periods are mandatory and jurisdictional. The language of Section 112(C) is plain, clear, and
unambiguous. When Section 112(C) states that “the Commissioner shall grant a refund or issue
the tax credit within one hundred twenty (120) days from the date of submission of complete
documents,” the law clearly gives the Commissioner 120 days within which to decide the
taxpayer’s claim. Resort to the courts prior to the expiration of the 120-day period is a patent
violation of the doctrine of exhaustion of administrative remedies, a ground for dismissing the
judicial suit due to prematurity. Philippine jurisprudence is awash with cases affirming and
reiterating the doctrine of exhaustion of administrative remedies. 65 Such doctrine is basic and
elementary.
When Section 112(C) states that “the taxpayer affected may, within thirty (30) days from
receipt of the decision denying the claim or after the expiration of the one hundred twenty-day
period, appeal the decision or the unacted claim with the Court of Tax Appeals,” the law does not
make the 120+30 day periods optional just because the law uses the word “may.” The word
“may” simply means that the taxpayer may or may not appeal the decision of the Commissioner
within 30 days from receipt of the decision, or within 30 days from the expiration of the 120-day
period. Certainly, by no stretch of the imagination can the word “may” be construed as making
the 120+30 day periods optional, allowing the taxpayer to file a judicial claim one day after filing
the administrative claim with the Commissioner.
The old rule66 that the taxpayer may file the judicial claim, without waiting for the
Commissioner’s decision if the two-year prescriptive period is about to expire, cannot apply
because that rule was adopted before the enactment of the 30-day period. The 30-day period
was adopted precisely to do away with the old rule, so that under the VAT System the
taxpayer will always have 30 days to file the judicial claim even if the Commissioner
acts only on the 120th day, or does not act at all during the 120-day period. With the
30-day period always available to the taxpayer, the taxpayer can no longer file a judicial claim for
refund or credit of input VAT without waiting for the Commissioner to decide until the expiration
of the 120-day period.
To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly
against the taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT
System is compliance with the 120+30 day mandatory and jurisdictional periods. Thus, strict
compliance with the 120+30 day periods is necessary for such a claim to prosper, whether before,
during, or after the effectivity of the Atlas doctrine, except for the period from the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when the Aichi doctrine was
adopted, which again reinstated the 120+30 day periods as mandatory and jurisdictional.
V. Revenue Memorandum Circular No. 49-03 (RMC 49-03) dated 15 April 2003
There is nothing in RMC 49-03 that states, expressly or impliedly, that the taxpayer need not
wait for the 120-day period to expire before filing a judicial claim with the CTA. RMC 49-03 merely
authorizes the BIR to continue processing the administrative claim even after the taxpayer has
filed its judicial claim, without saying that the taxpayer can file its judicial claim before the
expiration of the 120-day period. RMC 49-03 states: “In cases where the taxpayer has filed a
‘Petition for Review’ with the Court of Tax Appeals involving a claim for refund/TCC that is pending
at the administrative agency (either the Bureau of Internal Revenue or the One Stop Shop Inter -
Agency Tax Credit and Duty Drawback Center of the Department of Finance), the administrative
agency and the court may act on the case separately.” Thus, if the taxpayer files its judicial claim
before the expiration of the 120-day period, the BIR will nevertheless continue to act on the
administrative claim because such premature filing cannot divest the Commissioner of his
statutory power and jurisdiction to decide the administrative claim within the 120-day period.
On the other hand, if the taxpayer files its judicial claim after the 120-day period, the
Commissioner can still continue to evaluate the administrative claim. There is nothing new in this
because even after the expiration of the 120-day period, the Commissioner should still evaluate
internally the administrative claim for purposes of opposing the taxpayer’s judicial claim, or even
for purposes of determining if the BIR should actually concede to the taxpayer’s judicial claim.
The internal administrative evaluation of the taxpayer’s claim must necessarily continue to
enable the BIR to oppose intelligently the judicial claim or, if the facts and the law warrant
otherwise, for the BIR to concede to the judicial claim, resulting in the termination of the judicial
proceedings.
What is important, as far as the present cases are concerned, is that the mere
filing by a taxpayer of a judicial claim with the CTA before the expiration of the 120-
day period cannot operate to divest the Commissioner of his jurisdiction to decide an
administrative claim within the 120-day mandatory period, unless the Commissioner
has clearly given cause for equitable estoppel to apply as expressly recognized in
Section 246 of the Tax Code. 67
VI. BIR Ruling No. DA-489-03 dated 10 December 2003
BIR Ruling No. DA-489-03 does provide a valid claim for equitable estoppel under Section
246 of the Tax Code. BIR Ruling No. DA-489-03 expressly states that the “taxpayer-claimant
need not wait for the lapse of the 120-day period before it could seek judicial relief
with the CTA by way of Petition for Review.” Prior to this ruling, the BIR held, as shown by
its position in the Court of Appeals, 68 that the expiration of the 120-day period is mandatory and
jurisdictional before a judicial claim can be filed.
There is no dispute that the 120-day period is mandatory and jurisdictional, and that the CTA
does not acquire jurisdiction over a judicial claim that is filed before the expiration of the 120-day
period. There are, however, two exceptions to this rule. The first exception is if the Commissioner,
through a specific ruling, misleads a particular taxpayer to prematurely file a judicial claim with
the CTA. Such specific ruling is applicable only to such particular taxpayer. The second exception
is where the Commissioner, through a general interpretative rule issued under Section 4 of the
Tax Code, misleads all taxpayers into filing prematurely judicial claims with the CTA. In these
cases, the Commissioner cannot be allowed to later on question the CTA’s assumption of
jurisdiction over such claim since equitable estoppel has set in as expressly authorized under
Section 246 of the Tax Code.
Section 4 of the Tax Code, a new provision introduced by RA 8424, expressly grants to the
Commissioner the power to interpret tax laws, thus:
Sec. 4. Power of the Commissioner To Interpret Tax Laws and To Decide Tax Cases .―The power
to interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.
Since the Commissioner has exclusive and original jurisdiction to interpret tax laws,
taxpayers acting in good faith should not be made to suffer for adhering to general interpretative
rules of the Commissioner interpreting tax laws, should such interpretation later turn out to be
erroneous and be reversed by the Commissioner or this Court. Indeed, Section 246 of the Tax
Code expressly provides that a reversal of a BIR regulation or ruling cannot adversely prejudice a
taxpayer who in good faith relied on the BIR regulation or ruling prior to its reversal. Section 246
provides as follows:
Sec. 246. Non-Retroactivity of Rulings.―Any revocation, modification or reversal of any of
the rules and regulations promulgated in accordance with the preceding Sections or any of the
rulings or circulars promulgated by the Commissioner shall not be given retroactive
application if the revocation, modification or reversal will be prejudicial to the
taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the Bureau of Internal Revenue;
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Emphasis supplied)
Thus, a general interpretative rule issued by the Commissioner may be relied upon by
taxpayers from the time the rule is issued up to its reversal by the Commissioner or this Court.
Section 246 is not limited to a reversal only by the Commissioner because this Section expressly
states, “Any revocation, modification or reversal” without specifying who made the revocation,
modification or reversal. Hence, a reversal by this Court is covered under Section 246.
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner,
particularly on a difficult question of law. The abandonment of the Atlas doctrine
by Mirant and Aichi69 is proof that the reckoning of the prescriptive periods for input VAT tax
refund or credit is a difficult question of law. The abandonment of the Atlas doctrine did not result
in Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit they
received or could have received under Atlas prior to its abandonment. This Court is
applying Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the reversal
by this Court of a general interpretative rule issued by the Commissioner, like the reversal of a
specific BIR ruling under Section 246, should also apply prospectively. As held by this Court in CIR
v. Philippine Health Care Providers, Inc.:70
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals , this Court held that under Section
246 of the 1997 Tax Code, the Commissioner of Internal Revenue is precluded from
adopting a position contrary to one previously taken where injustice would result to
the taxpayer. Hence, where an assessment for deficiency withholding income taxes was made,
three years after a new BIR Circular reversed a previous one upon which the taxpayer had relied
upon, such an assessment was prejudicial to the taxpayer. To rule otherwise, opined the Court,
would be contrary to the tenets of good faith, equity, and fair play.
This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp. in the later
cases of Commissioner of Internal Revenue v. Borroughs, Ltd., Commissioner of Internal Revenue
v. Mega Gen. Mdsg. Corp., Commissioner of Internal Revenue v. Telefunken Semiconductor
(Phils.) Inc., and Commissioner of Internal Revenue v. Court of Appeals . The rule is that the
BIR rulings have no retroactive effect where a grossly unfair deal would result to the
prejudice of the taxpayer, as in this case.
More recently, in Commissioner of Internal Revenue v. Benguet Corporation , wherein the
taxpayer was entitled to tax refunds or credits based on the BIR’s own issuances but later was
suddenly saddled with deficiency taxes due to its subsequent ruling changing the category of the
taxpayer’s transactions for the purpose of paying its VAT, this Court ruled that applying such ruling
retroactively would be prejudicial to the taxpayer. (Emphasis supplied)
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule
applicable to all taxpayers or a specific ruling applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a
query made, not by a particular taxpayer, but by a government agency tasked with processing
tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback
Center of the Department of Finance. This government agency is also the addressee, or the
entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions
in its query to the Commissioner the administrative claim of Lazi Bay Resources Development,
Inc., the agency was in fact asking the Commissioner what to do in cases like the tax claim of Lazi
Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the 120-day
period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely
on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal
by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are
mandatory and jurisdictional.405
However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four reasons: first,
it is admittedly an erroneous interpretation of the law; second, prior to its issuance, the BIR held
that the 120-day period was mandatory and jurisdictional, which is the correct interpretation of
the law; third, prior to its issuance, no taxpayer can claim that it was misled by the BIR into filing
a judicial claim prematurely; and fourth, a claim for tax refund or credit, like a claim for tax
exemption, is strictly construed against the taxpayer.
San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it filed its
judicial claim prematurely on 10 April 2003, before the issuance of BIR Ruling No. DA-489-03 on
10 December 2003. To repeat, San Roque cannot claim that it was misled by the BIR into filing
its judicial claim prematurely because BIR Ruling No. DA-489-03 was issued only after San Roque
filed its judicial claim. At the time San Roque filed its judicial claim, the law as applied and
administered by the BIR was that the Commissioner had 120 days to act on administrative claims.
This was in fact the position of the BIR prior to the issuance of BIR Ruling No. DA-489-03. Indeed,
San Roque never claimed the benefit of BIR Ruling No. DA-489-03 or RMC 49-03,
whether in this Court, the CTA, or before the Commissioner.
Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the
issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim that in
filing its judicial claim prematurely without waiting for the 120-day period to expire, it was misled
by BIR Ruling No. DA-489-03. Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03,
which shields the filing of its judicial claim from the vice of prematurity.
Philex’s situation is not a case of premature filing of its judicial claim but of late filing, indeed
very late filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means
non-exhaustion of the 120-day period for the Commissioner to act on an administrative claim.
Philex cannot claim the benefit of BIR Ruling No. DA-489-03 because Philex did not file its judicial
claim prematurely but filed it long after the lapse of the 30-day period following the expiration
of the 120-day period. In fact, Philex filed its judicial claim 426 days after the lapse of the 30-
day period.
VII. Existing Jurisprudence
There is no basis whatsoever to the claim that in five cases this Court had already made a
ruling that the filing dates of the administrative and judicial claims are inconsequential, as long as
they are within the two-year prescriptive period. The effect of the claim of the dissenting opinions
is that San Roque’s failure to wait for the 120-day mandatory period to lapse is inconsequential,
thus allowing San Roque to claim the tax refund or credit. However, the five cases cited by the
dissenting opinions do not support even remotely the claim that this Court had already made such
a ruling. None of these five cases mention, cite, discuss, rule or even hint that
compliance with the 120-day mandatory period is inconsequential as long as the
administrative and judicial claims are filed within the two-year prescriptive period.
In CIR v. Toshiba Information Equipment (Phils.), Inc. ,71 the issue was whether any output
VAT was actually passed on to Toshiba that it could claim as input VAT subject to tax credit or
refund. The Commissioner argued that “although Toshiba may be a VAT-registered taxpayer, it is
not engaged in a VAT-taxable business.” The Commissioner cited Section 4.106-1 of Revenue
Regulations No. 75 that “refund of input taxes on capital goods shall be allowed only to the extent
that such capital goods are used in VAT-taxable business.” In the words of the Court, “Ultimately,
however, the issue still to be resolved herein shall be whether respondent Toshiba is entitled to
the tax credit/refund of its input VAT on its purchases of capital goods and services, to which this
Court answers in the affirmative.” Nowhere in this case did the Court discuss, state, or rule that
the filing dates of the administrative and judicial claims are inconsequential, as long as they are
within the two-year prescriptive period.
In Intel Technology Philippines, Inc. v. CIR, 72 the Court stated: “The issues to be resolved in
the instant case are (1) whether the absence of the BIR authority to print or the absence of the
TIN-V in petitioner’s export sales invoices operates to forfeit its entitlement to a tax refund/credit
of its unutilized input VAT attributable to its zero-rated sales; and (2) whether petitioner’s failure
to indicate “TIN-V” in its sales invoices automatically invalidates its claim for a tax credit
certification.” Again, nowhere in this case did the Court discuss, state, or rule that the filing dates
of the administrative and judicial claims are inconsequential, as long as they are within the two-
year prescriptive period.
In AT&T Communications Services Philippines, Inc. v. CIR,73 the Court stated: “x x x the CTA
First Division, conceding that petitioner’s transactions fall under the classification of zero-rated
sales, nevertheless denied petitioner’s claim ‘for lack of substantiation,’ x x x.” The Court
quoted the ruling of the First Division that “valid VAT official receipts, and not mere sale
invoices, should have been submitted” by petitioner to substantiate its claim. The Court
further stated: “x x x the CTA En Banc, x x x affirmed x x x the CTA First Division,” and
“petitioner’s motion for reconsideration having been denied x x x, the present petition for review
was filed.” Clearly, the sole issue in this case is whether petitioner complied with the substantiation
requirements in claiming for tax refund or credit. Again, nowhere in this case did the Court discuss,
state, or rule that the filing dates of the administrative and judicial claims are inconsequential, as
long as they are within the two-year prescriptive period.
In CIR v. Ironcon Builders and Development Corporation , 74 the Court put the issue in this
manner: “Simply put, the sole issue the petition raises is whether or not the CTA erred in granting
respondent Ironcon’s application for refund of its excess creditable VAT withheld.” The
Commissioner argued that “since the NIRC does not specifically grant taxpayers the option to
refund excess creditable VAT withheld, it follows that such refund cannot be allowed.” Thus, this
case is solely about whether the taxpayer has the right under the NIRC to ask for a cash refund
of excess creditable VAT withheld. Again, nowhere in this case did the Court discuss, state, or
rule that the filing dates of the administrative and judicial claims are inconsequential, as long as
they are within the two-year prescriptive period.
In CIR v. Cebu Toyo Corporation,75 the issue was whether Cebu Toyo was exempt or subject
to VAT. Compliance with the 120-day period was never an issue in Cebu Toyo. As the Court
explained:
Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue that
respondent Cebu Toyo Corporation, as a PEZA-registered enterprise, is exempt from national
and local taxes, including VAT, under Section 24 of Rep. Act No. 7916 and Section 109 of the
NIRC. Thus, they contend that respondent Cebu Toyo Corporation is not entitled to any refund or
credit on input taxes it previously paid as provided under Section 4.103-1 of Revenue Regulations
No. 7-95, notwithstanding its registration as a VAT taxpayer. For petitioner claims that said
registration was erroneous and did not confer upon the respondent any right to claim recognition
of the input tax credit.
The respondent counters that it availed of the income tax holiday under E.O. No. 226 for four
years from August 7, 1995 making it exempt from income tax but not from other taxes such as
VAT. Hence, according to respondent, its export sales are not exempt from VAT,
contrary to petitioner’s claim, but its export sales is subject to 0% VAT. Moreover, it
argues that it was able to establish through a report certified by an independent Certified Public
Accountant that the input taxes it incurred from April 1, 1996 to December 31, 1997 were directly
attributable to its export sales. Since it did not have any output tax against which said input taxes
may be offset, it had the option to file a claim for refund/tax credit of its unutilized input taxes.
Considering the submission of the parties and the evidence on record, we find the petition
bereft of merit.
Petitioner’s contention that respondent is not entitled to refund for being exempt
from VAT is untenable. This argument turns a blind eye to the fiscal incentives granted to
PEZA-registered enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute,
the respondent had two options with respect to its tax burden. It could avail of an income tax
holiday pursuant to provisions of E.O. No. 226, thus exempt it from income taxes for a number of
years but not from other internal revenue taxes such as VAT; or it could avail of the tax exemptions
on all taxes, including VAT under P.D. No. 66 and pay only the preferential tax rate of 5% under
Rep. Act No. 7916. Both the Court of Appeals and the Court of Tax Appeals found that respondent
availed of the income tax holiday for four (4) years starting from August 7, 1995, as clearly
reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where respondent specified
that it was availing of the tax relief under E.O. No. 226. Hence, respondent is not exempt
from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is engaged in
taxable rather than exempt transactions. (Emphasis supplied)
Clearly, the issue in Cebu Toyo was whether the taxpayer was exempt from VAT
or subject to VAT at 0% tax rate. If subject to 0% VAT rate, the taxpayer could claim a refund
or credit of its input VAT. Again, nowhere in this case did the Court discuss, state, or rule that the
filing dates of the administrative and judicial claims are inconsequential, as long as they are within
the two-year prescriptive period.410
While this Court stated in the narration of facts in Cebu Toyo that the taxpayer “did not bother
to wait for the Resolution of its (administrative) claim by the CIR” before filing its judicial claim
with the CTA, this issue was not raised before the Court. Certainly, this statement of the Court is
not a binding precedent that the taxpayer need not wait for the 120-day period to lapse.
Any issue, whether raised or not by the parties, but not passed upon by the Court ,
does not have any value as precedent. As this Court has explained as early as 1926:
It is contended, however, that the question before us was answered and resolved against the
contention of the appellant in the case of Bautista vs. Fajardo (38 Phil. 624). In that case no
question was raised nor was it even suggested that said section 216 did not apply to a public
officer. That question was not discussed nor referred to by any of the parties interested in that
case. It has been frequently decided that the fact that a statute has been accepted as valid, and
invoked and applied for many years in cases where its validity was not raised or passed on, does
not prevent a court from later passing on its validity, where that question is squarely and properly
raised and presented. Where a question passes the Court sub silentio, the case in which
the question was so passed is not binding on the Court ( McGirr vs. Hamilton and
Abreu, 30 Phil. 563), nor should it be considered as a precedent. (U.S. vs. Noriega and
Tobias, 31 Phil. 310; Chicote vs. Acasio, 31 Phil. 401; U.S. vs. More, 3 Cranch [U.S.] 159, 172; U.S.
vs. Sanges, 144 U.S. 310, 319; Cross vs. Burke, 146 U.S. 82.) For the reasons given in the case
of McGirr vs. Hamilton and Abreu, supra, the decision in the case of Bautista vs. Fajardo, supra,
can have no binding force in the interpretation of the question presented here. 76 (Emphasis
supplied)
In Cebu Toyo, the nature of the 120-day period, whether it is mandatory or optional, was not
even raised as an issue by any of the parties. The Court never passed upon this issue.
Thus, Cebu Toyo does not constitute binding precedent on the nature of the 120-day period.
There is also the claim that there are numerous CTA decisions allegedly supporting the
argument that the filing dates of the administrative and judicial claims are inconsequential, as
long as they are within the two-year prescriptive period. Suffice it to state that CTA decisions do
not constitute precedents, and do not bind this Court or the public. That is why CTA decisions are
appealable to this Court, which may affirm, reverse or modify the CTA decisions as the facts and
the law may warrant. Only decisions of this Court constitute binding precedents, forming part of
the Philippine legal system.77 As held by this Court in The Philippine Veterans Affairs Office v.
Segundo:78
x x x Let it be admonished that decisions of the Supreme Court “applying or interpreting the
laws or the Constitution . . . form part of the legal system of the Philippines,” and, as it were,
“laws” by their own right because they interpret what the laws say or mean. Unlike rulings of
the lower courts, which bind the parties to specific cases alone, our judgments are
universal in their scope and application, and equally mandatory in character. Let it be
warned that to defy our decisions is to court contempt. (Emphasis supplied)
The same basic doctrine was reiterated by this Court in De Mesa v. Pepsi Cola Products Phils.,
Inc.: 79
The principle of stare decisis et non quieta movere is entrenched in Article 8 of the Civil Code, to
wit:
ART. 8. Judicial decisions applying or interpreting the laws or the Constitution shall
form a part of the legal system of the Philippines.
It enjoins adherence to judicial precedents. It requires our courts to follow a rule
already established in a final decision of the Supreme Court. That decision becomes a
judicial precedent to be followed in subsequent cases by all courts in the land. The doctrine
of stare decisis is based on the principle that once a question of law has been examined and
decided, it should be deemed settled and closed to further argument. (Emphasis supplied)
VIII. Revenue Regulations No. 7-95 Effective 1
January 1996
Section 4.106-2(c) of Revenue Regulations No. 7-95, by its own express terms, applies only
if the taxpayer files the judicial claim “after” the lapse of the 60-day period, a period with which
San Roque failed to comply. Under Section 4.106-2(c), the 60-day period is still
mandatory and jurisdictional.
Moreover, it is a hornbook principle that a prior administrative regulation can never prevail
over a later contrary law, more so in this case where the later law was enacted precisely to amend
the prior administrative regulation and the law it implements.
The laws and regulation involved are as follows:
1977 Tax Code, as amended by Republic Act No. 7716 (1994)
Sec. 106. Refunds or tax credits of creditable input tax.―
(a) x x x x
(d) Period within which refund or tax credit of input tax shall be made―In proper cases,
the Commissioner shall grant a refund or issue the tax credit for creditable input
taxes within sixty (60) days from the date of submission of complete documents in
support of the application filed in accordance with subparagraphs (a) and (b) hereof. In
case of full or partial denial of the claim for tax refund or tax credit, or the failure on
the part of the Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within thirty (30) days from
receipt of the decision denying the claim or after the expiration of the sixty-
day period, appeal the decision or the unacted claim with the Court of Tax
Appeals.
Revenue Regulations No. 7-95 (1996)
Section 4.106-2. Procedures for claiming refunds or tax credits of input tax ―(a) x x x
xxxx
(c) Period within which refund or tax credit of input taxes shall be made.―In proper
cases, the Commissioner shall grant a tax credit/refund for creditable input taxes within
sixty (60) days from the date of submission of complete documents in support of the
application filed in accordance with subparagraphs (a) and (b) above.
In case of full or partial denial of the claim for tax credit/refund as decided by the
Commissioner of Internal Revenue, the taxpayer may appeal to the Court of Tax Appeals
within thirty (30) days from the receipt of said denial, otherwise the decision will become
final. However, if no action on the claim for tax credit/refund has been taken by
the Commissioner of Internal Revenue after the sixty (60) day period from the
date of submission of the application but before the lapse of the two (2) year
period from the date of filing of the VAT return for the taxable quarter, the
taxpayer may appeal to the Court of Tax Appeals.
xxxx
1997 Tax Code
Section 112. Refunds or Tax Credits of Input Tax ―
(A) x x x
x x x x414
(D) Period within which Refund or Tax Credit of Input Taxes shall be made.―In proper
cases, the Commissioner shall grant the refund or issue the tax credit certificate for
 creditable input taxes within one hundred twenty (120) days from the date of administrative claim. To recall, San Roque filed its judicial claim on 10 April 2003, a mere 13
submission of complete documents in support of the application filed in accordance with days after it filed its administrative claim.
Subsections (A) and (B) hereof. Even if, contrary to all principles of statutory construction as well as plain common sense , we
In case of full or partial denial of the claim for tax refund or tax credit, or gratuitously apply now Section 4.106-2(c) of Revenue Regulations No. 7-95, still San Roque
the failure on the part of the Commissioner to act on the application within the cannot recover any refund or credit because San Roque did not wait for the 60-day
period prescribed above, the taxpayer affected may, within thirty (30) days period to lapse, contrary to the express requirement in Section 4.106-2(c). In short,
from the receipt of the decision denying the claim or after the expiration of the San Roque does not even comply with Section 4.106-2(c). A claim for tax refund or credit
hundred twenty day-period, appeal the decision or the unacted claim with the is strictly construed against the taxpayer, who must prove that his claim clearly complies with all
Court of Tax Appeals. the conditions for granting the tax refund or credit. San Roque did not comply with the express
condition for such statutory grant.
There can be no dispute that under Section 106(d) of the 1977 Tax Code, as amended by RA A final word. Taxes are the lifeblood of the nation. The Philippines has been struggling to
7716, the Commissioner has a 60-day period to act on the administrative claim. This 60-day improve its tax efficiency collection for the longest time with minimal success. Consequently, the
period is mandatory and jurisdictional. Philippines has suffered the economic adversities arising from poor tax collections, forcing the
Did Section 4.106-2(c) of Revenue Regulations No. 7-95 change this, so that the 60-day government to continue borrowing to fund the budget deficits. This Court cannot turn a blind eye
period is no longer mandatory and jurisdictional? The obvious answer is no. to this economic malaise by being unduly liberal to taxpayers who do not comply with statutory
Section 4.106-2(c) itself expressly states that if, “after the sixty (60) day period ,” the requirements for tax refunds or credits. The tax refund claims in the present cases are not a
Commissioner fails to act on the administrative claim, the taxpayer may file the judicial claim even pittance. Many other companies stand to gain if this Court were to rule otherwise. The dissenting
“before the lapse of the two (2) year period.” Thus, under Section 4.106-2(c) the 60-day opinions will turn on its head the well-settled doctrine that tax refunds are strictly construed
period is still mandatory and jurisdictional. against the taxpayer.
Section 4.106-2(c) did not change Section 106(d) as amended by RA 7716, but merely WHEREFORE, the Court hereby (1) GRANTS the petition of the Commissioner of Internal
implemented it, for two reasons. First, Section 4.106-2(c) still expressly requires Revenue in G.R. No. 187485 to DENY the P483,797,599.65 tax refund or credit claim of San Roque
compliance with the 60-day period. This cannot be disputed. Power Corporation; (2) GRANTS the petition of Taganito Mining Corporation in G.R. No. 196113
Second, under the novel amendment introduced by RA 7716, mere inaction by the for a tax refund or credit of P8,365,664.38; and (3) DENIES the petition of Philex Mining
Commissioner during the 60-day period is deemed a denial of the claim. Thus, Section 4.106- Corporation in G.R. No. 197156 for a tax refund or credit of P23,956,732.44.
2(c) states that “if no action on the claim for tax refund/credit has been taken by the SO ORDERED.
Commissioner after the sixty (60) day period ,” the taxpayer “may” already file the judicial Leonardo-De Castro, Brion, Peralta, Bersamin, Abad, Villarama, Jr., Perez and Reyes, JJ.,
claim even long before the lapse of the two-year prescriptive period. Prior to the amendment by concur.
RA 7716, the taxpayer had to wait until the two-year prescriptive period was about to expire if Sereno, C.J., I join the dissent of J. Velasco; but I partly digress (See Separate Dissenting
the Commissioner did not act on the claim. 80 With the amendment by RA 7716, the taxpayer need Opinion).418
not wait until the two-year prescriptive period is about to expire before filing the judicial claim
because mere inaction by the Commissioner during the 60-day period is deemed a denial of the Velasco, Jr., J., I dissent. Please see Dissenting Opinion.
claim. This is the meaning of the phrase “but before the lapse of the two (2) year Del Castillo, J., I join J. Leonen in his separate opinion.
period” in Section 4.106-2(c). As Section 4.106-2(c) reiterates that the judicial claim can be Mendoza and Perlas-Bernabe, JJ., I join the dissent of J. Velasco.
filed only “after the sixty (60) day period ,” this period remains mandatory and jurisdictional. Leonen, J., See separate opinion.
Clearly, Section 4.106-2(c) did not amend Section 106(d) but merely faithfully implemented it.
Even assuming, for the sake of argument, that Section 4.106-2(c) of Revenue Regulations
No. 7-95, an administrative issuance, amended Section 106(d) of the Tax Code to make the period
given to the Commissioner non-mandatory, still the 1997 Tax Code, a much later law, reinstated
the original intent and provision of Section 106(d) by extending the 60-day period to 120 days
and re-adopting the original wordings of Section 106(d). Thus, Section 4.106-2(c), a mere
administrative issuance, becomes inconsistent with Section 112(D), a later law. Obviously, the
later law prevails over a prior inconsistent administrative issuance.
Section 112(D) of the 1997 Tax Code is clear, unequivocal, and categorical that the
Commissioner has 120 days to act on an administrative claim. The taxpayer can file the judicial
claim (1) only within thirty days after the Commissioner partially or fully denies the
claim within the 120-day period, or (2) only within thirty days from the expiration of the
120-day period if the Commissioner does not act within the 120-day period.
There can be no dispute that upon effectivity of the 1997 Tax Code on 1 January 1998,
or more than five years before San Roque filed its administrative claim on 28 March
2003, the law has been clear: the 120-day period is mandatory and jurisdictional. San Roque’s
claim, having been filed administratively on 28 March 2003, is governed by the 1997 Tax Code,
not the 1977 Tax Code. Since San Roque filed its judicial claim before the expiration of the 120-
day mandatory and jurisdictional period, San Roque’s claim cannot prosper.
San Roque cannot also invoke Section 4.106-2(c), which expressly provides that the taxpayer
can only file the judicial claim “after” the lapse of the 60-day period from the filing of the
administrative claim. San Roque filed its judicial claim just 13 days after filing its

