VIRGILIO GASTON, HORTENCIA STARKE, ROMEO GUANZON, OSCAR

VILLANUEVA, JOSE ABELLO, REMO RAMOS, CAROLINA LOPEZ, JESUS ISASI,

MANUEL LACSON, JAVIER LACSON, TITO TAGARAO, EDUARDO SUATENGCO,
AUGUSTO LLAMAS, RODOLFO SIASON, PACIFICO MAGHARI, JR., JOSE
JAMANDRE, AURELIO GAMBOA, ET AL., Petitioners, v. REPUBLIC PLANTERS
BANK, PHILIPPINE SUGAR COMMISSION, and SUGAR REGULATORY
ADMINISTRATION, Respondents, ANGEL H. SEVERINO, JR., GLICERIO
JAVELLANA, GLORIA P. DE LA PAZ, JOEY P. DE LA PAZ, ET AL., and NATIONAL
FEDERATION OF SUGARCANE PLANTERS, intervenors.
cir

SYLLABUS

1. STATUTES; PRESIDENTIAL DECREE 388; STABILIZATION FUND; NOT IMPLIED

TRUST CREATED IN FAVOR OF SUGAR PROCEDURES. — No implied trust in favor of the
sugar producers either can be deduced from the imposition of the levy. "The essential
idea of an implied trust involves a certain antagonism between the cestui que trust and
the trustee even when the trust has not arisen out of fraud nor out of any transaction of
a fraudulent or immoral character (65 CJ 222). It is not clearly shown from the statute
itself that the PHILSUCOM imposed on itself the obligation of holding the stabilization
fund for the benefit of the sugar producers. It must be categorically demonstrated that
the very administrative agency which is the source of such regulation would place a
burden on itself (Batchelder v. Central Bank of the Philippines, L-25071, July 29, 1972,
46 SCRA 102, citing People v. Que Po Lay, 94 Phil. 640 [1954]).

2. ID.; ID.; STABILIZATION FEES; NATURE; PURPOSE OF LEVY. — The stabilization

fees collected are in the nature of a tax, which is within the power of the State to
impose for the promotion of the sugar industry (Lutz v. Araneta, 98 Phil. 148). They
constitute sugar liens (Sec. 7[b], P.D. No. 388). The collections made accrue to a
"Special Fund," a "Development and Stabilization Fund," almost identical to the "Sugar
Adjustment and Stabilization Fund" created under Section 6 of Commonwealth Act 567.
The tax collected is not in a pure exercise of the taxing power. It is levied with a
regulatory purpose, to provide means for the stabilization of the sugar industry. The
levy is primarily in the exercise of the police power of the State (Lutz v. Araneta,
supra.).

DECISION

MELENCIO-HERRERA, J.:

Petitioners are sugar producers, sugarcane planters and millers, who have come to this
Court in their individual capacities and in representation of other sugar producers,
planters and millers, said to be so numerous that it is impracticable to bring them all
before the Court although the subject matter of the present controversy is of common
interest to all sugar producers, whether parties in this action or not.
Respondent Philippine Sugar Commission (PHILSUCOM, for short) was formerly the
government office tasked with the function of regulating and supervising the sugar
industry until it was superseded by its co-respondent Sugar Regulatory Administration
(SRA, for brevity) under Executive Order No. 18 on May 28, 1986. Although said
Executive Order abolished the PHILSUCOM, its existence as a juridical entity was
mandated to continue for three (3) more years "for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to dispose
of and convey its property and to distribute its assets."cralaw virtua1aw library

Respondent Republic Planters Bank (briefly, the Bank) is a commercial banking

corporation.

Angel H. Severino, Jr., Et Al., who are sugarcane planters planting and milling their
sugarcane in different mill districts of Negros Occidental, were allowed to intervene by
the Court, since they have common cause with petitioners and respondents having
interposed no objection to their intervention. Subsequently, on January 14, 1988, the
National Federation of Sugar Planters (NFSP) also moved to intervene, which the Court
allowed on February 16, 1988.

Petitioners and Intervenors have come to this Court praying for a Writ of Mandamus
commanding respondents: jgc:chanrobles.com.ph

"TO IMPLEMENT AND ACCOMPLISH THE PRIVATIZATION OF REPUBLIC PLANTERS BANK

BY THE TRANSFER AND DISTRIBUTION OF THE SHARES OF STOCK IN THE SAID BANK,
NOW HELD BY AND STILL CARRIED IN THE NAME OF THE PHILIPPINE SUGAR
COMMISSION, TO THE SUGAR PRODUCERS, PLANTERS AND MILLERS, WHO ARE THE
TRUE BENEFICIAL OWNERS OF THE 761,416 COMMON SHARES VALUED AT
P36,548,000.00, AND 53,005,045 PREFERRED SHARES (A, B & C) WITH A TOTAL PAR
VALUE OF P254,424,224.72, OR A TOTAL INVESTMENT OF P290,972,224.72, THE SAID
INVESTMENT HAVING BEEN FUNDED BY THE DEDUCTION OF P1.00 PER PICUL
FROM SUGAR PROCEEDS OF THE SUGAR PRODUCERS COMMENCING THE YEAR
1978-79 UNTIL THE PRESENT AS STABILIZATION FUND PURSUANT TO P.D. #388." cralaw virtua1aw library

Respondent Bank does not take issue with either petitioners or its co-respondents as it
has no beneficial or equitable interest that may be affected by the ruling in this Petition,
but welcomes the filing of the Petition since it will settle finally the issue of legal
ownership of the questioned shares of stock.

Respondents PHILSUCOM and SRA, for their part, squarely traverse the petition arguing
that no trust results from Section 7 of P.D. No. 388; that the stabilization fees collected
are considered government funds under the Government Auditing Code; that the
transfer of shares of stock from PHILSUCOM to the sugar producers would be irregular,
if not illegal; and that this suit is barred by laches.

The Solicitor General aptly summarizes the basic issues thus: (1) whether the
stabilization fees collected from sugar planters and millers pursuant to Section 7 of P.D.
No. 388 are funds in trust for them, or public funds; and (2) whether shares of stock in
respondent Bank paid for with said stabilization fees belong to the PHILSUCOM or to the
different sugar planters and millers from whom the fees were collected or levied.
P.D. No. 388, promulgated on February 2, 1974, which created the PHILSUCOM,
provided for the collection of a Stabilization Fund as follows: jgc:chanrobles.com.ph

"SEC. 7. Capitalization, Special Fund of the Commission, Development and Stabilization

Fund. — There is hereby established a fund for the commission for the purpose of
financing the growth and development of the sugar industry and all its components,
stabilization of the domestic market including the foreign market to be administered in
trust by the Commission and deposited in the Philippine National Bank derived in the
manner herein below cited from the following sources: chanrob1es virtual 1aw library

a. Stabilization fund shall be collected as provided for in the various provisions of this
Decree.

b. Stabilization fees shall be collected from planters and millers in the amount of Two
(P2.00) Pesos for every picul produced and milled for a period of five years from the
approval of this Decree and One (P1.00) Peso for every picul produced and milled every
year thereafter.

Provided: That fifty (P0.50) centavos per picul of the amount levied on planters, millers
and traders under Section 4(c) of this Decree will be used for the payment of salaries
and wages of personnel, fringe benefits and allowances of officers and employees for
the purpose of accomplishing and employees for the purpose of accomplishing the
efficient performance of the duties of the Commission.

Provided, further: That said amount shall constitute a lien on the sugar quedan and/or
warehouse receipts and shall be paid immediately by the planters and mill companies,
sugar centrals and refineries to the Commission." (paragraphing and bold supplied).

Section 7 of P.D. No. 388 does provide that the stabilization fees collected "shall be
administered in trust by the Commission." However, while the element of an intent to
create a trust is present, a resulting trust in favor of the sugar producers, millers and
planters cannot be said to have ensued because the presumptive intention of the
parties is not reasonably ascertainable from the language of the statute itself.

"The doctrine of resulting trusts is founded on the presumed intention of the parties;
and as a general rule, it arises where, and only where such may be reasonably
presumed to be the intention of the parties, as determined from the facts and
circumstances existing at the time of the transaction out of which it is sought to be
established (89 C.J.S. 947)." cralaw virtua1aw library

No implied trust in favor of the sugar producers either can be deduced from the
imposition of the levy. "The essential idea of an implied trust involves a certain
antagonism between the cestui que trust and the trustee even when the trust has not
arisen out of fraud nor out of any transaction of a fraudulent or immoral character (65
CJ 222). It is not clearly shown from the statute itself that the PHILSUCOM imposed on
itself the obligation of holding the stabilization fund for the benefit of the sugar
producers. It must be categorically demonstrated that the very administrative agency
which is the source of such regulation would place a burden on itself (Batchelder v.
Central Bank of the Philippines, L-25071, July 29, 1972, 46 SCRA 102, citing People v.
Que Po Lay, 94 Phil. 640 [1954]).
Neither can petitioners place reliance on the history of respondent Bank. They recite
that at the beginning, the Bank was owned by the Roman-Rojas Group. Because it
underwent difficulties early in the year 1978, Mr. Roberto S. Benedicto, then Chairman
of the PHILSUCOM, submitted a proposal to the Central Bank for the rehabilitation of
the Bank. The Central Bank acted favorably on the proposal at the meeting of the
Monetary Board on March 31, 1978 subject to the infusion of fresh capital by the
Benedicto Group. Petitioners maintain that this infusion of fresh capital was
accomplished, not by any capital investment by Mr. Benedicto, but by PHILSUCOM,
which set aside the proceeds of the P1.00 per picul stabilization fund to pay for its
subscription in shares of stock of respondent Bank. It is petitioners’ submission that all
shares were placed in PHILSUCOM’s name only out of convenience and necessity and
that they are the true and beneficial owners thereof.

In point of fact, we cannot see our way clear to upholding petitioners’ position that the
investment of the proceeds from the stabilization fund in subscriptions to the capital
stock of the Bank were being made for and on their behalf. That could have been
clarified by the Trust Agreement, dated May 28, 1986, entered into between
PHILSUCOM, as "Trustor" acting through Mr. Fred J. Elizalde as Officer-in-Charge, and
respondent RPB-Trust Department" as "Trustee," acknowledging that PHILSUCOM
"holds said shares for and in behalf of the sugar producers," the latter "being the true
and beneficial owners thereof." The Agreement, however, did not get off the ground
because it failed to receive the approval of the PHILSUCOM Board of Commissioners as
required in the Agreement itself.

The SRA, which succeeded PHILSUCOM, neither approved the Agreement because of
the adverse opinion of the SRA Resident Auditor, dated June 25, 1986, which was
affirmed by the Chairman of the Commission on Audit, on January 26, 1987.

On February 19, 1987, the SRA resolved to revoke the Trust Agreement "in the light of
the ruling of the Commission on Audit that the aforementioned Agreement is of doubtful
validity." cralaw virtua1aw library

From the legal standpoint, we find basis for the opinion of the Commission on Audit
reading:jgc:chanrobles.com.ph

"That the government, PHILSUCOM or its successor-in-interest, Sugar Regulatory

Administration, in particular, owns and stocks. While it is true that the collected
stabilization fees were set aside by PHILSUCOM to pay its subscription to RPB, it did not
collect said fees for the account of the sugar producers. That stabilization fees are
charges/levies on sugar produced and milled which accrued to PHILSUCOM under PD
338, as amended. . . ." cralaw virtua1aw library

The stabilization fees collected are in the nature of a tax, which is within the power of
the State to impose for the promotion of the sugar industry (Lutz v. Araneta, 98 Phil.
148). They constitute sugar liens (Sec. 7[b], P.D. No. 388). The collections made
accrue to a "Special Fund," a "Development and Stabilization Fund," almost identical to
the "Sugar Adjustment and Stabilization Fund" created under Section 6 of
Commonwealth Act 567. 1 The tax collected is not in a pure exercise of the taxing
power. It is levied with a regulatory purpose, to provide means for the stabilization of
the sugar industry. The levy is primarily in the exercise of the police power of the State
(Lutz v. Araneta, supra.).

"The protection of a large industry constituting one of the great sources of the state’s
wealth and therefore directly or indirectly affecting the welfare of so great a portion of
the population of the State is affected to such an extent by public interests as to be
within the police power of the sovereign." (Johnson v. State ex rel. Marey, 128 So. 857,
cited in Lutz v. Araneta, supra).

The stabilization fees in question are levied by the State upon sugar millers, planters
and producers for a special purpose — that of "financing the growth and development
of the sugar industry and all its components, stabilization of the domestic market
including the foreign market." The fact that the State has taken possession of moneys
pursuant to law is sufficient to constitute them state funds, even though they are held
for a special purpose (Lawrence v. American Surety Co., 263 Mich 586, 249 ALR 535,
cited in 42 Am. Jur. Sec. 2, p. 718). Having been levied for a special purpose, the
revenues collected are to be treated as a special fund, to be, in the language of the
statute, "administered in trust" for the purpose intended. Once the purpose has been
fulfilled or abandoned, the balance, if any, is to be transferred to the general funds of
the Government. That is the essence of the trust intended (See 1987 Constitution,
Article VI, Sec. 29(3), lifted from the 1935 Constitution, Article VI, Sec. 23[1]). 2

The character of the Stabilization Fund as a special fund is emphasized by the fact that
the funds are deposited in the Philippine National Bank and not in the Philippine
Treasury, moneys from which may be paid out only in pursuance of an appropriation
made by law (1987) Constitution, Article VI, Sec. 29[1], 1973 Constitution, Article VIII,
Sec. 18[1]).

That the fees were collected from sugar producers, planters and millers, and that the
funds were channeled to the purchase shares of stock in respondent Bank do not
convert the funds into a trust fund for their benefit nor make them the beneficial
owners of the shares so purchased. It is but rational that the fees be collected from
them since it is also they who are to be benefited from the expenditure of the funds
derived from it. The investment in shares of respondent Bank is not alien to the
purpose intended because of the Bank’s character as a commodity bank for sugar
conceived for the industry’s growth and development. Furthermore, of note is the fact
that one-half, (1/2) or P0.50 per picul, of the amount levied under P.D. No. 388 is to be
utilized for the "payment of salaries and wages of personnel, fringe benefits and
allowances of officers and employees of PHILSUCOM" thereby immediately negating the
claim that the entire amount levied is in trust for sugar, producers, planters and millers.

To rule in petitioners’ favor would contravene the general principle that revenues
derived from taxes cannot be used for purely private purposes or for the exclusive
benefit of private persons. The Stabilization Fund is to be utilized for the benefit of the
entire sugar industry, "and all its components, stabilization of the domestic market
including the foreign market," the industry being of vital importance to the country’s
economy and to national interest.

WHEREFORE, the Writ of Mandamus is denied and the Petition hereby dismissed. No
costs.
This Decision is immediately executory.

CASE DIGEST:

Facts:

Petitioners are sugar producers, sugarcane planters and millers, who have come to this
Court in their individual capacities and in representation of other sugar producers,
planters and millers.

Respondent Philippine Sugar Commission (PHILSUCOM, for short) was formerly the
government office tasked with the function of regulating and supervising the sugar
industry until it was superseded by its co-respondent Sugar Regulatory Administration
(SRA, for brevity) under Executive Order No. 18 on May 28, 1986. virtua1aw library

Respondent Republic Planters Bank (briefly, the Bank) is a commercial banking

corporation.

Angel H. Severino, Jr., Et Al., who are sugarcane planters planting and milling their
sugarcane in different mill districts of Negros Occidental, were allowed to intervene by
the Court, since they have common cause with petitioners and respondents having
interposed no objection to their intervention. Subsequently, National Federation of
Sugar Planters (NFSP) also moved to intervene, which the Court.

Petitioners and Intervenors have come to this Court praying for a Writ of Mandamus
commanding respondents: jgc:chanrobles.com.ph

"TO IMPLEMENT AND ACCOMPLISH THE PRIVATIZATION OF REPUBLIC PLANTERS BANK

BY THE TRANSFER AND DISTRIBUTION OF THE SHARES OF STOCK IN THE SAID BANK,
NOW HELD BY AND STILL CARRIED IN THE NAME OF THE PHILIPPINE SUGAR
COMMISSION, TO THE SUGAR PRODUCERS, PLANTERS AND MILLERS, WHO ARE THE
TRUE BENEFICIAL OWNERS OF THE 761,416 COMMON SHARES VALUED AT
P36,548,000.00, AND 53,005,045 PREFERRED SHARES (A, B & C) WITH A TOTAL PAR
VALUE OF P254,424,224.72, OR A TOTAL INVESTMENT OF P290,972,224.72, THE SAID
INVESTMENT HAVING BEEN FUNDED BY THE DEDUCTION OF P1.00 PER PICUL
FROM SUGAR PROCEEDS OF THE SUGAR PRODUCERS COMMENCING THE YEAR
1978-79 UNTIL THE PRESENT AS STABILIZATION FUND PURSUANT TO P.D. #388." cralaw virtua1aw library

Respondent Bank does not take issue with either petitioners or its co-respondents as it
has no beneficial or equitable interest that may be affected by the ruling in this Petition,
but welcomes the filing of the Petition since it will settle finally the issue of legal
ownership of the questioned shares of stock.

Respondents PHILSUCOM and SRA, for their part, squarely traverse the petition arguing
that no trust results from Section 7 of P.D. No. 388; that the stabilization fees collected
are considered government funds under the Government Auditing Code; that the
transfer of shares of stock from PHILSUCOM to the sugar producers would be irregular,
if not illegal; and that this suit is barred by laches.
ISSUE:

(1) whether the stabilization fees collected from sugar planters and millers
pursuant to Section 7 of P.D. No. 388 are funds in trust for them, or public
funds;

(2) whether shares of stock in respondent Bank paid for with said stabilization
fees belong to the PHILSUCOM or to the different sugar planters and millers
from whom the fees were collected or levied.

RULING:

1. The stabilization fees collected from sugar planters and millers pursuant to
Section 7 of P.D. No. 388 are public funds. According to P.D. No. 388,
promulgated on February 2, 1974, which created the PHILSUCOM, provided
for the collection of a Stabilization Fund as follows: jgc:chanrobles.com.ph

"SEC. 7. Capitalization, Special Fund of the Commission, Development and

Stabilization Fund. — There is hereby established a fund for the commission
for the purpose of financing the growth and development of the sugar
industry and all its components, stabilization of the domestic market
including the foreign market to be administered in trust by the Commission
and deposited in the Philippine National Bank derived in the manner herein
below cited from the following sources: chanrob1es virtual 1aw library

a. Stabilization fund shall be collected as provided for in the various

provisions of this Decree.

b. Stabilization fees shall be collected from planters and millers in the amount
of Two (P2.00) Pesos for every picul produced and milled for a period of five
years from the approval of this Decree and One (P1.00) Peso for every picul
produced and milled every year.

No implied trust in favor of the sugar producers either can be deduced from the
imposition of the levy. "The essential idea of an implied trust involves a certain
antagonism between the cestui que trust and the trustee even when the trust
has not arisen out of fraud nor out of any transaction of a fraudulent or immoral
character. It is not clearly shown from the statute itself that the PHILSUCOM
imposed on itself the obligation of holding the stabilization fund for the benefit of
the sugar producers. It must be categorically demonstrated that the very
administrative agency which is the source of such regulation would place a
burden on itself.

To rule in petitioners’ favor would contravene the general principle that revenues
derived from taxes cannot be used for purely private purposes or for the
 exclusive benefit of private persons. The Stabilization Fund is to be utilized for
the benefit of the entire sugar industry, "and all its components, stabilization of
the domestic market including the foreign market," the industry being of vital
importance to the country’s economy and to national interest.

2. The shares of stock in respondent Bank paid for with said stabilization fees
belong to the PHILSUCOM. The SC finds basis on the opinion of COA, "That
the government, PHILSUCOM or its successor-in-interest, Sugar Regulatory
Administration, in particular, owns and stocks. While it is true that the
collected stabilization fees were set aside by PHILSUCOM to pay its
subscription to RPB, it did not collect said fees for the account of the sugar
producers. That stabilization fees are charges/levies on sugar produced and
milled which accrued to PHILSUCOM under PD 338, as amended. . . ." cralaw virtua1aw library

The stabilization fees collected are in the nature of a tax, which is within the
power of the State to impose for the promotion of the sugar industry (Lutz v.
Araneta, 98 Phil. 148). They constitute sugar liens (Sec. 7[b], P.D. No. 388).
The collections made accrue to a "Special Fund," a "Development and
Stabilization Fund," almost identical to the "Sugar Adjustment and
Stabilization Fund" created under Section 6 of Commonwealth Act 567. 1 The
tax collected is not in a pure exercise of the taxing power. It is levied with a
regulatory purpose, to provide means for the stabilization of the sugar
industry. The levy is primarily in the exercise of the police power of the State.

The stabilization fees in question are levied by the State upon sugar millers, planters
and producers for a special purpose — that of "financing the growth and development
of the sugar industry and all its components, stabilization of the domestic market
including the foreign market." The fact that the State has taken possession of moneys
pursuant to law is sufficient to constitute them state funds, even though they are held
for a special purpose Having been levied for a special purpose, the revenues collected
are to be treated as a special fund, to be, in the language of the statute, "administered
in trust" for the purpose intended. Once the purpose has been fulfilled or abandoned,
the balance, if any, is to be transferred to the general funds of the Government.

The fees were collected from sugar producers, planters and millers, and that the funds
were channeled to the purchase shares of stock in respondent Bank do not convert the
funds into a trust fund for their benefit nor make them the beneficial owners of the
shares so purchased.

WHEREFORE, the Writ of Mandamus is denied and the Petition hereby dismissed. No
costs.
 PLANTERS PRODUCTS, INC., Petitioner, v. FERTIPHIL
CORPORATION, Respondent.
DECISION
REYES, R.T., J.:
THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the
constitutionality of statutes, executive orders, presidential decrees and other issuances.
The Constitution vests that power not only in the Supreme Court but in all Regional
Trial Courts.
The principle is relevant in this Petition for Review on Certiorari of the Decision1 of the
Court of Appeals (CA) affirming with modification that of the RTC in Makati City, 2 finding
petitioner Planters Products, Inc. (PPI) liable to private respondent Fertiphil Corporation
(Fertiphil) for the levies it paid under Letter of Instruction (LOI) No. 1465.
The Facts
Petitioner PPI and private respondent Fertiphil are private corporations incorporated
under Philippine laws.3 They are both engaged in the importation and distribution of
fertilizers, pesticides and agricultural chemicals.
On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers,
issued LOI No. 1465 which provided, among others, for the imposition of a capital
recovery component (CRC) on the domestic sale of all grades of fertilizers in the
Philippines.4 The LOI provides:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing
formula a capital contribution component of not less than P10 per bag. This capital
contribution shall be collected until adequate capital is raised to make PPI viable. Such
capital contribution shall be applied by FPA to all domestic sales of fertilizers in the
Philippines.5 (Underscoring supplied) cralawlibrary

Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic
market to the Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount
collected to the Far East Bank and Trust Company, the depositary bank of PPI. Fertiphil
paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986. 6
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy.
With the return of democracy, Fertiphil demanded from PPI a refund of the amounts it
paid under LOI No. 1465, but PPI refused to accede to the demand. 7
Fertiphil filed a complaint for collection and damages 8 against FPA and PPI with the RTC
in Makati. It questioned the constitutionality of LOI No. 1465 for being unjust,
unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial
of due process of law.9 Fertiphil alleged that the LOI solely favored PPI, a privately
owned corporation, which used the proceeds to maintain its monopoly of the fertilizer
industry.
In its Answer,10 FPA, through the Solicitor General, countered that the issuance of LOI
No. 1465 was a valid exercise of the police power of the State in ensuring the stability
of the fertilizer industry in the country. It also averred that Fertiphil did not sustain any
damage from the LOI because the burden imposed by the levy fell on the ultimate
consumer, not the seller.
 RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as
follows:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of
the plaintiff and against the defendant Planters Product, Inc., ordering the latter to pay
the former:
1) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand;
2) the sum of P100,000 as attorney's fees;
3) the cost of suit.
SO ORDERED.11
Ruling that the imposition of the P10 CRC was an exercise of the State's inherent power
of taxation, the RTC invalidated the levy for violating the basic principle that taxes can
only be levied for public purpose, viz.:
It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI
1465 is purportedly in the exercise of the power of taxation. It is a settled principle that
the power of taxation by the state is plenary. Comprehensive and supreme, the
principal check upon its abuse resting in the responsibility of the members of the
legislature to their constituents. However, there are two kinds of limitations on the
power of taxation: the inherent limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for public purposes:
The power to tax can be resorted to only for a constitutionally valid public purpose. By
the same token, taxes may not be levied for purely private purposes, for building up of
private fortunes, or for the redress of private wrongs. They cannot be levied for the
improvement of private property, or for the benefit, and promotion of private
enterprises, except where the aid is incident to the public benefit. It is well-settled
principle of constitutional law that no general tax can be levied except for the purpose
of raising money which is to be expended for public use. Funds cannot be exacted
under the guise of taxation to promote a purpose that is not of public interest. Without
such limitation, the power to tax could be exercised or employed as an authority to
destroy the economy of the people. A tax, however, is not held void on the ground of
want of public interest unless the want of such interest is clear. (71 Am. Jur. pp. 371-
372)
In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and
Pesticide Authority pursuant to the P10 per bag of fertilizer sold imposition under LOI
1465 which, in turn, remitted the amount to the defendant Planters Products, Inc. thru
the latter's depository bank, Far East Bank and Trust Co. Thus, by virtue of LOI 1465
the plaintiff, Fertiphil Corporation, which is a private domestic corporation, became
poorer by the amount of P6,698,144.00 and the defendant, Planters Product, Inc.,
another private domestic corporation, became richer by the amount of P6,698,144.00.
Tested by the standards of constitutionality as set forth in the afore-quoted
jurisprudence, it is quite evident that LOI 1465 insofar as it imposes the amount of P10
per fertilizer bag sold in the country and orders that the said amount should go to the
defendant Planters Product, Inc. is unlawful because it violates the mandate that a tax
can be levied only for a public purpose and not to benefit, aid and promote a private
enterprise such as Planters Product, Inc.12
PPI moved for reconsideration but its motion was denied. 13 PPI then filed a notice of
appeal with the RTC but it failed to pay the requisite appeal docket fee. In a separate
but related proceeding, this Court 14 allowed the appeal of PPI and remanded the case to
the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with modification
that of the RTC, with the following fallo:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED,
subject to the MODIFICATION that the award of attorney's fees is hereby DELETED. 15
In affirming the RTC decision, the CA ruled that the lis mota of the complaint for
collection was the constitutionality of LOI No. 1465, thus:
The question then is whether it was proper for the trial court to exercise its power to
judicially determine the constitutionality of the subject statute in the instant case.
As a rule, where the controversy can be settled on other grounds, the courts will not
resolve the constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The
policy of the courts is to avoid ruling on constitutional questions and to presume that
the acts of political departments are valid, absent a clear and unmistakable showing to
the contrary.
However, the courts are not precluded from exercising such power when the following
requisites are obtaining in a controversy before it: First, there must be before the court
an actual case calling for the exercise of judicial review. Second, the question must be
ripe for adjudication. Third, the person challenging the validity of the act must have
standing to challenge. Fourth, the question of constitutionality must have been raised at
the earliest opportunity; and lastly, the issue of constitutionality must be the very lis
mota of the case (Integrated Bar of the Philippines v. Zamora, 338 SCRA 81 [2000]).
Indisputably, the present case was primarily instituted for collection and damages.
However, a perusal of the complaint also reveals that the instant action is founded on
the claim that the levy imposed was an unlawful and unconstitutional special
assessment. Consequently, the requisite that the constitutionality of the law in question
be the very lis mota of the case is present, making it proper for the trial court to rule on
the constitutionality of LOI 1465.16
The CA held that even on the assumption that LOI No. 1465 was issued under the
police power of the state, it is still unconstitutional because it did not promote public
welfare. The CA explained:
In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under
the said law was an invalid exercise of the State's power of taxation inasmuch as it
violated the inherent and constitutional prescription that taxes be levied only for public
purposes. It reasoned out that the amount collected under the levy was remitted to the
depository bank of PPI, which the latter used to advance its private interest.
On the other hand, appellant submits that the subject statute's passage was a valid
exercise of police power. In addition, it disputes the court a quo's findings arguing that
the collections under LOI 1465 was for the benefit of Planters Foundation, Incorporated
(PFI), a foundation created by law to hold in trust for millions of farmers, the stock
ownership of PPI.
Of the three fundamental powers of the State, the exercise of police power has been
characterized as the most essential, insistent and the least limitable of powers,
extending as it does to all the great public needs. It may be exercised as long as the
activity or the property sought to be regulated has some relevance to public welfare
(Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition).
Vast as the power is, however, it must be exercised within the limits set by the
Constitution, which requires the concurrence of a lawful subject and a lawful method.
Thus, our courts have laid down the test to determine the validity of a police measure
as follows: (1) the interests of the public generally, as distinguished from those of a
particular class, requires its exercise; and (2) the means employed are reasonably
necessary for the accomplishment of the purpose and not unduly oppressive upon
individuals (National Development Company v. Philippine Veterans Bank, 192 SCRA 257
[1990]).
It is upon applying this established tests that We sustain the trial court's holding LOI
1465 unconstitutional. To be sure, ensuring the continued supply and distribution of
fertilizer in the country is an undertaking imbued with public interest. However, the
method by which LOI 1465 sought to achieve this is by no means a measure that will
promote the public welfare. The government's commitment to support the successful
rehabilitation and continued viability of PPI, a private corporation, is an unmistakable
attempt to mask the subject statute's impartiality. There is no way to treat the self-
interest of a favored entity, like PPI, as identical with the general interest of the
country's farmers or even the Filipino people in general. Well to stress, substantive due
process exacts fairness and equal protection disallows distinction where none is needed.
When a statute's public purpose is spoiled by private interest, the use of police power
becomes a travesty which must be struck down for being an arbitrary exercise of
government power. To rule in favor of appellant would contravene the general principle
that revenues derived from taxes cannot be used for purely private purposes or for the
exclusive benefit of private individuals.17
The CA did not accept PPI's claim that the levy imposed under LOI No. 1465 was for the
benefit of Planters Foundation, Inc., a foundation created to hold in trust the stock
ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465 was for the benefit of Planters
Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions
of farmers, the stock ownership of PFI on the strength of Letter of Undertaking (LOU)
issued by then Prime Minister Cesar Virata on April 18, 1985 and affirmed by the
Secretary of Justice in an Opinion dated October 12, 1987, to wit:
"2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to
include in its fertilizer pricing formula a capital recovery component, the proceeds of
which will be used initially for the purpose of funding the unpaid portion of the
outstanding capital stock of Planters presently held in trust by Planters Foundation, Inc.
(Planters Foundation), which unpaid capital is estimated at approximately P206 million
(subject to validation by Planters and Planters Foundation) (such unpaid portion of the
outstanding capital stock of Planters being hereafter referred to as the 'Unpaid
Capital' ), and subsequently for such capital increases as may be required for the
continuing viability of Planters.
The capital recovery component shall be in the minimum amount of P10 per bag, which
will be added to the price of all domestic sales of fertilizer in the Philippines by any
importer and/or fertilizer mother company. In this connection, the Republic hereby
acknowledges that the advances by Planters to Planters Foundation which were applied
to the payment of the Planters shares now held in trust by Planters Foundation, have
been assigned to, among others, the Creditors. Accordingly, the Republic, through FPA,
hereby agrees to deposit the proceeds of the capital recovery component in the special
trust account designated in the notice dated April 2, 1985, addressed by counsel for the
Creditors to Planters Foundation. Such proceeds shall be deposited by FPA on or before
the 15th day of each month.
The capital recovery component shall continue to be charged and collected until
payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the
Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the
amounts which may be outstanding from time to time of the Unpaid Capital and/or the
Subsidy Receivables and (d) the capital increases contemplated in paragraph 2 hereof.
For the purpose of the foregoing clause (c), the 'carrying cost' shall be at such rate as
will represent the full and reasonable cost to Planters of servicing its debts, taking into
account both its peso and foreign currency-denominated obligations." (Records, pp. 42-
43)
Appellant's proposition is open to question, to say the least. The LOU issued by then
Prime Minister Virata taken together with the Justice Secretary's Opinion does not
preponderantly demonstrate that the collections made were held in trust in favor of
millions of farmers. Unfortunately for appellant, in the absence of sufficient evidence to
establish its claims, this Court is constrained to rely on what is explicitly provided in LOI
1465 - that one of the primary aims in imposing the levy is to support the successful
rehabilitation and continued viability of PPI.18
PPI moved for reconsideration but its motion was denied. 19 It then filed the present
petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE
DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND
DAMAGES WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF
THE CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY
WHICH HAS NO STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE
FERTILIZER SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A
FOUNDATION CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR
STOCK OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE
EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.
 III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS
REMITTED TO THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO
AN EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED
RIGHTS BY VIRTUE OF THE PRINCIPLE OF "OPERATIVE FACT" PRIOR TO ANY
DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO
APPLICATION IN THE INSTANT CASE.20 (Underscoring supplied) cralawlibrary

Our Ruling
We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC
to resolve constitutional issues.
Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a
mere procedural technicality which may be waived.
PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No.
1465 because it does not have a "personal and substantial interest in the case or will
sustain direct injury as a result of its enforcement." 21 It asserts that Fertiphil did not
suffer any damage from the CRC imposition because "incidence of the levy fell on the
ultimate consumer or the farmers themselves, not on the seller fertilizer company." 22
We cannot agree. The doctrine of locus standi or the right of appearance in a court of
justice has been adequately discussed by this Court in a catena of cases. Succinctly put,
the doctrine requires a litigant to have a material interest in the outcome of a case. In
private suits, locus standi requires a litigant to be a "real party in interest," which is
defined as "the party who stands to be benefited or injured by the judgment in the suit
or the party entitled to the avails of the suit."23
In public suits, this Court recognizes the difficulty of applying the doctrine especially
when plaintiff asserts a public right on behalf of the general public because of
conflicting public policy issues.24 On one end, there is the right of the ordinary citizen to
petition the courts to be freed from unlawful government intrusion and illegal official
action. At the other end, there is the public policy precluding excessive judicial
interference in official acts, which may unnecessarily hinder the delivery of basic public
services.
In this jurisdiction, We have adopted the "direct injury test" to determine locus standi in
public suits. In People v. Vera,25 it was held that a person who impugns the validity of a
statute must have "a personal and substantial interest in the case such that he has
sustained, or will sustain direct injury as a result." The "direct injury test" in public suits
is similar to the "real party in interest" rule for private suits under Section 2, Rule 3 of
the 1997 Rules of Civil Procedure.26
Recognizing that a strict application of the "direct injury" test may hamper public
interest, this Court relaxed the requirement in cases of "transcendental importance" or
with "far reaching implications." Being a mere procedural technicality, it has also been
held that locus standi may be waived in the public interest. 27
Whether or not the complaint for collection is characterized as a private or public suit,
Fertiphil has locus standi to file it. Fertiphil suffered a direct injury from the
enforcement of LOI No. 1465. It was required, and it did pay, the P10 levy imposed for
every bag of fertilizer sold on the domestic market. It may be true that Fertiphil has
passed some or all of the levy to the ultimate consumer, but that does not disqualify it
from attacking the constitutionality of the LOI or from seeking a refund. As seller, it
bore the ultimate burden of paying the levy. It faced the possibility of severe sanctions
for failure to pay the levy. The fact of payment is sufficient injury to Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was
compelled to factor in its product the levy. The levy certainly rendered the fertilizer
products of Fertiphil and other domestic sellers much more expensive. The harm to
their business consists not only in fewer clients because of the increased price, but also
in adopting alternative corporate strategies to meet the demands of LOI No. 1465.
Fertiphil and other fertilizer sellers may have shouldered all or part of the levy just to
be competitive in the market. The harm occasioned on the business of Fertiphil is
sufficient injury for purposes of locus standi.
Even assuming arguendo that there is no direct injury, We find that the liberal policy
consistently adopted by this Court on locus standi must apply. The issues raised by
Fertiphil are of paramount public importance. It involves not only the constitutionality of
a tax law but, more importantly, the use of taxes for public purpose. Former President
Marcos issued LOI No. 1465 with the intention of rehabilitating an ailing private
company. This is clear from the text of the LOI. PPI is expressly named in the LOI as
the direct beneficiary of the levy. Worse, the levy was made dependent and conditional
upon PPI becoming financially viable. The LOI provided that "the capital contribution
shall be collected until adequate capital is raised to make PPI viable."
The constitutionality of the levy is already in doubt on a plain reading of the statute. It
is Our constitutional duty to squarely resolve the issue as the final arbiter of all
justiciable controversies. The doctrine of standing, being a mere procedural technicality,
should be waived, if at all, to adequately thresh out an important constitutional issue.
RTC may resolve constitutional issues; the constitutional issue was adequately raised in
the complaint; it is the lis mota of the case.
PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It
asserts that the constitutionality of the LOI cannot be collaterally attacked in a
complaint for collection.28 Alternatively, the resolution of the constitutional issue is not
necessary for a determination of the complaint for collection. 29
Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its
complaint. It claims that the constitutionality of LOI No. 1465 is the very lis mota of the
case because the trial court cannot determine its claim without resolving the issue. 30
It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute,
presidential decree or an executive order. This is clear from Section 5, Article VIII of
the 1987 Constitution, which provides:
SECTION 5. The Supreme Court shall have the following powers:
x x x
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari , as the law or the
Rules of Court may provide, final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty, international or
executive agreement, law, presidential decree, proclamation, order, instruction,
ordinance, or regulation is in question. (Underscoring supplied) cralawlibrary

