Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 103092 July 21, 1994

BANK OF AMERICA NT & SA, petitioner,

vs.
HONORABLE COURT OF APPEALS, AND THE COMMISSIONER OF INTERNAL
REVENUE, respondents.

G.R. No. 103106 July 21, 1994

BANK OF AMERICA NT & SA, petitioner,

vs.
THE HONORABLE COURT OF APPEALS AND THE COMMISSIONER OF INTERNAL
REVENUE, respondents.

Sycip, Salazar, Hernandez & Gatmaitan and Agcaoili & Associates for petitioner.

VITUG, J.:

Section 24(b) (2) (ii) of the National Internal Revenue Code, in the language it was worded in 1982
(the taxable period relevant to the case at bench), provided, in part, thusly:

Sec. 24. Rates of tax on corporations. . . .

(b) Tax on foreign corporations. . . .

(2) (ii) Tax on branch profit and remittances. —

Any profit remitted abroad by a branch to its head office shall be subject to a tax of
fifteen per cent (15%) . . . ."

Petitioner Bank of America NT & SA argues that the 15% branch profit remittance tax on the basis of
the above provision should be assessed on the amount actually remitted abroad, which is to say that
the 15% profit remittance tax itself should not form part of the tax base. Respondent Commissioner
of Internal Revenue, contending otherwise, holds the position that, in computing the 15% remittance
tax, the tax should be inclusive of the sum deemed remitted.

The statement of facts made by the Court of Tax Appeals, later adopted by the Court of Appeals,
and not in any serious dispute by the parties, can be quoted thusly:
 Petitioner is a foreign corporation duly licensed to engage in business in the
Philippines with Philippine branch office at BA Lepanto Bldg., Paseo de Roxas,
Makati, Metro Manila. On July 20, 1982 it paid 15% branch profit remittance tax in
the amount of P7,538,460.72 on profit from its regular banking unit operations and
P445,790.25 on profit from its foreign currency deposit unit operations or a total of
P7,984,250.97. The tax was based on net profits after income tax without deducting
the amount corresponding to the 15% tax.

Petitioner filed a claim for refund with the Bureau of Internal Revenue of that portion
of the payment which corresponds to the 15% branch profit remittance tax, on the
ground that the tax should have been computed on the basis of profits actually
remitted, which is P45,244,088.85, and not on the amount before profit remittance
tax, which is P53,228,339.82. Subsequently, without awaiting respondent's decision,
petitioner filed a petition for review on June 14, 1984 with this Honorable Court for
the recovery of the amount of P1,041,424.03 computed as follows:

Net Profits After Profit Tax Due Alleged

Income Tax But Remittance Alleged by Overpayment
Before Profit Tax Paid Petitioner Item 1-2
Remittance Tax _________ _________ ___________

A. Regular Banking
Unit Operations
(P50,256,404.82)

1. Computation of BIR
15% x P50,256,404.82 - P7,538,460.72

2. Computation of
Petitioner
- P50,256,404.82 x 15% P6,555,183.24 — P983,277.48
1.15

B. Foreign Currency
Deposit Unit
Operations
(P2,971,935)

1. Computation of BIR
15% x - P2,971,935.00 P445,790.25

2. Computation of
Petitioner
- P2,971,935.00 x 15% P387,643.70 P58,146.55

T O T A L. . P7,984,250.97 P6,942,286.94 P1,041,424.02" 1

The Court of Tax Appeals upheld petitioner bank in its claim for refund. The Commissioner of
Internal Revenue filed a timely appeal to the Supreme Court (docketed G.R. No. 76512) which
referred it to the Court of Appeals following this Court's pronouncement in Development Bank of the
Philippines vs. Court of Appeals, et al. (180 SCRA 609). On 19 September 1990, the Court of
Appeals set aside the decision of the Court of Tax Appeals. Explaining its reversal of the tax court's
decision, the appellate court said:

The Court of Tax Appeals sought to deduce legislative intent vis-a-vis the aforesaid

law through an analysis of the wordings thereof, which to their minds reveal an intent
to mitigate at least the harshness of successive taxation. The use of the
word remitted may well be understood as referring to that part of the said total branch
profits which would be sent to the head office as distinguished from the total profits of
the branch (not all of which need be sent or would be ordered remitted abroad). If the
legislature indeed had wanted to mitigate the harshness of successive taxation, it
would have been simpler to just lower the rates without in effect requiring the
relatively novel and complicated way of computing the tax, as envisioned by the
herein private respondent. The same result would have been achieved. 2

Hence, these petitions for review in G.R. No. 103092 and G.R.
No. 103106 (filed separately due to inadvertence) by the law firms of "Agcaoili and Associates" and
of "Sycip, Salazar, Hernandez and Gatmaitan" in representation of petitioner bank.

We agree with the Court of Appeals that not much reliance can be made on our decision in
Burroughs Limited vs. Commission of Internal Revenue (142 SCRA 324), for there we ruled against
the Commissioner mainly on the basis of what the Court so then perceived as his position in a 21
January 1980 ruling the reversal of which, by his subsequent ruling of 17 March 1982, could not
apply retroactively against Burroughs in conformity with Section 327 (now Section 246, re: non-
retroactivity of rulings) of the National Internal Revenue Code. Hence, we held:

Petitioner's aforesaid contention is without merit. What is applicable in the case at

bar is still the Revenue Ruling of January 21, 1980 because private respondent
Burroughs Limited paid the branch profit remittance tax in question on March 14,
1979. Memorandum Circular
No. 8-82 dated March 17, 1982 cannot be given retroactive effect in the light of
Section 327 of the National Internal Revenue Code which
provides —

Sec. 327. 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 taxpayer 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, or (c) where the taxpayer acted in bad faith.
(ABS-CBN Broadcasting Corp. v. CTA, 108 SCRA 151-152)

The prejudice that would result to private respondent Burroughs Limited by a

retroactive application of Memorandum Circular No. 8-82 is beyond question for it
would be deprived of the substantial amount of P172,058.90. And, insofar as the
enumerated exceptions are concerned, admittedly, Burroughs Limited does not fall
under any of them.
 The Court of Tax Appeals itself commented similarly when it observed thusly in its decision:

In finding the Commissioner's contention without merit, this Court however ruled
against the applicability of Revenue Memorandum Circular No. 8-82 dated March 17,
1982 to the Burroughs Limited case because the taxpayer paid the branch profit
remittance tax involved therein on March 14, 1979 in accordance with the ruling of
the Commissioner of Internal Revenue dated January 21, 1980. In view of Section
327 of the then in force National Internal Revenue Code, Revenue Memorandum
Circular No. 8-82 dated March 17, 1982 cannot be given retroactive effect because
any revocation or modification of any ruling or circular of the Bureau of Internal
Revenue should not be given retroactive application if such revocation or
modification will, subject to certain exceptions not pertinent thereto, prejudice
taxpayers. 3

The Solicitor General correctly points out that almost invariably in an ad valorem tax, the tax paid or
withheld is not deducted from the tax base. Such impositions as the ordinary income tax, estate and
gift taxes, and the value added tax are generally computed in like manner. In these cases, however,
it is so because the law, in defining the tax base and in providing for tax withholding, clearly spells it
out to be such. As so well expounded by the Tax Court —

. . . In all the situations . . . where the mechanism of withholding of taxes at source

operates to ensure collection of the tax, and which respondent claims the base on
which the tax is computed is the amount to be paid or remitted, the law applicable
expressly, specifically and unequivocally mandates that the tax is on the total
amount thereof which shall be collected and paid as provided in Sections 53 and 54
of the Tax Code. Thus:

Dividends received by an individual who is a citizen or resident of the

Philippines from a domestic corporation, shall be subject to a final tax
at the rate of fifteen (15%) per cent on the total amount thereof,
which shall be collected and paid as provided in Sections 53 and 54
of this Code. (Emphasis supplied; Sec. 21, Tax Code)

Interest from Philippine Currency bank deposits and yield from

deposit substitutes whether received by citizens of the Philippines or
by resident alien individuals, shall be subject to a final tax as follows:
(a) 15% of the interest or savings deposits, and (b) 20% of the
interest on time deposits and yield from deposits substitutes, which
shall be collected and paid as provided in Sections 53 and 54 of this
Code: . . . (Emphasis supplied; Sec. 21, Tax Code applicable.)

And on rental payments payable by the lessee to the lessor (at 5%), also cited by
respondent, Section 1, paragraph (C), of Revenue Regulations No. 13-78, November
1, 1978, provides that:

Section 1. Income payments subject to withholding tax and rates

prescribed therein. — Except as therein otherwise provided, there
shall be withheld a creditable income tax at the rates herein specified
for each class of payee from the following items of income payments
to persons residing in the Philippines.

xxx xxx xxx

 (C) Rentals — When the gross rental or the payment required to be
made as a condition to the continued use or possession of property,
whether real or personal, to which the payor or obligor has not taken
or is not taking title or in which he has no equity, exceeds five
hundred pesos (P500.00) per contract or payment whichever is
greater — five per centum (5%).

Note that the basis of the 5% withholding tax, as expressly and unambiguously
provided therein, is on the gross rental. Revenue Regulations No. 13-78 was
promulgated pursuant to Section 53(f) of the then in force National Internal Revenue
Code which authorized the Minister of Finance, upon recommendation of the
Commissioner of Internal Revenue, to require the withholding of income tax on the
same items of income payable to persons (natural or judicial) residing in the
Philippines by the persons making such payments at the rate of not less than 2 1/2%
but not more than 35% which are to be credited against the income tax liability of the
taxpayer for the taxable year.

On the other hand, there is absolutely nothing in Section 24(b) (2) (ii), supra, which
indicates that the 15% tax on branch profit remittance is on the total amount of profit
to be remitted abroad which shall be collected and paid in accordance with the tax
withholding device provided in Sections 53 and 54 of the Tax Code. The statute
employs "Any profit remitted abroad by a branch to its head office shall be subject to
a tax of fifteen per cent (15%)" — without more. Nowhere is there said of "base on
the total amount actually applied for by the branch with the Central Bank of the
Philippines as profit to be remitted abroad, which shall be collected and paid as
provided in Sections 53 and 54 of this Code." Where the law does not qualify that the
tax is imposed and collected at source based on profit to be remitted abroad, that
qualification should not be read into the law. It is a basic rule of statutory construction
that there is no safer nor better canon of interpretation than that when the language
of the law is clear and unambiguous, it should be applied as written. And to our mind,
the term "any profit remitted abroad" can only mean such profit as is "forwarded,
sent, or transmitted abroad" as the word "remitted" is commonly and popularly
accepted and understood. To say therefore that the tax on branch profit remittance is
imposed and collected at source and necessarily the tax base should be the amount
actually applied for the branch with the Central Bank as profit to be remitted abroad
is to ignore the unmistakable meaning of plain words. 4

In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad."
There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is
imposed on the amount sent abroad, and the law (then in force) calls for nothing further. The
taxpayer is a single entity, and it should be understandable if, such as in this case, it is the local
branch of the corporation, using its own local funds, which remits the tax to the Philippine
Government.

The remittance tax was conceived in an attempt to equalize the income tax burden on foreign
corporations maintaining, on the one hand, local branch offices and organizing, on the other hand,
subsidiary domestic corporations where at least a majority of all the latter's shares of stock are
owned by such foreign corporations. Prior to the amendatory provisions of the Revenue Code, local
branches were made to pay only the usual corporate income tax of 25%-35% on net income (now a
uniform 35%) applicable to resident foreign corporations (foreign corporations doing business in the
Philippines). While Philippine subsidiaries of foreign corporations were subject to the same rate of
25%-35% (now also a uniform 35%) on their net income, dividend payments, however, were
additionally subjected to a 15% (withholding) tax (reduced conditionally from 35%). In order to avert
what would otherwise appear to be an unequal tax treatment on such subsidiaries vis-a-vis local
branch offices, a 20%, later reduced to 15%, profit remittance tax was imposed on local branches on
their remittances of profits abroad. But this is where the tax pari-passu ends between domestic
branches and subsidiaries of foreign corporations.

The Solicitor General suggests that the analogy should extend to the ordinary application of the
withholding tax system and so with the rule on constructive remittance concept as well. It is difficult
to accept the proposition. In the operation of the withholding tax system, the payee is the taxpayer,
the person on whom the tax is imposed, while the payor, a separate entity, acts no more than an
agent of the government for the collection of the tax in order to ensure its payment. Obviously, the
amount thereby used to settle the tax liability is deemed sourced from the proceeds constitutive of
the tax base. Since the payee, not the payor, is the real taxpayer, the rule on constructive remittance
(or receipt) can be easily rationalized, if not indeed, made clearly manifest. It is hardly the case,
however, in the imposition of the 15% remittance tax where there is but one taxpayer using its own
domestic funds in the payment of the tax. To say that there is constructive remittance even of such
funds would be stretching far too much that imaginary rule. Sound logic does not defy but must
concede to facts.

We hold, accordingly, that the written claim for refund of the excess tax payment filed, within the two-
year prescriptive period, with the Court of Tax Appeals has been lawfully made.

WHEREFORE, the decision of the Court of Appeals appealed from is REVERSED and SET ASIDE,
and that of the Court of Tax Appeals is REINSTATED.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 76573 September 14, 1989

MARUBENI CORPORATION (formerly Marubeni — Iida, Co., Ltd.), petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents.

Melquiades C. Gutierrez for petitioner.

The Solicitor General for respondents.

FERNAN, C.J.:

Petitioner, Marubeni Corporation, representing itself as a foreign corporation duly organized and
existing under the laws of Japan and duly licensed to engage in business under Philippine laws with
branch office at the 4th Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal
of the decision of the Court of Tax Appeals   dated February 12, 1986 denying its claim for refund or
1

tax credit in the amount of P229,424.40 representing alleged overpayment of branch profit
remittance tax withheld from dividends by Atlantic Gulf and Pacific Co. of Manila (AG&P).