G.R. No. 134062. April 17, 2007.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BANK OF THE PHILIPPINE ISLANDS,
respondent.
Taxation; Assessments; Statutory Construction; Nothing in the old law required a written
statement to the taxpayer of the law and the facts on which the assessments were based—the
Court cannot read into the law what obviously was not intended by Congress .— When the
assessments were made pursuant to the former Section 270, the only requirement was for the
CIR to “notify” or inform the taxpayer of his “findings.” Nothing in the old law required a written
statement to the taxpayer of the law and facts on which the assessments were based. The Court
cannot read into the law what obviously was not intended by Congress. That would be judicial
legislation, nothing less. Jurisprudence, on the other hand, simply required that the assessments
contain a computation of tax liabilities, the amount the taxpayer was to pay and a demand for
payment within a prescribed period. Everything considered, there was no doubt the October 28,
1988 notices sufficiently met the requirements of a valid assessment under the old law and
jurisprudence.
Same; Same; Same; The amendment introduced by RA 8424 in renumbered Section 228
of the National Internal Revenue Code was not an affirmation of what the law required under the
former Section 270.—The sentence “[t]he taxpayers shall be informed in writing of the law and
the facts on which the assessment is made; otherwise, the assessment shall be void” was not in
the old Section 270 but was only later on inserted in the renumbered Section 228 in 1997.
Evidently, the legislature saw the need to modify the former Section 270 by inserting the
aforequoted sentence. The fact that the amendment was necessary showed that, prior to the
introduction of the amendment, the statute had an entirely different meaning. Contrary to the
submission of BPI, the inserted sentence in the renumbered Section 228 was not an affirmation
of what the law required under the former Section 270. The amendment introduced by RA 8424
was an innovation and could not be reasonably inferred from the old law.
Clearly, the legislature intended to insert a new provision regarding the form and substance
of assessments issued by the CIR. Same; Same; The taxpayer’s failure to protest the assessments
within the 30-day period provided in the former Section 270 meant that they became final and
unappealable—there arose a presumption of correctness when the taxpayer failed to protest the
assessments.— The inevitable conclusion is that BPI’s failure to protest the assessments within
the 30-day period provided in the former Section 270 meant that they became final and
unappealable. Thus, the CTA correctly dismissed BPI’s appeal for lack of jurisdiction. BPI was,
from then on, barred from disputing the correctness of the assessments or invoking any defense
that would reopen the question of its liability on the merits. Not only that. There arose a
presumption of correctness when BPI failed to protest the assessments: Tax assessments by tax
examiners are presumed correct and made in good faith. The taxpayer has the duty to prove
otherwise. In the absence of proof of any irregularities in the performance of duties, an
assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior
officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Roberto C. Renido for petitioner.
CORONA, J.:
This is a petition for review on certiorari 1 of a decision2 of the Court of Appeals (CA) dated May
29, 1998 in CA-G.R. SP No. 41025 which reversed and set aside the decision 3 and resolution4 of
the Court of Tax Appeals (CTA) dated November 16, 1995 and May 27, 1996, respectively, in CTA
Case No. 4715.
In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR)
assessed respondent Bank of the Philippine Islands’ (BPI’s) deficiency percentage and
documentary stamp taxes for the year 1986 in the total amount of P129,488,656.63:
1986—Deficiency Percentage Tax
Deficiency percentage tax P 7, 270,892.88
Add: 25% surcharge 1,817,723.22
20% interest from 1–21–87 to
10–28–88 3,215,825.03
Compromise penalty _____15,000.00
TOTAL AMOUNT DUE AND COLLECTIBLE P12,319,441.13
1986—Deficiency Documentary Stamp Tax
Deficiency percentage tax P93,723,372.40
Add: 25% surcharge 23,430,843.10
Compromise penalty _____15,000.00
TOTAL AMOUNT DUE AND COLLECTIBLE P117,169,215.50. 5
Both notices of assessment contained the following note:
‘Please be informed that your [percentage and documentary stamp taxes have] been assessed as
shown above. Said assessment has been based on return—(filed by you)—as verified)—(made by
this Office)—(pending investigation)—(after investigation). You are requested to pay the above
amount to this Office or to our Collection Agent in the Office of the City or Deputy Provincial
Treasurer of x x x’ 6
In a letter dated December 10, 1988, BPI, through counsel, replied as follows:
1. ‘1.Your “deficiency assessments” are no assessments at all. The taxpayer is
not informed, even in the vaguest terms, why it is being assessed a
deficiency. The very purpose of a deficiency assessment is to inform
taxpayer why he has incurred a deficiency so that he can make an intelligent
decision on whether to pay or to protest the assessment. This is all the
more so when the assessment involves astronomical amounts, as in this
case.
We therefore request that the examiner concerned be required to state, even in the briefest form,
why he believes the taxpayer has a deficiency documentary and percentage taxes, and as to the
percentage tax, it is important that the taxpayer be informed also as to what particular percentage
tax the assessment refers to.
1. 2.As to the alleged deficiency documentary stamp tax, you are aware of the
compromise forged between your office and the Bankers Association of the
Philippines [BAP] on this issue and of BPI’s submission of its computations
under this compromise. There is therefore no basis whatsoever for this
assessment, assuming it is on the subject of the BAP compromise. On the
other hand, if it relates to documentary stamp tax on some other issue, we
should like to be informed about what those issues are.
2. 3.As to the alleged deficiency percentage tax, we are completely at a loss
on how such assessment may be protested since your letter does not even
tell the taxpayer what particular percentage tax is involved and how your
examiner arrived at the deficiency. As soon as this is explained and clarified
in a proper letter of assessment, we shall inform you of the taxpayer’s
decision on whether to pay or protest the assessment.’ 7
On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that:
“. . . although in all respects, your letter failed to qualify as a protest under Revenue Regulations
No. 12–85 and therefore not deserving of any rejoinder by this office as no valid issue was raised
against the validity of our assessment . . . still we obliged to explain the basis of the assessments.
xxxxxxxxx
. . . this constitutes the final decision of this office on the matter.” 8
On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIR’s May 8,
1991 letter. 9 This was denied in a letter dated December 12, 1991, received by BPI on January
21, 1992.10
On February 18, 1992, BPI filed a petition for review in the CTA.11 In a decision dated
November 16, 1995, the CTA dismissed the case for lack of jurisdiction since the subject
assessments had become final and unappealable. The CTA ruled that BPI failed to protest on time
under Section 270 of the National Internal Revenue Code (NIRC) of 1986 and Section 7 in relation
to Section 11 of RA 1125.12 It denied reconsideration in a resolution dated May 27, 1996. 13
On appeal, the CA reversed the tax court’s decision and resolution and remanded the case to
the CTA14 for a decision on the merits.15 It ruled that the October 28, 1988 notices were not valid
assessments because they did not inform the taxpayer of the legal and factual bases therefor. It
declared that the proper assessments were those contained in the May 8, 1991 letter which
provided the reasons for the claimed deficiencies. 16 Thus, it held that BPI filed the petition for
review in the CTA on time.17 The CIR elevated the case to this Court.
This petition raises the following issues:
1. 1)whether or not the assessments issued to BPI for deficiency percentage
and documentary stamp taxes for 1986 had already become final and
unappealable and
2. 2)whether or not BPI was liable for the said taxes.
The former Section 27018 (now renumbered as Section 228) of the NIRC stated:
Sec. 270. Protesting of assessment.—When the [CIR] or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayer of his
findings. Within a period to be prescribed by implementing regulations, the taxpayer shall be
required to respond to said notice. If the taxpayer fails to respond, the [CIR] shall issue an
assessment based on his findings.
xxx xxx x x x (emphasis supplied)
Were the October 28, 1988 Notices Valid Assessments?
The first issue for our resolution is whether or not the October 28, 1988 notices 19 were valid
assessments. If they were not, as held by the CA, then the correct assessments were in the May
8, 1991 letter, received by BPI on June 27, 1991. BPI, in its July 6, 1991 letter, seasonably asked
for a reconsideration of the findings which the CIR denied in his December 12, 1991 letter,
received by BPI on January 21, 1992. Consequently, the petition for review filed by BPI in the CTA
on February 18, 1992 would be well within the 30-day period provided by law. 20
The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid
assessments. He asserts that he used BIR Form No. 17.08 (as revised in November 1964) which
was designed for the precise purpose of notifying taxpayers of the assessed amounts due and
demanding payment thereof.21 He contends that there was no law or jurisprudence then that
required notices to state the reasons for assessing deficiency tax liabilities. 22
BPI counters that due process demanded that the facts, data and law upon which the
assessments were based be provided to the taxpayer. It insists that the NIRC, as worded now
(referring to Section 228), specifically provides that:
“[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void.”
According to BPI, this is declaratory of what sound tax procedure is and a confirmation of what
due process requires even under the former Section 270.
BPI’s contention has no merit. The present Section 228 of the NIRC provides:
“Sec. 228. Protesting of Assessment.—When the [CIR] or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the
taxpayer of his findings: Provided, however, That a preassessment notice shall not be required
in the following cases:
xxx xxx xxx
The taxpayer shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.
xxx xxx x x x (emphasis supplied)
Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments
of the deficiency taxes were made. He merely notified BPI of his findings, consisting only of the
computation of the tax liabilities and a demand for payment thereof within 30 days after receipt.
In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section
270 prior to its amendment by RA 8424 (also known as the Tax Reform Act of 1997). 23 In CIR v.
Reyes,24 we held that:
“In the present case, Reyes was not informed in writing of the law and the facts on which the
assessment of estate taxes had been made. She was merely notified of the findings by the CIR,
who had simply relied upon the provisions of former Section 229 prior to its amendment by [RA]
8424, otherwise known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an
assessment. The old requirement of merely notifying the taxpayer of the CIR’s findings
was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on
which an assessment would be made; otherwise, the assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued against the
estate. On April 22, 1998, the final estate tax assessment notice, as well as demand letter, was
also issued. During those dates, RA 8424 was already in effect. The notice required under the
old law was no longer sufficient under the new law.”25 (emphasis supplied; italics in the
original)
Accordingly, when the assessments were made pursuant to the former Section 270, the only
requirement was for the CIR to “notify” or inform the taxpayer of his “findings.” Nothing in the
old law required a written statement to the taxpayer of the law and facts on which the assessments
were based. The Court cannot read into the law what obviously was not intended by Congress.
That would be judicial legislation, nothing less.
Jurisprudence, on the other hand, simply required that the assessments contain a
computation of tax liabilities, the amount the taxpayer was to pay and a demand for payment
within a prescribed period. 26 Everything considered, there was no doubt the October 28, 1988
notices sufficiently met the requirements of a valid assessment under the old law and
jurisprudence.
The sentence
“[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void”
was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in
1997. Evidently, the legislature saw the need to modify the former Section 270 by inserting the
aforequoted sentence.27 The fact that the amendment was necessary showed that, prior to the
introduction of the amendment, the statute had an entirely different meaning. 28
Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was
not an affirmation of what the law required under the former Section 270. The amendment
introduced by RA 8424 was an innovation and could not be reasonably inferred from the old
law.29 Clearly, the legislature intended to insert a new provision regarding the form and substance
of assessments issued by the CIR.30
In ruling that the October 28, 1988 notices were not valid assessments, the CA explained:
“x x x. Elementary concerns of due process of law should have prompted the [CIR] to inform [BPI]
of the legal and factual basis of the former’s decision to charge the latter for deficiency
documentary stamp and gross receipts taxes." 31
In other words, the CA’s theory was that BPI was deprived of due process when the CIR failed to
inform it in writing of the factual and legal bases of the assessments-even if these were not called
for under the old law.
We disagree.
Indeed, the underlying reason for the law was the basic constitutional requirement that “no
person shall be deprived of his property without due process of law." 32 We note, however, what
the CTA had to say:
‘x x x xxx xxx
From the foregoing testimony, it can be safely adduced that not only was [BPI] given the
opportunity to discuss with the [CIR] when the latter issued the former a Pre-Assessment Notice
(which [BPI] ignored) but that the examiners themselves went to [BPI] and “we talk to them and
we try to [thresh] out the issues, present evidences as to what they need.” Now, how can [BPI]
and/or its counsel honestly tell this Court that they did not know anything about the assessments?
Not only that. To further buttress the fact that [BPI] indeed knew beforehand the
assessments[,] contrary to the allegations of its counsel[,] was the testimony of Mr. Jerry Lazaro,
Assistant Manager of the Accounting Department of [BPI]. He testified to the fact that he prepared
worksheets which contain his analysis regarding the findings of the [CIR’s] examiner, Mr. San
Pedro and that the same worksheets were presented to Mr. Carlos Tan, Comptroller of [BPI]
xxx xxx xxx
From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of the
nature and basis of the assessments, and was given all the opportunity to contest the same but
ignored it despite the notice conspicuously written on the assessments which states that “this
ASSESSMENT becomes final and unappealable if not protested within 30 days after receipt.”
Counsel resorted to dilatory tactics and dangerously played with time. Unfortunately, such strategy
proved fatal to the cause of his client.'33
The CA never disputed these findings of fact by the CTA:
"[T]his Court recognizes that the [CTA], which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an expertise on the
subject, and its conclusions will not be overturned unless there has been an abuse or improvident
exercise of authority. Such findings can only be disturbed on appeal if they are not supported by
substantial evidence or there is a showing of gross error or abuse on the part of the [CTA]." 34
Under the former Section 270, there were two instances when an assessment became final and
unappealable: (1) when it was not protested within 30 days from receipt and (2) when the adverse
decision on the protest was not appealed to the CTA within 30 days from receipt of the final
decision:35
“Sec. 270.Protesting of assessment.
xxx xxx xxx
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation in such form and manner as may be prescribed by the implementing regulations
within thirty (30) days from receipt of the assessment; otherwise, the assessment shall become
final and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation adversely
affected by the decision on the protest may appeal to the [CTA] within thirty (30) days from
receipt of the said decision; otherwise, the decision shall become final, executory and
demandable.”
Implications of A Valid Assessment
Considering that the October 28, 1988 notices were valid assessments, BPI should have protested
the same within 30 days from receipt thereof. The December 10, 1988 reply it sent to the CIR did
not qualify as a protest since the letter itself stated that "[a]s soon as this is explained and clarified
in a proper letter of assessment, we shall inform you of the taxpayer’s decision on whether
to pay or protest the assessment." 36 Hence, by its own declaration, BPI did not regard this
letter as a protest against the assessments. As a matter of fact, BPI never deemed this a protest
since it did not even consider the October 28, 1988 notices as valid or proper assessments.
The inevitable conclusion is that BPI’s failure to protest the assessments within the 30-day period
provided in the former Section 270 meant that they became final and unappealable. Thus, the
CTA correctly dismissed BPI’s appeal for lack of jurisdiction. BPI was, from then on, barred from
disputing the correctness of the assessments or invoking any defense that would reopen the
question of its liability on the merits. 37 Not only that. There arose a presumption of correctness
when BPI failed to protest the assessments:
“Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer
has the duty to prove otherwise. In the absence of proof of any irregularities in the performance
of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by
his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax
assessments.” 38
Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be
deemed to have failed to appeal the CIR’s final decision regarding the disputed assessments within
the 30-day period provided by law. The CIR, in his May 8, 1991 response, stated that it was his
“final decision . . . on the matter.” BPI therefore had 30 days from the time it received the decision
on June 27, 1991 to appeal but it did not. Instead it filed a request for reconsideration and lodged
its appeal in the CTA only on February 18, 1992, way beyond the reglementary period. BPI must
now suffer the repercussions of its omission. We have already declared that:
“. . . the [CIR] should always indicate to the taxpayer in clear and unequivocal language whenever
his action on an assessment questioned by a taxpayer constitutes his final determination on the
disputed assessment, as contemplated by Sections 7 and 11 of [RA1125], as amended. On the
basis of his statement indubitably showing that the Commissioner’s communicated
action is his final decision on the contested assessment, the aggrieved taxpayer would
then be able to take recourse to the tax court at the opportune time. Without needless
difficulty, the taxpayer would be able to determine when his right to appeal to the tax
court accrues.
The rule of conduct would also obviate all desire and opportunity on the part of
the taxpayer to continually delay the finality of the assessment—and, consequently,
the collection of the amount demanded as taxes—by repeated requests for
recomputation and reconsideration. On the part of the [CIR], this would encourage his office
to conduct a careful and thorough study of every questioned assessment and render a correct
and definite decision thereon in the first instance. This would also deter the [CIR] from unfairly
making the taxpayer grope in the dark and speculate as to which action constitutes the decision
appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need
for fair play, regularity, and orderliness in administrative action.” 39 (emphasis supplied)
Either way (whether or not a protest was made), we cannot absolve BPI of its liability under the
subject tax assessments.
We realize that these assessments (which have been pending for almost 20 years) involve a
considerable amount of money. Be that as it may, we cannot legally presume the existence of
something which was never there. The state will be deprived of the taxes validly due it and the
public will suffer if taxpayers will not be held liable for the proper taxes assessed against them:
“Taxes are the lifeblood of the government, for without taxes, the government can neither exist
nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source
from the very existence of the state whose social contract with its citizens obliges it to promote
public interest and common good. The theory behind the exercise of the power to tax emanates
from necessity; without taxes, government cannot fulfill its mandate of promoting the general
welfare and well-being of the people.” 40
WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the Court of Appeals
in CA-G.R. SP No. 41025 is REVERSED and SET ASIDE.
SO ORDERED.
 No. L-22734. September 15, 1967.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MANUEL B. PINEDA, as one of the heirs
of deceased ATANASIO PINEDA, respondent.
Taxation; Income tax; Liability of an heir for tax.—An heir is liable for the assessment as
an heir and as a holder-transferee of property belonging to the estate/taxpayer. As an heir, he is
individually answerable for the part of the tax proportionate to the share he received from the
inheritance. His liability, however, cannot exceed the amount of his share (Art. 1311, Civil Code).
As a holder of the property belonging to the estate, he is liable for the tax up to the amount of
the property in his possession. The reason is that the Government has a lien on such property.
But after payment of such amount, he will have a right to contribution from his co-heirs.
Same; Ways available to government to collect the tax. —The Government has two ways
of collecting the taxes in question. One, by going after all the heirs and collecting from each one
of them the amount of the tax proportionate to the inheritance received, Another remedy,
pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to
property belong to the taxpayer for unpaid income tax, is by subjecting said property of the estate
which is in the hands of an heir or transferee to the payment of the tax due the estate.
Same; Taxes are the lifeblood of the government.—Taxes are the lifeblood of government
and their prompt and certain availability is an imperious need.
APPEAL from a decision of the Court of Tax Appeals.
The facts are stated in the opinion of the Court.
Solicitor General for petitioner.
Manuel B. Pineda for and in his own behalf as respondent.
BENGZON, J.P., J.:
On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children,
the eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of
First Instance of Manila (Case No. 71129) wherein the surviving widow was appointed
administratrix. The estate was divided among and awarded to the heirs and the proceedings
terminated on June 8, 1948. Manuel B. Pineda’s share amounted to about P2,-500.00.
After the estate proceedings were closed, the Bureau of Internal Revenue investigated the
income tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the
corresponding income tax returns were not filed. Thereupon, the representative of the Collector
of Internal Revenue filed said returns for the estate on the basis of information and data obtained
from the aforesaid estate proceedings and issued an assessment for the following:
1. Deficiency income tax
1945 P 135.83
1946 436.95
1947 1,206.91 P1,779.69
Add: 5% surcharge 88.98
1% monthly interest 720.77
from November 30,
1953 to April 15, 1957
Compromise for late 80.00
filing
Compromise for late 40.00
payment
Total amount due P2,707.44
2. Additional residence tax for 14.50
1945
3. Real Estate dealer’s tax for 207.50
the fourth quarter of
1946 and the whole year of 1947
Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed
to the Court of Tax Appeals alleging that he was appealing “only that proportionate part or portion
pertaining to him as one of the heirs.”
After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision
of the Commissioner on the ground that his right to assess and collect the tax has prescribed. The
Commissioner appealed and this Court affirmed the findings of the Tax Court in respect to the
assessment for income tax for the year 1947 but held that the right to assess and collect the taxes
for 1945 and 1946 has not prescribed. For 1945 and 1946 the returns were filed on August 24,
1953; assessments for both taxable years were made within five years therefrom or on October
19, 1953; and the action to collect the tax was filed within five years from the latter date, on
August 7, 1957. For taxable year 1947, however, the return was filed on March 1, 1948; the
assessment was made on October 19, 1953, more than five years from the date the return was
filed; hence, the right to assess income tax for 1947 had prescribed. Accordingly, We remanded
the case to the Tax Court for further appropriate proceedings.1
In the Tax Court, the parties submitted the case for decision without additional evidence.
On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda
liable for the payment corresponding to his share of the following taxes:
Deficiency income tax
1945............................................................ P135.83
1946 ........................................................... 436.95
Real estate dealer’s fixed tax 4th
quarter of 1946 and whole year of P187.50
1947 ........................................
The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B.
Pineda liable for the payment of all the taxes found by the Tax Court to be due from the estate in
the total amount of P760.28 instead of only for the amount of taxes corresponding to his share in
the estate.
Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid
income tax due the estate only up to the extent of and in proportion to any share he received. He
relies on Government of the Philippine Islands v. Pamintuan 2 where We held that “after the
partition of an estate, heirs and distributees are liable individually for the payment of all lawful
outstanding claims against the estate in proportion to the amount or value of the property they
have respectively received from the estate.”
We hold that the Government can require Manuel B. Pineda to pay the full amount of the
taxes assessed. Pineda is liable for the assessment as an heir and as a holder-transferee of
property belonging to the estate/ taxpayer. As an heir he is individually answerable for the part
of the tax proportionate to the share he received from the inheritance. 3 His liability, however,
cannot exceed the amount of his share. 4
As a holder of property belonging to the estate, Pineda is liable for the tax up to the amount
of the property in his possession. The reason is that the Government has a lien on the P2,500.00
received by him from the estate as his share in the inheritance, for unpaid income taxes 4a for
which said estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code, which
we quote hereunder:
“If any person, corporation, partnership, joint-account (cuenta en participation), association, or
insurance companyliable to pay the income tax, neglects or refuses to pay the same after demand,
the amount shall be a lien in favor of the Government of the Philippines from the time when the
assessment was made by the Commissioner of Internal Revenue until paid with interest, penalties,
and costs that may accrue in addition thereto upon all property and rights to property belonging
to the taxpayer: x x x”
By virtue of such lien, the Government has the right to subject the property in Pineda’s possession,
i.e., the P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After such
payment, Pineda will have a right of contribution from his co-heirs,5 to achieve an adjustment of
the proper share of each heir in the distributable estate.
All told, the Government has two ways of collecting the tax in question. One, by going after
all the heirs and collecting from each one of them the amount of the tax proportionate to the
inheritance received. This remedy was adopted in Government of the Philippine Islands v.
Pamintuan, supra. In said case, the Government filed an action against all the heirs for the
collection of the tax. This action rests on the concept that hereditary property consists only of that
part which remains after the settlement of all lawful claims against the estate, for the settlement
of which the entire estate is first liable.6 The reason why in case suit is filed against all the heirs
the tax due from the estate is levied proportionately against them is to achieve thereby two
results: first, payment of the tax; and second, adjustment of the shares of each heir in the
distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property
and rights to property belonging to the taxpayer for unpaid income tax, is by subjecting said
property of the estate which is in the hands of an heir or transferee to the payment of the tax
due, the estate. This second remedy is the very avenue the Government took in this case to collect
the tax. The Bureau of Internal Revenue should be given, in instances like the case at bar, the
necessary discretion to avail itself of the most expeditious way to collect the tax as may be
envisioned in the particular provision of the Tax Code above quoted, because taxes are the
lifeblood of government and their prompt and certain availability is an imperious need. 7 And as
afore-stated in this case the suit seeks to achieve only one objective: payment of the tax. The
adjustment of the respective shares due to the heirs from the inheritance, as lessened by the tax,
is left to await the suit for contribution by the heir from whom the Government recovered said
tax.
WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to
pay to the Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for
1945 and 1946, and real estate dealer’s fixed tax for the fourth quarter of 1946 and for the whole
year 1947, without prejudice to his right of contribution for his co-heirs. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zal-
divar, Sanchez, Castro, Angeles and Fernando, JJ., concur.
Decision modified.

________________

© Copyright 2021 Central Book Supply, Inc. All rights reserved.


No. L-31364. March 30, 1979.*
MISAEL P. VERA, as Commissioner of Internal Revenue, and JAIME ARANETA, as Regional
Director, Revenue Region No. 14, Bureau of Internal Revenue, petitioners, vs. HON. JOSE F.
FERNANDEZ, Judge of the Court of First Instance of Negros Occidental, Branch V, and FRANCIS
A. TONGOY, Administrator of the Estate of the late LUIS D, TONGOY, respondents.
Taxation; Estate Taxes; Statutory Construction; Interpretation; Rule 86, Sec 5, Rules of
Court; Tax obligations of decedent which are created by law different from money claims against
decedent arising from contract provided for in Sec. 5 of Mule 85 of the Rules of Court.—A perusal
of the aforequoted provisions, shows that it makes no mention of claims for monetary obligations
of the decedent created by law, such as taxes which is entirely of different character from the
claims expressly enumerated therein, such as: “all claims for money against the decedent arising
from contract, express or implied, whether the same be due, not due or contingent, all claims for
funeral expenses and expenses for the last sickness of the decedent and judgment for money
against the decedent.” Under the familiar rule of statutory construction of expressio unius est
exclusio alterius, the mention of one thing implies the exclusion of another thing not mentioned.
Thus, if a statute enumerates the things upon which it is to operate, everything else must
necessarily, and by implication be excluded from its operation and effect.
Same; Same; Prescription, not a case of; Claims for taxes collectible even after distribution
of decedent’s estate among his heirs who are liable in proportion of their share in the inheritance
to the payment of taxes; Claims for estate taxes exempted from application of statute of non-
claims.—That abolition of the Committee on Claims does not alter the bask railing kid down giving
exception on the claim for taxes from being filed as the other claims mentioned in the Rule should
be filed before the Court. Claims for taxes may he collected even after the distribution of the
decedent’s estate among his heirs who shall be liable therefor in proportion of their shar e in the
inheritance. (Government of the Philippines vs. Pamintuan, 55 Phil.13). The reason for the more
liberal treatment of claims for taxes against a decedent’s estate in the form of exception from the
application of the statute of non-claims, is not hard to find. Taxes are the lifeblood of the
Government and their prompt and certain availability are imperious need. (Commissioner of
Internal Revenue vs. Pineda, G.R. No. L-22734, September 15, 1967, 21 SCRA 105). Upon taxation
depends the Government ability to serve the people for whose benefit taxes are collected, To
safeguard such interest, neglect or omission of government officials entrusted with the collection
of taxes should not be allowed to bring harm or detriment to the people, in the same manner as
private persons may foe made to suffer individually on account of his own negligence, the
presumption being that they take good care of their personal affairs. This should not hold true to
government officials with respect to matters not of their own personal concern. This is the
philosophy behind the government’s exception, as a general rule, from the operation of the
principle of estoppel.
Same; Same; Unpaid taxes due the decedent collectible before inheritance passed to
decedent’s heirs even without presenting claim under Sec. 2 of Rule 86 of the Rules of Court. —
Furthermore, as held in Commissioner of Internal Revenue vs. Pineda, supra, citing the last
paragraph of Section 315 of the Tax Code payment of income tax shall be a lien in favor of the
Government of the Philippines from the time the assessment was made by the Commissioner of
Internal Revenue until paid with interests, penalties, etc. By virtue of such lien, this Court held
that the property of the estate already in the hands of an heir or transferee may be subject to the
payment of the tax due the estate. A fortiori, before the inheritance has passed to the heirs, the
unpaid taxes due the decedent may be collected, even without its having been presented under
Section 2 of Rule 36 of the Rules of Court, It may truly be said that until the property of the estate
of the decedent has vested in the heirs, the decedent, represented by his estate, continues as if
he were still alive, subject to the payment of such taxes as would be collectible from the estate
even after his death. Thus in the case abovecited, the income taxes sought to be collected were
due from the estate, for the three years 1946, 1947 and 1948 following his death in May, 1945.
Same; Same; Application for allowance of claim and order for payment of taxes by
decedent allowed even after expiration of time for filing of claims under the Rules of Court but
before order of distribution is entered. —In the instant case, petitioners filed an application (Motion
for Allowance of Claim and for an Order of Payment of Taxes) which, though filed after the
expiration of the time previously limited but before an order of the distribution is entered, should
have been granted by the respondent court, in the absence of any valid ground, as none was
shown, justifying denial of the motion, especially considering that it was for allowance of claim for
taxes due from the estate, which in effect represents a claim of the people at large, the only
reason given for the denial being that the claim was filed out of the previously limited period,
sustaining thereby private respondents’ contention, erroneously as has been demonstrated.
DE CASTRO, J.:
Appeal from two orders of the Court of First Instance of Negros Occidental, Branch V in Special
Proceedings No. 7794, entitled: “Intestate Estate of Luis D. Tongoy,” the first dated July 29, 1969
dismissing the Motion for Allowance of Claim and for an Order of Payment of Taxes by the
Government of the Republic of the Philippines against the Estate of the late Luis D. Tongoy, for
deficiency income taxes for the years 1963 and 1964 of the decedent in the total amount of
P3,254.80, inclusive 5% surcharge, 1% monthly interest and compromise penalties, and the
second, dated October 7, 1969, denying the Motion for reconsideration of the Order of dismissal.
The Motion for allowance of claim and for payment of taxes dated May 28, 1969 was filed on
June 3, 1969 in the abovementioned special proceedings, (par. 3, Annex A, Petition, pp. 1920,
Rollo). The claim represents the indebtedness to the Government of the late Luis D. Tongoy for
deficiency income taxes in the total sum of P3,254.80 as above stated, covered by Assessment
Notices Nos. 11-50-29-1-11061-21-63 and 11-50-291-110875-64, to which motion was attached
Proof of Claim (Annex B, Petition, pp. 21-22, Rollo). The Administrator opposed the motion solely
on the ground that the claim was barred under Section 5, Rule 86 of the Rules of Court (par. 4,
Opposition to Motion for Allowance of Claim, pp. 23-24, Rollo). Finding the opposition well-
founded, the respondent Judge, Jose F. Fernandez, dismissed the motion for allowance of claim
filed by herein petitioner, Regional Director of the Bureau of Internal Revenue, in an order dated
July 29, 1969 (Annex D, Petition p. 26, Rollo). On September 18, 1969, a motion for
reconsideration was filed, of the Order of July 29, 1969, but was denied in an Order dated October
7, 1969.
Hence, this appeal on certiorari, petitioner assigning the following errors:
1. “1.The lower court erred in holding that the claim for taxes by the
government against the estate of Luis D. Tongoy was filed beyond the
period provided in Section 2, Rule 86 of the Rules of Court.
2. 2.The lower court erred in holding that the claim for taxes of the
government was already barred under Section 5, Rule 86 of the Rules of
Court.”
which raise the sole issue of whether or not the statute of nonclaims, Section 5, Rule 86 of the
New Rule of Court, bars claim of the government for unpaid taxes, still within the period of
limitation prescribed in Section 331 and 332 of the National Internal Revenue Code.
Section 5, Rule 86, as invoked by the respondent Administrator in his Opposition to the Motion
for Allowance of Claim, etc. of the petitioners reads as follows:
“All claims for money against the decedent, arising from contracts, express or implied, whether
the same be due, not due, or contingent, all claims for funeral expenses and expenses for the last
sickness of the decedent, and judgment for money against the decedent, must be filed within the
time limited in the notice; otherwise they are barred forever, except that they may be set forth as
counterclaims in any action that the executor or administrator may bring against the claimants.
Where an executor or administrator commence an action, or prosecutes an action already
commenced by the deceased in his lifetime, the debtor may set forth by answer the claims he has
against the decedent, instead of presenting them independently to the court has herein provided,
and mutual claims may be set off against each other in such action; and if final judgment is
rendered in favor of the defendant, the amount so determined shall be considered the true balance
against the estate, as though the claim had been presented directly before the court in the
administration proceedings. Claims not yet due, or contingent may be approved at their present
value.”
A perusal of the aforequoted provisions shows that it makes no mention of claims for monetary
obligations of the decedent created by law, such as taxes which is entirely of different character
from the claims expressly enumerated therein, such as: “all claims for money against the decedent
arising from contract, express or implied, whether the same be due, not due or contingent, all
claims for funeral expenses and expenses for the last sickness of the decedent and judgment for
money against the decedent.” Under the familiar rule of statutory construction of expressio unius
est exclusio alterius, the mention of one thing implies the exclusion of another thing not
mentioned. Thus, if a statute enumerates the things upon which it is to operate, everything else
must necessarily, and by implication be excluded from its operation and effect (Crawford,
Statutory Construction, pp. 334-335).
In the case of Commissioner of Internal Revenue vs. Ilagan Electric & Ice Plant, et al., G.R.
No. L-23081, December 30, 1969, it was held that the assessment, collection and recovery of
taxes, as well as the matter of prescription thereof are governed by the provisions of the National
Internal Revenue Code, particularly Sections 331 and 332 thereof, and not by other provisions of
law. (See also Lim Tio, Dy Heng and Dee Jue vs. Court of Tax Appeals & Collector of Internal
Revenue, G. R. No. L-10681, March 29, 1958). Even without being specifically mentioned, the
provisions of Section 2 of Rule 86 of the Rules of Court may reasonably be presumed to have
been also in the mind of the Court as not affecting the aforecited Section of the National Internal
Revenue Code.
In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was even more pointedly held that
“taxes assessed against the estate of a deceased person x x x need not be submitted to the
committee on claims in the ordinary course of administration. In the exercise of its control over
the administrator, the court may direct the payment of such taxes upon motion showing that the
taxes have been assessed against the estate.” The abolition of the Committee on Claims does not
alter the basic ruling laid down giving exception to the claim for taxes from being filed as the
other claims mentioned in the Rule should be filed before the Court. Claims for taxes may be
collected even after the distribution of the decedent’s estate among his heirs who shall be liable
therefor in proportion of their share in the inheritance. (Government of the Philippines vs.
Pamintuan, 55 Phil. 13).
The reason for the more liberal treatment of claims for taxes against a decedent’s estate in
the form of exception from the application of the statute of non-claims, is not hard to find. Taxes
are the lifeblood of the Government and their prompt and certain availability are imperious need.
(Commissioner of Internal Revenue vs. Pineda, G. R. No. L-22734, September 15, 1967, 21 SCRA
105). Upon taxation depends the Government ability to serve the people for whose benefit taxes
are collected. To safeguard such interest, neglect or omission of government officials entrusted
with the collection of taxes should not be allowed to bring harm or detriment to the people, in the
same manner as private persons may be made to suffer individually on account of his own
negligence, the presumption being that they take good care of their personal affairs. This should
not hold true to government officials with respect to matters not of their own personal concern.
This is the philosophy behind the government’s exception, as a general rule, from the operation
of the principle of estoppel. (Republic vs. Caballero, L-27437, September 30, 1977, 79 SCRA
177; Manila Lodge No. 761, Benevolent and Protective Order of the Elks, Inc. vs. Court of
Appeals, L-41001, September 30, 1976, 73 SCRA 162; Sy vs. Central Bank of the Philippines, L-
41480, April 30, 1976, 70 SCRA 571; Balmaceda vs. Corominas & Co., Inc., 66 SCRA 553; Auyong
Hian vs. Court of Tax Appeals, 59 SCRA 110; Republic vs. Philippine Rabbit Bus Lines, Inc., 66
SCRA 553; Republic vs. Philippine Long Distance Telephone Company, L-18841, January 27,
1969, 26 SCRA 620; Zamora vs. Court of Tax Appeals, L-23272, November 26, 1970, 36 SCRA
77; E. Rodriguez, Inc. vs. Collector of Internal Revenue, L-23041, July 31, 1969, 28 SCRA 119.)
As already shown, taxes may be collected even after the distribution of the estate of the decedent
among his heirs (Government of the Philippines vs. Pamintuan, supra; Pineda s. CFI of
Tayabas, supra; Clara Diluangco Palanca vs. Commissioner of Internal Revenue, G. R. No. L-
16661, January 31, 1962).
Furthermore, as held in Commissioner of Internal Revenue vs. Pineda, supra, citing the last
paragraph of Section 315 of the Tax Code payment of income tax shall be a lien in favor of the
Government of the Philippines from the time the assessment was made by the Commissioner of
Intenal Revenue until paid with interests, penalties, etc. By virtue of such lien, this Court held that
the property of the estate already in the hands of an heir or transferee may be subject to the
payment of the tax due the estate. A fortiori, before the inheritance has passed to the heirs, the
unpaid taxes due the decedent may be collected, even without its having been presented under
Section 2 of Rule 86 of the Rules of Court. It may truly be said that until the property of the estate
of the decedent has vested in the heirs, the decedent, represented by his estate, continues as if
he were still alive, subject to the payment of such taxes as would be collectible from the estate
even after his death. Thus in the case abovecited, the income taxes sought to be collected were
due from the estate, for the three years 1946, 1947 and 1948 following his death in May, 1945.
Even assuming arguendo that claims for taxes have to be filed within the time prescribed in
Section 2, Rule 86 of the Rules of Court, the claim in question may be filed even after the expiration
of the time originally fixed therein, as may be gleaned from the italicized portion of the Rule herein
cited which reads:
“Section 2. Time within which claims shall be filed.—In the notice provided in the preceding
section, the court shall state the time for the filing of claims against the estate, which shall not be
more than twelve (12) nor less than six (6) months after the date of the first publication of the
notice. However, at any time before an order of distribution is entered, on application of a creditor
who has failed to file his claim within the time previously limited, the court may, for cause shown
and on such terms as are equitable, allow such claim to be filed within a time not exceeding one
(1) month.” (italics supplied)
In the instant case, petitioners filed an application (Motion for Allowance of Claim and for an
Order of Payment of Taxes) which, though filed after the expiration of the time previously limited
but before an order of the distribution is entered, should have been granted by the respondent
court, in the absence of any valid ground, as none was shown, justifying denial of the motion,
specially considering that it was for allowance of claim for taxes due from the estate, which in
effect represents a claim of the people at large, the only reason given for the denial that the claim
was filed out of the previously limited period, sustaining thereby private respondents’ contention,
erroneously as has been demonstrated.
WHEREFORE, the order appealed from is reversed. Since the Tax Commissioner’s assessment
in the total amount of P3,254.80 with 5% surcharge and 1% monthly interest as provided in the
Tax Code is a final one and the respondent estate’s sole defense of prescription has been herein
overruled, the Motion for Allowance of Claim is herein granted and respondent estate is ordered
to pay and discharge the same, subject only to the limitation of the interest collectible thereon as
provided by the Tax Code. No pronouncement as to costs.
SO ORDERED.
Teehankee (Chairman), Makasiar, Fernandez, Guerrero, and Melencio Herrera, JJ.,
concur.
Order reversed.
 G.R. No. 106611. July 21, 1994.* subsequently be upheld, the Government will be forced to institute anew a
proceeding for the recovery of erroneously refunded taxes which recourse must be
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF filed within the prescriptive period of ten years after discovery of the falsity, fraud
APPEALS, CITYTRUST BANKING CORPORATION and COURT OF TAX or omission in the false or fraudulent return involved. This would neces-sarily
require and entail additional efforts and expenses on the part of the Government,
APPEALS, respondents.
impose a burden on and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental operations.
Administrative Law; The Government is not bound by the errors committed by
its governmental agents.—It is a long and firmly settled rule of law that the
Same; Same; Same; When to avoid multiplicity of suits.—Thus, to avoid
Government is not bound by the errors committed by its agents. In the performance
multiplicity of suits and unnecessary difficulties or expenses, it is both logically
of its governmental functions, the State cannot be estopped by the neglect of its
necessary and legally appropriate that the issue of the deficiency tax assessment
agent and officers. Although the Government may generally be estopped through
against Citytrust be resolved jointly with its claim for tax refund, to determine once
the affirmative acts of public officers acting within their authority, their neglect or
and for all in a single proceeding the true and correct amount of tax due or
omission of public duties as exemplified in this case will not and should not produce
refundable.
that effect.
Same; Same; Tax payer and government must be given equal opportunities to
Taxation; Taxes are the lifeblood of the nation.—Nowhere is the aforestated
avail of remedies under the law.—In fact, as the Court of Tax Appeals itself has
rule more true than in the field of taxation. It is axiomatic that the Government
heretofore conceded, it would be only just and fair that the taxpayer and the
cannot and must not be estopped particularly in matters involving taxes. Taxes are
Government alike be given equal opportunities to avail of remedies under the law
the lifeblood of the nation through which the government agencies continue to
to defeat each other’s claim and to determine all matters of dispute between them
operate and with which the State effects its functions for the welfare of its
in one single case. It is important to note that in determining whether or not
constituents. The errors of certain administrative officers should never be allowed
petitioner is entitled to the refund of the amount paid, it would be necessary to
to jeopardize the Government’s financial position, especially in the case at bar
determine how much the Government is entitled to collect as taxes. This would
where the amount involves millions of pesos the collection whereof, if justified,
necessarily include the determination of the correct liability of the taxpayer and,
stands to be prejudiced just because of bureaucratic lethargy.
certainly, a determination of this case would constituteres judicata on both parties
as to all the matters subject thereof or necessarily involved therein.
Same; To award tax refund despite the existence of deficiency assessment is an
absurdity.—Further, it is also worth noting that the Court of Tax Appeals erred in
Administrative Law; Public Officers; Courts; The Supreme Court will
denying petitioner’s supplemental motion for reconsideration alleging and bringing
unhesitatingly react to any bane in the government service, with a replication of such
to said court’s attention the existence of the deficiency income and business tax
response being likewise expected by the people from the executive authorities.—The
assessment against Citytrust. The fact of such deficiency assessment is intimately
Court cannot end this adjudication without observing that what caused the
related to and inextricably intertwined with the right of respondent bank to claim
Government to lose its case in the tax court may hopefully be ascribed merely to
for a tax refund for the same year. To award such refund despite the existence of
the ennui or ineptitude of officialdom, and not to syndicated intent or corruption.
that deficiency assessment is an absurdity and a polarity in conceptual effects.
The evidential cul-de-sac in which the Solicitor General found himself once again
Herein private respondent cannot be entitled to refund and at the same time be
gives substance to the public perception and suspicion that it is another proverbial
liable for a tax deficiency assessment for the same year.
tip in the iceberg of venality in a government bureau which is pejoratively rated
over the years. What is so distressing, aside from the financial losses to the
Same; The grant of a refund is founded on the assumption that the tax return
Government, is the erosion of trust in a vital institution wherein the reputations of
is valid.—The grant of a refund is founded on the assumption that the tax return
so many honest and dedicated workers are besmirched by the acts or omissions of
is valid, that is, the facts stated therein are true and correct. The deficiency
a few. Hence, the liberal view we have here taken pro hac vice, which may give
assessment, although not yet final, created a doubt as to and constitutes a
some degree of assurance that this Court will unhesitatingly react to any bane in
challenge against the truth and accuracy of the facts stated in said return which,
the government service, with a replication of such response being likewise expected
by itself and without unquestionable evidence, cannot be the basis for the grant of
by the people from the executive authorities.
the refund.