In Mirasol v. Court of Appeals, 31 this Court recognized the power of the RTC to resolve
constitutional issues, thus:
On the first issue. It is settled that Regional Trial Courts have the authority and
jurisdiction to consider the constitutionality of a statute, presidential decree, or
executive order. The Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation not only in this Court, but in all Regional Trial
Courts.32
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs, 33 this
Court reiterated:
There is no denying that regular courts have jurisdiction over cases involving the
validity or constitutionality of a rule or regulation issued by administrative agencies.
Such jurisdiction, however, is not limited to the Court of Appeals or to this Court alone
for even the regional trial courts can take cognizance of actions assailing a specific rule
or set of rules promulgated by administrative bodies. Indeed, the Constitution vests the
power of judicial review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation in the
courts, including the regional trial courts.34
Judicial review of official acts on the ground of unconstitutionality may be sought or
availed of through any of the actions cognizable by courts of justice, not necessarily in
a suit for declaratory relief. Such review may be had in criminal actions, as in People v.
Ferrer35 involving the constitutionality of the now defunct Anti-Subversion law, or in
ordinary actions, as in Krivenko v. Register of Deeds 36 involving the constitutionality of
laws prohibiting aliens from acquiring public lands. The constitutional issue, however,
(a) must be properly raised and presented in the case, and (b) its resolution is
necessary to a determination of the case, i.e., the issue of constitutionality must be the
very lis mota presented.37
Contrary to PPI's claim, the constitutionality of LOI No. 1465 was properly and
adequately raised in the complaint for collection filed with the RTC. The pertinent
portions of the complaint allege:
6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of
fertilizer in the Philippines, is unlawful, unjust, uncalled for, unreasonable, inequitable
and oppressive because:
x x x
(c) It favors only one private domestic corporation, i.e., defendant PPPI, and imposed
at the expense and disadvantage of the other fertilizer importers/distributors who were
themselves in tight business situation and were then exerting all efforts and maximizing
management and marketing skills to remain viable;
 x x x
(e) It was a glaring example of crony capitalism, a forced program through which the
PPI, having been presumptuously masqueraded as "the" fertilizer industry itself, was
the sole and anointed beneficiary;
7. The CRC was an unlawful; and unconstitutional special assessment and its imposition
is tantamount to illegal exaction amounting to a denial of due process since the persons
of entities which had to bear the burden of paying the CRC derived no benefit
therefrom; that on the contrary it was used by PPI in trying to regain its former
despicable monopoly of the fertilizer industry to the detriment of other distributors and
importers.38 (Underscoring supplied) cralawlibrary

The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for
collection. Fertiphil filed the complaint to compel PPI to refund the levies paid under the
statute on the ground that the law imposing the levy is unconstitutional. The thesis is
that an unconstitutional law is void. It has no legal effect. Being void, Fertiphil had no
legal obligation to pay the levy. Necessarily, all levies duly paid pursuant to an
unconstitutional law should be refunded under the civil code principle against unjust
enrichment. The refund is a mere consequence of the law being declared
unconstitutional. The RTC surely cannot order PPI to refund Fertiphil if it does not
declare the LOI unconstitutional. It is the unconstitutionality of the LOI which triggers
the refund. The issue of constitutionality is the very lis mota of the complaint with the
RTC.
The P10 levy under LOI No. 1465 is an exercise of the power of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling against the
constitutionality of the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power
of taxation. It claims that the LOI was implemented for the purpose of assuring the
fertilizer supply and distribution in the country and for benefiting a foundation created
by law to hold in trust for millions of farmers their stock ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit
to a private company. The levy was imposed to pay the corporate debt of PPI. Fertiphil
also argues that, even if the LOI is enacted under the police power, it is still
unconstitutional because it did not promote the general welfare of the people or public
interest.
Police power and the power of taxation are inherent powers of the State. These powers
are distinct and have different tests for validity. Police power is the power of the State
to enact legislation that may interfere with personal liberty or property in order to
promote the general welfare,39 while the power of taxation is the power to levy taxes to
be used for public purpose. The main purpose of police power is the regulation of a
behavior or conduct, while taxation is revenue generation. The "lawful subjects" and
"lawful means" tests are used to determine the validity of a law enacted under the
police power.40 The power of taxation, on the other hand, is circumscribed by inherent
and constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise by the State of
its taxation power. While it is true that the power of taxation can be used as an
implement of police power,41 the primary purpose of the levy is revenue generation. If
the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax. 42
In Philippine Airlines, Inc. v. Edu,43 it was held that the imposition of a vehicle
registration fee is not an exercise by the State of its police power, but of its taxation
power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61
of the Land Transportation and Traffic Code that the legislative intent and purpose
behind the law requiring owners of vehicles to pay for their registration is mainly to
raise funds for the construction and maintenance of highways and to a much lesser
degree, pay for the operating expenses of the administering agency. x x x Fees may be
properly regarded as taxes even though they also serve as an instrument of regulation.
Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98
Phil. 148). If the purpose is primarily revenue, or if revenue is, at least, one of the real
and substantial purposes, then the exaction is properly called a tax. Such is the case of
motor vehicle registration fees. The same provision appears as Section 59(b) in the
Land Transportation Code. It is patent therefrom that the legislators had in mind a
regulatory tax as the law refers to the imposition on the registration, operation or
ownership of a motor vehicle as a "tax or fee." x x x Simply put, if the exaction under
Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not
be an "additional" tax. Rep. Act 4136 also speaks of other "fees" such as the special
permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change
of registration (Sec. 11). These are not to be understood as taxes because such fees
are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 59(b) of
the Code as taxes like the motor vehicle registration fee and chauffeurs' license fee.
Such fees are to go into the expenditures of the Land Transportation Commission as
provided for in the last proviso of Sec. 61.44 (Underscoring supplied) cralawlibrary

The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose.
The levy, no doubt, was a big burden on the seller or the ultimate consumer. It
increased the price of a bag of fertilizer by as much as five percent. 45 A plain reading of
the LOI also supports the conclusion that the levy was for revenue generation. The LOI
expressly provided that the levy was imposed "until adequate capital is raised to make
PPI viable."
Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it
was not for a public purpose. The levy was imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are exacted
only for a public purpose. They cannot be used for purely private purposes or for the
exclusive benefit of private persons.46 The reason for this is simple. The power to tax
exists for the general welfare; hence, implicit in its power is the limitation that it should
be used only for a public purpose. It would be a robbery for the State to tax its citizens
and use the funds generated for a private purpose. As an old United States case bluntly
put it: "To lay with one hand, the power of the government on the property of the
citizen, and with the other to bestow it upon favored individuals to aid private
enterprises and build up private fortunes, is nonetheless a robbery because it is done
under the forms of law and is called taxation." 47
The term "public purpose" is not defined. It is an elastic concept that can be hammered
to fit modern standards. Jurisprudence states that "public purpose" should be given a
broad interpretation. It does not only pertain to those purposes which are traditionally
viewed as essentially government functions, such as building roads and delivery of
basic services, but also includes those purposes designed to promote social justice.
Thus, public money may now be used for the relocation of illegal settlers, low-cost
housing and urban or agrarian reform.
While the categories of what may constitute a public purpose are continually expanding
in light of the expansion of government functions, the inherent requirement that taxes
can only be exacted for a public purpose still stands. Public purpose is the heart of a tax
law. When a tax law is only a mask to exact funds from the public when its true intent
is to give undue benefit and advantage to a private enterprise, that law will not satisfy
the requirement of "public purpose."
The purpose of a law is evident from its text or inferable from other secondary sources.
Here, We agree with the RTC and that CA that the levy imposed under LOI No. 1465
was not for a public purpose.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a private
company. The purpose is explicit from Clause 3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing
formula a capital contribution component of not less than P10 per bag. This capital
contribution shall be collected until adequate capital is raised to make PPI viable. Such
capital contribution shall be applied by FPA to all domestic sales of fertilizers in the
Philippines.48 (Underscoring supplied) cralawlibrary

It is a basic rule of statutory construction that the text of a statute should be given a
literal meaning. In this case, the text of the LOI is plain that the levy was imposed in
order to raise capital for PPI. The framers of the LOI did not even hide the insidious
purpose of the law. They were cavalier enough to name PPI as the ultimate beneficiary
of the taxes levied under the LOI. We find it utterly repulsive that a tax law would
expressly name a private company as the ultimate beneficiary of the taxes to be levied
from the public. This is a clear case of crony capitalism.
Second, the LOI provides that the imposition of the P10 levy was conditional and
dependent upon PPI becoming financially "viable." This suggests that the levy was
actually imposed to benefit PPI. The LOI notably does not fix a maximum amount when
PPI is deemed financially "viable." Worse, the liability of Fertiphil and other domestic
sellers of fertilizer to pay the levy is made indefinite. They are required to continuously
pay the levy until adequate capital is raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI were directly remitted
and deposited by FPA to Far East Bank and Trust Company, the depositary bank of
PPI.49 This proves that PPI benefited from the LOI. It is also proves that the main
purpose of the law was to give undue benefit and advantage to PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of
Understanding50 dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals
that PPI was in deep financial problem because of its huge corporate debts. There were
pending petitions for rehabilitation against PPI before the Securities and Exchange
Commission. The government guaranteed payment of PPI's debts to its foreign
creditors. To fund the payment, President Marcos issued LOI No. 1465. The pertinent
portions of the letter of understanding read:
 Republic of the Philippines
Office of the Prime Minister
Manila
LETTER OF UNDERTAKING
May 18, 1985
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE "CREDITORS")
OF PLANTERS PRODUCTS, INC. ("PLANTERS")
Gentlemen:
This has reference to Planters which is the principal importer and distributor of fertilizer,
pesticides and agricultural chemicals in the Philippines. As regards Planters, the
Philippine Government confirms its awareness of the following: (1) that Planters has
outstanding obligations in foreign currency and/or pesos, to the Creditors, (2)
that Planters is currently experiencing financial difficulties, and (3) that there are
presently pending with the Securities and Exchange Commission of the Philippines a
petition filed at Planters' own behest for the suspension of payment of all its
obligations, and a separate petition filed by Manufacturers Hanover Trust Company,
Manila Offshore Branch for the appointment of a rehabilitation receiver for Planters.
In connection with the foregoing, the Republic of the Philippines (the "Republic")
confirms that it considers and continues to consider Planters as a major fertilizer
distributor. Accordingly, for and in consideration of your expressed willingness to
consider and participate in the effort to rehabilitate Planters, the Republic hereby
manifests its full and unqualified support of the successful rehabilitation and continuing
viability of Planters, and to that end, hereby binds and obligates itself to the creditors
and Planters, as follows:
x x x
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA
to include in its fertilizer pricing formula a capital recovery component, the proceeds of
which will be used initially for the purpose of funding the unpaid portion of the
outstanding capital stock of Planters presently held in trust by Planters Foundation, Inc.
("Planters Foundation"), which unpaid capital is estimated at approximately P206
million (subject to validation by Planters and Planters Foundation) such unpaid portion
of the outstanding capital stock of Planters being hereafter referred to as the "Unpaid
Capital"), and subsequently for such capital increases as may be required for the
continuing viability of Planters.
x x x
The capital recovery component shall continue to be charged and collected until
payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the
Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the
amounts which may be outstanding from time to time of the Unpaid Capital and/or the
Subsidy Receivables, and (d) the capital increases contemplated in paragraph 2 hereof.
For the purpose of the foregoing clause (c), the "carrying cost" shall be at such rate as
will represent the full and reasonable cost to Planters of servicing its debts, taking into
account both its peso and foreign currency-denominated obligations.
REPUBLIC OF THE PHILIPPINES
By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance51
It is clear from the Letter of Understanding that the levy was imposed precisely to pay
the corporate debts of PPI. We cannot agree with PPI that the levy was imposed to
ensure the stability of the fertilizer industry in the country. The letter of understanding
and the plain text of the LOI clearly indicate that the levy was exacted for the benefit of
a private corporation.
All told, the RTC and the CA did not err in holding that the levy imposed under LOI No.
1465 was not for a public purpose. LOI No. 1465 failed to comply with the public
purpose requirement for tax laws.
The LOI is still unconstitutional even if enacted under the police power; it did not
promote public interest.
Even if We consider LOI No. 1695 enacted under the police power of the State, it would
still be invalid for failing to comply with the test of "lawful subjects" and "lawful means."
Jurisprudence states the test as follows: (1) the interest of the public generally, as
distinguished from those of particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of the purpose and not
unduly oppressive upon individuals.52
For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote
public interest. The law was enacted to give undue advantage to a private corporation.
We quote with approval the CA ratiocination on this point, thus:
It is upon applying this established tests that We sustain the trial court's holding LOI
1465 unconstitutional. ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

To be sure, ensuring the continued supply and distribution of fertilizer in the country is
an undertaking imbued with public interest. However, the method by which LOI 1465
sought to achieve this is by no means a measure that will promote the public
welfare. The government's commitment to support the successful rehabilitation and
continued viability of PPI, a private corporation, is an unmistakable attempt to mask the
subject statute's impartiality. There is no way to treat the self-interest of a favored
entity, like PPI, as identical with the general interest of the country's farmers or even
the Filipino people in general. Well to stress, substantive due process exacts fairness
and equal protection disallows distinction where none is needed. When a statute's
public purpose is spoiled by private interest, the use of police power becomes a
travesty which must be struck down for being an arbitrary exercise of government
power. To rule in favor of appellant would contravene the general principle that
revenues derived from taxes cannot be used for purely private purposes or for the
exclusive benefit of private individuals. (Underscoring supplied) cralawlibrary
The general rule is that an unconstitutional law is void; the doctrine of operative fact is
inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared
unconstitutional. It banks on the doctrine of operative fact, which provides that an
unconstitutional law has an effect before being declared unconstitutional. PPI wants to
retain the levies paid under LOI No. 1465 even if it is subsequently declared to be
unconstitutional.
We cannot agree. It is settled that no question, issue or argument will be entertained
on appeal, unless it has been raised in the court a quo. 53 PPI did not raise the
applicability of the doctrine of operative fact with the RTC and the CA. It cannot
belatedly raise the issue with Us in order to extricate itself from the dire effects of an
unconstitutional law.
At any rate, We find the doctrine inapplicable. The general rule is that an
unconstitutional law is void. It produces no rights, imposes no duties and affords no
protection. It has no legal effect. It is, in legal contemplation, inoperative as if it has
not been passed.54 Being void, Fertiphil is not required to pay the levy. All levies paid
should be refunded in accordance with the general civil code principle against unjust
enrichment. The general rule is supported by Article 7 of the Civil Code, which provides:
ART. 7. Laws are repealed only by subsequent ones, and their violation or non-
observance shall not be excused by disuse or custom or practice to the contrary.
When the courts declare a law to be inconsistent with the Constitution, the former shall
be void and the latter shall govern.
The doctrine of operative fact, as an exception to the general rule, only applies as a
matter of equity and fair play. 55 It nullifies the effects of an unconstitutional law by
recognizing that the existence of a statute prior to a determination of
unconstitutionality is an operative fact and may have consequences which cannot
always be ignored. The past cannot always be erased by a new judicial declaration. 56
The doctrine is applicable when a declaration of unconstitutionality will impose an
undue burden on those who have relied on the invalid law. Thus, it was applied to a
criminal case when a declaration of unconstitutionality would put the accused in double
jeopardy57 or would put in limbo the acts done by a municipality in reliance upon a law
creating it.58
Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by
Fertiphil under LOI No. 1465. It unduly benefited from the levy. It was proven during
the trial that the levies paid were remitted and deposited to its bank account. Quite the
reverse, it would be inequitable and unjust not to order a refund. To do so would
unjustly enrich PPI at the expense of Fertiphil. Article 22 of the Civil Code explicitly
provides that "every person who, through an act of performance by another comes into
possession of something at the expense of the latter without just or legal ground shall
return the same to him." We cannot allow PPI to profit from an unconstitutional law.
Justice and equity dictate that PPI must refund the amounts paid by Fertiphil.
WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November
28, 2003 is AFFIRMED.
SO ORDERED.
 [G.R. NO. 166006 : March 14, 2008]

PLANTERS PRODUCTS, INC., Petitioner, v. FERTIPHIL CORPORATION,

Respondent.

DECISION

REYES, R.T., J.:

THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider
the constitutionality of statutes, executive orders, presidential decrees and
other issuances. The Constitution vests that power not only in the Supreme
Court but in all Regional Trial Courts.

The principle is relevant in this Petition for Review on Certiorari of the

Decision1 of the Court of Appeals (CA) affirming with modification that of the
RTC in Makati City,2 finding petitioner Planters Products, Inc. (PPI) liable to
private respondent Fertiphil Corporation (Fertiphil) for the levies it paid under
Letter of Instruction (LOI) No. 1465.

The Facts

Petitioner PPI and private respondent Fertiphil are private corporations

incorporated under Philippine laws.3 They are both engaged in the importation
and distribution of fertilizers, pesticides and agricultural chemicals.

4
The LOI provides:

3. The Administrator of the Fertilizer Pesticide Authority to include in its

fertilizer pricing formula a capital contribution component of not less than P10
per bag. This capital contribution shall be collected until adequate capital is
raised to make PPI viable. Such capital contribution shall be applied by FPA to
all domestic sales of fertilizers in the Philippines.5 (Underscoring supplied)
cralawlibrary

Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the
domestic market to the Fertilizer and Pesticide Authority (FPA). FPA then
remitted the amount collected to the Far East Bank and Trust Company, the
depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to
January 24, 1986.6

After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the
P10 levy. With the return of democracy, Fertiphil demanded from PPI a refund
of the amounts it paid under LOI No. 1465, but PPI refused to accede to the
demand.7

Fertiphil filed a complaint for collection and damages 8 against FPA and PPI
with the RTC in Makati. It questioned the constitutionality of LOI No. 1465 for
being unjust, unreasonable, oppressive, invalid and an unlawful imposition
that amounted to a denial of due process of law. 9 Fertiphil alleged that the LOI
solely favored PPI, a privately owned corporation, which used the proceeds to
maintain its monopoly of the fertilizer industry.

In its Answer,10 FPA, through the Solicitor General, countered that the
issuance of LOI No. 1465 was a valid exercise of the police power of the State
in ensuring the stability of the fertilizer industry in the country. It also averred
that Fertiphil did not sustain any damage from the LOI because the burden
imposed by the levy fell on the ultimate consumer, not the seller.

RTC Disposition

On November 20, 1991, the RTC rendered judgment in favor of Fertiphil,

disposing as follows:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in

favor of the plaintiff and against the defendant Planters Product, Inc., ordering
the latter to pay the former:

1) the sum of P6,698,144.00 with interest at 12% from the time of judicial
demand;

2) the sum of P100,000 as attorney's fees;

3) the cost of suit.

SO ORDERED.11

Ruling that the imposition of the P10 CRC was an exercise of the State's
inherent power of taxation, the RTC invalidated the levy for violating the basic
principle that taxes can only be levied for public purpose, viz.:

It is apparent that the imposition of P10 per fertilizer bag sold in the country
by LOI 1465 is purportedly in the exercise of the power of taxation. It is a
settled principle that the power of taxation by the state is plenary.
Comprehensive and supreme, the principal check upon its abuse resting in the
responsibility of the members of the legislature to their constituents.
However, there are two kinds of limitations on the power of taxation: the
inherent limitations and the constitutional limitations.

One of the inherent limitations is that a tax may be levied only for public
purposes:

The power to tax can be resorted to only for a constitutionally valid public
purpose. By the same token, taxes may not be levied for purely private
purposes, for building up of private fortunes, or for the redress of private
wrongs. They cannot be levied for the improvement of private property, or for
the benefit, and promotion of private enterprises, except where the aid is
incident to the public benefit. It is well-settled principle of constitutional law
that no general tax can be levied except for the purpose of raising money
which is to be expended for public use. Funds cannot be exacted under the
guise of taxation to promote a purpose that is not of public interest. Without
such limitation, the power to tax could be exercised or employed as an
authority to destroy the economy of the people. A tax, however, is not held
void on the ground of want of public interest unless the want of such interest
is clear. (71 Am. Jur. pp. 371-372)

In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the
Fertilizer and Pesticide Authority pursuant to the P10 per bag of fertilizer sold
imposition under LOI 1465 which, in turn, remitted the amount to the
defendant Planters Products, Inc. thru the latter's depository bank, Far East
Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil
Corporation, which is a private domestic corporation, became poorer by the
amount of P6,698,144.00 and the defendant, Planters Product, Inc., another
private domestic corporation, became richer by the amount of P6,698,144.00.

Tested by the standards of constitutionality as set forth in the afore-quoted

jurisprudence, it is quite evident that LOI 1465 insofar as it imposes the
amount of P10 per fertilizer bag sold in the country and orders that the said
amount should go to the defendant Planters Product, Inc. is unlawful because
it violates the mandate that a tax can be levied only for a public purpose and
not to benefit, aid and promote a private enterprise such as Planters Product,
Inc.12

PPI moved for reconsideration but its motion was denied. 13 PPI then filed a
notice of appeal with the RTC but it failed to pay the requisite appeal docket
fee. In a separate but related proceeding, this Court 14 allowed the appeal of
PPI and remanded the case to the CA for proper disposition.

CA Decision

On November 28, 2003, the CA handed down its decision affirming with
modification that of the RTC, with the following fallo:

IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby

AFFIRMED, subject to the MODIFICATION that the award of attorney's fees is
hereby DELETED.15

In affirming the RTC decision, the CA ruled that the lis mota of the complaint
for collection was the constitutionality of LOI No. 1465, thus:

The question then is whether it was proper for the trial court to exercise its
power to judicially determine the constitutionality of the subject statute in the
instant case.

As a rule, where the controversy can be settled on other grounds, the courts
will not resolve the constitutionality of a law (Lim v. Pacquing, 240 SCRA 649
[1995]). The policy of the courts is to avoid ruling on constitutional questions
and to presume that the acts of political departments are valid, absent a clear
and unmistakable showing to the contrary.

However, the courts are not precluded from exercising such power when the
following requisites are obtaining in a controversy before it: First, there must
be before the court an actual case calling for the exercise of judicial review.
Second, the question must be ripe for adjudication. Third, the person
challenging the validity of the act must have standing to challenge. Fourth, the
question of constitutionality must have been raised at the earliest opportunity;
and lastly, the issue of constitutionality must be the very lis mota of the case
(Integrated Bar of the Philippines v. Zamora, 338 SCRA 81 [2000]).

Indisputably, the present case was primarily instituted for collection and
damages. However, a perusal of the complaint also reveals that the instant
action is founded on the claim that the levy imposed was an unlawful and
unconstitutional special assessment. Consequently, the requisite that the
constitutionality of the law in question be the very lis mota of the case is
present, making it proper for the trial court to rule on the constitutionality of
LOI 1465.16

The CA held that even on the assumption that LOI No. 1465 was issued under
the police power of the state, it is still unconstitutional because it did not
promote public welfare. The CA explained:

In declaring LOI 1465 unconstitutional, the trial court held that the levy
imposed under the said law was an invalid exercise of the State's power of
taxation inasmuch as it violated the inherent and constitutional prescription
that taxes be levied only for public purposes. It reasoned out that the amount
collected under the levy was remitted to the depository bank of PPI, which the
latter used to advance its private interest.

On the other hand, appellant submits that the subject statute's passage was a
valid exercise of police power. In addition, it disputes the court a quo's
findings arguing that the collections under LOI 1465 was for the benefit of
Planters Foundation, Incorporated (PFI), a foundation created by law to hold
in trust for millions of farmers, the stock ownership of PPI.

Of the three fundamental powers of the State, the exercise of police power has
been characterized as the most essential, insistent and the least limitable of
powers, extending as it does to all the great public needs. It may be exercised
as long as the activity or the property sought to be regulated has some
relevance to public welfare (Constitutional Law, by Isagani A. Cruz, p. 38,
1995 Edition).

Vast as the power is, however, it must be exercised within the limits set by the
Constitution, which requires the concurrence of a lawful subject and a lawful
method. Thus, our courts have laid down the test to determine the validity of a
police measure as follows: (1) the interests of the public generally, as
distinguished from those of a particular class, requires its exercise; and (2)
the means employed are reasonably necessary for the accomplishment of the
purpose and not unduly oppressive upon individuals (National Development
Company v. Philippine Veterans Bank, 192 SCRA 257 [1990]).

It is upon applying this established tests that We sustain the trial court's
holding LOI 1465 unconstitutional. To be sure, ensuring the continued supply
and distribution of fertilizer in the country is an undertaking imbued with
public interest. However, the method by which LOI 1465 sought to achieve
this is by no means a measure that will promote the public welfare. The
government's commitment to support the successful rehabilitation and
continued viability of PPI, a private corporation, is an unmistakable attempt to
mask the subject statute's impartiality. There is no way to treat the self-
interest of a favored entity, like PPI, as identical with the general interest of
the country's farmers or even the Filipino people in general. Well to stress,
substantive due process exacts fairness and equal protection disallows
distinction where none is needed. When a statute's public purpose is spoiled
by private interest, the use of police power becomes a travesty which must be
struck down for being an arbitrary exercise of government power. To rule in
favor of appellant would contravene the general principle that revenues
derived from taxes cannot be used for purely private purposes or for the
exclusive benefit of private individuals.17

The CA did not accept PPI's claim that the levy imposed under LOI No. 1465
was for the benefit of Planters Foundation, Inc., a foundation created to hold
in trust the stock ownership of PPI. The CA stated:

Appellant next claims that the collections under LOI 1465 was for the benefit
of Planters Foundation, Incorporated (PFI), a foundation created by law to
hold in trust for millions of farmers, the stock ownership of PFI on the
strength of Letter of Undertaking (LOU) issued by then Prime Minister Cesar
Virata on April 18, 1985 and affirmed by the Secretary of Justice in an Opinion
dated October 12, 1987, to wit:

"2. Upon the effective date of this Letter of Undertaking, the Republic shall
cause FPA to include in its fertilizer pricing formula a capital recovery
component, the proceeds of which will be used initially for the purpose of
funding the unpaid portion of the outstanding capital stock of Planters
presently held in trust by Planters Foundation, Inc. (Planters Foundation),
which unpaid capital is estimated at approximately P206 million (subject to
validation by Planters and Planters Foundation) (such unpaid portion of the
outstanding capital stock of Planters being hereafter referred to as the 'Unpaid
Capital' ), and subsequently for such capital increases as may be required for
the continuing viability of Planters.

The capital recovery component shall be in the minimum amount of P10 per
bag, which will be added to the price of all domestic sales of fertilizer in the
Philippines by any importer and/or fertilizer mother company. In this
connection, the Republic hereby acknowledges that the advances by Planters
to Planters Foundation which were applied to the payment of the Planters
shares now held in trust by Planters Foundation, have been assigned to,
among others, the Creditors. Accordingly, the Republic, through FPA, hereby
agrees to deposit the proceeds of the capital recovery component in the
special trust account designated in the notice dated April 2, 1985, addressed
by counsel for the Creditors to Planters Foundation. Such proceeds shall be
deposited by FPA on or before the 15th day of each month.

The capital recovery component shall continue to be charged and collected

until payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the
payment of the Subsidy Receivables, (c) any carrying cost accruing from the
date hereof on the amounts which may be outstanding from time to time of
the Unpaid Capital and/or the Subsidy Receivables and (d) the capital
increases contemplated in paragraph 2 hereof. For the purpose of the
foregoing clause (c), the 'carrying cost' shall be at such rate as will represent
the full and reasonable cost to Planters of servicing its debts, taking into
account both its peso and foreign currency-denominated obligations."
(Records, pp. 42-43)

Appellant's proposition is open to question, to say the least. The LOU issued by
then Prime Minister Virata taken together with the Justice Secretary's Opinion
does not preponderantly demonstrate that the collections made were held in
trust in favor of millions of farmers. Unfortunately for appellant, in the
absence of sufficient evidence to establish its claims, this Court is constrained
to rely on what is explicitly provided in LOI 1465 - that one of the primary
aims in imposing the levy is to support the successful rehabilitation and
continued viability of PPI.18

PPI moved for reconsideration but its motion was denied. 19 It then filed the
present petition with this Court.

Issues

Petitioner PPI raises four issues for Our consideration, viz.:

THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED

AND BE DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR
COLLECTION AND DAMAGES WHERE THE ISSUE OF CONSTITUTIONALITY IS
NOT THE VERY LIS MOTA OF THE CASE. NEITHER CAN LOI 1465 BE
CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS NO STANDING TO DO
SO.

II

LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE
FERTILIZER SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR
BENEFITING A FOUNDATION CREATED BY LAW TO HOLD IN TRUST FOR
MILLIONS OF FARMERS THEIR STOCK OWNERSHIP IN PPI CONSTITUTES A
VALID LEGISLATION PURSUANT TO THE EXERCISE OF TAXATION AND POLICE
POWER FOR PUBLIC PURPOSES.

III

THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS

REMITTED TO THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS
PURSUANT TO AN EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED
DUTIES AND CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE OF
"OPERATIVE FACT" PRIOR TO ANY DECLARATION OF UNCONSTITUTIONALITY
OF LOI 1465.
 IV

THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO

APPLICATION IN THE INSTANT CASE.20 (Underscoring supplied) cralawlibrary

Our Ruling

We shall first tackle the procedural issues of locus standi and the jurisdiction
of the RTC to resolve constitutional issues.

Fertiphil has locus standi because it suffered direct injury; doctrine of standing
is a mere procedural technicality which may be waived.

PPI argues that Fertiphil has no locus standi to question the constitutionality
of LOI No. 1465 because it does not have a "personal and substantial interest
in the case or will sustain direct injury as a result of its enforcement." 21 It
asserts that Fertiphil did not suffer any damage from the CRC imposition
because "incidence of the levy fell on the ultimate consumer or the farmers
themselves, not on the seller fertilizer company." 22

We cannot agree. The doctrine of locus standi or the right of appearance in a

court of justice has been adequately discussed by this Court in a catena of
cases. Succinctly put, the doctrine requires a litigant to have a material
interest in the outcome of a case. In private suits, locus standi requires a
litigant to be a "real party in interest," which is defined as "the party who
stands to be benefited or injured by the judgment in the suit or the party
entitled to the avails of the suit."23

In public suits, this Court recognizes the difficulty of applying the doctrine
especially when plaintiff asserts a public right on behalf of the general public
because of conflicting public policy issues. 24 On one end, there is the right of
the ordinary citizen to petition the courts to be freed from unlawful
government intrusion and illegal official action. At the other end, there is the
public policy precluding excessive judicial interference in official acts, which
may unnecessarily hinder the delivery of basic public services.

In this jurisdiction, We have adopted the "direct injury test" to determine

locus standi in public suits. In People v. Vera, 25 it was held that a person who
impugns the validity of a statute must have "a personal and substantial
interest in the case such that he has sustained, or will sustain direct injury as
a result." The "direct injury test" in public suits is similar to the "real party in
interest" rule for private suits under Section 2, Rule 3 of the 1997 Rules of
Civil Procedure.26

Recognizing that a strict application of the "direct injury" test may hamper
public interest, this Court relaxed the requirement in cases of "transcendental
importance" or with "far reaching implications." Being a mere procedural
technicality, it has also been held that locus standi may be waived in the
public interest.27
Whether or not the complaint for collection is characterized as a private or
public suit, Fertiphil has locus standi to file it. Fertiphil suffered a direct injury
from the enforcement of LOI No. 1465. It was required, and it did pay, the P10
levy imposed for every bag of fertilizer sold on the domestic market. It may be
true that Fertiphil has passed some or all of the levy to the ultimate consumer,
but that does not disqualify it from attacking the constitutionality of the LOI or
from seeking a refund. As seller, it bore the ultimate burden of paying the
levy. It faced the possibility of severe sanctions for failure to pay the levy. The
fact of payment is sufficient injury to Fertiphil.

Moreover, Fertiphil suffered harm from the enforcement of the LOI because it
was compelled to factor in its product the levy. The levy certainly rendered the
fertilizer products of Fertiphil and other domestic sellers much more
expensive. The harm to their business consists not only in fewer clients
because of the increased price, but also in adopting alternative corporate
strategies to meet the demands of LOI No. 1465. Fertiphil and other fertilizer
sellers may have shouldered all or part of the levy just to be competitive in the
market. The harm occasioned on the business of Fertiphil is sufficient injury
for purposes of locus standi.

Even assuming arguendo that there is no direct injury, We find that the liberal
policy consistently adopted by this Court on locus standi must apply. The
issues raised by Fertiphil are of paramount public importance. It involves not
only the constitutionality of a tax law but, more importantly, the use of taxes
for public purpose. Former President Marcos issued LOI No. 1465 with the
intention of rehabilitating an ailing private company. This is clear from the text
of the LOI. PPI is expressly named in the LOI as the direct beneficiary of the
levy. Worse, the levy was made dependent and conditional upon PPI becoming
financially viable. The LOI provided that "the capital contribution shall be
collected until adequate capital is raised to make PPI viable."

The constitutionality of the levy is already in doubt on a plain reading of the

statute. It is Our constitutional duty to squarely resolve the issue as the final
arbiter of all justiciable controversies. The doctrine of standing, being a mere
procedural technicality, should be waived, if at all, to adequately thresh out an
important constitutional issue.

RTC may resolve constitutional issues; the constitutional issue was adequately
raised in the complaint; it is the lis mota of the case.