The following facts are undisputed: Marubeni Corporation of Japan has equity investments in AG&P
of Manila. For the first quarter of 1981 ending March 31, AG&P declared and paid cash dividends to
petitioner in the amount of P849,720 and withheld the corresponding 10% final dividend tax thereon.
Similarly, for the third quarter of 1981 ending September 30, AG&P declared and paid P849,720 as
cash dividends to petitioner and withheld the corresponding 10% final dividend tax thereon.  2

AG&P directly remitted the cash dividends to petitioner's head office in Tokyo, Japan, net not only of
the 10% final dividend tax in the amounts of P764,748 for the first and third quarters of 1981, but
also of the withheld 15% profit remittance tax based on the remittable amount after deducting the
final withholding tax of 10%. A schedule of dividends declared and paid by AG&P to its stockholder
Marubeni Corporation of Japan, the 10% final intercorporate dividend tax and the 15% branch profit
remittance tax paid thereon, is shown below:

1981 FIRST THIRD TOTAL OF

QUARTER QUARTER FIRST and
(three months (three months THIRD quarters
ended 3.31.81) ended 9.30.81)
(In Pesos)
Cash Dividends Paid 849,720.44 849,720.00 1,699,440.00
10% Dividend Tax 84,972.00 84,972.00 169,944.00
Withheld
 Cash Dividend net of 764,748.00 764,748.00 1,529,496.00
10% Dividend Tax
Withheld
15% Branch Profit 114,712.20 114,712.20 229,424.40  3

Remittance Tax Withheld

Net Amount Remitted to 650,035.80 650,035.80 1,300,071.60
Petitioner

The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for
the first quarter of 1981 were paid to the Bureau of Internal Revenue by AG&P on April 20, 1981
under Central Bank Receipt No. 6757880. Likewise, the 10% final dividend tax of P84,972 and the
15% branch profit remittance tax of P114,712 for the third quarter of 1981 were paid to the Bureau of
Internal Revenue by AG&P on August 4, 1981 under Central Bank Confirmation Receipt No.
7905930.  4

Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit
remittance on cash dividends declared and remitted to petitioner at its head office in Tokyo in the
total amount of P229,424.40 on April 20 and August 4, 1981.  5

In a letter dated January 29, 1981, petitioner, through the accounting firm Sycip, Gorres, Velayo and
Company, sought a ruling from the Bureau of Internal Revenue on whether or not the dividends
petitioner received from AG&P are effectively connected with its conduct or business in the
Philippines as to be considered branch profits subject to the 15% profit remittance tax imposed
under Section 24 (b) (2) of the National Internal Revenue Code as amended by Presidential Decrees
Nos. 1705 and 1773.

In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:

Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits remitted
abroad by a branch office to its head office which are effectively connected with its
trade or business in the Philippines are subject to the 15% profit remittance tax. To
be effectively connected it is not necessary that the income be derived from the
actual operation of taxpayer-corporation's trade or business; it is sufficient that the
income arises from the business activity in which the corporation is engaged. For
example, if a resident foreign corporation is engaged in the buying and selling of
machineries in the Philippines and invests in some shares of stock on which
dividends are subsequently received, the dividends thus earned are not considered
'effectively connected' with its trade or business in this country. (Revenue
Memorandum Circular No. 55-80).

In the instant case, the dividends received by Marubeni from AG&P are not income
arising from the business activity in which Marubeni is engaged. Accordingly, said
dividends if remitted abroad are not considered branch profits for purposes of the
15% profit remittance tax imposed by Section 24 (b) (2) of the Tax Code, as
amended . . . 6

Consequently, in a letter dated September 21, 1981 and filed with the Commissioner of Internal
Revenue on September 24, 1981, petitioner claimed for the refund or issuance of a tax credit of
P229,424.40 "representing profit tax remittance erroneously paid on the dividends remitted by
Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20 and August 4, 1981 to ... head office in
Tokyo. 7

On June 14, 1982, respondent Commissioner of Internal Revenue denied petitioner's claim for
refund/credit of P229,424.40 on the following grounds:

While it is true that said dividends remitted were not subject to the 15% profit
remittance tax as the same were not income earned by a Philippine Branch of
Marubeni Corporation of Japan; and neither is it subject to the 10% intercorporate
dividend tax, the recipient of the dividends, being a non-resident stockholder,
nevertheless, said dividend income is subject to the 25 % tax pursuant to Article 10
(2) (b) of the Tax Treaty dated February 13, 1980 between the Philippines and
Japan.

Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan

is subject to 25 % tax, and that the taxes withheld of 10 % as intercorporate dividend
tax and 15 % as profit remittance tax totals (sic) 25 %, the amount refundable offsets
the liability, hence, nothing is left to be refunded. 
8

Petitioner appealed to the Court of Tax Appeals which affirmed the denial of the refund by the
Commissioner of Internal Revenue in its assailed judgment of February 12, 1986.  9

In support of its rejection of petitioner's claimed refund, respondent Tax Court explained:

Whatever the dialectics employed, no amount of sophistry can ignore the fact that
the dividends in question are income taxable to the Marubeni Corporation of Tokyo,
Japan. The said dividends were distributions made by the Atlantic, Gulf and Pacific
Company of Manila to its shareholder out of its profits on the investments of the
Marubeni Corporation of Japan, a non-resident foreign corporation. The investments
in the Atlantic Gulf & Pacific Company of the Marubeni Corporation of Japan were
directly made by it and the dividends on the investments were likewise directly
remitted to and received by the Marubeni Corporation of Japan. Petitioner Marubeni
Corporation Philippine Branch has no participation or intervention, directly or
indirectly, in the investments and in the receipt of the dividends. And it appears that
the funds invested in the Atlantic Gulf & Pacific Company did not come out of the
funds infused by the Marubeni Corporation of Japan to the Marubeni Corporation
Philippine Branch. As a matter of fact, the Central Bank of the Philippines, in
authorizing the remittance of the foreign exchange equivalent of (sic) the dividends in
question, treated the Marubeni Corporation of Japan as a non-resident stockholder of
the Atlantic Gulf & Pacific Company based on the supporting documents submitted to
it.

Subject to certain exceptions not pertinent hereto, income is taxable to the person
who earned it. Admittedly, the dividends under consideration were earned by the
Marubeni Corporation of Japan, and hence, taxable to the said corporation. While it
is true that the Marubeni Corporation Philippine Branch is duly licensed to engage in
business under Philippine laws, such dividends are not the income of the Philippine
Branch and are not taxable to the said Philippine branch. We see no significance
thereto in the identity concept or principal-agent relationship theory of petitioner
because such dividends are the income of and taxable to the Japanese corporation
in Japan and not to the Philippine branch. 10
Hence, the instant petition for review.

It is the argument of petitioner corporation that following the principal-agent relationship theory,
Marubeni Japan is likewise a resident foreign corporation subject only to the 10 % intercorporate
final tax on dividends received from a domestic corporation in accordance with Section 24(c) (1) of
the Tax Code of 1977 which states:

Dividends received by a domestic or resident foreign corporation liable to tax under

this Code — (1) Shall be subject to a final tax of 10% on the total amount thereof,
which shall be collected and paid as provided in Sections 53 and 54 of this Code ....

Public respondents, however, are of the contrary view that Marubeni, Japan, being a non-resident
foreign corporation and not engaged in trade or business in the Philippines, is subject to tax on
income earned from Philippine sources at the rate of 35 % of its gross income under Section 24 (b)
(1) of the same Code which reads:

(b) Tax on foreign corporations — (1) Non-resident corporations. — A foreign

corporation not engaged in trade or business in the Philippines shall pay a tax equal
to thirty-five per cent of the gross income received during each taxable year from all
sources within the Philippines as ... dividends ....

but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of
1980 concluded between the Philippines and Japan.   Thus:
11

Article 10 (1) Dividends paid by a company which is a resident of a Contracting State

to a resident of the other Contracting State may be taxed in that other Contracting
State.

(2) However, such dividends may also be taxed in the Contracting State of which the
company paying the dividends is a resident, and according to the laws of that
Contracting State, but if the recipient is the beneficial owner of the dividends the tax
so charged shall not exceed;

(a) . . .

(b) 25 per cent of the gross amount of the dividends in all other cases.

Central to the issue of Marubeni Japan's tax liability on its dividend income from Philippine sources
is therefore the determination of whether it is a resident or a non-resident foreign corporation under
Philippine laws.

Under the Tax Code, a resident foreign corporation is one that is "engaged in trade or business"
within the Philippines. Petitioner contends that precisely because it is engaged in business in the
Philippines through its Philippine branch that it must be considered as a resident foreign corporation.
Petitioner reasons that since the Philippine branch and the Tokyo head office are one and the same
entity, whoever made the investment in AG&P, Manila does not matter at all. A single corporate
entity cannot be both a resident and a non-resident corporation depending on the nature of the
particular transaction involved. Accordingly, whether the dividends are paid directly to the head office
or coursed through its local branch is of no moment for after all, the head office and the office branch
constitute but one corporate entity, the Marubeni Corporation, which, under both Philippine tax and
corporate laws, is a resident foreign corporation because it is transacting business in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise:

The general rule that a foreign corporation is the same juridical entity as its branch
office in the Philippines cannot apply here. This rule is based on the premise that the
business of the foreign corporation is conducted through its branch office, following
the principal agent relationship theory. It is understood that the branch becomes its
agent here. So that when the foreign corporation transacts business in the
Philippines independently of its branch, the principal-agent relationship is set aside.
The transaction becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not the branch or the resident
foreign corporation.

Corollarily, if the business transaction is conducted through the branch office, the
latter becomes the taxpayer, and not the foreign corporation.  12

In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the
head office in Japan which is a separate and distinct income taxpayer from the branch in the
Philippines. There can be no other logical conclusion considering the undisputed fact that the
investment (totalling 283.260 shares including that of nominee) was made for purposes peculiarly
germane to the conduct of the corporate affairs of Marubeni Japan, but certainly not of the branch in
the Philippines. It is thus clear that petitioner, having made this independent investment attributable
only to the head office, cannot now claim the increments as ordinary consequences of its trade or
business in the Philippines and avail itself of the lower tax rate of 10 %.

But while public respondents correctly concluded that the dividends in dispute were neither subject
to the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax, the recipient being a
non-resident stockholder, they grossly erred in holding that no refund was forthcoming to the
petitioner because the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan
Tax Convention pursuant to Article 10 (2) (b).

To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that
each tax has a different tax basis. While the tax on dividends is directly levied on the dividends
received, "the tax base upon which the 15 % branch profit remittance tax is imposed is the profit
actually remitted abroad." 13

Public respondents likewise erred in automatically imposing the 25 % rate under Article 10 (2) (b) of
the Tax Treaty as if this were a flat rate. A closer look at the Treaty reveals that the tax rates fixed by
Article 10 are the maximum rates as reflected in the phrase "shall not exceed." This means that any
tax imposable by the contracting state concerned should not exceed the 25 % limitation and that
said rate would apply only if the tax imposed by our laws exceeds the same. In other words, by
reason of our bilateral negotiations with Japan, we have agreed to have our right to tax limited to a
certain extent to attain the goals set forth in the Treaty.

Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the
applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-
Japan Treaty of 1980. Said section provides:

(b) Tax on foreign corporations. — (1) Non-resident corporations — ... (iii) On

dividends received from a domestic corporation liable to tax under this Chapter, the
tax shall be 15% of the dividends received, which shall be collected and paid as
provided in Section 53 (d) of this Code, subject to the condition that the country in
which the non-resident foreign corporation is domiciled shall allow a credit against
 the tax due from the non-resident foreign corporation, taxes deemed to have been
paid in the Philippines equivalent to 20 % which represents the difference between
the regular tax (35 %) on corporations and the tax (15 %) on dividends as provided in
this Section; ....

Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign
corporation, as a general rule, is taxed 35 % of its gross income from all sources within the
Philippines. [Section 24 (b) (1)].

However, a discounted rate of 15% is given to petitioner on dividends received from a domestic
corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a
tax credit of not less than 20 % of the dividends received. This 20 % represents the difference
between the regular tax of 35 % on non-resident foreign corporations which petitioner would have
ordinarily paid, and the 15 % special rate on dividends received from a domestic corporation.

Consequently, petitioner is entitled to a refund on the transaction in question to be computed as

follows:

Total cash dividend paid ................P1,699,440.00

less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
------------------

Cash dividend net of 15 % tax

due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
-------------------

Amount to be refunded to petitioner

representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========

It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-
resident stockholder from a domestic corporation under Section 24 (b) (1) (iii) is easily within the
maximum ceiling of 25 % of the gross amount of the dividends as decreed in Article 10 (2) (b) of the
Tax Treaty.

There is one final point that must be settled. Respondent Commissioner of Internal Revenue is
laboring under the impression that the Court of Tax Appeals is covered by Batas Pambansa Blg.
129, otherwise known as the Judiciary Reorganization Act of 1980. He alleges that the instant
petition for review was not perfected in accordance with Batas Pambansa Blg. 129 which provides
that "the period of appeal from final orders, resolutions, awards, judgments, or decisions of any court
in all cases shall be fifteen (15) days counted from the notice of the final order, resolution, award,
judgment or decision appealed from ....

This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals
which has been created by virtue of a special law, Republic Act No. 1125. Respondent court is not
among those courts specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or
decision of the Court of Tax Appeals is given thirty (30) days from notice to appeal therefrom.
Otherwise, said order, ruling, or decision shall become final.

Records show that petitioner received notice of the Court of Tax Appeals's decision denying its claim
for refund on April 15, 1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner
filed a motion for reconsideration which respondent court subsequently denied on November 17,
1986, and notice of which was received by petitioner on November 26, 1986. Two days later, or on
November 28, 1986, petitioner simultaneously filed a notice of appeal with the Court of Tax Appeals
and a petition for review with the Supreme Court.   From the foregoing, it is evident that the instant
14

appeal was perfected well within the 30-day period provided under R.A. No. 1125, the whole 30-day
period to appeal having begun to run again from notice of the denial of petitioner's motion for
reconsideration.

WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated February 12,
1986 which affirmed the denial by respondent Commissioner of Internal Revenue of petitioner
Marubeni Corporation's claim for refund is hereby REVERSED. The Commissioner of Internal
Revenue is ordered to refund or grant as tax credit in favor of petitioner the amount of P144,452.40
representing overpayment of taxes on dividends received. No costs.

So ordered.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 160756               March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE
GUILLERMO PARAYNO, JR., Respondents.

DECISION

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 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.

x x x           x x x          x x x

(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.

x x x           x x x          x x x

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:

x x x           x x x          x x x

(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 business in accordance with the following schedule –
 Those which are exempt from a Exempt
withholding tax at source as
prescribed in Sec. 2.57.5 of these
regulations.

With a selling price of five hundred 1.5%

thousand pesos (₱500,000.00) or
less.

With a selling price of more than five 3.0%

hundred thousand pesos
(₱500,000.00) but not more than two
million pesos (₱2,000,000.00).

With selling price of more than two 5.0%

million pesos (₱2,000,000.00)

x x x           x x x          x x x

Gross selling price shall mean 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, as determined in the
Income Tax Regulations shall be used.

Where the consideration or part thereof is payable on installment, no withholding tax is required to
be made on the periodic installment payments where 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 last installment or installments to be paid to the seller.

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.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

x x x           x x x          x x x

(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 classified as ordinary asset. - A [CWT] based on the
gross selling price/total amount of consideration or the fair market value determined in accordance
with Section 6(E) of 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 with the following schedule:

Where the seller/transferor is exempt from [CWT] in Exempt

accordance with Sec. 2.57.5 of these regulations.
Upon the following values of real property, where the  
seller/transferor is habitually engaged in the real estate
business.
With a selling price of Five Hundred Thousand Pesos 1.5%
 (₱500,000.00) or less.