Same; Actions; Multiplicity of suits; To grant the refund without

determination of the proper assessment and the tax due would inevitably result in
multiplicity of proceedings or suits.—Moreover, to grant the refund without
determination of the proper assessment and the tax due would inevitably result in
multiplicity of proceedings or suits. If the deficiency assessment should
PETITION for review of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
The Solicitor General for petitioner.
Pelaez, Adriano & Gregorio for private respondent.
REGALADO,J.:
The judicial proceedings over the present controversy commenced with CTA
Case No. 4099, wherein the Court of Tax Appeals ordered herein petitioner
Commissioner of Internal Revenue to grant a refund to herein private
respondent Citytrust Banking Corporation (Citytrust) in the amount of
P13,314,506.14, representing its overpaid income taxes for 1984 and 1985, but
denied its claim for the alleged refundable amount reflected in its 1983 income
tax return on the ground of prescription.1 That judgment of the tax court was
affirmed by respondent Court of
______________
1 Decision, Citytrust Banking Corporation vs. Commissioner of Internal Revenue, May
28, 1991, penned by Associate Judge Ernesto D. Acosta with the concurrence of Presiding
Judge Alex Z. Reyes and Associate Judge Constante C. Roaquim; Rollo, 26.
351
VOL. 234, JULY 21, 1994 351
Commissioner of Internal Revenue vs. Court of Appeals
Appeals in its judgment in CA-G.R. SP No. 26839.2 The case was then elevated
to us in the present petition for review on certiorari wherein the latter
judgment is impugned and sought to be nullified and/or set aside.
It appears that in a letter dated August 26, 1986, herein private respondent
corporation filed a claim for refund with the Bureau of Internal Revenue (BIR)
in the amount of P19,971,745,00 representing the alleged aggregate of the
excess of its carried-over total quarterly payments over the actual income tax
due, plus carried-over withholding tax payments on government securities and
rental income, as computed in its final income tax return for the calendar year
ending December 31, 1985.3
Two days later, or on August 28, 1986, in order to interrupt the running of
the prescriptive period, Citytrust filed a petition with the Court of Tax Appeals,
docketed therein as CTA Case No. 4099, claiming the refund of its income tax
overpayments for the years 1983, 1984 and 1985 in the total amount of
P19,971,745.00.4
In the answer filed by the Office of the Solicitor General, for and in behalf
of therein respondent commissioner, it was asserted that the mere averment
that Citytrust incurred a net loss in 1985 does not ipso facto merit a refund;
that the amounts of P6,611,223.00, P1,959,514.00 and P28,238.00 claimed by
Citytrust as 1983 income tax overpayment, taxes withheld on proceeds of
government securities investments, as well as on rental income, respectively,
are not properly documented; that assuming arguendo that petitioner is
entitled to refund, the right to claim the same has prescribed with respect to
income tax payments prior to August 28, 1984, pursuant to Sections 292 and
295 of the National Internal Revenue Code of 1977, as amended, since the
petition was filed only on August 28, 1986.5
On February 20, 1991, the case was submitted for decision based solely on
the pleadings and evidence submitted by herein private respondent Citytrust.
Herein petitioner could not present any evidence by reason of the repeated
failure of the Tax Credit/ Refund Division of the BIR to transmit the records of
the case, as well as the investigation report thereon, to the Solicitor General.6
However, on June 24, 1991, herein petitioner filed with the tax court a
manifestation and motion praying for the suspension of the proceedings in the
said case on the ground that the claim of Citytrust for tax refund in the amount
of P19,971,745.00 was already being processed by the Tax Credit/Refund
Division of the BIR, and that said bureau was only awaiting the submission by
Citytrust of the required confirmation receipts which would show whether or
not the aforestated amount was actually paid and remitted to the BIR.7
Citytrust filed an opposition thereto, contending that since the Court of Tax
Appeals already acquired jurisdiction over the case, it could no longer be
divested of the same; and, further, that the proceedings therein could not be
suspended by the mere fact that the claim for refund was being
administratively processed, especially where the case had already been
submitted for decision. It also argued that the BIR had already conducted an
audit, citing therefor Exhibits Y, Y-1, Y-2 and Y-3 adduced in the case, which
clearly showed that there was an overpayment of income taxes and for which
a tax credit or refund was due to Citytrust. The foregoing exhibits are allegedly
conclusive proof of and an admission by herein petitioner that there had been
an over-payment of income taxes.8
The tax court denied the motion to suspend proceedings on the ground that
the case had already been submitted for decision since February 20, 1991.9
Thereafter, said court rendered its decision in the case, the decretal portion
of which declares:
“WHEREFORE, in view of the foregoing, petitioner is entitled to a refund but only
for the overpaid taxes incurred in 1984 and 1985. The refundable amount as shown
in its 1983 income tax return is hereby denied on the ground of prescription.
Respondent is hereby ordered to grant a refund to petitioner Citytrust Banking
Corp. in the amount of P13,314,506.14 representing the overpaid income taxes for
1984 and 1985, recomputed as follows:
1984 Income tax P 4,715,533.00
due
Less: 1984 P16,214,599.00*
Quarterly payments
1984 Tax Credits— 1,921,245.37*
W/T on int. on
gov’t. sec.
W/T on rental inc. 26,604.30* 18,162,448.67
Tax Overpayment (13,446,915.67)
Less: FCDU 150,252.00
payable
Amount refundable P(13,296,663.67)
for 1984
1985 Income tax P-0-
due (loss)
Less: W/T on 36,716.47*
rentals
Tax Overpayment (36,716.47)*
Less: FCDU 18,874.00
payable
Amount P(17,842.47)
Refundable for
1985
*Note:
These credits are smaller than the claimed amount because only the above
figures are well supported by the various exhibits presented during the hearing.
No pronouncement as to costs.
SO ORDERED.”10
The order for refund was based on the following findings of the Court of Tax
Appeals: (1) the fact of withholding has been established by the statements and
certificates of withholding taxes accomplished by herein private respondent’s
withholding agents, the authenticity of which were neither disputed nor
controverted by herein petitioner; (2) no evidence was presented which could
effectively dispute the correctness of the income tax return filed by herein
respondent corporation and other material facts stated therein; (3) no
deficiency assessment was issued by herein petitioner; and (4) there was an
audit report submitted by the BIR Assessment Branch, recommending the
refund of overpaid taxes for the years concerned (Exhibits Y to Y-3), which
enjoys the presumption of regularity in the performance of official duty.11
A motion for the reconsideration of said decision was initially filed by the
Solicitor General on the sole ground that the statements and certificates of
taxes allegedly withheld are not conclusive evidence of actual payment and
remittance of the taxes withheld to the BIR.12 A supplemental motion for
reconsideration was thereafter filed, wherein it was contended for the first
time that herein private respondent had outstanding unpaid deficiency income
taxes. Petitioner alleged that through an inter-office memorandum of the Tax
Credit/Refund Division, dated August 8, 1991, he came to know only lately that
Citytrust had outstanding tax liabilities for 1984 in the amount of
P56,588,740.91 representing deficiency income and business taxes covered by
Demand/Assessment Notice No. FAS-1-84-003291-003296.13
Oppositions to both the basic and supplemental motions for reconsideration
were filed by private respondent Citytrust.14 Thereafter, the Court of Tax
Appeals issued a resolution denying both motions for the reason that Section
52 (b) of the Tax Code, as implemented by Revenue Regulation 6-85, only
requires that the claim for tax credit or refund must show that the income
received was declared as part of the gross income, and that the fact of
withholding was duly established. Moreover, with regard to the argument
raised in the supplemental motion for reconsideration anent the deficiency tax
assessment against herein petitioner, the tax court ruled that since that
matter was not raised in the pleadings, the same cannot be considered,
invoking therefor the salutary purpose of the omnibus motion rule which is to
obviate multiplicity of motions and to discourage dilatory pleadings.15
As indicated at the outset, a petition for review was filed by herein
petitioner with respondent Court of Appeals which in due course promulgated
its decision affirming the judgment of the Court of Tax Appeals. Petitioner
eventually elevated the case to this Court, maintaining that said respondent
court erred in affirming the grant of the claim for refund of Citytrust,
considering that, firstly, said private respondent failed to prove and
substantiate its claim for such refund; and, secondly, the bureau’s findings of
deficiency income and business tax liabilities against private respondent for
the year 1984 bars such payment.16
After a careful review of the records, we find that under the peculiar
circumstances of this case, the ends of substantial justice and public interest
would be better subserved by the remand of this case to the Court of Tax
Appeals for further proceedings.
It is the sense of this Court that the BIR, represented herein by petitioner
Commissioner of Internal Revenue, was denied its day in court by reason of
the mistakes and/or negligence of its officials and employees. It can readily be
gleaned from the records that when it was herein petitioner’s turn to present
evidence, several postponements were sought by its counsel, the Solicitor
General, due to the unavailability of the necessary records which were not
transmitted by the Refund Audit Division of the BIR to said counsel, as well as
the investigation report made by the Banks/ Financing and Insurance Division
of the said bureau, despite repeated requests.17 It was under such a predi-
cament and in deference to the tax court that ultimately, said records being
still unavailable, herein petitioner’s counsel was constrained to submit the case
for decision on February 20, 1991 without presenting any evidence.
For that matter, the BIR officials and/or employees concerned also failed to
heed the order of the Court of Tax Appeals to remand the records to it pursuant
to Section 2, Rule 7 of the Rules of the Court of Tax Appeals which provides
that the Commissioner of Internal Revenue and the Commissioner of Customs
shall certify and forward to the Court of Tax Appeals, within ten days after
filing his answer, all the records of the case in his possession, with the pages
duly numbered, and if the records are in separate folders, then the folders shall
also be numbered.
The aforestated impassé came about due to the fact that, despite the filing of
the aforementioned initiatory petition in CTA Case No. 4099 with the Court of
Tax Appeals, the Tax Refund Division of the BIR still continued to act
administratively on the claim for refund previously filed therein, instead of
forwarding the records of the case to the Court of Tax Appeals as ordered.18
It is a long and firmly settled rule of law that the Government is not bound
by the errors committed by its agents.19 In the performance of its governmental
functions, the State cannot be estopped by the neglect of its agent and officers.
Although the Government may generally be estopped through the affirmative
acts of public officers acting within their authority, their neglect or omission of
public duties as exemplified in this case will not and should not produce that
effect.
Nowhere is the aforestated rule more true than in the field of taxation.20 It
is axiomatic that the Government cannot and must not be estopped
particularly in matters involving taxes. Taxes are the lifeblood of the nation
through which the government agencies continue to operate and with which
the State effects its functions for the welfare of its constituents.21 The errors of
certain administrative officers should never be allowed to jeopardize the
Government’s financial position,22 especially in the case at bar where the
amount involves millions of pesos the collection whereof, if justified, stands to
be prejudiced just because of bureaucratic lethargy.
Further, it is also worth noting that the Court of Tax Appeals erred in
denying petitioner’s supplemental motion for reconsideration alleging and
bringing to said court’s attention the existence of the deficiency income and
business tax assessment against Citytrust. The fact of such deficiency
assessment is intimately related to and inextricably intertwined with the right
of respondent bank to claim for a tax refund for the same year. To award such
refund despite the existence of that deficiency assessment is an absurdity and
a polarity in conceptual effects. Herein private respondent cannot be entitled
to refund and at the same time be liable for a tax deficiency assessment for the
same year.
The grant of a refund is founded on the assumption that the tax return is
valid, that is, the facts stated therein are true and correct. The deficiency
assessment, although not yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the facts stated in said return
which, by itself and without unquestionable evidence, cannot be the basis for
the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977,
which was the applicable law when the claim of Citytrust was filed, provides
that “(w)hen an assessment is made in case of any list, statement, or return,
which in the opinion of the Commissioner of Internal Revenue was false or
fraudulent or contained any understatement or undervaluation, no tax
collected under such assessment shall be recovered by any suits unless it is
proved that the said list, statement, or return was not false nor fraudulent and
did not contain any understatement or under-valuation; but this provision
shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines.”
Moreover, to grant the refund without determination of the proper
assessment and the tax due would inevitably result in multiplicity of
proceedings or suits. If the deficiency assessment should subsequently be
upheld, the Government will be forced to institute anew a proceeding for the
recovery of erroneously refunded taxes which recourse must be filed within the
prescriptive period of ten years after discovery of the falsity, fraud or omission
in the false or fraudulent return involved.23 This would necessarily require and
entail additional efforts and expenses on the part of the Government, impose
a burden on and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses,
it is both logically necessary and legally appropriate that the issue of the
deficiency tax assessment against Citytrust be resolved jointly with its claim
for tax refund, to determine once and for all in a single proceeding the true and
correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, 24 it
would be only just and fair that the taxpayer and the Government alike be
given equal opportunities to avail of remedies under the law to defeat each
other’s claim and to determine all matters of dispute between them in one
single case. It is important to note that in determining whether or not
petitioner is entitled to the refund of the amount paid, it would be necessary to
determine how much the Government is entitled to collect as taxes. This would
necessarily include the determination of the correct liability of the taxpayer
and, certainly, a deter-mination of this case would constitute res judicata on
both parties as to all the matters subject thereof or necessarily involved
therein.
The Court cannot end this adjudication without observing that what caused
the Government to lose its case in the tax court may hopefully be ascribed
merely to the ennui or ineptitude of officialdom, and not to syndicated intent
or corruption. The evidentialcul-de-sac in which the Solicitor General found
himself once again gives substance to the public perception and suspicion that
it is another proverbial tip in the iceberg of venality in a government bureau
which is pejoratively rated over the years. What is so distressing, aside from
the financial losses to the Government, is the erosion of trust in a vital
institution wherein the reputations of so many honest and dedicated workers
are besmirched by the acts or omissions of a few. Hence, the liberal view we
have here taken pro hac vice, which may give some degree of assurance that
this Court will unhesitatingly react to
any bane in the government service, with a replication of such response being
likewise expected by the people from the exclusive authorities.
WHEREFORE, the judgment of respondent Court of Appeals in CA-G.R. SP
No. 26839 is hereby SET ASIDE and the case at bar is REMANDED to the
Court of Tax Appeals for further proceedings and appropriate action, more
particularly, the reception of evidence for petitioner and the corresponding
disposition of CTA Case No. 4099 not otherwise inconsistent with our
adjudgment herein.
SO ORDERED.

No. L-28896. February 17, 1988.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ALGUE, INC.,
and THE COURT OF TAX APPEALS, respondents.
Taxation; Nature of taxes; Purpose of taxation; Collection of taxes should be
made in accordance with law.—Taxes are the lifeblood of the government and so
should be collected without unnecessary hindrance. On the other hand, such
collection should be made in accordance with law as any arbitrariness will negate
the very reason for government itself. It is therefore necessary to reconcile the
apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be achieved.
Same; Appeal; Appeal from a decision of the Commissioner of Internal Revenue
with the Court of Tax Appeals is 30 days from receipt thereof.—The above
chronology shows that the petition was filed seasonably. According to Rep. Act No.
1125, the appeal may be made within thirty days after receipt of the decision or
ruling challenged.
Same; Warrant of distraint and levy; Rule that the warrant of distraint and
levy is proof of the finality of the assessment; Exception is where there is a letter of
protest after receipt of notice of assessment.—It is true that as a rule the warrant of
distraint and levy is "proof of the finality of the assessment" and "renders hopeless
a request for reconsideration," being "tantamount to an outright denial thereof and
makes the said request deemed rejected." But there is a special circumstance in the
case at bar that prevents application of this accepted doctrine. The proven fact is
that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account
before the warrant of distraint and levy was issued; indeed, such protest could not
be located in the office of the petitioner. It was only after Atty. Guevara gave the
BIR a copy of the protest that it was, if at all, considered by the tax authorities.
During the intervening period, the warrant was premature and could therefore not
be served.
Same; Same; Same; Same; Protest filed, not pro forma, and was based on
strong legal considerations; Case at bar.—As the Court of Tax Appeals correctly
noted, the protest filed by private respondent was not pro forma and was based on
strong legal considerations. It thus had the effect of suspending on January 18,
1965, when it was filed, the reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period started running again
only on April 7, 1965, when the private respondent was definitely informed of the
implied rejection of the said protest and the warrant was finally served on it. Hence,
when the appeal was filed on April 23, 1965, only 20 days of the reglementary
period had been consumed.
Same; Income Tax; Payments in promotional fees, not fictitious; Claimed
deduction of P75,000 proper; Strict business procedures not applied in a family
corporation.—We find that these suspicions were adequately met by the private
respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de
Jesus, testified that the payments were not made in one lump sum but periodically
and in different amounts as each payee's need arose. It should be remembered that
this was a family corporation where strict business procedures were not applied
and immediate issuance of receipts was not required. Even so, at the end of the
year, when the books were to be closed, each payee made an accounting of all of the
fees received by him or her, to make up the total of P75,000.00. Admittedly,
everything seemed to be informal. This arrangement was understandable,
however, in view of the close relationship among the persons in the family
corporation.
Same; Same; Same; Same; Amount of promotional fees, not excessive.—We
agree with the respondent court that the amount of the promotional fees was not
excessive. The total commission paid by the Philippine Sugar Estate Development
Co. to the private respondent was P1 25,000.00. After deducting the said fees, Algue
still had a balance of P50,000.00 as clear profit from the transaction. The amount
of P75,000.00 was 60% of the total commission. This was a reasonable proportion,
considering that it was the payees who did practically everything, from the
formation of the Vegetable Oil Investment Corporation to the actual purchase by it
of the Sugar Estate properties.
Same; Same; Same; Same; Burden on taxpayer to prove validity of the claimed
deduction, successfully discharged; Payment of the fees was
11
VOL. 158, FEBRUARY 17, 1988 11
Commissioner of lnternal Revenue vs. Algue, Inc.
necessary and reasonable.—The Solicitor General is correct when he says that
the burden is on the taxpayer to prove the validity of the claimed deduction. In the
present case, however, we find that the onus has been discharged satisfactorily.
The private respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors
and prominent businessmen to venture in an experimental enterprise and involve
themselves in a new business requiring millions of pesos. This was no mean feat
and should be, as it was, sufficiently recompensed.
Same; Same; Rationale of taxation.—It is said that taxes are what we pay for
civilized society. Without taxes, the government would be paralyzed for lack of the
motive power to activate and operate it. Hence, despite the natural reluctance to
surrender part of one's hard-earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government. The
government, for its part, is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance their
moral and material values, This symbiotic relationship is the rationale of taxation
and should dispel the erroneous notion that it is an arbitrary method of exaction
by those in the seat of power.
APPEAL from the decision of the Court of Tax Appeals.
The facts are stated in the opinion of the Court.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be
achieved.
The main issue in this case is whether or not the Collector of Internal
Revenue correctly disallowed the P75,000.00 deduction claimed by private
respondent Algue as legitimate business expenses in its income tax returns.
The corollary issue is whether or not the appeal of the private respondent from
the decision of the Collector of Internal Revenue was made on time and in
accordance with law.
12
12 SUPREME COURT REPORTS ANNOTATED
Commissioner of lnternal Revenue vs. Algue, Inc.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a
domestic corporation engaged in engineering, construction and other allied
activities, received a letter from the petitioner assessing it in the total amount
of P83,183.85 as delinquency income taxes for the years 1958 and 1959.1 On
January 18, 1965, Algue filed a letter of protest or request for reconsideration,
which letter was stamp-received on the same day in the office of the
petitioner.2 On March 12, 1965, a warrant of distraint and levy was presented
to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who
refused to receive it on the ground of the pending protest. 3 A search of the
protest in the dockets of the case proved fruitless. Atty. Guevara produced his
file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service
of the warrant.4 On April 7, 1965, Atty. Guevara was finally informed that the
BIR was not taking any action on the protest and it was only then that he
accepted the warrant of distraint and levy earlier sought to be served.5 Sixteen
days later, on April 23, 1965, Algue filed a petition for review of the decision of
the Commissioner of Internal Revenue with the Court of Tax Appeals.6
The above chronology shows that the petition was filed seasonably.
According to Rep. Act No. 1125, the appeal may be made within thirty days
after receipt of the decision or ruling challenged.7 It is true that as a rule the
warrant of distraint and levy is "proof of the finality of the assessment" 8 and
"renders hopeless a request for reconsideration," 9 being "tantamount to an
outright denial thereof and makes the said request deemed rejected." 10
But there is a special circumstance in the case at bar that prevents application
of this accepted doctrine.
The proven fact is that four days after the private respondent received the
petitioner's notice of assessment, it filed its letter of protest. This was
apparently not taken into account before the warrant of distraint and levy was
issued; indeed, such protest could not be located in the office of the petitioner.
It was only after Atty. Guevara gave the BIR a copy of the protest that it was,
if at all, considered by the tax authorities. During the intervening period, the
warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted,11 the protest filed by private
respondent was not pro forma and was based on strong legal considerations. It
thus had the effect of suspending on January 18, 1965, when it was filed, the
reglementary period which started on the date the assessment was
received, viz., Jaauary 14, 1965. The period started running again only on Ap
7, 1965, when the private respondent was definitely informed of the implied
rejection of the said protest and the warrant was finally served on it. Hence,
when the appeal was filed on April 23, 1965, only 20 days of the reglementary
period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was
properly disallowed because it was not an ordinary, reasonable or necessary
business expense. The Court of Tax Appeals had seen it differently. Agreeing
with Algue, it held that the said amount had been legitimately paid by the
private respondent for actual services rendered. The payment was in the form
of promotional fees. These were collected by the payees for their work in the
creation of the Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar Estate
Development Company.
Parenthetically, it may be observed that the petitioner had originally
claimed these promotional fees to be personal holding company income12 but
later conformed to the decision of the respondent court rejecting this
assertion.13 In fact, as the said court found, the amount was earned through
the joint efforts of the persons among whom it was distributed. It has been
established that the Philippine Sugar Estate Development Company had
earlier appointed Algue as its agent, authorizing it to sell its land. factories
and oil manufacturing process. Pursuant to such authority, Alberto Guevara,
Jr., Eduardo Guevara, Isabel Guevara, Edith O'Farell, and Pablo Sanchez
worked for the formation of the Vegetable Oil Investment Corporation,
inducing other persons to invest in it.14 Ultimately, after its incorporation
largely through the promotion of the said persons, this new corporation
purchased the PSEDC properties.15 For this sale, Algue received as agent a
commission of P125,000.00, and it was from this commission that the
P75,000.00 promotional fees were paid to the aforenamed individuals.16
There is no dispute that the payees duly reported their respective shares of
the fees in their income tax returns and paid the corresponding taxes
thereon.17 The Court of Tax Appeals also found, after examining the evidence,
that no distribution of dividends was involved.18
The petitioner claims that these payments are fictitious because most of the
payees are members of the same family in control of Algue. It is argued that
no indication was made as to how such payments were made, whether by check
or in cash, and there is not enough substantiation of such payments. In short,
the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private
respondent when its President, Alberto Guevara, and the accountant, Cecilia
V. de Jesus, testified that the payments were not made in one lump sum but
periodically and in different amounts as each payee's need arose.19 It should
be remembered that this was a family corporation where strict business
procedures were not applied and immediate issuance of receipts was not
required. Even so, at the end of the year, when the books were to be closed,
each payee made an accounting of all of the fees received by him or her, to
make up the total of P75,000.00.20 Admittedly, everything seemed to be
informal. This arrangement was understandable, however, in view of the close
relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees
was not excessive. The total commission paid by the Philippine Sugar Estate
Development Co. to the private respondent was P125,000.00.21 After deducting
the said fees, Algue still had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the total commission. This
was a reasonable proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil Investment
Corporation to the actual purchase by it of the Sugar Estate properties.
This finding of the respondent court is in accord with the following provision
of the Tax Code:
"SEC. 30. Deductions from gross income.—In computing net income there shall be
allowed as deductions—
. (a)Expenses:
. (1)In general.—All the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal
services actually rendered; x x x"22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
"SEC. 70. Compensation for personal services.—Among the ordinary and necessary
expenses paid or incurred in carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation for personal services
actually rendered. The test of deductibility in the case of compensation payments
is whether they are reasonable and are, in fact, payments purely for service. This
test and its practical application may be further stated and illustrated as follows:
"Any amount paid in the form of compensation, but not in fact as the purchase
price of services, is not deductible. (a) An ostensible salary paid by a corporation
may be a distribution of a dividend on stock. This is likely to occur in the case of a
corporation having few stockholders, practically all of whom draw salaries. If in
such a case the salaries are in excess of those ordinarily paid for similar services,
and the excessive payment correspond or bear a close relationship to the
stockholdings of the officers of employees, it would seem likely that the salaries are
not paid wholly for services rendered, but the excessive payments are a distribution
of earnings upon the stock. x x x" (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular
employ of Algue nor were they its controlling stockholders.23
The Solicitor General is correct when he says that the burden is on the
taxpayer to prove the validity of the claimed deduction. In the present case,
however, we find that the onus has been discharged satisfactorily. The private
respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors
and prominent businessmen to venture in an experimental enterprise and
involve themselves in a new business requiring millions of pesos. This was no
mean feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of one's
hard-earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its
part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and
material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it
is a requirement in all democratic regimes that it be exercised reasonably and
in accordance with the prescribed procedure. If it is not, then the taxpayer has
a right to complain and the courts will then come to his succor. For all the
awesome power of the tax collector, he may still be stopped in his tracks if the
taxpayer can demonstrate, as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the
petitioner was filed on time with the respondent court in accordance with Rep.
Act No. 1125. And we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code and should
therefore not have been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is
AFFIRMED in toto, without costs.
SO ORDERED.
 G.R. No. 117359. July 23, 1998.*
DAVAO GULF LUMBER CORPORATION, petitioner, vs. COMMISSIONER
OF INTERNAL REVENUE and COURT OF APPEALS, respondents.
Taxation; A tax cannot be imposed unless it is supported by the clear and
express language of a statute; Once the tax is unquestionably imposed, “a claim of
exemption from tax payments must be clearly shown and based on language in the
law too plain to be mistaken.”—A tax cannot be imposed unless it is supported by
the clear and express language of a statute; on the other hand, once the tax is
unquestionably imposed, “[a] claim of exemption from tax payments must be clearly
shown and based on language in the law too plain to be mistaken.” Since the partial
refund authorized under Section 5, RA 1435, is in the nature of a tax exemption, it
must be construed strictissimi juris against the grantee. Hence, petitioner’s claim
of refund on the basis of the specific taxes it actually paid must expressly be granted
in a statute stated in a language too clear to be mistaken.
Same; There is no tax exemption solely on the ground of eq-uity.—Petitioner
asserts that “equity and justice demand that the computation of the tax refunds be
based on actual amounts paid under Sections 153 and 156 of the NIRC.” We
disagree. According to an eminent authority on taxation, “there is no tax exemption
solely on the ground of equity.”
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Carpio, Villaraza & Cruz for petitioner.
The Solicitor General for public respondents.
PANGANIBAN, J.:
Because taxes are the lifeblood of the nation, statutes that allow exemptions
are construed strictly against the grantee and liberally in favor of the
government. Otherwise stated, any exemption from the payment of a tax must
be clearly stated in the language of the law; it cannot be merely implied
therefrom.
Statement of the Case
This principium is applied by the Court in resolving this petition for review
under Rule 45 of the Rules of Court, assailing the Decision1 of Respondent
Court of Appeals2 in CA-GR SP No. 34581 dated September 26, 1994, which
affirmed the June 21, 1994 Decision3 of the Court of Tax Appeals4 in CTA Case
No. 3574. The dispositive portion of the CTA Decision affirmed by Respondent
Court reads:
“WHEREFORE, judgment is hereby rendered ordering the respondent to refund to
the petitioner the amount of P2,923.15 representing the partial refund of specific
taxes paid on manufactured oils and fuels.”5
The Antecedent Facts
The facts are undisputed.6 Petitioner is a licensed forest concessionaire
possessing a Timber License Agreement granted by the Ministry of Natural
Resources (now Department of Environment and Natural Resources). From
July 1, 1980 to January 31, 1982 petitioner purchased, from various oil
companies, refined and manufactured mineral oils as well as motor and diesel
fuels, which it used exclusively for the exploitation and operation of its forest
concession. Said oil companies paid the specific taxes imposed, under Sections
153 and 1567 of the 1977 National Internal Revenue Code (NIRC), on the sale
of said products. Being included in the purchase price of the oil products, the
specific taxes paid by the oil companies were eventually passed on to the user,
the petitioner in this case.
On December 13, 1982, petitioner filed before Respondent Commissioner of
Internal Revenue (CIR) a claim for refund in the amount of P120,825.11,
representing 25% of the specific taxes actually paid on the above-mentioned
fuels and oils that were used by petitioner in its operations as forest
concessionaire. The claim was based on Insular Lumber Co. vs. Court of Tax
Appeals8 and Section 5 of RA 1435 which reads:
“Section 5. The proceeds of the additional tax on manufactured oils shall accrue to
the road and bridge funds of the political subdivision for whose benefit the tax is
collected: Provided, however, That whenever any oils mentioned above are used by
miners or forest concessionaires in their operations, twenty-five per centum of the
specific tax paid thereon shall be refunded by the Collector of Internal Revenue
upon submission of proof of actual use of oils and under similar conditions
enumerated in subparagraphs one and two of section one hereof, amending section
one hundred forty-two of the Internal Revenue Code: Provided, further, That no
new road shall be constructed unless the routes or location thereof shall have been
approved by the Commissioner of Public Highways after a determination that such
road can be made part of an integral and articulated route in the Philippine
Highway System, as required in section twenty-six of the Philippine Highway Act
of 1953.”
It is an unquestioned fact that petitioner complied with the procedure for
refund, including the submission of proof of the actual use of the
aforementioned oils in its forest concession as required by the above-quoted
law. Petitioner, in support of its claim for refund, submitted to the CIR the
affidavits of its general manager, the president of the Philippine Wood
Products Association, and three disinterested persons, all attesting that the
said manufactured diesel and fuel oils were actually used in the exploitation
and operation of its forest concession.
On January 20, 1983, petitioner filed at the CTA a petition for review
docketed as CTA Case No. 3574. On June 21, 1994, the CTA rendered its
decision finding petitioner entitled to a partial refund of specific taxes the
latter had paid in the reduced amount of P2,923.15. The CTA ruled that the
claim on purchases of lubricating oil (from July 1, 1980 to January 19, 1981)
and on manufactured oils other than lubricating oils (from July 1, 1980 to
January 4, 1981) had prescribed. Disallowed on the ground that they were not
included in the original claim filed before the CIR were the claims for refund
on purchases of manufactured oils from January 1, 1980 to June 30, 1980 and
from February 1, 1982 to June 30, 1982. In regard to the other purchases, the
CTA granted the claim, but it computed the refund based on rates deemed paid
under RA 1435, and not on the higher rates actually paid by petitioner under
the NIRC.
Insisting that the basis for computing the refund should be the increased
rates prescribed by Sections 153 and 156 of the NIRC, petitioner elevated the
matter to the Court of Appeals. As noted earlier, the Court of Appeals affirmed
the CTA Decision. Hence, this petition for review.9
Public Respondent’s Ruling
In its petition before the Court of Appeals, petitioner raised the following
arguments:
. “I.The respondent Court of Tax Appeals failed to apply the Supreme
Court’s Decision in Insular Lumber Co. v. Court of Tax Appeals which
granted the claim for partial refund of specific taxes paid by the
claimant, without qualification or limitation.
. “II.The respondent Court of Tax Appeals ignored the increase in rates
imposed by succeeding amendatory laws, under which the petitioner
paid the specific taxes on manufactured and diesel fuels.
. “III.In its decision, the respondent Court of Tax Appeals ruled contrary
to established tenets of law when it lent itself to interpreting Section
5 of R.A. 1435, when the construction of said law is not necessary.
. “IV.Sections 1 and 2 of R.A. 1435 are not the operative provisions to be
applied but rather, Sections 153 and 156 of the National Internal
Revenue Code, as amended.
. “V.To rule that the basis for computation of the refunded taxes should
be Sections 1 and 2 of R.A. 1435 rather than Section 153 and 156 of
the National Internal Revenue Code is unfair, erroneous, arbitrary,
inequitable and oppressive.”10
The Court of Appeals held that the claim for refund should indeed be computed
on the basis of the amounts deemed paid under Sections 1 and 2 of RA 1435.
In so ruling, it cited our pronouncement in Commissioner of Internal Revenue
v. Rio Tuba Nickel Mining Corporation11 and our subsequent Resolution dated
June 15, 1992 clarifying the said Decision. Respondent Court further ruled
that the claims for refund which prescribed and those which were not filed at
the administrative level must be excluded.
The Issue
In its Memorandum, petitioner raises one critical issue:
“Whether or not petitioner is entitled under Republic Act No. 1435 to the refund of
25% of the amount of specific taxes it actually paid on various refined and
manufactured mineral oils and other oil products taxed under Sec. 153 and Sec.
156 of the 1977 (Sec. 142 and Sec. 145 of the 1939) National Internal Revenue
Code.”12
In the main, the question before us pertains only to the computation of the tax
refund. Petitioner argues that the refund should be based on the increased
rates of specific taxes which it actually paid, as prescribed in Sections 153 and
156 of the NIRC. Public respondent, on the other hand, contends that it should
be based on specific taxes deemed paid under Sections 1 and 2 of RA 1435.
The Court’s Ruling
The petition is not meritorious.
Petitioner Entitled to Refund
Under Sec. 5 of RA 1435
At the outset, it must be stressed that petitioner is entitled to a partial refund
under Section 5 of RA 1435, which was enacted to provide means for increasing
the Highway Special Fund.
The rationale for this grant of partial refund of specific taxes paid on
purchases of manufactured diesel and fuel oils rests on the character of the
Highway Special Fund. The specific taxes collected on gasoline and fuel accrue
to the Fund, which is to be used for the construction and maintenance of the
highway system. But because the gasoline and fuel purchased by mining and
lumber concessionaires are used within their own compounds and roads, and
their vehicles seldom use the national highways, they do not directly benefit
from the Fund and its use. Hence, the tax refund gives the mining and the
logging companies a measure of relief in light of their peculiar
situation.13 When the Highway Special Fund was abolished in 1985, the reason
for the refund likewise ceased to exist.14 Since petitioner purchased the subject
manufactured diesel and fuel oils from July 1, 1980 to January 31, 1982 and
submitted the required proof that these were actually used in operating its
forest concession, it is entitled to claim the refund under Section 5 of RA 1435.
Tax Refund Strictly Construed
Against the Grantee
Petitioner submits that it is entitled to the refund of 25 percent of the specific
taxes it had actually paid for the petroleum products used in its operations. In
other words, it claims a refund based on the increased rates under Sections
153 and 156 of the NIRC.15 Petitioner argues that the statutory grant of the
refund privilege, specifically the phrase “twenty-five per centum of the specific
tax paid thereon shall be refunded by the Collector of Internal Revenue,” is
“clear and unambiguous” enough to require construction or qualification
thereof.16 In addition, it cites our pronouncement in Insular Lumber vs. Court
of Tax Appeals:17
“x x x Section 5 [of RA 1435] makes reference to subparagraphs 1 and 2 of Section
1 only for the purpose of prescribing the procedure for refund. This express
reference cannot be expanded in scope to include the limitation of the period of
refund. If the limitation of the period of refund of specific taxes paid on oils used in
aviation and agriculture is intended to cover similar taxes paid on oil used by
miners and forest concessionaires, there would have been no need of dealing with
oil used by miners and forest concessions separately and Section 5 would very well
have been included in Section 1 of Republic Act No. 1435, notwithstanding the
different rate of exemption.”
Petitioner then reasons that “the express mention of Section 1 of RA 1435 in
Section 5 cannot be expanded to include a limitation on the tax rates to be
applied x x x [otherwise,] Section 5 should very well have been included in
Section 1 x x x.”18
The Court is not persuaded. The relevant statutory provisions do not clearly
support petitioner’s claim for refund. RA 1435 provides:
“SECTION 1. Section one hundred and forty-two of the National Internal Revenue
Code, as amended, is further amended to read as follows:
“SEC. 142. Specific tax on manufactured oils and other fuels.—On refined and
manufactured mineral oils and motor fuels, there shall be collected the following
taxes:
. “(a)Kerosene or petroleum, per liter of volume capacity, two and one-half
centavos;
. “(b)Lubricating oils, per liter of volume capacity, seven centavos;
. “(c)Naphtha, gasoline, and all other similar products of distillation, per
liter of volume capacity, eight centavos; and
. “(d)On denatured alcohol to be used for motive power, per liter of volume
capacity, one centavo: Provided, That if the denatured alcohol is mixed
with gasoline, the specific tax on which has already been paid, only the
alcohol content shall be subject to the tax herein prescribed. For the
purpose of this subsection, the removal of denatured alcohol of not less
than one hundred eighty degrees proof (ninety per centum absolute
alcohol) shall be deemed to have been removed for motive power, unless
shown to the contrary.
“Whenever any of the oils mentioned above are, during the five years from June
eighteen, nineteen hundred and fifty two, used in agriculture and aviation, fifty per
centum of the specific tax paid thereon shall be refunded by the Collector of Internal
Revenue upon the submission of the following:
. “(1)A sworn affidavit of the producer and two disinterested persons
proving that the said oils were actually used in agriculture, or in lieu
thereof.
. “(2)Should the producer belong to any producers’ association or federation,
duly registered with the Securities and Exchange Commission, the
affidavit of the president of the association or federation, attesting to the
fact that the oils were actually used in agriculture.
. “(3)In the case of aviation oils, a sworn certificate satisfactory to the
Collector proving that the said oils were actually used in
aviation: Provided, That no such refunds shall be granted in respect
85
VOL. 293, JULY 23, 1998 85
Davao Gulf Lumber Corporation vs. Commissioner of
Internal Revenue
to the oils used in aviation by citizens and corporations of foreign countries
which do not grant equivalent refunds or exemptions in respect to similar oils used
in aviation by citizens and corporations of the Philippines.”
SEC. 2. Section one hundred and forty-five of the National Internal Revenue
Code, as amended, is further amended to read as follows:
“SEC. 145. Specific Tax on Diesel fuel oil.—On fuel oil, commercially known as
diesel fuel oil, and on all similar fuel oils, having more or less the same generating
power, there shall be collected, per metric ton, one peso.”
xxx xxx xxx
Section 5. The proceeds of the additional tax on manufactured oils shall accrue
to the road and bridge funds of the political subdivision for whose benefit the tax is
collected: Provided, however, That whenever any oils mentioned above are used by
miners or forest concessionaires in their operations, twenty-five per centum of the
specific tax paid thereon shall be refunded by the Collector of Internal Revenue
upon submission of proof of actual use of oils and under similar conditions
enumerated in subparagraphs one and two of section one hereof, amending section
one hundred forty-two of the Internal Revenue Code: Provided, further, That no
new road shall be constructed unless the route or location thereof shall have been
approved by the Commissioner of Public Highways after a determination that such
road can be made part of an integral and articulated route in the Philippine
Highway System, as required in section twenty-six of the Philippine Highway Act
of 1953.”
Subsequently, the 1977 NIRC, PD 1672 and EO 672 amended the first two
provisions, renumbering them and prescribing higher rates. Accordingly,
petitioner paid specific taxes on petroleum products purchased from July 1,
1980 to January 31, 1982 under the following statutory provisions.
From February 8, 1980 to March 20, 1981, Sections 153 and 156 provided
as follows:
“SEC. 153. Specific tax on manufactured oils and other fuels.—On refined and
manufactured mineral oils and motor fuels, there shall be collected the following
taxes which shall attach to the
 86
86 SUPREME COURT REPORTS ANNOTATED
Davao Gulf Lumber Corporation vs. Commissioner of
Internal Revenue
articles hereunder enumerated as soon as they are in existence as such:
. “(a)Kerosene, per liter of volume capacity, seven centavos;
. “(b)Lubricating oils, per liter of volume capacity, eighty centavos;
. “(c)Naphtha, gasoline and all other similar products of distillation, per
liter of volume capacity, ninety-one centavos: Provided, That, on premium
and aviation gasoline, the tax shall be one peso per liter of volume
capacity;
centavos, which tax shall attach to this fuel oil as soon as it is in existence
as such.”
87
VOL. 293, JULY 23, 1998 87
Davao Gulf Lumber Corporation vs. Commissioner of
Internal Revenue
Then on March 21, 1981, these provisions were amended by EO 672 to read:
“SEC. 153. Specific tax on manufactured oils and other fuels.—On refined and
manufactured mineral oils and motor fuels, there shall be collected the following
taxes which shall attach to the articles hereunder enumerated as soon as they are
in existence as such:
. “(a)Kerosene, per liter of volume capacity, nine centavos;

. “(b)Lubricating oils, per liter of volume capacity, eighty centavos;