PPI insists that the RTC and the CA erred in ruling on the constitutionality of
the LOI. It asserts that the constitutionality of the LOI cannot be collaterally
attacked in a complaint for collection. 28 Alternatively, the resolution of the
constitutional issue is not necessary for a determination of the complaint for
collection.29

Fertiphil counters that the constitutionality of the LOI was adequately pleaded
in its complaint. It claims that the constitutionality of LOI No. 1465 is the very
lis mota of the case because the trial court cannot determine its claim without
resolving the issue.30
It is settled that the RTC has jurisdiction to resolve the constitutionality of a
statute, presidential decree or an executive order. This is clear from Section 5,
Article VIII of the 1987 Constitution, which provides:

SECTION 5. The Supreme Court shall have the following powers:

x x x

(2) Review, revise, reverse, modify, or affirm on appeal or certiorari , as the

law or the Rules of Court may provide, final judgments and orders of lower
courts in:

(a) All cases in which the constitutionality or validity of any treaty,

international or executive agreement, law, presidential decree, proclamation,
order, instruction, ordinance, or regulation is in question. (Underscoring
supplied)cralawlibrary

In Mirasol v. Court of Appeals,31 this Court recognized the power of the RTC to
resolve constitutional issues, thus:

On the first issue. It is settled that Regional Trial Courts have the authority
and jurisdiction to consider the constitutionality of a statute, presidential
decree, or executive order. The Constitution vests the power of judicial review
or the power to declare a law, treaty, international or executive agreement,
presidential decree, order, instruction, ordinance, or regulation not only in this
Court, but in all Regional Trial Courts.32

In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign

Affairs,33 this Court reiterated:

There is no denying that regular courts have jurisdiction over cases involving
the validity or constitutionality of a rule or regulation issued by administrative
agencies. Such jurisdiction, however, is not limited to the Court of Appeals or
to this Court alone for even the regional trial courts can take cognizance of
actions assailing a specific rule or set of rules promulgated by administrative
bodies. Indeed, the Constitution vests the power of judicial review or the
power to declare a law, treaty, international or executive agreement,
presidential decree, order, instruction, ordinance, or regulation in the courts,
including the regional trial courts.34

Judicial review of official acts on the ground of unconstitutionality may be

sought or availed of through any of the actions cognizable by courts of justice,
not necessarily in a suit for declaratory relief. Such review may be had in
criminal actions, as in People v. Ferrer 35 involving the constitutionality of the
now defunct Anti-Subversion law, or in ordinary actions, as in Krivenko v.
Register of Deeds36 involving the constitutionality of laws prohibiting aliens
from acquiring public lands. The constitutional issue, however, (a) must be
properly raised and presented in the case, and (b) its resolution is necessary
to a determination of the case, i.e., the issue of constitutionality must be the
very lis mota presented.37
Contrary to PPI's claim, the constitutionality of LOI No. 1465 was properly and
adequately raised in the complaint for collection filed with the RTC. The
pertinent portions of the complaint allege:

6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all
grades of fertilizer in the Philippines, is unlawful, unjust, uncalled for,
unreasonable, inequitable and oppressive because:

x x x

(c) It favors only one private domestic corporation, i.e., defendant PPPI, and
imposed at the expense and disadvantage of the other fertilizer
importers/distributors who were themselves in tight business situation and
were then exerting all efforts and maximizing management and marketing
skills to remain viable;

x x x

(e) It was a glaring example of crony capitalism, a forced program through

which the PPI, having been presumptuously masqueraded as "the" fertilizer
industry itself, was the sole and anointed beneficiary;

7. The CRC was an unlawful; and unconstitutional special assessment and its
imposition is tantamount to illegal exaction amounting to a denial of due
process since the persons of entities which had to bear the burden of paying
the CRC derived no benefit therefrom; that on the contrary it was used by PPI
in trying to regain its former despicable monopoly of the fertilizer industry to
the detriment of other distributors and importers.38 (Underscoring supplied) cralawlibrary

The constitutionality of LOI No. 1465 is also the very lis mota of the complaint
for collection. Fertiphil filed the complaint to compel PPI to refund the levies
paid under the statute on the ground that the law imposing the levy is
unconstitutional. The thesis is that an unconstitutional law is void. It has no
legal effect. Being void, Fertiphil had no legal obligation to pay the levy.
Necessarily, all levies duly paid pursuant to an unconstitutional law should be
refunded under the civil code principle against unjust enrichment. The refund
is a mere consequence of the law being declared unconstitutional. The RTC
surely cannot order PPI to refund Fertiphil if it does not declare the LOI
unconstitutional. It is the unconstitutionality of the LOI which triggers the
refund. The issue of constitutionality is the very lis mota of the complaint with
the RTC.

The P10 levy under LOI No. 1465 is an exercise of the power of taxation.

At any rate, the Court holds that the RTC and the CA did not err in ruling
against the constitutionality of the LOI.

PPI insists that LOI No. 1465 is a valid exercise either of the police power or
the power of taxation. It claims that the LOI was implemented for the purpose
of assuring the fertilizer supply and distribution in the country and for
benefiting a foundation created by law to hold in trust for millions of farmers
their stock ownership in PPI.

Fertiphil counters that the LOI is unconstitutional because it was enacted to

give benefit to a private company. The levy was imposed to pay the corporate
debt of PPI. Fertiphil also argues that, even if the LOI is enacted under the
police power, it is still unconstitutional because it did not promote the general
welfare of the people or public interest.

Police power and the power of taxation are inherent powers of the State.
These powers are distinct and have different tests for validity. Police power is
the power of the State to enact legislation that may interfere with personal
liberty or property in order to promote the general welfare, 39 while the power
of taxation is the power to levy taxes to be used for public purpose. The main
purpose of police power is the regulation of a behavior or conduct, while
taxation is revenue generation. The "lawful subjects" and "lawful means"
tests are used to determine the validity of a law enacted under the police
power.40 The power of taxation, on the other hand, is circumscribed by
inherent and constitutional limitations.

We agree with the RTC that the imposition of the levy was an exercise by the
State of its taxation power. While it is true that the power of taxation can be
used as an implement of police power, 41 the primary purpose of the levy is
revenue generation. If the purpose is primarily revenue, or if revenue is, at
least, one of the real and substantial purposes, then the exaction is properly
called a tax.42

In Philippine Airlines, Inc. v. Edu, 43 it was held that the imposition of a vehicle
registration fee is not an exercise by the State of its police power, but of its
taxation power, thus:

It is clear from the provisions of Section 73 of Commonwealth Act 123 and

Section 61 of the Land Transportation and Traffic Code that the legislative
intent and purpose behind the law requiring owners of vehicles to pay for their
registration is mainly to raise funds for the construction and maintenance of
highways and to a much lesser degree, pay for the operating expenses of the
administering agency. x x x Fees may be properly regarded as taxes even
though they also serve as an instrument of regulation.

Taxation may be made the implement of the state's police power (Lutz v.
Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if revenue is, at
least, one of the real and substantial purposes, then the exaction is properly
called a tax. Such is the case of motor vehicle registration fees. The same
provision appears as Section 59(b) in the Land Transportation Code. It is
patent therefrom that the legislators had in mind a regulatory tax as the law
refers to the imposition on the registration, operation or ownership of a motor
vehicle as a "tax or fee." x x x Simply put, if the exaction under Rep. Act 4136
were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an
"additional" tax. Rep. Act 4136 also speaks of other "fees" such as the special
permit fees for certain types of motor vehicles (Sec. 10) and additional fees
for change of registration (Sec. 11). These are not to be understood as taxes
because such fees are very minimal to be revenue-raising. Thus, they are not
mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle
registration fee and chauffeurs' license fee. Such fees are to go into the
expenditures of the Land Transportation Commission as provided for in the
last proviso of Sec. 61.44 (Underscoring supplied)cralawlibrary

The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory
purpose. The levy, no doubt, was a big burden on the seller or the ultimate
consumer. It increased the price of a bag of fertilizer by as much as five
percent.45 A plain reading of the LOI also supports the conclusion that the levy
was for revenue generation. The LOI expressly provided that the levy was
imposed "until adequate capital is raised to make PPI viable."

Taxes are exacted only for a public purpose. The P10 levy is unconstitutional
because it was not for a public purpose. The levy was imposed to give undue
benefit to PPI.

An inherent limitation on the power of taxation is public purpose. Taxes are

exacted only for a public purpose. They cannot be used for purely private
purposes or for the exclusive benefit of private persons. 46 The reason for this
is simple. The power to tax exists for the general welfare; hence, implicit in its
power is the limitation that it should be used only for a public purpose. It
would be a robbery for the State to tax its citizens and use the funds
generated for a private purpose. As an old United States case bluntly put it:
"To lay with one hand, the power of the government on the property of the
citizen, and with the other to bestow it upon favored individuals to aid private
enterprises and build up private fortunes, is nonetheless a robbery because it
47
is done under the forms of law and is called taxation."

The term "public purpose" is not defined. It is an elastic concept that can be
hammered to fit modern standards. Jurisprudence states that "public purpose"
should be given a broad interpretation. It does not only pertain to those
purposes which are traditionally viewed as essentially government functions,
such as building roads and delivery of basic services, but also includes those
purposes designed to promote social justice. Thus, public money may now be
used for the relocation of illegal settlers, low-cost housing and urban or
agrarian reform.

While the categories of what may constitute a public purpose are continually
expanding in light of the expansion of government functions, the inherent
requirement that taxes can only be exacted for a public purpose still stands.
Public purpose is the heart of a tax law. When a tax law is only a mask to
exact funds from the public when its true intent is to give undue benefit and
advantage to a private enterprise, that law will not satisfy the requirement of
"public purpose."

The purpose of a law is evident from its text or inferable from other secondary
sources. Here, We agree with the RTC and that CA that the levy imposed under
LOI No. 1465 was not for a public purpose.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a
private company. The purpose is explicit from Clause 3 of the law, thus:

3. The Administrator of the Fertilizer Pesticide Authority to include in its

fertilizer pricing formula a capital contribution component of not less than P10
per bag. This capital contribution shall be collected until adequate capital is
raised to make PPI viable. Such capital contribution shall be applied by FPA to
all domestic sales of fertilizers in the Philippines.48 (Underscoring supplied)
cralawlibrary

It is a basic rule of statutory construction that the text of a statute should be

given a literal meaning. In this case, the text of the LOI is plain that the levy
was imposed in order to raise capital for PPI. The framers of the LOI did not
even hide the insidious purpose of the law. They were cavalier enough to
name PPI as the ultimate beneficiary of the taxes levied under the LOI. We
find it utterly repulsive that a tax law would expressly name a private
company as the ultimate beneficiary of the taxes to be levied from the public.
This is a clear case of crony capitalism.

Second, the LOI provides that the imposition of the P10 levy was conditional
and dependent upon PPI becoming financially "viable." This suggests that the
levy was actually imposed to benefit PPI. The LOI notably does not fix a
maximum amount when PPI is deemed financially "viable." Worse, the liability
of Fertiphil and other domestic sellers of fertilizer to pay the levy is made
indefinite. They are required to continuously pay the levy until adequate
capital is raised for PPI.

Third, the RTC and the CA held that the levies paid under the LOI were directly
remitted and deposited by FPA to Far East Bank and Trust Company, the
depositary bank of PPI.49 This proves that PPI benefited from the LOI. It is
also proves that the main purpose of the law was to give undue benefit and
advantage to PPI.

Fourth, the levy was used to pay the corporate debts of PPI. A reading of the
Letter of Understanding50 dated May 18, 1985 signed by then Prime Minister
Cesar Virata reveals that PPI was in deep financial problem because of its
huge corporate debts. There were pending petitions for rehabilitation against
PPI before the Securities and Exchange Commission. The government
guaranteed payment of PPI's debts to its foreign creditors. To fund the
payment, President Marcos issued LOI No. 1465. The pertinent portions of the
letter of understanding read:

Republic of the Philippines

Office of the Prime Minister
Manila

LETTER OF UNDERTAKING

May 18, 1985

TO: THE BANKING AND FINANCIAL INSTITUTIONS

LISTED IN ANNEX A HERETO WHICH ARE
 CREDITORS (COLLECTIVELY, THE "CREDITORS")
OF PLANTERS PRODUCTS, INC. ("PLANTERS")

Gentlemen:

This has reference to Planters which is the principal importer and distributor
of fertilizer, pesticides and agricultural chemicals in the Philippines. As
regards Planters, the Philippine Government confirms its awareness of the
following: (1) that Planters has outstanding obligations in foreign currency
and/or pesos, to the Creditors, (2) that Planters is currently experiencing
financial difficulties, and (3) that there are presently pending with the
Securities and Exchange Commission of the Philippines a petition filed at
Planters' own behest for the suspension of payment of all its obligations, and a
separate petition filed by Manufacturers Hanover Trust Company, Manila
Offshore Branch for the appointment of a rehabilitation receiver for Planters.

In connection with the foregoing, the Republic of the Philippines (the

"Republic") confirms that it considers and continues to consider Planters as a
major fertilizer distributor. Accordingly, for and in consideration of your
expressed willingness to consider and participate in the effort to rehabilitate
Planters, the Republic hereby manifests its full and unqualified support of the
successful rehabilitation and continuing viability of Planters, and to that end,
hereby binds and obligates itself to the creditors and Planters, as follows:

x x x

2. Upon the effective date of this Letter of Undertaking, the Republic shall
cause FPA to include in its fertilizer pricing formula a capital recovery
component, the proceeds of which will be used initially for the purpose of
funding the unpaid portion of the outstanding capital stock of Planters
presently held in trust by Planters Foundation, Inc. ("Planters Foundation"),
which unpaid capital is estimated at approximately P206 million (subject to
validation by Planters and Planters Foundation) such unpaid portion of the
outstanding capital stock of Planters being hereafter referred to as the
"Unpaid Capital"), and subsequently for such capital increases as may be
required for the continuing viability of Planters.

x x x

The capital recovery component shall continue to be charged and collected

until payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the
payment of the Subsidy Receivables, (c) any carrying cost accruing from the
date hereof on the amounts which may be outstanding from time to time of
the Unpaid Capital and/or the Subsidy Receivables, and (d) the capital
increases contemplated in paragraph 2 hereof. For the purpose of the
foregoing clause (c), the "carrying cost" shall be at such rate as will represent
the full and reasonable cost to Planters of servicing its debts, taking into
account both its peso and foreign currency-denominated obligations.

REPUBLIC OF THE PHILIPPINES

By:

(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance51

It is clear from the Letter of Understanding that the levy was imposed
precisely to pay the corporate debts of PPI. We cannot agree with PPI that the
levy was imposed to ensure the stability of the fertilizer industry in the
country. The letter of understanding and the plain text of the LOI clearly
indicate that the levy was exacted for the benefit of a private corporation.

All told, the RTC and the CA did not err in holding that the levy imposed under
LOI No. 1465 was not for a public purpose. LOI No. 1465 failed to comply with
the public purpose requirement for tax laws.

The LOI is still unconstitutional even if enacted under the police power; it did
not promote public interest.

Even if We consider LOI No. 1695 enacted under the police power of the State,
it would still be invalid for failing to comply with the test of "lawful subjects"
and "lawful means." Jurisprudence states the test as follows: (1) the interest
of the public generally, as distinguished from those of particular class,
requires its exercise; and (2) the means employed are reasonably necessary
for the accomplishment of the purpose and not unduly oppressive upon
individuals.52

For the same reasons as discussed, LOI No. 1695 is invalid because it did not
promote public interest. The law was enacted to give undue advantage to a
private corporation. We quote with approval the CA ratiocination on this point,
thus:

It is upon applying this established tests that We sustain the trial court's
holding LOI 1465 unconstitutional. ςηαñrοblεš νιr†υαl lαω lιbrαrÿ

To be sure, ensuring the continued supply and distribution of fertilizer in the

country is an undertaking imbued with public interest. However, the method
by which LOI 1465 sought to achieve this is by no means a measure that will
promote the public welfare. The government's commitment to support the
successful rehabilitation and continued viability of PPI, a private corporation,
is an unmistakable attempt to mask the subject statute's impartiality. There is
no way to treat the self-interest of a favored entity, like PPI, as identical with
the general interest of the country's farmers or even the Filipino people in
general. Well to stress, substantive due process exacts fairness and equal
protection disallows distinction where none is needed. When a statute's public
purpose is spoiled by private interest, the use of police power becomes a
travesty which must be struck down for being an arbitrary exercise of
government power. To rule in favor of appellant would contravene the general
principle that revenues derived from taxes cannot be used for purely private
purposes or for the exclusive benefit of private individuals. (Underscoring
supplied) cralawlibrary
The general rule is that an unconstitutional law is void; the doctrine of
operative fact is inapplicable.

PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is
declared unconstitutional. It banks on the doctrine of operative fact, which
provides that an unconstitutional law has an effect before being declared
unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even
if it is subsequently declared to be unconstitutional.

We cannot agree. It is settled that no question, issue or argument will be

entertained on appeal, unless it has been raised in the court a quo. 53 PPI did
not raise the applicability of the doctrine of operative fact with the RTC and
the CA. It cannot belatedly raise the issue with Us in order to extricate itself
from the dire effects of an unconstitutional law.

At any rate, We find the doctrine inapplicable. The general rule is that an
unconstitutional law is void. It produces no rights, imposes no duties and
affords no protection. It has no legal effect. It is, in legal contemplation,
inoperative as if it has not been passed. 54 Being void, Fertiphil is not required
to pay the levy. All levies paid should be refunded in accordance with the
general civil code principle against unjust enrichment. The general rule is
supported by Article 7 of the Civil Code, which provides:

ART. 7. Laws are repealed only by subsequent ones, and their violation or non-
observance shall not be excused by disuse or custom or practice to the
contrary.

When the courts declare a law to be inconsistent with the Constitution, the
former shall be void and the latter shall govern.

The doctrine of operative fact, as an exception to the general rule, only applies
as a matter of equity and fair play. 55 It nullifies the effects of an
unconstitutional law by recognizing that the existence of a statute prior to a
determination of unconstitutionality is an operative fact and may have
consequences which cannot always be ignored. The past cannot always be
erased by a new judicial declaration.56

The doctrine is applicable when a declaration of unconstitutionality will

impose an undue burden on those who have relied on the invalid law. Thus, it
was applied to a criminal case when a declaration of unconstitutionality would
put the accused in double jeopardy57 or would put in limbo the acts done by a
municipality in reliance upon a law creating it. 58

Here, We do not find anything iniquitous in ordering PPI to refund the

amounts paid by Fertiphil under LOI No. 1465. It unduly benefited from the
levy. It was proven during the trial that the levies paid were remitted and
deposited to its bank account. Quite the reverse, it would be inequitable and
unjust not to order a refund. To do so would unjustly enrich PPI at the
expense of Fertiphil. Article 22 of the Civil Code explicitly provides that "every
person who, through an act of performance by another comes into possession
of something at the expense of the latter without just or legal ground shall
return the same to him." We cannot allow PPI to profit from an
unconstitutional law. Justice and equity dictate that PPI must refund the
amounts paid by Fertiphil.

WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated

November 28, 2003 is AFFIRMED.

SO ORDERED.

John hay case 414 s 356

JOHN HAY PEOPLE’S ALTERNATIVE COALITION V. VICTOR LIM G.R.

No. 119775 October 24, 2003 J. Carpio-Morales. This is a petition
assailing the constitutionality of Presidential Proclamation No. 420
(Proc. 420) creating and designating a portion of the area covered by
Camp John Hay into a special economic zone (SEZ). In particular,
petitioners challenge the validity of Proc. 420 on the grounds that it
infringes on Sec. 28(4), Art. 6 of the Constitution and that it
diminishes the local autonomy of Baguio City.

FACTS: · 1992: Congress enacted RA 7227, or the Bases Conversion

and Development Act

o The act accelerates the conversion of the military reservations

into other productive uses and creates the Bases Conversion and
Development Authority (BCDA)

o RA 7227 primarily created the Subic Special Economic Zone

(Subic SEZ), delineated its metes and bounds, and granted the Subic
SEZ incentives like tax and duty-free importations, and exemptions of
businesses from local and national taxes

o The RA also gave express authority to the President to create

via Executive Proclamation, subject to the concurrence of the LGUs
to be affected, other SEZs in areas covered by Clark, Wallace Station
in San Fernando, and Camp John Hay (CJH)

· 1993: BCDA entered into a Memorandum of Agreement (MOA)

and Escrow Agreement with Tuntex and Asiaworld (British Virgin
Islands corporations)
 o Agreed on a joint venture agreement (JVA), which was
executed, thus creating the Baguio International Development
Management Corporation to LEASE areas within CJH in Baguio
and Poro Point in La Union

· 1993: Sangguniang Panglungsod of Baguio (Sanggunian)

officially asked the BCDA to exclude 9 barangays partly and totally
located in the CJH area from the coverage of any plan for
development

o Also submitted a 15-point concept for the development of

CJH

o They proposed that the development be protective of the

environment and that priority development opportunities, as well
as free access, be granted to Baguio residents

o Also proposed guaranteed participation of the city govt.

in the management and operation of the camp and liability for
local taxes of the businesses to be established in the CJH

· BCDA partly agreed and rejected other proposals; the

Sanggunian then submitted their proposal to the President

1994: Pres. Ramos issued Proc. 420, granting BCDA

authority to implement all necessary policies, rules, and
regulations, including investment incentives in the Camp John
Hay Area

1995: Petitioners filed instant petition challenging the

constitutionality and validity of the MOA and JVA between
BCDA, Tuntex, and Asiaworld

ISSUES/HELD:

A. PROCEDURAL ISSUES

· Court first established that the issue of the validity of

the JVA and MOA is MOOT
 o both have already been revoked at the time of the
decision

o but they said that they can still review the

constitutionality of Proc. 420 which has not been
mooted by the fact of conversion of a portion of CJH
into an SEZ

· Court also viewed as crucial issues the fact that the

transformation of CJH into an SEZ is not just a
reclassification of the area but a conversion.

o involves turning areas into sites of business

activity in line with govt. policy

o Baguio City’s ecology will necessarily be affected;

petitioners cite problem on scarcity of water supply
within the city

o Local and national govt. is faced with the challenge

of how to provide a sustainable, sound, and equitable
transition for the city once the conversion takes place

1. Actual case or controversy: YES

· Existence of a real clash of interests and rights between petitioners

and respondents

· Dispute has ripened into a judicial controversy even absent an overt

act

2. Locus standi: YES

· RA 7227 expressly requires concurrence of affected LGUs in the

creation of SEZs, thus vesting them with legal standing for it is in
effect a recognition of the real interests of the communities to be
affected

· Interest of inhabitants of Baguio City is thus recognized since the

govt. act being challenged may lead to them sustaining direct injury
as a result
· Court also cites the Bataan powerplant case (Garcia v. Board of
Investments) in establishing petitioners’ standing because similarly,
“their interest is actual, real, vital, and legal for it would affect not only
their economic life but also the air they breathe”

·Petitioners Claravall and Yaranon are duly elected councilors of

Baguio; their concurrence is required by RA 7227, hence they have
locus standi

3. Earliest Opportunity and Lis Mota: YES;

the petition is established right away to be centered on issues of

constitutionality of the assailed government acts

B. SUBSTANTIVE ISSUES

1. WN Proc. 420 is unconstitutional by providing for national and local

tax exemption: YES

· It was established in the language of Sec. 12, RA 7227 that the

tax exemption only applies to SUBIC SEZ; no express extension of
the aforesaid benefits to other SEZs still to be created was made. The
deliberations of the Senate also affirm this fact [see Notes]

· It is the legislature, unless limited by the Constitution, that has

full power to exempt any person, corporation, or class from tax, as
included in their broad power to tax. The Constitution may provide for
specific tax exemptions; local govts may pass ordinances of tax
exemption but only for local taxes

· Sec. 28(4), Art. 6, 1987 Consti: No law granting any tax

exemption shall be passed without the concurrence of a majority of
all Members of Congress

· Proc. 420 extends the tax exemption contemplated in RA 7227

to other economic zones. Thus, it is an infringement of RA 7227 and
Sec. 28(4), Art. 6
2. WN Proc. 420 is unconsti for limiting or interfering w local
autonomy of Baguio City: NO

· Petitioners:

o Argue that President has no authority to subject the CJH SEZ

to the governance of the BCDA which has only oversight functions

o Beyond oversight, they argue that there will be a diminution of

the city govt's power over an area within its jurisdiction

o Basically, they believe Proc. 420 gives the President power of

control rather than just supervision over local govt.

· Court: o Sec. 12 of RA 7227 explicitly grants broad rights of

ownership and administration to the BCDA; hence, they necessarily
have CONTROL over it subject to certain limitations provided by law o
Sec. 15, RA 7227 authorizes the President to delineate and declare
portions, by means of an executive proclamation, other SEZs in areas
covered by Clark, Wallace Station in San Fernando, and Camp John
Hay (CJH)

RULING:

2ND sentence of Sec. 3 of Proc. 420 is declared NULL AND

VOID. Not the whole Proc. 420 is declared unconstitutional
since only the said provision on tax exemption is
repugnant to RA 7227 and Sec. 28(4), Art. 6. Proc. 420,
without the invalidated portion, remains valid and
effective. Sec. 3. Investment Climate in John Hay Special Economic
Zone. – Pursuant to Sections 5 (m) Section 15 of Republic Act No.
7227, the John Hay Poro Point Development Corporation shall
implement all necessary policies, rules, and regulations governing
the zone, including investment incentives, in consultation with
pertinent government departments. Among others, the zone shall
have all the applicable incentives of the Special Economic Zone
under Section 12 of Republic Act No. 7227 and those applicable
incentives granted in the Export Processing Zones, the Omnibus
Investment Code of 1987, the Foreign Investment Act of 1991, and
new investment laws that may hereinafter be enacted.
Where part of a statute is void as contrary to the
Constitution, while another part is valid, the valid portion,
if separable from the invalid, may stand and be
enforced.52 This Court finds that the other provisions in
Proclamation No. 420 converting a delineated portion of
Camp John Hay into the John Hay SEZ are separable from
the invalid second sentence of Section 3 thereof, hence
they stand.

WHEREFORE, the second sentence of Section 3 of

Proclamation No. 420 is hereby declared NULL AND VOID
and is accordingly declared of no legal force and effect.
Public respondents are hereby enjoined from
implementing the aforesaid void provision.

NOTES: Senate Deliberations Senator Angara: [D]uring our

short caucus, Senator Laurel raised the point that if we
give this delegation to the President to establish other
economic zones, that may be an unwarranted delegation.
So we agreed we will simply limit the definition of powers
and description of the zone to Subic, but that does not
exclude the possibility of creating other economic zones
within the baselands … This provision now will be confined
only to Subic.

Sta. lucia realty v. Pasig gr 166838 june 11, 2011

For review is the June 30, 2004 Decision [1] and the January 27, 2005 Resolution [2] of
the Court of Appeals in CA-G.R. CV No. 69603, which affirmed with modification the
August 10, 1998 Decision [3] and October 9, 1998 Order [4] of the Regional Trial Court
(RTC) of Pasig City, Branch 157, in Civil Case No. 65420.

Petitioner Sta. Lucia Realty & Development, Inc. (Sta. Lucia) is the registered owner of
several parcels of land with Transfer Certificates of Title (TCT) Nos. 39112, 39110 and
38457, all of which indicated that the lots were located in Barrio Tatlong Kawayan,
Municipality of Pasig [5] (Pasig).

The parcel of land covered by TCT No. 39112 was consolidated with that covered by
TCT No. 518403, which was situated in Barrio Tatlong Kawayan, Municipality of Cainta,
Province of Rizal (Cainta). The two combined lots were subsequently partitioned into
three, for which TCT Nos. 532250, 598424, and 599131, now all bearing the Cainta
address, were issued.

TCT No. 39110 was also divided into two lots, becoming TCT Nos. 92869 and 92870.

The lot covered by TCT No. 38457 was not segregated, but a commercial building
owned by Sta. Lucia East Commercial Center, Inc., a separate corporation, was built on
it. [6]

Upon Pasig's petition to correct the location stated in TCT Nos. 532250, 598424, and
599131, the Land Registration Court, on June 9, 1995, ordered the amendment of the
TCTs to read that the lots with respect to TCT No. 39112 were located in Barrio Tatlong
Kawayan, Pasig City. [7]

On January 31, 1994, Cainta filed a petition [8] for the settlement of its land boundary
dispute with Pasig before the RTC, Branch 74 of Antipolo City (Antipolo RTC). This case,
docketed as Civil Case No. 94-3006, is still pending up to this date.

On November 28, 1995, Pasig filed a Complaint, [9] docketed as Civil Case No. 65420,
against Sta. Lucia for the collection of real estate taxes, including penalties and
interests, on the lots covered by TCT Nos. 532250, 598424, 599131, 92869, 92870 and
38457, including the improvements thereon (the subject properties).

Sta. Lucia, in its Answer, alleged that it had been religiously paying its real estate taxes
to Cainta, just like what its predecessors-in-interest did, by virtue of the demands and
assessments made and the Tax Declarations issued by Cainta on the claim that the
subject properties were within its territorial jurisdiction. Sta. Lucia further argued that
since 1913, the real estate taxes for the lots covered by the above TCTs had been paid
to Cainta. [10]

Cainta was allowed to file its own Answer-in-Intervention when it moved to intervene
on the ground that its interest would be greatly affected by the outcome of the case. It
averred that it had been collecting the real property taxes on the subject properties
even before Sta. Lucia acquired them. Cainta further asseverated that the
establishment of the boundary monuments would show that the subject properties are
within its metes and bounds. [11]

Sta. Lucia and Cainta thereafter moved for the suspension of the proceedings, and
claimed that the pending petition in the Antipolo RTC, for the settlement of boundary
dispute between Cainta and Pasig, presented a "prejudicial question" to the resolution
of the case. [12]

The RTC denied this in an Order dated December 4, 1996 for lack of merit. Holding
 [13]
that the TCTs were conclusive evidence as to its ownership and location, the RTC,
on August 10, 1998, rendered a Decision in favor of Pasig:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of [Pasig],

ordering Sta. Lucia Realty and Development, Inc. to pay [Pasig]:

1) P273,349.14 representing unpaid real estate taxes and penalties as of 1996, plus
interest of 2% per month until fully paid;

2) P50,000.00 as and by way of attorney's fees; and

3) The costs of suit.

Judgment is likewise rendered against the intervenor Municipality of Cainta, Rizal,

ordering it to refund to Sta. Lucia Realty and Development, Inc. the realty tax
payments improperly collected and received by the former from the latter in the
aggregate amount of P358, 403.68. [14]

After Sta. Lucia and Cainta filed their Notices of Appeal, Pasig, on September 11, 1998,
filed a Motion for Reconsideration of the RTC's August 10, 1998 Decision.

The RTC, on October 9, 1998, granted Pasig's motion in an Order [15] and modified its
earlier decision to include the realty taxes due on the improvements on the subject
lots:

WHEREFORE, premises considered, the plaintiff's motion for reconsideration is hereby

granted. Accordingly, the Decision, dated August 10, 1998 is hereby modified in that
the defendant is hereby ordered to pay plaintiff the amount of P5,627,757.07
representing the unpaid taxes and penalties on the improvements on the subject
parcels of land whereon real estate taxes are adjudged as due for the year 1996. [16]

Accordingly, Sta. Lucia filed an Amended Notice of Appeal to include the RTC's October
9, 1998 Order in its protest.

On October 16, 1998, Pasig filed a Motion for Execution Pending Appeal, to which both
Sta. Lucia and Cainta filed several oppositions, on the assertion that there were no
good reasons to warrant the execution pending appeal. [17]

On April 15, 1999, the RTC ordered the issuance of a Writ of Execution against Sta.
Lucia.

On May 21, 1999, Sta. Lucia filed a Petition for Certiorari under Rule 65 of the Rules of
Court with the Court of Appeals to assail the RTC's order granting the execution.
Docketed as CA-G.R. SP No. 52874, the petition was raffled to the First Division of the
Court of Appeals, which on September 22, 2000, ruled in favor of Sta. Lucia, to wit:
WHEREFORE, in view of the foregoing, the instant petition is hereby GIVEN DUE
COURSE and GRANTED by this Court. The assailed Order dated April 15, 1999 in Civil
Case No. 65420 granting the motion for execution pending appeal and ordering the
issuance of a writ of execution pending appeal is hereby SET ASIDE and
declared NULL and VOID.[18]

The Court of Appeals added that the boundary dispute case presented a "prejudicial
question which must be decided before x x x Pasig can collect the realty taxes due over
the subject properties." [19]

Pasig sought to have this decision reversed in a Petition for Certiorari filed before this
Court on November 29, 2000, but this was denied on June 25, 2001 for being filed out
of time. [20]

Meanwhile, the appeal filed by Sta. Lucia and Cainta was raffled to the (former)
Seventh Division of the Court of Appeals and docketed as CA-G.R. CV No. 69603. On
June 30, 2004, the Court of Appeals rendered its Decision, wherein it agreed with the
RTC's judgment:

WHEREFORE, the appealed Decision is hereby AFFIRMED with

the MODIFICATION that the award of P50,000.00 attorney's fees is DELETED. [21]

In affirming the RTC, the Court of Appeals declared that there was no proper legal basis
to suspend the proceedings. [22] Elucidating on the legal meaning of a "prejudicial
question," it held that "there can be no prejudicial question when the cases involved are
both civil." [23] The Court of Appeals further held that the elements of litis
pendentia and forum shopping, as alleged by Cainta to be present, were not met.

Sta. Lucia and Cainta filed separate Motions for Reconsideration, which the Court of
Appeals denied in a Resolution dated January 27, 2005.

Undaunted, Sta. Lucia and Cainta filed separate Petitions for Certiorari with this Court.
Cainta's petition, docketed as G.R. No. 166856 was denied on April 13, 2005 for
Cainta's failure to show any reversible error. Sta. Lucia's own petition is the one
subject of this decision. [24]

In praying for the reversal of the June 30, 2004 judgment of the Court of Appeals, Sta.
Lucia assigned the following errors:

ASSIGNMENT OF ERRORS

THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING [WITH MODIFICATION]

THE DECISION OF THE REGIONAL TRIAL COURT IN PASIG CITY

II.
THE HONORABLE COURT OF APPEALS ERRED IN NOT SUSPENDING THE CASE IN VIEW
OF THE PENDENCY OF THE BOUNDARY DISPUTE WHICH WILL FINALLY DETERMINE THE
SITUS OF THE SUBJECT PROPERTIES

III.

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE PAYMENT OF
REALTY TAXES THROUGH THE MUNICIPALITY OF CAINTA WAS VALID PAYMENT OF
REALTY TAXES

IV.

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT IN THE

MEANTIME THAT THE BOUNDARY DISPUTE CASE IN ANTIPOLO CITY REGIONAL TRIAL
COURT IS BEING FINALLY RESOLVED, THE PETITIONER STA. LUCIA SHOULD BE
PAYING THE REALTY TAXES ON THE SUBJECT PROPERTIES THROUGH THE
INTERVENOR CAINTA TO PRESERVE THE STATUS QUO.[25]

Pasig, countering each error, claims that the lower courts correctly decided the case
considering that the TCTs are clear on their faces that the subject properties are
situated in its territorial jurisdiction. Pasig contends that the principles of litis pendentia,
forum shopping, and res judicata are all inapplicable, due to the absence of their
requisite elements. Pasig maintains that the boundary dispute case before the Antipolo
RTC is independent of the complaint for collection of realty taxes which was filed before
the Pasig RTC. It avers that the doctrine of "prejudicial question," which has a definite
meaning in law, cannot be invoked where the two cases involved are both civil. Thus,
Pasig argues, since there is no legal ground to preclude the simultaneous hearing of
both cases, the suspension of the proceedings in the Pasig RTC is baseless.