With a selling price of more than Five Hundred Thousand 3.0%

Pesos (₱500,000.00) but not more than Two Million Pesos
(₱2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(₱2,000,000.00).

x x x           x x x          x x x

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.

x x x           x x x          x x x

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.

(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. 7-2003 8 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;

x x x           x x x          x x x

(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.

x x x           x x x          x x x

c. In the case of domestic corporations. –

x x x           x x x          x x x

(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.

x x x           x x x          x x x

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.
 x x x           x x x          x x x

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. –

x x x           x x x          x x x

(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;

x x x           x x x          x x x

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;

x x x           x x x          x x x

(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.

x x x           x x x          x x x

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. Undoubtedly, the taxpayer is
taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the
tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the
end of the taxable year. Instead, said withholding 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.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property
categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax
and flat rate of 6% on the gain 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

The differences between the two forms of withholding tax, i.e., creditable and final, show that
ordinary assets are not treated in the same manner as capital assets. Final withholding tax (FWT)
and CWT are distinguished as follows:

FWT CWT

a) The amount of income tax withheld by a) Taxes withheld on certain income

the withholding agent is constituted as a full payments are intended to equal or at least
and final payment of the income tax due approximate the tax due of the payee on
from the payee on the said income. said income.

b)The liability for payment of the tax rests
primarily on the payor as a withholding
agent.
b) Payee of income is required to report the
income and/or pay the difference between
the tax withheld and the tax due on the
income. The payee also has the right to ask
for a refund if the tax withheld is more than
the tax due.

c) The payee is not required to file an c) The income recipient is still required to
income tax return for the particular file an income tax return, as prescribed in
 income.73 Sec. 51 and Sec. 52 of the NIRC, as
amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is
imposed on the sale of ordinary assets. The inherent and substantial differences between FWT and
CWT disprove petitioner’s contention that ordinary assets are being lumped together with, and
treated similarly as, capital assets in contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary
to the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment
of income tax involving ordinary assets.75

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 mechanics of the FWT are distinct from those of
the CWT. The withholding agent/buyer’s act of collecting the tax at the time of the transaction by
withholding the tax due from the income payable is the essence of the withholding tax method of tax
collection.

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. 1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to
pay labor wages, 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.

 SECOND DIVISION

November 9, 2016

G.R. No. 196596

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
DE LA SALLE UNIVERSITY, INC., Respondent

x-----------------------x

G.R. No. 198841

DE LA SALLE UNIVERSITY INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

x-----------------------x

G.R. No. 198941

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
DE LA SALLE UNIVERSITY, INC., Respondent.

DECISION

BRION, J.:

Before the Court are consolidated petitions for review on certiorari: 1

1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to assail the

December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax Appeals
(CTA) in En Banc Case No. 622; 2

2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 decision
and October 4, 2011 resolution in CTA En Banc Case No. 671;  and 3

3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and October 4,
2011 resolution in CTA En Banc Case No. 671. 4

G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division (CTA
Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En Banc Case No. 622 filed by the
Commissioner to challenge CTA Case No. 7303. G.R. No. 198841 and 198941 both stemmed
from CTA En Banc Case No. 671 filed by DLSU to also challenge CTA Case No. 7303.

The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA)
No. 2794 authorizing its revenue officers to examine the latter's books of accounts and other
accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003 and
Unverified Prior Years. 5

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU. 6

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU the
following deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and
bookstores operating within the campus; (2) value-added tax (VAI) on business income; and
(3) documentary stamp tax (DSI) on loans and lease contracts. The BIR demanded the payment
of ₱17,303,001.12, inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and
2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed on
August 3, 2005 a petition for review with the CTA Division. 8

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article XIV,
Section 4 (3) of the Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly,
and exclusively for educational purposes shall be exempt from taxes and duties. xxx.

On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive
portion of the decision reads:

WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the loan
transactions of [DLSU] in the amount of ₱1,1681,774.00 is hereby CANCELLED. However, [DLSU]
is ORDERED TO PAY deficiency income tax, VAT and DST on its lease contracts, plus 25%
surcharge for the fiscal years 2001, 2002 and 2003 in the total amount of ₱18,421,363.53 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount due
computed from September 30, 2004 until full payment thereof pursuant to Section 249(C)(3) of the
[National Internal Revenue Code]. Further, the compromise penalties imposed by [the
Commissioner] were excluded, there being no compromise agreement between the parties.

SO ORDERED. 9

Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010
decision.  On April 6, 2010, the CTA Division denied the Commissioner's motion for reconsideration
10

while it held in abeyance the resolution on DLSU's motion for reconsideration. 11

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622)
arguing that DLSU's use of its revenues and assets for non-educational or commercial purposes
removed these items from the exemption coverage under the Constitution. 12

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of documentary
evidence to prove that its rental income was used actually, directly and exclusively for educational
purposes.  The Commissioner did not promptly object to the formal offer of supplemental evidence
13

despite notice. 14
On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced the
amount of DLSU's tax deficiencies. The dispositive portion of the amended decision reads:

WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY GRANTED.

[DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT and DST plus 25% surcharge
for the fiscal years 2001, 2002 and 2003 in the total adjusted amount of ₱5,506,456.71 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the ... basic
deficiency taxes ... until full payment thereof pursuant to Section 249(B) of the [National Internal
Revenue Code] ... xxx.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the deficiency
taxes, surcharge and deficiency interest which have accrued ... from September 30, 2004 until fully
paid.15

Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued that
the CTA Division erred in admitting DLSU's additional evidence. 16

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for review
with the CTA En Banc (CTA En Banc Case No. 671) on the following grounds: (1) the entire
assessment should have been cancelled because it was based on an invalid LOA; (2) assuming the
LOA was valid, the CTA Division should still have cancelled the entire assessment because DLSU
submitted evidence similar to those submitted by Ateneo De Manila University (Ateneo) in
a separate case where the CTA cancelled Ateneo's tax assessment;  and (3) the CTA Division erred
17

in finding that a portion of DLSU's rental income was not proved to have been used actually, directly
and exclusively for educational purposes. 18

The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings of
the CTA Division. 19

Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public Accountant

(Independent CPA), the CTA En Banc found that DLSU was able to prove that a portion of the
assessed rental income was used actually, directly and exclusively for educational purposes; hence,
exempt from tax.  The CTA En Banc was satisfied with DLSU's supporting evidence confirming that
20

part of its rental income had indeed been used to pay the loan it obtained to build the university's
Physical Education – Sports Complex. 21

Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was not
shown by supporting documents to have been actually, directly and exclusively used for educational
purposes, must be subjected to income tax and VAT. 22

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU froved its remittance of the DST due on its loan
and mortgage documents.  The CTA En Banc found that DLSU's DST payments had been remitted
23
to the BIR, evidenced by the stamp on the documents made by a DST imprinting machine, which is
allowed under Section 200 (D) of the National Internal Revenue Code (Tax Code)  and Section 2 of
24

Revenue Regulations (RR) No. 15-2001. 25

Admissibility of DLSU's supplemental evidence

The CTA En Banc held that the supplemental pieces of documentary evidence were admissible
even if DLSU formally offered them only when it moved for reconsideration of the CTA Division's
original decision. Notably, the law creating the CTA provides that proceedings before it shall not be
governed strictly by the technical rules of evidence.26

The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December 10,
2010 decision.  Thus, she came to this court for relief through a petition for review on certiorari (G.R.
27

No. 196596).

CTA En Banc Case No. 671

The CTA En Banc partially granted DLSU's petition for review and further reduced its tax liabilities
to ₱2,554,825.47 inclusive of surcharge. 28

On the validity of the Letter of Authority

The issue of the LOA' s validity was raised during trial;  hence, the issue was deemed properly
29

submitted for decision and reviewable on appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and
that the practice of issuing a LOA covering audit of unverified prior years is prohibited.  The
30

prohibition is consistent with Revenue Memorandum Order (RMO) No. 43-90, which provides that if
the audit includes more than one taxable period, the other periods or years shall be specifically
indicated in the LOA. 31

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
Years. Hence, the assessments for deficiency income tax, VAT and DST for taxable years 2001 and
2002 are void, but the assessment for taxable year 2003 is valid. 32

On the applicability of the Ateneo case

The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different
parties, factual settings, bases of assessments, sets of evidence, and defenses. 33

On the CTA Division's appreciation of the evidence

The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It held that while
DLSU successfully proved that a portion of its rental income was transmitted and used to pay the
loan obtained to fund the construction of the Sports Complex, the rental income from other sources
were not shown to have been actually, directly and exclusively used for educational purposes. 34

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner
(G.R. No. 198941) came to this Court for relief.

The Consolidated Petitions

G.R. No. 196596

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed
of.  DLSU's operations of canteens and bookstores within its campus even though exclusively
35

serving the university community do not negate income tax liability. 36

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be harmonized
with Section 30 (H) of the Tax Code, which states among others, that the income of whatever kind
and character of [a non-stock and non-profit educational institution] from any of [its] properties, real
or personal, or from any of [its] activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed by this Code. 37

The Commissioner argues that the CTA En Banc misread and misapplied the case
of Commissioner of Internal Revenue v. YMCA  to support its conclusion that revenues however
38

generated are covered by the constitutional exemption, provided that, the revenues will be used for
educational purposes or will be held in reserve for such purposes. 39

On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt only
from property tax but not from income tax on the rentals earned from property.  Thus, DLSU's
40

income from the leases of its real properties is not exempt from taxation even if the income would be
used for educational purposes. 41

Second, the Commissioner insists that DLSU did not prove the fact of DST payment  and that it is
42

not qualified to use the On-Line Electronic DST Imprinting Machine, which is available only to certain
classes of taxpayers under RR No. 9-2000. 43

Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. The
belated submission of supplemental evidence reopened the case for trial, and worse, DLSU offered
the supplemental evidence only after it received the unfavorable CTA Division's original decision.  In44

any case, DLSU's submission of supplemental documentary evidence was unnecessary since its
rental income was taxable regardless of its disposition. 45

G.R. No. 198841

DLSU argues as that:

First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified prior
years. A LOA issued contrary to RMO No. 43-90 is void, thus, an assessment issued based on such
defective LOA must also be void. 46

DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified Prior
Years. On the basis of this defective LOA, the Commissioner assessed DLSU for deficiency income
tax, VAT and DST for taxable years 2001, 2002 and 2003.  DLSU objects to the CTA En
47

Banc's conclusion that the LOA is valid for taxable year 2003. According to DLSU, when RMO No.
43-90 provides that:

The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby prohibited.
it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA
issued to DLSU follows this format, then any assessment arising from it must be entirely voided. 48

Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly
situated parties, the same set of evidence should be appreciated and weighed in the same
manner.  The CTA En Banc erred when it did not similarly appreciate DLSU' s evidence as it did to
49

the pieces of evidence submitted by Ateneo, also a non-stock, non-profit educational institution. 50

G.R. No. 198941

The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly the
same as those she raised in her: (1) petition docketed as G.R. No. 196596 and (2) comment on
DLSU's petition docketed as G.R. No. 198841. 51

Counter-arguments

DLSU's Comment on G.R. No. 196596

First, DLSU questions the defective verification attached to the petition. 52

Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and
revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purposes are exempt from taxes and duties. 53

On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit educational
institutions is novel to the 1987 Constitution and that Section 30 (H) of the 1997 Tax Code cannot
amend the 1987 Constitution;  (2) Section 30 of the 1997 Tax Code is almost an exact replica of
54

Section 26 of the 1977 Tax Code -with the addition of non-stock, non-profit educational institutions
to the list of tax-exempt entities; and (3) that the 1977 Tax Code was promulgated when the 1973
Constitution was still in place.

DLSU elaborates that the tax exemption granted to a private educational institution under the 1973
Constitution was only for real property tax. Back then, the special tax treatment on income of private
educational institutions only emanates from statute, i.e., the 1977 Tax Code. Only under the 1987
Constitution that exemption from tax of all the assets and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purposes, was
expressly and categorically enshrined. 55

DLSU thus invokes the doctrine of constitutional supremacy, which renders any subsequent law that
is contrary to the Constitution void and without any force and effect.  Section 30 (H) of the 1997 Tax
56

Code insofar as it subjects to tax the income of whatever kind and character of a non-stock and non-
profit educational institution from any of its properties, real or personal, or from any of its activities
conducted for profit regardless of the disposition made of such income, should be declared without
force and effect in view of the constitutionally granted tax exemption on "all revenues and assets of
non-stock, non-profit educational institutions used actually, directly, and exclusively for educational
purposes." 57

DLSU further submits that it complies with the requirements enunciated in the YMCA case, that for
an exemption to be granted under Article XIV, Section 4 (3) of the Constitution, the taxpayer must
prove that: (1) it falls under the classification non-stock, non-profit educational institution; and (2) the
income it seeks to be exempted from taxation is used actually, directly and exclusively for
educational purposes.  Unlike YMCA, which is not an educational institution, DLSU is undisputedly a
58

non-stock, non-profit educational institution. It had also submitted evidence to prove that it actually,
directly and exclusively used its income for educational purposes. 59

DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized that
the tax exemption was granted "to incentivize private educational institutions to share with the State
the responsibility of educating the youth." 60

Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled
DLSU' s loan and mortgage transactions had remitted to the BIR the DST through an imprinting
machine, a method allowed under RR No. 15-2001.  In any case, DLSU argues that it cannot be
61

held liable for DST owing to the exemption granted under the Constitution. 62

Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal offer of
supplemental evidence. Because of the Commissioner's failure to timely object, she became bound
by the results of the submission of such supplemental evidence. 63

The CIR's Comment on G.R. No. 198841

The Commissioner submits that DLSU is estopped from questioning the LOA's validity because it
failed to raise this issue in both the administrative and judicial proceedings.  That it was asked on
64

cross-examination during the trial does not make it an issue that the CTA could resolve.  The
65

Commissioner also maintains that DLSU's rental income is not tax-exempt because an educational
institution is only exempt from property tax but not from tax on the income earned from the property. 66

DLSU's Comment on G.R. No. 198941

DLSU puts forward the same counter-arguments discussed above.  In addition, DLSU prays that the
67

Court award attorney's fees in its favor because it was constrained to unnecessarily retain the
services of counsel in this separate petition. 68

Issues

Although the parties raised a number of issues, the Court shall decide only the pivotal issues, which
we summarize as follows:

I. Whether DLSU' s income and revenues proved to have been used actually, directly and
exclusively for educational purposes are exempt from duties and taxes;

II. Whether the entire assessment should be voided because of the defective LOA;

III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and

IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence may be disturbed
by the Court.

Our Ruling

As we explain in full below, we rule that:

 I. The income, revenues and assets of non-stock, non-profit educational institutions proved
to have been used actually, directly and exclusively for educational purposes are exempt
from duties and taxes.

II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is
valid.

III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and

IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to have
manifestly overlooked certain relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion.