. “(d)On denatured alcohol to be used for motive power, per liter of volume
capacity, one centavo: Provided, That, unless otherwise provided for by
special laws, if the denatured alcohol is mixed with gasoline, the specific
. “(c)Naphtha, gasoline and all other similar products of distillation, per
liter of volume capacity, one peso and six centavos: Provided, That on
tax on which has already been paid, only the alcohol content shall be
premium and aviation gasoline, the tax shall be one peso and ten centavos
subject to the tax herein prescribed. For the purposes of this subsection,
and one peso, respectively, per liter of volume capacity;
the removal of denatured alcohol of not less than one hundred eighty
degrees proof (ninety per centum absolute alcohol) shall be deemed to have
been removed for motive power, unless shown to the contrary; . “(d)On denatured alcohol to be used for motive power, per liter of volume
capacity, one centavo: Provided, That unless otherwise provided for by
special laws, if the denatured alcohol is mixed with gasoline, the specific
. “(e)Processed gas, per liter of volume capacity, three centavos;
tax on which has already been paid, only the alcohol content shall be
subject to the tax herein prescribed. For the purpose of this subsection,
. “(f)Thinners and solvents, per liter of volume capacity, fifty-seven
the removal of denatured alcohol of not less than one hundred eighty
centavos;
degrees proof (ninety per centum absolute alcohol) shall be deemed to have
been removed for motive power, unless shown to the contrary;
. “(g)Liquefied petroleum gas, per kilogram, fourteen centavos: Provided,
That, liquefied petroleum gas used for motive power shall be taxed at the
. “(e)Processed gas, per liter of volume capacity, three centavos;
equivalent rate as the specific tax on diesel fuel oil;
. “(f)Thinners and solvents, per liter of volume capacity, sixty-one centavos;
. “(h)Asphalts, per kilogram, eight centavos;
. “(g)Liquefied petroleum gas, per kilogram, twenty-one centavos: Provided,
. “(i)Greases, waxes and petroleum, per kilogram, fifty centavos;
That, liquefied petroleum gas used for motive power shall be taxed at the
equivalent rate as the specific tax on diesel fuel oil;
. “(j)Aviation turbo jet fuel, per liter of volume capacity, fifty-five centavos.”
(As amended by Sec. 1, P.D. No. 1672.)
. “(h)Asphalts, per kilogram, twelve centavos;
xxx xxx xxx
“SEC. 156. Specific tax on diesel fuel oil.—On fuel oil, commercially known
as diesel fuel oil, and on all similar fuel oils, having more or less the same
. “(i)Greases, waxes and petrolatum, per kilogram, fifty centavos;
generating power, per liter of volume capacity, seventeen and one-half
 . “(j)Aviation turbo-jet fuel, per liter of volume capacity, sixty-four
centavos.”
xxx xxx xxx
88
88 SUPREME COURT REPORTS ANNOTATED
Davao Gulf Lumber Corporation vs. Commissioner of
Internal Revenue
“SEC. 156. Specific tax on diesel fuel oil.—On fuel oil, commercially known as diesel
fuel oil, and all similar fuel oils, having more or less the same generating power,
per liter of volume capacity, twenty-five and one-half centavos, which tax shall
attach to this fuel oil as soon as it is in existence as such.”
A tax cannot be imposed unless it is supported by the clear and express
language of a statute;19 on the other hand, once the tax is unquestionably
imposed, “[a] claim of exemption from tax payments must be clearly shown and
based on language in the law too plain to be mistaken.” 20 Since the partial
refund authorized under Section 5, RA 1435, is in the nature of a tax
exemption,21 it must be construed strictissimi juris against the grantee.
Hence, petitioner’s claim of refund on the basis of the specific taxes it actually
paid must expressly be granted in a statute stated in a language too clear to
be mistaken.
We have carefully scrutinized RA 1435 and the subsequent pertinent
statutes and found no expression of a legislative will authorizing a refund
based on the higher rates claimed by petitioner. The mere fact that the
privilege of refund was included in Section 5, and not in Section 1, is
insufficient to support petitioner’s claim. When the law itself does not explicitly
provide that a refund under RA 1435 may be based on higher rates which were
nonexistent at the time of its enactment, this Court cannot presume otherwise.
A legislative lacuna cannot be filled by judicial fiat.22
The issue is not really novel. In Commissioner of Internal Revenue vs. Court of
Appeals and Atlas Consolidated Mining and Development Corporation23 (the
second Atlas case), the CIR contended that the refund should be based on
Sections 1 and 2 of RA 1435, not Sections 153 and 156 of the NIRC of 1977. In
categorically ruling that Private Respondent Atlas Consolidated Mining and
Development Corporation was entitled to a refund based on Sections 1 and 2
of RA 1435, the Court, through Mr. Justice Hilario G. Davide, Jr., reiterated
our pronouncement in Commissioner of Internal Revenue vs. Rio Tuba Nickel
and Mining Corporation:
“Our Resolution of 25 March 1992 modifying our 30 September 1991 Decision in
the Rio Tuba case sets forth the controlling doctrine. In that Resolution, we stated:
‘Since the private respondent’s claim for refund covers specific taxes paid from 1980
to July 1983 then we find that the private respondent is entitled to a refund. It
should be made clear, however, that Rio Tuba is not entitled to the whole amount
it claims as refund.
The specific taxes on oils which Rio Tuba paid for the aforesaid period were no
longer based on the rates specified by Sections 1 and 2 of R.A. No. 1435 but on the
increased rates mandated under Sections 153 and 156 of the National Internal
Revenue Code of 1977. We note however, that the latter law does not specifically
provide for a refund to these mining and lumber companies of specific taxes paid
on manufactured and diesel fuel oils.
In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]), the
Court held that the authorized partial refund under Section 5 of R.A. No. 1435
partakes of the nature of a tax exemption and therefore cannot be allowed unless
granted in the most explicit and categorical language. Since the grant of refund
privileges must be strictly construed against the taxpayer, the basis for the refund
shall be the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435.
ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby MODIFIED. The
private respondent’s CLAIM for REFUND is GRANTED, computed on the basis of
the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435, without
interest.’24
We rule, therefore, that since Atlas’ claims for refund cover specific taxes paid
before 1985, it should be granted the refund based on the rates specified by Sections
1 and 2 of R.A. No. 1435 and not on the increased rates under Sections 153 and 156
of the Tax Code of 1977, provided the claims are not yet barred by prescription.”
(Italics supplied.)
Insular Lumber Co. and First Atlas Case
Not Inconsistent With Rio Tuba
and Second Atlas Case
Petitioner argues that the applicable jurisprudence in this case should
be Commissioner of Internal Revenue vs. Atlas Consolidated and Mining
Corp. (the first Atlas case), an unsigned resolution, and Insular Lumber Co. vs.
Court of Tax Appeals, an en banc decision.25 Petitioner also asks the Court to
take a “second look” at Rio Tuba and the second Atlas case, both decided by
Divisions, in view of Insular which was decided en banc. Petitioner posits that
“[I]n view of the similarity of the situation of herein petitioner with Insular
Lumber Company (claimant in Insular Lumber) and Rio Tuba Nickel Mining
Corporation (claimant in Rio Tuba), a dilemma has been created as to whether
or not Insular Lumber, which has been decided by the Honorable Court en
banc, or Rio Tuba, which was decided only [by] the Third Division of the
Honorable Court, should apply.”26
We find no conflict between these two pairs of cases. Neither Insular
Lumber Co. nor the first Atlas case ruled on the issue of whether the refund
privilege under Section 5 should be computed based on the specific tax deemed
paid under Sections 1 and 2 of RA 1435, regardless of what was actually paid
under the increased rates. Rio Tuba and the second Atlas case did.
 Insular Lumber Co. decided a claim for refund on specific tax paid on
petroleum products purchased in the year 1963, when the increased rates
under the NIRC of 1977 were not yet in effect. Thus, the issue now before us
did not exist at the time, since the applicable rates were still those prescribed
under Sections 1 and 2 of RA 1435.
On the other hand, the issue raised in the first Atlas case was whether the
claimant was entitled to the refund under Section 5, notwithstanding its
failure to pay any additional tax under a municipal or city ordinance. Although
Atlas purchased petroleum products in the years 1976 to 1978 when the rates
had already been changed, the Court did not decide or make any
pronouncement on the issue in that case.
Clearly, it is impossible for these two decisions to clash with our
pronouncement in Rio Tuba and second Atlas case, in which we ruled that the
refund granted be computed on the basis of the amounts deemed paid under
Sections 1 and 2 of RA 1435. In this light, we find no basis for petitioner’s
invocation of the constitutional proscription that “no doctrine or principle of
law laid down by the Court in a decision rendered en banc or in division may
be modified or reversed except by the Court sitting en banc.”27
Finally, petitioner asserts that “equity and justice demand that the
computation of the tax refunds be based on actual amounts paid under Sections
153 and 156 of the NIRC.”28 We disagree. According to an eminent authority
on taxation, “there is no tax exemption solely on the ground of equity.”29
WHEREFORE, the petition is hereby DENIED and the assailed Decision of
the Court of Appeals is AFFIRMED.

_______________
 G.R. Nos. 49839-46. April 26, 1991.*
JOSE B. L. REYES and EDMUNDO A. REYES, petitioners, vs. PEDRO
ALMANZOR, VICENTE ABAD SANTOS, JOSE ROÑO, in their capacities as
appointed and Acting Members of the CENTRAL BOARD OF ASSESSMENT
APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL
C. FLORES, in their capacities as appointed and Acting Members of the BOARD
OF ASSESSMENT APPEALS of Manila; and NICOLAS CATIIL, in his capacity
as City Assessor of Manila, respondents.
Political Law; Taxation; The power to tax is the strongest of all the powers of
the government.—The power to tax “is an attribute of sovereignty”. In fact, it is the
strongest of all the powers of government. But for all its plenitude, the power to tax
is not unconfined as there are restrictions. Adversely effecting as it does property
rights, both the due process and equal protection clauses of the Constitution may
properly be invoked to invalidate in appropriate cases a revenue measure. If it were
otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall that
“the power to tax involves the power to destroy.” The web or unreality spun from
Marshall’s famous dictum was brushed away by one stroke of Mr. Justice Holmes’
pen, thus: “The power to tax is not the power to destroy while this Court sits.” “So
it is in the Philippines.” (Sison, Jr. v. Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v.
Commissioner of Internal Revenue, 139 SCRA 439 [1985]).
Same; Same; Due process; When the due process clause of the constitution may
be invoked.—In the same vein, the due process clause may be invoked where a
taxing statute is so arbitrary that it finds no support in the Constitution. An
obvious example is where it can be shown to amount to confiscation of property.
That would be a clear abuse of power (Sison v. Ancheta, supra).
Same; Same; Appraisal and Assessment of Real Property; The appraisal and
assessment of real property for taxation purposes is that the property must be
“appraised at its current and fair market value.”—Finally under the Real Property
Tax Code (P.D. 464 as amended), it is declared that the first Fundamental Principle
to guide the appraisal and assessment of real property for taxation purposes is that
the property must be “appraised at its current and fair market value.”
Same; Same; Taxes; Collection of taxes should be made in accordance with law
as any arbitrariness will negate the very reason for government itself.—Verily, taxes
are the lifeblood of the government and so should be collected without unnecessary
hindrance. However, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore
necessary to reconcile the apparently conflicting interests of the authorities and
the taxpayers so that the real purpose of taxations, which is the promotion of the
common good, may be achieved (Commissioner of Internal Revenue v. Algue, Inc.,
et al., 158 SCRA 9 [1988]). Consequently, it stands to reason that petitioners who
are burdened by the government by its Rental Freezing Laws (then R.A. No. 6359
and P.D. 20) under the principle of social justice should not now be penalized by
the same government by the imposition of excessive taxes petitioners can ill afford
and eventually result in the forfeiture of their properties.
PETITION for certiorari to review the decision of the Central Board of
Assessment Appeals. Almanzor, J.
The facts are stated in the opinion of the Court.
Barcelona, Perlas, Joven & Academia Law Offices for petitioners.
PARAS, J.:
This is a petition for review on certiorari to reverse the June 10, 1977 decision
of the Central Board of Assessment Appeals 1 in CBAA Cases Nos. 72-79
entitled “J.B.L. Reyes, Edmundo Reyes, et al. v. Board of Assessment Appeals
of Manila and City Assessor of Manila” which affirmed the March 29, 1976
decision of the Board of Tax Assessment Appeals 2 in BTAA Cases Nos. 614,
614-A-J, 615, 615-A, B, E, “Jose Reyes, et al. v. City Assessor of Manila” and
“Edmundo Reyes and Milagros Reyes v. City Assessor of Manila” upholding
the classification and assessments made by the City Assessor of Manila.
The facts of the case are as follows:
Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of
parcels of land situated in Tondo and Sta. Cruz Districts, City of Manila, which
are leased and entirely occupied as dwelling sites by tenants. Said tenants
were paying monthly rentals not exceeding three hundred pesos (P300.00) in
July, 1971. On July 14, 1971, the National Legislature enacted Republic Act
No. 6359 prohibiting for one year from its effectivity, an increase in monthly
rentals of dwelling units or of lands on which another’s dwelling is located,
where such rentals do not exceed three hundred pesos (P300.00) a month but
allowing an increase in rent by not more than 10% thereafter. The said Act
also suspended paragraph (1) of Article 1673 of the Civil Code for two years
from its effectivity thereby disallowing the ejectment of lessees upon the
expiration of the usual legal period of lease. On October 12, 1972, Presidential
Decree No. 20 amended R.A. No. 6359 by making absolute the prohibition to
increase monthly rentals below P300.00 and by indefinitely suspending the
aforementioned provision of the Civil Code, excepting leases with a definite
period. Consequently, the Reyeses, petitioners herein, were precluded from
raising the rentals and from ejecting the tenants. In 1973, respondent City
Assessor of Manila re-classified and reassessed the value of the subject
properties based on the schedule of market values duly reviewed by the
Secretary of Finance. The revision, as expected, entailed an increase in the
corresponding tax rates prompting petitioners to file a Memorandum of
Disagreement with the Board of Tax Assessment Appeals. They averred that
the reassessments made were “excessive, unwarranted, inequitable,
confiscatory and unconstitutional” considering that the taxes
_imposed upon them greatly exceeded the annual income derived from their
properties. They argued that the income approach should have been used in
determining the land values instead of the comparable sales approach which
the City Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax Assessment
Appeals, however, considered the assessments valid, holding thus:
“WHEREFORE, and considering that the appellants have failed to submit concrete
evidence which could overcome the presumptive regularity of the classification and
assessments appear to be in accordance with the base schedule of market values
and of the base schedule of building unit values, as approved by the Secretary of
Finance, the cases should be, as they are hereby, upheld.
“SO ORDERED.” (Decision of the Board of Tax Assessment Appeals, Rollo, p.
22).
The Reyeses appealed to the Central Board of Assessment Appeals. They
submitted, among others, the summary of the yearly rentals to show the
income derived from the properties. Respondent City Assessor, on the other
hand, submitted three (3) deeds of sale showing the different market values of
the real property situated in the same vicinity where the subject properties of
petitioners are located. To better appreciate the locational and physical
features of the land, the Board of Hearing Commissioners conducted an ocular
inspection with the presence of two representatives of the City Assessor prior
to the hearing of the case. Neither the owners nor their authorized
representatives were present during the said ocular inspection despite proper
notices served them. It was found that certain parcels of land were below street
level and were affected by the tides (Rollo, pp. 24-25).
On June 10, 1977, the Central Board of Assessment Appeals rendered its
decision, the dispositive portion of which reads:
“WHEREFORE, the appealed decision insofar as the valuation and assessment of
the lots covered by Tax Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844
and PD-3824 is affirmed.
“For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and
(1) PD-266, the appealed Decision is modified by allowing a 20% reduction in their
respective market values and applying therein the assessment level of 30% to
arrive at the corresponding assessed value.
“SO ORDERED.” (Decision of the Central Board of Assessment Appeals, Rollo,
p. 27)
Petitioner’s subsequent motion for reconsideration was denied, hence, this
petition.
The Reyeses assigned the following error:
THE HONORABLE BOARD ERRED IN ADOPTING THE “COMPARABLE
SALES APPROACH” METHOD IN FIXING THE ASSESSED VALUE OF
APPELLANTS’ PROPERTIES.
The petition is impressed with merit.
The crux of the controversy is in the method used in tax assessment of the
properties in question. Petitioners maintain that the “Income Approach”
method would have been more realistic for in disregarding the effect of the
restrictions imposed by P.D. 20 on the market value of the properties affected,
respondent Assessor of the City of Manila unlawfully and unjustifiably set
increased new assessed values at levels so high and successive that the
resulting annual real estate taxes would admittedly exceed the sum total of
the yearly rentals paid or payable by the dweller tenants under P.D. 20. Hence,
petitioners protested against the levels of the values assigned to their
properties as revised and increased on the ground that they were arbitrarily
excessive, unwarranted, inequitable, confiscatory and unconstitutional (Rollo,
p. 10-A).
On the other hand, while respondent Board of Tax Assessment Appeals
admits in its decision that the income approach is used in determining land
values in some vicinities, it maintains that when income is affected by some
sort of price control, the same is rejected in the consideration and study of land
values as in the case of properties affected by the Rent Control Law for they do
not project the true market value in the open market (Rollo, p. 21). Thus,
respondents opted instead for the “Comparable Sales Approach” on the ground
that the value estimate of the properties predicated upon prices paid in actual,
market transactions would be a uniform and a more credible standards to use
especially in case of mass appraisal of properties (Ibid.). Otherwise stated,
public respondents would have this Court
327
VOL. 196, APRIL 26, 1991 327
Reyes vs. Almanzor
completely ignore the effects of the restrictions of P.D. No. 20 on the market
value of properties within its coverage. In any event, it is unquestionable that
both the “Comparable Sales Approach” and the “Income Approach” are
generally acceptable methods of appraisal for taxation purposes (The Law on
Transfer and Business Taxation by Hector S. De Leon, 1988 Edition). However,
it is conceded that the propriety of one as against the other would of course
depend on several factors. Hence, as early as 1923 in the case of Army & Navy
Club, Manila v. Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it has been
stressed that the assessors, in fixing the value of the property, have to consider
all the circumstances and elements of value and must exercise a prudent
discretion in reaching conclusions.
Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule
of taxation must not only be uniform, but must also be equitable and
progressive.
Uniformity has been defined as that principle by which all taxable articles
or kinds of property of the same class shall be taxed at the same rate (Churchill
v. Concepcion, 34 Phil. 969 [1916]).
Notably in the 1935 Constitution, there was no mention of the equitable or
progressive aspects of taxation required in the 1973 Charter (Fernando “The
Constitution of the Philippines”, p. 221, Second Edition). Thus, the need to
examine closely and determine the specific mandate of the Constitution.
Taxation is said to be equitable when its burden falls on those better able
to pay. Taxation is progressive when its rate goes up depending on the
resources of the person affected (Ibid.).
The power to tax “is an attribute of sovereignty”. In fact, it is the strongest
of all the powers of government. But for all its plenitude, the power to tax is
not unconfined as there are restrictions. Adversely effecting as it does property
rights, both the due process and equal protection clauses of the Constitution Reyes vs. Almanzor
may properly be invoked to invalidate in appropriate cases a revenue measure. rary in character. At this point in time, the falsity of such premises cannot be
If it were otherwise, there would be truth to the 1903 dictum of Chief Justice more convincingly demonstrated by the fact that the law has existed for around
Marshall that “the power to tax involves the power to destroy.” The web or twenty (20) years with no end to it in sight.
unreality spun from Marshall’s famous dictum was brushed away by one Verily, taxes are the lifeblood of the government and so should be collected
stroke of Mr. Justice Holmes’ pen, thus: “The power to tax is not the power to without unnecessary hindrance. However, such collection should be made in
destroy while this Court sits.” “So it is in the Philip- accordance with law as any arbitrariness will negate the very reason for
328 government itself. It is therefore necessary to reconcile the apparently
328 SUPREME COURT REPORTS ANNOTATED conflicting interests of the authorities and the taxpayers so that the real
Reyes vs. Almanzor purpose of taxations, which is the promotion of the common good, may be
pines.” (Sison, Jr. v. Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v. achieved (Commissioner of Internal Revenue v. Algue, Inc., et al., 158 SCRA
Commissioner of Internal Revenue, 139 SCRA 439 [1985]). 9 [1988]). Consequently, it stands to reason that petitioners who are burdened
In the same vein, the due process clause may be invoked where a taxing by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D.
statute is so arbitrary that it finds no support in the Constitution. An obvious 20) under the principle of social justice should not now be penalized by the
example is where it can be shown to amount to confiscation of property. That same government by the imposition of excessive taxes petitioners can ill afford
would be a clear abuse of power (Sison v. Ancheta, supra). and eventually result in the forfeiture of their properties.
The taxing power has the authority to make a reasonable and natural By the public respondents’ own computation the assessment by income
classification for purposes of taxation but the government’s act must not be approach would amount to only P10.00 per sq. meter at the time in question.
prompted by a spirit of hostility, or at the very least discrimination that finds PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed
no support in reason. It suffices then that the laws operate equally and decisions of public respondents are REVERSED and SET ASIDE; and (c) the
uniformly on all persons under similar circumstances or that all persons must respondent Board of Assessment Appeals of Manila and the City Assessor of
be treated in the same manner, the conditions not being different both in the Manila are ordered to make a new assessment by the income approach method
privileges conferred and the liabilities imposed (Ibid., p. 662). to guarantee a fairer and more realistic basis of computation (Rollo, p. 71).
Finally under the Real Property Tax Code (P.D. 464 as amended), it is SO ORDERED.
declared that the first Fundamental Principle to guide the appraisal and
assessment of real property for taxation purposes is that the property must be
“appraised at its current and fair market value.”
By no strecth of the imagination can the market value of properties covered
by P.D. No. 20 be equated with the market value of properties not so covered.
The former has naturally a much lesser market value in view of the rental
restrictions.
Ironically, in the case at bar, not even the factors determinant of the
assessed value of subject properties under the “comparable sales approach”
were presented by the public respondents, namely: (1) that the sale must
represent a bonafide arm’s length transaction between a willing seller and a
willing buyer and (2) the property must be comparable property (Rollo, p. 27).
Nothing can justify or support their view as it is of judicial notice that for
properties covered by P.D. 20 especially during the time in question, there were
hardly any willing buyers. As a general rule, there were no takers so that there
can be no reasonable basis for the conclusion that these properties were
comparable with other residential properties not burdened by P.D. 20. Neither
can the given circumstances be nonchalantly dismissed by public respondents
as imposed under distressed conditions clearly implying that the same were
merely tempo-
329
VOL. 196, APRIL 26, 1991 329
 G.R. No. 112024. January 28, 1999.*
PHILIPPINE BANK OF COMMUNICATIONS,
petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX
APPEALS and COURT OF APPEALS, respondents.
Taxation; Due Process; Due process of law under the Constitution does not
require judicial proceedings in tax cases—it is of utmost importance that the modes
adopted to enforce the collection of taxes levied should be summary and interfered
with as little as possible.— Basic is the principle that “taxes are the lifeblood of the
nation.” The primary purpose is to generate funds for the State to finance the needs
of the citizenry and to advance the common weal. Due process of law under the
Constitution does not require judicial proceedings in tax cases. This must
necessarily be so because it is upon taxation that the government chiefly relies to
obtain the means to carry on its operations and it is of utmost importance that the
modes adopted to enforce the collection of taxes levied should be summary and
interfered with as little as possible.
Same; Tax Refunds; Prescription.—Claims for refund or tax credit should be
exercised within the time fixed by law because the BIR being an administrative
body enforced to collect taxes, its functions should not be unduly delayed or
hampered by incidental matters.
Same; Same; Same; Actions; The taxpayer may file a claim for refund or credit
with the Commissioner of Internal Revenue, within two (2) years after payment of
tax, before any suit in CTA is commenced.—The rule states that the taxpayer may
file a claim for refund or credit with the Commissioner of Internal Revenue, within
two (2) years after payment of tax, before any suit in CTA is commenced. The two-
year prescriptive period provided, should be computed from the time of filing the
Adjustment Return and final payment of the tax for the year.
Same; Same; Same; Administrative Law; Statutory Construction; Revenue
Memorandum Circular (RMC) 7-85, changing the prescriptive period of two years
to ten years on claims of excess quarterly income tax payments, created a clear
inconsistency with the provision of Sec. 230 of 1977 NIRC.—When the Acting
Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive
period of two years to ten years on claims of excess quarterly income tax payments,
such circular created a clear inconsistency with the provision of Sec. 230 of 1977
NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress.
Same; Same; Same; Same; Same; Judicial Review; Courts will not
countenance administrative issuances overriding, instead of remaining consistent
and in harmony with, the law they seek to apply and implement.—It bears repeating
that Revenue memorandum-circulars are considered administrative rulings (in the
sense of more specific and less general interpretations of tax laws) which are issued
from time to time by the Commissioner of Internal Revenue. It is widely accepted
that the interpretation placed upon a statute by the executive officers, whose duty
is to enforce it, is entitled to great respect by the courts. Nevertheless, such
interpretation is not conclusive and will be ignored if judicially found to be
erroneous. Thus, courts will not countenance administrative issuances that
override, instead of remaining consistent and in harmony with, the law they seek
to apply and implement.
Same; Same; Same; Same; Estoppel; Fundamental is the rule that the State
cannot be put in estoppel by the mistakes or errors of its officials or agents.—
Further, fundamental is the rule that the State cannot be put in estoppel by the
mistakes or errors of its officials or agents. As pointed out by the respondent courts,
the nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal
Revenue is an administrative interpretation which is not in harmony with Sec. 230
of 1977 NIRC, for being contrary to the express provision of a statute. Hence, his
interpretation could not be given weight for to do so would, in effect, amend the
statute.
Same; Same; Same; Same; Same; Statutory Construction; A memorandum
circular of a bureau head could not operate to vest a taxpayer with a shield against
judicial action, for there are no vested rights to speak of respecting a wrong
construction of the law by the
243
VOL. 302, JANUARY 28, 1999 243
Philippine Bank of Communications vs.
Commissioner of Internal Revenue
administrative officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the same; The non-retroactivity of
rulings by the Commissioner of Internal Revenue is not applicable where the nullity
of a Revenue Memorandum Circular was declared by courts and not by the
Commissioner of Internal Revenue.—Article 8 of the Civil Code recognizes judicial
decisions, applying or interpreting statutes as part of the legal system of the
country. But administrative decisions do not enjoy that level of recognition. A
memorandum-circular of a bureau head could not operate to vest a taxpayer with
a shield against judicial action. For there are no vested rights to speak of respecting
a wrong construction of the law by the administrative officials and such wrong
interpretation could not place the Government in estoppel to correct or overrule the
same. Moreover, the non-retroactivity of rulings by the Commissioner of Internal
Revenue is not applicable in this case because the nullity of RMC No. 7-85 was
declared by respondent courts and not by the Commissioner of Internal Revenue.
Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund
is in the nature of a claim for exemption and should be construed in strictissimi
juris against the taxpayer.
Same; Same; The corporation must signify in its annual corporate adjustment
return (by marking the option box provided in the BIR form) its intention, whether
to request for a refund or claim for an automatic tax credit for the succeeding taxable
year.—Sec. 69 of the 1977 NIRC, (now Sec. 76 of the 1997 NIRC) provides that any
excess of the total quarterly payments over the actual income tax computed in the
adjustment or final corporate income tax return, shall either (a) be refunded to the
corporation, or (b) may be credited against the estimated quarterly income tax Subsequently, however, PBCom suffered losses so that when it filed its
liabilities for the quarters of the succeeding taxable year. The corporation must Annual Income Tax Returns for the year-ended December 31, 1985, it declared
signify in its annual corporate adjustment return (by marking the option box a net loss of P25,317,228.00, thereby showing no income tax liability. For the
provided in the BIR form) its intention, whether to request for a refund or claim for succeeding year, ending December 31, 1986, the petitioner likewise reported a
an automatic tax credit for the succeeding taxable year. To ease the administration net loss of P14,129,602.00, and thus declared no tax payable for the year.
of tax collection, these remedies are in the alternative, and the choice of one But during these two years, PBCom earned rental income from leased
precludes the other. properties. The lessees withheld and remitted to the BIR withholding
creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.
PETITION for review on certiorari of a decision of the Court of Appeals.
On August 7, 1987, petitioner requested the Commissioner of Internal
Revenue, among others, for a tax credit of P5,016,954.00 representing the
The facts are stated in the opinion of the Court.
244
overpayment of taxes in the first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable
244 SUPREME COURT REPORTS ANNOTATED
taxes withheld by their lessees from property rentals in 1985 for P282,795.50
Philippine Bank of Communications vs. Commissioner and in 1986 for P234,077.69.
of Internal Revenue Pending the investigation of the respondent Commissioner of Internal
Angara, Obello, Concepcion, Regala & Cruz for petitioner. Revenue, petitioner instituted a Petition for Review on November 18, 1988
The Solicitor General for respondents. before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case
No. 4309 entitled: “Philippine Bank of Communications vs. Commissioner of
QUISUMBING, J.: Internal Revenue.”
246
This petition for review assails the Resolution1 of the Court of Appeals dated 246 SUPREME COURT REPORTS ANNOTATED
September 22, 1993, affirming the Decision2 and Resolution3 of the Court of
Philippine Bank of Communications vs. Commissioner
Tax Appeals which denied the claims of the petitioner for tax refund and tax
credits, and disposing as follows: of Internal Revenue
“IN VIEW OF ALL THE FOREGOING, the instant petition for review is DENIED The losses petitioner incurred as per the summary of petitioner’s claims for
due course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its refund and tax credit for 1985 and 1986, filed before the Court of Tax Appeals,
resolution dated July 20, 1993, are hereby AFFIRMED in toto. are as follows:
1985 1986
SO ORDERED.”4 Net Income (P25,317,228.00) (P14,129,602.00)
(Loss)
The Court of Tax Appeals earlier ruled as follows:
“WHEREFORE, petitioner’s claim for refund/tax credit of overpaid income tax for Tax Due NIL NIL
1985 in the amount of P5,299,749.95 is hereby denied for having been filed beyond Quarterly tax
the reglementary period. The 1986 claim for refund amounting to P234,077.69 is Payments 5,016,954.00 —
likewise denied since petitioner has opted and in all likelihood automatically Made
credited the same to the succeeding year. The petition for review is dismissed for
lack of merit.
Tax Withheld 282,795.50
at Source
SO ORDERED.”5 ____________ 234,077.69
Excess Tax P 5,299,749.50* P 234,077.69
The facts on record show the antecedent circumstances pertinent to this case.
Payments
Petitioner, Philippine Bank of Communications (PBCom), a commercial
* CTA’s decision reflects PBCom’s 1985 tax claim as
banking corporation duly organized under Philippine laws, filed its quarterly
income tax returns for the first and second quarters of 1985, reported profits, P5,299,749.95. A forty-five centavo difference was
and paid the total income tax of P5,016,954.00. The taxes due were settled by noted.
applying PBCom’s tax credit memos and accordingly, the Bureau of Internal On May 20, 1993, the CTA rendered a decision which, as stated on the outset,
Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for denied the request of petitioner for a tax refund or credit in the sum amount of