Cainta also filed its own comment reiterating its legal authority over the subject
properties, which fall within its territorial jurisdiction. Cainta claims that while it has
been collecting the realty taxes over the subject properties since way back 1913, Pasig
only covered the same for real property tax purposes in 1990, 1992, and 1993. Cainta
also insists that there is a discrepancy between the locational entries and the technical
descriptions in the TCTs, which further supports the need to await the settlement of the
boundary dispute case it initiated.

The errors presented before this Court can be narrowed down into two basic issues:

1) Whether the RTC and the CA were correct in deciding Pasig's Complaint without
waiting for the resolution of the boundary dispute case between Pasig and Cainta; and

2) Whether Sta. Lucia should continue paying its real property taxes to Cainta, as it
alleged to have always done, or to Pasig, as the location stated in Sta. Lucia's TCTs.

We agree with the First Division of the Court of Appeals in CA-G.R. SP No. 52874 that
the resolution of the boundary dispute between Pasig and Cainta would determine
 [26]
which local government unit is entitled to collect realty taxes from Sta. Lucia.

The Local Government Unit entitled

To Collect Real Property Taxes

The Former Seventh Division of the Court of Appeals held that the resolution of the
complaint lodged before the Pasig RTC did not necessitate the assessment of the
parties' evidence on the metes and bounds of their respective territories. It cited our
ruling in Odsigue v. Court of Appeals [27] wherein we said that a certificate of title is
conclusive evidence of both its ownership and location. [28] The Court of Appeals even
referred to specific provisions of the 1991 Local Government Code and Act. No. 496 to
support its ruling that Pasig had the right to collect the realty taxes on the subject
properties as the titles of the subject properties show on their faces that they are
situated in Pasig. [29]

Under Presidential Decree No. 464 or the "Real Property Tax Code," the authority to
collect real property taxes is vested in the locality where the property is situated:

Sec. 5. Appraisal of Real Property. -- All real property, whether taxable or exempt, shall
be appraised at the current and fair market value prevailing in the locality where the
property is situated.

x x x x

Sec. 57. Collection of tax to be the responsibility of treasurers. -- The collection of the
real property tax and all penalties accruing thereto, and the enforcement of the
remedies provided for in this Code or any applicable laws, shall be the responsibility of
the treasurer of the province, city or municipality where the property is
situated. (Emphases ours.)

This requisite was reiterated in Republic Act No. 7160, also known as the 1991 the
Local Government Code, to wit:

Section 201. Appraisal of Real Property. - All real property, whether taxable or
exempt, shall be appraised at the current and fair market value prevailing in the
locality where the property is situated. The Department of Finance shall promulgate
the necessary rules and regulations for the classification, appraisal, and assessment of
real property pursuant to the provisions of this Code.

Section 233. Rates of Levy. - A province or city or a municipality within the

Metropolitan Manila Area shall fix a uniform rate of basic real property tax applicable to
their respective localities as follows: x x x. (Emphases ours.)

The only import of these provisions is that, while a local government unit is authorized
under several laws to collect real estate tax on properties falling under its territorial
jurisdiction, it is imperative to first show that these properties are
unquestionably within its geographical boundaries.
Accentuating on the importance of delineating territorial boundaries, this Court,
in Mariano, Jr. v. Commission on Elections [30] said:

The importance of drawing with precise strokes the territorial boundaries of a local unit
of government cannot be overemphasized. The boundaries must be clear for they
define the limits of the territorial jurisdiction of a local government unit. It can
legitimately exercise powers of government only within the limits of its
territorial jurisdiction. Beyond these limits, its acts are ultra vires. Needless to
state, any uncertainty in the boundaries of local government units will sow costly
conflicts in the exercise of governmental powers which ultimately will prejudice the
people's welfare. This is the evil sought to be avoided by the Local Government Code in
requiring that the land area of a local government unit must be spelled out in metes
and bounds, with technical descriptions. [31] (Emphasis ours.)

The significance of accurately defining a local government unit's boundaries was

stressed in City of Pasig v. Commission on Elections, [32] which involved the
consolidated petitions filed by the parties herein, Pasig and Cainta, against two
decisions of the Commission on Elections (COMELEC) with respect to the plebiscites
scheduled by Pasig for the ratification of its creation of two new Barangays. Ruling on
the contradictory reliefs sought by Pasig and Cainta, this Court affirmed the COMELEC
decision to hold in abeyance the plebiscite to ratify the creation of Barangay
Karangalan; but set aside the COMELEC's other decision, and nullified the plebiscite
that ratified the creation of Barangay Napico in Pasig, until the boundary dispute before
the Antipolo RTC had been resolved. The aforementioned case held as follows:

1. The Petition of the City of Pasig in G.R. No. 125646 is DISMISSED for lack
of merit; while

2. The Petition of the Municipality of Cainta in G.R. No. 128663 is GRANTED.

The COMELEC Order in UND No. 97-002, dated March 21, 1997, is SET
ASIDE and the plebiscite held on March 15, 1997 to ratify the creation of
Barangay Napico in the City of Pasig is declared null and void. Plebiscite
on the same is ordered held in abeyance until after the courts settle with
finality the boundary dispute between the City of Pasig and the
Municipality of Cainta, in Civil Case No. 94-3006. [33]

Clearly therefore, the local government unit entitled to collect real property taxes from
Sta. Lucia must undoubtedly show that the subject properties are situated within its
territorial jurisdiction; otherwise, it would be acting beyond the powers vested to it by
law.

Certificates of Title as
Conclusive Evidence of Location
While we fully agree that a certificate of title is conclusive as to its ownership and
location, this does not preclude the filing of an action for the very purpose of attacking
the statements therein. In De Pedro v. Romasan Development Corporation, [34] we
proclaimed that:

We agree with the petitioners that, generally, a certificate of title shall be conclusive as
to all matters contained therein and conclusive evidence of the ownership of the land
referred to therein. However, it bears stressing that while certificates of title are
indefeasible, unassailable and binding against the whole world, including the
government itself, they do not create or vest title. They merely confirm or record title
already existing and vested. They cannot be used to protect a usurper from the true
owner, nor can they be used as a shield for the commission of fraud; neither do they
permit one to enrich himself at the expense of other. [35]

In Pioneer Insurance and Surety Corporation v. Heirs of Vicente Coronado, [36] we set
aside the lower courts' ruling that the property subject of the case was not situated in
the location stated and described in the TCT, for lack of adequate basis. Our decision
was in line with the doctrine that the TCT is conclusive evidence of ownership and
location. However, we refused to simply uphold the veracity of the disputed TCT, and
instead, we remanded the case back to the trial court for the determination of the exact
location of the property seeing that it was the issue in the complaint filed before it. [37]

In City Government of Tagaytay v. Guerrero, [38] this Court reprimanded the City of
Tagaytay for levying taxes on a property that was outside its territorial jurisdiction, viz:

In this case, it is basic that before the City of Tagaytay may levy a certain property for
sale due to tax delinquency, the subject property should be under its territorial
jurisdiction. The city officials are expected to know such basic principle of law. The
failure of the city officials of Tagaytay to verify if the property is within its
jurisdiction before levying taxes on the same constitutes gross
negligence. [39] (Emphasis ours.)

Although it is true that "Pasig" is the locality stated in the TCTs of the subject
properties, both Sta. Lucia and Cainta aver that the metes and bounds of the subject
properties, as they are described in the TCTs, reveal that they are within Cainta's
boundaries. [40] This only means that there may be a conflict between the location as
stated and the location as technically described in the TCTs. Mere reliance therefore on
the face of the TCTs will not suffice as they can only be conclusive evidence of the
subject properties' locations if both the stated and described locations point to the same
area.

The Antipolo RTC, wherein the boundary dispute case between Pasig and Cainta is
pending, would be able to best determine once and for all the precise metes and
bounds of both Pasig's and Cainta's respective territorial jurisdictions. The resolution of
this dispute would necessarily ascertain the extent and reach of each local
government's authority, a prerequisite in the proper exercise of their powers, one of
which is the power of taxation. This was the conclusion reached by this Court in City of
Pasig v. Commission on Elections, [41] and by the First Division of the Court of Appeals
in CA-G.R. SP No. 52874. We do not see any reason why we cannot adhere to the
same logic and reasoning in this case.

The "Prejudicial Question" Debate

It would be unfair to hold Sta. Lucia liable again for real property taxes it already paid
simply because Pasig cannot wait for its boundary dispute with Cainta to be decided.
Pasig has consistently argued that the boundary dispute case is not a prejudicial
question that would entail the suspension of its collection case against Sta. Lucia. This
was also its argument in City of Pasig v. Commission on Elections, [42] when it sought to
nullify the COMELEC's ruling to hold in abeyance (until the settlement of the boundary
dispute case), the plebiscite that will ratify its creation of Barangay Karangalan. We
agreed with the COMELEC therein that the boundary dispute case presented
a prejudicial question and explained our statement in this wise:

To begin with, we agree with the position of the COMELEC that Civil Case No. 94-3006
involving the boundary dispute between the Municipality of Cainta and the City of Pasig
presents a prejudicial question which must first be decided before plebiscites for the
creation of the proposed barangays may be held.

The City of Pasig argues that there is no prejudicial question since the same
contemplates a civil and criminal action and does not come into play where both cases
are civil, as in the instant case. While this may be the general rule, this Court has
held in Vidad v. RTC of Negros Oriental, Br. 42, that, in the interest of good
order, we can very well suspend action on one case pending the final outcome
of another case closely interrelated or linked to the first.

In the case at bar, while the City of Pasig vigorously claims that the areas covered by
the proposed Barangays Karangalan and Napico are within its territory, it can not deny
that portions of the same area are included in the boundary dispute case pending
before the Regional Trial Court of Antipolo. Surely, whether the areas in controversy
shall be decided as within the territorial jurisdiction of the Municipality of Cainta or the
City of Pasig has material bearing to the creation of the proposed Barangays
Karangalan and Napico. Indeed, a requisite for the creation of a barangay is for its
territorial jurisdiction to be properly identified by metes and bounds or by more or less
permanent natural boundaries. Precisely because territorial jurisdiction is an issue
raised in the pending civil case, until and unless such issue is resolved with finality, to
define the territorial jurisdiction of the proposed barangays would only be an exercise in
futility. Not only that, we would be paving the way for potentially ultra vires acts of
such barangays. x x x. [43] (Emphases ours.)

It is obvious from the foregoing, that the term "prejudicial question," as appearing in
the cases involving the parties herein, had been used loosely. Its usage had been more
in reference to its ordinary meaning, than to its strict legal meaning under the Rules of
Court. [44] Nevertheless, even without the impact of the connotation derived from the
term, our own Rules of Court state that a trial court may control its own proceedings
according to its sound discretion:
 POWERS AND DUTIES OF COURTS AND JUDICIAL OFFICERS
Rule 135

SEC. 5. Inherent powers of courts. - Every court shall have power:

x x x x

(g) To amend and control its process and orders so as to make them comformable to
law and justice.

Furthermore, we have acknowledged and affirmed this inherent power in our own
decisions, to wit:

The court in which an action is pending may, in the exercise of a sound discretion, upon
proper application for a stay of that action, hold the action in abeyance to abide the
outcome of another pending in another court, especially where the parties and the
issues are the same, for there is power inherent in every court to control the disposition
of causes (sic) on its dockets with economy of time and effort for itself, for counsel, and
for litigants. Where the rights of parties to the second action cannot be properly
determined until the questions raised in the first action are settled the second action
should be stayed.

The power to stay proceedings is incidental to the power inherent in every court to
control the disposition of the cases on its dockets, considering its time and effort, that
of counsel and the litigants. But if proceedings must be stayed, it must be done in order
to avoid multiplicity of suits and prevent vexatious litigations, conflicting judgments,
confusion between litigants and courts. It bears stressing that whether or not the RTC
would suspend the proceedings in the SECOND CASE is submitted to its sound
discretion. [45]

In light of the foregoing, we hold that the Pasig RTC should have held in abeyance the
proceedings in Civil Case No. 65420, in view of the fact that the outcome of the
boundary dispute case before the Antipolo RTC will undeniably affect both Pasig's and
Cainta's rights. In fact, the only reason Pasig had to file a tax collection case against
Sta. Lucia was not that Sta. Lucia refused to pay, but that Sta. Lucia had already paid,
albeit to another local government unit. Evidently, had the territorial boundaries of the
contending local government units herein been delineated with accuracy, then there
would be no controversy at all.

In the meantime, to avoid further animosity, Sta. Lucia is directed to deposit

the succeeding real property taxes due on the subject properties, in an escrow
account with the Land Bank of the Philippines.

WHEREFORE, the instant petition is GRANTED. The June 30, 2004 Decision and the
January 27, 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 69603 are SET
ASIDE. The City of Pasig and the Municipality of Cainta are both directed to await the
judgment in their boundary dispute case (Civil Case No. 94-3006), pending before
Branch 74 of the Regional Trial Court in Antipolo City, to determine which local
government unit is entitled to exercise its powers, including the collection of real
property taxes, on the properties subject of the dispute. In the meantime, Sta. Lucia
Realty and Development, Inc. is directed to deposit the succeeding real property taxes
due on the lots and improvements covered by TCT Nos. 532250, 598424, 599131,
92869, 92870 and 38457 in an escrow account with the Land Bank of the Philippines.

SO ORDERED.

Mactan international airport c. city of lapu-lapu gr 181756, june 15, 2015

This is a clear opportunity for this Court to clarify the effects of our two previous
decisions, issued a decade apart, on the power of local government units to collect real
property taxes from airport authorities located within their area, and the nature or the
juridical personality of said airport authorities.

Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil
Procedure seeking to reverse and set aside the October 8, 2007 Decision1 of the Court
of Appeals (Cebu City) in CA-G.R. SP No. 01360 and the February 12,
2008 Resolution2 denying petitioner�s motion for reconsideration.

THE FACTS

Petitioner Mactan-Cebu International Airport Authority (MCIAA) was created by

Congress on July 31, 1990 under Republic Act No. 6958 3 to �undertake the
economical, efficient and effective control, management and supervision of
the Mactan International Airport in the Province of Cebu and the Lahug Airport in Cebu
City x x x and such other airports as may be established in the Province of Cebu.� It
is represented in this case by the Office of the Solicitor General.

Respondent City of Lapu-Lapu is a local government unit and political subdivision,

created and existing under its own charter with capacity to sue and be sued.
Respondent Elena T. Pacaldo was impleaded in her capacity as the City Treasurer of
respondent City.

Upon its creation, petitioner enjoyed exemption from realty taxes under the following
provision of Republic Act No. 6958:chanRoblesvirtualLawlibrary

Section 14. Tax Exemptions. � The Authority shall be exempt from realty taxes
imposed by the National Government or any of its political subdivisions, agencies and
instrumentalities: Provided, That no tax exemption herein granted shall extend to any
subsidiary which may be organized by the Authority. chanroblesvirtuallawlibrary

On September 11, 1996, however, this Court rendered a decision in Mactan-Cebu

International Airport Authority v. Marcos4 (the 1996 MCIAA case) declaring that upon
the effectivity of Republic Act No. 7160 (The Local Government Code of 1991),
petitioner was no longer exempt from real estate taxes. The Court held: chanRoblesvirtualLawlibrary

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of
the LGC, exemptions from payment of real property taxes granted to natural or juridical
persons, including government-owned or controlled corporations, except as provided in
the said section, and the petitioner is, undoubtedly, a government-owned corporation,
it necessarily follows that its exemption from such tax granted it in Section 14 of its
Charter, R.A. No. 6958, has been withdrawn. x x x. chanroblesvirtuallawlibrary

On January 7, 1997, respondent City issued to petitioner a Statement of Real Estate

Tax assessing the lots comprising the Mactan International Airport in the amount of
P162,058,959.52. Petitioner complained that there were discrepancies in said
Statement of Real Estate Tax as follows: chanRoblesvirtualLawlibrary

(a) [T]he statement included lots and buildings not found in the inventory of
petitioner�s real properties;

(b) [S]ome of the lots were covered by two separate tax declarations which resulted in
double assessment;

(c) [There were] double entries pertaining to the same lots; and

(d) [T]he statement included lots utilized exclusively for governmental purposes. 5
Respondent City amended its billing and sent a new Statement of Real Estate Tax to
petitioner in the amount of P151,376,134.66. Petitioner averred that this amount
covered real estate taxes on the lots utilized solely and exclusively for public or
governmental purposes such as the airfield, runway and taxiway, and the lots on which
they are situated.6
chanrobleslaw

Petitioner paid respondent City the amount of four million pesos (P4,000,000.00)
monthly, which was later increased to six million pesos (P6,000,000.00) monthly. As of
December 2003, petitioner had paid respondent City a total of P275,728,313.36.7 chanrobleslaw

Upon request of petitioner�s General Manager, the Secretary of the Department of

Justice (DOJ) issued Opinion No. 50, Series of 1998,8 and we quote the pertinent
portions of said Opinion below: chanRoblesvirtualLawlibrary

You further state that among the real properties deemed transferred to MCIAA are the
airfield, runway, taxiway and the lots on which the runway and taxiway are situated,
the tax declarations of which were transferred in the name of the MCIAA. In 1997, the
City of Lapu-Lapu imposed real estate taxes on these properties invoking the provisions
of the Local Government Code.

It is your view that these properties are not subject to real property tax because they
are exclusively used for airport purposes. You said that the runway and taxiway are not
only used by the commercial airlines but also by the Philippine Air Force and other
government agencies. As such and in conjunction with the above interpretation of
Section 15 of R.A. No. 6958, you believe that these properties are considered owned by
the Republic of the Philippines. Hence, this request for opinion.
The query is resolved in the affirmative. The properties used for airport
purposes (i.e. airfield, runway, taxiway and the lots on which the runway and
taxiway are situated) are owned by the Republic of the Philippines.

x x x x

Under the Law on Public Corporations, the legislature has complete control over the
property which a municipal corporation has acquired in its public or governmental
capacity and which is devoted to public or governmental use. The municipality in
dealing with said property is subject to such restrictions and limitations as the
legislature may impose. On the other hand, property which a municipal corporation
acquired in its private or proprietary capacity, is held by it in the same character as a
private individual. Hence, the legislature in dealing with such property, is subject to the
constitutional restrictions concerning property (Martin, Public Corporations [1997], p.
30; see also Province of Zamboanga del [Norte] v. City of Zamboanga [131 Phil. 446]).
The same may be said of properties transferred to the MCIAA and used for airport
purposes, such as those involved herein. Since such properties are of public dominion,
they are deemed held by the MCIAA in trust for the Government and can be alienated
only as may be provided by law.

Based on the foregoing, it is our considered opinion that the properties used
for airport purposes, such as the airfield, runway and taxiway and the lots on
which the runway and taxiway are located, are owned by the State or by the
Republic of the Philippines and are merely held in trust by the MCIAA,
notwithstanding that certificates of titles thereto may have been issued in the
name of the MCIAA. (Emphases added.)
Based on the above DOJ Opinion, the Department of Finance issued a 2 nd Indorsement
to the City Treasurer of Lapu-Lapu dated August 3, 1998, 9 which reads: chanRoblesvirtualLawlibrary

The distinction as to which among the MCIAA properties are still considered �owned
by the State or by the Republic of the Philippines,� such as the resolution in the
above-cited DOJ Opinion No. 50, for purposes of real property tax exemption is hereby
deemed tenable considering that the subject �airfield, runway, taxiway and the lots
on which the runway and taxiway are situated� appears to be the subject of real
property tax assessment and collection of the city government of Lapu-Lapu, hence, the
same are definitely located within the jurisdiction of Lapu-Lapu City.

Moreover, then Undersecretary Antonio P. Belicena of the Department of

Finance, in his 1st Indorsement dated May 18, 1998, advanced that �this
Department (DOF) interposes no objection to the request of Mactan Cebu
International Airport Authority for exemption from payment of real property
tax on the property used for airport purposes� mentioned above.

The City Assessor, therefore, is hereby instructed to transfer the assessment

of the subject airfield, runway, taxiway and the lots on which the runway and
taxiway are situated, from the �Taxable Roll� to the �Exempt Roll�
of real properties.

The City Treasurer thereat should be informed on the action taken for his immediate
appropriate action. (Emphases added.)
Respondent City Treasurer Elena T. Pacaldo sent petitioner a Statement of Real
Property Tax Balances up to the year 2002 reflecting the amount of P246,395,477.20.
Petitioner claimed that the statement again included the lots utilized solely and
exclusively for public purpose such as the airfield, runway, and taxiway and the lots on
which these are built. Respondent Pacaldo then issued Notices of Levy on 18 sets of
real properties of petitioner.10 chanrobleslaw

Petitioner filed a petition for prohibition11 with the Regional Trial Court (RTC) of Lapu-
Lapu City with prayer for the issuance of a temporary restraining order (TRO) and/or a
writ of preliminary injunction, docketed as SCA No. 6056-L. Branch 53 of RTC Lapu-
Lapu City then issued a 72-hour TRO. The petition for prohibition sought to enjoin
respondent City from issuing a warrant of levy against petitioner�s properties and
from selling them at public auction for delinquency in realty tax obligations. The petition
likewise prayed for a declaration that the airport terminal building, the airfield, runway,
taxiway and the lots on which they are situated are exempted from real estate taxes
after due hearing. Petitioner based its claim of exemption on DOJ Opinion No. 50.

The RTC issued an Order denying the motion for extension of the TRO. Thus, on
December 10, 2003, respondent City auctioned 27 of petitioner�s properties. As
there was no interested bidder who participated in the auction sale, respondent City
forfeited and purchased said properties. The corresponding Certificates of Sale of
Delinquent Property were issued to respondent City.12 chanrobleslaw

Petitioner claimed before the RTC that it had discovered that respondent City did not
pass any ordinance authorizing the collection of real property tax, a tax for the special
education fund (SEF), and a penalty interest for its nonpayment. Petitioner argued that
without the corresponding tax ordinances, respondent City could not impose and collect
real property tax, an additional tax for the SEF, and penalty interest from petitioner.13 chanrobleslaw

The RTC issued an Order14 on December 28, 2004 granting petitioner�s application
for a writ of preliminary injunction. The pertinent portions of the Order are quoted
below:chanRoblesvirtualLawlibrary

The supervening legal issue has rendered it imperative that the matter of the
consolidation of the ownership of the auctioned properties be placed on hold.
Furthermore, it is the view of the Court that great prejudice and damage will be
suffered by petitioner if it were to lose its dominion over these properties now when the
most important legal issue has still to be resolved by the Court. Besides, the
respondents and the intervenor have not sufficiently shown cause why petitioner�s
application should not be granted.

WHEREFORE, the foregoing considered, petitioner�s application for a writ of

preliminary injunction is granted. Consequently, upon the approval of a bond in the
amount of one million pesos (P1,000,000.00), let a writ of preliminary injunction issue
enjoining the respondents, the intervenor, their agents or persons acting in [their]
behalf, to desist from consolidating and exercising ownership over the properties of the
petitioner. chanroblesvirtuallawlibrary
However, upon motion of respondents, the RTC lifted the writ of preliminary injunction
in an Order15 dated December 5, 2005. The RTC reasoned as follows: chanRoblesvirtualLawlibrary

The respondent City, in the course of the hearing of its motion, presented to this Court
a certified copy of its Ordinance No. 44 (Omnibus Tax Ordinance of the City of Lapu-
Lapu), Section 25 whereof authorized the collection of a rate of one and one-half (1
�) [per centum] from owners, executors or administrators of any real estate lying
within the jurisdiction of the City of Lapu-Lapu, based on the assessed value as shown
in the latest revision.

Though this ordinance was enacted prior to the effectivity of Republic Act No. 7160
(Local Government Code of 1991), to the mind of the Court this ordinance is still a valid
and effective ordinance in view of Sec. 529 of RA 7160 x x x [and the] Implementing
Rules and Regulations of RA 7160 x x x.

x x x x

The tax collected under Ordinance No. 44 is within the rates prescribed by RA 7160,
though the 25% penalty collected is higher than the 2% interest allowed under Sec.
255 of the said law which provides:chanRoblesvirtualLawlibrary

In case of failure to pay the basic real property tax or any other tax levied under this
Title upon the expiration of the periods as provided in Section 250, or when due, as the
case may be, shall subject the taxpayer to the payment of interest at the rate of two
percent (2%) per month on the unpaid amount or a fraction thereof, until the
delinquent tax shall have been fully paid: Provided, however, That in no case shall the
total interest on the unpaid tax or portion thereof exceed thirty-six (36) months. chanroblesvirtuallawlibrary

This difference does not however detract from the essential enforceability and
effectivity of Ordinance No. 44 pursuant to Section 529 of RA 7160 and Article 278 of
the Implementing Rules and Regulations. The outcome of this disparity is simply that
respondent City can only collect an interest of 2% per month on the unpaid tax.
Consequently, respondent City [has] to recompute the petitioner�s tax liability.

It is also the Court�s perception that respondent City can still collect the additional
1% tax on real property without an ordinance to this effect. It may be recalled that
Republic Act No. 5447 has created the Special Education Fund which is constituted from
the proceeds of the additional tax on real property imposed by the law. Respondent City
has collected this tax as mandated by this law without any ordinance for the purpose,
as there is no need for it. Even when RA 5447 was amended by PD 464 (Real Property
Tax Code), respondent City had continued to collect the tax, as it used to.

It is true that RA 7160 has repealed RA 5447, but what has been repealed are only
Section 3, a(3) and b(2) which concern the allocation of the additional tax, considering
that under RA 7160, the proceeds of the additional 1% tax on real property accrue
exclusively to the Special Education Fund. Nevertheless, RA 5447 has not been totally
repealed; there is only a partial repeal.

It may be observed that there is no requirement in RA 7160 that an ordinance be

enacted to enable the collection of the additional 1% tax. This is so since RA 5447 is
still in force and effect, and the declared policy of the government in enacting the law,
which is to contribute to the financial support of the goals of education as provided in
the Constitution, necessitates the continued and uninterrupted collection of the tax.
Considering that this is a tax of far-reaching importance, to require the passage of an
ordinance in order that the tax may be collected would be to place the collection of the
tax at the option of the local legislature. This would run counter to the declared policy
of the government when the SEF was created and the tax imposed.

As regards the allegation of respondents that this Court has no jurisdiction to entertain
the instant petition, the Court deems it proper, at this stage of the proceedings, not to
treat this issue, as it involves facts which are yet to be established.

x x x [T]he Court�s issuance of a writ of preliminary injunction may appear to be a

futile gesture in the light of Section 263 of RA 7160. x x x.

x x x x

It would seem from the foregoing provisions, that once the taxpayer fails to redeem
within the one-year period, ownership fully vests on the local government unit
concerned. Thus, when in the present case petitioner failed to redeem the parcels of
land acquired by respondent City, the ownership thereof became fully vested on
respondent City without the latter having to perform any other acts to perfect its
ownership. Corollary thereto, ownership on the part of respondent City has become a
fait accompli.

WHEREFORE, in the light of the foregoing considerations, respondents� motion for

reconsideration is granted, and the order of this Court dated December 28, 2004 is
hereby reconsidered. Consequently, the writ of preliminary injunction issued by this
Court is hereby lifted. chanroblesvirtuallawlibrary

Aggrieved, petitioner filed a petition for certiorari16 with the Court of Appeals (Cebu
City), with urgent prayer for the issuance of a TRO and/or writ of preliminary
injunction, docketed as CA-G.R. SP No. 01360. The Court of Appeals (Cebu City) issued
a TRO17 on January 5, 2006 and shortly thereafter, issued a writ of preliminary
injunction18 on February 17, 2006.

RULING OF THE COURT OF APPEALS

The Court of Appeals (Cebu City) promulgated the questioned Decision on October 8,
2007, holding that petitioner is a government-owned or controlled corporation and its
properties are subject to realty tax. The dispositive portion of the questioned Decision
reads:chanRoblesvirtualLawlibrary

WHEREFORE, in view of the foregoing, judgment is hereby rendered by us as follows:

a. We DECLARE the airport terminal building, the airfield, runway, taxiway

and the lots on which they are situated NOT EXEMPT from the real estate
tax imposed by the respondent City of Lapu-Lapu;

b. We DECLARE the imposition and collection of the real estate tax, the
additional levy for the Special Education Fund and the penalty interest
as VALID and LEGAL. However, pursuant to Section 255 of the Local
 Government Code, respondent city can only collect an interest of 2% per
month on the unpaid tax which total interest shall, in no case, exceed
thirty-six (36) months;

c. We DECLARE the sale in public auction of the aforesaid properties and

the eventual forfeiture and purchase of the subject property by the
respondent City of Lapu-Lapu as NULL and VOID. However, petitioner
MCIAA�s property is encumbered only by a limited lien possessed by
the respondent City of Lapu-Lapu in accord with Section 257 of the Local
Government Code.19

Petitioner filed a Motion for Partial Reconsideration 20 of the questioned Decision

covering only the portion of said decision declaring that petitioner is a GOCC and,
therefore, not exempt from the realty tax and special education fund imposed by
respondent City. Petitioner cited Manila International Airport Authority v. Court of
Appeals21 (the 2006 MIAA case) involving the City of Para�aque and the Manila
International Airport Authority. Petitioner claimed that it had been described by this
Court as a government instrumentality, and that it followed �as a logical
consequence that petitioner is exempt from the taxing powers of respondent City of
Lapu-Lapu.�22 Petitioner alleged that the 1996 MCIAA case had been overturned by
the Court in the 2006 MIAA case. Petitioner thus prayed that it be declared exempt
from paying the realty tax, special education fund, and interest being collected by
respondent City.

On February 12, 2008, the Court of Appeals denied petitioner�s motion for partial
reconsideration in the questioned Resolution.

The Court of Appeals followed and applied the precedent established in the
1996 MCIAA case and refused to apply the 2006 MIAA case. The Court of Appeals wrote
in the questioned Decision: �We find that our position is in line with the coherent and
cohesive interpretation of the relevant provisions of the Local Government Code on
local taxation enunciated in the [1996 MCIAA] case which to our mind is more elegant
and rational and provides intellectual clarity than the one provided by the Supreme
Court in the [2006] MIAA case.�23 chanrobleslaw

In the questioned Decision, the Court of Appeals held that petitioner�s airport
terminal building, airfield, runway, taxiway, and the lots on which they are situated are
not exempt from real estate tax reasoning as follows: chanRoblesvirtualLawlibrary

Under the Local Government Code (LGC for brevity), enacted pursuant to the
constitutional mandate of local autonomy, all natural and juridical persons, including
government-owned or controlled corporations (GOCCs), instrumentalities and agencies,
are no longer exempt from local taxes even if previously granted an exemption. The
only exemptions from local taxes are those specifically provided under the Code itself,
or those enacted through subsequent legislation.

Thus, the LGC, enacted pursuant to Section 3, Article X of the Constitution, provides for
the exercise by local government units of their power to tax, the scope thereof or its
limitations, and the exemptions from local taxation.
Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units. x x x.

x x x x

The above-stated provision, however, qualified the exemption of the National

Government, its agencies and instrumentalities from local taxation with the phrase
�unless otherwise provided herein.�

Section 232 of the LGC provides for the power of the local government units (LGUs for
brevity) to levy real property tax. x x x.

x x x x

Section 234 of the LGC provides for the exemptions from payment of real property
taxes and withdraws previous exemptions granted to natural and juridical persons,
including government-owned and controlled corporations, except as provided therein. x
x x.

x x x x

Section 193 of the LGC is the general provision on withdrawal of tax exemption
privileges. x x x.24 (Citations omitted.)
The Court of Appeals went on to state that contrary to the ruling of the Supreme Court
in the 2006 MIAA case, it finds and rules that:
chanRoblesvirtualLawlibrary

a) Section 133 of the LGC is not an absolute prohibition on the power of the LGUs to
tax the National Government, its agencies and instrumentalities as the same is qualified
by Sections 193, 232 and 234 which �otherwise provided�; and

b) Petitioner MCIAA is a GOCC.25 (Emphasis ours.)

The Court of Appeals ratiocinated in the following manner: chanRoblesvirtualLawlibrary

Pursuant to the explicit provision of Section 193 of the LGC, exemptions previously
enjoyed by persons, whether natural or juridical, like the petitioner MCIAA, are deemed
withdrawn upon the effectivity of the Code. Further, the last paragraph of Section 234
of the Code also unequivocally withdrew, upon the Code�s effectivity, exemptions
from payment of real property taxes previously granted to natural or juridical persons,
including government-owned or controlled corporations, except as provided in the said
section. Petitioner MCIAA, undoubtedly a juridical person, it follows that its exemption
from such tax granted under Section 14 of R.A. 6958 has been withdrawn.

x x x x

From the [1996 MCIAA] ruling, it is acknowledged that, under Section 133 of the LGC,
instrumentalities were generally exempt from all forms of local government taxation,
unless otherwise provided in the Code. On the other hand, Section 232 �otherwise
provided� insofar as it allowed local government units to levy an ad valorem real
property tax, irrespective of who owned the property. At the same time, the imposition
of real property taxes under Section 232 is, in turn, qualified by the phrase �not
hereinafter specifically exempted.� The exemptions from real property taxes are
enumerated in Section 234 of the Code which specifically states that only real
properties owned by the Republic of the Philippines or any of its political subdivisions
are exempted from the payment of the tax. Clearly, instrumentalities or GOCCs do not
fall within the exceptions under Section 234 of the LGC.

Thus, as ruled in the [1996 MCIAA] case, the prohibition on taxing the national
government, its agencies and instrumentalities under Section 133 is qualified by
Sections 232 and 234, and accordingly, the only relevant exemption now applicable to
these bodies is what is now provided under Section 234(a) of the Code. It may be
noted that the express withdrawal of previously granted exemptions to persons from
the payment of real property tax by the LGC does not even make any distinction as to
whether the exempt person is a governmental entity or not. As Sections 193 and 234 of
the Code both state, the withdrawal applies to �all persons, including GOCCs,�
thus encompassing the two classes of persons recognized under our laws, natural
persons and juridical persons.

x x x x

The question of whether or not petitioner MCIAA is an instrumentality or a GOCC has

already been lengthily but soundly, cogently and lucidly answered in the [1996 MCIAA]
case x x x.

x x x x

Based on the foregoing, the claim of the majority of the Supreme Court in the
[2006 MIAA] case that MIAA (and also petitioner MCIAA) is not a government-owned or
controlled corporation but an instrumentality based on Section 2(10) of the
Administrative Code of 1987 appears to be unsound. In the [2006 MIAA] case, the
majority justifies MIAA�s purported exemption on Section 133(o) of the Local
Government Code which places agencies and instrumentalities: as generally exempt
from the taxation powers of the LGUs. It further went on to hold that �By express
mandate of the Local Government Code, local governments cannot impose any kind of
tax on national government instrumentalities like the MIAA.� x x x. 26 (Citations
omitted.)
The Court of Appeals further cited Justice Tinga�s dissent in the 2006 MIAA case as
well as provisions from petitioner MCIAA�s charter to show that petitioner is a
GOCC.27 The Court of Appeals wrote: chanRoblesvirtualLawlibrary

These cited provisions establish the fitness of the petitioner MCIAA to be the subject of
legal relations. Under its charter, it has the power to acquire, possess and incur
obligations. It also has the power to contract in its own name and to acquire title to
movable or immovable property. More importantly, it may likewise exercise powers of a
corporation under the Corporation Code. Moreover, based on its own allegation, it even
recognized itself as a GOCC when it alleged in its petition for prohibition filed before the
lower court that it �is a body corporate organized and existing under Republic Act No.
6958 x x x.�

We also find to be not meritorious the assertion of petitioner MCIAA that the
respondent city can no longer challenge the tax-exempt character of the properties
since it is estopped from doing so when respondent City of Lapu-Lapu, through its
former mayor, Ernest H. Weigel, Jr., had long ago conceded that petitioner�s
properties are exempt from real property tax.