The parties failed to convince the Court that the CTA overlooked or failed to consider relevant facts.
We thus sustain the CTA En Banc's findings that:

a. DLSU proved that a portion of its rental income was used actually, directly and exclusively
for educational purposes; and

b. DLSU proved the payment of the DST through its bank's on-line imprinting machine.

I. The revenues and assets of non-stock,

non-profit educational institutions
proved to have been used actually,
directly, and exclusively for educational
purposes are exempt from duties and
taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:

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

directly, and exclusively for educational purposes shall
be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may likewise be

entitled to such exemptions subject to the limitations provided by law including restrictions on
dividends and provisions for reinvestment. [underscoring and emphasis supplied]

Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock, non-
profit educational institutions and (2) proprietary educational institutions.
69

Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU as a
non-stock, non-profit educational institution.70

Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the
Constitution, in the same provision, also imposes certain conditions to avail of the exemption. We
discuss below the import of the constitutional text vis-a-vis the Commissioner's counter-arguments.
Fourth, there is a marked distinction between the treatment of non-stock, non-profit educational
institutions and proprietary educational institutions. The tax exemption granted to non-stock, non-
profit educational institutions is conditioned only on the actual, direct and exclusive use of their
revenues and assets for educational purposes. While tax exemptions may also be granted to
proprietary educational institutions, these exemptions may be subject to limitations imposed by
Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a proprietary
educational institution is crucial in determining the nature and extent of the tax exemption granted to
non-stock, non-profit educational institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the
Tax Code. The relevant text reads:

The following organizations shall not be taxed under this Title [Tax on

Income] in respect to income received by them as such:

xxxx

(H) A non-stock and non-profit educational institution

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for
profit regardless of the disposition made of such income shall be subject to tax imposed
under this Code. [underscoring and emphasis supplied]

The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non-stock,
non-profit educational institutions such that the revenues and income they derived from their assets,
or from any of their activities conducted for profit, are taxable even if these revenues and income are
used for educational purposes.

Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-stock, non-profit
educational institutions?

We answer in the negative.

While the present petition appears to be a case of first impression,  the Court in the YMCA case had
71

in fact already analyzed and explained the meaning of Article XIV, Section 4 (3) of the Constitution.
The Court in that case made doctrinal pronouncements that are relevant to the present case.

The issue in YMCA was whether the income derived from rentals of real property owned by the
YMCA, established as a "welfare, educational and charitable non-profit corporation," was subject to
income tax under the Tax Code and the Constitution. 72

The Court denied YMCA's claim for exemption on the ground that as a charitable institution falling
under Article VI, Section 28 (3) of the Constitution,  the YMCA is not tax-exempt per se; " what is
73

exempted is not the institution itself... those exempted from real estate taxes are lands, buildings
and improvements actually, directly and exclusively used for religious, charitable or educational
purposes." 74

The Court held that the exemption claimed by the YMCA is expressly disallowed by the last
paragraph of then Section 27 (now Section 30) of the Tax Code, which mandates that the income of
exempt organizations from any of their properties, real or personal, are subject to the same tax
imposed by the Tax Code, regardless of how that income is used. The Court ruled that the last
paragraph of Section 27 unequivocally subjects to tax the rent income of the YMCA from its
property.75

In short, the YMCA is exempt only from property tax but not from income tax.

As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax
privilege granted under Article XIV, Section 4 (3) of the Constitution.

The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the Constitution
holding that the term educational institution, when used in laws granting tax exemptions, refers to
the school system (synonymous with formal education); it includes a college or an educational
establishment; it refers to the hierarchically structured and chronologically graded learnings
organized and provided by the formal school system. 76

The Court then significantly laid down the requisites for availing the tax exemption under Article XIV,
Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted from taxation is used
actually, directly and exclusively for educational purposes. 77

We now adopt YMCA as precedent and hold that:

1. The last paragraph of Section 30 of the Tax Code is without force and effect with respect to non-
stock, non-profit educational institutions, provided, that the non-stock, non-profit educational
institutions prove that its assets and revenues are used actually, directly and exclusively for
educational purposes.

2. The tax-exemption constitutionally-granted to non-stock, non-profit educational institutions, is not

subject to limitations imposed by law.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income  for 78

educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions,
churches, parsonages or convents, mosques, and non-profit cemeteries), which exempts from
tax only the assets, i.e., "all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes ... ," Article XIV, Section 4
(3) categorically states that "[a]ll revenues and assets ... used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties."
The addition and express use of the word revenues in Article XIV, Section 4 (3) of the Constitution is
not without significance.

We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records
of the 1986 Constitutional Commission  to provide broader tax privilege to non-stock, non-profit
79

educational institutions as recognition of their role in assisting the State provide a public good. The
tax exemption was seen as beneficial to students who may otherwise be charged unreasonable
tuition fees if not for the tax exemption extended to all revenues and assets of non-stock, non-profit
educational institutions.80

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not
require that the revenues and income must have also been sourced from educational activities or
activities related to the purposes of an educational institution. The phrase all revenues is unqualified
by any reference to the source of revenues. Thus, so long as the revenues and income are used
actually, directly and exclusively for educational purposes, then said revenues and income shall be
exempt from taxes and duties. 81

We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business
operations.  It may refer to the sale of goods, rendition of services, or the return of an investment.
82

Revenue is a component of the tax base in income tax,  VAT,  and local business tax (LBT).
83 84 85

Assets, on the other hand, are the tangible and intangible properties owned by a person or entity.  It 86

may refer to real estate, cash deposit in a bank, investment in the stocks of a corporation, inventory
of goods, or any property from which the person or entity may derive income or use to generate the
same. In Philippine taxation, the fair market value of real property is a component of the tax base in
real property tax (RPT).  Also, the landed cost of imported goods is a component of the tax base in
87

VAT on importation  and tariff duties.

88 89

Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually,
directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT, and
LBT. On the other hand, when it also shows that it uses its assets in the form of real property for
educational purposes, it shall be exempted from RPT.

To be clear, proving the actual use of the taxable item will result in an exemption, but the specific tax
from which the entity shall be exempted from shall depend on whether the item is an item of revenue
or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the
leased portion is not actually, directly and exclusively used for educational purposes, even if the
bookstore or canteen caters only to university students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley
College, Inc. v. Aquino.  We ruled in that case that the test of exemption from taxation is the use of
90

the property for purposes mentioned in the Constitution. We also held that the exemption extends to
facilities which are incidental to and reasonably necessary for the accomplishment of the main
purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes, removes
such asset from the property tax exemption granted under the Constitution.  There is no exemption
91
because the asset is not used actually, directly and exclusively for educational purposes. The
commercial use of the property is also not incidental to and reasonably necessary for the
accomplishment of the main purpose of a university, which is to educate its students.

However, if the university actually, directly and exclusively uses for educational

purposes the revenues earned from the lease of its school building, such revenues shall be exempt
from taxes and duties. The tax exemption no longer hinges on the use of the asset from which the
revenues were earned, but on the actual, direct and exclusive use of the revenues for educational
purposes.

Parenthetically, income and revenues of non-stock, non-profit educational institution not used

actually, directly and exclusively for educational purposes are not exempt from duties and taxes. To
avail of the exemption, the taxpayer must factually prove that it used actually, directly and
exclusively for educational purposes the revenues or income sought to be exempted.

The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These
are two things that must be viewed and treated separately. But so long as the assets or revenues
are used actually, directly and exclusively for educational purposes, they are exempt from duties
and taxes.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions, unlike the exemption
that may be availed of by proprietary
educational institutions, is not subject to
limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions differently from proprietary
educational institutions cannot be doubted. As discussed, the privilege granted to the former is
conditioned only on the actual, direct and exclusive use of their revenues and assets for educational
purposes. In clear contrast, the tax privilege granted to the latter may be subject to limitations
imposed by law.

We spell out below the difference in treatment if only to highlight the privileged status of non-stock,
non-profit educational institutions compared with their proprietary counterparts.

While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section
30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational institution is
covered by Section 27 (Rates of Income Tax on Domestic Corporations).

To be specific, Section 30 provides that exempt organizations like non-stock, non-profit educational
institutions shall not be taxed on income received by them as such.

Section 27 (B), on the other hand, states that "[p]roprietary educational institutions ... which are
nonprofit shall pay a tax of ten percent (10%) on their taxable income .. . Provided, that if the gross
income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross
income derived by such educational institutions ... [the regular corporate income tax of 30%] shall be
imposed on the entire taxable income ... " 92

By the Tax Code's clear terms, a proprietary educational institution is entitled only to the reduced
rate of 10% corporate income tax. The reduced rate is applicable only if: (1) the proprietary
educational institution is nonprofit and (2) its gross income from unrelated trade, business or activity
does not exceed 50% of its total gross income.

Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-
stock, non-profit educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being
contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-
profit educational institutions used actually, directly and exclusively for educational purpose. We
make this declaration in the exercise of and consistent with our duty  to uphold the primacy of the
93

Constitution.94

Finally, we stress that our holding here pertains only to non-stock, non-profit educational institutions
and does not cover the other exempt organizations under Section 30 of the Tax Code.

For all these reasons, we hold that the income and revenues of DLSU proven to have been used
actually, directly and exclusively for educational purposes are exempt from duties and taxes.

II. The LOA issued to DLSU is

not entirely void. The
assessment for taxable year
2003 is valid.

DLSU objects to the CTA En Banc 's conclusion that the LOA is valid for taxable year 2003 and
insists that the entire LOA should be voided for being contrary to RMO No. 43-90, which provides
that if tax audit includes more than one taxable period, the other periods or years shall be specifically
indicated in the LOA.

A LOA is the authority given to the appropriate revenue officer to examine the books of account and
other accounting records of the taxpayer in order to determine the taxpayer's correct internal
revenue liabilities  and for the purpose of collecting the correct amount of tax,  in accordance with
95 96

Section 5 of the Tax Code, which gives the CIR the power to obtain information, to
summon/examine, and take testimony of persons. The LOA commences the audit process  and 97

informs the taxpayer that it is under audit for possible deficiency tax assessment.

Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and
consequently, disregard the BIR and the CTA's findings of tax deficiency for taxable year 2003?

We answer in the negative.

The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:

3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable year. The
practice of issuing [LO As] covering audit of unverified prior years is hereby prohibited. If the audit of
a taxpayer shall include more than one taxable period, the other periods or years shall be specifically
indicated in the [LOA].98

What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified prior
years. RMO 43-90 does not say that a LOA which contains unverified prior years is void. It merely
prescribes that if the audit includes more than one taxable period, the other periods or years must be
specified. The provision read as a whole requires that if a taxpayer is audited for more than one
taxable year, the BIR must specify each taxable year or taxable period on separate LOAs.

Read in this light, the requirement to specify the taxable period covered by the LOA is simply to
inform the taxpayer of the extent of the audit and the scope of the revenue officer's authority. Without
this rule, a revenue officer can unduly burden the taxpayer by demanding random accounting
records from random unverified years, which may include documents from as far back as ten years
in cases of fraud audit.99

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
Years. The LOA does not strictly comply with RMO 43-90 because it includes unverified prior years.
This does not mean, however, that the entire LOA is void.

As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable period
is specified in the LOA. DLSU was fully apprised that it was being audited for taxable year 2003.
Corollarily, the assessments for taxable years 2001 and 2002 are void for having
been unspecified on separate LOAs as required under RMO No. 43-90.

Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA' s validity at the CTA
Division, and thus, should not have been entertained on appeal, is not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up during the
trial.  DLSU then raised the issue in its memorandum and motion for partial reconsideration with the
100

CTA Division. DLSU raised it again on appeal to the CTA En Banc. Thus, the CTA En Banc could,
as it did, pass upon the validity of the LOA.  Besides, the Commissioner had the opportunity to
101

argue for the validity of the LOA at the CTA En Banc but she chose not to file her comment and
memorandum despite notice. 102

III.The CTA correctly admitted

the supplemental evidence
formally offered by DLSU.

The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of
documentary evidence.

To recall, DLSU formally offered its supplemental evidence upon filing its motion for reconsideration
with the CTA Division.  The CTA Division admitted the supplemental evidence, which proved that a
103

portion of DLSU's rental income was used actually, directly and exclusively for educational purposes.
Consequently, the CTA Division reduced DLSU's tax liabilities.

We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually
reinforcing grounds, to wit: (1) the Commissioner failed to timely object to the formal offer of
supplemental evidence; and (2) the CTA is not governed strictly by the technical rules of evidence.

First, the failure to object to the offered evidence renders it admissible, and the court cannot, on its
own, disregard such evidence. 104

The Court has held that if a party desires the court to reject the evidence offered, it must so state in
the form of a timely objection and it cannot raise the objection to the evidence for the first time on
appeal.  Because of a party's failure to timely object, the evidence offered becomes part of the
105
evidence in the case. As a consequence, all the parties are considered bound by any outcome
arising from the offer of evidence properly presented. 106

As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of evidence
despite notice.  The Commissioner objected to the admission of the supplemental evidence only
107

when the case was on appeal to the CTA En Banc. By the time the Commissioner raised her
objection, it was too late; the formal offer, admission and evaluation of the supplemental
evidence were all fait accompli.

We clarify that while the Commissioner's failure to promptly object had no bearing on the materiality
or sufficiency of the supplemental evidence admitted, she was bound by the outcome of the CTA
Division's assessment of the evidence. 108

Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's
admission of the formal offer of supplemental evidence, without prompt objection from the
Commissioner, was thus justified.

Notably, this Court had in the past admitted and considered evidence attached to the taxpayers'
motion for reconsideration.1âwphi1

In the case of BPI-Family Savings Bank v. Court of Appeals,  the tax refund claimant attached to its
109

motion for reconsideration with the CT A its Final Adjustment Return. The Commissioner, as in the
present case, did not oppose the taxpayer's motion for reconsideration and the admission of
the Final Adjustment Return.  We thus admitted and gave weight to the Final Adjustment
110

Return although it was only submitted upon motion for reconsideration.

We held that while it is true that strict procedural rules generally frown upon the submission of
documents after the trial, the law creating the CTA specifically provides that proceedings before it
shall not be governed strictly by the technical rules of evidence  and that the paramount
111

consideration remains the ascertainment of truth. We ruled that procedural rules should not bar
courts from considering undisputed facts to arrive at a just determination of a controversy.112

We applied the same reasoning in the subsequent cases of Filinvest Development Corporation v.
Commissioner of Internal Revenue  and Commissioner of Internal Revenue v. PERF Realty
113

Corporation,  where the taxpayers also submitted the supplemental supporting document only upon
114

filing their motions for reconsideration.