P3,401,701.00 and P1,615,253.00, respectively. P5,299,749.95, on the ground that it was filed beyond the two-year
reglementary period provided for by law. The petitioner’s claim for refund in
1986 amounting to P234,077.69 was likewise denied on the assumption that it
was automatically credited by PBCom against its tax payment in the
succeeding year.
On June 22, 1993, petition filed a Motion for Reconsideration of the CTA’s
decision but the same was denied due course for lack of merit.6
Thereafter, PBCom filed a petition for review of said decision and resolution
of the CTA with the Court of Appeals. However on September 22, 1993, the
Court of Appeals affirmed in toto the CTA’s resolution dated July 20, 1993.
Hence this petition now before us.
The issues raised by the petitioner are:
. I.Whether taxpayer PBCom—which relied in good faith on the formal
assurances of BIR in RMC No. 7-85 and did not immediately file with
the CTA a petition for review asking for the refund/tax credit of its
1985-86 excess quarterly income tax payments—can be prejudiced by
the subsequent BIR rejection, applied retroactively, of its assurances
in RMC No. 7-85 that the prescriptive period for the refund/tax credit
of excess quarterly income tax payments is not two years but ten (10).7
. II.Whether the Court of Appeals seriously erred in affirming the CTA
decision which denied PBCom’s claim for the refund of P234,077.69
income tax overpaid in 1986 on the mere speculation, without proof,
that there were taxes due in 1987 and that PBCom availed of tax-
crediting that year.8
Simply stated, the main question is: Whether or not the Court of Appeals erred
in denying the plea for tax refund or tax credits on the ground of prescription,
despite petitioner’s reliance on RMC No. 7-85, changing the prescriptive period
of two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet
barred by prescription relying on the applicability of Revenue Memorandum
Circular No. 7-85 issued on April 1, 1985. The circular states that overpaid
income taxes are not covered by the two-year prescriptive period under the tax
Code and that taxpayers may claim refund or tax credits for the excess
quarterly income tax with the BIR within ten (10) years under Article 1144 of
the Civil Code. The pertinent portions of the circular reads:
“REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX
CREDIT OF EXCESS CORPORATE
INCOME TAX RESULTING FROM THE
FILING OF THE FINAL ADJUSTMENT
RETURN
TO: All Internal Revenue Officers and Others
Concerned
Sections 85 and 86 of the National Internal Revenue Code provide:
xxx xxx xxx
The foregoing provisions are implemented by Section 7 of Revenue Regulations
Nos. 10-77 which provide:
xxx xxx xxx
It has been observed, however, that because of the excess tax payments,
corporations file claims for recovery of overpaid income tax with the Court of Tax
Appeals within the two-year period from the date of payment, in accordance with
Sections 292 and 295 of the National Internal Revenue Code. It is obvious that the
filing of the case in court is to preserve the judicial right of the corporation to claim
the refund or tax credit.
It should be noted, however, that this is not a case of erroneously or illegally
paid tax under the provisions of Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may request for the
refund of the overpaid income tax or claim for automatic tax credit. To insure
prompt action on corporate annual income tax returns showing refundable
amounts arising from overpaid quarterly income taxes, this Office has promulgated
Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the
procedure in processing said returns. Under these procedures, the returns are
merely pre-audited which consist mainly of checking mathematical accuracy of the
figures of the return. After which, the refund or tax credit is granted, and, this
procedure was adopted to facilitate immediate action on cases like this.
In this regard, therefore, there is no need to file petitions for review in the Court
of Tax Appeals in order to preserve the right to claim refund or tax credit within the
two-year period. As already stated, actions hereon by the Bureau are immediate
after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may
recover from the Bureau of Internal Revenue excess income tax paid under the
provisions of Section 86 of the Tax Code within 10 years from the date of payment
considering that it is an obligation created by law (Article 1144 of the Civil
Code).9 (Emphasis supplied.)
Petitioner argues that the government is barred from asserting a position
contrary to its declared circular if it would result to injustice to taxpayers.
Citing ABS-CBN Broadcasting Corporation vs. Court of Tax
Appeals10 petitioner claims that rulings or circulars promulgated by the
Commissioner of Internal Revenue have to retroactive effect if it would be
prejudicial to taxpayers. In ABS-CBN case, the Court held that the
government is precluded from adopting a position inconsistent with one
previously taken where injustice would result therefrom or where there has
been a misrepresentation to the taxpayer.
 Petitioner contends that Sec. 246 of the National Internal Revenue Code
explicitly provides for this rule as follows:
“Sec. 246. Non-retroactivity of rulings.—Any revocation, modification or reversal of
any of the rules and regulations promulgated in accordance with the preceding
section or any of the rulings or circulars promulgated by the Commissioner shall
not be given retroactive application if the revocation, modification, or reversal will
be prejudicial to the taxpayers except in the following cases:
. a)where the taxpayer deliberately misstates or omits material facts from
his return or in any document required of him by the Bureau of Internal
Revenue;
. b)where the facts subsequently gathered by the Bureau of Internal
Revenue are materially different from the facts on which the ruling is
based;
. c)where the taxpayer acted in bad faith.”
Respondent Commissioner of Internal Revenue, through the Solicitor General,
argues that the two-year prescriptive period for filing tax cases in court
concerning income tax payments of Corporations is reckoned from the date of
filing the Final Adjusted Income Tax Return, which is generally done on April
15 following the close of the calendar year. As precedents, respondent
Commissioner cited cases which adhered to this principle, to wit: ACCRA
Investments Corp. vs. Court of Appeals, et al.,11 and Commissioner of Internal
Revenue vs. TMX Sales, Inc., et al.12 Respondent Commissioner also states that
since the Final Adjusted Income Tax Return of the petitioner for the taxable
year 1985 was supposed to be filed on April 15, 1986, the latter had only until
April 15, 1988 to seek relief from the court. Further, respondent Commissioner
stresses that when the petitioner filed the case before the CTA on November
18, 1988, the same was filed beyond the time fixed by law, and such failure is
fatal to petitioner’s cause of action.
After a careful study of the records and applicable jurisprudence on the
matter, we find that, contrary to the petitioner’s contention, the relaxation of
revenue regulations by RMC 7-85 is not warranted as it disregards the two-
year prescriptive period set by law.
Basic is the principle that “taxes are the lifeblood of the nation.” The
primary purpose is to generate funds for the State to finance the needs of the
citizenry and to advance the common weal.13 Due process of law under the
Constitution does not require judicial proceedings in tax cases. This must
necessarily be so because it is upon taxation that the government chiefly relies
to obtain the means to carry on its operations and it is of utmost importance
that the modes adopted to enforce the collection of taxes levied should be
summary and interfered with as little as possible.14
From the same perspective, claims for refund or tax credit should be
exercised within the time fixed by law because the BIR being an administrative
body enforced to collect taxes, its functions should not be unduly delayed or
hampered by incidental matters.
Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now
Sec. 229, NIRC of 1997) provides for the prescriptive period for filing a court
proceeding for the recovery of tax erroneously or illegally collected, viz.:
“Sec. 230. Recovery of tax erroneously or illegally collected.—No suit or proceeding
shall be maintained in any court for the recovery of any national internal revenue
tax hereafter alleged to have been erroneously or illegally assessed or collected, or
of any penalty claimed to have been collected without authority, or of any sum
alleged to have been excessive or in any manner wrongfully collected, until a claim
for refund or credit has been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has been
paid under protest or duress.
In any case, no such suit or proceeding shall be begun after the expiration of two
years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment: Provided, however, That the Commissioner
may, even without a written claim therefor, refund or credit any tax, where on the
face of the return upon which payment was made, such payment appears clearly to
have been erroneously paid.” (Italics supplied)
The rule states that the taxpayer may file a claim for refund or credit with the
Commissioner of Internal Revenue, within two (2) years after payment of tax,
before any suit in CTA is commenced. The two-year prescriptive period
provided, should be computed from the time of filing the Adjustment Return
and final payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life
Insurance Co.,15 this Court explained the application of Sec. 230 of 1977 NIRC,
as follows:
“Clearly, the prescriptive period of two years should commence to run only from the
time that the refund is ascertained, which can only be determined after a final
adjustment return is accomplished. In the present case, this date is April 16, 1984,
and two years from this date would be April 16, 1986. x x x As we have earlier said
in the TMX Sales case, Sections 68, 16 69,17 and 7018 on Quarterly Corporate
Income Tax Payment and Section 321 should be considered in conjunction with
it.”19
When the Acting Commissioner of Internal Revenue issued RMC 7-85,
changing the prescriptive period of two years to ten years on claims of excess
quarterly income tax payments, such circular created a clear inconsistency
with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply
interpret the law; rather it legislated guidelines contrary to the statute passed
by Congress.
It bears repeating that Revenue memorandum-circulars are considered
administrative rulings (in the sense of more specific and less general
interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive officers, whose duty is to
enforce it, is entitled to great respect by the courts. Nevertheless, such
interpretation is not conclusive and will be ignored if judicially found to be
erroneous.20 Thus, courts will not countenance administrative issuances that
override, instead of remaining consistent and in harmony with, the law they
seek to apply and implement.21
In the case of People vs. Lim,22 it was held that rules and regulations issued
by administrative officials to implement a law cannot go beyond the terms and
provisions of the latter.
“Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only
inconsistent with but is contrary to the provisions and spirit of Act No. 4003 as
amended, because whereas the prohibition prescribed in said Fisheries Act was for
any single period of time not exceeding five years duration, FAO No. 37-1 fixed no
period, that is to say, it establishes an absolute ban for all time. This
discrepancy between Act No. 4003 and FAO No. 37-1 was probably due to an
oversight on the part of Secretary of Agriculture and Natural Resources. Of course,
in case of discrepancy, the basic Act prevails, for the reason that the regulation or
rule issued to implement a law cannot go beyond the terms and provisions of the
latter. x x x In this connection, the attention of the technical men in the offices of
Department Heads who draft rules and regulation is called to the importance and
necessity of closely following the terms and provisions of the law which they
intended to implement, this to avoid any possible misunderstanding or confusion
as in the present case.”23
Further, fundamental is the rule that the State cannot be put in estoppel by
the mistakes or errors of its officials or agents.24 As pointed out by the
respondent courts, the nullification of RMC No. 7-85 issued by the Acting
Commissioner of Internal Revenue is an administrative interpretation which
is not in harmony with Sec. 230 of 1977 NIRC, for being contrary to the express
provision of a statute. Hence, his interpretation could not be given weight for
to do so would, in effect, amend the statute.
As aptly stated by respondent Court of Appeals:
“It is likewise argued that the Commissioner of Internal Revenue, after
promulgating RMC No. 7-85, is estopped by the principle of non-retroactivity of BIR
rulings. Again We do not agree. The Memorandum Circular, stating that a taxpayer
may recover the excess income tax paid within 10 years from date of payment
because this is an obligation created by law, was issued by the Acting
Commissioner of Internal Revenue. On the other hand, the decision, stating that
the taxpayer should still file a claim for a refund or tax credit and the corresponding
petition for review within the two-year prescription period, and that the
lengthening of the period of limitation on refund from two to ten years would be
adverse to public policy and run counter to the positive mandate of Sec. 230,
NIRC,—was the ruling and judicial interpretation of the Court of Tax Appeals.
Estoppel has no application in the case at bar because it was not the Commissioner
of Internal Revenue who denied petitioner’s claim of refund or tax credit. Rather,
it was the Court of Tax Appeals who denied (albeit correctly) the claim and in effect,
ruled that the RMC No. 7-85 issued by the Commissioner of Internal Revenue is an
administrative interpretation which is out of harmony with or contrary to the
express provision of a statute (specifically Sec. 230, NIRC), hence, cannot be given
weight for to do so would in effect amend the statute.” 25
Article 8 of the Civil Code26 recognizes judicial decisions, applying or
interpreting statutes as part of the legal system of the country. But
administrative decisions do not enjoy that level of recognition. A
memorandum-circular of a bureau head could not operate to vest a taxpayer
with a shield against judicial action. For there are no vested rights to speak of
respecting a wrong construction of the law by the administrative officials and
such wrong interpretation could not place the Government in estoppel to
correct or overrule the same.27 Moreover, the non-retroactivity of rulings by
the Commissioner of Internal Revenue is not applicable in this case because
the nullity of RMC No. 7-85 was declared by respondent courts and not by the
Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly
held by this Court, a claim for refund is in the nature of a claim for exemption
and should be construed in strictissimi juris against the tax-payer.28
On the second issue, the petitioner alleges that the Court of Appeals
seriously erred in affirming CTA’s decision denying its claim for refund of
P234,077.69 (tax overpaid in 1986), based on mere speculation, without proof,
that PBCom availed of the automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC29 (now Sec. 76 of the 1997 NIRC) provides that
any excess of the total quarterly payments over the actual income tax
computed in the adjustment or final corporate income tax return, shall
either (a) be refunded to the corporation, or (b) may be credited against the
estimated quarterly income tax liabilities for the quarters of the succeeding
taxable year.
The corporation must signify in its annual corporate adjustment return (by
marking the option box provided in the BIR form) its intention, whether to
request for a refund or claim for an automatic tax credit for the succeeding
taxable year. To ease the administration of tax collection, these remedies are
in the alternative, and the choice of one precludes the other.
As stated by respondent Court of Appeals:
“Finally, as to the claimed refund of income tax over-paid in 1986-the Court of Tax
Appeals, after examining the adjusted final corporate annual income tax return for
taxable year 1986, found out that petitioner opted to apply for automatic tax credit.
This was the basis used (vis-a-vis the fact that the 1987 annual corporate tax return
was not offered by the petitioner as evidence) by the CTA in concluding that
petitioner had indeed availed of and applied the automatic tax credit to the
succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies
of refund and tax credit are alternative.”30
That the petitioner opted for an automatic tax credit in accordance with Sec.
69 of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax
Return, is a finding of fact which we must respect. Moreover, the 1987 annual
corporate tax return of the petitioner was not offered as evidence to controvert
said fact. Thus, we are bound by the findings of fact by respondent courts, there
being no showing of gross error or abuse on their part to disturb our reliance
thereon.31
WHEREFORE, the petition is hereby DENIED. The decision of the Court
of Appeals appealed from is AFFIRMED, with COSTS against the petitioner.
SO ORDERED.
 climate. It is therefore fair for the government to require them to make a reasonable
contribution to the public expenses.
CHAMBER OF REAL ESTATE AND BUILDERS’ ASSOCIATIONS, INC.,
petitioner, vs. THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, Same; Minimum Corporate Income Tax (MCIT); As a tax on gross income,
THE HON. ACTING SECRETARY OF FINANCE JUANITA D. AMATONG, Minimum Corporate Income Tax (MCIT) prevents tax evasion and minimizes tax
and THE HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO avoidance schemes achieved through sophisticated and artful manipulations of
PARAYNO, JR., respondents. deductions and other stratagems.—The primary purpose of any legitimate business
is to earn a profit. Continued and repeated losses after operations of a corporation
Remedial Law; Actions; Justiciable Review; Requisites before the courts will or consistent reports of minimal net income render its financial statements and its
assume jurisdiction over a constitutional question.—Courts will not assume tax payments suspect. For sure, certain tax avoidance schemes resorted to by
jurisdiction over a constitutional question unless the following requisites are corporations are allowed in our jurisdiction. The MCIT serves to put a cap on such
satisfied: (1) there must be an actual case calling for the exercise of judicial review; tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax
(2) the question before the court must be ripe for adjudication; (3) the person avoidance schemes achieved through sophisticated and artful manipulations of
challenging the validity of the act must have standing to do so; (4) the question of deductions and other stratagems. Since the tax base was broader, the tax rate was
constitutionality must have been raised at the earliest opportunity and (5) the issue lowered.
of constitutionality must be the very lis mota of the case.
607
Same; Same; Same; Meaning of an Actual Case or Controversy; A question is
considered ripe for adjudication when the act being challenged has a direct adverse VOL. 614, March 9, 2010 607
effect on the individual challenging it.—An actual case or controversy involves a Chamber of Real Estate and Builders' Associations, Inc.
conflict of legal rights or an assertion of opposite legal claims which is susceptible vs. Romulo
of judicial resolution as distinguished from a hypothetical or abstract difference or
dispute. On the other hand, a question is considered ripe for adjudication when the
Same; Same; Taxes are the lifeblood of the government; Taxation is an inherent
act being challenged has a direct adverse effect on the individual challenging it.
attribute of sovereignty; The legislature wields the power to define what tax shall be
imposed, why it should be imposed, how much tax shall be imposed, against whom
Same; Same; Same; Locus Standi; Legal standing or locus standi is a party’s
(or what) it shall be imposed and where it shall be imposed.—Taxes are the lifeblood
personal and substantial interest in a case such that it has sustained or will sustain
of the government. Without taxes, the government can neither exist nor endure.
direct injury as a result of the governments act being challenged.—Legal standing
The exercise of taxing power derives its source from the very existence of the State
or locus standi is a party’s personal and substantial interest in a case such that it
whose social contract with its citizens obliges it to promote public interest and the
has sustained or will sustain direct injury as a result of the governmental act being
common good. Taxation is an inherent attribute of sovereignty. It is a power that
challenged. In Holy Spirit Homeowners Association, Inc. v. Defensor, 497 SCRA 581
is purely legislative. Essentially, this means that in the legislature primarily lies
(2006) we held that the association had legal standing because its members stood
the discretion to determine the nature (kind), object (purpose), extent (rate),
to be injured by the enforcement of the assailed provisions.
coverage (subjects) and situs (place) of taxation. It has the authority to prescribe a
certain tax at a specific rate for a particular public purpose on persons or things
Same; Same; Same; Courts; Court has the discretion to take cognizance of a
within its jurisdiction. In other words, the legislature wields the power to define
suit which does not satisfy the requirements of an actual case, ripeness or legal
what tax shall be imposed, why it should be imposed, how much tax shall be
standing when paramount public interest is involved.—In any event, this Court has
imposed, against whom (or what) it shall be imposed and where it shall be imposed.
the discretion to take cognizance of a suit which does not satisfy the requirements
of an actual case, ripeness or legal standing when paramount public interest is
Same; Same; Like any other statute, tax legislation carries a presumption of
involved. The questioned MCIT and CWT affect not only petitioners but practically
constitutionality.—As a general rule, the power to tax is plenary and unlimited in
all domestic corporate taxpayers in our country. The transcendental importance of
its range, acknowledging in its very nature no limits, so that the principal check
the issues raised and their overreaching significance to society make it proper for
against its abuse is to be found only in the responsibility of the legislature (which
us to take cognizance of this petition.
imposes the tax) to its constituency who are to pay it. Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any other
Taxation; Corporation Law; Domestic corporations owe their corporate
statute, tax legislation carries a presumption of constitutionality.
existence and their privilege to do business to the government; It is therefore fair for
the government to require them to make a reasonable contribution to the public
Same; Same; Courts; Court will not strike down a revenue measure as
expenses.—Domestic corporations owe their corporate existence and their privilege
unconstitutional (for being violative of the due process clause) on the mere allegation
to do business to the government. They also benefit from the efforts of the
of arbitrariness by the taxpayer.—In Sison, Jr. v. Ancheta, et al., 130 SCRA 654
government to improve the financial market and to ensure a favorable business
(1984) we held that the due process clause may properly be invoked to invalidate,
in appropriate cases, a revenue measure when it amounts to a confiscation of
property. But in the same case, we also explained that we will not strike down a
revenue measure as unconstitutional (for being violative of the due process clause)
on the mere allegation of arbitrariness by the taxpayer. There must be a factual
foundation to such an unconstitutional taint. This merely adheres to the
authoritative
608
608 SUPREME COURT REPORTS ANNOTATED
Chamber of Real Estate and Builders' Associations, Inc.
vs. Romulo
doctrine that, where the due process clause is invoked, considering that it is
not a fixed rule but rather a broad standard, there is a need for proof of such
persuasive character.
Same; Same; The Minimum Corporate Income Tax (MCIT) is not a tax on
capital; The Minimum Corporate Income Tax (MCIT) is imposed on gross income.—
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because
capital is not income. In other words, it is income, not capital, which is subject to
income tax. However, the MCIT is not a tax on capital. The MCIT is imposed on
gross income which is arrived at by deducting the capital spent by a corporation in
the sale of its goods, i.e., the cost of goods and other direct expenses from gross
sales. Clearly, the capital is not being taxed.
Same; Same; Minimum Corporate Income Tax (MCIT) is not an additional tax
imposition; It is imposed in lieu of the normal net income tax and only if the normal
income tax is suspiciously low.—Furthermore, the MCIT is not an additional tax
imposition. It is imposed in lieu of the normal net income tax, and only if the
normal income tax is suspiciously low. The MCIT merely approximates the amount
of net income tax due from a corporation, pegging the rate at a very much reduced
2% and uses as the base the corporation’s gross income.
Same; Same; Withholding Tax System; The method of withholding tax at
source is a procedure of collecting income tax which is sanctioned by our tax laws;
Three primary lessons why the withholding tax system was devised.—We have long
recognized that the method of withholding tax at source is a procedure of collecting
income tax which is sanctioned by our tax laws. The withholding tax system was
devised for three primary reasons: first, to provide the taxpayer a convenient
manner to meet his probable income tax liability; second, to ensure the collection
of income tax which can otherwise be lost or substantially reduced through failure
to file the corresponding returns and third, to improve the government’s cash flow.
Same; Same; Same; The creditable withholding tax (CWT) does not impose
new taxes nor does it increase taxes; It relates entirely to the method and time of
payment.—It is stressed that the CWT is creditable against the tax due from the
seller of the property at the end of the taxable year. The seller will be able to claim
a tax refund
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Chamber of Real Estate and Builders' Associations, Inc.
vs. Romulo
if its net income is less than the taxes withheld. Nothing is taken that is not
due so there is no confiscation of property repugnant to the constitutional
guarantee of due process. More importantly, the due process requirement applies
to the power to tax. The CWT does not impose new taxes nor does it increase taxes.
It relates entirely to the method and time of payment.
Same; Constitutional Law; Equal Protection Clause; The guaranty of the equal
protection of the laws is not violated by legislation based on a reasonable
classification; Requisites for Classification to be Valid.—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.” Stated differently, all persons
belonging to the same class shall be taxed alike. It follows that the guaranty of the
equal protection of the laws is not violated by legislation based on a reasonable
classification. Classification, to be valid, must (1) rest on substantial distinctions;
(2) be germane to the purpose of the law; (3) not be limited to existing conditions
only and (4) apply equally to all members of the same class.
Same; Same; Same; The taxing power has the authority to make reasonable
classifications for purposes of taxation.—The taxing power has the authority to
make reasonable classifications for purposes of taxation. Inequalities which result
from a singling out of one particular class for taxation, or exemption, infringe no
constitutional limitation. The real estate industry is, by itself, a class and can be
validly treated differently from other business enterprises.
SPECIAL CIVIL ACTION in the Supreme Court. Certiorari and Mandamus.
The facts are stated in the opinion of the Court.
Isagani A. Cruz for petitioner.
Manuel M. Serrano collaborating counsel for petitioner.
The Solicitor General for respondents.
610
610 SUPREME COURT REPORTS ANNOTATED
Chamber of Real Estate and Builders' Associations, Inc.
vs. Romulo
CORONA, J.:
In this original petition for certiorari and mandamus,1 petitioner Chamber
of Real Estate and Builders’ Associations, Inc. is questioning the
constitutionality of Section 27 (E) of Republic Act (RA) 84242 and the revenue
regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to
implement said provision and those involving creditable withholding taxes.3
Petitioner is an association of real estate developers and builders in the
Philippines. It impleaded former Executive Secretary Alberto Romulo, then
acting Secretary of Finance Juanita D. Amatong and then Commissioner of
Internal Revenue Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum corporate
income tax (MCIT) on corporations and creditable withholding tax (CWT) on
sales of real properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and
is implemented by RR 9-98. Petitioner argues that the MCIT violates the due
process clause because it levies income tax even if there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-
2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of
which prescribe the rules and procedures for the collection of CWT on the sale
of real properties categorized as ordinary assets. Petitioner contends that these
revenue regulations are contrary to law for two reasons: first, they ignore the
different treatment by RA 8424 of ordinary assets and capital assets
and second, respondent
Secretary of Finance has no authority to collect CWT, much less, to base the
CWT on the gross selling price or fair market value of the real properties
classified as ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject
revenue regulations violate the due process clause because, like the MCIT, the
government collects income tax even when the net income has not yet been
determined. They contravene the equal protection clause as well because the
CWT is being levied upon real estate enterprises but not on other business
enterprises, more particularly those in the manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the present
case;
(2) whether or not the imposition of the MCIT on domestic
corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of
real properties classified as ordinary assets under RRs 2-98, 6-2001 and
7-2003, is unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year of
operation, is assessed an MCIT of 2% of its gross income when such MCIT is
greater than the normal corporate income tax imposed under Section 27(A).4 If
the regular income tax is higher than the MCIT, the corporation does not pay
the MCIT. Any excess of the MCIT over the normal tax shall be carried forward
and credited against the normal income tax for the three immediately
succeeding taxable years. Section 27(E) of RA 8424 provides:
“Section 27 (E). [MCIT] on Domestic Corporations.—
(1) Imposition of Tax.—A [MCIT] of two percent (2%)
of the gross income as of the end of the taxable year,
as defined herein, is hereby imposed on a corporation
taxable under this Title, beginning on the fourth
taxable year immediately following the year in which
such corporation commenced its business operations,
when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the
taxable year.
(2) Carry Forward of Excess Minimum Tax.—Any
excess of the [MCIT] over the normal income tax as
computed under Subsection (A) of this Section shall
be carried forward and credited against the normal
income tax for the three (3) immediately succeeding
taxable years.
(3) Relief from the [MCIT] under certain conditions.—
The Secretary of Finance is hereby authorized to
suspend the imposition of the [MCIT] on any
corporation which suffers losses on account of
prolonged labor dispute, or because of force majeure,
or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to
promulgate, upon recommendation of the
Commissioner, the necessary rules and regulations
that shall define the terms and conditions under
which he may suspend the imposition of the [MCIT]
in a meritorious case.
(4) Gross Income Defined.—For purposes of applying
the [MCIT] provided under Subsection (E) hereof, the
term ‘gross income’ shall mean gross sales less sales
returns, discounts and allowances and cost of goods
sold. “Cost of goods sold” shall include all business
expenses directly incurred to produce the
merchandise to bring them to their present location
and use.
For trading or merchandising concern, “cost of
goods sold” shall include the invoice cost of the goods
 sold, plus import duties, freight in transporting the
goods to the place where the goods are actually sold
including insurance while the goods are in transit.
For a manufacturing concern, “cost of goods
manufactured and sold” shall include all costs of
production of
613
VOL. 614, March 9, 2010 613
Chamber of Real Estate and Builders' Associations, Inc.
vs. Romulo
finished goods, such as raw materials used, direct
labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring
the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of
service, “gross income” means gross receipts less sales
returns, allowances, discounts and cost of services.
“Cost of services” shall mean all direct costs and
expenses necessarily incurred to provide the services
required by the customers and clients including (A)
salaries and employee benefits of personnel,
consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in
providing the service such as depreciation or rental of
equipment used and cost of supplies: Provided,
however, that in the case of banks, “cost of services”
shall include interest expense.”
On August 25, 1998, respondent Secretary of Finance (Secretary), on the
recommendation of the Commissioner of Internal Revenue (CIR), promulgated
RR 9-98 implementing Section 27(E).5 The pertinent portions thereof read:
“Sec. 2.27(E) [MCIT] on Domestic Corporations.—
(1) Imposition of the Tax.—A [MCIT] of two percent
(2%) of the gross income as of the end of the taxable
year (whether calendar or fiscal year, depending on
the accounting period employed) is hereby imposed
upon any domestic corporation beginning the fourth
(4th) taxable year immediately following the taxable
year in which such corporation commenced its
business operations. The MCIT shall be imposed
whenever such corporation has zero or negative
taxable income or whenever the amount of minimum
corporate income tax is greater than the normal
income tax due from such corporation.
For purposes of these Regulations, the term,
“normal income tax” means the income tax rates
prescribed under Sec. 27(A) and Sec. 28(A)(1) of the
Code xxx at 32% effective January 1, 2000 and
thereafter.
xxx xxx xxx
(2) Carry forward of excess [MCIT].—Any excess of the
[MCIT] over the normal income tax as computed
under Sec. 27(A) of the Code shall be carried forward
on an annual basis and credited against the normal
income tax for the three (3) immediately succeeding
taxable years.
xxx xxx xxx
Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation
of respondent CIR, promulgated RR 2-98 implementing certain provisions of
RA 8424 involving the withholding of taxes.6 Under Section 2.57.2(J) of RR No.
2-98, income payments from the sale, exchange or transfer of real property,
other than capital assets, by persons residing in the Philippines and habitually
engaged in the real estate business were subjected to CWT:
“Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx xxx xxx
(J)Gross selling price or total amount of consideration or its equivalent paid to
the seller/owner for the sale, exchange or transfer of.—Real property, other than
capital assets, sold by an individual, corporation, estate, trust, trust fund or
pension fund and the seller/transferor is habitually engaged in the real estate—
 Those which are exempt from a
withholding tax at source as pre-
scribed in Sec. 2.57.5 of these
regula-
tions.
However, if the buyer is engaged in trade or business, whether a corporation or
otherwise, the tax shall be deducted and withheld by the buyer on every
installment.
Exempt
This provision was amended by RR 6-2001 on July 31, 2001:

“Sec. 2.57.2. Income payment subject to [CWT] and rates

With a selling price of five prescribed thereon:
hundred 1.5%
thousand pesos (P500,000.00) or xxx xxx xxx
less.
616

616 SUPREME COURT REPORTS ANNOTATED

With a selling price of more than Chamber of Real Estate and Builders' Associations, Inc.
five vs. Romulo
hundred thousand pesos (J) Gross selling price or total amount of consideration
(P500,000.00) but not more than 3.0% or its equivalent paid to the seller/owner for the sale,
two exchange or transfer of real property classified as
million pesos (P2,000,000.00). ordinary asset. – A [CWT] based on the gross selling
With selling price of more than price/total amount of consideration or the fair market
two 5.0% value determined in accordance with Section 6(E) of
million pesos (P2,000,000.00) the Code, whichever is higher, paid to the
seller/owner for the sale, transfer or exchange of real
property, other than capital asset, shall be imposed
upon the withholding agent,/buyer, in accordance
business in accordance with the following schedule— with the following schedule:
Where the seller/transferor is exempt
xxx xxx xxx
from
Gross selling price shall mean the consideration stated in the sales document or [CWT] in accordance with Sec. 2.57.5 Exempt
the fair market value determined in accordance with Section 6 (E) of the Code, as of these regulations.
amended, whichever is higher. In an exchange, the fair market value of the Upon the following values of real
property received in exchange, as determined in the Income Tax Regulations shall
be used. property,
where the seller/transferor is habitually
Where the consideration or part thereof is payable on installment, no en-
withholding tax is required to be made on the periodic installment payments where
gaged in the real estate business.
the buyer is an individual not engaged in trade or business. In such a case, the
applicable rate of tax based on the entire consideration shall be withheld on the With a selling price of Five Hundred
last installment or installments to be paid to the seller. Thousand 1.5%
Pesos (P500,000.00) or less.
With a selling price of more than
Five Hundred Thousand Pesos (P500,000.00)
but not more than Two Million Pesos
(P2,000,000.00). 3.0%
With a selling price of more than two
Million Pesos (P2,000,000.00). 5.0%
xxx xxx xxx
Gross selling price shall remain the consideration stated in
the sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended,
whichever is higher. In an exchange, the fair market value of
the property received in exchange shall be considered as the
consideration.
xxx xxx xxx
However, if the buyer is engaged in trade or business,
whether a corporation or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment
plan (that is, payments in the year of sale do not
exceed 25% of the selling price), the tax shall be
deducted and withheld by the buyer on every
installment.
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VOL. 614, March 9, 2010 617
Chamber of Real Estate and Builders' Associations, Inc.
vs. Romulo
(ii) If, on the other hand, the sale is on a “cash basis” or
is a “deferred-payment sale not on the installment
plan” (that is, payments in the year of sale exceed
25% of the selling price), the buyer shall withhold the
tax based on the gross selling price or fair market
value of the property, whichever is higher, on the first
installment.
In any case, no Certificate Authorizing Registration (CAR)
shall be issued to the buyer unless the [CWT] due on the sale,
transfer or exchange of real property other than capital asset
has been fully paid.” (Underlined amendments in the original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides
that any sale, barter or exchange subject to the CWT will not be recorded by
the Registry of Deeds until the CIR has certified that such transfers and
conveyances have been reported and the taxes thereof have been duly paid:7
“Sec. 2.58.2. Registration with the Register of Deeds.—Deeds of conveyances
of land or land and building/improvement thereon arising from sales, barters, or
exchanges subject to the creditable expanded withholding tax shall not be recorded
by the Register of Deeds unless the [CIR] or his duly authorized representative has
certified that such transfers and conveyances have been reported and the expanded
withholding tax, inclusive of the documentary stamp tax, due thereon have been
fully paid xxxx.”
On February 11, 2003, RR No. 7-20038 was promulgated, providing for the
guidelines in determining whether a particular real property is a capital or an
ordinary asset for purposes of imposing the MCIT, among others. The pertinent
portions thereof state:
“Section 4. Applicable taxes on sale, exchange or other
disposition of real property.—Gains/Income derived from sale,
exchange, or other disposition of real properties shall, unless
otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties
are classified as capital assets or ordinary assets;
a. In the case of individual citizen (including estates and
trusts), resident aliens, and non-resident aliens engaged
in trade or business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines,
classified as ordinary assets, shall be subject to the
[CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98],
as amended, based on the gross selling price or
current fair market value as determined in
accordance with Section 6(E) of the Code, whichever
 is higher, and consequently, to the ordinary income
tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on net taxable
income.
xxx xxx xxx
c. In the case of domestic corporations.—
xxx xxx xxx
(ii) The sale of land and/or building classified as
ordinary asset and other real property (other than
land and/or building treated as capital asset),
regardless of the classification thereof, all of which
are located in the Philippines, shall be subject to the
[CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98],
as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the
ordinary income tax, however, domestic corporations
may become subject to the [MCIT] under Sec. 27(E) of
the Code, whichever is applicable.
xxx xxx xxx
619
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Chamber of Real Estate and Builders' Associations, Inc.
vs. Romulo
We shall now tackle the issues raised.
Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless
the following requisites are satisfied: (1) there must be an actual case calling
for the exercise of judicial review; (2) the question before the court must be ripe
for adjudication; (3) the person challenging the validity of the act must have
standing to do so; (4) the question of constitutionality must have been raised
at the earliest opportunity and (5) the issue of constitutionality must be the
very lis mota of the case.9
Respondents aver that the first three requisites are absent in this case.
According to them, there is no actual case calling for the exercise of judicial
power and it is not yet ripe for adjudication because
“[petitioner] did not allege that CREBA, as a corporate entity, or any of its
members, has been assessed by the BIR for the payment of [MCIT] or [CWT] on
sales of real property. Neither did petitioner allege that its members have shut
down their businesses as a result of the payment of the MCIT or CWT. Petitioner
has raised concerns in mere abstract and hypothetical form without any actual,
specific and concrete instances cited that the assailed law and revenue regulations
have actually and adversely affected it. Lacking empirical data on which to base
any conclusion, any discussion on the constitutionality of the MCIT or CWT on
sales of real property is essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate justification
for adjudicating abstract issues. Otherwise, adjudication would be no different from
the giving of advisory opinion that does not really settle legal issues.”10
An actual case or controversy involves a conflict of legal rights or an
assertion of opposite legal claims which is susceptible of judicial resolution as
distinguished from a hypothetical or abstract difference or dispute.11 On the
other hand, a question is considered ripe for adjudication when the act being
challenged has a direct adverse effect on the individual challenging it.12
Contrary to respondents’ assertion, we do not have to wait until petitioner’s
members have shut down their operations as a result of the MCIT or CWT.
The assailed provisions are already being implemented. As we stated
in Didipio Earth-Savers’ Multi-Purpose Association, Incorporated (DESAMA)
v. Gozun:13
“By the mere enactment of the questioned law or the approval of the challenged
act, the dispute is said to have ripened into a judicial controversy even without any
other overt act. Indeed, even a singular violation of the Constitution and/or the law
is enough to awaken judicial duty.”14
If the assailed provisions are indeed unconstitutional, there is no better time
than the present to settle such question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
“Petitioner is an association of some of the real estate developers and builders
in the Philippines. Petitioners did not allege that [it] itself is in the real estate
business. It did not allege any material interest or any wrong that it may suffer
from the enforcement of [the assailed provisions].”15
Legal standing or locus standi is a party’s personal and substantial interest
in a case such that it has sustained or will sustain direct injury as a result of
the governmental act being challenged.16 In Holy Spirit Homeowners
Association, Inc. v. Defensor,17 we held that the association had legal standing
because its members stood to be injured by the enforcement of the assailed
provisions:
“Petitioner association has the legal standing to institute the instant petition
xxx. There is no dispute that the individual members of petitioner association are
residents of the NGC. As such they are covered and stand to be either benefited or
injured by the enforcement of the IRR, particularly as regards the selection process
of beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner
association may assail those provisions in the IRR which it believes to be
unfavorable to the rights of its members. xxx Certainly, petitioner and its members
have sustained direct injury arising from the enforcement of the IRR in that they
have been disqualified and eliminated from the selection process.” 18
In any event, this Court has the discretion to take cognizance of a suit which
does not satisfy the requirements of an actual case, ripeness or legal standing
when paramount public interest is involved.19 The questioned MCIT and CWT
affect not only petitioners but practically all domestic corporate taxpayers in
our country. The transcendental importance of the issues raised and their
overreaching significance to society make it proper for us to take cognizance of
this petition.20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by RA 8424
to the Philippine taxation system. It came about as a result of the perceived
inadequacy of the self-assessment system in capturing the true income of
corporations.21 It was devised as a relatively simple and effective revenue-
raising instrument compared to the normal income tax which is more difficult
to control and enforce. It is a means to ensure that everyone will make some
minimum contribution to the support of the public sector. The congressional
deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of certain
corporations of reporting constantly a loss in their operations to avoid the payment
of taxes, and thus avoid sharing in the cost of government. In this regard, the Tax
Reform Act introduces for the first time a new concept called the [MCIT] so as to
minimize tax evasion, tax avoidance, tax manipulation in the country and for
administrative convenience. … This will go a long way in ensuring that
corporations will pay their just share in supporting our public life and our economic
advancement.22
Domestic corporations owe their corporate existence and their privilege to
do business to the government. They also benefit from the efforts of the
government to improve the financial market and to ensure a favorable business
climate. It is therefore fair for the government to require them to make a
reasonable contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which, while
having large turn-overs, report minimal or negative net income resulting in
minimal or zero income taxes year in and year out, through under-declaration
of income or over-deduction of expenses otherwise called tax shelters.23
Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why
they have proposed the [MCIT]. Because from experience too, you have corporations
which have been losing year in and year out and paid no tax. So, if the corporation
has been losing for the past five years to ten years, then that corporation has no
business to be in business. It is dead. Why continue if you are losing year in and
year out? So, we have this provision to avoid this type of tax shelters, Your Honor.24
The primary purpose of any legitimate business is to earn a profit.
Continued and repeated losses after operations of a corporation or consistent
reports of minimal net income render its financial statements and its tax
payments suspect. For sure, certain tax avoidance schemes resorted to by
corporations are allowed in our jurisdiction. The MCIT serves to put a cap on
such tax shelters. As a tax on gross income, it prevents tax evasion and
minimizes tax avoidance schemes achieved through sophisticated and artful
manipulations of deductions and other stratagems. Since the tax base was
broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the following
safeguards were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of the need
to recoup initial major capital expenditures, the imposition of the MCIT
commences only on the fourth taxable year immediately following the year in
which the corporation commenced its operations.25 This grace period allows a
new business to stabilize first and make its ventures viable before it is
subjected to the MCIT.26
Second, the law allows the carrying forward of any excess of the MCIT paid
over the normal income tax which shall be credited against the normal income
tax for the three immediately succeeding years.27
Third, since certain businesses may be incurring genuine repeated losses,
the law authorizes the Secretary of Finance to suspend the imposition of MCIT
if a corporation suffers losses due to prolonged labor dispute, force majeure and
legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine taxation
system, several other countries already had their own system of minimum
corporate income taxation. Our lawmakers noted that most developing
countries, particularly Latin American and Asian countries, have the same
form of safeguards as we do. As pointed out during the committee hearings:
“[Mr. Medalla:] Note that most developing countries where you have of course
quite a bit of room for underdeclaration of gross receipts have this same form of
safeguards.
In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax
of half a percent (0.5%) of gross assessable income. In Korea a 25% of taxable
income before deductions and exemptions. Of course the different countries have
different basis for that minimum income tax.
The other thing you’ll notice is the preponderance of Latin American countries
that employed this method. Okay, those are additional Latin American countries.”29
At present, the United States of America, Mexico, Argentina, Tunisia, Panama
and Hungary have their own versions of the MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is
unconstitutional because it is highly oppressive, arbitrary and confiscatory
which amounts to deprivation of property without due process of law. It
explains that gross income as defined under said provision only considers the
cost of goods sold and other direct expenses; other major expenditures, such as
administrative and interest expenses which are equally necessary to produce
gross income, were not taken into account.31 Thus, pegging the tax base of the
MCIT to a corporation’s gross income is tantamount to a confiscation of capital
because gross income, unlike net income, is not “realized gain.”32
We disagree.
Taxes are the lifeblood of the government. Without taxes, the government
can neither exist nor endure. The exercise of taxing power derives its source
from the very existence of the
State whose social contract with its citizens obliges it to promote public interest
and the common good.33
Taxation is an inherent attribute of sovereignty.34 It is a power that is
purely legislative.35 Essentially, this means that in the legislature primarily
lies the discretion to determine the nature (kind), object (purpose), extent
(rate), coverage (subjects) and situs (place) of taxation.36 It has the authority to
prescribe a certain tax at a specific rate for a particular public purpose on
persons or things within its jurisdiction. In other words, the legislature wields
the power to define what tax shall be imposed, why it should be imposed, how
much tax shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range,
acknowledging in its very nature no limits, so that the principal check against
its abuse is to be found only in the responsibility of the legislature (which
imposes the tax) to its constituency who are to pay it.37 Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any other
statute, tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat “[no]
person shall be deprived of life, liberty or property without due process of law.”
In Sison, Jr. v. Ancheta, et al.,38 we held that the due process clause may
properly be invoked to invalidate, in appropriate cases, a revenue
measure39 when it amounts to a confiscation of property.40 But in the same case,
we also explained that we will not strike down a revenue measure as
unconstitutional (for being violative of the due process clause) on the mere
allegation of arbitrariness by the taxpayer.41 There must be a factual
foundation to such an unconstitutional taint.42 This merely adheres to the
authoritative doctrine that, where the due process clause is invoked,
considering that it is not a fixed rule but rather a broad standard, there is a
need for proof of such persuasive character.43
Petitioner is correct in saying that income is distinct from capital.44 Income
means all the wealth which flows into the taxpayer other than a mere return
on capital. Capital is a fund or property existing at one distinct point in time
while income denotes a flow of wealth during a definite period of time.45 Income
is gain derived and severed from capital.46 For income to be taxable, the
following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.47
Certainly, an income tax is arbitrary and confiscatory if it taxes capital
because capital is not income. In other words, it is income, not capital, which
is subject to income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the
capital spent by a corporation in the sale of its goods, i.e., the cost of goods48 and
other direct expenses from gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in
lieu of the normal net income tax, and only if the normal income tax is
suspiciously low. The MCIT merely approximates the amount of net income
tax due from a corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporation’s gross income.
Besides, there is no legal objection to a broader tax base or taxable income
by eliminating all deductible items and at the same time reducing the
applicable tax rate.49
“Statutes taxing the gross “receipts,” “earnings,” or “income” of particular
corporations are found in many jurisdictions. Tax thereon is generally held to be
within the power of a state to impose; or constitutional, unless it interferes with
interstate commerce or violates the requirement as to uniformity of taxation.”50
The United States has a similar alternative minimum tax (AMT) system
which is generally characterized by a lower tax rate but a broader tax
base.51 Since our income tax laws are of American origin, interpretations by
American courts of our parallel tax laws have persuasive effect on the
interpretation of these laws.52 Although our MCIT is not exactly the same as
the AMT, the policy behind them and the procedure of their implementation
are comparable. On the question of the AMT’s constitutionality, the United
States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:53
“In enacting the minimum tax, Congress attempted to remedy general taxpayer
distrust of the system growing from large numbers of taxpayers with large incomes
who were yet paying no taxes.
xxx xxx xxx
We thus join a number of other courts in upholding the constitutionality of the
[AMT]. xxx [It] is a rational means of obtaining a broad-based tax, and therefore is
constitutional.”54
The U.S. Court declared that the congressional intent to ensure that corporate
taxpayers would contribute a minimum amount of taxes was a legitimate
governmental end to which the AMT bore a reasonable relation.55
 American courts have also emphasized that Congress has the power to
condition, limit or deny deductions from gross income in order to arrive at the
net that it chooses to tax.56 This is because deductions are a matter of
legislative grace.57
Absent any other valid objection, the assignment of gross income, instead
of net income, as the tax base of the MCIT, taken with the reduction of the tax
rate from 32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative
experiences of its members nor does it present empirical data to show that the
implementation of the MCIT resulted in the confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis, its
allegation that the MCIT is arbitrary and confiscatory. The Court cannot strike
down a law as unconstitutional simply because of its yokes.58 Taxation is
necessarily burdensome because, by its nature, it adversely affects property
rights.59 The party alleging the law’s unconstitutionality has the burden to
demonstrate the supposed violations in understandable terms.60
RR 9-98 Merely Clarifies
Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due
process of law because the MCIT is being imposed and collected even when
there is actually a loss, or a zero or negative taxable income:
“Sec. 2.27(E) [MCIT] on Domestic Corporations.—
(1) Imposition of the Tax.—xxx The MCIT shall be imposed whenever such
corporation has zero or negative taxable income or whenever the amount of
[MCIT] is greater than the normal income tax due from such corporation.”
(Emphasis supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such
corporation has zero or negative taxable income, merely defines the coverage
of Section 27(E). This means that even if a corporation incurs a net loss in its
business operations or reports zero income after deducting its expenses, it is
still subject to an MCIT of 2% of its gross income. This is consistent with the
law which imposes the MCIT on gross income notwithstanding the amount of
the net income. But the law also states that the MCIT is to be paid only if it is
greater than the normal net income. Obviously, it may well be the case that
the MCIT would be less than the net income of the corporation which posts a
zero or negative taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes (including
income taxes) are collected.61 Under Section 57 of RA 8424, the types of income
subject to withholding tax are divided into three categories: (a) withholding of
final tax on certain incomes; (b) withholding of creditable tax at source and (c)
tax-free covenant bonds. Petitioner is concerned with the second category
(CWT) and maintains that the revenue regulations on the collection of CWT on
sale of real estate categorized as ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and ordinary
assets under RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98
and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated “with grave
abuse of discretion amounting to lack of jurisdiction” and “patently in
contravention of law”62 because they ignore such distinctions. Petitioner’s
conclusion is based on the following premises: (a) the revenue regulations use
gross selling price (GSP) or fair market value (FMV) of the real estate as basis
for determining the income tax for the sale of real estate classified as ordinary
assets and (b) they mandate the collection of income tax on a per transaction
basis, i.e., upon consummation of the sale via the CWT, contrary to RA 8424
which calls
_______________
for the payment of the net income at the end of the taxable period.63
Petitioner theorizes that since RA 8424 treats capital assets and ordinary
assets differently, respondents cannot disregard the distinctions set by the
legislators as regards the tax base, modes of collection and payment of taxes
on income from the sale of capital and ordinary assets.
Petitioner’s arguments have no merit.
Authority of the Secretary of Finance
to Order the Collection of CWT on
Sales of Real Property Considered as
Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424, the
authority to promulgate the necessary rules and regulations for the effective
enforcement of the provisions of the law. Such authority is subject to the
limitation that the rules and regulations must not override, but must remain
consistent and in harmony with, the law they seek to apply and implement.64 It
is well-settled that an administrative agency cannot amend an act of
Congress.65
We have long recognized that the method of withholding tax at source is a
procedure of collecting income tax which is sanctioned by our tax laws.66 The
withholding tax system was devised for three primary reasons: first, to provide
the taxpayer a convenient manner to meet his probable income tax liability;
second, to ensure the collection of income tax which can otherwise be lost or
substantially reduced through failure to file the corresponding returns and
third, to improve the government’s cash flow.67 This results in administrative
savings, prompt and efficient collection of taxes, prevention of delinquencies
and reduction of governmental effort to collect taxes through more complicated
means and remedies.68
Respondent Secretary has the authority to require the withholding of a tax
on items of income payable to any person, national or juridical, residing in the
Philippines. Such authority is derived from Section 57(B) of RA 8424 which
provides:
“SEC. 57. Withholding of Tax at Source.—
xxx xxx xxx
(B) Withholding of Creditable Tax at Source. The
[Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of
income payable to natural or juridical persons,
residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate
of not less than one percent (1%) but not more than
thirty-two percent (32%) thereof, which shall be
credited against the income tax liability of the
taxpayer for the taxable year.”
The questioned provisions of RR 2-98, as amended, are well within the
authority given by Section 57(B) to the Secretary, i.e., the graduated rate of
1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the
income payable and the tax is creditable against the income tax liability of the
taxpayer for the taxable year.
Effect of RRs on the Tax Base for
the Income Tax of Individuals or
Corporations Engaged in the Real
Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax
base of a real estate business’ income tax from net income to GSP or FMV of
the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a taxpayer
in order to extinguish its possible tax obligation.69 They are installments on the
annual tax which may be due at the end of the taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real property
classified as ordinary assets remains to be the entity’s net income imposed
under Section 24 (resident individuals) or Section 27 (domestic corporations)
in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions.
The CWT is to be deducted from the net income tax payable by the taxpayer at
the end of the taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003
reiterate that the tax base for the sale of real property classified as ordinary
assets remains to be the net taxable income:
“Section 4.—Applicable taxes on sale, exchange or other
disposition of real property.—Gains/Income derived from sale,
exchange, or other disposition of real properties shall unless
otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties
are classified as capital assets or ordinary assets;
xxx xxx xxx
a. In the case of individual citizens (including estates
and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines,
classified as ordinary assets, shall be subject to the [CWT]
(expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended,
based on the [GSP] or current [FMV] as determined in
accordance with Section 6(E) of the Code, whichever is higher,
and consequently, to the ordinary income tax imposed
under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the
case may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations.
The sale of land and/or building classified as ordinary asset
and other real property (other than land and/or building
treated as capital asset), regardless of the classification
thereof, all of which are located in the Philippines, shall
be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of
[RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the
ordinary income tax, however, domestic corporations may
become subject to the [MCIT] under Sec. 27(E) of the same
Code, whichever is applicable.” (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its income
tax return and credit the taxes withheld (by the withholding agent/buyer)
against its tax due. If the tax due is greater than the tax withheld, then the
taxpayer shall pay the difference. If, on the other hand, the tax due is less than
the tax withheld, the taxpayer will be entitled to a refund or tax credit. also has the right to ask
Undoubtedly, the taxpayer is taxed on its net income. for a refund if the tax
The use of the GSP/FMV as basis to determine the withholding taxes is
evidently for purposes of practicality and convenience. Obviously, the
withheld is more than the
withholding agent/buyer who is obligated to withhold the tax does not know, tax due.
nor is he privy to, how much the taxpayer/seller will have as its net income at c) The payee is not c) The income recipient is
the end of the taxable year. Instead, said withholding required to file an still required to file an
636
income tax return for income tax return, as
636 SUPREME COURT REPORTS ANNOTATED
the particular prescribed in Sec. 51 and
Chamber of Real Estate and Builders' Associations, Inc.
income.73 Sec. 52 of the NIRC, as
vs. Romulo
amended.74
agent’s knowledge and privity are limited only to the particular transaction in
which he is a party. In such a case, his basis can only be the GSP or FMV as _______________
these are the only factors reasonably known or knowable by him in connection
with the performance of his duties as a withholding agent.
72 RA 8424, Section 57(A) and RR 2-98, Section 2.57.1 (A)(6).
No Blurring of Distinctions Between
Ordinary Assets and Capital Assets 637
VOL. 614, March 9, 2010 637
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of Chamber of Real Estate and Builders' Associations, Inc.
the real property categorized as ordinary assets. On the other hand, Section vs. Romulo
27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain
c) The payee is not c) The income recipient is
presumed to be realized from the sale of a capital asset based on its GSP or
FMV. This final tax is also withheld at source.72 required to file an still required to file an
The differences between the two forms of withholding tax, i.e., creditable income tax return income tax return, as
and final, show that ordinary assets are not treated in the same manner as for the particular prescribed in Sec. 51 and
capital assets. Final withholding tax (FWT) and CWT are distinguished as income.
73
Sec. 52 of the NIRC, as
follows: 74
amended.
FWT CWT
As previously stated, FWT is imposed on the sale of capital assets. On the
a) The amount of a) Taxes withheld on other hand, CWT is imposed on the sale of ordinary assets. The inherent and
income tax withheld certain income payments substantial differences between FWT and CWT disprove petitioner’s
by the withholding are intended to equal or contention that ordinary assets are being lumped together with, and treated
agent is constituted at least approximate the similarly as, capital assets in contravention of the pertinent provisions of RA
8424.
as a full and final tax due of the payee on
Petitioner insists that the levy, collection and payment of CWT at the time
payment of the income said income. of transaction are contrary to the provisions of RA 8424 on the manner and
tax due from the payee time of filing of the return, payment and assessment of income tax involving
on the said income. ordinary assets.75
b) The liability for b) Payee of income is The fact that the tax is withheld at source does not automatically mean that
it is treated exactly the same way as capital gains. As aforementioned, the
payment of the tax required to report the
mechanics of the FWT are distinct from those of the CWT. The withholding
rests primarily on income and/or pay the agent/buyer’s act of collecting the tax at the time of the transaction by
the payor as a difference between the tax withholding the tax due from the income payable is the essence of the
withholding agent. withheld and the tax due withholding tax method of tax collection.
on the income. The payee
No Rule that Only Passive Incomes
Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to withholding
tax, whether final or creditable. According to petitioner, the whole of Section
57 governs the withholding of income tax on passive income. The enumeration
in Section 57(A) refers to passive income being subjected to FWT. It follows
that Section 57(B) on CWT should also be limited to passive income:
“SEC. 57. Withholding of Tax at Source.—
(A) Withholding of Final Tax on Certain Incomes.—Subject to rules and
regulations, the [Secretary] may promulgate, upon the recommendation of the
[CIR], requiring the filing of income tax return by certain income payees, the tax
imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1);
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3),
27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1),
28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282
of this Code on specified items of income shall be withheld by payor-
corporation and/or person and paid in the same manner and subject to the same
conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source.—The [Secretary] may, upon
the recommendation of the [CIR], require the withholding of a tax on the items
of income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by law, at the rate of
not less than one percent (1%) but not more than thirty-two percent (32%) thereof,
which shall be credited against the income tax liability of the taxpayer for the
taxable year.” (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain kinds
of income and enumerates these as passive income. The BIR defines passive
income by stating what it is not:
“…if the income is generated in the active pursuit and performance of the
corporation’s primary purposes, the same is not passive income…”76
It is income generated by the taxpayer’s assets. These assets can be in the
form of real properties that return rental income, shares of stock in a
corporation that earn dividends or interest income received from savings.
On the other hand, Section 57(B) provides that the Secretary can require a
CWT on “income payable to natural or juridical persons, residing in the
Philippines.” There is no requirement that this income be passive income. If
that were the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while
Section 57(B) pertains to CWT. The former covers the kinds of passive income
enumerated therein and the latter encompasses any income other than those
listed in 57(A). Since the law itself makes distinctions, it is wrong to regard
57(A) and 57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or
deviate from the text of Section 57(B). RR 2-98 merely implements the law by
specifying what income is subject to CWT. It has been held that, where a
statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to carry
out its functions.77 Similarly, considering that the law uses the general term
“income,” the Secretary and CIR may specify the kinds of income the rules will
apply to based on what is feasible. In addition, administrative rules and
regulations ordinarily deserve to be given weight and respect by the courts78 in
view of the rule-making authority
given to those who formulate them and their specific expertise in their
respective fields.
No Deprivation of Property
Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate
classified as ordinary assets deprives its members of their property without
due process of law because, in their line of business, gain is never assured by
mere receipt of the selling price. As a result, the government is collecting tax
from net income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the
seller of the property at the end of the taxable year. The seller will be able to
claim a tax refund if its net income is less than the taxes withheld. Nothing is
taken that is not due so there is no confiscation of property repugnant to the
constitutional guarantee of due process. More importantly, the due process
requirement applies to the power to tax.79 The CWT does not impose new taxes
nor does it increase taxes.80 It relates entirely to the method and time of
payment.
Petitioner protests that the refund remedy does not make the CWT less
burdensome because taxpayers have to wait years and may even resort to
litigation before they are granted a refund.81 This argument is misleading. The
practical problems encountered in claiming a tax refund do not affect the
constitutionality and validity of the CWT as a method of collecting the tax.
Petitioner complains that the amount withheld would have otherwise been
used by the enterprise to pay labor wages,
Chamber of Real Estate and Builders' Associations, Inc.
vs. Romulo
materials, cost of money and other expenses which can then save the entity
from having to obtain loans entailing considerable interest expense. Petitioner
also lists the expenses and pitfalls of the trade which add to the burden of the
realty industry: huge investments and borrowings; long gestation period;
sudden and unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive “up-front”
regulatory fees from at least 20 government agencies.82
Petitioner’s lamentations will not support its attack on the constitutionality
of the CWT. Petitioner’s complaints are essentially matters of policy best
addressed to the executive and legislative branches of the government.
Besides, the CWT is applied only on the amounts actually received or
receivable by the real estate entity. Sales on installment are taxed on a per-
installment basis.83 Petitioner’s desire to utilize for its operational and capital
expenses money earmarked for the payment of taxes may be a practical
business option but it is not a fundamental right which can be demanded from
the court or from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal
protection clause because the CWT is being levied only on real estate
enterprises. Specifically, petitioner points out that manufacturing enterprises
are not similarly imposed a CWT on their sales, even if their manner of doing
business is not much different from that of a real estate enterprise. Like a
manufacturing concern, a real estate business is involved in a continuous
process of production and it incurs costs and expenditures on a regular basis.
The only difference is that “goods” produced by the real estate business are
house and lot units.84
Again, we disagree.
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.”85 Stated differently, all persons belonging to the same class
shall be taxed alike. It follows that the guaranty of the equal protection of the
laws is not violated by legislation based on a reasonable classification.
Classification, to be valid, must (1) rest on substantial distinctions; (2) be
germane to the purpose of the law; (3) not be limited to existing conditions only
and (4) apply equally to all members of the same class.86
The taxing power has the authority to make reasonable classifications for
purposes of taxation.87 Inequalities which result from a singling out of one
particular class for taxation, or exemption, infringe no constitutional
limitation.88 The real estate industry is, by itself, a class and can be validly
treated differently from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as
manufacturing enterprises, fails to realize that what distinguishes the real
estate business from other manufacturing enterprises, for purposes of the
imposition of the
CWT, is not their production processes but the prices of their goods sold and
the number of transactions involved. The income from the sale of a real
property is bigger and its frequency of transaction limited, making it less
cumbersome for the parties to comply with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of
thousands of transactions with several thousand customers every month
involving both minimal and substantial amounts. To require the customers of
manufacturing enterprises, at present, to withhold the taxes on each of their
transactions with their tens or hundreds of suppliers may result in an
inefficient and unmanageable system of taxation and may well defeat the
purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive
items are also sold infrequently, e.g. heavy equipment, jewelry, furniture,
appliance and other capital goods yet these are not similarly subjected to the
CWT.89 As already discussed, the Secretary may adopt any reasonable method
to carry out its functions.90 Under Section 57(B), it may choose what to subject
to CWT.A reading of Section 2.57.2 (M) of RR 2-98 will also show that
petitioner’s argument is not accurate. The sales of manufacturers who have
clients within the top 5,000 corporations, as specified by the BIR, are also
subject to CWT for their transactions with said 5,000 corporations.91
Section 2.58.2 of RR No. 2-98 Merely
Implements Section 58 of RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the
Registry of Deeds should not effect the
regisration of any document transferring real property unless a certification is
issued by the CIR that the withholding tax has been paid. Petitioner proffers
hardly any reason to strike down this rule except to rely on its contention that
the CWT is unconstitutional. We have ruled that it is not. Furthermore, this
provision uses almost exactly the same wording as Section 58(E) of RA 8424
and is unquestionably in accordance with it:
“Sec. 58. Returns and Payment of Taxes Withheld at Source.—
(E) Registration with Register of Deeds.—No registration of any document
transferring real property shall be effected by the Register of Deeds
unless the [CIR] or his duly authorized representative has certified that
such transfer has been reported, and the capital gains or [CWT], if any,
has been paid: xxxx any violation of this provision by the Register of Deeds shall
be subject to the penalties imposed under Section 269 of this Code.” (Emphasis
supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as saying “[the]
hardest thing in the world to understand is the income tax.”92 When a party
questions the constitutionality of an income tax measure, it has to contend not
only with Einstein’s observation but also with the vast and well-established
jurisprudence in support of the plenary powers of Congress to impose taxes.
Petitioner has miserably failed to discharge its burden of convincing the Court
that the imposition of MCIT and CWT is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
 [No. L-7859. December 22, 1955]
WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased
Antonio Jayme Ledesma, plaintiff and appellant, vs. J. ANTONIO ARANETA, as
the Collector of Internal Revenue, defendant and appellee.
. 1.CONSTITUTIONAL LAW; TAXATION; POWER OF STATE TO LEVY
TAX IN AID AND SUPPORT OF SUGAR INDUSTRY.—As the protection
and promotion of the sugar industry is a matter of public
149
VOL. 98, DECEMBER 22, 1955 149
Lutz vs. Araneta
. concern, the Legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. Here, the
legislative discretion must be allowed full play, subject only to the test of
reasonableness; and it is not contended that the means provided in section
6 of Commonwealth Act No. 567 bear no relation to the objective pursued
or are oppressive in character. If objective and methods arealike
constitutionally valid, no reason is seen why the state may not levy taxes
to raise funds for their prosecution and attainment. Taxation may be made
the implement of the state’s police power (Great Atl. & Pac. Tea
Co. vs. Grosjean, 301 U.S. 412, 81 L. Ed. 1193; U.S. vs. Butler, 297 U.S. 1,
80 L. Ed. 477; M’Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579).
. 2.ID. ; ID. ; ID.; ; POWER OF STATE TO SELECT SUBJECT OF
TAXATION.—It is inherent in the power to tax that a state be free to
select the subjects of taxation, and it has been repeatedly held that
“inequalities which result from a singling out of one particular class for
taxation or exemption infringe 110 constitutional limitation
(Carmichael vs. Southern Coal & Coke Co., 301 U.S. 495, 81 L. Ed. 1245,
citing numerous authorities, at 1251).
APPEAL from a judgment of the Court of First Instance of Negros Occidental.
Teodoro, Sr., J.
The facts are stated in the opinion of the Court.
Ernesto J. Gonzaga for appellant.
Solicitor General Ambrosio Padilla, First Assistant Solicitor General
Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee.
REYES, J.B. L., J.:
This case was initiated in the Court of First Instance of Negros Occidental to
test the legality of the taxes imposed by Commonwealth Act No. 567, otherwise
known as the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a
declaration of emergency, due to the threat to our industry by the imminent
imposition of export taxes upon sugar as provided in the Tydings-McDuffie Act,
and the “eventual loss of its preferential position in the United States market”;
wherefore, the national policy was expressed “to obtain a readjustment of the
benefits derived
150
150 PHILIPPINE REPORTS ANNOTATED
Lutz vs. Araneta
from the sugar industry by the component elements thereof“and “to stabilize
the sugar industry so as to prepare it for the eventuality of the loss of its
preferential position in the United States market and the imposition of the
export taxes.”
In section 2, Commonwealth Act 567 provides for an increase of the existing
tax on the manufacture of sugar, on a graduated basis, on each picul of sugar
manuf actured; while section 3 levies on owners or persons in control of lands
devoted to the cultivation of sugar cane and ceded to others for a consideration,
on lease or otherwise—
“a tax equivalent to the difference between the money value of the rental or
consideration collected and the amount representing 12 per centum of the assessed
value of such land.”
According to section 6 of the law—
“SEC. 6. All collections made under this Act shall accrue to a special fund in the
Philippine Treasury, to be known as the ‘Sugar Adjustment and Stabilization
Fund,’ and shall be paid out only for any or all of the following purposes or to attain
any or all of the following objectives, as may be provided by law.
First, to place the sugar industry in a position to maintain itself, despite the
gradual loss of the preferntial position of the Philippine sugar in the United States
market, and ultimately to insure its continued existence notwithstanding the loss
of that market and the consequent necessity of meeting competition in the free
markets of the world;
Second, to readjust the benefits derived from the sugar industry by all of the
component elements thereof—the mill, the landowner, the planter of the sugar
cane, and the laborers in the factory and in the field—so that all might continue
profitably to engage therein;
Third, to limit the production of sugar to areas more economically suited to the
production thereof; and
Fourth, to afford labor employed in the industry a living wage and to improve
their living and working conditions: Provided, That the President of the
Philippines may, until the adjournment of the next regular session of the National
Assembly, make the necessary disbursements from the fund herein created (1) for
the establishment and operation of sugar experiment station or stations and the
undertaking of researchers (a) to increase the recoveries of the centrifugal sugar
factories with the view of reducing manufacturing costs, (b) to produce and
propagate higher yielding varieties of sugar
151
VOL. 98, DECEMBER 22, 1955 151
Lutz vs. Araneta
cane more adaptable to different district conditions in the Philippines, (c) to lower
the costs of raising sugar cane, (d) to improve the buying quality of denatured
alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing the
other by-products of the industry, (/) to determine what crop or crops are suitable
for rotation and for the utilization of excess cane lands, and (g) on other problems
the solution of which would help rehabilitate and stabilize the industry, and (2) for
the improvement of living and working conditions in sugar mills and sugar
plantations, authorizing him to organize the necessary agency or agencies to take
charge of the expenditure and allocation of said funds to carry out the purpose
hereinbefore enumerated, and, likewise, authorizing the disbursement from the
fund herein created of the necessary amount or amounts needed for salaries, wages,
travelling expenses, equipment, and other sundry expenses of said agency or
agencies.”
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate
Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of
Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under
section 3 of the Act, for the crop years 1948–1949 and 1949–1950; alleging that
such tax is unconstitutional and void, being levied for the aid and support of
the sugar industry exclusively, which in plaintiff’s opinion is not a public
purpose for which a tax may be constitutionally levied. The action having been
dismissed by the Court of First Instance, the plaintiffs appealed the case
directly to this Court (Judiciary Act, section 17).
The basic defect in the plaintiff’s position is his assumption that the tax
provided for in Commonwealth Act No. 567 is a pure exercise of the taxing
power. Analysis of the Act, and particularly of section 6 (heretofore quoted in
full), will show that the tax is levied with a regulatory purpose, to provide
means f or the rehabilitation and stabilization of the threatened sugar
industry. In other words, the act is primarily an exercise of the police power.
This Court can take judicial notice of the fact that sugar production is one
of the great industries of our nation, sugar occupying a leading position among
its export products; that it gives employment to thousands of laborers in
152
152 PHILIPPINE REPORTS ANNOTATED
Lutz vs. Araneta
fields and factories; that it is a great source of the state’s wealth, is one of the
important sources of foreign exchange needed by our government, and is thus
pivotal in the plans of a regime committed to a policy of currency stability. Its
promotion, protection and advancement, therefore redounds greatly to the
general welfare. Hence it was competent for the legislature to find that the
general welfare demanded that the sugar industry should be stabilized in turn;
and in the wide field of its police power, the lawmaking body could provide that
the distribution of benefits therefrom be readjusted among its components to
enable it to resist the added strain of the increase in taxes that it had to sustain
(Sligh vs. Kirkwood, 237 U.S. 52, 59 L. Ed. 835; Johnson vs. State ex rel.
Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552, 139 So.
121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus
industry in Florida—
“The protection of a large industry constituting one of the great sources of the
state’s wealth and therefore directly or Indirectly affecting the welfare of so great
a portion of the population of the State is affected to such an extent by public
interests as to be within the police power of the sovereign.” (128 So. 857)
Once it is conceded, as it must, that the protection and promotion of the sugar
industry is a matter of public concern, it follows ‘that the Legislature may
determine within reasonable bounds what is necessary for its protection and