It is not denied by the respondent city that it considered, through its former mayor,
Ernest H. Weigel, Jr., petitioner�s subject properties, specifically the runway and
taxiway, as exempt from taxes. However, as astutely pointed out by the respondent
city it �can never be in estoppel, particularly in matters involving taxes. It is a well-
known rule that erroneous application and enforcement of the law by public officers do
not preclude subsequent correct application of the statute, and that the Government is
never estopped by mistake or error on the part of its agents.� 28 (Citations omitted.)
The Court of Appeals established the following: chanRoblesvirtualLawlibrary

a) [R]espondent City was able to prove and establish that it has a valid and existing
ordinance for the imposition of realty tax against petitioner MCIAA;

b) [T]he imposition and collection of additional levy of 1% Special Education Fund (SEF)
is authorized by law, Republic Act No. 5447; and

c) [T]he collection of penalty interest for delinquent taxes is not only authorized by law
but is likewise [sanctioned] by respondent City�s ordinance. 29
The Court of Appeals likewise held that respondent City has a valid and existing local
tax ordinance, Ordinance No. 44, or the Omnibus Tax Ordinance of Lapu-Lapu City,
which provided for the imposition of real property tax. The relevant provision reads: chanRoblesvirtualLawlibrary

Chapter 5 � Tax on Real Property Ownership

Section 25. RATE OF TAX. - A rate of one and one-half (1 �) percentum shall be
collected from owners, executors or administrators of any real estate lying within the
territorial jurisdiction of the City of Lapu-Lapu, based on the assessed value as shown in
the latest revision.30
The Court of Appeals found that even if Ordinance No. 44 was enacted prior to the
effectivity of the LGC, it remained in force and effect, citing Section 529 of the LGC and
Article 278 of the LGC�s Implementing Rules and Regulations. 31 chanrobleslaw

As regards the Special Education Fund, the Court of Appeals held that respondent City
can still collect the additional 1% tax on real property even without an ordinance to this
effect, as this is authorized by Republic Act No. 5447, as amended by Presidential
Decree No. 464 (the Real Property Tax Code), which does not require an enabling tax
ordinance. The Court of Appeals affirmed the RTC�s ruling that Republic Act No. 5447
was still in force and effect notwithstanding the passing of the LGC, as the latter only
partially repealed the former law. What Section 534 of the LGC repealed was Section 3
a(3) and b(2) of Republic Act No. 5447, and not the entire law that created the Special
Education Fund.32 The repealed provisions referred to allocation of taxes on Virginia
type cigarettes and duties on imported leaf tobacco and the percentage remittances to
the taxing authority concerned. The Court of Appeals, citing The Commission on Audit
of the Province of Cebu v. Province of Cebu,33 held that �[t]he failure to add a
specific repealing clause particularly mentioning the statute to be repealed indicates
that the intent was not to repeal any existing law on the matter, unless an
irreconcilable inconsistency and repugnancy exists in the terms of the new and the old
laws.�34 The Court of Appeals quoted the RTC�s discussion on this issue, which we
reproduce below: chanRoblesvirtualLawlibrary

It may be observed that there is no requirement in RA 7160 that an ordinance be

enacted to enable the collection of the additional 1% tax. This is so since R.A. 5447 is
still in force and effect, and the declared policy of the government in enacting the law,
which is to contribute to the financial support of the goals of education as provided in
the Constitution, necessitates the continued and uninterrupted collection of the tax.
Considering that this is a tax of far-reaching importance, to require the passage of an
ordinance in order that the tax may be collected would be to place the collection of the
tax at the option of the local legislature. This would run counter to the declared policy
of the government when the SEF was created and the tax imposed. 35
Regarding the penalty interest, the Court of Appeals found that Section 30 of Ordinance
No. 44 of respondent City provided for a penalty surcharge of 25% of the tax due for a
given year. Said provision reads: chanRoblesvirtualLawlibrary

Section 30. � PENALTY FOR FAILURE TO PAY TAX. � Failure to pay the tax provided
for under this Chapter within the time fixed in Section 27, shall subject the taxpayer to
a surcharge of twenty-five percent (25%), without interest. 36
The Court of Appeals however declared that after the effectivity of the Local
Government Code, the respondent City could only collect penalty surcharge up to the
extent of 72%, covering a period of three years or 36 months, for the entire delinquent
property.37 This was lower than the 25% per annum surcharge imposed by Ordinance
No. 44.38 The Court of Appeals affirmed the findings of the RTC in the decision quoted
below:chanRoblesvirtualLawlibrary

The tax collected under Ordinance No. 44 is within the rates prescribed by RA 7160,
though the 25% penalty collected is higher than the 2% allowed under Sec. 255 of the
said law which provides: ChanRoblesVirtualawlibrary

x x x x

This difference does not however detract from the essential enforceability and
effectivity of Ordinance No. 44 pursuant to Section 529 of RA No. 7160 and Article 278
of the Implementing Rules and Regulations. The outcome of this disparity is simply that
respondent City can only collect an interest of 2% per month on the unpaid tax.
Consequently, respondent city will have to [recompute] the petitioner�s tax liability. 39
It is worthy to note that the Court of Appeals nevertheless held that even if it
is clear that respondent City has the power to impose real property taxes over
petitioner, �it is also evident and categorical that, under Republic Act No.
6958, the properties of petitioner MCIAA may not be conveyed or transferred
to any person or entity except to the national government.�40 The relevant
provisions of the said law are quoted below: chanRoblesvirtualLawlibrary

Section 4. Functions, Powers and Duties. � The Authority shall have the following
functions, powers and duties: ChanRoblesVirtualawlibrary
x x x x

(e) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of
any land, building, airport facility, or property of whatever kind and nature, whether
movable or immovable, or any interest therein: Provided, That any asset located in
the Mactan International Airport important to national security shall not be subject to
alienation or mortgage by the Authority nor to transfer to any entity other than the
National Government[.]

Section 13. Borrowing Power. � The Authority may, in accordance with Section
21, Article XII of the Constitution and other existing laws, rules and regulations on local
or foreign borrowing, raise funds, either from local or international sources, by way of
loans, credit or securities, and other borrowing instruments with the power to create
pledges, mortgages and other voluntary liens or encumbrances on any of its assets or
properties, subject to the prior approval of the President of the Philippines.

All loans contracted by the Authority under this section, together with all interests and
other sums payable in respect thereof, shall constitute a charge upon all the revenues
and assets of the Authority and shall rank equally with one another, but shall have
priority over any other claim or charge on the revenue and assets of the Authority:
Provided, That this provision shall not be construed as a prohibition or restriction on the
power of the Authority to create pledges, mortgages and other voluntary liens or
encumbrances on any asset or property of the Authority.

The payment of the loans or other indebtedness of the Authority may be guaranteed by
the National Government subject to the approval of the President of the Philippines. chanroblesvirtuallawlibrary

The Court of Appeals concluded that �it is clear that petitioner MCIAA is denied by its
charter the absolute right to dispose of its property to any person or entity except to
the national government and it is not empowered to obtain loans or encumber its
property without the approval of the President.�41 The questioned Decision contained
the following conclusion:chanRoblesvirtualLawlibrary

With the advent of RA 7160, the Local Government Code, the power to tax is no longer
vested exclusively on Congress. LGUs, through its local legislative bodies, are now
given direct authority to levy taxes, fees and other charges pursuant to Article X,
Section 5 of the 1987 Constitution. And one of the most significant provisions of the
LGC is the removal of the blanket inclusion of instrumentalities and agencies of the
national government from the coverage of local taxation. The express withdrawal by the
Code of previously granted exemptions from realty taxes applied to instrumentalities
and government-owned or controlled corporations (GOCCs) such as the
petitioner Mactan-Cebu International Airport Authority. Thus, petitioner MCIAA became
a taxable person in view of the withdrawal of the realty tax exemption that it previously
enjoyed under Section 14 of RA No. 6958 of its charter. As expressed and categorically
held in the Mactan case, the removal and withdrawal of tax exemptions previously
enjoyed by persons, natural or juridical, are consistent with the State policy to ensure
autonomy to local governments and the objective of the Local Government Code that
they enjoy genuine and meaningful local autonomy to enable them to attain their fullest
development as self-reliant communities and make them effective partners in the
attainment of national goals.
However, in the case at bench, petitioner MCIAA�s charter expressly bars the
alienation or mortgage of its property to any person or entity except to the national
government. Therefore, while petitioner MCIAA is a taxable person for purposes of real
property taxation, respondent City of Lapu-Lapu is prohibited from seizing, selling and
owning these properties by and through a public auction in order to satisfy petitioner
MCIAA�s tax liability.42 (Citations omitted.)
In the questioned Resolution that affirmed its questioned Decision, the Court of Appeals
denied petitioner�s motion for reconsideration based on the following grounds: chanRoblesvirtualLawlibrary

First, the MCIAA case remains the controlling law on the matter as the same is
the established precedent; not the MIAA case but the MCIAA case since the
former, as keenly pointed out by the respondent City of Lapu-Lapu, has not yet
attained finality as there is still yet a pending motion for reconsideration filed
with the Supreme Court in the aforesaid case.

Second, and more importantly, the ruling of the Supreme Court in

the MIAA case cannot be similarly invoked in the case at bench. The said case
cannot be considered as the �law of the case.� The �law of the case�
doctrine has been defined as that principle under which determinations of questions of
law will generally be held to govern a case throughout all its subsequent stages where
such determination has already been made on a prior appeal to a court of last resort. It
is merely a rule of procedure and does not go to the power of the court, and will not be
adhered to where its application will result in an unjust decision. It relates entirely to
questions of law, and is confined in its operation to subsequent proceedings in the
same case. According to said doctrine, whatever has been irrevocably established
constitutes the law of the case only as to the same parties in the same case and not to
different parties in an entirely different case. Besides, pending resolution of the
aforesaid motion for reconsideration in the MIAA case, the latter case has not
irrevocably established anything.

Thus, after a thorough and judicious review of the allegations in petitioner�s motion
for reconsideration, this Court resolves to deny the same as the matters raised therein
had already been exhaustively discussed in the decision sought to be reconsidered, and
that no new matters were raised which would warrant the modification, much less
reversal, thereof.43 (Emphasis added, citations omitted.)
PETITIONER�S THEORY

Petitioner is before us now claiming that this Court, in the 2006 MIAA case, had
expressly declared that petitioner, while vested with corporate powers, is not
considered a government-owned or controlled corporation, but is a government
instrumentality like the Manila International Airport Authority (MIAA), Philippine Ports
Authority (PPA), University of the Philippines, and Bangko Sentral ng Pilipinas (BSP).
Petitioner alleges that as a government instrumentality, all its airport lands and
buildings are exempt from real estate taxes imposed by respondent City.44 chanrobleslaw

Petitioner alleges that Republic Act No. 6958 placed �a limitation on petitioner�s
administration of its assets and properties� as it provides under Section 4(e) that
�any asset in the international airport important to national security cannot be
alienated or mortgaged by petitioner or transferred to any entity other than the
National Government.�45 chanrobleslaw

Thus, petitioner claims that the Court of Appeals (Cebu City) gravely erred in
disregarding the following:chanRoblesvirtualLawlibrary

PETITIONER IS A GOVERNMENT INSTRUMENTALITY AS EXPRESSLY DECLARED BY THE

HONORABLE COURT IN THE MIAA CASE. AS SUCH, IT IS EXEMPT FROM PAYING REAL
ESTATE TAXES IMPOSED BY RESPONDENT CITY OF LAPU-LAPU.

II

THE PROPERTIES OF PETITIONER CONSISTING OF THE AIRPORT TERMINAL BUILDING,

AIRFIELD, RUNWAY, TAXIWAY, INCLUDING THE LOTS ON WHICH THEY ARE SITUATED,
ARE EXEMPT FROM REAL PROPERTY TAXES.

III

RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE REAL PROPERTY TAX WITHOUT

ANY APPROPRIATE ORDINANCE.

IV

RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE AN ADDITIONAL 1% TAX FOR THE

SPECIAL EDUCATION FUND IN THE ABSENCE OF ANY CORRESPONDING ORDINANCE.

RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE ANY INTEREST SANS ANY

ORDINANCE MANDATING ITS IMPOSITION.46
Petitioner claims the following similarities with MIAA:

1. MCIAA belongs to the same class and performs identical functions as MIAA;

2. MCIAA is a public utility like MIAA;

3. MIAA was organized to operate the international and domestic airport in

Paranaque City for public use, while MCIAA was organized to operate the
international and domestic airport in Mactan for public use.

4. Both are attached agencies of the Department of Transportation and

Communications.47

Petitioner compares its charter (Republic Act No. 6958) with that of MIAA (Executive
Order No. 903).
Section 3 of Executive Order No. 903 provides: chanRoblesvirtualLawlibrary

Sec. 3. Creation of the Manila International Airport Authority. There is hereby

established a body corporate to be known as the Manila International Airport Authority
which shall be attached to the Ministry of Transportation and Communications. The
principal office of the Authority shall be located at the New Manila International Airport.
The Authority may establish such offices, branches, agencies or subsidiaries as it may
deem proper and necessary; x x x. chanroblesvirtuallawlibrary

Section 2 of Republic Act No. 6958 reads: chanRoblesvirtualLawlibrary

Section 2. Creation of the Mactan-Cebu International Airport Authority. �

There is hereby established a body corporate to be known as the Mactan-Cebu
International Airport Authority which shall be attached to the Department of
Transportation and Communications. The principal office of the Authority shall be
located at the Mactan International Airport, Province of Cebu.

The Authority may have such branches, agencies or subsidiaries as it may deem proper
and necessary. chanroblesvirtuallawlibrary

As to MIAA�s purposes and objectives, Section 4 of Executive Order No. 903

reads:chanRoblesvirtualLawlibrary

Sec. 4. Purposes and Objectives. The Authority shall have the following purposes and
objectives: ChanRoblesVirtualawlibrary

(a) To help encourage and promote international and domestic air traffic in the
Philippines as a means of making the Philippines a center of international trade and
tourism and accelerating the development of the means of transportation and
communications in the country;

(b) To formulate and adopt for application in the Airport internationally acceptable
standards of airport accommodation and service; and

(c) To upgrade and provide safe, efficient, and reliable airport facilities for international
and domestic air travel. chanroblesvirtuallawlibrary

Petitioner claims that the above purposes and objectives are analogous to those
enumerated in its charter, specifically Section 3 of Republic Act No. 6958, which
reads:chanRoblesvirtualLawlibrary

Section 3. Primary Purposes and Objectives. � The Authority shall principally
undertake the economical, efficient and effective control, management and supervision
of the Mactan International Airport in the Province of Cebu and the Lahug Airport in
Cebu City, hereinafter collectively referred to as the airports, and such other airports as
may be established in the Province of Cebu. In addition, it shall have the following
objectives: ChanRoblesVirtualawlibrary

(a) To encourage, promote and develop international and domestic air traffic in the
central Visayas and Mindanao regions as a means of making the regions centers of
international trade and tourism, and accelerating the development of the means of
transportation and communications in the country; and
(b) To upgrade the services and facilities of the airports and to formulate internationally
acceptable standards of airport accommodation and service. chanroblesvirtuallawlibrary

The powers, functions and duties of MIAA under Section 5 of Executive Order No. 903
are: ChanRoblesVirtualawlibrary

Sec. 5. Functions, Powers and Duties. The Authority shall have the following functions,
powers and duties: chanRoblesvirtualLawlibrary

(a To formulate, in coordination with the Bureau of Air Transportation and other appropriate
) government agencies, a comprehensive and integrated policy and program for the Airport
and to implement, review and update such policy and program periodically;

(b To control, supervise, construct, maintain, operate and provide such facilities or services
) as shall be necessary for the efficient functioning of the Airport;

(c To promulgate rules and regulations governing the planning, development, maintenance,

) operation and improvement of the Airport, and to control and/or supervise as may be
necessary the construction of any structure or the rendition of any services within the
Airport;

(d To sue and be sued in its corporate name;

)

(e To adopt and use a corporate seal;

)

(f) To succeed by its corporate name;

(g To adopt its by-laws, and to amend or repeal the same from time to time;
)

(h To execute or enter into contracts of any kind or nature;

)

(i) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of any
land, building, airport facility, or property of whatever kind and nature, whether movable
or immovable, or any interest therein;

(j) To exercise the power of eminent domain in the pursuit of its purposes and objectives;

(k To levy, and collect dues, charges, fees or assessments for the use of the Airport premises,
) works, appliances, facilities or concessions or for any service provided by the Authority,
subject to the approval of the Minister of Transportation and Communications in
consultation with the Minister of Finance, and subject further to the provisions of Batas
Pambansa Blg. 325 where applicable;
 (l) To invest its idle funds, as it may deem proper, in government securities and other
evidences of indebtedness of the government;

( To provide services, whether on its own or otherwise, within the Airport and the
m approaches thereof, which shall include but shall not be limited to, the following:
)

(1 Aircraft movement and allocation of parking areas of aircraft on the ground;

)

(2 Loading or unloading of aircrafts;

)

(3 Passenger handling and other services directed towards the care, convenience and
) security of passengers, visitors and other airport users; and

(4 Sorting, weighing, measuring, warehousing or handling of baggage and goods.

)

(n To perform such other acts and transact such other business, directly or indirectly
) necessary, incidental or conducive to the attainment of the purposes and objectives of the
Authority, including the adoption of necessary measures to remedy congestion in the
Airport; and

(o To exercise all the powers of a corporation under the Corporation Law, insofar as these
) powers are not inconsistent with the provisions of this Executive Order.
Petitioner claims that MCIAA has related functions, powers and duties under Section 4
of Republic Act No. 6958, as shown in the provision quoted below: chanRoblesvirtualLawlibrary

Section 4. Functions, Powers and Duties. � The Authority shall have the following
functions, powers and duties: ChanRoblesVirtualawlibrary

(a) To formulate a comprehensive and integrated development policy and program for
the airports and to implement, review and update such policy and program periodically;

(b) To control, supervise, construct, maintain, operate and provide such facilities or
services as shall be necessary for the efficient functioning of the airports;

(c) To promulgate rules and regulations governing the planning, development,

maintenance, operation and improvement of the airports, and to control and supervise
the construction of any structure or the rendition of any service within the airports;

(d) To exercise all the powers of a corporation under the Corporation Code of the
Philippines, insofar as those powers are not inconsistent with the provisions of this Act;

(e) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of
any land, building, airport facility, or property of whatever kind and nature, whether
movable or immovable, or any interest therein: Provided, That any asset located in
the Mactan International Airport important to national security shall not be subject to
alienation or mortgage by the Authority nor to transfer to any entity other than the
National Government;

(f) To exercise the power of eminent domain in the pursuit of its purposes and
objectives;

(g) To levy and collect dues, charges, fees or assessments for the use of airport
premises, works, appliances, facilities or concessions, or for any service provided by the
Authority;

(h) To retain and appropriate dues, fees and charges collected by the Authority relative
to the use of airport premises for such measures as may be necessary to make the
Authority more effective and efficient in the discharge of its assigned tasks;

(i) To invest its idle funds, as it may deem proper, in government securities and other
evidences of indebtedness; and

(j) To provide services, whether on its own or otherwise, within the airports and the
approaches thereof as may be necessary or in connection with the maintenance and
operation of the airports and their facilities. chanroblesvirtuallawlibrary

Petitioner claims that like MIAA, it has police authority within its premises, as shown in
their respective charters quoted below: chanRoblesvirtualLawlibrary

EO 903, Sec. 6. Police Authority. � The Authority shall have the power to exercise
such police authority as may be necessary within its premises to carry out its functions
and attain its purposes and objectives, without prejudice to the exercise of functions
within the same premises by the Ministry of National Defense through the Aviation
Security Command (AVSECOM) as provided in LOI 961: Provided, That the Authority
may request the assistance of law enforcement agencies, including request for
deputization as may be required. x x x.

R.A. No. 6958, Section 5. Police Authority. � The Authority shall have the power
to exercise such police authority as may be necessary within its premises or areas of
operation to carry out its functions and attain its purposes and objectives: Provided,
That the Authority may request the assistance of law enforcement agencies, including
request for deputization as may be required. x x x. chanroblesvirtuallawlibrary

Petitioner pointed out other similarities in the two charters, such as: ChanRoblesVirtualawlibrary

1. Both MCIAA and MIAA are covered by the Civil Service Law, rules and regulations
(Section 15, Executive Order No. 903; Section 12, Republic Act No. 6958);

2. Both charters contain a proviso on tax exemptions (Section 21, Executive Order No.
903; Section 14, Republic Act No. 6958);

3. Both MCIAA and MIAA are required to submit to the President an annual report
generally dealing with their activities and operations (Section 14, Executive Order No.
903; Section 11, Republic Act No. 6958); and
4. Both have borrowing power subject to the approval of the President (Section 16,
Executive Order No. 903; Section 13, Republic Act No. 6958). 48 chanrobleslaw

Petitioner suggests that it is because of its similarity with MIAA that this Court, in the
2006 MIAA case, placed it in the same class as MIAA and considered it as a government
instrumentality.

Petitioner submits that since it is also a government instrumentality like MIAA, the
following conclusion arrived by the Court in the 2006 MIAA case is also applicable to
petitioner:chanRoblesvirtualLawlibrary

Under Section 2(10) and (13) of the Introductory Provisions of the

Administrative Code, which governs the legal relation and status of
government units, agencies and offices within the entire government
machinery, MIAA is a government instrumentality and not a government-
owned or controlled corporation. Under Section 133(o) of the Local
Government Code, MIAA as a government instrumentality is not a taxable
person because it is not subject to �[t]axes, fees or charges of any kind�
by local governments. The only exception is when MIAA leases its real
property to a �taxable person� as provided in Section 234(a) of the Local
Government Code, in which case the specific real property leased becomes
subject to real estate tax. Thus, only portions of the Airport Lands and
Buildings leased to taxable persons like private parties are subject to real
estate tax by the City of Para�aque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA,
being devoted to public use, are properties of public dominion and thus owned
by the State or the Republic of the Philippines. Article 420 specifically mentions
�ports x x x constructed by the State,� which includes public airports and
seaports, as properties of public dominion and owned by the Republic. As properties
of public dominion owned by the Republic, there is no doubt whatsoever that
the Airport Lands and Buildings are expressly exempt from real estate tax
under Section 234(a) of the Local Government Code. This Court has also
repeatedly ruled that properties of public dominion are not subject to
execution or foreclosure sale.49 (Emphases added.)
Petitioner insists that its properties consisting of the airport terminal building, airfield,
runway, taxiway and the lots on which they are situated are not subject to real property
tax because they are actually, solely and exclusively used for public purposes. 50 They
are indispensable to the operation of the Mactan International Airport and by their very
nature, these properties are exempt from tax. Said properties belong to the State and
are merely held by petitioner in trust. As earlier mentioned, petitioner claims that these
properties are important to national security and cannot be alienated, mortgaged, or
transferred to any entity except the National Government.

Petitioner prays that judgment be rendered: chanRoblesvirtualLawlibrary

a) Declaring petitioner exempt from paying real property taxes as it is a government

instrumentality;
 b) Declaring respondent City of Lapu-Lapu as bereft of any authority to levy and collect the
basic real property tax, the additional tax for the SEF and the penalty interest for its
failure to pass the corresponding tax ordinances; and

c) Declaring, in the alternative, the airport lands and buildings of petitioner as exempt from
real property taxes as they are used solely and exclusively for public purpose.51
In its Consolidated Reply filed through the OSG, petitioner claims that the
2006 MIAA ruling has overturned the 1996 MCIAA ruling. Petitioner cites Justice Dante
O. Tinga�s dissent in the MIAA ruling, as follows: chanRoblesvirtualLawlibrary

[The] ineluctable conclusion is that the majority rejects the rationale and ruling
in Mactan. The majority provides for a wildly different interpretation of Section 133, 193
and 234 of the Local Government Code than that employed by the Court in Mactan.
Moreover, the parties in Mactan and in this case are similarly situated, as can be
obviously deducted from the fact that both petitioners are airport authorities operating
under similarly worded charters. And the fact that the majority cites doctrines
contrapuntal to the Local Government Code as in Basco and Maceda evinces an intent
to go against the Court�s jurisprudential trend adopting the philosophy of expanded
local government rule under the Local Government Code.

x x x The majority is obviously inconsistent with Mactan and there is no way these two
rulings can stand together. Following basic principles in statutory
construction, Mactan will be deemed as giving way to this new ruling.

x x x x

There is no way the majority can be justified unless Mactan is overturned. The MCIAA
and the MIAA are similarly situated. They are both, as will be demonstrated, GOCCs,
commonly engaged in the business of operating an airport. They are the owners of
airport properties they respectively maintain and hold title over these properties in their
name. These entities are both owned by the State, and denied by their respective
charters the absolute right to dispose of their properties without prior approval
elsewhere. Both of them are not empowered to obtain loans or encumber their
properties without prior approval the prior approval of the President. 52 (Citations
omitted.)
Petitioner likewise claims that the enactment of Ordinance No. 070-2007 is an
admission on respondent City�s part that it must have a tax measure to be able to
impose a tax or special assessment. Petitioner avers that assuming that it is a non-
exempt entity or that its airport lands and buildings are not exempt, it was only upon
the effectivity of Ordinance No. 070-2007 on January 1, 2008 that respondent City
could properly impose the basic real property tax, the additional tax for the SEF, and
the interest in case of nonpayment.53 chanrobleslaw

Petitioner filed its Memorandum54 on June 17, 2009.

RESPONDENTS� THEORY

In their Comment,55 respondents point out that petitioner partially moved for a
reconsideration of the questioned Decision only as to the issue of whether petitioner is
a GOCC or not. Thus, respondents declare that the other portions of the questioned
decision had already attained finality and ought not to be placed in issue in this petition
for certiorari. Thus, respondents discussed the other issues raised by petitioner with
reservation as to this objection.

Respondents summarized the issues and the grounds relied upon as follows: chanRoblesvirtualLawlibrary

STATEMENT OF THE ISSUES

WHETHER OR NOT PETITIONER IS A GOVERNMENT INSTRUMENTALITY EXEMPT FROM

PAYING REAL PROPERTY TAXES

WHETHER OR NOT RESPONDENT CITY CAN [IMPOSE] REALTY TAX, SPECIAL

EDUCATION FUND AND PENALTY INTEREST

WHETHER OR NOT THE AIRPORT TERMINAL BUILDING, AIRFIELD, RUNWAY, TAXIWAY

INCLUDING THE LOTS ON WHICH THEY ARE SITUATED ARE EXEMPT FROM REALTY
TAXES

GROUNDS RELIED UPON

1. PETITIONER IS A GOCC HENCE NOT EXEMPT FROM REALTY TAXES

2. TERMINAL BUILDING, RUNWAY, TAXIWAY ARE NOT EXEMPT FROM

REALTY TAXES

3. ESTOPPEL DOES NOT LIE AGAINST GOVERNMENT

4. CITY CAN COLLECT REALTY TAX AND INTEREST

5. CITY CAN COLLECT SEF

6. MCIAA HAS NOT SHOWN ANY IRREPARABLE INJURY WARRANTING

INJUNCTIVE RELIEF

7. MCIAA HAS NOT COMPLIED WITH PROVISION OF THE LGC56

Respondents claim that �the mere mention of MCIAA in the MIAA v. [Court of
Appeals] case does not make it the controlling case on the matter.� 57 Respondents
further claim that the 1996 MCIAA case where this Court held that petitioner is a GOCC
is the controlling jurisprudence. Respondents point out that petitioner and MIAA are two
very different entities. Respondents argue that petitioner is a GOCC contrary to its
assertions, based on its Charter and on DOJ Opinion No. 50.

Respondents contend that if petitioner is not a GOCC but an instrumentality of the

government, still the following statement in the 1996 MCIAA case applies: chanRoblesvirtualLawlibrary

Besides, nothing can prevent Congress from decreeing that even instrumentalities or
agencies of the Government performing governmental functions may be subject to tax.
Where it is done precisely to fulfill a constitutional mandate and national policy, no one
can doubt its wisdom.58
Respondents argue that MCIAA properties such as the terminal building, taxiway and
runway are not exempt from real property taxation. As discussed in the
1996 MCIAA case, Section 234 of the LGC omitted GOCCs such as MCIAA from entities
enjoying tax exemptions. Said decision also provides that the transfer of ownership of
the land to petitioner was absolute and petitioner cannot evade payment of taxes. 59 chanrobleslaw

Even if the following issues were not raised by petitioner in its motion for
reconsideration of the questioned Decision, and thus the ruling pertaining to these
issues in the questioned decision had become final, respondents still discussed its side
over its objections as to the propriety of bringing these up before this Court.

1. Estoppel does not lie against the government.

2. Respondent City can collect realty taxes and interest.

a. Based on the Local Government Code (Sections 232, 233, 255) and its IRR
(Sections 241, 247).

b. The City of Lapu-Lapu passed in 1980 Ordinance No. 44, or the Omnibus Tax
Ordinance, wherein the imposition of real property tax was made. This Ordinance
was in force and effect by virtue of Article 278 of the IRR of Republic Act No.
7160.60 chanrobleslaw

c. Ordinance No. 070-2007, known as the Revised Lapu-Lapu City Revenue Code,
imposed real property taxes, special education fund and further provided for the
payment of interest and surcharges. Thus, the issue is pass� and is moot and
academic.

3. Respondent City can collect Special Education Fund.

a. The LGC does not require the enactment of an ordinance for the collection of the
SEF.

b. Congress did not entirely repeal the SEF law, hence, its levy, imposition and
collection need not be covered by ordinance. Besides, the City has enacted the
Revenue Code containing provisions for the levy and collection of the SEF. 61

Furthermore, respondents aver that: ChanRoblesVirtualawlibrary

1. Collection of taxes is beyond the ambit of injunction.

a. Respondents contend that the petition only questions the denial of the writ of
preliminary injunction by the RTC and the Court of Appeals. Petitioner failed to
show irreparable injury.
 b. Comparing the alleged damage that may be caused petitioner and the direct
affront and challenge against the power to tax, which is an attribute of
sovereignty, it is but appropriate that injunctive relief should be denied.

2. Petitioner did not comply with LGC provisions on payment under protest.

a. Petitioner should have protested the tax imposition as provided in Article 285 of
the IRR of Republic Act No. 7160. Section 252 of Republic Act No.
716062 requires that the taxpayer�s protest can only be entertained if the tax
is first paid under protest.63

Respondents submitted their Memorandum64 on June 30, 2009, wherein they allege
that the 1996 MCIAA case is still good law, as shown by the following cases wherein it
was quoted:

1. National Power Corporation v. Local Board of Assessment Appeals of

Batangas [545 Phil. 92 (2007)];

2. Mactan-Cebu International Airport Authority v. Urgello [549 Phil. 302 (2007)];

3. Quezon City v. ABS-CBN Broadcasting Corporation [588 Phil. 785 (2008)]; and

4. The City of Iloilo v. Smart Communications, Inc. [599 Phil. 492 (2009)].

Respondents assert that the constant reference to the 1996 MCIAA case �could
hardly mean that the doctrine has breathed its last� and that the 1996 MCIAA case
stands as precedent and is controlling on petitioner MCIAA. 65 chanrobleslaw

Respondents allege that the issue for consideration is whether it is proper for petitioner
to raise the issue of whether it is not liable to pay real property taxes, special education
fund (SEF), interests and/or surcharges.66 Respondents argue that the Court of Appeals
was correct in declaring petitioner liable for realty taxes, etc., on the terminal building,
taxiway, and runway. Respondent City relies on the following grounds: chanRoblesvirtualLawlibrary

1. The case of MCIAA v. Marcos, et al., is controlling on petitioner MCIAA;

2. MCIAA is a corporation;

3. Section 133 in relation to Sections 232 and 234 of the Local Government
Code of 1991 authorizes the collection of real property taxes (etc.) from
MCIAA;

4. Terminal Building, Runway & Taxiway are not of the Public Dominion and
are not exempt from realty taxes, special education fund and interest;

5. Respondent City can collect realty tax, interest/surcharge, and Special

Education Fund from MCIAA; [and]
 6. Estoppel does not lie against the government.67

THIS COURT�S RULING

The petition has merit. The petitioner is an instrumentality of the government; thus, its
properties actually, solely and exclusively used for public purposes, consisting of the
airport terminal building, airfield, runway, taxiway and the lots on which they are
situated, are not subject to real property tax and respondent City is not justified in
collecting taxes from petitioner over said properties.

DISCUSSION

The Court of Appeals (Cebu City) erred in declaring that the 1996 MCIAA case still
controls and that petitioner is a GOCC. The 2006 MIAA case governs.

The Court of Appeals� reliance on the 1996 MCIAA case is misplaced and its staunch
refusal to apply the 2006 MIAA case is patently erroneous. The Court of Appeals,
finding for respondents, refused to apply the ruling in the 2006 MIAA case on the
premise that the same had not yet reached finality, and that as far as MCIAA is
concerned, the 1996 MCIAA case is still good law.68 chanrobleslaw

While it is true, as respondents allege, that the 1996 MCIAA case was cited in a long
line of cases,69 still, in 2006, the Court en banc decided a case that in
effect reversed the 1996 Mactan ruling. The 2006 MIAA case had, since the
promulgation of the questioned Decision and Resolution, reached finality and had in fact
been either affirmed or cited in numerous cases by the Court. 70 The decision became
final and executory on November 3, 2006.71 Furthermore, the 2006 MIAA case was
decided by the Court en banc while the 1996 MCIAA case was decided by a Division.
Hence, the 1996 MCIAA case should be read in light of the subsequent and unequivocal
ruling in the 2006 MIAA case.

To recall, in the 2006 MIAA case, we held that MIAA�s airport lands and buildings are
exempt from real estate tax imposed by local governments; that it is not a GOCC but
an instrumentality of the national government, with its real properties being owned by
the Republic of the Philippines, and these are exempt from real estate tax. Specifically
referring to petitioner, we stated as follows:
chanRoblesvirtualLawlibrary

Many government instrumentalities are vested with corporate powers but they
do not become stock or non-stock corporations, which is a necessary condition
before an agency or instrumentality is deemed a government-owned or
controlled corporation. Examples are the Mactan International Airport
Authority, the Philippine Ports Authority, the University of the Philippines and Bangko
Sentral ng Pilipinas. All these government instrumentalities exercise corporate powers
but they are not organized as stock or non-stock corporations as required by Section
2(13) of the Introductory Provisions of the Administrative Code. These government
instrumentalities are sometimes loosely called government corporate entities.
However, they are not government-owned or controlled corporations in the strict sense
as understood under the Administrative Code, which is the governing law defining the
legal relationship and status of government entities. 72 (Emphases ours.)
In the 2006 MIAA case, the issue before the Court was �whether the Airport Lands
and Buildings of MIAA are exempt from real estate tax under existing laws.� 73 We
quote the extensive discussion of the Court that led to its finding that MIAA�s lands
and buildings were exempt from real estate tax imposed by local governments: chanRoblesvirtualLawlibrary

First, MIAA is not a government-owned or controlled corporation but an instrumentality

of the National Government and thus exempt from local taxation. Second, the real
properties of MIAA are owned by the Republic of the Philippines and thus exempt from
real estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

x x x x

There is no dispute that a government-owned or controlled corporation is not exempt

from real estate tax. However, MIAA is not a government-owned or controlled
corporation. Section 2(13) of the Introductory Provisions of the Administrative Code of
1987 defines a government-owned or controlled corporation as follows: chanRoblesvirtualLawlibrary

SEC. 2. General Terms Defined. - x x x

(13) Government-owned or controlled corporation refers to any agency organized as a

stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or
through its instrumentalities either wholly, or, where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) percent of its capital stock: x x x. chanroblesvirtuallawlibrary

A government-owned or controlled corporation must be �organized as a stock or

non-stock corporation.� MIAA is not organized as a stock or non-stock corporation.
MIAA is not a stock corporation because it has no capital stock divided into shares.
MIAA has no stockholders or voting shares. x x x

x x x x

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.