Although the cited cases involved claims for tax refunds, we also dispense with the strict application
of the technical rules of evidence in the present tax assessment case. If anything, the liberal
application of the rules assumes greater force and significance in the case of a taxpayer who claims
a constitutionally granted tax exemption. While the taxpayers in the cited cases claimed refund of
excess tax payments based on the Tax Code,  DLSU is claiming tax exemption based on the
115

Constitution. If liberality is afforded to taxpayers who paid more than they should have under a
statute, then with more reason that we should allow a taxpayer to prove its exemption from tax
based on the Constitution.

Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only because
the Commissioner failed to promptly object, but more so because the strict application of the
technical rules of evidence may defeat the intent of the Constitution.
IV. The CTA's appreciation of
evidence is generally binding on
the Court unless compelling
reasons justify otherwise.

It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which, by
the very nature of its function of being dedicated exclusively to the resolution of tax problems, has
developed an expertise on the subject, unless there has been an abuse or improvident exercise of
authority.  We thus accord the findings of fact by the CTA with the highest respect. These findings
116

of facts can only be disturbed on appeal if they are not supported by substantial evidence or there is
a showing of gross error or abuse on the part of the CTA. In the absence of any clear and convincing
proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in
every respect. 117

We sustain the factual findings of the CTA.

The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used
actually, directly and exclusively for educational purposes a portion of its assessed income and that
it had remitted the DST payments though an online imprinting machine.

a. DLSU used actually, directly, and exclusively for educational purposes a portion of its assessed
income.

To see how the CTA arrived at its factual findings, we review the process undertaken, from which it
deduced that DLSU successfully proved that it used actually, directly and exclusively for educational
purposes a portion of its rental income.

The CTA reduced DLSU' s deficiency income tax and VAT liabilities in view of the submission of the
supplemental evidence, which consisted of statement of receipts, statement of disbursement and
fund balance and statement of fund changes. 118

These documents showed that DLSU borrowed ₱93.86 Million,  which was used to build the
119

university's Sports Complex. Based on these pieces of evidence, the CTA found that DLSU' s rental
income from its concessionaires were indeed transmitted and used for the payment of this loan. The
CTA held that the degree of preponderance of evidence was sufficiently met to prove actual, direct
and exclusive use for educational purposes.

The CTA also found that DLSU's rental income from other concessionaires, which were allegedly
deposited to a fund (CF-CPA Account),  intended for the university's capital projects, was not
120

proved to have been used actually, directly and exclusively for educational purposes. The
CTA observed that "[DLSU] ... failed to fully account for and substantiate all the disbursements from
the [fund]." Thus, the CTA "cannot ascertain whether rental income from the [other] concessionaires
was indeed used for educational purposes." 121

To stress, the CTA's factual findings were based on and supported by the report of the Independent
CPA who reviewed, audited and examined the voluminous documents submitted by DLSU.

Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and
verification of receipts, invoices, vouchers and other long accounts; (b) reproduction of, and
comparison of such reproduction with, and certification that the same are faithful copies of original
documents, and pre-marking of documentary exhibits consisting of voluminous documents; (c)
preparation of schedules or summaries containing a chronological listing of the numbers, dates and
amounts covered by receipts or invoices or other relevant documents and the amount(s) of taxes
paid; (d) making findings as to compliance with substantiation requirements under pertinent
tax laws, regulations and jurisprudence; (e) submission of a formal report with certification of
authenticity and veracity of findings and conclusions in the performance of the audit; (f) testifying on
such formal report; and (g) performing such other functions as the CTA may direct. 122

Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA held
that only the portion of the rental income pertaining to the substantiated disbursements (i.e., proved
by receipts, vouchers, etc.) from the CF-CPA Account was considered as used actually, directly and
exclusively for educational purposes. Consequently, the unaccounted and unsubstantiated
disbursements must be subjected to income tax and VAT. 123

The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable years
2001 and 2002 due to the defective LOA. 124

The Court finds that the above fact-finding process undertaken by the CTA shows that it based its
ruling on the evidence on record, which we reiterate, were examined and verified by the Independent
CPA. Thus, we see no persuasive reason to deviate from these factual findings.

However, while we generally respect the factual findings of the CTA, it does not mean that we are
bound by its conclusions. In the present case, we do not agree with the method used by the CTA to
arrive at DLSU' s unsubstantiated rental income (i.e., income not proved to have been actually,
directly and exclusively used for educational purposes).

To recall, the CTA found that DLSU earned a rental income of ₱l0,610,379.00 in taxable year
2003.  DLSU earned this income from leasing a portion of its premises to: 1) MTG-Sports Complex,
125

2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri International, and 6) MTO Bookstore. 126

To prove that its rental income was used for educational purposes, DLSU identified the transactions
where the rental income was expended, viz.: 1) ₱4,007,724.00  used to pay the loan obtained by
127

DLSU to build the Sports Complex; and 2) ₱6,602,655.00 transferred to the CF-CPA Account. 128

DLSU also submitted documents to the Independent CPA to prove that the ₱6,602,655.00
transferred to the CF-CPA Account was used actually, directly and exclusively for educational
purposes. According to the Independent CPA' findings, DLSU was able to substantiate
disbursements from the CF-CPA Account amounting to ₱6,259,078.30.

Contradicting the findings of the Independent CPA, the CTA concluded that out of
the ₱l0,610,379.00 rental income, ₱4,841,066.65 was unsubstantiated, and thus, subject to income
tax and VAT. 129

The CTA then concluded that the ratio of substantiated disbursements to the total disbursements
from the CF-CPA Account for taxable year 2003 is only 26.68%.  The CTA held as follows:
130

However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri
International and MTO Bookstore, which were transmitted to the CF-CPA Account, petitioner again
failed to fully account for and substantiate all the disbursements from the CF-CPA Account; thus
failing to prove that the rental income derived therein were actually, directly and exclusively used for
educational purposes. Likewise, the findings of the Court-Commissioned Independent CPA show
that the disbursements from the CF-CPA Account for fiscal year 2003 amounts to ₱6,259,078.30
only. Hence, this portion of the rental income, being the substantiated disbursements of the CF-CPA
Account, was considered by the Special First Division as used actually, directly and exclusively for
educational purposes. Since for fiscal year 2003, the total disbursements per voucher is
₱6,259,078.3 (Exhibit "LL-25-C"), and the total disbursements per subsidiary ledger amounts to
₱23,463,543.02 (Exhibit "LL-29-C"), the ratio of substantiated disbursements for fiscal year 2003 is
26.68% (₱6,259,078.30/₱23,463,543.02). Thus, the substantiated portion of CF-CPA Disbursements
for fiscal year 2003, arrived at by multiplying the ratio of 26.68% with the total rent income added to
and used in the CF-CPA Account in the amount of ₱6,602,655.00 is ₱1,761,588.35.  (emphasis
131

supplied)

For better understanding, we summarize the CTA's computation as follows:

1. The CTA subtracted the rent income used in the construction of the Sports Complex
(₱4,007,724.00) from the rental income (₱10,610,379.00) earned from the abovementioned
concessionaries. The difference (₱6,602,655.00) was the portion claimed to have been deposited to
the CF-CPA Account.

2. The CTA then subtracted the supposed substantiated portion of CF-CPA disbursements

(₱1,761,308.37) from the ₱6,602,655.00 to arrive at the supposed unsubstantiated portion of the
rental income (₱4,841,066.65). 132

3. The substantiated portion of CF-CPA disbursements (₱l,761,308.37)  was derived by multiplying

133

the rental income claimed to have been added to the CF-CPA Account (₱6,602,655.00) by 26.68%
or the ratio of substantiated disbursements to total disbursements (₱23,463,543.02).

4. The 26.68% ratio  was the result of dividing the substantiated disbursements from the CF-CPA
134

Account as found by the Independent CPA (₱6,259,078.30) by the total disbursements

(₱23,463,543.02) from the same account.

We find that this system of calculation is incorrect and does not truly give effect to the constitutional
grant of tax exemption to non-stock, non-profit educational institutions. The CTA's reasoning is
flawed because it required DLSU to substantiate an amount that is greater than the rental income
deposited in the CF-CPA Account in 2003.

To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its rental
income (which amounted to a total of ₱10.61 million)  were used for educational purposes. This
135

amount was divided into two parts: (a) the ₱4.0l million, which was used to pay the loan obtained for
the construction of the Sports Complex; and (b) the ₱6.60 million,  which was transferred to the CF-
136

CPA account.

For year 2003, the total disbursement from the CF-CPA account amounted to ₱23 .46
million.  These figures, read in light of the constitutional exemption, raises the question: does DLSU
137

claim that the whole total CF-CPA disbursement of ₱23.46 million is tax-exempt so that it is
required to prove that all these disbursements had been made for educational purposes?

We answer in the negative.

The records show that DLSU never claimed that the total CF-CPA disbursements of ₱23.46 million
had been for educational purposes and should thus be tax-exempt; DLSU only claimed ₱10.61
million for tax-exemption and should thus be required to prove that this amount had been used as
claimed.
Of this amount, ₱4.01 had been proven to have been used for educational purposes, as confirmed
by the Independent CPA. The amount in issue is therefore the balance of ₱6.60 million which was
transferred to the CF-CPA which in turn made disbursements of ₱23.46 million for various general
purposes, among them the ₱6.60 million transferred by DLSU.

Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for educational
purposes in year 2003 in the amount ₱6.26 million. Based on these given figures, the CT A
concluded that the expenses for educational purposes that had been coursed through the CF-CPA
should be prorated so that only the portion that ₱6.26 million bears to the total CF-CPA
disbursements should be credited to DLSU for tax exemption.

This approach, in our view, is flawed given the constitutional requirement that revenues actually and
directly used for educational purposes should be tax-exempt. As already mentioned above, DLSU is
not claiming that the whole ₱23.46 million CF-CPA disbursement had been used for educational
purposes; it only claims that ₱6.60 million transferred to CF-CPA had been used for educational
purposes. This was what DLSU needed to prove to have actually and directly used for educational
purposes.

That this fund had been first deposited into a separate fund (the CF -CPA established to fund capital
projects) lends peculiarity to the facts of this case, but does not detract from the fact that the
deposited funds were DLSU revenue funds that had been confirmed and proven to have been
actually and directly used for educational purposes via the CF-CPA. That the CF-CPA might have
had other sources of funding is irrelevant because the assessment in the present case pertains only
to the rental income which DLSU indisputably earned as revenue in 2003. That the proven CF-CPA
funds used for educational purposes should not be prorated as part of its total CF-CPA
disbursements for purposes of crediting to DLSU is also logical because no claim whatsoever had
been made that the totality of the CF-CPA disbursements had been for educational purposes. No
prorating is necessary; to state the obvious, exemption is based on actual and direct use and this
DLSU has indisputably proven.

Based on these considerations, DLSU should therefore be liable only for the difference between
what it claimed and what it has proven. In more concrete terms, DLSU only had to prove that its
rental income for taxable year 2003 (₱10,610,379.00) was used for educational purposes. Hence,
while the total disbursements from the CF-CPA Account amounted to ₱23,463,543.02, DLSU only
had to substantiate its Pl0.6 million rental income, part of which was the ₱6,602,655.00 transferred
to the CF-CPA account. Of this latter amount, ₱6.259 million was substantiated to have been used
for educational purposes.

To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year 2003
as follows:

  CTA
Decision 138

Revised
Rental income 10,610,379.00 10,610,379.00

4,007,724.00 4,007,724.00
Less: Rent income used in construction of the Sports
Complex

     
 Rental income deposited to the CF-CPA Account 6,602,655.00 6,602,655.00

     

1,761,588.35 6,259,078.30
Less: Substantiated portion of CF-CPA
disbursements

     

Tax base for deficiency income tax and VAT 4,841,066.65 343.576.70

On DLSU' s argument that the CTA should have appreciated its evidence in the same way as it did
with the evidence submitted by Ateneo in another separate case, the CTA explained that the issue in
the Ateneo case was not the same as the issue in the present case.

The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income taxes
and VAT under certain BIR and Department of Finance issuances  that required the educational
139

institution to own and operate the canteens, or other commercial enterprises within its campus, as
condition for tax exemption. The CTA held that the Constitution does not require the educational
institution to own or operate these commercial establishments to avail of the exemption. 140

Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate the
separate sets of evidence differently. The CTA likewise stressed that DLSU and Ateneo gave distinct
defenses and that its wisdom "cannot be equated on its decision on two different cases with two
different issues."
141

DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because it
submitted similar, if not stronger sets of evidence, as Ateneo. We reject DLSU's argument for
being non sequitur. Its reliance on the concept of uniformity of taxation is also incorrect.

First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and

materiality of the evidence supporting their respective claims for tax exemption would necessarily
differ because their attendant issues and facts differ.

To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable
years they were assessed varied. The amount of tax assessment also varied. The amount of
income proven to have been used for educational purposes
also varied because the amount substantiated varied.  Thus, the amount of tax assessment
142

cancelled by the CTA varied.

On the one hand, the BIR assessed DLSU a total tax deficiency of ₱17,303,001.12 for taxable years
2001, 2002 and 2003. On the other hand, the BIR assessed Ateneo a total deficiency tax
of ₱8,864,042.35 for the same period. Notably, DLSU was assessed deficiency DST, while Ateneo
was not.143

Thus, although both Ateneo and DLSU claimed that they used their rental income actually, directly
and exclusively for educational purposes by submitting similar evidence, e.g., the testimony of their
employees on the use of university revenues, the report of the Independent CPA, their income
summaries, financial statements, vouchers, etc., the fact remains that DLSU failed to prove that a
portion of its income and revenues had indeed been used for educational purposes.

The CTA significantly found that some documents that could have fully supported DLSU's claim
were not produced in court. Indeed, the Independent CPA testified that some disbursements had not
been proven to have been used actually, directly and exclusively for educational purposes. 144

The final nail on the question of evidence is DLSU's own admission that the original of these
documents had not in fact been produced before the CTA although it claimed that there was no bad
faith on its part.  To our mind, this admission is a good indicator of how the Ateneo and the DLSU
145

cases varied, resulting in DLSU's failure to substantiate a portion of its claimed exemption.

Further, DLSU's invocation of Section 5, Rule 130 of the Revised

Rules on Evidence, that the contents of the missing supporting documents were proven by its recital
in some other authentic documents on record,  can no longer be entertained at this late stage of the
146

proceeding. The CTA did not rule on this particular claim. The CTA also made no finding on DLSU' s
assertion of lack of bad faith. Besides, it is not our duty to go over these documents to test the
truthfulness of their contents, this Court not being a trier of facts.

Second, DLSU misunderstands the concept of uniformity of taxation.

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate.  A tax is uniform when it operates with the same force and
147

effect in every place where the subject of it is found.  The concept requires that all subjects of
148

taxation similarly situated should be treated alike and placed in equal footing.149

In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike because
their income proved to have been used actually, directly and exclusively for educational purposes
were exempted from taxes. The CTA equally applied the requirements in the YMCA case to test if
they indeed used their revenues for educational purposes.