expedient for its promotion. Here, the legislative discretion must be allowed
full play, subject only to the test of reasonableness; and it is not contended that
the means provided in section 6 of the law (above quoted) bear no relation to
the objective pursued or are oppressive in character. If objective and methods
are alike constitutionally valid, no reason is seen why the state may not levy
taxes to raise f unds f or their prosecution and attainment. Taxation may be
made the implement of the state’s police power (Great Atl. & Pac. Tea
Co. vs. Grosjean, 301 U.S. 412, 81 L. Ed. 1193; U.S. vs. Butler, 297 U.S. 1, 80
L. Ed. 477; M’Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579).
153
VOL. 98, DECEMBER 22, 955 153
Lutz vs. Araneta
That the tax to be levied should burden the sugar producers themselves can
hardly be a ground of complaint; indeed, it appears rational that the tax be
obtained precisely from those who are to be benefited from the expenditure of
the funds derived from it. At any rate, it is inherent in the power to tax that a
state be free to select the subjects of taxation, and it has been repeatedly held
that “inequalities which result from a singling out of one particular class for
taxation, or exemption infringe no constitutional limitation”
(Carmichael vs. Southern Coal & Coke Co., 301 U.S. 495, 81 L. Ed. 1245, citing
numerous authorities, at p. 1251).
From the point of view we have taken it appears of no moment that the f
unds raised under the Sugar Stabilization Act, now in question, should be
exclusively spent in aid of the sugar industry, since it is that very enterprise
that is being protected. It may be that other industries are also in need of
similar protection; but the legislature is not required by the Constitution to
adhere to a policy of “all or none.” As ruled in Minnesota ex
rel. Pearson vs. Probate Court, 309 U.S. 270, 84 L. Ed. 744, “if the law
presumably hits the evil where it is most felt, it is not to be over-thrown
because there are other instances to which it might have been applied;” and
that “the legislative authority, exerted within its proper field, need not
embrace all the evils within its reach” (N. L.R. B. vs. Jones & Laughlin Steel
Corp. 301 U.S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be
said that the devotion of tax money to experimental stations to seek increase
of efficiency in sugar production, utilization of by-products and solution of
allied problems, as well as to the improvement of living and working conditions
in sugar mills or plantations, without any part of such money being channeled
directly to private persons, constitutes expenditure of tax money for private
purposes, (compare Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR
1392, 1400).
154
154 PHILIPPINE REPORTS ANNOTATED
Mallare, et al. vs. Panahon, et al.
The decision appealed f rom is affirmed, with costs against appellant. So
ordered.
 G.R. No. 167330. September 18, 2009.*
PHILIPPINE HEALTH CARE PROVIDERS, INC.,
petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.
Statutory Construction; It is a cardinal rule in statutory construction that no
word, clause sentence, provision or part of a statute shall be considered surplusage
or superfluous, meaningless, void and insignificant.—It is a cardinal rule in
statutory construction that no word, clause, sentence, provision or part of a statute
shall be considered surplusage or superfluous, meaningless, void and insignificant.
To this end, a construction which renders every word operative is preferred over
that which makes some words idle and nugatory. This principle is expressed in the
maxim Ut magis valeat quam pereat, that is, we choose the interpretation which
gives effect to the whole of the statute—its every word.
Health Maintenance Organizations; Various courts in the United States, whose
jurisprudence has a persuasive effect on our decisions, have determined that Health
Maintenance Organizations (HMOs) are not in the insurance business.—Various
courts in the United States, whose jurisprudence has a persuasive effect on our
decisions, have determined that HMOs are not in the insurance business. One test
that they have applied is 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. Applying the “principal object and purpose test,” there is significant
American case law supporting the argument that a corporation (such as an HMO,
whether or not organized for profit), whose main object is to provide the members
of a group with health services, is not engaged in the insurance business.
Insurance Law; Even if petitioner assumes the risk of paying the cost of these
services even if significantly more than what the member has prepaid, it nevertheless
cannot be considered as being engaged in the insurance business.—The mere
presence of risk would be insufficient to override the primary purpose of the
business to provide medical services as needed, with payment made directly to the
provider of these services. In short, even if petitioner assumes the risk of paying
the cost of these services even if significantly more than what the member has
prepaid, it nevertheless cannot be considered as being engaged in the insurance
business.
Administrative Agencies; It is well-settled that the interpretation of an
administrative agency which is tasked to implement a statute is accorded great
respect and ordinarily controls the interpretation of laws by the courts.—It is
significant that petitioner, as an HMO, is not part of the insurance industry. This
is evident from the fact that it is not supervised by the Insurance Commission but
by the Department of Health. In fact, in a letter dated September 3, 2000, the
Insurance Commissioner confirmed that petitioner is not engaged in the insurance
business. This determination of the com-
415
VOL. 600, SEPTEMBER 18, 2009 415
Philippine Health Care Providers Inc. vs.
Commissioner on Internal Revenue
missioner must be accorded great weight. It is well-settled that the
interpretation of an administrative agency which is tasked to implement a statute
is accorded great respect and ordinarily controls the interpretation of laws by the
courts. The reason behind this rule was explained in Nestlé Philippines, Inc. v.
Court of Appeals, 203 SCRA 504 (1991): The rationale for this rule relates not only
to the emergence of the multifarious needs of a modern or modernizing society and
the establishment of diverse administrative agencies for addressing and satisfying
those needs; it also relates to the accumulation of experience and growth of
specialized capabilities by the administrative agency charged with implementing a
particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,
29 SCRA 617 (1969) the Court stressed that executive officials are presumed to
have familiarized themselves with all the considerations pertinent to the meaning
and purpose of the law, and to have formed an independent, conscientious and
competent expert opinion thereon. The courts give much weight to the government
agency officials charged with the implementation of the law, their competence,
expertness, experience and informed judgment, and the fact that they frequently
are the drafters of the law they interpret.
Taxation; Tax laws may not be extended by implication beyond the clear import
of their language, nor their operation enlarged so as to embrace matters not
specifically provided.—In construing this provision, we should be guided by the
principle that tax statutes are strictly construed against the taxing authority. This
is because taxation is a destructive power which interferes with the personal and
property rights of the people and takes from them a portion of their property for
the support of the government. Hence, tax laws may not be extended by implication
beyond the clear import of their language, nor their operation enlarged so as to
embrace matters not specifically provided.
Contracts; Insurance Law; Even if a contract contains all the elements of a
contract, if its primary purpose is the rendering of service; it is not a contract of
insurance.—In our jurisdiction, a commentator of our insurance laws has pointed
out that, 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: It does
not necessarily follow however, that a contract containing all the four elements
mentioned above would be an insurance contract. The primary purpose of the
parties in making the
416
416 SUPREME COURT REPORTS
ANNOTATED
Philippine Health Care Providers Inc. vs.
Commissioner on Internal Revenue
contract may negate the existence of an insurance contract. For
example, a law firm which enters into contracts with clients whereby in
consideration of periodical payments, it promises to represent such clients in all
suits for or against them, is not engaged in the insurance business. Its contracts
are simply for the purpose of rendering personal services. On the other hand, a
contract by which a corporation, in consideration of a stipulated amount, agrees at
its own expense to defend a physician against all suits for damages for malpractice
is one of insurance, and the corporation will be deemed as engaged in the business
of insurance. Unlike the lawyer’s retainer contract, the essential purpose of such a
contract is not to render personal services, but to indemnify against loss and
damage resulting from the defense of actions for malpractice.
Same; Same; Although risk is a primary element of an insurance contract, it is
not necessarily true that risk alone is sufficient to establish it.—Although risk is a
primary element of an insurance contract, it is not necessarily true that risk alone
is sufficient to establish it. Almost anyone who undertakes a contractual obligation
always bears a certain degree of financial risk. Consequently, there is a need to
distinguish prepaid service contracts (like those of petitioner) from the usual
insurance contracts.
Health Maintenance Organizations; Documentary Stamp Tax; If it had been
the intent of the legislature to impose Documentary Stamp Tax (DST) on health care
agreements, it could have done so in clear and categorical terms.—We can clearly
see from these two histories (of the DST on the one hand and HMOs on the other)
that when the law imposing the DST was first passed, HMOs were yet unknown in
the Philippines. However, when the various amendments to the DST law were
enacted, they were already in existence in the Philippines and the term had in fact
already been defined by RA 7875. If it had been the intent of the legislature to
impose DST on health care agreements, it could have done so in clear and
categorical terms. It had many opportunities to do so. But it did not. The fact that
the NIRC contained no specific provision on the DST liability of health care
agreements of HMOs at a time they were already known as such, belies any
legislative intent to impose it on them. As a matter of fact, petitioner was
assessed its DST liability only on January 27, 2000, after more than a
decade in the business as an HMO.417
VOL. 600, SEPTEMBER 18, 2009 417
Philippine Health Care Providers Inc. vs.
Commissioner on Internal Revenue
Taxation; The power to tax is an incident of sovereignty and is unlimited in
its range, acknowledging in its very nature no limits, so that security against its
abuse is to be found only in the responsibility of the legislature which imposes the
tax on the constituency who is to pay it.—As a general rule, the power to tax is an
incident of sovereignty and is unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who is
to pay it. So potent indeed is the power that it was once opined that “the power to
tax involves the power to destroy.” Petitioner claims that the assessed DST to date
which amounts to P376 million is way beyond its net worth of P259 million.
Respondent never disputed these assertions. Given the realities on the ground,
imposing the DST on petitioner would be highly oppressive. It is not the purpose of
the government to throttle private business. On the contrary, the government
ought to encourage private enterprise. Petitioner, just like any concern organized
for a lawful economic activity, has a right to maintain a legitimate business. As
aptly held in Roxas, et al. v. CTA, et al., 23 SCRA 276 (1968): The power of taxation
is sometimes called also the power to destroy. Therefore it should be exercised with
caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the “hen that lays
the golden egg.”
Same; Documentary Stamp Tax; We held in a recent case that Documentary
Stamp Tax (DST) is one of the taxes covered by the tax amnesty program under RA
9480.—We held in a recent case that DST is one of the taxes covered by the tax
amnesty program under RA 9480. There is no other conclusion to draw than that
petitioner’s liability for DST for the taxable years 1996 and 1997 was totally
extinguished by its availment of the tax amnesty under RA 9480.
Judgments; When a minute resolution denies or dismisses a petition for failure
to comply with formal and substantive requirements, the challenged decision,
together with its findings of fact and legal conclusions are deemed sustained.—It is
true that, although contained in a minute resolution, our dismissal of the petition
was a disposition of the merits of the case. When we dismissed the petition, we
effectively affirmed the CA ruling being questioned. As a result, our ruling in that
case has already become final. When a minute
418
418 SUPREME COURT REPORTS
ANNOTATED
Philippine Health Care Providers Inc. vs.
Commissioner on Internal Revenue
resolution denies or dismisses a petition for failure to comply with formal and
substantive requirements, the challenged decision, together with its findings of fact
and legal conclusions, are deemed sustained. But what is its effect on other cases?
Health Maintenance Organizations; Taxation; Taking into account that health
care agreements are clearly not within the ambit of Section 185 of the National
Internal Revenue Code (NIRC) and there was never any legislative intent to impose
the same on Health Maintenance Organization (HMO) like petitioner, the same
should not be arbitrarily and unjustly included in its coverage.—Taking into
account that health care agreements are clearly not within the ambit of Section 185
of the NIRC and there was never any legislative intent to impose the same on
HMOs like petitioner, the same should not be arbitrarily and unjustly included in
its coverage. It is a matter of common knowledge that there is a great social need
for adequate medical services at a cost which the average wage earner can afford.
HMOs arrange, organize and manage health care treatment in the furtherance of
the goal of providing a more efficient and inexpensive health care system made
possible by quantity purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein individuals are charged a fee
each time they receive medical services), including the ability to control costs. They
protect their members from exposure to the high cost of hospitalization and other
medical expenses brought about by a fluctuating economy. Accordingly, they play
an important role in society as partners of the State in achieving its constitutional
mandate of providing its citizens with affordable health services.
MOTION FOR RECONSIDERATION and SUPPLEMENTAL MOTION FOR
RECONSIDERATION of a decision of the Supreme Court.
The facts are stated in the resolution of the Court.
Divina & Uy Law Offices for petitioner.
Litigation and Prosecution Division for respondent.
RESOLUTION
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the
people and instill health consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
“Section 11. The State shall adopt an integrated and comprehensive approach
to health development which shall endeavor to make essential goods, health and
other social services available to all the people at affordable cost. There shall be
priority for the needs of the underprivileged sick, elderly, disabled, women, and
children. The State shall endeavor to provide free medical care to paupers.”1
For resolution are a motion for reconsideration and supplemental motion
for reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed
by petitioner Philippine Health Care Providers, Inc.2
We recall the facts of this case, as follows:
“Petitioner is a domestic corporation whose primary purpose is “[t]o establish,
maintain, conduct and operate a prepaid group practice health care delivery system
or a health maintenance organization to take care of the sick and disabled persons
enrolled in the health care plan and to provide for the administrative, legal, and
financial responsibilities of the organization.” Individuals enrolled in its health
care programs pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided by its duly licensed
physicians, specialists and other professional technical staff participating in the
group practice health delivery system at a hospital or clinic owned, operated or
accredited by it.
xxx xxx xxx
On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent
petitioner a formal demand letter and the corresponding assessment notices
demanding the payment of deficiency taxes, including surcharges and interest, for
the taxable years 1996 and 1997 in the total amount of P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on
petitioner’s health care agreement with the members of its health care program
pursuant to Section 185 of the 1997 Tax Code xxxx.
xxx xxx xxx
Petitioner protested the assessment in a letter dated February 23, 2000. As
respondent did not act on the protest, petitioner filed a petition for review in the
Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST
assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of which
read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is
PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the
deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus
20% interest from January 20, 1997 until fully paid for the 1996 VAT
deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest
from January 20, 1998 until fully paid for the 1997 VAT deficiency.
Accordingly, VAT Ruling No. [231]-88 is declared void and without force and
effect. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to
DESIST from collecting the said DST deficiency tax.
SO ORDERED.”
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as
it cancelled the DST assessment. He claimed that petitioner’s health care
agreement was a contract of insurance subject to DST under Section 185 of the
1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioner’s
health care agreement was in the nature of a non-life insurance contract
subject to DST.421
VOL. 600, SEPTEMBER 18, 2009 421
Philippine Health Care Providers Inc. vs.
Commissioner on Internal Revenue
WHEREFORE, the petition for review is GRANTED. The Decision of
the Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and
1997 deficiency documentary stamp tax assessment and ordered petitioner to
desist from collecting the same is REVERSED and SET ASIDE.
 Respondent is ordered to pay the amounts of P55,746,352.19 and
P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997,
respectively, plus 25% surcharge for late payment and 20% interest per
annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax
Code, until the same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner
filed this case.
xxx xxx xxx”
In a decision dated June 12, 2008, the Court denied the petition and
affirmed the CA’s decision. We held 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.
Olivares3 and Philamcare Health Systems, Inc. v. CA.4 We also 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.
Unable to accept our verdict, petitioner filed the present motion for
reconsideration and supplemental motion for reconsideration, asserting the
following arguments:
(a) The DST under Section 185 of the National Internal
Revenue of 1997 is imposed only on a company engaged
in the business of fidelity bonds and other insurance policies. Petitioner, as
an HMO, is a service provider, not an insurance company.
(b) The Court, in dismissing the appeal in CIR v.
Philippine National Bank, affirmed in effect the CA’s
disposition that health care services are not in the nature
of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements
from items subject to DST is clear, especially in the light
of the amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioner’s agreements are
contracts of indemnity, they are not those contemplated
under Section 185.
(f) Assuming arguendo that petitioner’s agreements are
akin to health insurance, health insurance is not covered
by Section 185.
(g) The agreements do not fall under the phrase “other
branch of insurance” mentioned in Section 185.
(h) The June 12, 2008 decision should only apply
prospectively.
(i) Petitioner availed of the tax amnesty benefits under
RA 9480 for the taxable year 2005 and all prior years.
5
Therefore, the questioned assessments on the DST are
now rendered moot and academic.” 6
Oral arguments were held in Baguio City on April 22, 2009. The parties
submitted their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it
availed of a tax amnesty under RA 94807 (also known as the “Tax Amnesty Act
of 2007”) by fully paying
the amount of P5,127,149.08 representing 5% of its net worth as of the year
ending December 31, 2005.8
We find merit in petitioner’s motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and
Exchange Commission on June 30, 1987.9 It is engaged in the dispensation of
the following medical services to individuals who enter into health care
agreements with it:
“Preventive medical services such as periodic monitoring of health problems,
family planning counseling, consultation and advices on diet, exercise and other
healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-rays,
urinalysis, fecalysis, complete blood count, and the like and
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.”10
Individuals enrolled in its health care program pay an annual membership
fee. Membership is on a year-to-year basis. The medical services are dispensed
to enrolled members in a hospital or clinic owned, operated or accredited by
petitioner, through physicians, medical and dental practitioners under
contract with it. It negotiates with such health care practitioners regarding
payment schemes, financing and other procedures for the delivery of health
services. Except in cases of emergency, the professional services are to be
provided only by petitioner’s physicians, i.e. those directly employed by it11or
whose services are contracted by it.12 Petitioner also provides hospital services
such as room and board accommodation, laboratory services, operating rooms,
x-ray facilities and general nursing care.13 If and when a member avails of the
benefits under the agreement, petitioner pays the participating physicians and
other health care providers for the services rendered, at pre-agreed rates.14
To avail of petitioner’s health care programs, the individual members are
required to sign and execute a standard health care agreement embodying the
terms and conditions for the provision of the health care services. The same
agreement contains the various health care services that can be engaged by
the enrolled member, i.e., preventive, diagnostic and curative medical services.
Except for the curative aspect of the medical service offered, the enrolled
member may actually make use of the health care services being offered by
petitioner at any time.
Health Maintenance Organizations Are
Not Engaged In The Insurance Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is
an HMO and not an insurer because its agreements are treated as insurance
contracts and the DST is not a tax on the business but an excise on the
privilege, opportunity or facility used in the transaction of the business.15
Petitioner, however, submits that it is of critical importance to characterize
the business it is engaged in, that is, to determine whether it is an HMO or an
insurance company, as this distinction is indispensable in turn to the issue of
whether or not it is liable for DST on its health care agreements.16
A second hard look at the relevant law and jurisprudence convinces the
Court that the arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997)
provides:
“Section 185. 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.” (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence,
provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which renders
every word operative is preferred over that which makes some
words idle and nugatory.17 This principle is expressed in the maxim Ut magis
valeat quam pereat, that is, we choose the interpretation which gives effect to
the whole of the statute—its every word.18
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).
Petitioner is admittedly an HMO. 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.”19 The payments do not vary with the extent, frequency or
type of services provided.
The question is: was petitioner, as an HMO, engaged in the business of
insurance during the pertinent taxable years? We rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code)
enumerates what constitutes “doing an insurance business” or “transacting an
insurance business”:
“a) making or proposing to make, as insurer, any insurance
contract;
b) making or proposing to make, as surety, any contract of
suretyship as a vocation and not as merely incidental to
any other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance
business, specifically recognized as constituting the doing
of an insurance business within the meaning of this Code;
d) doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner designed
to evade the provisions of this Code.”
In the application of the provisions of this Code, the fact
that no profit is derived from the making of insurance
contracts, agreements or transactions or that no separate or
direct consideration is received therefore, shall not be deemed
conclusive to show that the making thereof does not constitute
the doing or transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a persuasive
effect on our decisions,21 have determined that HMOs are not in the insurance
business. One test that they have applied is 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.
Applying the “principal object and purpose test,” 22 there is significant
American case law supporting the argument that a corporation (such as an
HMO, whether or not organized for profit), whose main object is to provide the
members of a group with health services, is not engaged in the insurance
business.
The rule was enunciated in Jordan v. Group Health Association23 wherein
the Court of Appeals of the District of Columbia Circuit held that Group Health
Association should not be considered as engaged in insurance activities since
it was created primarily for the distribution of health care services rather than
the assumption of insurance risk.
“xxx Although Group Health’s activities may be considered in one aspect as
creating security against loss from illness or accident more truly they constitute
the quantity purchase of well-rounded, continuous medical service by its members.
xxx The functions of such an organization are not identical with those of
insurance or indemnity companies. The latter are concerned primarily, if not
exclusively, with risk and the consequences of its descent, not with service, or its
extension in kind, quantity or distribution; with the unusual occurrence, not the
daily routine of living. Hazard is predominant. On the other hand, the
cooperative is concerned principally with getting service rendered to its
members and doing so at lower prices made possible by quantity
purchasing and economies in operation. Its primary purpose is to reduce
the cost rather than the risk of medical care; to broaden the service to the
individual in kind and quantity; to enlarge the number receiving it; to
regularize it as an every-
day incident of living, like purchasing food and clothing or oil and gas,
rather than merely protecting against the financial loss caused by
extraordinary and unusual occurrences, such as death, disaster at sea,
fire and tornado. It is, in this instance, to take care of colds, ordinary aches and
pains, minor ills and all the temporary bodily discomforts as well as the more
serious and unusual illness. To summarize, the distinctive features of the
cooperative are the rendering of service, its extension, the bringing of
physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in
cost by quantity purchasing in short, getting the medical job done and
paid for; not, except incidentally to these features, the indemnification for
cost after the services is rendered. Except the last, these are not
distinctive or generally characteristic of the insurance
arrangement. There is, therefore, a substantial difference between contracting in
this way for the rendering of service, even on the contingency that it be needed, and
contracting merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present
should not outweigh all other factors. If attention is focused only on that feature,
the line between insurance or indemnity and other types of legal arrangement and
economic function becomes faint, if not extinct. This is especially true when the
contract is for the sale of goods or services on contingency. But obviously it was not
the purpose of the insurance statutes to regulate all arrangements for assumption
or distribution of risk. That view would cause them to engulf practically all
contracts, particularly conditional sales and contingent service agreements. The
fallacy is in looking only at the risk element, to the exclusion of all others
present or their subordination to it. The question turns, not on whether
risk is involved or assumed, but on whether that or something else to
which it is related in the particular plan is its principal object
purpose.”24 (Emphasis supplied)
In California Physicians’ Service v. Garrison,25 the California court felt that,
after scrutinizing the plan of operation as a
whole of the corporation, it was service rather than indemnity which stood as
its principal purpose.
“There is another and more compelling reason for holding that the service is not
engaged in the insurance business. Absence or presence of assumption of risk
or peril is not the sole test to be applied in determining its status. The
question, more broadly, is whether, looking at the plan of operation as a
whole, ‘service’ rather than ‘indemnity’ is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and
maintained by the California physicians have a wide scope in the field of social
service. Probably there is no more impelling need than that of adequate
medical care on a voluntary, low-cost basis for persons of small income.
The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is ‘service’ of a high order and not ‘indemnity.’
”26(Emphasis supplied)
American courts have pointed out that the main difference between an
HMO and an insurance company is that HMOs undertake to provide or
arrange for the provision of medical services through participating physicians
while insurance companies simply undertake to indemnify the insured for
medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic
Associates, P.A. v. Horizon Blue Cross and Blue Shield of New Jersey27 is clear
on this point:
“The basic distinction between medical service corporations and ordinary health
and accident insurers is that the former undertake to provide prepaid medical
services through participating physicians, thus relieving subscribers of any
further financial burden, while the latter only undertake to indemnify an insured
for medical expenses up to, but not beyond, the schedule of rates contained in the
policy.
xxx xxx xxx
 The primary purpose of a medical service corporation, however, is an
undertaking to provide physicians who will render services to subscribers on a
prepaid basis. Hence, if there are no physicians participating in the medical
service corporation’s plan, not only will the subscribers be deprived of the
protection which they might reasonably have expected would be
provided, but the corporation will, in effect, be doing business solely as a
health and accident indemnity insurer without having qualified as such and
rendering itself subject to the more stringent financial requirements of the General
Insurance Laws….
A participating provider of health care services is one who agrees in writing to
render health care services to or for persons covered by a contract issued by health
service corporation in return for which the health service corporation agrees
to make payment directly to the participating provider.”28 (Emphasis
supplied)
Consequently, the mere presence of risk would be insufficient to override
the primary purpose of the business to provide medical services as needed, with
payment made directly to the provider of these services.29 In short, even if
petitioner assumes the risk of paying the cost of these services even if
significantly more than what the member has prepaid, it nevertheless cannot
be considered as being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for
services rendered in case of emergency by non-participating health providers
would still be incidental to petitioner’s purpose of providing and arranging for
health care services and does not transform it into an insurer. To fulfill its
obligations to its members under the agreements, petitioner is required to set
up a system and the facilities for the delivery of such medical services. This
indubitably shows that indemnification is not its sole object.
In fact, a substantial portion of petitioner’s services covers preventive and
diagnostic medical services intended to keep members from developing medical
conditions or diseases.30 As an HMO, it is its obligation to maintain the good
health of its members. Accordingly, its health care programs are
designed to prevent or to minimize the possibility of any assumption
of risk on its part. Thus, its undertaking under its agreements is not to
indemnify its members against any loss or damage arising from a medical
condition but, on the contrary, to provide the health and medical services
needed to prevent such loss or damage.31
Overall, petitioner appears to provide insurance-type benefits to its
members (with respect to its curative medical services), but these are
incidental to the principal activity of providing them medical care. The
“insurance-like” aspect of petitioner’s business is miniscule compared to its
noninsurance activities. Therefore, since it substantially provides health care
services rather than insurance services, it cannot be considered as being in the
insurance business.
It is important to emphasize that, in adopting the “principal purpose test”
used in the above-quoted U.S. cases, we are not saying that petitioner’s
operations are identical in every respect to those of the HMOs or health
providers which were parties to those cases. What we are stating is that, for
the purpose of determining what “doing an insurance business” means, we
have to scrutinize the operations of the business as a whole and not its mere
components. This is of course only prudent and appropriate, taking into
account the burdensome and strict laws, rules and regulations applicable to
insurers and other entities engaged in the insurance business. Moreover, we
are also not unmindful that there are other American authorities who have
found particular HMOs to be actually engaged in insurance activities.32
Lastly, it is significant that petitioner, as an HMO, is not part of the
insurance industry. This is evident from the fact that it is not supervised by
the Insurance Commission but by the Department of Health.33 In fact, in a
letter dated September 3, 2000, the Insurance Commissioner confirmed that
petitioner is not engaged in the insurance business. This determination of the
commissioner must be accorded great weight. It is well-settled that the
interpretation of an administrative agency which is tasked to implement a
statute is accorded great respect and ordinarily controls the interpretation of
laws by the courts. The reason behind this rule was explained in Nestlé
Philippines, Inc. v. Court of Appeals:34
“The rationale for this rule relates not only to the emergence of the multifarious
needs of a modern or modernizing society and the establishment of diverse
administrative agencies for addressing and satisfying those needs; it also relates to
the accumulation of experience and growth of specialized capabilities by the
administrative agency charged with implementing a particular statute. In Asturias
Sugar Central, Inc. vs. Commissioner of Customs,35 the Court stressed that
executive officials are presumed to have familiarized themselves with all the
considerations pertinent to the meaning and purpose of the law, and to have formed
an independent, conscientious and competent expert opinion thereon. The courts
give much weight to the government agency officials charged with the
implementation of the law, their competence, expertness, experience and informed
judgment, and the fact that they frequently are the drafters of the law they
interpret.36
A HEALTH CARE AGREEMENT IS NOT AN IN-
SURANCE CONTRACT CONTEMPLATED UNDER SECTION 185
OF THE NIRC OF 1997
Section 185 states that DST is imposed on “all policies of insurance… or
obligations of the nature of indemnity for loss, damage, or liability….” In our
decision dated June 12, 2008, we ruled that petitioner’s health care agreements
are contracts of indemnity and are therefore insurance contracts:
“It is … incorrect to say that the health care agreement is not based on loss or
damage because, under the said agreement, petitioner assumes the liability and
indemnifies its member for hospital, medical and related expenses (such as
professional fees of physicians). The term “loss or damage” is broad enough to cover
the monetary expense or liability a member will incur in case of illness or injury.
 Under the health care agreement, the rendition of hospital, medical and
professional services to the member in case of sickness, injury or emergency or his
availment of so-called “out-patient services” (including physical examination, x-ray
and laboratory tests, medical consultations, vaccine administration and family
planning counseling) is the contingent event which gives rise to liability on the part
of the member. In case of exposure of the member to liability, he would be entitled
to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by
paying for expenses arising from the stipulated contingencies belies its claim that
its services are prepaid. The expenses to be incurred by each member cannot be
predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of
paying for the costs of the services even if they are significantly and substantially
more than what the member has “prepaid.” Petitioner does not bear the costs alone
but distributes or spreads them out among a large group of persons bearing a
similar risk, that is, among all the other members of the health care program. This
is insurance.”37
We reconsider. We shall quote once again the pertinent portion of Section
185:
“Section 185. 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), xxxx”
(Emphasis supplied)
In construing this provision, we should be guided by the principle that tax
statutes are strictly construed against the taxing authority. 38 This is because
taxation is a destructive power which interferes with the personal and property
rights of the people and takes from them a portion of their property for the
support of the government.39 Hence, tax laws may not be extended by
implication beyond the clear import of their language, nor their operation
enlarged so as to embrace matters not specifically provided.40
We are aware that, 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.
Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event.
An insurance contract exists where the following elements concur:
“1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed
peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk and
5. In consideration of the insurer’s promise, the insured pays a premium.” 41
Do the agreements between petitioner and its members possess all these
elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed
out that, 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:
“It does not necessarily follow however, that a contract containing all the four
elements mentioned above would be an insurance
contract. The primary purpose of the parties in making the contract may
negate the existence of an insurance contract. For example, a law firm which
enters into contracts with clients whereby in consideration of periodical payments,
it promises to represent such clients in all suits for or against them, is not engaged
in the insurance business. Its contracts are simply for the purpose of rendering
personal services. On the other hand, a contract by which a corporation, in
consideration of a stipulated amount, agrees at its own expense to defend a
physician against all suits for damages for malpractice is one of insurance, and the
corporation will be deemed as engaged in the business of insurance. Unlike the
lawyer’s retainer contract, the essential purpose of such a contract is not to render
personal services, but to indemnify against loss and damage resulting from the
defense of actions for malpractice.”42 (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are
present in petitioner’s agreements. To begin with, there is no loss, damage or
liability on the part of the member that should be indemnified by petitioner as
an HMO. Under the agreement, the member pays petitioner a predetermined
consideration in exchange for the hospital, medical and professional services
rendered by the petitioner’s physician or affiliated physician to him. In case of
availment by a member of the benefits under the agreement, petitioner does
not reimburse or indemnify the member as the latter does not pay any third
party. Instead, it is the petitioner who pays the participating physicians and
other health care providers for the services rendered at pre-agreed rates. The
member does not make any such payment.
In other words, there is nothing in petitioner’s agreements that gives rise
to a monetary liability on the part of the member to any third party-provider
of medical services which might in turn necessitate indemnification from
petitioner. The terms “indemnify” or “indemnity” presuppose that a liability or
claim has already been incurred. There is no in-
Philippine Health Care Providers Inc. vs.
Commissioner on Internal Revenue
demnity precisely because the member merely avails of medical services to be
paid or already paid in advance at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take advantage of the
bulk of the benefits anytime, e.g. laboratory services, x-ray, routine annual
physical examination and consultations, vaccine administration as well as
family planning counseling, even in the absence of any peril, loss or damage on
his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the
member who receives care from a non-participating physician or hospital.
However, this is only a very minor part of the list of services available. The
assumption of the expense by petitioner is not confined to the happening of a
contingency but includes incidents even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program,
Inc.,43 although the health care contracts called for the defendant to partially
reimburse a subscriber for treatment received from a non-designated doctor,
this did not make defendant an insurer. Citing Jordan, the Court determined
that “the primary activity of the defendant (was) the provision of podiatric
services to subscribers in consideration of prepayment for such
services.”44 Since indemnity of the insured was not the focal point of the
agreement but the extension of medical services to the member at an affordable
cost, it did not partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is
not necessarily true that risk alone is sufficient to establish it. Almost anyone
who undertakes a contractual obligation always bears a certain degree of
financial risk. Consequently, there is a need to distinguish prepaid service
contracts (like those of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to
provide health services: the risk that it might fail to earn a reasonable return
on its investment. But it is not the risk of the type peculiar only to insurance
companies. Insurance risk, also known as actuarial risk, is the risk that the
cost of insurance claims might be higher than the premiums paid. The amount
of premium is calculated on the basis of assumptions made relative to the
insured.45
However, assuming that petitioner’s commitment to provide medical
services to its members can be construed as an acceptance of the risk that it
will shell out more than the prepaid fees, it still will not qualify as an insurance
contract because petitioner’s objective is to provide medical services at reduced
cost, not to distribute risk like an insurer.
In sum, an examination of petitioner’s agreements with its members leads
us to conclude that it is not an insurance contract within the context of our
Insurance Code.
THERE WAS NO LEGISLATIVE INTENT TO IMPOSE
DST ON HEALTH CARE AGREEMENTS OF HMOS
Furthermore, militating in convincing fashion against the imposition of
DST on petitioner’s health care agreements under Section 185 of the NIRC of
1997 is the provision’s legislative history. The text of Section 185 came into
U.S. law as early as 1904 when HMOs and health care agreements were not
even in existence in this jurisdiction. It was imposed under Section 116, Article
XI of Act No. 1189 (otherwise known as the “Internal Revenue Law of
1904”)46 enacted on July 2,1904 and became effective on August 1, 1904. Except
for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction
of the pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the
several bonds, debentures, or certificates of stock and indebtedness, and other
documents, instruments, matters, and things mentioned and described in this
section, or for or in respect to the vellum, parchment, or paper upon which such
instrument, matters, or things or any of them shall be written or printed by any
person or persons who shall make, sign, or issue the same, on and after January
first, nineteen hundred and five, the several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or bond or obligation of the
nature of indemnity for loss, damage, or liability made or renewed by any
person, association, company, or corporation transacting the business of
accident, fidelity, employer’s liability, plate glass, steam boiler, burglar,
elevator, automatic sprinkle, or other branch of insurance (except life,
marine, inland, and fire insurance) xxxx” (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914)
was enacted revising and consolidating the laws relating to internal revenue.
The aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was
completely reproduced as Section 30 (l), Article III of Act No. 2339. The very
detailed and exclusive enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again
reproduced as Section 1604 (l), Article IV of Act No. 2657 (Administrative
Code). Upon its amendment on March 10, 1917, the pertinent DST provision
became Section 1449 (l) of Act No. 2711, otherwise known as the
Administrative Code of 1917.441
VOL. 600, SEPTEMBER 18, 2009 441
Philippine Health Care Providers Inc. vs.
Commissioner on Internal Revenue
 Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466
(the NIRC of 1939), which codified all the internal revenue laws of the
Philippines. In an amendment introduced by RA 40 on October 1, 1946, the
DST rate was increased but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate
was reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457
and 1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST
rate was again increased.
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234
of the NIRC of 1977 was renumbered as Section 198. And under Section 23 of
EO47 273 dated July 25, 1987, it was again renumbered and became Section
185.
On December 23, 1993, under RA 7660, Section 185 was amended but,
again, only with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA
8424 (or the NIRC of 1997), the subject legal provision was retained as the
present Section 185. In 2004, amendments to the DST provisions were
introduced by RA 924348 but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the
Philippines with the formation of Bancom Health Care Corporation in 1974.
The same pioneer HMO was later reorganized and renamed Integrated Health
Care Services, Inc. (or Intercare). However, there are those who claim that
Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the
Philippines as early as 1965 and having been formally incorporated in 1991.
Afterwards, HMOs proliferated quickly and currently, there are 36 registered
HMOs with a total enrollment of more than 2 million.49
We can clearly see from these two histories (of the DST on the one hand and
HMOs on the other) that when the law imposing the DST was first passed,
HMOs were yet unknown in the Philippines. However, when the various
amendments to the DST law were enacted, they were already in existence in
the Philippines and the term had in fact already been defined by RA 7875. If it
had been the intent of the legislature to impose DST on health care
agreements, it could have done so in clear and categorical terms. It had many
opportunities to do so. But it did not. The fact that the NIRC contained no
specific provision on the DST liability of health care agreements of HMOs at a
time they were already known as such, belies any legislative intent to impose
it on them. As a matter of fact, petitioner was assessed its DST liability
only on January 27, 2000, after more than a decade in the business as
an HMO.50
Considering that Section 185 did not change since 1904 (except for the rate
of tax), it would be safe to say that health care agreements were never, at any
time, recognized as insurance contracts or deemed engaged in the business of
insurance within the context of the provision.
THE POWER TO TAX IS NOT
THE POWER TO DESTROY
As a general rule, the power to tax is an incident of sovereignty and is
unlimited in its range, acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the responsibility of the
legislature which im-
poses the tax on the constituency who is to pay it.51 So potent indeed is the
power that it was once opined that “the power to tax involves the power to
destroy.”52
Petitioner claims that the assessed DST to date which amounts to P376
million53 is way beyond its net worth of P259 million.54 Respondent never
disputed these assertions. Given the realities on the ground, imposing the DST
on petitioner would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the government
ought to encourage private enterprise.55 Petitioner, just like any concern
organized for a lawful economic activity, has a right to maintain a legitimate
business.56 As aptly held in Roxas, et al. v. CTA, et al.:57
“The power of taxation is sometimes called also the power to destroy. Therefore
it should be exercised with caution to minimize injury to the proprietary rights of
a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector
kill the “hen that lays the golden egg.”58
Legitimate enterprises enjoy the constitutional protection not to be taxed
out of existence. Incurring losses because of a tax imposition may be an
acceptable consequence but killing the business of an entity is another matter
and should not be allowed. It is counter-productive and ultimately subversive
of the nation’s thrust towards a better economy which will ultimately benefit
the majority of our people.59
PETITIONER’S TAX LIABILITY
WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment
for taxable years 1996 and 1997 became moot and academic60 when it availed
of the tax amnesty under RA 9480 on December 10, 2007. It paid P5,127,149.08
representing 5% of its net worth as of the year ended December 31, 2005 and
complied with all requirements of the tax amnesty. Under Section 6(a) of RA
9480, it is entitled to immunity from payment of taxes as well as additions
thereto, and the appurtenant civil, criminal or administrative penalties under
the 1997 NIRC, as amended, arising from the failure to pay any and all internal
revenue taxes for taxable year 2005 and prior years.61
Far from disagreeing with petitioner, respondent manifested in its
memorandum:
“Section 6 of [RA 9840] provides that availment of tax amnesty entitles a
taxpayer to immunity from payment of the tax involved, including the civil,
criminal, or administrative penalties provided under the 1997 [NIRC], for tax
liabilities arising in 2005 and the preceding years.