Section 3 of the Corporation Code defines a stock corporation as one whose �capital
stock is divided into shares and x x x authorized to distribute to the holders of such
shares dividends x x x.� MIAA has capital but it is not divided into shares of stock.
MIAA has no stockholders or voting shares. Hence, MIAA is not a stock corporation.

MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as �one where no part of its
income is distributable as dividends to its members, trustees or officers.� A non-
stock corporation must have members. Even if we assume that the Government is
considered as the sole member of MIAA, this will not make MIAA a non-stock
corporation. Non-stock corporations cannot distribute any part of their income to their
members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual
gross operating income to the National Treasury. This prevents MIAA from qualifying as
a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock corporations are

�organized for charitable, religious, educational, professional, cultural, recreational,
fraternal, literary, scientific, social, civil service, or similar purposes, like trade,
industry, agriculture and like chambers.� MIAA is not organized for any of these
purposes. MIAA, a public utility, is organized to operate an international and domestic
airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not
qualify as a government-owned or controlled corporation. What then is the
legal status of MIAA within the National Government?

MIAA is a government instrumentality vested with corporate powers to

perform efficiently its governmental functions. MIAA is like any other
government instrumentality, the only difference is that MIAA is vested with
corporate powers. Section 2(10) of the Introductory Provisions of the Administrative
Code defines a government �instrumentality� as follows: chanRoblesvirtualLawlibrary

SEC. 2. General Terms Defined. - x x x

(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. x x x. chanroblesvirtuallawlibrary

When the law vests in a government instrumentality corporate powers, the

instrumentality does not become a corporation. Unless the government
instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also
corporate powers. Thus, MIAA exercises the governmental powers of eminent
domain, police authority and the levying of fees and charges. At the same
time, MIAA exercises �all the powers of a corporation under the Corporation
Law, insofar as these powers are not inconsistent with the provisions of this
Executive Order.�

Likewise, when the law makes a government instrumentality operationally autonomous,

the instrumentality remains part of the National Government machinery although not
integrated with the department framework. The MIAA Charter expressly states that
transforming MIAA into a �separate and autonomous body� will make its operation
more �financially viable.�

Many government instrumentalities are vested with corporate powers but they
do not become stock or non-stock corporations, which is a necessary condition
before an agency or instrumentality is deemed a government-owned or
controlled corporation. Examples are the Mactan International Airport
Authority, the Philippine Ports Authority, the University of the Philippines and Bangko
Sentral ng Pilipinas. All these government instrumentalities exercise corporate
powers but they are not organized as stock or non-stock corporations as
required by Section 2(13) of the Introductory Provisions of the Administrative
Code. These government instrumentalities are sometimes loosely called
government corporate entities. However, they are not government-owned or
controlled corporations in the strict sense as understood under the
Administrative Code, which is the governing law defining the legal relationship
and status of government entities.74 (Emphases ours, citations omitted.)
The Court in the 2006 MIAA case went on to discuss the limitation on the taxing power
of the local governments as against the national government or its instrumentality: chanRoblesvirtualLawlibrary

A government instrumentality like MIAA falls under Section 133(o) of the Local
Government Code, which states: chanRoblesvirtualLawlibrary

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. -
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following: ChanRoblesVirtualawlibrary

x x x x

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units. x x x. chanroblesvirtuallawlibrary

Section 133(o) recognizes the basic principle that local governments cannot tax the
national government, which historically merely delegated to local governments the
power to tax. While the 1987 Constitution now includes taxation as one of the powers
of local governments, local governments may only exercise such power �subject to
such guidelines and limitations as the Congress may provide.�

When local governments invoke the power to tax on national government

instrumentalities, such power is construed strictly against local
governments. The rule is that a tax is never presumed and there must be clear
language in the law imposing the tax. Any doubt whether a person, article or activity is
taxable is resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.

Another rule is that a tax exemption is strictly construed against the taxpayer claiming
the exemption. However, when Congress grants an exemption to a national
government instrumentality from local taxation, such exemption is construed liberally in
favor of the national government instrumentality. x x x.

x x x x

There is, moreover, no point in national and local governments taxing each
other, unless a sound and compelling policy requires such transfer of public
funds from one government pocket to another.

There is also no reason for local governments to tax national government

instrumentalities for rendering essential public services to inhabitants of local
governments. The only exception is when the legislature clearly intended to tax
government instrumentalities for the delivery of essential public services for sound and
compelling policy considerations. There must be express language in the law
empowering local governments to tax national government instrumentalities. Any doubt
whether such power exists is resolved against local governments.

Thus, Section 133 of the Local Government Code states that �unless otherwise
provided� in the Code, local governments cannot tax national government
instrumentalities. x x x.75 (Emphases ours, citations omitted.)
The Court emphasized that the airport lands and buildings of MIAA are owned by the
Republic and belong to the public domain. The Court said: chanRoblesvirtualLawlibrary

The Airport Lands and Buildings of MIAA are property of public dominion and therefore
owned by the State or the Republic of the Philippines. x x x.

x x x x

No one can dispute that properties of public dominion mentioned in Article 420 of the
Civil Code, like �roads, canals, rivers, torrents, ports and bridges constructed by the
State,� are owned by the State. The term �ports� includes seaports and
airports. The MIAA Airport Lands and Buildings constitute a �port� constructed by
the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are
properties of public dominion and thus owned by the State or the Republic of the
Philippines.

The Airport Lands and Buildings are devoted to public use because they are
used by the public for international and domestic travel and transportation.
The fact that the MIAA collects terminal fees and other charges from the public
does not remove the character of the Airport Lands and Buildings as properties
for public use. x x x.

x x x x

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA
charges to airlines, constitute the bulk of the income that maintains the operations of
MIAA. The collection of such fees does not change the character of MIAA as an airport
for public use. Such fees are often termed user�s tax. This means taxing those
among the public who actually use a public facility instead of taxing all the public
including those who never use the particular public facility. A user�s tax is more
equitable - a principle of taxation mandated in the 1987 Constitution.

The Airport Lands and Buildings of MIAA x x x are properties of public

dominion because they are intended for public use. As properties of public
dominion, they indisputably belong to the State or the Republic of the
Philippines.76 (Emphases supplied, citations omitted.)
The Court also held in the 2006 MIAA case that airport lands and buildings are outside
the commerce of man.

As properties of public dominion, the Airport Lands and Buildings are outside the
commerce of man. The Court has ruled repeatedly that properties of public dominion
are outside the commerce of man. As early as 1915, this Court already ruled
in Municipality of Cavite v. Rojas that properties devoted to public use are outside the
commerce of man, thus: ChanRoblesVirtualawlibrary

x x x x

The Civil Code, Article 1271, prescribes that everything which is not outside the
commerce of man may be the object of a contract, x x x.
x x x x

The Court has also ruled that property of public dominion, being outside the commerce
of man, cannot be the subject of an auction sale.

Properties of public dominion, being for public use, are not subject to levy,
encumbrance or disposition through public or private sale. Any encumbrance,
levy on execution or auction sale of any property of public dominion is void for
being contrary to public policy. Essential public services will stop if properties
of public dominion are subject to encumbrances, foreclosures and auction
sale. This will happen if the City of Para�aque can foreclose and compel the auction
sale of the 600-hectare runway of the MIAA for non-payment of real estate tax.

Before MIAA can encumber the Airport Lands and Buildings, the President must first
withdraw from public use the Airport Lands and Buildings. x x x.

x x x x

Thus, unless the President issues a proclamation withdrawing the Airport

Lands and Buildings from public use, these properties remain properties of
public dominion and are inalienable. Since the Airport Lands and Buildings are
inalienable in their present status as properties of public dominion, they are
not subject to levy on execution or foreclosure sale. As long as the Airport
Lands and Buildings are reserved for public use, their ownership remains with
the State or the Republic of the Philippines.

The authority of the President to reserve lands of the public domain for public use, and
to withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of
the Administrative Code of 1987, which states: chanRoblesvirtualLawlibrary

SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government.
- (1) The President shall have the power to reserve for settlement or public use, and for
specific public purposes, any of the lands of the public domain, the use of which is not
otherwise directed by law. The reserved land shall thereafter remain subject to the
specific public purpose indicated until otherwise provided by law or proclamation;
x x x x

There is no question, therefore, that unless the Airport Lands and Buildings are
withdrawn by law or presidential proclamation from public use, they are properties of
public dominion, owned by the Republic and outside the commerce of man. 77
Thus, the Court held that MIAA is �merely holding title to the Airport Lands and
Buildings in trust for the Republic. [Under] Section 48, Chapter 12, Book I of the
Administrative Code [which] allows instrumentalities like MIAA to hold title to real
properties owned by the Republic.�78 chanrobleslaw

The Court in the 2006 MIAA case cited Section 234(a) of the Local Government Code
and held that said provision exempts from real estate tax any �[r]eal property owned
by the Republic of the Philippines.�79 The Court emphasized, however, that
�portions of the Airport Lands and Buildings that MIAA leases to private entities are
not exempt from real estate tax.� The Court further held: chanRoblesvirtualLawlibrary

This exemption should be read in relation with Section 133(o) of the same Code, which
prohibits local governments from imposing �[t]axes, fees or charges of any kind on
the National Government, its agencies and instrumentalities x x x.� The real
properties owned by the Republic are titled either in the name of the Republic itself or
in the name of agencies or instrumentalities of the National Government. The
Administrative Code allows real property owned by the Republic to be titled in the name
of agencies or instrumentalities of the national government. Such real properties
remain owned by the Republic and continue to be exempt from real estate tax.

The Republic may grant the beneficial use of its real property to an agency or
instrumentality of the national government. This happens when title of the real property
is transferred to an agency or instrumentality even as the Republic remains the owner
of the real property. Such arrangement does not result in the loss of the tax exemption.
Section 234(a) of the Local Government Code states that real property owned by the
Republic loses its tax exemption only if the �beneficial use thereof has been granted,
for consideration or otherwise, to a taxable person.� MIAA, as a government
instrumentality, is not a taxable person under Section 133(o) of the Local Government
Code. Thus, even if we assume that the Republic has granted to MIAA the beneficial use
of the Airport Lands and Buildings, such fact does not make these real properties
subject to real estate tax.

However, portions of the Airport Lands and Buildings that MIAA leases to private
entities are not exempt from real estate tax. For example, the land area occupied by
hangars that MIAA leases to private corporations is subject to real estate tax. In such a
case, MIAA has granted the beneficial use of such land area for a consideration to a
taxable person and therefore such land area is subject to real estate tax. x x x. 80
Significantly, the Court reiterated the above ruling and applied the same reasoning
in Manila International Airport Authority v. City of Pasay,81 thus: chanRoblesvirtualLawlibrary

The only difference between the 2006 MIAA case and this case is that the
2006 MIAA case involved airport lands and buildings located in Para�aque
City while this case involved airport lands and buildings located in Pasay
City. The 2006 MIAA case and this case raised the same threshold issue: whether the
local government can impose real property tax on the airport lands, consisting mostly
of the runways, as well as the airport buildings, of MIAA. x x x.

x x x x

The definition of �instrumentality� under Section 2(10) of the Introductory

Provisions of the Administrative Code of 1987 uses the phrase �includes x x x
government-owned or controlled corporations� which means that a government
�instrumentality� may or may not be a �government-owned or controlled
corporation.� Obviously, the term government �instrumentality�
is broader than the term �government-owned or controlled corporation.� x x x.

x x x x

The fact that two terms have separate definitions means that while a government
�instrumentality� may include a �government-owned or controlled
corporation,� there may be a government �instrumentality� that will not qualify
as a �government-owned or controlled corporation.�

A close scrutiny of the definition of �government-owned or controlled corporation�

in Section 2(13) will show that MIAA would not fall under such definition. MIAA is a
government �instrumentality� that does not qualify as a �government-
owned or controlled corporation.� x x x.

x x x x

Thus, MIAA is not a government-owned or controlled corporation but a government

instrumentality which is exempt from any kind of tax from the local governments.
Indeed, the exercise of the taxing power of local government units is subject to the
limitations enumerated in Section 133 of the Local Government Code. Under Section
133(o) of the Local Government Code, local government units have no power to tax
instrumentalities of the national government like the MIAA. Hence, MIAA is not liable to
pay real property tax for the NAIA Pasay properties.

Furthermore, the airport lands and buildings of MIAA are properties of public dominion
intended for public use, and as such are exempt from real property tax under Section
234(a) of the Local Government Code. However, under the same provision, if MIAA
leases its real property to a taxable person, the specific property leased becomes
subject to real property tax. In this case, only those portions of the NAIA Pasay
properties which are leased to taxable persons like private parties are subject to real
property tax by the City of Pasay. (Emphases added, citations omitted.)
The Court not only mentioned petitioner MCIAA as similarly situated as MIAA. It also
mentioned several other government instrumentalities, among which was the Philippine
Fisheries Development Authority. Thus, applying the 2006 MIAA ruling, the Court,
in Philippine Fisheries Development Authority v. Court of Appeals,82 held: chanRoblesvirtualLawlibrary

On the basis of the parameters set in the MIAA case, the Authority should be classified
as an instrumentality of the national government. As such, it is generally exempt from
payment of real property tax, except those portions which have been leased to private
entities.

In the MIAA case, petitioner Philippine Fisheries Development Authority was cited as
among the instrumentalities of the national government. x x x.

x x x x

Indeed, the Authority is not a GOCC but an instrumentality of the government. The
Authority has a capital stock but it is not divided into shares of stocks. Also, it has no
stockholders or voting shares. Hence, it is not a stock corporation. Neither [is it] a non-
stock corporation because it has no members.

The Authority is actually a national government instrumentality which is defined as an

agency of the national government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. When the law vests in a government instrumentality
corporate powers, the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-stock corporation, it remains
a government instrumentality exercising not only governmental but also corporate
powers.

Thus, the Authority which is tasked with the special public function to carry out the
government�s policy �to promote the development of the country�s fishing
industry and improve the efficiency in handling, preserving, marketing, and distribution
of fish and other aquatic products,� exercises the governmental powers of eminent
domain, and the power to levy fees and charges. At the same time, the Authority
exercises �the general corporate powers conferred by laws upon private and
government-owned or controlled corporations.�

x x x x

In light of the foregoing, the Authority should be classified as an instrumentality of the

national government which is liable to pay taxes only with respect to the portions of the
property, the beneficial use of which were vested in private entities. When local
governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never
presumed and there must be clear language in the law imposing the tax. Any doubt
whether a person, article or activity is taxable is resolved against taxation. This rule
applies with greater force when local governments seek to tax national government
instrumentalities.

Thus, the real property tax assessments issued by the City of Iloilo should be upheld
only with respect to the portions leased to private persons. In case the Authority fails to
pay the real property taxes due thereon, said portions cannot be sold at public auction
to satisfy the tax delinquency. x x x.

x x x x

In sum, the Court finds that the Authority is an instrumentality of the national
government, hence, it is liable to pay real property taxes assessed by the City of Iloilo
on the IFPC only with respect to those portions which are leased to private entities.
Notwithstanding said tax delinquency on the leased portions of the IFPC, the latter or
any part thereof, being a property of public domain, cannot be sold at public auction.
This means that the City of Iloilo has to satisfy the tax delinquency through means
other than the sale at public auction of the IFPC. (Citations omitted.)
Another government instrumentality specifically mentioned in the 2006 MIAA case was
the Philippine Ports Authority (PPA). Hence, in Curata v. Philippine Ports Authority,83 the
Court held that the PPA is similarly situated as MIAA, and ruled in this wise:chanRoblesvirtualLawlibrary

This Court�s disquisition in Manila International Airport Authority v. Court of

Appeals � ruling that MIAA is not a government-owned and/or controlled corporation
(GOCC), but an instrumentality of the National Government and thus exempt from local
taxation, and that its real properties are owned by the Republic of the Philippines
�� is instructive. x x x. These findings are squarely applicable to PPA, as it is
similarly situated as MIAA. First, PPA is likewise not a GOCC for not having shares of
stocks or members. Second, the docks, piers and buildings it administers are likewise
owned by the Republic and, thus, outside the commerce of man. Third, PPA is a mere
trustee of these properties. Hence, like MIAA, PPA is clearly a government
instrumentality, an agency of the government vested with corporate powers to perform
efficiently its governmental functions.

Therefore, an undeniable conclusion is that the funds of PPA partake of government

funds, and such may not be garnished absent an allocation by its Board or by statutory
grant. If the PPA funds cannot be garnished and its properties, being government
properties, cannot be levied via a writ of execution pursuant to a final judgment, then
the trial court likewise cannot grant discretionary execution pending appeal, as it would
run afoul of the established jurisprudence that government properties are exempt from
execution. What cannot be done directly cannot be done indirectly. (Citations omitted.)
In Government Service Insurance System v. City Treasurer and City Assessor of the
City of Manila84 the Court found that the GSIS was also a government instrumentality
and not a GOCC, applying the 2006 MIAA case even though the GSIS was not among
those specifically mentioned by the Court as similarly situated as MIAA. The Court
said:
chanRoblesvirtualLawlibrary

GSIS an instrumentality of the National Government

Apart from the foregoing consideration, the Court�s fairly recent ruling in Manila
International Airport Authority v. Court of Appeals, a case likewise involving real estate
tax assessments by a Metro Manila city on the real properties administered by MIAA,
argues for the non-tax liability of GSIS for real estate taxes. x x x.

x x x x

While perhaps not of governing sway in all fours inasmuch as what were
involved in Manila International Airport Authority, e.g., airfields and runways,
are properties of the public dominion and, hence, outside the commerce of
man, the rationale underpinning the disposition in that case is squarely
applicable to GSIS, both MIAA and GSIS being similarly situated. First, while
created under CA 186 as a non-stock corporation, a status that has remained
unchanged even when it operated under PD 1146 and RA 8291, GSIS is not, in the
context of the aforequoted Sec. 193 of the LGC, a GOCC following the teaching
of Manila International Airport Authority, for, like MIAA, GSIS�s capital is not divided
into unit shares. Also, GSIS has no members to speak of. And by members, the
reference is to those who, under Sec. 87 of the Corporation Code, make up the non-
stock corporation, and not to the compulsory members of the system who are
government employees. Its management is entrusted to a Board of Trustees whose
members are appointed by the President.

Second, the subject properties under GSIS�s name are likewise owned by the
Republic. The GSIS is but a mere trustee of the subject properties which have either
been ceded to it by the Government or acquired for the enhancement of the system.
This particular property arrangement is clearly shown by the fact that the disposal or
conveyance of said subject properties are either done by or through the authority of the
President of the Philippines. x x x. (Emphasis added, citations omitted.)
All the more do we find that petitioner MCIAA, with its many similarities to the MIAA,
should be classified as a government instrumentality, as its properties are being used
for public purposes, and should be exempt from real estate taxes. This is not to
derogate in any way the delegated authority of local government units to collect realty
taxes, but to uphold the fundamental doctrines of uniformity in taxation and equal
protection of the laws, by applying all the jurisprudence that have exempted from said
taxes similar authorities, agencies, and instrumentalities, whether covered by the
2006 MIAA ruling or not.

To reiterate, petitioner MCIAA is vested with corporate powers but it is not a stock or
non-stock corporation, which is a necessary condition before an agency or
instrumentality is deemed a government-owned or controlled corporation. Like MIAA,
petitioner MCIAA has capital under its charter but it is not divided into shares of stock.
It also has no stockholders or voting shares. Republic Act No. 6958 provides: chanRoblesvirtualLawlibrary

Section 9. Capital. � The [Mactan-Cebu International Airport] Authority shall have
an authorized capital stock equal to and consisting of: ChanRoblesVirtualawlibrary

(a) The value of fixed assets (including airport facilities, runways and equipment) and
such other properties, movable and immovable, currently administered by or belonging
to the airports as valued on the date of the effectivity of this Act;

(b) The value of such real estate owned and/or administered by the airports; and

(c) Government contribution in such amount as may be deemed an appropriate initial

balance. Such initial amount, as approved by the President of the Philippines, which
shall be more or less equivalent to six (6) months working capital requirement of the
Authority, is hereby authorized to be appropriated in the General Appropriations Act of
the year following its enactment into law. chanroblesvirtuallawlibrary

Thereafter, the government contribution to the capital of the Authority shall be provided
for in the General Appropriations Act.

Like in MIAA, the airport lands and buildings of MCIAA are properties of public dominion
because they are intended for public use. As properties of public dominion, they
indisputably belong to the State or the Republic of the Philippines, and are outside the
commerce of man. This, unless petitioner leases its real property to a taxable person,
the specific property leased becomes subject to real property tax; in which case, only
those portions of petitioner�s properties which are leased to taxable persons like
private parties are subject to real property tax by the City of Lapu-Lapu.

We hereby adopt and apply to petitioner MCIAA the findings and conclusions of the
Court in the 2006 MIAA case, and we quote: chanRoblesvirtualLawlibrary

To summarize, MIAA is not a government-owned or controlled corporation under

Section 2(13) of the Introductory Provisions of the Administrative Code because it is not
organized as a stock or non-stock corporation. Neither is MIAA a government-owned or
controlled corporation under Section 16, Article XII of the 1987 Constitution because
MIAA is not required to meet the test of economic viability. MIAA is a government
instrumentality vested with corporate powers and performing essential public services
pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. As
a government instrumentality, MIAA is not subject to any kind of tax by local
governments under Section 133(o) of the Local Government Code. The exception to the
exemption in Section 234(a) does not apply to MIAA because MIAA is not a taxable
entity under the Local Government Code. Such exception applies only if the beneficial
use of real property owned by the Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use
and thus are properties of public dominion. Properties of public dominion are owned by
the State or the Republic. x x x.

x x x x

The term �ports x x x constructed by the State� includes airports and

seaports. The Airport Lands and Buildings of MIAA are intended for public use,
and at the very least intended for public service. Whether intended for public
use or public service, the Airport Lands and Buildings are properties of public
dominion. As properties of public dominion, the Airport Lands and Buildings
are owned by the Republic and thus exempt from real estate tax under Section
234(a) of the Local Government Code.

4. Conclusion

Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code,
which governs the legal relation and status of government units, agencies and offices
within the entire government machinery, MIAA is a government instrumentality and not
a government-owned or controlled corporation. Under Section 133(o) of the Local
Government Code, MIAA as a government instrumentality is not a taxable person
because it is not subject to �[t]axes, fees or charges of any kind� by local
governments. The only exception is when MIAA leases its real property to a �taxable
person� as provided in Section 234(a) of the Local Government Code, in which case
the specific real property leased becomes subject to real estate tax. Thus, only
portions of the Airport Lands and Buildings leased to taxable persons like
private parties are subject to real estate tax by the City of Para�aque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being
devoted to public use, are properties of public dominion and thus owned by the State or
the Republic of the Philippines. Article 420 specifically mentions �ports x x x
constructed by the State,� which includes public airports and seaports, as properties
of public dominion and owned by the Republic. As properties of public dominion owned
by the Republic, there is no doubt whatsoever that the Airport Lands and Buildings are
expressly exempt from real estate tax under Section 234(a) of the Local Government
Code. This Court has also repeatedly ruled that properties of public dominion
are not subject to execution or foreclosure sale.85 (Emphases added.)
WHEREFORE, we hereby GRANT the petition. We REVERSE and SET
ASIDE the Decision dated October 8, 2007 and the Resolution dated February 12,
2008 of the Court of Appeals (Cebu City) in CA-G.R. SP No. 01360. Accordingly,
we DECLARE:
 1. Petitioner�s properties that are actually, solely and exclusively used for public
purpose, consisting of the airport terminal building, airfield, runway, taxiway and
the lots on which they are situated, EXEMPT from real property tax imposed by
the City of Lapu-Lapu.

2. VOID all the real property tax assessments, including the additional tax for the
special education fund and the penalty interest, as well as the final notices of
real property tax delinquencies, issued by the City of Lapu-Lapu on
petitioner�s properties, except the assessment covering the portions that
petitioner has leased to private parties.

3. NULL and VOID the sale in public auction of 27 of petitioner�s properties and
the eventual forfeiture and purchase of the said properties by respondent City of
Lapu-Lapu. We likewise declare VOID the corresponding Certificates of Sale of
Delinquent Property issued to respondent City of Lapu-Lapu.

SO ORDERED. cralawlawl—--

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ibraryhh

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Cir vs. judge apolinario santos gr 119252, aug. 18, 1997

Wisdom of tax policy not a justiciable issue

SYLLABUS:

It is inherent in the power to tax that the State be

free to select the subjects of taxation, and it has been repeatedly held that

“inequalities which result from a singling out of one particular class for

taxation, or exemption, infringe no constitutional limitation.—The

respondents presented an exhaustive study on the tax rates on jewelry levied

by different Asian countries. This is meant to convince us that compared to

other countries, the tax rates imposed on said industry in the Philippines is

oppressive and confiscatory. This Court, however, cannot subscribe to the

theory that the tax rates of other countries should be used as a yardstick in

determining what may be the proper subjects of taxation in our own country.
It should be pointed out that in imposing the aforementioned taxes and

duties, the State, acting through the legislative and executive branches, is

exercising its sovereign prerogative. It is inherent in the power to tax that

the State be free to select the subjects of taxation, and it has been repeatedly

held that “inequalities which result from a singling out of one particular

class for taxation, or exemption, infringe no constitutional limitation.”

FACTS: On August 5, 1988, the then Regional Director of Region 4-A, acting for and in
behalf of the Commissioner of Internal Revenue, issued Regional Mission Order
directing BIR officers to conduct surveillance, monitoring, and inventory of all imported
articles of Hans Brumann, Inc., a member of the Guild of Philippine Jewelers, Inc., and
place the same under preventive embargo. This was to see if the proper taxes have
been paid. The duration of the mission was from August 8-20, 1988.

The BIR officers inventoried the articles, requested for proof of necessary
payments for excise and VAT taxes on said articles, and requested not to sell the
articles until it can be proven that the necessary taxes thereon have been paid. The
owner, Brumann, signed a receipt acknowledging that the articles inventoried have
been seized and left in his possession, and promising not to dispose of the same
without authority of the CIR pending investigation.

The BIR requested that certain documents be presented for “stocktaking

investigation for excise tax purposes” but Brumann did not produce them. Other
members of the Guild (Miladay Jewels, Mercelles, Solid Gold, Diagem Traders) were
also subjected to the same request.

On Nov. 29, 1988, private respondents prayed that Sec. 126, 127(a)(b), 150(a)
of the National Internal Revenue Code and Hdg. No 71.01, 71.02, 71.03, 71.04,
Chapter 71 of the Tariff and Customs Code be declared unconstitutional and void, and
that the CIR and Customs be prevented or enjoined from issuing mission orders and
other orders of similar nature.

The RTC declared Sec 104 of the Tariff and Custom Code of the Philippines, Hdg,
71.01, 71.02,71.03,71.04, Chapter 71 as amended by EO 470, imposing 3%-10% tariff
and customs duty on natural and cultured pearls and precious or semi-precious stones,
and Sec. 150(1) of the National Internal Revenue Code of 1977, as amended,
renumbered and rearranged by EO 273, imposing 20% excise tax on jewelry, pearls,
and other precious stones, as inoperative and without force and effect insofar as
petitioners are concerned.

ISSUE:
Whether or not the RTC has authority to pass judgment upon taxation policy of the
government.

RULING:

Passing judgment on the wisdom of the laws is a matter on which the RTC is not
competent to rule. It is a matter for the legislature to decide. “The Judiciary does not
pass upon question of wisdom, justice or expediency of legislation” (Angara vs.
Electoral Commission). Judicial power only allows “to settle actual controversies
involving rights which are legally demandable and enforceable” and may not annul an
act of the political departments simply because the judiciary feel it unwise or
impractical.

Respondent RTC judge encroached upon matters properly falling within the province of
legislative functions. In citing as basis for his decision unproven comparative data
pertaining to differences between tax rates of various Asian countries, and concluding
that the jewelry industry in the Philippines suffers as a result, the respondent judge
took it upon himself to supplant legislative policy regarding jewelry taxation. In
advocating the abolition of local tax and duty on jewelry simply because other countries
have adopted such policies, the respondent judge overlooked the fact that such matters
are not for him to decide.

There are reasons why jewelry, a non-essential item, is taxed as it is and these
reasons are deliberated by our legislature, are beyond the reach of judicial questioning.
As held in Macasiano vs. National Housing Authority:

“The policy of our courts is to avoid ruling on constitutional questions and to

presume that the acts of the political departments are valid in the absence of a clear
and unmistakable showing to the contrary. To doubt is to sustain, this presumption is
based on the doctrine of separation of powers…The theory is that as the joint act of
Congress and the President of the Philippines, a law has been carefully studied and
determined to be in accordance with the fundamental law before it was finally enacted.”

BUT, this is not to say that the RTCs have no power to declare a law
unconstitutional. “The Constitution contemplates that the inferior courts should have
jurisdiction in cases involving constitutionality of any treaty or law, for it speaks of
appellate review of final judgments of inferior courts in cases where such
constitutionality happens to be in issue.” But this authority does not extend to deciding
questions which pertain to legislative policy. The RTC can only look into the validity of a
provision, that is, whether or not it has been passed according to the procedures laid
down by law, and thus cannot inquire as to the reasons for its existence.

Judges can only interpret and apply the law, they cannot repeal or amend it.

G.R. No. 188550, August 19, 2013

DEUTSCHE BANK AG MANILA BRANCH, Petitioner, v. COMMISSIONER OF

INTERNAL REVENUE, Respondent.

DECISION
This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch
(petitioner) under Rule 45 of the 1997 Rules of Civil Procedure assailing the
Court of Tax Appeals En Banc (CTA En Banc) Decision2 dated 29 May 2009 and
Resolution3 dated 1 July 2009 in C.T.A. EB No. 456.

THE FACTS

In accordance with Section 28(A)(5) 4 of the National Internal Revenue Code

(NIRC) of 1997, petitioner withheld and remitted to respondent on 21 October
2003 the amount of PHP 67,688,553.51, which represented the fifteen percent
(15%) branch profit remittance tax (BPRT) on its regular banking unit (RBU)
net income remitted to Deutsche Bank Germany (DB Germany) for 2002 and
prior taxable years.5 cralaw virtualaw library

Believing that it made an overpayment of the BPRT, petitioner filed with the
BIR Large Taxpayers Assessment and Investigation Division on 4 October
2005 an administrative claim for refund or issuance of its tax credit certificate
in the total amount of PHP 22,562,851.17. On the same date, petitioner
requested from the International Tax Affairs Division (ITAD) a confirmation of
its entitlement to the preferential tax rate of 10% under the RP-Germany Tax
Treaty.6
cralaw virtualaw library

Alleging the inaction of the BIR on its administrative claim, petitioner filed a
Petition for Review7 with the CTA on 18 October 2005. Petitioner reiterated its
claim for the refund or issuance of its tax credit certificate for the amount of
PHP 22,562,851.17 representing the alleged excess BPRT paid on branch
profits remittance to DB Germany.

THE CTA SECOND DIVISION RULING8 cralaw virtualaw library

After trial on the merits, the CTA Second Division found that petitioner indeed
paid the total amount of PHP 67,688,553.51 representing the 15% BPRT on its
RBU profits amounting to PHP 451,257,023.29 for 2002 and prior taxable
years. Records also disclose that for the year 2003, petitioner remitted to DB
Germany the amount of EURO 5,174,847.38 (or PHP 330,175,961.88 at the
exchange rate of PHP 63.804:1 EURO), which is net of the 15% BPRT.

However, the claim of petitioner for a refund was denied on the ground that
the application for a tax treaty relief was not filed with ITAD prior to the
payment by the former of its BPRT and actual remittance of its branch profits
to DB Germany, or prior to its availment of the preferential rate of ten percent
(10%) under the RP-Germany Tax Treaty provision. The court a quo held that
petitioner violated the fifteen (15) day period mandated under Section III
paragraph (2) of Revenue Memorandum Order (RMO) No. 1-2000.

Further, the CTA Second Division relied on Mirant (Philippines) Operations

Corporation (formerly Southern Energy Asia-Pacific Operations [Phils.], Inc.)
v. Commissioner of Internal Revenue 9(Mirant) where the CTA En Banc ruled
that before the benefits of the tax treaty may be extended to a foreign
corporation wishing to avail itself thereof, the latter should first invoke the
provisions of the tax treaty and prove that they indeed apply to the
corporation.

THE CTA EN BANC RULING10 cralaw virtualaw library

The CTA En Banc affirmed the CTA Second Division�s Decision dated 29
August 2008 and Resolution dated 14 January 2009. Citing Mirant, the CTA En
Banc held that a ruling from the ITAD of the BIR must be secured prior to the
availment of a preferential tax rate under a tax treaty. Applying the principle
of stare decisis et non quieta movere, the CTA En Banc took into consideration
that this Court had denied the Petition in G.R. No. 168531 filed by Mirant for
failure to sufficiently show any reversible error in the assailed judgment. 11 The
CTA En Banc ruled that once a case has been decided in one way, any other
case involving exactly the same point at issue should be decided in the same
manner.

The court likewise ruled that the 15-day rule for tax treaty relief application
under RMO No. 1-2000 cannot be relaxed for petitioner, unlike in CBK Power
Company Limited v. Commissioner of Internal Revenue.12 In that case, the rule
was relaxed and the claim for refund of excess final withholding taxes was
partially granted. While it issued a ruling to CBK Power Company Limited after
the payment of withholding taxes, the ITAD did not issue any ruling to
petitioner even if it filed a request for confirmation on 4 October 2005 that the
remittance of branch profits to DB Germany is subject to a preferential tax
rate of 10% pursuant to Article 10 of the RP-Germany Tax Treaty.

ISSUE

This Court is now confronted with the issue of whether the failure to strictly
comply with RMO No. 1-2000 will deprive persons or corporations of the
benefit of a tax treaty.
THE COURT�S RULING

The Petition is meritorious.

Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall
be subject to a tax of 15% based on the total profits applied for or earmarked
for remittance without any deduction of the tax component. However,
petitioner invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty,
which provides that where a resident of the Federal Republic of Germany has a
branch in the Republic of the Philippines, this branch may be subjected to the
branch profits remittance tax withheld at source in accordance with Philippine
law but shall not exceed 10% of the gross amount of the profits remitted by
that branch to the head office.

By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch

in the Philippines, remitting to its head office in Germany, the benefit of a
preferential rate equivalent to 10% BPRT.

On the other hand, the BIR issued RMO No. 1-2000, which requires that any
availment of the tax treaty relief must be preceded by an application with
ITAD at least 15 days before the transaction. The Order was issued to
streamline the processing of the application of tax treaty relief in order to
improve efficiency and service to the taxpayers. Further, it also aims to
prevent the consequences of an erroneous interpretation and/or application of
the treaty provisions (i.e., filing a claim for a tax refund/credit for the
overpayment of taxes or for deficiency tax liabilities for underpayment). 13 cralaw virtualaw library

The crux of the controversy lies in the implementation of RMO No. 1-2000.