DLSU can only assert that the CTA violated the rule on uniformity if it can show that,
despite proving that it used actually, directly and exclusively for educational purposes its income and
revenues, the CTA still affirmed the imposition of taxes. That the DLSU secured a different result
happened because it failed to fully prove that it used actually, directly and exclusively for educational
purposes its revenues and income.

On this point, we remind DLSU that the rule on uniformity of taxation does not mean that subjects of
taxation similarly situated are treated in literally the same way in all and every occasion. The fact
that the Ateneo and DLSU are both non-stock, non-profit educational institutions, does not mean that
the CTA or this Court would similarly decide every case for (or against) both universities. Success in
tax litigation, like in any other litigation, depends to a large extent on the sufficiency of evidence.
DLSU's evidence was wanting, thus, the CTA was correct in not fully cancelling its tax liabilities.

b. DLSU proved its payment of the DST

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were paid
and remitted through its bank's On-Line Electronic DST Imprinting Machine. The Commissioner
argues that DLSU is not allowed to use this method of payment because an educational institution is
excluded from the class of taxpayers who can use the On-Line Electronic DST Imprinting Machine.
We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax Code
and the relevant revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and paid for by the
person making, signing, issuing, accepting, or transferring the same.  The Tax Code provides that
150

whenever one party to the document enjoys exemption from DST, the other party not exempt from
DST shall be directly liable for the tax. Thus, it is clear that DST shall be payable by any party to the
document, such that the payment and compliance by one shall mean the full settlement of the DST
due on the document.

In the present case, DLSU entered into mortgage and loan agreements with banks. These
agreements are subject to DST.  For the purpose of showing that the DST on the loan agreement
151

has been paid, DLSU presented its agreements bearing the imprint showing that DST on the
document has been paid by the bank, its counterparty. The imprint should be sufficient proof that
DST has been paid. Thus, DLSU cannot be further assessed for deficiency DST on the said
documents.

Finally, it is true that educational institutions are not included in the class of taxpayers who can pay
and remit DST through the On-Line Electronic DST Imprinting Machine under RR No. 9-2000. As
correctly held by the CTA, this is irrelevant because it was not DLSU who used the On-Line
Electronic DST Imprinting Machine but the bank that handled its mortgage and loan transactions.
RR No. 9-2000 expressly includes banks in the class of taxpayers that can use the On-Line
Electronic DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the

payment of the assessed DST deficiency, except for the unpaid balance of

₱13,265.48. 152

WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal

Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision and March 29, 2011
resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 622, except for the total
amount of deficiency tax liabilities of De La Salle University, Inc., which had been reduced.

We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition of
the Commissioner of Internal Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011
decision and October 4, 2011 resolution of the Court of Tax Appeals En Banc in CTA En Banc Case
No. 671, with the MODIFICATION that the base for the deficiency income tax and VAT for taxable
year 2003 is ₱343,576.70.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 195909               September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

x-----------------------x

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

The Case

These are consolidated  petitions for review on certiorari under Rule 45 of the Rules of Court
1 

assailing the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its
Resolution  of 1 March 2011 in CTA Case No. 6746. This Court resolves this case on a pure
2 

question of law, which involves the interpretation of Section 27(B) vis-à-vis Section 30(E) and (G) of
the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit
corporation. Under its articles of incorporation, among its corporate purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent,
charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to
the sick, diseased and disabled persons; provided that purely medical and surgical services
shall be performed by duly licensed physicians and surgeons who may be freely and
individually contracted by patients;

(b) To provide a career of health science education and provide medical services to the
community through organized clinics in such specialties as the facilities and resources of the
corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion of health as
well as provide facilities for scientific and medical researches which, in the opinion of the
 Board of Trustees, may be justified by the facilities, personnel, funds, or other requirements
that are available;

(d) To cooperate with organized medical societies, agencies of both government and private
sector; establish rules and regulations consistent with the highest professional ethics;

x x x x 
3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to ₱76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to
₱63,935,351.57 during trial in the First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the
NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential
tax rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's.
According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the
exemption on non-profit hospitals that were previously categorized as non-stock, non-profit
corporations under Section 26 of the 1997 Tax Code x x x."  It is a specific provision which prevails
5 

over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, non-
profit charitable institutions and civic organizations promoting social welfare. 
6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke's had total revenues of
₱1,730,367,965 or approximately ₱1.73 billion from patient services in 1998.  7

St. Luke's contended that the BIR should not consider its total revenues, because its free services to
patients was ₱218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less
operating expenses) of ₱334,642,615.  St. Luke's also claimed that its income does not inure to the
8 

benefit of any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does
not destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA
that Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment
of Section 27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section
30 of the NIRC and instead, imposes a preferential rate of 10% on their taxable income. The BIR
prays that St. Luke's be ordered to pay ₱57,659,981.19 as deficiency income and expanded
withholding tax for 1998 with surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding
of a part of its income,  as well as the payment of surcharge and delinquency interest. There is no
9 

ground for this Court to undertake such a factual review. Under the Constitution  and the Rules of
10 

Court,  this Court's review power is generally limited to "cases in which only an error or question of
11 
law is involved."  This Court cannot depart from this limitation if a party fails to invoke a recognized
12 

exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision
dated 23 February 2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED.
Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the
amount of ₱110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby
ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable
year 1998 in the respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the sum of
₱6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the
total amount of ₱6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to
Section 249(C)(3) of the NIRC of 1997.

SO ORDERED.  13

The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid, arose from the
failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net")  came 14 

from charitable activities. The CTA cancelled the remainder of the ₱63,113,952.79 deficiency
assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En
Banc held was not applicable to St. Luke's.  15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section
30(E) and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services
to its patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's
Medical Center, Inc. v. Commissioner of Internal Revenue,  which examined the primary purposes
16 

of St. Luke's under its articles of incorporation and various documents  identifying St. Luke's as a
17 

charitable institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City,  which states that "a
18 

charitable institution does not lose its charitable character and its consequent exemption from
taxation merely because recipients of its benefits who are able to pay are required to do so, where
funds derived in this manner are devoted to the charitable purposes of the institution x x x."  The 19 

generation of income from paying patients does not per se destroy the charitable nature of St.
Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue,  which20 

ruled that the old NIRC (Commonwealth Act No. 466, as amended)  "positively exempts from
21 

taxation those corporations or associations which, otherwise, would be subject thereto, because of
the existence of x x x net income."  The NIRC of 1997 substantially reproduces the provision on
22 

charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very
responsible organization must be run to at least insure its existence, by operating within the limits of
its own resources, especially its regular income. In other words, it should always strive, whenever
possible, to have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's.  The CTA
24 

explained that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit."
On the other hand, Congress specifically used the word "non-stock" to qualify a charitable
"corporation or association" in Section 30(E) of the NIRC. According to the CTA, this is unique in the
present tax code, indicating an intent to exempt this type of charitable organization from income tax.
Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is clear that non-
stock, non-profit hospitals operated exclusively for charitable purpose are exempt from income tax
on income received by them as such, applying the provision of Section 30(E) of the NIRC of 1997,
as amended."  25

The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B)
of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the
petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall
raise only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of
Appeals  which permits factual review "when the Court of Appeals [in this case, the CTA] manifestly
26 

overlooked certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion."  27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA
"disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the
nature of the 'Other Income-Net' x x x."  This is not a case of overlooking or failing to consider
28 

relevant evidence. The CTA obviously considered the evidence and concluded that it is self-serving.
The CTA declared that it has "gone through the records of this case and found no other evidence
aside from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x."  29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25%
surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the
time prescribed for its payment in the notice of assessment[.]"  St. Luke's is also liable to pay 20%
30 

delinquency interest under Section 249(C)(3) of the NIRC.  As explained by the CTA En Banc, the
31 

amount of ₱6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only
deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest.  32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section
27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable
and social welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to
proprietary educational institutions and proprietary non-profit hospitals. The BIR argues that
Congress intended to remove the exemption that non-profit hospitals previously enjoyed under
Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the
NIRC of 1997.  Section 27(B) of the present NIRC provides:
33 

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof
shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated
trade, business or other activity' means any trade, business or other activity, the conduct of which is
not substantially related to the exercise or performance by such educational institution or hospital of
its primary purpose or function. A 'proprietary educational institution' is any private school maintained
and administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may
be, in accordance with existing laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a
charitable institution and an organization promoting social welfare. The arguments of St. Luke's
focus on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable
institutions.  St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to
34 

remove the exemption for "proprietary non-profit" hospitals.  The relevant provisions of Section 30
35 

state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income
or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific
person;

xxxx

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)
The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B)
of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand,
can be construed together without the removal of such tax exemption. The effect of the introduction
of Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-
profit educational institutions  and proprietary non-profit hospitals, among the institutions covered by
36 

Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate
rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the
definition of a "proprietary educational institution" as "any private school maintained and
administered by private individuals or groups" with a government permit. "Non-profit" means no net
income or asset accrues to or benefits any member or specific person, with all the net income or
asset devoted to the institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino
Inc. de Cebu,  this Court considered as non-profit a sports club organized for recreation and
37 

entertainment of its stockholders and members. The club was primarily funded by membership fees
and dues. If it had profits, they were used for overhead expenses and improving its golf course.  The 38 

club was non-profit because of its purpose and there was no evidence that it was engaged in a
profit-making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court
defined "charity" in Lung Center of the Philippines v. Quezon City  as "a gift, to be applied
40 

consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing
their minds and hearts under the influence of education or religion, by assisting them to establish
themselves in life or [by] otherwise lessening the burden of government."  A non-profit club for the
41 

benefit of its members fails this test. An organization may be considered as non-profit if it does not
distribute any part of its income to stockholders or members. However, despite its being a tax
exempt institution, any income such institution earns from activities conducted for profit is taxable, as
expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity in
Lung Center. The issue in Lung Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities already assume a
part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of
taxes by the government is compensated by its relief from doing public works which would have
been funded by appropriations from the Treasury.  42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for
a tax exemption are specified by the law granting it. The power of Congress to tax implies the power
to exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that
"[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress."  The requirements for a tax exemption are strictly construed against the
43 

taxpayer  because an exemption restricts the collection of taxes necessary for the existence of the
44 

government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution
for the purpose of exemption from real property taxes. This ruling uses the same premise as
Hospital de San Juan  and Jesus Sacred Heart College  which says that receiving income from
45  46 

paying patients does not destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether out-patient, or confined
in the hospital, or receives subsidies from the government, so long as the money received is devoted
or used altogether to the charitable object which it is intended to achieve; and no money inures to
the private benefit of the persons managing or operating the institution.  47

For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that "[c]haritable institutions,
churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable,
or educational purposes shall be exempt from taxation."  The test of exemption is not strictly a
48 

requirement on the intrinsic nature or character of the institution. The test requires that the institution
use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung
Center of the Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to remove from the
tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E)
of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of
the NIRC defines the corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that
the institution "actually, directly and exclusively" use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted "exclusively"
for charitable purposes. The organization of the institution refers to its corporate form, as shown by
its articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC
specifically requires that the corporation or association be non-stock, which is defined by the
Corporation Code as "one where no part of its income is distributable as dividends to its members,
trustees, or officers"  and that any profit "obtain[ed] as an incident to its operations shall, whenever
49 

necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized."  However, under Lung Center, any profit by a charitable institution must
50 

not only be plowed back "whenever necessary or proper," but must be "devoted or used altogether
to the charitable object which it is intended to achieve." 51
The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that
"no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person." The use of lands, buildings and improvements of the institution is but
a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not
ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property "actually, directly and exclusively"
for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise,
to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated
exclusively" by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
"any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation
or association [must be] organized and operated exclusively for x x x charitable x x x purposes x x
x." It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the "income of whatever
kind and character" of a charitable institution "from any of its activities conducted for profit,
regardless of the disposition made of such income, shall be subject to tax." Prior to the introduction
of Section 27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate
under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying patients. It cannot
be disputed that a hospital which receives approximately ₱1.73 billion from paying patients is not an
institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are
income received from "activities conducted for profit."  Indeed, St. Luke's admits that it derived
52 

profits from its paying patients. St. Luke's declared ₱1,730,367,965 as "Revenues from Services to
Patients" in contrast to its "Free Services" expenditure of ₱218,187,498. In its Comment in G.R. No.
195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income
after expenses was allocated to free or charitable services" in 1998.  53

REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00

 OPERATING EXPENSES

Professional care of patients ₱1,016,608,394.00

Administrative 287,319,334.00

Household and Property 91,797,622.00

₱1,395,725,350.00

INCOME FROM OPERATIONS ₱334,642,615.00 100%

Free Services -218,187,498.00 -65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES ₱116,455,117.00 34.80%

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a
privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for the
words "used exclusively" without doing violence to the Constitution and the law. Solely is
synonymous with exclusively.  54

The Court cannot expand the meaning of the words "operated exclusively" without violating the
NIRC. Services to paying patients are activities conducted for profit. They cannot be considered any
other way. There is a "purpose to make profit over and above the cost" of services.  The ₱1.73
55 

billion total revenues from paying patients is not even incidental to St. Luke's charity expenditure of
₱218,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying patients, then it cannot be said
that the income is "devoted or used altogether to the charitable object which it is intended to
achieve."  The income is plowed back to the corporation not entirely for charitable purposes, but for
56 

profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that
income from activities for profit is taxable "regardless of the disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase
"any activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus
Cuenco, who was a member of the Committee of Conference for the Senate, which introduced the
phrase "or from any activity conducted for profit."
P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no cree Vd. que es
una actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha
universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa; pero

considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de
buena posición social económica, lo que se paga por estos enfermos debe estar sujeto a 'income
tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any
activity conducted for profit.'  57

The question was whether having a hospital is essential to an educational institution like the College
of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid
rooms generally occupied by people of good economic standing, then it should be subject to income
tax. He said that this was one of the reasons Congress inserted the phrase "or any activity
conducted for profit."

The question in Jesus Sacred Heart College involves an educational institution.  However, it is
58 

applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on
the activities of charitable institutions. Activities for profit should not escape the reach of taxation.
Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its profitable activities from
being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an
institution be "operated exclusively" for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if
it earns income from its for-profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate
but now at the preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be limited to institutions beneficial to the public and those
which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to
the detriment of the government and other taxpayers. 1âwphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits
are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is "a corporation for purely charitable and social welfare purposes"59 and thus
exempt from income tax.  In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue,  the
60  61 

Court said that "good faith and honest belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the tax law, are sufficient justification to
delete the imposition of surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center,
Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income
tax rate under Section 27(B) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals
are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1,
Rule 45 of the Rules of Court.