In view of petitioner’s availment of the benefits of [RA 9840], and without
conceding the merits of this case as discussed above, respondent concedes that
such tax amnesty extinguishes the tax liabilities of petitioner. This
admission, however, is not meant to preclude a revocation of the amnesty granted
in case it is found to have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law.” 62 (Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered
by the tax amnesty program under RA 9480.63 There is no other conclusion to
draw than that petitioner’s liability for DST for the taxable years 1996 and
1997 was totally extinguished by its availment of the tax amnesty under RA
9480.
IS THE COURT BOUND BY A MINUTE
RESOLUTION IN ANOTHER CASE?
Petitioner raises another interesting issue in its motion for reconsideration:
whether this Court is bound by the ruling of the CA64 in CIR v. Philippine
National Bank65 that a health care agreement of Philamcare Health Systems
is not an insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute
resolution of this Court dismissing the appeal in Philippine National
Bank (G.R. No. 148680).66 Petitioner argues that the dismissal of G.R. No.
148680 by minute resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care agreement is not an
insurance contract.
It is true that, although contained in a minute resolution, our dismissal of
the petition was a disposition of the merits of the case. When we dismissed the
petition, we effectively affirmed the CA ruling being questioned. As a result,
our ruling in that case has already become final.67 When a minute resolution
denies or dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and
legal conclusions, are deemed sustained.68 But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the
same parties, it constitutes res judicata.69 However, if other parties or another
subject matter (even with the same parties and issues) is involved, the minute
resolution is not binding precedent. Thus, in CIR v. Baier-Nickel,70 the Court
noted that a previous case, CIR v. Baier-Nickel71 involving the same parties
and the same issues, was previously disposed of by the Court thru a minute
resolution dated February 17, 2003 sustaining the ruling of the CA.
Nonetheless, the Court ruled that the previous case “ha(d) no bearing” on
the latter case because the two cases involved different subject matters as they
were concerned with the taxable income of different taxable years.72
Besides, there are substantial, not simply formal, 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.73 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.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since
petitioner’s liability for DST on its health care agreement was not the subject
matter of G.R. No. 148680, petitioner cannot successfully invoke the minute
resolution in that case (which is not even binding precedent) in its favor.
Nonetheless, in view of the reasons already discussed, this does not detract in
any way from the fact that petitioner’s health care agreements are not subject
to DST.
A FINAL NOTE
Taking into account that health care agreements are clearly not within the
ambit of Section 185 of the NIRC and there was never any legislative intent to
impose the same on HMOs like petitioner, the same should not be arbitrarily
and unjustly included in its coverage.
It is a matter of common knowledge that there is a great social need for
adequate medical services at a cost which the average wage earner can afford.
HMOs arrange, organize and manage health care treatment in the furtherance
of the goal of providing a more efficient and inexpensive health care system
made possible by quantity purchasing of services and economies of scale. They
offer advantages over the pay-for-service system (wherein individuals are
charged a fee each time they receive medical services), including the ability to
control costs. They protect their members from exposure to the high cost of
hospitalization and other medical expenses brought about by a fluctuating
economy. Accordingly, they play an important role in society as partners of the
State in achieving its constitutional mandate of providing its citizens with
affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium
charged.74 Its imposition will elevate the cost of health care services. This will
in turn necessitate an increase in the membership fees, resulting in either
placing health services beyond the reach of the ordinary wage earner or driving
the industry to the ground. At the end of the day, neither side wins, considering
the indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August
16, 2004 decision of the Court of Appeals in CA-G.R. SP No. 70479 is
REVERSED and SET ASIDE. The 1996 and
 G.R. No. 159647. April 15, 2005.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CENTRAL
LUZON DRUG CORPORATION, respondent.
Taxation; Tax Credits and Tax Deductions; Senior Citizens’ Law (R.A. No.
7432); The tax credit allowed under R.A. 7432 to establishments as a result of
granting senior citizens 20% discount on their purchase of medicines from private
establishments may be claimed by such establishments even though they are
operating at a loss.— Section 4(a) of RA 7432 grants to senior citizens the privilege
of obtaining a 20 percent discount on their purchase of medicine from any private
establishment in the country. The latter may then claim the cost of the discount as
a tax credit. But can such credit be claimed, even though an establishment operates
at a loss? We answer in the affirmative.
Same; Same; Same; Words and Phrases; Tax credit generally refers to an
amount that is subtracted directly from one’s total tax liability, an allowance
against the tax itself, or a deduction from what is owed; Tax deduction is defined as
a subtraction from income for tax purposes, or an amount that is allowed by law to
reduce income prior to the application of the tax rate to compute the amount of tax
which is due.—Although the term is not specifically defined in our Tax Code, tax
credit generally refers to an amount that is “subtracted directly from one’s total tax
liability.” It is an “allowance against the tax itself” or “a deduction from what is
owed” by a taxpayer to the government. Examples of tax credits are withheld taxes,
payments of estimated tax, and investment tax credits. Tax credit should be
understood in relation to other tax concepts. One of these is tax deduction—defined
as a subtraction “from income for tax purposes,” or an amount that is “allowed by
law to reduce income prior to [the] application of the tax rate to compute the
amount of tax which is due.” An example of a tax deduction is any of the allowable
deductions enumerated in Section 34 of the Tax Code.
Same; Same; Same; Same; A tax credit differs from a tax deduction; A tax
credit reduces the tax due, including—whenever applicable—the income tax that is
determined after applying the corresponding tax rates to taxable income; A tax
deduction reduces the income that is subject to tax in order to arrive at taxable
income.—A tax credit differs from a tax deduction. On the one hand, a tax
credit reduces the tax due, including—whenever applicable—the income tax that is
determined after applying the corresponding tax rates to taxable income. A tax
deduction, on the other, reduces the income that is subject to tax in order to arrive
at taxable income. To think of the former as the latter is to avoid, if not entirely
confuse, the issue. A tax credit is used only after the tax has been computed; a tax
deduction, before.
Same; Same; Same; Under R.A. 7432, Congress has granted without
conditions a tax credit benefit to all covered establishments; Although this tax credit
benefit is available, it need not be used by losing ventures, since there is no tax
liability that calls for its application—by its nature, the tax credit may still be
deducted from a future, not a present, tax liability, without which it does not have
any use.—If a net loss is reported by, and no other taxes are currently due from, a
business establishment, there will obviously be no tax liability against which
any tax credit can be applied. For the establishment to choose the immediate
availment of a tax credit will be premature and impracticable. Nevertheless, the
irrefutable fact remains that, under RA 7432, Congress has granted without
conditions a tax credit benefit to all covered establishments. Although this tax
credit benefit is available, it need not be used by losing ventures, since there is no
tax liability that calls for its application. Neither can it be reduced to nil by the
quick yet callow stroke of an administrative pen, simply because no reduction of
taxes can instantly be effected. By its nature, the tax credit may still be deducted
from a future, not a present, tax liability, without which it does not have any use.
In the meantime, it need not move. But it breathes.
Same; Same; Same; While a tax liability is essential to the availment or use of
any tax credit, prior tax payments are not—for the existence or grant solely of such
credit, neither a tax liability nor a prior tax payment is needed.—While a tax
liability is essential to the availment or use of any tax credit, prior tax payments
are not. On the contrary, for the existence or grant solely of such credit, neither a
tax liability nor a prior tax payment is needed. The Tax Code is in fact
416
416 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs. Central
Luzon Drug Corporation
replete with provisions granting or allowing tax credits, even though no taxes
have been previously paid.
Same; Same; Same; To deny the tax credit, despite the plain mandate of the
law and the regulations carrying out that mandate, is indefensible.—RA 7432
specifically allows private establishments to claim as tax credit the amount of
discounts they grant. In turn, the Implementing Rules and Regulations, issued
pursuant thereto, provide the procedures for its availment. To deny such credit,
despite the plain mandate of the law and the regulations carrying out that
mandate, is indefensible.
Same; Same; Same; Words and Phrases; By ordinary acceptation, a discount
is an “abatement or reduction made from the gross amount or value of anything.”—
The definition given by petitioner is erroneous. It refers to tax credit as the amount
representing the 20 percent discount that “shall be deducted by the said
establishments from their gross income for income tax purposes and from
their gross sales for value-added tax or other percentage tax purposes.” In ordinary
business language, the tax credit represents the amount of such discount. However,
the manner by which the discount shall be credited against taxes has not been
clarified by the revenue regulations. By ordinary acceptation, a discount is an
“abatement or reduction made from the gross amount or value of anything.” To be
more precise, it is in business parlance “a deduction or lowering of an amount of
money”; or “a reduction from the full amount or value of something, especially a
price.” In business there are many kinds of discount, the most common of which is
that affecting the income statement or financial report upon which the income tax is
based.
Same; Same; Same; Same; “Cash Discount,” “Sales Discount,” “Quantity,
Volume or Bulk Discount,” “Trade Discount,” “Chain Discount,” and “Functional
Discount,” Explained.—A cash discount, for example, is one granted by business
establishments to credit customers for their prompt payment. It is a “reduction in
price offered to the purchaser if payment is made within a shorter period of time
than the maximum time specified.” Also referred to as a sales discount on the part
of the seller and a purchase discount on the part of the buyer, it may be expressed
in such terms as “5/10, n/30.” A quantity discount, however, is a “reduction in price
allowed for purchases made in large quantities, justified by savings in packaging,
417
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Commissioner of Internal Revenue vs. Central
Luzon Drug Corporation
shipping, and handling.” It is also called a volume or bulk discount. A
“percentage reduction from the list price x x x allowed by manufacturers to
wholesalers and by wholesalers to retailers” is known as a trade discount. No entry
for it need be made in the manual or computerized books of accounts, since the
purchase or sale is already valued at the net price actually charged the buyer. The
purpose for the discount is to encourage trading or increase sales, and the prices at
which the purchased goods may be resold are also suggested. Even a chain
discount—a series of discounts from one list price—is recorded at net. Finally, akin
to a trade discount is a functional discount. It is “a supplier’s price discount given
to a purchaser based on the [latter’s] role in the [former’s] distribution system.”
This role usually involves warehousing or advertising.
Same; Same; Same; Same; The term sales discounts is not expressly defined in
the Tax Code, but one provision adverts to amounts whose sum—along with sales
returns, allowances and cost of goods sold—is deducted from gross sales to come up
with the gross income, profit or margin derived from business.—The term sales
discounts is not expressly defined in the Tax Code, but one provision adverts to
amounts whose sum—along with sales returns, allowances and cost of goods sold—
is deducted from gross sales to come up with the gross income,
profit or margin derived from business. In another provision therein, sales
discounts that are granted and indicated in the invoices at the time of sale—and
that do not depend upon the happening of any future event—may be excluded from
the gross sales within the same quarter they were given. While determinative only
of the VAT, the latter provision also appears as a suitable reference point for income
tax purposes already embraced in the former. After all, these two provisions affirm
that sales discounts are amounts that are always deductible from gross sales.
Same; Same; Same; To be sure, the privilege enjoyed by the senior citizen must
be equivalent to the tax credit benefit enjoyed by the private establishment granting
the discount.—A distinguishing feature of the implementing rules of RA 7432 is the
private establishment’s outright deduction of the discount from the invoice price of
the medicine sold to the senior citizen. It is, therefore, expected that for each retail
sale made under this law, the discount period lasts no more than a day, because
such discount is given—and the net amount thereof collected—immediately upon
perfection of the sale.
418
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ANNOTATED
Commissioner of Internal Revenue vs. Central
Luzon Drug Corporation
Although prompt payment is made for an arm’s-length transaction by the
senior citizen, the real and compelling reason for the private establishment giving
the discount is that the law itself makes it mandatory. What RA 7432 grants the
senior citizen is a mere discount privilege, not a sales discount or any of the above
discounts in particular. Prompt payment is not the reason for (although a necessary
consequence of) such grant. To be sure, the privilege enjoyed by the senior citizen
must be equivalent to the tax credit benefit enjoyed by the private establishment
granting the discount. Yet, under the revenue regulations promulgated by our tax
authorities, this benefit has been erroneously likened and confined to a sales
discount.
Same; Same; Same; To stress, the effect of a sales discount on the income
statement and income tax return of an establishment covered by R.A. 7432 is
different from that resulting from the availment or use of its tax credit benefit; When
the law says that the cost of the discount may be claimed as a tax credit, it means
that the amount—when claimed—shall be treated as a reduction from any tax
liability, plain and simple.—To stress, the effect of a sales discount on the income
statement and income tax return of an establishment covered by RA 7432 is
different from that resulting from the availment or use of its tax credit benefit.
While the former is a deduction before, the latter is a deduction after, the income
tax is computed. As mentioned earlier, a discount is not necessarily a sales
discount, and a tax credit for a simple discount privilege should not be
automatically treated like a sales discount. Ubi lex non distinguit, nec nos
distinguere debemus. Where the law does not distinguish, we ought not to
distinguish. Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax
credit as the 20 percent discount deductible from gross income for income
tax purposes, or from gross sales for VAT or other percentage tax purposes. In
effect, the tax credit benefit under RA 7432 is related to a sales discount. This
contrived definition is improper, considering that the latter has to be deducted
from gross sales in order to compute the gross income in the income statement and
cannot be deducted again, even for purposes of computing the income tax. When
the law says that the cost of the discount may be claimed as a tax credit, it means
that the amount—when claimed—shall be treated as a reduction from any tax
liability, plain and simple. The option to avail of the tax credit benefit depends upon
the existence of a tax liability, but to limit the benefit to a sales discount—which is
not even identical to the discount privilege that is
419
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Commissioner of Internal Revenue vs. Central
Luzon Drug Corporation
granted by law—does not define it at all and serves no useful purpose. The
definition must, therefore, be stricken down.
Same; Same; Same; Administrative Law; A law cannot be amended by a mere
regulation.—The law cannot be amended by a mere regulation. In fact, a regulation
that “operates to create a rule out of harmony with the statute is a mere nullity”;
it cannot prevail. It is a cardinal rule that courts “will and should respect the
contemporaneous construction placed upon a statute by the executive officers
whose duty it is to enforce it x x x.” In the scheme of judicial tax administration,
the need for certainty and predictability in the implementation of tax laws is
crucial. Our tax authorities fill in the details that “Congress may not have the
opportunity or competence to provide.” The regulations these authorities issue are
relied upon by taxpayers, who are certain that these will be followed by the courts.
Courts, however, will not uphold these authorities’ interpretations when clearly
absurd, erroneous or improper.
Same; Same; Same; Same; The administrative agency issuing regulations
may not enlarge, alter or restrict the provisions of the law it administers—it cannot
engraft additional requirements not contemplated by the legislature.—In the
present case, the tax authorities have given the term tax credit in Sections 2.i and
4 of RR 2-94 a meaning utterly in contrast to what RA 7432 provides. Their
interpretation has muddled up the intent of Congress in granting a mere discount
privilege, not a sales discount. The administrative agency issuing these regulations
may not enlarge, alter or restrict the provisions of the law it administers; it cannot
engraft additional requirements not contemplated by the legislature. In case of
conflict, the law must prevail. A “regulation adopted pursuant to law is law.”
Conversely, a regulation or any portion thereof not adopted pursuant to law is no
law and has neither the force nor the effect of law.
Same; Same; Same; Statutory Construction; The word “may” in §4.a of R.A.
7432 implies that availability of the tax credit benefit is neither unrestricted nor
mandatory—what it means is that the tax credit benefit is merely permissive, not
imperative.—The word may in the text of the statute implies that the availability
of the tax credit benefit is neither unrestricted nor mandatory. There is no absolute
right conferred upon respondent, or any similar taxpayer, to avail itself of the tax
credit remedy whenever it chooses; “neither does it
420
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ANNOTATED
Commissioner of Internal Revenue vs. Central
Luzon Drug Corporation
impose a duty on the part of the government to sit back and allow an
important facet of tax collection to be at the sole control and discretion of the
taxpayer.” For the tax authorities to compel respondent to deduct the 20 percent
discount from either its gross income or its gross sales is, therefore, not only to
make an imposition without basis in law, but also to blatantly contravene the law
itself. What Section 4.a of RA 7432 means is that the tax credit benefit is merely
permissive, not imperative. Respondent is given two options—either to claim or not
to claim the cost of the discounts as a tax credit. In fact, it may even ignore the
credit and simply consider the gesture as an act of beneficence, an expression of its
social conscience.
Same; Same; Same; It is the existence or the lack of a tax liability that
determines whether the cost of the discounts can be used as a tax credit—R.A. 7432
does not give the establishment the unfettered right to avail itself of the credit
whenever it pleases.—It is the existence or the lack of a tax liability that determines
whether the cost of the discounts can be used as a tax credit. RA 7432 does not give
respondent the unfettered right to avail itself of the credit whenever it pleases.
Neither does it allow our tax administrators to expand or contract the legislative
mandate. “The ‘plain meaning rule’ or verba legis in statutory construction is thus
applicable x x x. Where the words of a statute are clear, plain and free from
ambiguity, it must be given its literal meaning and applied without attempted
interpretation.”
Same; Same; Same; Eminent Domain; Just Compensation; The tax credit
benefit granted to the establishments can be deemed as their just compensation for
private property taken by the State for public use.—Sections 2.i and 4 of RR 2-94
deny the exercise by the State of its power of eminent domain. Be it stressed that
the privilege enjoyed by senior citizens does not come directly from the State, but
rather from the private establishments concerned. Accordingly, the tax
credit benefit granted to these establishments can be deemed as their just
compensation for private property taken by the State for public use.
Same; Same; Same; Same; Same; The discount privilege to which our senior
citizens are entitled is actually a benefit enjoyed by the general public to which these
citizens belong; As a result of the 20 percent discount imposed by R.A. 7432, an
establishment becomes entitled to a just compensation, and this term refers not only
to the
421
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Commissioner of Internal Revenue vs. Central
Luzon Drug Corporation
issuance of a tax credit certificate indicating the correct amount of the
discounts given, but also to the promptness in its release.—The concept of public
use is no longer confined to the traditional notion of use by the public, but held
synonymous with public interest, public benefit, public welfare, and public
convenience. The discount privilege to which our senior citizens are entitled is
actually a benefit enjoyed by the general public to which these citizens belong. The
discounts given would have entered the coffers and formed part of the gross sales of
the private establishments concerned, were it not for RA 7432. The permanent
reduction in their total revenues is a forced subsidy corresponding to the taking of
private property for public use or benefit. As a result of the 20 percent discount
imposed by RA 7432, respondent becomes entitled to a just compensation. This
term refers not only to the issuance of a tax credit certificate indicating the correct
amount of the discounts given, but also to the promptness in its release. Equivalent
to the payment of property taken by the State, such issuance—when not done
within a reasonable time from the grant of the discounts—cannot be considered
as just compensation. In effect, respondent is made to suffer the consequences of
being immediately deprived of its revenues while awaiting actual receipt, through
the certificate, of the equivalent amount it needs to cope with the reduction in its
revenues.
Same; Same; Same; Same; Same; The taxation power can also be used as an
implement for the exercise of the power of eminent domain.—The taxation power
can also be used as an implement for the exercise of the power of eminent domain.
Tax measures are but “enforced contributions exacted on pain of penal sanctions”
and “clearly imposed for a public purpose.” In recent years, the power to tax has
indeed become a most effective tool to realize social justice, public welfare, and the
equitable distribution of wealth.
Same; Same; Same; Same; Same; Social Justice; The social justice
consecrated in our Constitution is not intended to take away rights from a person
and give them to another who is not entitled thereto—for this reason, a just
compensation for income that is taken away from an establishment becomes
necessary.—While it is a declared commitment under Section 1 of RA 7432, social
justice “cannot be invoked to trample on the rights of property owners who under
our Constitution and laws are also entitled to protection. The social justice
consecrated in our [C]onstitution [is] not intended to
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ANNOTATED
Commissioner of Internal Revenue vs. Central
Luzon Drug Corporation
take away rights from a person and give them to another who is not entitled
thereto.” For this reason, a just compensation for income that is taken away from
respondent becomes necessary. It is in the tax credit that our legislators find
support to realize social justice, and no administrative body can alter that fact.
Same; Same; Same; Statutory Construction; The deliberations of the
Bicameral Conference Committee which finalized RA 7432 disclose the true intent
of the legislators to treat the sales discount as a tax credit, rather than as a deduction
from gross income.—Congress has allowed all private establishments a simple tax
credit, not a deduction. In fact, no cash outlay is required from the government for
the availment or use of such credit. The deliberations on February 5, 1992 of the
Bicameral Conference Committee Meeting on Social Justice, which finalized RA
7432, disclose the true intent of our legislators to treat the sales discounts as a tax
credit, rather than as a deduction from gross income.
Same; Same; Same; Same; It is a canon of statutory construction that a later
statute, general in its terms and not expressly repealing a prior special statute, will
ordinarily not affect the special provisions of such earlier statute—R.A. 7432 is an
earlier law not expressly repealed by, and therefore remains an exception to, the Tax
Code, a later law.—RA 7432 is a special law that should prevail over the Tax Code—
a general law. “x x x [T]he rule is that on a specific matter the special law shall
prevail over the general law, which shall be resorted to only to supply deficiencies
in the former.” In addition, “[w]here there are two statutes, the earlier special and
the later general—the terms of the general broad enough to include the matter
provided for in the special—the fact that one is special and the other is general
creates a presumption that the special is to be considered as remaining an
exception to the general, one as a general law of the land, the other as the law of a
particular case.” “It is a canon of statutory construction that a later statute, general
in its terms and not expressly repealing a prior special statute, will ordinarily not
affect the special provisions of such earlier statute.” RA 7432 is an earlier law not
expressly repealed by, and therefore remains an exception to, the Tax Code—a later
law. When the former states that a tax credit may be claimed, then the requirement
of prior tax payments under certain provisions of the latter, as discussed above,
cannot be made to apply. Neither can the instances of or references to a tax
deduction under the Tax Code be made to restrict RA 7432. No provision of any
revenue regulation can supplant or modify the acts of Congress.
PETITION for review on certiorari of the decision and resolution of the Court
of Appeals.
The facts are stated in the opinion of the Court.
Joy Ann Marie G. Nolasco for respondent.
PANGANIBAN, J.:
The 20 percent discount required by the law to be given to senior citizens is
a tax credit, not merely a tax deduction from the gross income or gross sale of
the establishment concerned. A tax credit is used by a private establishment
only after the tax has been computed; a tax deduction, before the tax is
computed. RA 7432 unconditionally grants a tax credit to all covered entities.
Thus, the provisions of the revenue regulation that withdraw or modify such
grant are void. Basic is the rule that administrative regulations cannot amend
or revoke the law.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking
to set aside the August 29, 2002 Decision2 and the August 11, 2003
Resolution3 of the Court of Appeals (CA) in CA-GR SP No. 67439. The assailed
Decision reads as follows:
“WHEREFORE, premises considered, the Resolution appealed from is
AFFIRMED in toto. No costs.”4
The assailed Resolution denied petitioner’s Motion for Reconsideration.
The Facts
The CA narrated the antecedent facts as follows:
“Respondent is a domestic corporation primarily engaged in retailing of medicines
and other pharmaceutical products. In 1996, it operated six (6) drugstores under
the business name and style ‘Mercury Drug.’
“From January to December 1996, respondent granted twenty (20%) percent
sales discount to qualified senior citizens on their purchases of medicines pursuant
to Republic Act No. [R.A.] 7432 and its Implementing Rules and Regulations. For
the said period, the amount allegedly representing the 20% sales discount granted
by respondent to qualified senior citizens totaled P904,769.00.
“On April 15, 1997, respondent filed its Annual Income Tax Return for taxable
year 1996 declaring therein that it incurred net losses from its operations.
“On January 16, 1998, respondent filed with petitioner a claim for tax
refund/credit in the amount of P904,769.00 allegedly arising from the 20% sales
discount granted by respondent to qualified senior citizens in compliance with
[R.A.] 7432. Unable to obtain affirmative response from petitioner, respondent
elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a Petition
for Review.
“On February 12, 2001, the Tax Court rendered a Decision5 dismissing
respondent’s Petition for lack of merit. In said decision, the [CTA] justified its
ruling with the following ratiocination:
‘x x x, if no tax has been paid to the government, erroneously or illegally, or if no
amount is due and collectible from the taxpayer, tax refund or tax credit is
unavailing. Moreover, whether the recovery of the tax is made by means of a claim
for refund or tax credit, before recovery is allowed[,] it must be first established
that there was an actual collection and receipt by the government of the tax sought
to be recovered. x x x.
‘x x x xxx xxx
‘Prescinding from the above, it could logically be deduced that tax credit is
premised on the existence of tax liability on the part of taxpayer. In other words, if
there is no tax liability, tax credit is not available.’
“Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed
resolution,6 granted respondent’s motion for reconsideration and ordered herein
petitioner to issue a Tax Credit Certificate in favor of respondent citing the decision
of the then Special Fourth Division of [the CA] in CA G.R. SP No. 60057 entitled
‘Central [Luzon] Drug Corporation vs. Commissioner of Internal Revenue’
promulgated on May 31, 2001, to wit:
‘However, Sec. 229 clearly does not apply in the instant case because the tax sought
to be refunded or credited by petitioner was not erroneously paid or illegally
collected. We take exception to the CTA’s sweeping but unfounded statement that
‘both tax refund and tax credit are modes of recovering taxes which are either
erroneously or illegally paid to the government.’ Tax refunds or credits do not
exclusively pertain to illegally collected or erroneously paid taxes as they may be
other circumstances where a refund is warranted. The tax refund provided under
Section 229 deals exclusively with illegally collected or erroneously paid taxes but
there are other possible situations, such as the refund of excess estimated corporate
quarterly income tax paid, or that of excess input tax paid by a VAT-registered
person, or that of excise tax paid on goods locally produced or manufactured but
actually exported. The standards and mechanics for the grant of a refund or credit
under these situations are different from that under Sec. 229. Sec. 4(a) of R.A. 7432,
is yet another instance of a tax credit and it does not in any way refer to illegally
collected or erroneously paid taxes, x x x.’ ” 7
Ruling of the Court of Appeals
The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA)
ordering petitioner to issue a tax credit certificate in favor of respondent in the
reduced amount of P903,038.39. It reasoned that Republic Act No. (RA) 7432
required neither a tax liability nor a payment of taxes by private
establishments prior to the availment of a tax credit. Moreover, such credit is
not tantamount to an unintended benefit from the law, but rather a just
compensation for the taking of private property for public use.
Hence this Petition.8
The Issues
Petitioner raises the following issues for our consideration:
“Whether the Court of Appeals erred in holding that respondent may claim the 20%
sales discount as a tax credit instead of as a deduction from gross income or gross
sales.
“Whether the Court of Appeals erred in holding that respondent is entitled to a
refund.”9
These two issues may be summed up in only one: whether respondent, despite
incurring a net loss, may still claim the 20 percent sales discount as a tax
credit.
The Court’s Ruling
The Petition is not meritorious.
Sole Issue:
Claim of 20 Percent Sales Discount
as Tax Credit Despite Net Loss
Section 4(a) of RA 743210 grants to senior citizens the privilege of obtaining a
20 percent discount on their purchase of medicine from any private
establishment in the country.11 The latter may then claim the cost of the
discount as a tax credit.12 But can such credit be claimed, even though an
establishment operates at a loss?
We answer in the affirmative.
Tax Credit versus
Tax Deduction
Although the term is not specifically defined in our Tax Code, 13 tax
credit generally refers to an amount that is “subtracted directly from one’s total
tax liability.”14 It is an “allowance against the tax itself”15 or “a deduction from
what is owed”16 by a taxpayer to the government. Examples of tax credits are
withheld taxes, payments of estimated tax, and investment tax credits.17
Tax credit should be understood in relation to other tax concepts. One of
these is tax deduction—defined as a subtraction “from income for tax
purposes,”18 or an amount that is “allowed by law to reduce income prior to
[the] application of the tax rate to compute the amount of tax which is
due.”19 An example of a tax deduction is any of the allowable deductions
enumerated in Section 3420 of the Tax Code.
A tax credit differs from a tax deduction. On the one hand, a tax
credit reduces the tax due, including—whenever applicable—the income
tax that is determined after applying the corresponding tax rates to taxable
income.21 A tax deduction,
on the other, reduces the income that is subject to tax22 in order to arrive
at taxable income.23 To think of the former as the latter is to avoid, if not
entirely confuse, the issue. A tax credit is used only after the tax has been
computed; a tax deduction, before.
Tax Liability Required
for Tax Credit
Since a tax credit is used to reduce directly the tax that is due, there ought to
be a tax liability before the tax credit can be applied. Without that liability,
any tax credit application will be useless. There will be no reason for deducting
the latter when there is, to begin with, no existing obligation to the
government. However, as will be presented shortly, the existence of a tax credit
or its grant by law is not the same as the availment or use of such credit. While
the grant is mandatory, the availment or use is not.
If a net loss is reported by, and no other taxes are currently due from, a
business establishment, there will obviously be no tax liability against which
any tax credit can be applied.24 For the establishment to choose the immediate
availment of a tax credit will be premature and impracticable. Nevertheless,
the irrefutable fact remains that, under RA 7432, Congress has granted
without conditions a tax credit benefit to all covered establishments.
Although this tax credit benefit is available, it need not be used by losing
ventures, since there is no tax liability that calls for its application. Neither
can it be reduced to nil by the quick yet callow stroke of an administrative pen,
simply be-
cause no reduction of taxes can instantly be effected. By its nature, the tax
credit may still be deducted from a future, not a present, tax liability, without
which it does not have any use. In the meantime, it need not move. But it
breathes.
Prior Tax Payments Not
Required for Tax Credit
While a tax liability is essential to the availment or use of any tax credit, prior
tax payments are not. On the contrary, for the existence or grant solely of such
credit, neither a tax liability nor a prior tax payment is needed. The Tax Code
is in fact replete with provisions granting or allowing tax credits, even though
no taxes have been previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax
credit—subject to certain limitations—for estate taxes paid to a foreign
country. Also found in Section 101(C) is a similar provision for donor’s taxes—
again when paid to a foreign country—in computing for the donor’s tax due.
The tax credits in both instances allude to the prior payment of taxes, even if
not made to our government.
Under Section 110, a VAT (Value-Added Tax)-registered person engaging
in transactions—whether or not subject to the VAT—is also allowed a tax
credit that includes a ratable portion of any input tax not directly attributable
to either activity. This input tax may either be the VAT on the purchase or
importation of goods or services that is merely due from—not necessarily paid
by—such VAT-registered person in the course of trade or business; or the
transitional input tax determined in accordance with Section 111(A). The
latter type may in fact be an amount equivalent to only eight percent of the
value of a VAT-registered person’s beginning inventory of goods, materials and
supplies, when such amount—as computed—is higher than the actual VAT
paid on the said items.25 Clearly from this provision, the tax credit refers to an
input tax that is either due only or given a value by mere comparison with the
VAT actually paid—then later prorated. No tax is actually paid prior to the
availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is merely
presumptive is allowed. For the purchase of primary agricultural products
used as inputs—either in the processing of sardines, mackerel and milk, or in
the manufacture of refined sugar and cooking oil—and for the contract price of
public work contracts entered into with the government, again, no prior tax
payments are needed for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or
effectively zero-rated may, under Section 112(A), apply for the issuance of a tax
credit certificate for the amount of creditable input taxes merely due—again
not necessarily paid to—the government and attributable to such sales, to the
extent that the input taxes have not been applied against output
taxes.26 Where a taxpayer is engaged in zero-rated or effectively zero-rated
sales and also in taxable or exempt sales, the amount of creditable input taxes
due that are not directly and entirely attributable to any one of these
transactions shall be proportionately allocated on the basis of the volume of
sales. Indeed, in availing of such tax credit for VAT purposes, this provision—
as well as the one earlier mentioned—shows that the prior payment of taxes is
not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another
illustration of a tax credit allowed, even though no prior tax payments are not
required. Specifically, in this provision, the imposition of a final withholding
tax rate on cash and/or property dividends received by a nonresident foreign
corporation from a domestic corporation is subjected to the condition that a
foreign tax credit will be given by the domiciliary country in an amount
equivalent to taxes that are merely deemed paid.27 Although true, this
provision actually refers to the tax credit as a condition only for the imposition
of a lower tax rate, not as a deduction from the corresponding tax liability.
Besides, it is not our government but the domiciliary country that credits
against the income tax payable to the latter by the foreign corporation, the tax
to be foregone or spared.28
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically
allows as credits, against the income tax imposable under Title II, the amount
of income taxes merely incurred—not necessarily paid—by a domestic
corporation during a taxable year in any foreign country. Moreover, Section
34(C)(5) provides that for such taxes incurred but not paid, a tax credit may be
allowed, subject to the condition precedent that the taxpayer shall simply give
a bond with sureties satisfactory to and approved by petitioner, in such sum as
may be required; and further conditioned upon payment by the taxpayer of any
tax found due, upon petitioner’s redetermination of it.
In addition to the above-cited provisions in the Tax Code, there are also tax
treaties and special laws that grant or allow tax credits, even though no prior
tax payments have been made.
Under the treaties in which the tax credit method is used as a relief to avoid
double taxation, income that is taxed in the state of source is also taxable in
the state of residence, but the tax paid in the former is merely allowed as a
credit against the tax levied in the latter.29 Apparently, payment is made to
the state of source, not the state of residence. No tax, therefore, has
been previously paid to the latter.
Under special laws that particularly affect businesses, there can also be tax
credit incentives. To illustrate, the incentives provided for in Article 48 of
Presidential Decree No. (PD) 1789, as amended by Batas Pambansa Blg. (BP)
391, include tax credits equivalent to either five percent of the net value
earned, or five or ten percent of the net local content of exports.30 In order to
avail of such credits under the said law and still achieve its objectives, no prior
tax payments are necessary.
From all the foregoing instances, it is evident that prior tax payments are
not indispensable to the availment of a tax credit. Thus, the CA correctly held
that the availment under RA 7432 did not require prior tax payments by
private establishments concerned.31 However, we do not agree with its
finding32 that the carry-over of tax credits under the said special law to
succeeding taxable periods, and even their application against internal
revenue taxes, did not necessitate the existence of a tax liability.
The examples above show that a tax liability is certainly important in
the availment or use, not the existence or grant, of a tax credit. Regarding this
matter, a private establishment reporting a net loss in its financial statements
is no different from another that presents a net income. Both are entitled to the
tax credit provided for under RA 7432, since the law itself accords that
unconditional benefit. However, for the losing establishment to immediately
apply such credit, where no tax is due, will be an improvident usance.
Sections 2.i and 4 of Revenue
Regulations No. 2-94 Erroneous
RA 7432 specifically allows private establishments to claim as tax credit the
amount of discounts they grant.33 In turn, the Implementing Rules and
Regulations, issued pursuant thereto, provide the procedures for its
availment.34 To deny such credit, despite the plain mandate of the law and the
regulations carrying out that mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as
the amount representing the 20 percent discount that “shall be deducted by
the said establishments from their gross income for income tax purposes and
from their gross sales for value-added tax or other percentage tax
purposes.”35 In ordinary business language, the tax credit represents the
amount of such discount. However, the manner by which the discount shall be
credited against taxes has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an “abatement or reduction made
from the gross amount or value of anything.” 36 To be more precise, it is in
business parlance “a deduction or lowering of an amount of money”;37 or “a
reduction from the full amount or value of something, especially a price.”38 In
business there are many kinds of discount, the most common
of which is that affecting the income statement39 or financial report upon which
the income tax is based.
Business Discounts
Deducted from Gross Sales
A cash discount, for example, is one granted by business establishments
to credit customers for their prompt payment.40 It is a “reduction in price
offered to the purchaser if payment is made within a shorter period of time
than the maximum time specified.”41 Also referred to as a sales discount on the
part of the seller and a purchase discount on the part of the buyer, it may be
expressed in such terms as “5/10, n/30.”42
A quantity discount, however, is a “reduction in price allowed for purchases
made in large quantities, justified by savings in packaging, shipping, and
handling.”43 It is also called a volume or bulk discount.44
A “percentage reduction from the list price x x x allowed by manufacturers
to wholesalers and by wholesalers to retail-
ers”45 is known as a trade discount. No entry for it need be made in the manual
or computerized books of accounts, since the purchase or sale is already valued
at the net price actually charged the buyer.46 The purpose for the discount is
to encourage trading or increase sales, and the prices at which the purchased
goods may be resold are also suggested.47 Even a chain discount—a series of
discounts from one list price—is recorded at net.48
Finally, akin to a trade discount is a functional discount. It is “a supplier’s
price discount given to a purchaser based on the [latter’s] role in the [former’s]
distribution system.”49 This role usually involves warehousing or advertising.
 Based on this discussion, we find that the nature of a sales discount is
peculiar. Applying generally accepted accounting principles (GAAP) in the
country, this type of discount is reflected in the income statement50 as a line
item deducted—along with returns, allowances, rebates and other similar
expenses—from gross sales to arrive at net sales.51 This type of
presentation is resorted to, because the accounts receivable and sales figures
that arise from sales discounts,—as well as from quantity, volume or bulk
discounts—are recorded in the manual and computerized books of
accounts and reflected in the financial statements at the gross amounts of the
invoices.52 This manner of recording credit sales—known as the gross
method—is most widely used, because it is simple, more convenient to apply
than the net method, and produces no material errors over time.53
However, under the net method used in recording trade, chain or functional
discounts, only the net amounts of the invoices—after the discounts have been
deducted—are recorded in the books of accounts54 and reflected in the financial
statements. A separate line item cannot be shown,55 because the transactions
themselves involving both accounts receivable and sales have already been
entered into, net of the said discounts.
The term sales discounts is not expressly defined in the Tax Code, but one
provision adverts to amounts whose sum—along with sales returns,
allowances and cost of goods sold56—is deducted from gross sales to come up
with the gross income,
profit or margin57 derived from business.58 In another provision therein, sales
discounts that are granted and indicated in the invoices at the time of sale—
and that do not depend upon the happening of any future event—may be
excluded from the gross sales within the same quarter they were
given.59 While determinative only of the VAT, the latter provision also appears
as a suitable reference point for income tax purposes already embraced in the
former. After all, these two provisions affirm that sales discounts are amounts
that are always deductible from gross sales.
Reason for the Senior Citizen Discount:
The Law, Not Prompt Payment
A distinguishing feature of the implementing rules of RA 7432 is the private
establishment’s outright deduction of the discount from the invoice price of the
medicine sold to the senior citizen.60 It is, therefore, expected that for each
retail sale made under this law, the discount period lasts no more than a day,
because such discount is given—and the net amount thereof collected—
immediately upon perfection of the
sale.61 Although prompt payment is made for an arm’s-length transaction by
the senior citizen, the real and compelling reason for the private establishment
giving the discount is that the law itself makes it mandatory.
What RA 7432 grants the senior citizen is a mere discount privilege, not
a sales discount or any of the above discounts in particular. Prompt payment
is not the reason for (although a necessary consequence of) such grant. To be
sure, the privilege enjoyed by the senior citizen must be equivalent to the tax
credit benefit enjoyed by the private establishment granting the discount. Yet,
under the revenue regulations promulgated by our tax authorities, this benefit
has been erroneously likened and confined to a sales discount.
To a senior citizen, the monetary effect of the privilege may be the same as
that resulting from a sales discount. However, to a private establishment, the
effect is different from a simple reduction in price that results from such
discount. In other words, the tax credit benefit is not the same as a sales
discount. To repeat from our earlier discourse, this benefit cannot and should
not be treated as a tax deduction.
To stress, the effect of a sales discount on the income statement and income
tax return of an establishment covered by RA 7432 is different from that
resulting from the availment or use of its tax credit benefit. While the former
is a deduction before, the latter is a deduction after, the income tax is
computed. As mentioned earlier, a discount is not necessarily a sales discount,
and a tax credit for a simple discount privilege should not be automatically
treated like a sales
discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law
does not distinguish, we ought not to distinguish.
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as
the 20 percent discount deductible from gross income for income tax purposes,
or from gross sales for VAT or other percentage tax purposes. In effect, the tax
credit benefit under RA 7432 is related to a sales discount. This contrived
definition is improper, considering that the latter has to be deducted from gross
sales in order to compute the gross income in the income statement and cannot
be deducted again, even for purposes of computing the income tax.
When the law says that the cost of the discount may be claimed as a tax
credit, it means that the amount—when claimed—shall be treated as a
reduction from any tax liability, plain and simple. The option to avail of the tax
credit benefit depends upon the existence of a tax liability, but to limit the
benefit to a sales discount—which is not even identical to the discount privilege
that is granted by law—does not define it at all and serves no useful purpose.
The definition must, therefore, be stricken down.
Laws Not Amended
by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a regulation
that “operates to create a rule out of harmony with the statute is a mere
nullity”;62 it cannot prevail.
It is a cardinal rule that courts “will and should respect the
contemporaneous construction placed upon a statute by the executive officers
whose duty it is to enforce it x x x.” 63 In the scheme of judicial tax
administration, the need for certainty and predictability in the implementation
of tax laws is crucial.64 Our tax authorities fill in the details that “Congress
may not have the opportunity or competence to provide.” 65 The regulations
these authorities issue are relied upon by taxpayers, who are certain that these
will be followed by the courts.66 Courts, however, will not uphold these
authorities’ interpretations when clearly absurd, erroneous or improper.
In the present case, the tax authorities have given the term tax credit in
Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432
provides. Their interpretation has muddled up the intent of Congress in
granting a mere discount privilege, not a sales discount. The administrative
agency issuing these regulations may not enlarge, alter or restrict the
provisions of the law it administers; it cannot engraft additional requirements
not contemplated by the legislature.67
In case of conflict, the law must prevail.68 A “regulation adopted pursuant
to law is law.”69 Conversely, a regulation or
any portion thereof not adopted pursuant to law is no law and has neither the
force nor the effect of law.70
Availment of Tax
Credit Voluntary
Third, the word may in the text of the statute71 implies that the availability of
the tax credit benefit is neither unrestricted nor mandatory.72 There is no
absolute right conferred upon respondent, or any similar taxpayer, to avail
itself of the tax credit remedy whenever it chooses; “neither does it impose a
duty on the part of the government to sit back and allow an important facet of
tax collection to be at the sole control and discretion of the taxpayer.” 73 For the
tax authorities to compel respondent to deduct the 20 percent discount from
either its gross income or its gross sales74 is, therefore, not only to make an
imposition without basis in law, but also to blatantly contravene the law itself.
What Section 4.a of RA 7432 means is that the tax credit benefit is merely
permissive, not imperative. Respondent is given two options—either to claim
or not to claim the cost of the discounts as a tax credit. In fact, it may even
ignore the credit and simply consider the gesture as an act of beneficence, an
expression of its social conscience.
Granting that there is a tax liability and respondent claims such cost as
a tax credit, then the tax credit can easily be applied. If there is none, the credit
cannot be used and will just have to be carried over and
revalidated75 accordingly. If, however, the business continues to operate at a
loss and no other taxes are due, thus compelling it to close shop, the credit can
never be applied and will be lost altogether.
In other words, it is the existence or the lack of a tax liability that
determines whether the cost of the discounts can be used as a tax credit. RA
7432 does not give respondent the unfettered right to avail itself of the credit
whenever it pleases. Neither does it allow our tax administrators to expand or
contract the legislative mandate. “The ‘plain meaning rule’ or verba legis in
statutory construction is thus applicable x x x. Where the words of a statute
are clear, plain and free from ambiguity, it must be given its literal meaning
and applied without attempted interpretation.” 76
Tax Credit Benefit
Deemed Just Compensation
Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power
of eminent domain. Be it stressed that the privilege enjoyed by senior citizens
does not come directly from the State, but rather from the private
establishments concerned. Accordingly, the tax credit benefit granted to these
establishments can be deemed as their just compensation for private property
taken by the State for public use.77
The concept of public use is no longer confined to the traditional notion
of use by the public, but held synonymous with public interest, public
benefit, public welfare, and public convenience.78 The discount privilege to
which our senior citizens are entitled is actually a benefit enjoyed by the
general public to which these citizens belong. The discounts given would have
entered the coffers and formed part of the gross sales of the private
establishments concerned, were it not for RA 7432. The permanent reduction
in their total revenues is a forced subsidy corresponding to the taking of private
property for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432, respondent
becomes entitled to a just compensation. This term refers not only to the
issuance of a tax credit certificate indicating the correct amount of the
discounts given, but also to the promptness in its release. Equivalent to the
payment of property taken by the State, such issuance—when not done within
a reasonable time from the grant of the discounts—cannot be considered as just
compensation. In effect, respondent is made to suffer the consequences of being
immediately deprived of its revenues while awaiting actual receipt, through
the certificate, of the equivalent amount it needs to cope with the reduction in
its revenues.79
Besides, the taxation power can also be used as an implement for the
exercise of the power of eminent domain.80 Tax measures are but “enforced
contributions exacted on pain of penal sanctions” 81 and “clearly imposed for
a public purpose.”82 In recent years, the power to tax has indeed become a most
effective tool to realize social justice, public welfare, and the equitable
distribution of wealth.83
While it is a declared commitment under Section 1 of RA 7432, social justice
“cannot be invoked to trample on the rights of property owners who under our
Constitution and laws are also entitled to protection. The social justice
consecrated in our [C]onstitution [is] not intended to take away rights from a
person and give them to another who is not entitled thereto.” 84 For this reason,
a just compensation for income that is taken away from respondent becomes
necessary. It is in the tax credit that our legislators find support to realize
social justice, and no administrative body can alter that fact.
To put it differently, a private establishment that merely breaks even85—
without the discounts yet—will surely start to incur losses because of such
discounts. The same effect is expected if its mark-up is less than 20 percent,
and if all its sales come from retail purchases by senior citizens. Aside
from the observation we have already raised earlier, it will also be grossly
unfair to an establishment if the discounts will be treated merely as deductions
from either its gross income or its gross sales. Operating at a loss through no
fault of its own, it will realize that the tax credit limitation under RR 2-94 is
inutile, if not improper. Worse, profit-generating businesses will be put in a
better position if they avail themselves of tax credits denied those that are
losing, because no taxes are due from the latter.
Grant of Tax Credit
Intended by the Legislature
Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are
assisted by the community as a whole and to establish a program beneficial to
them.86 These objectives are consonant with the constitutional policy of
making “health x x x services available to all the people at affordable
cost”87 and of giving “priority for the needs of the x x x elderly.” 88 Sections 2.i
and 4 of RR 2-94, however, contradict these constitutional policies and
statutory objectives.
Furthermore, Congress has allowed all private establishments a simple tax
credit, not a deduction. In fact, no cash outlay is required from the government
for the availment or use of such credit. The deliberations on February 5, 1992
of the Bicameral Conference Committee Meeting on Social Justice, which
finalized RA 7432, disclose the true intent of our legislators to treat the sales
discounts as a tax credit, rather than as a deduction from gross income. We
quote from those deliberations as follows:
“THE CHAIRMAN. (Rep. Unico). By the way, before that ano, about deductions
from taxable income. I think we incorporated there a provision na—on the
responsibility of the private hospitals and drugstores, hindi ba?
SEN. ANGARA. Oo.
THE CHAIRMAN. (Rep. Unico). So, I think we have to put in also a provision
here about the deductions from taxable income of that private hospitals, di
ba ganon ‘yan?
MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting
government and public institutions, so, puwede na po nating hindi isama
yung mga less deductions ng taxable income.
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals.
Yung isiningit natin?
MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the
microphone).
SEN. ANGARA. Hindi pa, hindi pa.
THE CHAIRMAN. (Rep. Unico). Ah, ‘di pa ba naisama natin?
SEN. ANGARA. Oo. You want to insert that?
THE CHAIRMAN. (Rep. Unico). Yung ang proposal ni Senator Shahani, e.
SEN. ANGARA. In the case of private hospitals they got the grant of 15%
discount, provided that, the private hospitals can claim the expense as a tax
credit.
REP. AQUINO. Yah could be allowed as deductions in the perpetrations of
(inaudible) income.
SEN. ANGARA. I-tax credit na lang natin para walang cashout ano?
REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng
establishments na covered.
THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.
REP. AQUINO. Ano ba yung establishments na covered?
448
448 SUPREME COURT REPORTS ANNOTATED
Commissioner of Internal Revenue vs. Central Luzon
Drug Corporation
SEN. ANGARA. Restaurant lodging houses, recreation centers.
REP. AQUINO. All establishments covered siguro?
SEN. ANGARA. From all establishments. Alisin na natin ‘Yung kuwan kung
ganon. Can we go back to Section 4 ha?
REP. AQUINO. Oho.
SEN. ANGARA. Letter A. To capture that thought, we’ll say the grant of 20%
discount from all establishments et cetera, et cetera, provided that said
establishments—provided that private establishments may claim the cost
as a tax credit. Ganon ba ‘yon?
REP. AQUINO. Yah.
SEN. ANGARA. Dahil kung government, they don’t need to claim it.
THE CHAIRMAN. (Rep. Unico). Tax credit.
SEN. ANGARA. As a tax credit [rather] than a kuwan—deduction, Okay.
REP. AQUINO. Okay.
SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A”.89
Special Law
Over General Law
Sixth and last, RA 7432 is a special law that should prevail over the Tax Code—
a general law. “x x x [T]he rule is that on a specific matter the special law shall
prevail over the general law, which shall be resorted to only to supply
deficiencies in the former.”90 In addition, “[w]here there are two statutes, the
earlier special and the later general—the terms of the general broad enough to
include the matter provided for in the special—the fact that one is special and
the other is general creates a presumption that the special is to be considered
as remaining an exception to the general,91 one as a general law of the land,
the other as the law of a particular case.” 92 “It is a canon of statutory
construction that a later statute, general in its terms and not expressly
repealing a prior special statute, will ordinarily not affect the special
provisions of such earlier statute.”93
RA 7432 is an earlier law not expressly repealed by, and therefore remains
an exception to, the Tax Code—a later law. When the former states that a tax
credit may be claimed, then the requirement of prior tax payments under
certain provisions of the latter, as discussed above, cannot be made to apply.
Neither can the instances of or references to a tax deduction under the Tax
Code94 be made to restrict RA 7432. No provision of any revenue regulation
can supplant or modify the acts of Congress.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision and
Resolution of the Court of Appeals AFFIRMED. No pronouncement as to costs.