Petitioner argues that, considering that it has met all the conditions under Article 10 of
the RP-Germany Tax Treaty, the CTA erred in denying its claim solely on the basis of
RMO No. 1-2000. The filing of a tax treaty relief application is not a condition
precedent to the availment of a preferential tax rate. Further, petitioner posits
that, contrary to the ruling of the CTA, Mirant is not a binding judicial
precedent to deny a claim for refund solely on the basis of noncompliance with
RMO No. 1-2000.

Respondent counters that the requirement of prior application under RMO No.
1-2000 is mandatory in character. RMO No. 1-2000 was issued pursuant to the
unquestioned authority of the Secretary of Finance to promulgate rules and
regulations for the effective implementation of the NIRC. Thus, courts cannot
ignore administrative issuances which partakes the nature of a statute and
have in their favor a presumption of legality.

The CTA ruled that prior application for a tax treaty relief is mandatory, and
noncompliance with this prerequisite is fatal to the taxpayer�s availment of
the preferential tax rate.

We disagree.

A minute resolution is not a binding precedent

At the outset, this Court�s minute resolution on Mirant is not a binding

precedent. The Court has clarified this matter in Philippine Health Care
Providers, Inc. v. Commissioner of Internal Revenue 14 as follows:
It is true that, although contained in a minute resolution, our
dismissal of the petition was a disposition of the merits of the case.
When we dismissed the petition, we effectively affirmed the CA
ruling being questioned. As a result, our ruling in that case has
already become final. When a minute resolution denies or dismisses
a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of
fact and legal conclusions, are deemed sustained. But what is its
effect on other cases?

With respect to the same subject matter and the same issues
concerning the same parties, it constitutes res judicata. However, if
other parties or another subject matter (even with the same parties
and issues) is involved, the minute resolution is not binding
precedent. Thus, in CIR v. Baier-Nickel, the Court noted that a
previous case, CIR v. Baier-Nickel involving the same parties and
the same issues, was previously disposed of by the Court thru a
minute resolution dated February 17, 2003 sustaining the ruling of
the CA. Nonetheless, the Court ruled that the previous case
�ha(d) no bearing� on the latter case because the two cases
involved different subject matters as they were concerned with the
taxable income of different taxable years.

Besides, there are substantial, not simply formal, distinctions

between a minute resolution and a decision. The constitutional
requirement under the first paragraph of Section 14, Article VIII of
the Constitution that the facts and the law on which the judgment is
based must be expressed clearly and distinctly applies only to
 decisions, not to minute resolutions. A minute resolution is signed
only by the clerk of court by authority of the justices, unlike a
decision. It does not require the certification of the Chief Justice.
Moreover, unlike decisions, minute resolutions are not published in
the Philippine Reports. Finally, the proviso of Section 4(3) of Article
VIII speaks of a decision. Indeed, as a rule, this Court lays down
doctrines or principles of law which constitute binding precedent in
a decision duly signed by the members of the Court and certified by
the Chief Justice. (Emphasis supplied)
Even if we had affirmed the CTA in Mirant, the doctrine laid down in that
Decision cannot bind this Court in cases of a similar nature. There are
differences in parties, taxes, taxable periods, and treaties involved; more
importantly, the disposition of that case was made only through a minute
resolution.

Tax Treaty vs. RMO No. 1-2000

Our Constitution provides for adherence to the general principles of

international law as part of the law of the land.15 The time-honored
international principle of pacta sunt servanda demands the performance in
good faith of treaty obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties, and obligations
under the treaty must be performed by them in good faith. 16 More importantly,
treaties have the force and effect of law in this jurisdiction.17 cralaw virtualaw library

Tax treaties are entered into �to reconcile the national fiscal legislations of
the contracting parties and, in turn, help the taxpayer avoid simultaneous
taxations in two different jurisdictions.�18CIR v. S.C. Johnson and Son, Inc.
further clarifies that �tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the
imposition of comparable taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical periods. The apparent
rationale for doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable and
reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate.�19
cralaw virtualaw library

Simply put, tax treaties are entered into to minimize, if not eliminate the
harshness of international juridical double taxation, which is why they are
also known as double tax treaty or double tax agreements.
�A state that has contracted valid international obligations is bound to
make in its legislations those modifications that may be necessary to ensure
the fulfillment of the obligations undertaken.�20 Thus, laws and issuances
must ensure that the reliefs granted under tax treaties are accorded to the
parties entitled thereto. The BIR must not impose additional requirements
that would negate the availment of the reliefs provided for under international
agreements. More so, when the RP-Germany Tax Treaty does not provide for
any pre-requisite for the availment of the benefits under said agreement.

Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which
would indicate a deprivation of entitlement to a tax treaty relief for failure to
comply with the 15-day period. We recognize the clear intention of the BIR in
implementing RMO No. 1-2000, but the CTA�s outright denial of a tax treaty
relief for failure to strictly comply with the prescribed period is not in harmony
with the objectives of the contracting state to ensure that the benefits granted
under tax treaties are enjoyed by duly entitled persons or corporations.

Bearing in mind the rationale of tax treaties, the period of application for the
availment of tax treaty relief as required by RMO No. 1-2000 should not
operate to divest entitlement to the relief as it would constitute a violation of
the duty required by good faith in complying with a tax treaty. The denial of
the availment of tax relief for the failure of a taxpayer to apply within the
prescribed period under the administrative issuance would impair the value of
the tax treaty. At most, the application for a tax treaty relief from the BIR
should merely operate to confirm the entitlement of the taxpayer to the relief.

The obligation to comply with a tax treaty must take precedence over the
objective of RMO No. 1-2000. Logically, noncompliance with tax treaties has
negative implications on international relations, and unduly discourages
foreign investors. While the consequences sought to be prevented by RMO No.
1-2000 involve an administrative procedure, these may be remedied through
other system management processes, e.g., the imposition of a fine or penalty.
But we cannot totally deprive those who are entitled to the benefit of a treaty
for failure to strictly comply with an administrative issuance requiring prior
application for tax treaty relief.

Prior Application vs. Claim for Refund

Again, RMO No. 1-2000 was implemented to obviate any erroneous

interpretation and/or application of the treaty provisions. The objective of the
BIR is to forestall assessments against corporations who erroneously availed
themselves of the benefits of the tax treaty but are not legally entitled
thereto, as well as to save such investors from the tedious process of claims
for a refund due to an inaccurate application of the tax treaty provisions.
However, as earlier discussed, noncompliance with the 15-day period for prior
application should not operate to automatically divest entitlement to the tax
treaty relief especially in claims for refund.

The underlying principle of prior application with the BIR becomes moot in
refund cases, such as the present case, where the very basis of the claim is
erroneous or there is excessive payment arising from non-availment of a tax
treaty relief at the first instance. In this case, petitioner should not be faulted
for not complying with RMO No. 1-2000 prior to the transaction. It could not
have applied for a tax treaty relief within the period prescribed, or 15 days
prior to the payment of its BPRT, precisely because it erroneously paid the
BPRT not on the basis of the preferential tax rate under

the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC.
Hence, the prior application requirement becomes illogical. Therefore, the fact
that petitioner invoked the provisions of the RP-Germany Tax Treaty when it
requested for a confirmation from the ITAD before filing an administrative
claim for a refund should be deemed substantial compliance with RMO No. 1-
2000.

Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy
for tax recovery when there has been an erroneous payment of tax. The
outright denial of petitioner�s claim for a refund, on the sole ground of
failure to apply for a tax treaty relief prior to the payment of the BPRT, would
defeat the purpose of Section 229.

Petitioner is entitled to a refund

It is significant to emphasize that petitioner applied � though belatedly �

for a tax treaty relief, in substantial compliance with RMO No. 1-2000. A ruling
by the BIR would have confirmed whether petitioner was entitled to the lower
rate of 10% BPRT pursuant to the RP-Germany Tax Treaty.

Nevertheless, even without the BIR ruling, the CTA Second Division found as
follows:
Based on the evidence presented, both documentary and
testimonial, petitioner was able to establish the following facts: cralawlibrary

a. That petitioner is a branch office in the Philippines of Deutsche

Bank AG, a corporation organized and existing under the laws of the
Federal Republic of Germany; chanr0blesvirtualawlibrary
 b. That on October 21, 2003, it filed its Monthly Remittance Return
of Final Income Taxes Withheld under BIR Form No. 1601-F and
remitted the amount of P67,688,553.51 as branch profits remittance
tax with the BIR; and

c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having

issued a clearance, petitioner remitted to Frankfurt Head Office the
amount of EUR5,174,847.38 (or P330,175,961.88 at 63.804
Peso/Euro) representing its 2002 profits remittance. 22 cralaw virtualaw library

The amount of PHP 67,688,553.51 paid by petitioner represented the 15%

BPRT on its RBU net income, due for remittance to DB Germany amounting to
PHP 451,257,023.29 for 2002 and prior taxable years. 23 cralaw virtualaw library

Likewise, both the administrative and the judicial actions were filed within the
two-year prescriptive period pursuant to Section 229 of the NIRC. 24 cralaw virtualaw library

Clearly, there is no reason to deprive petitioner of the benefit of a preferential

tax rate of 10% BPRT in accordance with the RP-Germany Tax Treaty.

Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU
net income amounting to PHP 451,257,023.29 for 2002 and prior taxable
years, applying the 10% BPRT. Thus, it is proper to grant petitioner a refund
of the difference between the PHP 67,688,553.51 (15% BPRT) and PHP
45,125,702.34 (10% BPRT) or a total of PHP 22,562,851.17.

WHEREFORE, premises considered, the instant Petition is GRANTED.

Accordingly, the Court of Tax Appeals En Banc Decision dated 29 May 2009
and Resolution dated 1 July 2009 are REVERSED and SET ASIDE. A new one is
hereby entered ordering respondent Commissioner of Internal Revenue to
refund or issue a tax credit certificate in favor of petitioner Deutsche Bank AG
Manila Branch the amount of TWENTY TWO MILLION FIVE HUNDRED SIXTY
TWO THOUSAND EIGHT HUNDRED FIFTY ONE PESOS AND SEVENTEEN
CENTAVOS (PHP 22,562,851.17), Philippine currency, representing the
erroneously paid BPRT for 2002 and prior taxable years.

SO ORDERED.
 Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue

GR Number 188550

SYLLABUS:

Taxation; National Internal Revenue Code; Foreign Corporations;

Under Section 28(A)(5) of the National Internal Revenue Code (NIRC), any

profit remitted to its head office shall be subject to a tax of 15% based on the

total profits applied for or earmarked for remittance without any deduction

of the tax component.―Under Section 28(A)(5) of the NIRC, any profit

remitted to its head office shall be subject to a tax of 15% based on the total

profits applied for or earmarked for remittance without any deduction of the

tax component. However, petitioner invokes paragraph 6, Article 10 of the

RP-Germany Tax Treaty, which provides that where a resident of the

Federal Republic of Germany has a branch in the Republic of the

Philippines, this branch may be subjected to the branch profits remittance

tax withheld at source in accordance with Philippine law but shall not

exceed 10% of the gross amount of the profits remitted by that branch to the

head office.

_________________________________________________________________

Tax treaties are entered into to minimize, if not

eliminate the harshness of international juridical double taxation, which is

why they are also known as double tax treaty or double tax agreements.―Tax treaties
are entered into “to reconcile the

national fiscal legislations of the contracting parties and, in turn, help the

taxpayer avoid simultaneous taxations in two different jurisdictions.” CIR v.

S.C. Johnson and Son, Inc., 309 SCRA 37 (1999), further clarifies that “tax

conventions are drafted with a view towards the elimination of international

juridical double taxation, which is defined as the imposition of comparable

taxes in two or more states on the same taxpayer in respect of the same

subject matter and for identical periods. The apparent rationale for doing

away with double taxation is to encourage the free flow of goods and

services and the movement of capital, technology and persons between

countries, conditions deemed vital in creating robust and dynamic

economies. Foreign investments will only thrive in a fairly predictable and

reasonable international investment climate and the protection against

double taxation is crucial in creating such a climate.” Simply put, tax

treaties are entered into to minimize, if not eliminate the harshness of

international juridical double taxation, which is why they are also known as

double tax treaty or double tax agreements.

Petition: Petition for Review

Petitioner: Deutsche Bank AG Manila Branch

Respondent: Commissioner of Internal Revenue

Ponente: Sereno, C. J.

Date: August 28, 2013

Facts:

Pursuant to the National Internal Revenue Code of 1997, on October 21, 2003, the petitioner remitted to the
respondent the amount of Php 67,688,553.51, representing fifteen (15) percent of the branch profit remittance
tax (BPRT) on its regular banking unit (RBU) net income remitted to the Deutsche Bank of Germany (DB
Germany) for 2002 and prior taxable years.

Believing that they made an overpayment of the BPRT, on October 4, 2005, the petitioner filed with the BIR
Large Taxpayers Assessment and Investigation Division an administrative claim for refund or a tax credit
certificate representing the alleged excess BPRT paid (amount of Php 22,562,851.17). The petitioners also
requested from the International Tax Affairs Division (ITAD) for a confirmation of its entitlement to a
preferential tax rate of 10% under the RP-Germany Tax Treaty.

Because of the alleged inaction of the BIR on the administrative claim, on October 18, 2005, the petitioner
filed a petition for review with the Court of Tax Appeals (CTA), reiterating its claim for refund or tax credit
certificate representing the alleged excess BPRT paid. The claim was denied on the ground that application for
tax treaty relief was not filed with ITAD prior to the payment of BPRT, thereby violating the fifteen-day period
mandated under Section III, paragraph 2 of the Revenue Memorandum Order No. 1-2000. Also, the CTA
Second Division relied on an en banc decision of the CTA that before the benefits of a tax treaty may be
extended to a foreign corporation, the latter should first invoke the provisions of the tax treaty and prove that
they indeed apply to the corporation (Mirant Operations Corporation v Commissioner of Internal Revenue).

Hence this petition.

Issue:

Whether or not the failure to strictly comply with the provisions of RMO No. 1-2000 will deprive persons or
corporations the benefit of a tax treaty.

Ruling:

No. The constitution provides for the adherence to the general principles of international law as part of the
law of the land (Article II, Section 2). Every treaty is binding upon the parties, and obligations must be
performed (Article 26, Vienna Convention on the Law on Treaties). There is nothing in RMO 1-2000
indicating a deprivation of entitlement to a tax treaty for failure to comply with the fifteen-day period. The
denial of availment of tax relief for the failure to apply within the prescribed period (under the administrative
issuance) would impair the value of the tax treaty. Also, the obligation to comply with the tax treaty must take
precedence over the objective of RMO 1-2000 because the non-compliance with tax treaties would have
negative implications on international affairs and would discourage foreign investments.

Dispositive:

The petition was granted, the CTA en banc decision was set aside and reversed. The respondent was ordered to
refund or issue a tax credit certificate (the amount of Php 22,562,851.17) in favor of the petitioner.
set 2

G.R. No. 156252 June 27, 2006

COCA-COLA BOTTLERS PHILIPPINES, INC., Petitioner,

vs.
CITY OF MANILA, LIBERTY M. TOLEDO – City Treasurer and JOSEPH SANTIAGO – Chief,
Licensing Division, Respondents.

DECISION

CHICO-NAZARIO, J.:

Before Us is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure,
1
assailing the Order of the Regional Trial Court (RTC) of Manila, Branch 21, dated 8 May 2002,
2
dismissing petitioner’s Petition for Injunction, and the Order dated 5 December 2002, denying
petitioner’s Motion for Reconsideration.

Petitioner Coca-Cola Bottlers Philippines, Inc. is a corporation engaged in the business of

manufacturing and selling beverages and maintains a sales office located in the City of Manila.

On 25 February 2000, the City Mayor of Manila approved Tax Ordinance No. 7988, otherwise known
as "Revised Revenue Code of the City of Manila" repealing Tax Ordinance No. 7794 entitled,
"Revenue Code of the City of Manila." Tax Ordinance No. 7988 amended certain sections of Tax
Ordinance No. 7794 by increasing the tax rates applicable to certain establishments operating within
the territorial jurisdiction of the City of Manila, including herein petitioner.

3
Aggrieved by said tax ordinance, petitioner filed a Petition before the Department of Justice (DOJ),
4
against the City of Manila and its Sangguniang Panlungsod, invoking Section 187 of the Local
Government Code of 1991 (Republic Act No. 7160). Said Petition questions the constitutionality or
legality of Section 21 of Tax Ordinance No. 7988. According to petitioner:

; that said deletion would, in effect, impose additional business tax onSection 21 of the Old Revenue
Code of the City of Manila (Ordinance No. 7794, as amended) was reproduced verbatim as Section
21 under the new Ordinance except for the last paragraph thereof which reads: "PROVIDED, that all
registered businesses in the City of Manila that are already paying the aforementioned tax shall be
exempted from payment thereof", which was deleted businesses, including herein petitioner, that are
already subject to business tax under the other sections, specifically Sec. 14, of the New Revenue
Code of the City of Manila, which imposition, petitioner claims, "is beyond or exceeds the limitation
on the taxing power of the City of Manila under Sec. 143 (h) of the LGC of 1991; and that deletion is
a palpable and manifest violation of the Local Government Code of 1991, and the clear mandate of
Article X, Sec. 5 of the 1987 Constitution, hence Section 21 is "illegal and unconstitutional."

On 17 August 2000, then DOJ Secretary Artemio G. Tuquero issued a Resolution declaring Tax
Ordinance No. 7988 null and void and without legal effect, the pertinent portions of which read:

After a judicious scrutiny of the records of this case, in the light of the pertinent provisions of the
Local Government Code of 1991, this Department finds for the petitioner.

The Local Government Code of 1991 provides:

"Section 188. Publication of Tax Ordinances and Revenue Measures. – Within ten (10) days after
their approval, certified true copies of all provincial, city and municipal tax ordinances or revenue
measures shall be published in full for three (3) consecutive days in a newspaper of local circulation;
Provided, however, that in provinces, cities, and municipalities where there are no newspapers or
local circulations the same may be posted in at least two (2) conspicuous and publicly accessible
places." (R.A. No. 7160) (stress supplied)

Upon the other hand, the Rules and Regulations Implementing the Local Government Code of 1991,
insofar as pertinent, mandates:

"Art. 277. Publication of Tax Ordinances and Revenue Measures. – (a) within ten (10) days after
their approval, certified true copies of all provincial, city and municipal tax ordinances or revenue
measures shall be published in full for three (3) consecutive days in a newspaper of local circulation
provided that in provinces, cities and municipalities where there are no newspapers of local
circulation, the same may be posted in at least two (2) conspicuous and publicly accessible places.

If the tax ordinances or revenue measure contains penal provisions as authorized under Art. 279 of
this Rule, the gist of such tax ordinance or revenue measure shall be published in a newspaper of
general circulation within the province, posting of such ordinance or measure shall be made in
accessible and conspicuous public places in all municipalities and cities of the province to which the
sanggunian enacting the ordinance or revenue measure belongs.

xxx xxx xxx."

(emphasis ours)

It is clear from the above-quoted provisions of R.A. No. 7160 and its implementing rules that the
requirement of publication is MANDATORY and leaves no choice. The use of the word "shall" in both
provisions is imperative, operating to impose a duty that may be enforced (Soco v. Militante, 123
SCRA 160, 167; Modern Coach Corp. v. Faver 173 SE 2d 497, 499).

Its essence is simply to inform the people and the entities who may likely be affected, of the
existence of the tax measure. It bears emphasis, that, strict observance of the said procedural
requirement is the only safeguard against any unjust and unreasonable exercise of the taxing
powers by ensuring that the taxpayers are notified through publication of the existence of the
measure, and are therefore able to voice out their views or objections to the said measure. For, after
all, taxes are obligatory exactions or enforced contributions corollary to taking of property.

xxxx

In the case at bar, respondents, by its failure to file their comments and present documentary
evidence to show that the mandatory requirement of law on publication, among other things, has
been met, may be deemed to have waived its right to controvert or dispute the documentary
evidence submitted by petitioner which indubitably show that subject tax ordinance was published
only once, i.e., on the May 22, 2000 issue of the Philippine Post. Clearly, therefore, herein
respondents failed to satisfy the requirement that said ordinance shall be published for three (3)
consecutive days as required by law.

xxxx

In view of the foregoing, we find it unnecessary to pass upon the other issues raised by the
petitioner.
WHEREFORE, premises considered, Tax Ordinance No. 7988 of the City of Manila is hereby
declared NULL and VOID and WITHOUT LEGAL EFFECT for having been enacted in contravention
5
of the provisions of the Local Government Code of 1991 and its implementing rules and regulations.

The City of Manila failed to file a Motion for Reconsideration nor lodge an appeal of said Resolution,
thus, said Resolution of the DOJ Secretary declaring Tax Ordinance No. 7988 null and void has
lapsed into finality.

On 16 November 2000, Atty. Leonardo A. Aurelio wrote the Bureau of Local Government Finance
(BLGF) requesting in behalf of his client, Singer Sewing Machine Company, an opinion on whether
the Office of the City Treasurer of Manila has the right to enforce Tax Ordinance No. 7988 despite
the Resolution, dated 17 August 2000, of the DOJ Secretary. Acting on said letter, the BLGF
Executive Director issued an Indorsement on 20 November 2000 ordering the City Treasurer of
Manila to "cease and desist" from enforcing Tax Ordinance No. 7988. According to the BLGF:

In the attached Resolution dated August 17, 2000 of the Department of Justice, it is stated that "x x x
Ordinance No. 7988 of the City of Manila is hereby declared NULL AND VOID AND WITHOUT
LEGAL EFFECT for having been enacted in contravention of the provisions of the Local Government
Code of 1991 and its implementing rules and regulations."

xxxx

In view thereof, that Office is hereby instructed to cease and desist from implementing the
aforementioned Manila Tax Ordinance No. 7988, inviting attention to Section 190 of the Local
Government Code (LGC) of 1991, quoted hereunder:

"Section 190. Attempt to Enforce Void or Suspended Tax Ordinances and Revenue Measures.- The
enforcement of any tax ordinance or revenue measures after due notice of the disapproval or
suspension thereof shall be sufficient ground to administrative disciplinary action against the local
officials and employees responsible therefore."

6
Be guided accordingly.

Despite the Resolution of the DOJ declaring Tax Ordinance No. 7988 null and void and the directive
of the BLGF that respondents cease and desist from enforcing said tax ordinance, respondents
continued to assess petitioner business tax for the year 2001 based on the tax rates prescribed
under Tax Ordinance No. 7988. Thus, petitioner filed a Complaint with the RTC of Manila, Branch
21, on 17 January 2001, praying that respondents be enjoined from implementing the
aforementioned tax ordinance.

On 28 November 2001, the RTC of Manila, Branch 21, rendered a Decision in favor of petitioner, the
decretal portion of which states:

The defendants did not follow the procedure in the enactment of Tax Ordinance No. 7988. The Court
agrees with plaintiff’s contention that the ordinance should first be published for three (3)
consecutive days in a newspaper of local circulation aside from the posting of the same in at least
four (4) conspicuous public places.

xxxx

WHEREFORE, premises considered, judgment is hereby rendered declaring the injunction

permanent. Defendants are enjoined from implementing Tax Ordinance No. 7988. The bond posted
7
by the plaintiff is hereby CANCELLED.
During the pendency of the said case, the City Mayor of Manila approved on 22 February 2001 Tax
Ordinance No. 8011 entitled, "An Ordinance Amending Certain Sections of Ordinance No. 7988."
Said tax ordinance was again challenged by petitioner before the DOJ through a Petition questioning
the legality of the aforementioned tax ordinance on the grounds that (1) said tax ordinance amends a
tax ordinance previously declared null and void and without legal effect by the DOJ; and (2) said tax
ordinance was likewise not published upon its approval in accordance with Section 188 of the Local
Government Code of 1991.

On 5 July 2001, then DOJ Secretary Hernando Perez issued a Resolution declaring Tax Ordinance
No. 8011 null and void and legally not existing. According to the DOJ Secretary:

After a careful examination/evaluation of the records of this case and applying the pertinent
provisions of the Local Government Code of 1991, this Department finds the instant petition of Coca-
Cola Bottlers, Philippines, Inc. meritorious.

It bears stress, at the outset, that the subject ordinance was passed and approved by the
respondents principally to amend Ordinance No. 7988 which was earlier nullified by this Department
in its Resolution Dated August 17, 2000, also at the instance of the herein petitioner. x x x

xxxx

x x x [T]he only logical conclusion, therefore, is that Ordinance No. 8011, subject herein, is also null
and void, it being a mere amendatory ordinance of Ordinance No. 7988 which, as earlier stated, had
been nullified by this Department. An invalid or unconstitutional law or ordinance does not, in legal
contemplation, exist (Manila Motors Co., Inc. vs. Flores, 99 Phil. 738). Where a statute which has
been amended is invalid, nothing, in effect, has been amended. As held in People vs. Lim, 108 Phil.
1091:

"If an order or law sought to be amended is invalid, then it does not legally exist. There would be no
occasion or need to amend it; x x x" (at p. 1097)

Instead of amending Ordinance No. 7988, herein respondent should have enacted another tax
measure which strictly complies with the requirements of law, both procedural and substantive. The
passage of the assailed ordinance did not have the effect of curing the defects of Ordinance No.
7988 which, any way, does not legally exist.

xxxx

WHEREFORE, premises considered, Tax Ordinance No. 8011 is hereby declared NULL and VOID
8
and LEGALLY NOT EXISTING.

Respondent’s Motion for Reconsideration of the Resolution of the DOJ was subsequently denied in
9
a Resolution, dated 12 March 2002.

The City of Manila appealed the DOJ Resolution, dated 12 March 2002, denying its Motion for
Reconsideration of the Resolution nullifying Tax Ordinance No. 8011 before the RTC of Manila,
Branch 17, but the same was dismissed for lack of jurisdiction in an Order, dated 2 December 2002.
According to the trial court:

From whatever angle the recourse of herein petitioners was viewed, either from the standpoint of
Section 1, Rule 43, or Section 1 and the last sentence of the second paragraph of Section 4, Rule 65
of the 1997 Rules of Civil Procedure, the conclusion was inevitable that petitioners’ remedial
measure from dispositions of the Secretary of Justice should have been ventilated before the next
judicial plane. x x x

-.

Consequently, respondents appealed the foregoing Order, dated 2 December 2002, via a Petition for
Review on Certiorari to the Supreme Court docketed as G.R. No. 157490. However, said appeal
was dismissed in our Resolution, dated 23 June 2003, the dispositive of which reads:

Pursuant to Rule 45 and other related provisions of the 1997 Rules of Civil Procedure as amended
governing appeals by certiorari to the Supreme Court, only petitions which are accompanied by or
which comply strictly with the requirements specified therein shall be entertained. On the basis
thereof, the Court resolves to DENY the instant petition for review on certiorari of the orders of the
Regional Trial Court, Manila, Branch 17 dated December 2, 2002 and March 7, 2003 for the late
filing as the petition was filed beyond the reglementary period of fifteen (15) days fixed in Sec. 2,
Rule 45 in relation to Sec. 5(a), Rule 56.

The omnibus motion of petitioners for reconsideration of the resolution of April 23, 2003 which
denied the motion for an extension of time to file a petition is DENIED for lack of merit.

Respondents’ Motion for Reconsideration was subsequently denied in a Resolution, dated 11

August 2003, in which the Court resolved as follows:

Acting on the motion of petitioners for reconsideration of the resolution of June 23, 2003 which
denied the petition for review on certiorari and considering that there is no compelling reason to
warrant a modification of this Court’s resolution, the Court resolves to DENY reconsideration with
FINALITY.

Meanwhile, on the basis of the enactment of Tax Ordinance No. 8011, the City of Manila filed a
Motion for Reconsideration with the RTC of Manila, Branch 21, of its Decision, dated 28 November
2001, which the court a quo granted in the herein assailed Order dated 8 May 2002, the full text of
which reads:

Considering that Ordinance No. 7988 (Amended Revenue Code of the City of Manila) has already
been amended by Ordinance No. 8011 entitled "An Ordinance Amending Certain Sections of
Ordinance No. 7988" approved by the City Mayor of Manila on February 22, 2001, let the above-
10
entitled case be as it is hereby DISMISSED. Without pronouncement as to costs."

Petitioner’s Motion for Reconsideration of the above-quoted Order was denied by the trial court in
the second challenged Order, dated 5 December 2002; hence the instant Petition.

The case at bar revolves around the sole pivotal issue of whether or not Tax Ordinance No. 7988 is
null and void and of no legal effect. However, respondents, in their Comment and Memorandum,
raise the procedural issue of whether or not the instant Petition has complied with the requirements
of the 1997 Rules on Civil Procedure; thus, the Court resolves to first pass upon this issue before
tackling the substantial matters involved in this case.

Respondents insist that the instant Petition raises questions of fact that are proscribed under Rule
45 of the 1997 Rules of Civil Procedure which states that Petitions for Certiorari before the Supreme
Court shall raise only questions of law.

RULING
We do not agree. There is a question of fact when doubt or controversy arises as to the truth or
falsity of the alleged facts, when there is no dispute as to fact, the question of whether or not the
11
conclusion drawn therefrom is correct is a question of law. A thorough reading of the Petition will
reveal that petitioner does not present an issue in which we are called to rule on the truth or falsity of
any fact alleged in the case. Furthermore, the resolution of whether or not the court a quo erred in
dismissing petitioner’s case in light of the enactment of Tax Ordinance No. 8011, allegedly amending
Tax Ordinance No. 7988, does not necessitate an incursion into the facts attending the case.

Contrarily, it is respondents who actually raise questions of fact before us. While accusing petitioner
of raising questions of fact, respondents, in the same breath, proceeded to allege that the RTC of
Manila, Branch 21, in its Decision, dated 28 November 2001, failed to take into account the evidence
presented by respondents allegedly proving that Tax Ordinance No. 7988 was published for four
times in a newspaper of general circulation in accordance with the requirements of law. A
determination of whether or not the trial court erred in concluding that Tax Ordinance No. 7988 was
indeed published for four times in a newspaper of general circulation would clearly involve a
calibration of the probative value of the evidence presented by respondents to prove such allegation.
Therefore, said issue is a question of fact which this Court, not being a trier of facts, will decline to
pass upon.

Respondents also point out that the Petition was not properly verified and certified because Nelson
Empalmado, the Vice President for Tax and Financial Services of Coca-Cola Bottlers Philippines,
Inc. who verified the subject Petition was not duly authorized to file said Petition. Respondents
assert that nowhere in the attached Secretary’s Certificate can it be found the authority of Nelson
Empalmado to institute the instant Petition. Thus, there being a lack of proper verification,
respondents contend that the Petition must be treated as a mere scrap of paper, which has no legal
effect as declared in Section 4, Rule 7 of the 1997 Rules of Civil Procedure.

An inspection of the Secretary’s Certificate attached to the petition will show that Nelson

Empalmado is not among those designated as representative to prosecute claims in behalf of Coca-
Cola Bottlers Philippines, Inc. However, it would seem that the authority of Mr. Empalmado to file the
instant Petition emanated from a Special Power of Attorney signed by Ramon V. Lapez, Jr.,
Associate Legal Counsel/Assistant Corporate Secretary of Coca-Cola Bottlers Philippines, Inc. and
one of those named in the Secretary’s Certificate as authorized to file a Petition in behalf of the
corporation. A careful perusal of said Secretary’s Certificate will further reveal that the persons
authorized therein to represent petitioner corporation in any suit are also empowered to designate
and appoint any individual as attorney-in-fact of the corporation for the prosecution of any suit.
Accordingly, by virtue of the Special Power of Attorney executed by Ramon V. Lapez, Jr. authorizing
Nelson Emplamado to file a Petition before the Supreme Court, the instant Petition has been
properly verified, in accordance with the 1997 Rules of Civil Procedure.

Having disposed of the procedural issues raised by respondents, We now come to the pivotal issue
in this petition.

It is undisputed from the facts of the case that Tax Ordinance No. 7988 has already been declared
by the DOJ Secretary, in its Order, dated 17 August 2000, as null and void and without legal effect
due to respondents’ failure to satisfy the requirement that said ordinance be published for three
consecutive days as required by law. Neither is there quibbling on the fact that the said Order of the
DOJ was never appealed by the City of Manila, thus, it had attained finality after the lapse of the
period to appeal.

Furthermore, the RTC of Manila, Branch 21, in its Decision dated 28 November 2001, reiterated the
findings of the DOJ Secretary that respondents failed to follow the procedure in the enactment of tax
measures as mandated by Section 188 of the Local Government Code of 1991, in that they failed to
publish Tax Ordinance No. 7988 for three consecutive days in a newspaper of local circulation. From
the foregoing, it is evident that Tax Ordinance No. 7988 is null and void as said ordinance was
published only for one day in the 22 May 2000 issue of the Philippine Post in contravention of the
unmistakable directive of the Local Government Code of 1991.

Despite the nullity of Tax Ordinance No. 7988, the court a quo, in the assailed Order, dated 8 May
2002, went on to dismiss petitioner’s case on the force of the enactment of Tax Ordinance No. 8011,
amending Tax Ordinance No. 7988. Significantly, said amending ordinance was likewise declared
null and void by the DOJ Secretary in a Resolution, dated 5 July 2001, elucidating that "[I]nstead of
amending Ordinance No. 7988, [herein] respondent should have enacted another tax measure
which strictly complies with the requirements of law, both procedural and substantive. The passage
of the assailed ordinance did not have the effect of curing the defects of Ordinance No. 7988 which,
any way, does not legally exist." Said Resolution of the DOJ Secretary had, as well, attained finality
by virtue of the dismissal with finality by this Court of respondents’ Petition for Review on Certiorari
in G.R. No. 157490 assailing the dismissal by the RTC of Manila, Branch 17, of its appeal due to
lack of jurisdiction in its Order, dated 11 August 2003.

Based on the foregoing, this Court must reverse the Order of the RTC of Manila, Branch 21,
dismissing petitioner’s case as there is no basis in law for such dismissal. The amending law, having
been declared as null and void, in legal contemplation, therefore, does not exist. Furthermore, even
if Tax Ordinance No. 8011 was not declared null and void, the trial court should not have dismissed
the case on the reason that said tax ordinance had already amended Tax Ordinance No. 7988 . As
12
held by this Court in the case of People v. Lim, if an order or law sought to be amended is invalid,
13
then it does not legally exist, there should be no occasion or need to amend it.

WHEREFORE, premises considered, the instant Petition is hereby GRANTED. The Orders of the
RTC of Manila, Branch 21, dated 8 May 2002 and 5 December 2002, respectively, are hereby
REVERSED and SET ASIDE.

SO ORDERED.

COCA-COLA BOTTLERS PHILIPPINES, INC.

VS.

CITY OF MANILA, LIBERTY M. TOLEDO – CITY TREASURER AND JOSEPH SANTIAGO

– CHIEF, LICENSING DIVISION

syllabus

Taxation; Local Taxation; Failure to follow the procedure in enactment

of tax measures renders the same null and void; Respon-dents’ failure to
follow the procedure in enactment of tax measures as mandated by Section

188 of the Local Government Code of 1991, in that they failed to publish

Tax Ordinance No. 7988 for three consecutive days in a newspaper of local

circulation renders the same null and void.—The RTC of Manila, Branch

21, in its Decision dated 28 November 2001, reiterated the findings of the

DOJ Secretary that respondents failed to follow the procedure in the

enactment of tax measures as mandated by Section 188 of the Local

Government Code of 1991, in that they failed to publish Tax Ordinance No.

7988 for three consecutive days in a newspaper of local circulation. From

the foregoing, it is evident that Tax Ordinance No. 7988 is null and void as

said ordinance was published only for one day in the 22 May 2000 issue of

the Philippine Post in contravention of the unmistakable directive of the

Local Government Code of 1991.