SO ORDERED.
 THIRD DIVISION

February 27, 2019

G.R. No. 202792

LA SALLIAN EDUCATIONAL INNOVATORS FOUNDATION (DE LA SALLE

UNIVERSITYCOLLEGE OF ST. BENILDE) INC., Petitioner
vs.
COMMISIONER OF INTERNAL REVENUE, Respondent

DECISION

A. REYES, JR., J.:

Before this Court is a Petition for Review on Certiorari  taken under Rule 16 of the Revised Rules of
1

the Court of Tax Appeals, in relation to Rule 45 of the Rules of Court seeking to nullify the
Decision  dated April 19, 2012 and Resolution  promulgated on July 17, 2012 of the Court of Tax
2 3

Appeals (CTA) En Banc.

The Factual Antecedents

Petitioner La Sallian Educational Innovators Foundation, Inc. (De La Salle University-College of St.
Benilde Foundation)/for brevity) is a non-stock, non-profit domestic corporation duly organized and
existing under the laws of the Philippines.  Respondent is the Commissioner of Internal Revenue
4

who has the power to decide, cancel, and abate tax liabilities pursuant to Section 204(B) of the Tax
Code, as amended. 5

On June 17, 2005, respondent issued two (2) Assessment Notices, both numbered 33-FY 05-31-02,
for fiscal year ending May 31, 2002.  The notices have demand letters against petitioner for
1âшphi1

deficiency income tax. The alleged deficiency income tax is in the amount of P122,414,521.70,
inclusive of interest, computed as follows: 6

Gross Income Per Return on Educational ₱618,449,079.00

Less: Expenses Per Return on Educational 459,848,867.00

Net Income Per Return ₱158,600,212.00

Add: Adjustments Per Investigation

Interest Expense

- Disallowed (Sec. 34 (B) NIRC) ₱21,827,506.66

Provision For Retirement

- Not Deductible (Sec. 34 NIRC) 27,059,453.34

 Provision For Doubtful Accounts

- Not Deductible (Sec. 34 NIRC) 4,252,393.73

Not Subject to Withholding Tax

- Sec. 34 NIRC

Rental 123,147.00

Income Not Subjected to Income Tax

- Depository Accounts (Sec. 32 NIRC) 575,702,650.00

Unlocated/Unsupported Invoices & Vouchers (Sec. 34 2,150,270.66 631,170,895.82

NIRC)

Adjusted Taxable Income ₱789,771,107.82

Tax Due ₱ 78,977,110.78

Less: Tax due per return -

Deficiency Income Tax (subject to increments) ₱ 78,977,110.78

Add: 25% surcharge (Sec. 248)

20% interest from __ to 06-20-05 (Sec. 249) ₱ 43,437,410.92

Compromise Penalty (Sec. 254) ______________

TOTAL AMOUNT DUE & COLLECTIBLE ₱122,414,521.70

The other Assessment Notice is for a deficiency value-added tax (VAT) in the amount of
P2,752,228.54, inclusive of interest, computed as follows:

Taxable Income Subject to VAT

ICC Revenue ₱ 24,830,069.00

Auxiliary Service Income 637,280.35

Concessionaire 606,726.00

Mimeo/Xerox 425,489.60

Book store-School Supplies 559,140.96

Parking Fund 2,729,330.75

 Boarding House 2,513,338.02

Locker Rental 309,172.00 32,610,546.68

VAT Output Tax Due - Sec. 106/08 NIRC ₱ 3,261,054.67

Less: Creditable Input Tax

Carried Over from Previous Quarter ₱770,351.28

Current Input Tax 943,242.91

Total

Less: Excess/To be Applied to

Succeeding Year - Sec. 110 NIRC ₱ 121,991.53

Unsupported - Sec. 110 NIRC 393,240.74

Pro-rated between Hotel & School

- Sec. 110, NIRC 309,956.13 825,188.40 888,405.79

VAT Due ₱ 2,372,648.88

Less: Payment 652,506.04

Deficiency VAT ₱ 1,720,142.84

Add: 25% surcharge (Sec. 248)

20% interest from __ to 06-20-05 (Sec. 249) 1,032,085.70

Compromise Penalty (Sec. 254)

_____________________________

TOTAL AMOUNT DUE & COLLECTIBLE ₱ 2,752,228.54 7

On the same date, a separate demand letter was also sent by respondent to petitioner for a
compromise penalty in deficiency VAT in the amount of P25,000.00. 8

To contest the deficiency taxes assessed, petitioner Foundation filed a Protest or Request for
Reconsideration to respondent on July 20, 2005.  After the petitioner Foundation has submitted all
9

the documents in support of its protest, and in view of respondent's inaction thereto, petitioner
Foundation filed a Petition for Review before the Special First Division of the CTA Division. It was
sent through registered mail on April 17, 2006, the last day of filing the appeal.  However, petitioner
10

was only able to pay the docket and other legal fees nine days after or on April 26, 2006. 11
Notably, petitioner Foundation executed an Agreement Form with the Bureau of Internal Revenue
(BIR) on April 21, 2006, and paid the deficiency VAT liability of P601,487.70 on May 9, 2006. 12

However, respondent alleged that the petitioner Foundation has already lost its tax-exempt status,
malting it liable to deficiency income tax. The Details of Discrepancies issued by the BIR
enumerated the following findings, to wit: 13

a. The foundation may be a non-stock entity but it is definitely a profit-oriented organization wherein
majority of its revenue-operating activities are generating huge amount of profit amounting to P643
million that earned from expensive tuition fees collected from its students, mostly belong to a [sic]
upper class family.

b. The foundation's Cash in Bank in the amount of P775 million comprise of investing activities and
has significant movement in relation to its charitable purposes, which mean that the foundation are
[sic] not giving sufficient donations which is the main reasons [sic] for its qualification[s] [sic] for
exemption. During the school year the foundations [sic] has a total cash receipts of approximately
1.222 Billion out of which only 77 Million goes to the revolving fund.

c. Based on the Cash Flow of the foundation activities the taxpayer has used 583 Million for
operating activities, 54 Million interest/settlement of loan and 203 Million for investing activities or
70% of foundation's earnings goes to the administrative purposes and improvement of the school to
increase number of its enrollees and increase further its profit and not to further its charitable
purposes.

Pursuant to section 30 of the NIRC, "Notwithstanding the provisions in the preceding Paragraphs,
the income of whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for profit [r]egardless of the
disposition made by such income, shall be subject to tax imposed under this Code."

d. The taxpayer's Ruling for exemption from the BIR was obtained in 1988, hence, all Ruling issued
before the implementations or RA No. 8424 or CTRP was repealed, thereby, requiring the taxpayer
to apply for new Revenue Ruling for exemption taking consideration of its income earning activities.

On the other hand, petitioner Foundation consistently argued that it enjoys a tax-exempt status from
all taxes as a non-stock, non-profit educational institution as expressly provided under Paragraph 4,
Section 4, Article XIV of the 1987 Constitution, which reads:

ARTICLE XIV
EDUCATION, SCIENCE AND TECHNOLOGY, ARTS, CULTURE AND SPORTS EDUCATION

xxxx

Section 4. x x x.

xxxx

(3) All revenues and assets of non-stock, non-profit educational institution used actually, directly and
exclusively for educational purposes shall be exempt from taxes and duties. x x x.

Moreover, petitioner Foundation denied the respondent's allegations that it engaged in

disproportionate profit-earning activities contrary to its educational purpose. Contrary to the
allegations, it explained that the sum of P643,279,148.00 is not profit, but merely the gross receipts
from school-year 2002. 14

Bearing in mind that the total expenses of the Foundation is in the amount of P582,903,965.00, the
net receipt of petitioner Foundation is only P60,375,183.  This was corroborated by the Foundation's
15

Audited Financial Statement.  Remarkably, this amount is equivalent to just 9.38% of its total
16

operating receipts. 17

Furthermore, petitioner Foundation's claim that all the said income is actually, directly and
exclusively used or earmarked for promoting its educational purpose and not a single centavo inure
to the benefit of any of the Foundation's members, trustees and officers.  The Independent Certified
18

Public Accountant, Mr. Edwin Ramos, also testified and explained that the administrative expenses
of the Foundation would necessarily be lower than 27.35%.

Thereafter, respondent filed its Answer on June 15, 2006,  and petitioner Foundation filed its Reply
19

on June 30, 2006  to the CTA Division.

20

Ruling of CTA Division

On July 16, 2010, the CTA Division promulgated a Decision  ruling in favor of petitioner Foundation,
21

and cancelling Assessment Notice No. 33-FY 05-31-02 for fiscal year ending May 31, 2002, with
demand letter. The dispositive portion reads:

WHEREFORE, the Petition for Review is hereby GRANTED. The Assessment Notice No. 33-FY 05-
31-02 for fiscal year ending May 31, 2002, with demand letter, against petitioner for deficiency
income tax in the amount of ONE HUNDRED TWENTY-TWO MILLION FOUR HUNDRED
FOURTEEN THOUSAND FIVE HUNDRED TWENTY-ONE PESOS & 70/100 (P122,414,521.70) is
hereby CANCELLED.

SO ORDERED. 22

The CTA Division also ruled that there's nothing in the Foundation's books that will show that it
operated for profit or that any of its income inured to the benefit of its members or trustees.  The
23

CTA Division found that (1) petitioner Foundation maintained its tax-exempt status under Section 4,
Article XIV of the 1987 Constitution, and (2) the Final Assessment Notices issued by respondent
against petitioner Foundation are not valid for failing to state their legal and factual basis hence, all
other issues raised are moot and academic. 24

Dissatisfied with CTA Division's decision, respondent filed a Motion for Reconsideration dated
August 3, 2010,  which petitioner Foundation opposed by filing an Opposition to Motion for
25

Reconsideration dated August 16, 2010. 26

The CTA Division resolved it by promulgating a Resolution dated November 18, 2010 denying
respondent's motion for reconsideration for lack of merit.  In the body of the resolution, the CTA
27

Division agreed with petitioner Foundation that respondent's motion for reconsideration merely
raised the same arguments which have been sufficiently addressed and passed by the CTA Division
in the assailed decision. 28

Thereafter, respondent filed a petition for review before the CTA En Banc dated December 21, 2010
against the resolution denying its Motion for Reconsideration,  to which petitioner Foundation filed its
29

Comment on February 3, 2011. 30

Ruling of the CTA En Banc

On April 19, 2012, the CTA En Banc promulgated a Decision  granting respondent's petition for
31

review and reversing the decision of the CTA Division, to wit:

WHEREFORE, the Petition for Review dated December 21, 2010, filed by the Commissioner of
Internal Revenue, is hereby GRANTED. The Decision dated July 16, 2010 and the Resolution dated
November 18, 2010 are REVERSED and SET ASIDE. Consequently, the Petition for Review dated
April 17, 2006 filed before the Court in Division is DISMISSED, on jurisdictional grounds.

SO ORDERED. 32

The CTA En Banc ruled that the CTA Division should not have given due course to petitioner
Foundation's petition for review.  Payment of docket fees and other legal fees within the thirty (30)-
33

day reglementary period to appeal is mandatory and jurisdictional. The late payment of docket fees
prevented the CTA Division from acquiring jurisdiction.  Petitioner Foundation's appeal was allegedly
34

not perfected because the payment of the docket fees was made only on April 26, 2006 or nine (9)
days after April 17, 2006, the last day for filing the appeal.  As a result, the assailed assessment has
35

allegedly become final and executory. 36

Moreover, even assuming that the CTA Division had jurisdiction over the petition, the latter allegedly
erred in cancelling the assessment notice because the presumption of its correctness has not been
overturned. The CTA En Banc emphasized that petitioner Foundation's tax exempt status has been
impliedly revoked due to its excessive profit-earning activities. 37

Aggrieved, petitioner Foundation filed its Motion for Reconsideration  dated May 18, 2012, but it was
38

likewise denied by the CTA En Banc. 39

Hence, this petition for review on certiorari. 40

The Issues

Although the parties raised a number of issues, this Court shall decide only the pivotal issues which
we summarized as follows: 41

I. WHETHER THE PETITIONER FOUNDATION HAS LOST ITS TAX-EXEMPT STATUS

UNDER THE 1987 CONSTITUTION

II. WHETHER THE CTA EN BANG COMMITTED A REVERSIBLE ERROR WHEN IT

REVERSED AND SET ASIDE THE DECISION OF THE CTA DIVISION DATED JULY
16, 2010 AND RESOLUTION DATED NOVEMBER 18, 2010

Ruling of the Court

The petition is meritorious.

No less than the 1987 Constitution expressly exempt all revenues and assets of non-stock, non-
profit educational institutions from taxes provided that they are actually, directly and exclusively used
for educational purposes, to wit: 42
Section 4.(1) The State recognizes the complementary roles of public and private institutions in the
educational system and shall exercise reasonable supervision and regulation of all educational
institutions.

xxxx

(3) All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and
duties. (Emphasis and underscoring supplied)

This constitutional exemption is reiterated in Section 30 (H) of the 1997 Tax Code, as amended,
which provides as follows:

Sec. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:

xxxx

(H) A non[-]stock and non[-]profit educational institution[.]

Clearly, non-stock, non-profit educational institutions are not required to pay taxes on all their
revenues and assets if they are used actually, directly and exclusively for educational purposes.

According to the BIR, petitioner Foundation has failed to comply with the constitutional requirements
for being a profit-oriented educational institution. Hence, it is no longer a tax-exempt entity, and is
subject to a 10% income tax rate as a taxable proprietary educational institution. 43

The Court disagrees.

Petitioner Foundation has presented adequate legal and factual basis to prove that it remains as a
tax exempt entity under Article XIV, Section 4, Paragraph 3 of the 1987 Constitution.

Based on jurisprudence and tax rulings, a taxpayer shall be granted with this tax exemption after
proving that: (1) it falls under the classification of non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually, directly
and exclusively for educational purposes. 44

Petitioner Foundation has fulfilled both of the abovementioned requirements.

For the first requirement, there is no contest as both the parties have stipulated that petitioner
Foundation is a non-stock, non-profit educational institution. 45

Nonetheless, the Petitioner Foundation's primary and secondary purposes in its Amended Articles of
Incorporation clearly provide that it is a non-stock, non-profit educational entity, to wit:
46

SECOND: That the purposes and objectives for which such corporation is incorporated are:

That the primary purpose for which said corporation is formed is to establish a school that will offer
elementary, secondary, collegiate and post graduate courses of study, as well as technical,
vocational and special courses under one campus with emphasis on its being innovative in its
approach to undergraduate education through self-learning devices, kits, individually guided
teaching, credit by equivalence, credited internships, and practicism, as the Board of Trustees may
determine, the primary intention being to form the whole man through integration of a liberal
Christian education with professional competence for participation in Philippine development.

AND IN THE FURTHERANCE OF THE FOREGOING, the institution shall:

xxxx

8. Any profits derived from activities and undertakings described in paragraph 2, 3, 5 and 6
immediately preceding shall not inure to any of the members, trustees or officers but shall be used
exclusively for the maintenance of the Corporation.

Moreover, petitioner Foundation has no capital divided into shares.  No part of its income can be
47

distributed as dividends to its members, trustees and officers.  The members of the Board of
48

Trustees do not receive any compensation for the performance of their duties, including attendance
in meetings. 49

It is also important to mention that in BIR Ruling No. 176-88 dated August 23, 1988, the BIR already
declared that petitioner Foundation is a non-stock, non-profit educational institution that is exempt
from certain taxes. 50

As pointed out by respondent, petitioner Foundation did not secure a new BIR Ruling on its claim for
exemption after the Tax Code has been amended. However, this Court finds such fact insignificant.
The application for a new BIR Ruling is unnecessary considering that the BIR Ruling was never
revoked, and the primary purpose of petitioner Foundation remained the same. Notably, respondent
also failed to mention any legal basis that will require petitioner Foundation to secure a new BIR
Ruling to confirm its tax exempt status.

Furthermore, the respondent claimed that petitioner Foundation is not a non-profit educational
institution anymore due to its alleged enormous profits. Respondent accused it of operating contrary
to the nature of a non-profit educational institution by generating massive profits in the amount of
P643,000,000.00 from tuition fees, and having cash worth P775,000,000 in its bank. 51

However, these allegations were completely unsupported by facts and evidence.

Based on the evidence presented, the P643,000,000.00 is not petitioner Foundation's profit as it is
just the gross receipt from school year 2002.  Unfortunately, respondent easily overlooked petitioner
52

Foundation's administrative and non-administrative expenses amounting to P582,903,965.00.  This 53

sum constituted the total operating expenses of petitioner Foundation for the fiscal year ended May
31, 2002.  Thus, the income of petitioner Foundation is only P60,375,183.00 or 9.38% of its
54

operating receipts.  This is way below the average gross profit margin rate of 20% for most business
55

enterprises. 56

Furthermore, the alleged P775,000,000 cash of petitioner Foundation is in reality a part of its Cash
and Cash Equivalents account. The amount of P575,700,000.00 therein constitutes Funds Held in
Trust to finance capital improvements, scholarship, faculty development, retirement and for other
restricted uses.  The rest of the account consists of highly liquidated debt instruments purchased
57

with a short term maturity.  Clearly, there is nothing in the petitioner Foundation's books that will
58

indicate that it is driven by profit or that its income is used for anything but in pursuit of its primary
purpose.
In several cases, this Court has ruled that a non-profit institution will not be considered profit driven
simply because of generating profits.  The reason behind this was explained by this Court in its
59

earlier ruling in Jesus Sacred Heart College v. Collector of Internal Revenue,  to wit:
60

To hold that an educational Institution is subject to income tax whenever it is so administered as to

reasonably assure that it will not incur in deficit, is to nullify and defeat the aforementioned
exemption. Indeed, the effect, in general, of the interpretation advocated by appellant would be to
deny the exemption whenever there is net income, contrary to the tenor of said section 27(e) which
positively exempts from taxation those corporations or associations which, otherwise, would be
subject thereto, because of the existence of said net income.

Needless to say, every responsible organization must be so run as to, at least insure its
existence by operating within the limits of its own resources, especially its regular income. In
other words, it should always strive, whenever possible, to have a surplus.  (Emphasis and
61

underscoring supplied)

Considering the clear explanation of the nature of the money involved, it is evident that all of
petitioner Foundation's income is actually, directly and exclusively used or earmarked for promoting
its educational purpose.  To reiterate, respondent never argued that the income of petitioner
62

Foundation was used in any manner other than for promoting its purpose as a non-stock, non-profit
educational institution, hi fact, there is not even a single argument or evidence presented to cast a
doubt in the proper usage of petitioner Foundation's income.

Furthermore, a simple reading of the Constitution would show that Article XIV, Section 4 (3) does not
require that the revenues and income must have also been earned from educational activities or
activities related to the purposes of an educational institution. The phrase "all revenues" is
unqualified by any reference to the source of revenues.  Thus, so long as the revenues and income
63

are used actually, directly and exclusively for educational purposes, then said revenues and income
shall be exempt from taxes and duties. 64

In the instant case, petitioner Foundation firmly and adequately argued that none of its income
inured to the benefit of any officer or entity. Instead, its income has been actually, exclusively and
directly used for performing its purpose as an educational institution. Undoubtedly, petitioner
Foundation has also proven this second requisite.

Thus, the tax exempt status of petitioner Foundation under the 1987 Constitution is clear.

It can be recalled that the questioned CTA En Banc decision only ruled on the procedural aspect of
the case on the ground that it is jurisdictional and determinative of the validity of the whole
process.  The late payment of docket fees allegedly divested the CTA Division of jurisdiction or
65

authority to take cognizance of the petition for review filed before it.  As a result, the decision of the
66

CTA Division was rendered without jurisdiction, and is totally null and void. Thus, the impugned tax
deficiency assessment has become final and executory, and its correctness cannot be disputed
anymore. 67

This Court cannot agree.

The tax exemption expressly granted by the 1987 Constitution, the supreme law of the land, cannot
be set aside by any statute, especially by a mere technicality in procedure. While payment of docket
fee and other legal fees within the thirty (30)-day reglementary period to appeal a tax assessment to
the CTA is mandatory and jurisdictional, this Court will not hesitate to exercise its equity jurisdiction
and allow a liberal interpretation of the rules of procedure if a rigid application will defeat substantial
justice.

This Court has ruled in the past that if a rigid application of the rules of procedure will tend to
obstruct rather than serve the broader interests of justice and depending on the prevailing
circumstances of the case, such as where strong considerations of substantive justice are manifest
ill the petition, the Court may relax the strict application of the rules of procedure in the exercise of its
equity jurisdiction.
68

The Court's pronouncement in Heirs of Amada Zaulda v. Zaulda  is instructive on this matter, to wit:
69

The reduction in the number of pending cases is laudable, but if it would be attained by precipitate, if
not preposterous, application of technicalities, justice would not be served. The law abhors
technicalities that impede the cause of justice. The court's primary duty is to render or dispense
justice. "It is a more prudent course of action for the court to excuse a technical lapse and
afford the parties a review of the case on appeal rather than dispose of the case on
technicality and cause a grave injustice to the parties, giving a false impression of speedy
disposal of cases while actually resulting in more delay, if not miscarriage of justice. " x x x

What should guide judicial action is the principle that a party-litigant should be given the
fullest opportunity to establish the merits of his complaint or defense rather than for him to
lose life, liberty, honor, or property on technicalities. The rules of procedure should be
viewed as mere tools designed to facilitate the attainment of justice. Their strict and rigid
application, which would result in technicalities that tend to frustrate rather than promote substantial
justice, must always be eschewed. At this juncture, the Court reminds all members of the bench and
bar of the admonition in the often-cited case of Alonso v. Villamar  (Emphasis and underscoring
70

supplied; citation omitted)

Otherwise stated, procedural rules are important tools designed to facilitate the dispensation of
justice, but legal technicalities may be excused when strict adherence thereto will impede the
achievement of justice it seeks to serve.

In the present case, petitioner Foundation timely opposed the tax deficiency assessments against it
by filing a Protest or Request for Reconsideration, the proper remedy, before the BIR. Due to
respondent's inaction, it filed a petition for review, also the proper remedy, within the reglementary
period required by law. In addition, it completely paid the required docket and legal fees in the
amount of P861,178.34.

However, a procedural controversy arose because the payment of the required docket and legal
fees was done nine (9) days after the last day for filing the petition for review. To recall, petitioner
Foundation's petition for review was filed through a registered mail on April 17, 2006, the last day of
filing. It was not able to pay the docket and legal fees on the day of filing because the CTA received
the petition and made a computation of the required fees only on April 26, 2006 or nine (9) days
after.

The question now is: should the late payment of the docket fees divest the CTA Division of
jurisdiction over petitioner Foundation's petition for review making the VAT deficiency assessment of
P122,414,521.70 against a tax-exempt entity final and executory?

This Court answers in the negative.

Indeed, the general rule is that a petition for review is perfected by timely filing it and paying the
requisite docket fees and other lawful fees. However, all general rules admit of certain exceptions. 71

In Mactan Cebu International Airport Authority v. Mangubat  where the docket fees were paid six (6)
72

days late, this Court said that where the party immediately paid the required fees showing
willingness to abide by the rules, and in view of the significance of the issues raised in the cask the
same calls for judicial leniency, thus:

In all, what emerges from all of the above is that the rules of procedure in the matter of paying the
docket fees must be followed. However, there are exceptions to the stringent requirement as to call
for a relaxation of the application of the rules, such as: (1) most persuasive and weighty reasons;
(2) to relieve a litigant from an injustice not commensurate with his failure to comply with the
prescribed procedure; (3) good faith of the defaulting party by immediately paying within a
reasonable time from the time of the default; (4) the existence of special or compelling
circumstances; (5) the merits of the case; (6) a cause not entirely attributable to the fault or
negligence of the party favored by the suspension of the rules; (7) a lack of any showing that the
review sought is merely frivolous and dilatory; (8) the other party will not be unjustly prejudiced
thereby; (9) fraud, accident, mistake or excusable negligence without appellant's fault; (10) peculiar
legal and equitable circumstances attendant to each case; (11) in the name of substantial justice and
fair play; (12) importance of the issues involved; and (13) exercise of sound discretion by the judge
guided by all the attendant circumstances. Concomitant to a liberal interpretation of the rules of
procedure should be an effort on the part of the party invoking liberality to adequately explain his
failure to abide by the rules. Anyone seeking exemption from the application of the Rule has the
burden of proving that exceptionally meritorious instances exist which warrant such
departure.  (Emphasis and underscoring supplied)
73

In other words, while procedural rules are important in the administration of justice, they may be
excused for the most persuasive and meritorious reasons in order to relieve a litigant of an injustice
that is not commensurate with the degree of his thoughtlessness in not complying with the procedure
prescribed.74

To reiterate, petitioner Foundation was able to establish that it is a tax exempt entity under the 1987
Constitution. It has timely filed its Protest to the tax deficiency assessment. It was also able to
actually pay the full amount of the required docket and legal fees in the amount of P861,178.34, but
it was nine (9) days late. Evidently, petitioner Foundation immediately paid the docket and legal fees
upon the CTA's assessment of the proper amount which showed petitioner's good faith.

Moreover, the issue involved in this case is no less than the tax assessment over a non-stock, non-
profit educational institution, which the 1987 Constitution mandated to be tax exempt. Otherwise
stated, what is at stake is the opportunity for the proper and just determination of petitioner
Foundation's status as a tax-exempt entity under the 1987 Constitution, and a deprivation of a
substantial amount of property.

Taking into account the importance of the issues raised in the petition filed before the CTA Division,
and what petitioner stands to lose, the CTA En Banc should have considered the merits of said
petition. By ruling for the denial of the said petition solely based on technicalities, the CTA En
Banc absolutely foreclosed the resolution of the issues raised therein. Definitely, justice would have
been better served if the CTA En Banc allowed the resolution of the issues that were raised in the
petition.
This Court agrees with the decision of the CTA Division to give due course to the petition.
Consequently, the CTA Division acquired jurisdiction to examine the assailed VAT deficiency
assessment, and the latter did not become final and executory.

Furthermore, the Court finds petitioner Foundation's procedural mistake incommensurate to the
grave injustice to be made in violation of the 1987 Constitution's mandate, and petitioner
Foundation's payment of P122,414,521.70, representing the VAT deficiency.

It is worthy to note that this kind of lenient application of the rules of procedure for exceptionally
persuasive and meritorious reasons is not novel. In fact, in the case of Tanenglian v. Lorenzo, et
al.,  this Court gave due course to the appeal which was not only made through a wrong mode but
75

was even filed beyond the reglementary period. This Court recognized the broader interest of justice
and reasoned that: 76

We have not been oblivious to or unmindful of the extraordinary situations that merit liberal
application of the Rules, allowing us, depending on the circumstances, to set aside technical
infirmities and give due course to the appeal. In cases where we dispense with the technicalities, we
do not mean to undermine the force and effectivity of the periods set by law. I those rare cases
where we did not stringently apply the procedural rules, there always existed a clear need to prevent
the commission of a grave injustice. Our judicial system and the courts have always tried to
maintain a healthy balance between the strict enforcement o procedural laws and the
guarantee that every litigant be given the full opportunity for the just and proper disposition
of his cause. x x x.

xxxx

In Sebastian v. Morales, we ruled that rules of procedure must b faithfully followed except only
when, for persuasive reasons, they may be relaxed to relieve a litigant of an injustice not
commensurate with his failure to comply with the prescribed procedure, thus:

xxxx

The Court has allowed some meritorious cases to proceed despite inherent procedural defects and
lapses. This is in keeping with the principle that rules of procedure are mere tools designed to
facilitate the attainment of justice and that strict and rigid application of rules which would result in
technicalities that tend to frustrate rather than promote substantial justice must always be avoided. It
is a far better and more prudent cause o action for the court to excuse a technical lapse and
afford the parties a review of the case to attain the ends of justice, rather than dispose of the
case on technicality and cause grave injustice to the parties, giving false impression of
speedy disposal of cases while actually resulting in more delay, if not a miscarriage of
justice. (Emphasis supplied; citation, omitted).

Finally, it is crucial to be reminded that the constitutionally mandated tax privilege granted to non-
stock non-profit educational institutions plays an important role in promoting quality and affordable
education in the country. In the consolidated cases of Commissioner of Internal Revenue v. De La
Salle University Inc.,  this Court discussed the important role of this tax privilege for educating the
77

students, to wit:

We find that the text demonstrates the policy of the 1987 Constitution, discernible from the records
of the 1986 Constitutional Commission to provide broader tax privilege to non-stock, non-profit
educational institutions as recognition of their role in assisting the State provide a public
good. The tax exemption was seen as beneficial to students who may otherwise be charged
unreasonable tuition fees if not for the tax exemption extended to all revenues and assets of
non-stock, non-profit educational institutions. (Emphasis and underscoring supplied; citations
omitted).

Evidently, petitioner Foundation, being a non-stock, non-profit educational institution, is not liable to
the payment of VAT deficiency assessment, and the CTA En Banc erred in finding otherwise and in
reversing the CTA Division.

WHEREFORE, premises considered, the petition is GRANTED. The assailed Decision dated April
19, 2012 and Resolution promulgated on July 17, 2012 of the Court of Tax Appeals En Banc in
C.T.A. EB Case No. 703 are ANULLED and SET ASIDE. Assessment Notice No. 33-FY 05-31-02
for fiscal year ending May 31, 2002 against petitioner La Sallian Educational Innovators Foundation
(De La Salle University-College of St. Benilde), Inc. for deficiency income tax in the amount of ONE
HUNDRED TWENTY-TWO MILLION FOUR HUNDRED FOURTEEN THOUSAND FIVE HUNDRED
TENTY-ONE PESOS & 70/100 (P122,414,521.70) is hereby CANCELLED.

SO ORDERED.