FACTS:

On 25 February 2000, the City Mayor of Manila approved Tax Ordinance No. 7988,
otherwise known as "Revised Revenue Code of the City of Manila" which increased the tax
rates applicable to certain establishments operating within the City of Manila, including that
of Coca Cola. Coca Cola then filed a petition before the Department of Justice (DOJ), against
the City of Manila and its Sangguniang Panlungsod, invoking Section 1874 of the Local
Government Code of 1991 and at the same time questioning the constitutionality of Section
21 of Tax Ordinance No. 7988.

Section 21 of the Old Revenue Code states that all registered businesses in the City of
Manila that are already paying the aforementioned tax shall be exempted from payment
thereof. This was deleted in the ordinance. In effect, it now imposed additional business tax
on Coca Cola which is already subject to other business tax. It is contended that the
deletion is a palpable and manifest violation of the LGC 1991. Subsequently, DOJ issued a
Resolution declaring Tax Ordinance No. 7988 null and void and without legal effect due to
failure to comply with mandatory publication requirements as provided for in the Local
Government Code of 1991 which provides:
"Section 188. Publication of Tax Ordinances and Revenue Measures. – Within ten
(10) days after their approval, certified true copies of all provincial, city and municipal tax
ordinances or revenue measures shall be published in full for three (3) consecutive days in a
newspaper of local circulation; Provided, however, that in provinces, cities, and
municipalities where there are no newspapers or local circulations the same may be posted
in at least two (2) conspicuous and publicly accessible places."

Documentary evidence submitted by Coca Cola indubitably shows that subject tax
ordinance was published only once, i.e., on the May 22, 2000 issue of the
Philippine Post. Clearly, therefore, City of Manila failed to satisfy the requirement that said
ordinance shall be published for three (3) consecutive days as required by law.

In affirming the nullification of the ordinance as per request of another taxpayer, Singer
Sewing Maching, the BLGF Executive Director issued an Indorsement on 20 November 2000
ordering the City Treasurer of Manila to "cease and desist" from enforcing Tax Ordinance
No. 7988. However, despite the Resolution of the DOJ and the directive of the BLGF, they
still continued to assess Coca Cola business tax for the year 2001. Thus, Coca Cola filed a
Complaint with the RTC of Manila praying that the City be enjoined from implementing the
tax ordinance.

During the pendency of the said case, the City Mayor of Manila approved an amendment of
the same tax ordinance which was again challenged by Coca Cola before the DOJ on the
grounds that (1) said tax ordinance amends a tax ordinance previously declared null and
void and without legal effect by the DOJ; and (2) said tax ordinance was likewise not
published upon its approval.

The amendatory ordinance was likewise declared null and void by the DOJ, it being a mere
amendatory ordinance of Ordinance No. 7988. The omnibus motion of petitioners for
reconsideration of the resolution of April 23, 2003 which denied the motion for an extension
of time to file a petition is DENIED for lack of merit.

Meanwhile, on the basis of the enactment of Tax Ordinance No. 8011, the City of Manila
filed a Motion for Reconsideration with the RTC of Manila which the court a quo granted
stating that considering that Ordinance No. 7988 (Amended Revenue Code of the City of
Manila) has already been amended by Ordinance No. 8011 entitled "An Ordinance
Amending Certain Sections of Ordinance No. 7988" approved by the City Mayor of Manila on
February 22, 2001, the case must be DISMISSED.

ISSUE:
Whether or not Tax Ordinance No. 7988 is null and void and of no legal effect due to the
City's failure to satisfy the requirement of publication for three consecutive days, regardless
of the amendmentory ordinance issued.

SC RULING:

From the foregoing, it is evident that Tax Ordinance No. 7988 is null and void as said
ordinance was published only for one day in the 22 May 2000 issue of the Philippine Post in
contravention of the unmistakable directive of the Local Government Code of 1991.

Despite the nullity of Tax Ordinance No. 7988, RTC went on to dismiss petitioner’s case on
the force of the enactment of Tax Ordinance No. 8011, amending Tax Ordinance No. 7988.
Significantly, said amending ordinance was likewise declared null and void by the DOJ
Secretary in a Resolution, dated 5 July 2001, elucidating that "[I]nstead of amending
Ordinance No. 7988, the City should have enacted another tax measure which
strictly complies with the requirements of law, both procedural and substantive.
The passage of the assailed ordinance did not have the effect of curing the defects
of Ordinance No. 7988 which, any way, does not legally exist."

Based on the foregoing, this Court must reverse the Order of the RTC of Manila in
dismissing petitioner’s case as there is no basis in law for such dismissal. The amending law,
having been declared as null and void, in legal contemplation, therefore, does not exist.
Furthermore, even if Tax Ordinance No. 8011 was not declared null and void, the trial court
should not have dismissed the case on the reason that said tax ordinance had already
amended Tax Ordinance No. 7988. As held by this Court in the case of People v. Lim, if an
order or law sought to be amended is invalid, then it does not legally exist, there
should be no occasion or need to amend it.

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,

vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees.

Sabido, Sabido & Associates for appellant.

Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant
Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.

Delegation of taxing power to

local governments may not be assailed on the ground of double taxation.—

There is no validity to the assertion that the delegated authority can be

declared unconstitutional on the theory of double taxation. It must be

observed that the delegating authority specifies the limitations and

enumerates the taxes over which local taxation may not be exercised. x x x

Moreover, double taxation, in general, is not forbidden by our fundamental

law, since We have not adopted as part thereof the injunction against double

taxation found in the Constitution of the United States and some states of

the Union. Double taxation becomes obnoxious only where the taxpayer is

taxed twice for the benefit of the same governmental entity or by the same

jurisdiction for the same purpose, but not in a case where one tax is imposed

by the State and the other by the city of municipality.

MARTIN, J.:

This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294,
which was certified to Us by the Court of Appeals on October 6, 1969, as involving only pure
questions of law, challenging the power of taxation delegated to municipalities under the Local
Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).

On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc.,
commenced a complaint with preliminary injunction before the Court of First Instance of Leyte for
1
that court to declare Section 2 of Republic Act No. 2264. otherwise known as the Local Autonomy
Act, unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances
Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null and void.

On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state
that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the
production tax rates imposed therein are practically the same, and second, that on January 17,
1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager
of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by the latter of the
provisions of said Ordinance No. 27, series of 1962.

Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies
and collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo
2
for every bottle of soft drink corked." For the purpose of computing the taxes due, the person, firm,
company or corporation producing soft drinks shall submit to the Municipal Treasurer a monthly
3
report, of the total number of bottles produced and corked during the month.
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies
and collects "on soft drinks produced or manufactured within the territorial jurisdiction of this
municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
4
capacity." For the purpose of computing the taxes due, the person, fun company, partnership,
corporation or plant producing soft drinks shall submit to the Municipal Treasurer a monthly report of
5
the total number of gallons produced or manufactured during the month.

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'

On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under
the oft the said Ordinances; and to pay the costs."

From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals,
which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as
amended.

There are three capital questions raised in this appeal:

1. — Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and
oppressive?

2. — Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific
taxes?

3. — Are Ordinances Nos. 23 and 27 unjust and unfair?

1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter
6
of right to every independent government, without being expressly conferred by the people. It is a
power that is purely legislative and which the central legislative body cannot delegate either to the
executive or judicial department of the government without infringing upon the theory of separation
of powers. The exception, however, lies in the case of municipal corporations, to which, said theory
does not apply. Legislative powers may be delegated to local governments in respect of matters of
7 8
local concern. This is sanctioned by immemorial practice. By necessary implication, the
legislative power to create political corporations for purposes of local self-government carries with it
9
the power to confer on such local governmental agencies the power to tax. Under the New
Constitution, local governments are granted the autonomous authority to create their own sources of
revenue and to levy taxes.

Section 5, Article XI provides: "Each local government unit shall have the power to create its sources
of revenue and to levy taxes, subject to such limitations as may be provided by law." Withal, it
cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere of the
legislative power to enact and vest in local governments the power of local taxation.

The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense,
would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the
authority, the State is not limited 6 the exact measure of that which is exercised by itself. When it is
said that the taxing power may be delegated to municipalities and the like, it is meant that there may
be delegated such measure of power to impose and collect taxes as the legislature may deem
expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy
10
the State has not deemed wise to tax for more general purposes. This is not to say though that
the constitutional injunction against deprivation of property without due process of law may be
passed over under the guise of the taxing power, except when the taking of the property is in the
lawful exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule on
uniformity of taxation is observed; (3) either the person or property taxed is within the jurisdiction of
the government levying the tax; and (4) in the assessment and collection of certain kinds of taxes
11
notice and opportunity for hearing are provided. Due process is usually violated where the tax
imposed is for a private as distinguished from a public purpose; a tax is imposed on property outside
the State, i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in assessing
and collecting taxes. But, a tax does not violate the due process clause, as applied to a particular
taxpayer, although the purpose of the tax will result in an injury rather than a benefit to such
taxpayer. Due process does not require that the property subject to the tax or the amount of tax to
be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the
tax and the manner in which it shall be apportioned are generally not necessary to due process of
12
law.

There is no validity to the assertion that the delegated authority can be declared unconstitutional on
the theory of double taxation. It must be observed that the delegating authority specifies the
13
limitations and enumerates the taxes over which local taxation may not be exercised. The reason
is that the State has exclusively reserved the same for its own prerogative. Moreover, double
taxation, in general, is not forbidden by our fundamental law, since We have not adopted as part
thereof the injunction against double taxation found in the Constitution of the United States and
14
some states of the Union. Double taxation becomes obnoxious only where the taxpayer is taxed
15
twice for the benefit of the same governmental entity or by the same jurisdiction for the same
16
purpose, but not in a case where one tax is imposed by the State and the other by the city or
17
municipality.

2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because
these two ordinances cover the same subject matter and impose practically the same tax rate. The
thesis proceeds from its assumption that both ordinances are valid and legally enforceable. This is
not so. As earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or
collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo
for .every bottle corked, irrespective of the volume contents of the bottle used. When it was
discovered that the producer or manufacturer could increase the volume contents of the bottle and
still pay the same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on
October 28, 1962, imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity. The difference between the two ordinances clearly lies in the tax rate of the soft
drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance
No. 27, it is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity . The
intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was
intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter,
18
even without words to that effect. Plaintiff-appellant in its brief admitted that defendants-appellees
are only seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of facts confirms
the fact that the Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel compliance by the
plaintiff-appellant of the provisions of said Ordinance No. 27, series of 1962. The aforementioned
admission shows that only Ordinance No. 27, series of 1962 is being enforced by defendants-
appellees. Even the Provincial Fiscal, counsel for defendants-appellees admits in his brief "that
Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of
the latter are inconsistent with the provisions of the former."

That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or
a specific tax. Undoubtedly, the taxing authority conferred on local governments under Section 2,
Republic Act No. 2264, is broad enough as to extend to almost "everything, accepting those which
are mentioned therein." As long as the text levied under the authority of a city or municipal ordinance
is not within the exceptions and limitations in the law, the same comes within the ambit of the
general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in cabisus non
19
excepti The limitation applies, particularly, to the prohibition against municipalities and municipal
districts to impose "any percentage tax or other taxes in any form based thereon nor impose taxes
on articles subject to specific tax except gasoline, under the provisions of the National Internal
Revenue Code." For purposes of this particular limitation, a municipal ordinance which prescribes a
set ratio between the amount of the tax and the volume of sale of the taxpayer imposes a sales tax
20
and is null and void for being outside the power of the municipality to enact. But, the imposition of
"a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft
drinks produced or manufactured under Ordinance No. 27 does not partake of the nature of a
percentage tax on sales, or other taxes in any form based thereon. The tax is levied on the produce
(whether sold or not) and not on the sales. The volume capacity of the taxpayer's production of soft
drinks is considered solely for purposes of determining the tax rate on the products, but there is not
21
set ratio between the volume of sales and the amount of the tax.

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified
articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and
cigarettes, matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel
22
oil, cinematographic films, playing cards, saccharine, opium and other habit-forming drugs. Soft
drink is not one of those specified.

3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all
23
softdrinks, produced or manufactured, or an equivalent of 1-½ centavos per case, cannot be
considered unjust and unfair. 24 an increase in the tax alone would not support the claim that the tax
is oppressive, unjust and confiscatory. Municipal corporations are allowed much discretion in
determining the rates of imposable taxes. 25 This is in line with the constutional policy of according
the widest possible autonomy to local governments in matters of local taxation, an aspect that is
given expression in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so
excessive as to be prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27
Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if the purpose
of the law to further strengthen local autonomy were to be realized. 28

Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten
crowners or P2,000.00 with ten but not more than twenty crowners imposed on manufacturers,
producers, importers and dealers of soft drinks and/or mineral waters under Ordinance No. 54,
29
series of 1964, as amended by Ordinance No. 41, series of 1968, of defendant Municipality,
appears not to affect the resolution of the validity of Ordinance No. 27. Municipalities are empowered
to impose, not only municipal license taxes upon persons engaged in any business or occupation
but also to levy for public purposes, just and uniform taxes. The ordinance in question (Ordinance
No. 27) comes within the second power of a municipality.

ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the
Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the
Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23, same series,
is hereby declared of valid and legal effect. Costs against petitioner-appellant.

SO ORDERED.

Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muñoz Palma, Aquino and
Concepcion, Jr., JJ., concur.

Separate Opinions

FERNANDO, J., concurring:

The opinion of the Court penned by Justice Martin is impressed with a scholarly and comprehensive
character. Insofar as it shows adherence to tried and tested concepts of the law of municipal
taxation, I am only in agreement. If I limit myself to concurrence in the result, it is primarily because
with the article on Local Autonomy found in the present Constitution, I feel a sense of reluctance in
restating doctrines that arose from a different basic premise as to the scope of such power in
accordance with the 1935 Charter. Nonetheless it is well-nigh unavoidable that I do so as I am
unable to share fully what for me are the nuances and implications that could arise from the
approach taken by my brethren. Likewise as to the constitutional aspect of the thorny question of
1
double taxation, I would limit myself to what has been set forth in City of Baguio v. De Leon.

1. The present Constitution is quite explicit as to the power of taxation vested in local and municipal
corporations. It is therein specifically provided: "Each local government unit shall have the power to
create its own sources of revenue and to levy taxes subject to such limitations as may be provided
2
by law. That was not the case under the 1935 Charter. The only limitation then on the authority,
plenary in character of the national government, was that while the President of the Philippines was
vested with the power of control over all executive departments, bureaus, or offices, he could only . It
3
exercise general supervision over all local governments as may be provided by law ... As far as
legislative power over local government was concerned, no restriction whatsoever was placed on the
Congress of the Philippines. It would appear therefore that the extent of the taxing power was solely
for the legislative body to decide. It is true that in 1939, there was a statute that enlarged the scope
4
of the municipal taxing power. Thereafter, in 1959 such competence was further expanded in the
5
Local Autonomy Act. Nevertheless, as late as December of 1964, five years after its enactment of
the Local Autonomy Act, this Court, through Justice Dizon, in Golden Ribbon Lumber Co. v. City of
6
Butuan, reaffirmed the traditional concept in these words: "The rule is well-settled that municipal
corporations, unlike sovereign states, after clothed with no power of taxation; that its charter or a
statute must clearly show an intent to confer that power or the municipal corporation cannot assume
and exercise it, and that any such power granted must be construed strictly, any doubt or ambiguity
7
arising from the terms of the grant to be resolved against the municipality."

8
Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao, "is an
9
attribute of sovereignty which municipal corporations do not enjoy." That case left no doubt either
as to weakness of a claim "based merely by inferences, implications and deductions, [as they have
10
no place in the interpretation of the power to tax of a municipal corporation." As the conclusion
reached by the Court finds support in such grant of the municipal taxing power, I concur in the result.
2. As to any possible infirmity based on an alleged double taxation, I would prefer to rely on the
11
doctrine announced by this Court in City of Baguio v. De Leon. Thus: "As to why double taxation
is not violative of due process, Justice Holmes made clear in this language: 'The objection to the
taxation as double may be laid down on one side. ... The 14th Amendment [the due process clause)
no more forbids double taxation than it does doubling the amount of a tax, short of (confiscation or
proceedings unconstitutional on other grouse With that decision rendered at a time when American
sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To
some, it delivered the coup justice to the bogey of double taxation as a constitutional bar to the
exercise of the taxing power. It would seem though that in the United States, as with us, its ghost, as
noted by an eminent critic, still stalks the juridical stage. 'In a 1947 decision, however, we quoted
with approval this excerpt from a leading American decision: 'Where, as here, Congress has clearly
12
expressed its intention, the statute must be sustained even though double taxation results.

So I would view the issues in this suit and accordingly concur in the result.

Separate Opinions
FERNANDO, J., concurring:

The opinion of the Court penned by Justice Martin is impressed with a scholarly and comprehensive
character. Insofar as it shows adherence to tried and tested concepts of the law of municipal
taxation, I am only in agreement. If I limit myself to concurrence in the result, it is primarily because
with the article on Local Autonomy found in the present Constitution, I feel a sense of reluctance in
restating doctrines that arose from a different basic premise as to the scope of such power in
accordance with the 1935 Charter. Nonetheless it is well-nigh unavoidable that I do so as I am
unable to share fully what for me are the nuances and implications that could arise from the
approach taken by my brethren. Likewise as to the constitutional aspect of the thorny question of
1
double taxation, I would limit myself to what has been set forth in City of Baguio v. De Leon.

1. The present Constitution is quite explicit as to the power of taxation vested in local and municipal
corporations. It is therein specifically provided: "Each local government unit shall have the power to
create its own sources of revenue and to levy taxes subject to such limitations as may be provided
 2
by law. That was not the case under the 1935 Charter. The only limitation then on the authority,
plenary in character of the national government, was that while the President of the Philippines was
vested with the power of control over all executive departments, bureaus, or offices, he could only . It
3
exercise general supervision over all local governments as may be provided by law ... As far as
legislative power over local government was concerned, no restriction whatsoever was placed on the
Congress of the Philippines. It would appear therefore that the extent of the taxing power was solely
for the legislative body to decide. It is true that in 1939, there was a statute that enlarged the scope
4
of the municipal taxing power. Thereafter, in 1959 such competence was further expanded in the
5
Local Autonomy Act. Nevertheless, as late as December of 1964, five years after its enactment of
the Local Autonomy Act, this Court, through Justice Dizon, in Golden Ribbon Lumber Co. v. City of
6
Butuan, reaffirmed the traditional concept in these words: "The rule is well-settled that municipal
corporations, unlike sovereign states, after clothed with no power of taxation; that its charter or a
statute must clearly show an intent to confer that power or the municipal corporation cannot assume
and exercise it, and that any such power granted must be construed strictly, any doubt or ambiguity
7
arising from the terms of the grant to be resolved against the municipality."

8
Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao, "is an
9
attribute of sovereignty which municipal corporations do not enjoy." That case left no doubt either
as to weakness of a claim "based merely by inferences, implications and deductions, [as they have
10
no place in the interpretation of the power to tax of a municipal corporation." As the conclusion
reached by the Court finds support in such grant of the municipal taxing power, I concur in the result.
2. As to any possible infirmity based on an alleged double taxation, I would prefer to rely on the
11
doctrine announced by this Court in City of Baguio v. De Leon. Thus: "As to why double taxation
is not violative of due process, Justice Holmes made clear in this language: 'The objection to the
taxation as double may be laid down on one side. ... The 14th Amendment [the due process clause)
no more forbids double taxation than it does doubling the amount of a tax, short of (confiscation or
proceedings unconstitutional on other grouse With that decision rendered at a time when American
sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To
some, it delivered the coup justice to the bogey of double taxation as a constitutional bar to the
exercise of the taxing power. It would seem though that in the United States, as with us, its ghost, as
noted by an eminent critic, still stalks the juridical stage. 'In a 1947 decision, however, we quoted
with approval this excerpt from a leading American decision: 'Where, as here, Congress has clearly
12
expressed its intention, the statute must be sustained even though double taxation results.

So I would view the issues in this suit and accordingly concur in the result.

G.R. No. L-22814 August 28, 1968

PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-appellant,

vs.
CITY OF BUTUAN, MEMBERS OF THE MUNICIPAL BOARD,
THE CITY MAYOR and THE CITY TREASURER, all of the CITY OF BUTUAN, defendants-
appellees.
Sabido, Sabido and Associates for plaintiff-appellant.
The City Attorney of Butuan City for defendants-appellees.

bar.—In the present case the tax prescribed in section 3 of Ordinance No.

110 of the City of Butuan, as originally approved, was imposed upon dealers

"engaged in selling" soft drinks or carbonated drinks. Thus, it would seem

that the intent was then to levy of tax upon the sale of said merchandise. As

amended by Ordinance No. 122, the tax is, however, imposed oriLy upon

"any agent and/or consignee of any person, association, partnership,

company or corporation engaged in selling x x x soft drinks or carbonated

drinks."

As a consequence, merchants engaged in the sale of soft drinks or

carbonated drinks, are not subject to the tax, unless they are agents and/or

consignees of another dealer, who, in the very nature of things, must be one

engaged in business outside the City. Besides, the tax would not be

applicable to such agent and/or consignee, if less than 1,000 cases of soft

drinks are consigned or shipped to him every month. When we consider,

also, that the tax "shall be based and computed from the cargo manifest or

bill of lading x x x showing the number of cases"—not sold—but "received"

by the taxpayer, the intention to limit the application of the ordinance to soft

drinks and carbonated drinks brought into the City from outside thereof

becomes apparent. Viewed from this angle, the tax partakes of the nature of

an import duty, which is beyond defendant's authority to impose by express

provision of law (Sec. 2[1], Rep. Act 2264; Panaligan v. City of Tacloban,

L-9319, Sept. 27, 1957, 102 Phil. 1162; East Asiatic Co. v. City of Davao,

L-16253, Aug. 21, 1962).

Even, however, if the burden in question were regarded as a tax on the

sale of said beverages, it would still be invalid, as discriminatory, and hence,

violative of the uniformity required by the Constitution and the law therefor,
since only sales by "agents or consignees" of outside dealers would be

subject to the tax. Sales by local dealers, not acting for or on behalf of other

merchants, regardless of the volume of their sales, and even if the same

exceeded those made by said agents or consignees of producers or

merchants established outside the City of Butuan, would be exempt from the

disputed tax.

It is true that the uniformity essential to the valid exercise of the power

of taxation does not require identity or equality under all circumstances, or

negate the authority to classify the objects of taxation. The classification

made in the exercise of this authority, to be valid, must, however, be

reasonable and this requirement is not deemed satisfied unless: (1) it is

based upon substantial distinctions which make the real differences; (2)

these are germane to the purpose of the legislation or ordinance; (3) the

classification applies, not only to present con-

791

"1.

"2.

VOL. 24, AUGUST 28, 1968 791

Pepsi-Cola Bottling Co. of the Phil., Inc. vs. City of Butuan

ditions, but, also, to future conditions substantially identical to those of the

present; and (4) the classification applies equally to all those who belong to

the same class.

These conditions are not f fully met by the ordinance in question.

Indeed, if its purpose were merely to levy a burden upon the sale of soft
drinks or carbonated beverages, there is no reason why sales thereof by

dealers other than agents or consignees of producers or merchants

established outside the City of Butuan should be exempt from the tax.

DIRECT APPEAL, from a decision of the Court of First Instance of

Agusan. Ortiz, J.

The facts are stated in the opinion of the Court.

Sabido, Sabido & Associates for plaintiff-appellant.

The City Attorney of Butuan City for defendants-appellees.

CONCEPCION, C.J.:

Direct appeal to this Court, from a decision of the Court of First

Instance of Agusan, dismissing plaintiff's complaint, with costs.

Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a

domestic corporation with offices and principal place of business in

Quezon City. The defendants are the City of Butuan, its City Mayor,

the members of its municipal board and its City Treasurer. Plaintiff

seeks to recover the sums paid by it to the City of Butuan—

hereinafter referred to as the City—and collected by the latter,

pursuant to its Municipal Ordinance No. 110, as amended by

Municipal Ordinance No. 122, both series of 1960, which plaintiff

assails as null and void, and to prevent the enforcement thereof.

Both parties submitted the case for decision in the lower court upon

a stipulation to the effect:

That plaintiff's warehouse in the City of Butuan serves as a storage

for its products the "Pepsi-Cola" soft drinks. for sale to customers

in the City of Butuan and all the municipalities in the Province of

Agusan. These "Pepsi-Cola" soft drinks are bottled in Cebu City

and shipped to the Butuan City warehouse of plaintiff for

distribution and sale in the City of Butuan and all municipalities of

Agusan.

That on August 16, 1960, the City of Butuan enacted Ordinance

No, 110 which was subsequently amended by Ordin

792

"3.

"4.

"5.

"6.

"7.

"8.

792 SUPREME COURT REPORTS ANNOTATED

Pepsi-Cola Bottling Co. of the Phil., Inc. vs. City of Butuan

ance No. 122 and effective November 28, 1960. A copy of

Ordinance No. 110, Series of 1960 and Ordinance No. 122 are

incorporated herein as Exhibits "A" and "B", respectively.

That Ordinance No. 110 as amended, imposes a tax on any person,

association, etc., of P0.10 per case of 24 bottles of Pepsi-Cola and

the plaintiff paid under protest the amount of P4,926.63 from

August 16 to December 31, 1960 and the amount of P9,250.40

from January 1 to July 30, 1961.

That the plaintiff filed the foregoing complaint for the recovery of
the total amount of P14,177.03 paid under protest and those that if

may later on pay until the termination of this case on the ground

that Ordinance No. 110 as amended of the City of Butuan is illegal,

that the tax imposed is excessive and that it is unconstitutional.

That pursuant to Ordinance No. 110 as amended, the City Treasurer

of Butuan City, has prepared a form to be accomplished by the

plaintiff for the computation of the tax. A cop(y) of the form is

enclosed herewith as Exhibit "C".

That the Profit and Loss Statement of the plaintiff for the period

from January 1, 1961 to July 30, 1961 of its warehouse in Butuan

City is incorporated herein as Exhibits "D" to "D-l" to "D-5". In

this Profit and Loss Statement, the defendants claim that the

plaintiff is not entitled to a depreciation of P3,052.63 but only

Pl,202.55 in which case the profit of plaintiff will be increased from

P1,254.44 to P3,104.52. The plaintiff differs only on the claim of

depreciation which the company claims to be F3,052.62. This is in

accordance with the findings of the representative of the

undersigned City Attorney who verified the records of the plaintiff.

That beginning November 21, 1960, the price of PepsiCola per case

of 24 bottles was increased to f 1.92 which price is uniform

throughout the Philippines. Said increa&e was made due to the

increase in the production cost of its manufacture.

That the parties reserve the right to submit arguments on the

constitutionality and illegality of Ordinance No. 110, as amended

of the City of Butuan in their respecitive memoranda.

"x x x x x."
Section 1 of said Ordinance No. 110, as amended, states what

products are "liquors", within the purview thereof. Section 2

provides for the payment by "any agent and/or consignee" of any

dealer "engaged in selling liquors, imported or local, in the City," of

taxes at specified rates. Section 3 prescribes a tax of FO.10 per case

of 24 bottles of the sof t drinks and carbonated beverages therein

named, and "all other soft drinks or carbonated drinks." Section 3-A, defines

the meaning of the term "consignee or agent" for purposes of the

ordinance. Section 4 provides that said taxes "shall be paid at the

end of every calendar month." Pursuant to Section 5, the taxes "shall

be based and computed from the cargo manifest or bill of lading or

any other record showing the number of cases of soft drinks, liquors

or all other soft drinks or carbonated drinks received within the

month." Sections 6, 7 and 8 specify the surcharge to be added for

failure to pay the taxes within the period prescribed and the penalties

imposable for "deliberate and willful refusal to pay the tax

mentioned in Sections 2 and 3" or for failure "to furnish the office of

the City Treasurer a copy of the bill of lading or cargo manifest or

record of soft drinks, liquors or carbonated drinks for sale in the

City." Section 9 makes the ordinance applicable to soft drinks,

liquors or carbonated drinks "received outside" but "sold within" the

City. Section 10 of the ordinance provides that the revenue derived

therefrom "shall be alloted as follows: 40% for Roads and Bridges

Fund; 40% for the General Fund and 20% for the School Fund."

Plaintiff maintains that the disputed ordinance is null and void

because: (1) it partakes of the nature of an import tax; (2) it amounts

to double taxation; (3) it is excessive, oppressive and confiscatory;

(4) it is highly unjust and discriminatory; and (5) section 2 of

Republic Act No. 2264, upon the authority of which it was enacted,

is an unconstitutional delegation of legislative powers.

The second and last objections are manifestly devoid of merit.

Indeed—independently of whether or not the tax in question, when

considered in relation to the sales tax prescribed by Acts of

Congress, amounts to double taxation, on which we need not and do

not express any opinion—double taxation, in general, is not

forbidden by our fundamental law. We have not adopted, as part

thereof, the injunction against double taxation found in the

Constitution of the United States and of some States of the Union.

Then, again, the general principle against

delegation of legislative powers, in consequence of the theory of

separation of powers- is subject to one wellestablished exception,

namely: legislative powers may be delegated to local governments—

to which said theory does not apply

—in respect of matters of local

concern.

The third objection is, likewise, untenable. The tax of "P0.10 per

case of 24 bottles" of soft drinks or carbonated drinks—in the

production and sale of which plaintiff is engaged—or less than

P0.0042 per bottle, is manifestly too small to be excessive,

oppressive, or confiscatory.

The first and the fourth objections merit, however, serious

consideration. In this connection, it is noteworthy that the tax

prescribed in section 3 of Ordinanoe No. 110, as originally

approved, was imposed upon dealers "engaged in selling" soft drinks

or carborated drinks. Thus, it would seem that the intent was then to

levy a tax upon the sale of said merchandise. As amended by

Ordinance No. 122, the tax is, however, imposed only upon "any

agent and/or consignee of any person, association, partnership,

company or corporation engaged in selling x x soft drinks or

carbonated drinks." And, pursuant to section 3-A, which was

inserted by said Ordinance No. 122:

"x x—Definition of the Term Consignee or Agent.—For purposes of this

Ordinance, a consignee of agent shall mean any person, association,

partnership, company or corporation who acts in the place of another by

authority from him or one entrusted with the business of another or to whom

is consigned or shipped no less than 1,000 cases of hard liquors or soft

drinks every month for resale, either retail or wholesale."

As a consequence, merchants engaged in the sale of soft drink or

carbonated drinks, are not subject to the tax, unless they are agents

and/or consignees of another dealer, who, in the very nature of

things, must be one engaged

___________

ter-Island Gas Service, 99 Phil. 847, 854; Syjuco v. Municipality of Parafiaque, L-

11265, Nov. 27, 1959; City of Bacolod v. Gruet, L-18290, Jan. 31, 1963.

2 U.S. v. Bull, 15 Phil. 7, 27; Kilbourn v. Thompson, 103 U.S. 168, 26 L. ed. 377.

3 State v. City of Mankato, 136 N.W. 264; People v. Provinees, 34 Cal. 520;

Stoutenburgh v. Hennick, 129 U.S. 141, 32 L. ed. 637.

795

VOL. 24, AUGUST 30, 1968 795

Pepsi-Cola Bottling Co. of the PhiL, Inc. vs. City of Butuan

in business outside the City. Besides, the tax would not be applicable

to such agent and/or consignee, if less than 1,000 cases of soft drinks

are consigned or shipped to him every month. When we consider,

also, that the tax "shall be based and computed from the cargo

manifest or bill of lading x x showing the number of cases"—not

sold—but "received" by the taxpayer, the intention to limit the

application of the ordinance to soft drinks and carbonated drinks

brought into the City from outside thereof becomes apparent.

Viewed from this angle, the tax partakes of the nature of an import

duty, which is beyond defendant's authority to impose by express

provision of law.

Even, however, if the burden in question were regarded as a tax

on the sale of said beverages, it would still be invalid, as

discriminatory, and hence, violative of the uniformity required by

the Constitution and the law therefor, since only sales by "agents or

consignees" of outside dealers would be subject to the tax. Sales by

local dealers, not acting for or on behalf of other merchants,

regardless of the volume of their sales, and even if the same

exceeded those made by said agents or consignees of producers or

merchants established outside the City of Butuan, would be exempt

from the disputed tax.

It is true that the uniformity essential to the valid exercise of the

power of taxation does not require identity or equality under all

circumstances, or negate the authority to classify the objects of

taxation.

The classification made in the exercise of this authority, to

be valid, must, however, be reasonable

and this requirement is not

deemed satisfied unless: (1) it is based upon substantial distinctions

which make real differences; (2) these are germane to the purpose of

the legislation or ordinance; (3) the

(4) the classification applies equally all those who belong to the

same class.

These conditions are not fully met by the ordinance in question.

Indeed, if its purpose were merely to levy a burden upon the sale of

soft drinks or carbonated beverages, there is no reason why sales

thereof by dealers other than agents or consignees of producers or

merchants established outside the City of Butuan should be exempt

from the tax.

WHEREFORE, the decision appealed from is hereby reversed,

and another one shall be entered annulling Ordinance No. 110, as

amended by Ordinance No. 122, and sentencing the City of Butuan

to refund to plaintiff herein the amounts collected from and paid

under protest by the latter, with interest thereon at the legal rate from
the date of the promulgation of this decision, in addition to the costs,

and defendants herein are, accordingly, restrained and prohibited

permanently from enforcing said Ordinance, as amended. It is so

ordered.

CONCEPCION, C.J.:

Direct appeal to this Court, from a decision of the Court of First Instance of Agusan, dismissing
plaintiff's complaint, with costs.

Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with offices and
principal place of business in Quezon City. The defendants are the City of Butuan, its City Mayor,
the members of its municipal board and its City Treasurer. Plaintiff — seeks to recover the sums
paid by it to the City of Butuan — hereinafter referred to as the City and collected by the latter,
pursuant to its Municipal Ordinance No. 110, as amended by Municipal Ordinance No. 122, both
series of 1960, which plaintiff assails as null and void, and to prevent the enforcement thereof. Both
parties submitted the case for decision in the lower court upon a stipulation to the effect:

1. That plaintiff's warehouse in the City of Butuan serves as a storage for its products the "Pepsi-
Cola" soft drinks for sale to customers in the City of Butuan and all the municipalities in the Province
of Agusan. These "Pepsi-Cola Cola" soft drinks are bottled in Cebu City and shipped to the Butuan
City warehouse of plaintiff for distribution and sale in the City of Butuan and all municipalities of
Agusan. .

2. That on August 16, 1960, the City of Butuan enacted Ordinance No. 110 which was subsequently
amended by Ordinance No. 122 and effective November 28, 1960. A copy of Ordinance No. 110,
Series of 1960 and Ordinance No. 122 are incorporated herein as Exhibits "A" and "B", respectively.

3. That Ordinance No. 110 as amended, imposes a tax on any person, association, etc., of P0.10
per case of 24 bottles of Pepsi-Cola and the plaintiff paid under protest the amount of P4,926.63
from August 16 to December 31, 1960 and the amount of P9,250.40 from January 1 to July 30,
1961.

4. That the plaintiff filed the foregoing complaint for the recovery of the total amount of P14,177.03
paid under protest and those that if may later on pay until the termination of this case on the ground
that Ordinance No. 110 as amended of the City of Butuan is illegal, that the tax imposed is excessive
and that it is unconstitutional.

5. That pursuant to Ordinance No. 110 as amended, the City Treasurer of Butuan City, has prepared
a form to be accomplished by the plaintiff for the computation of the tax. A copy of the form is
enclosed herewith as Exhibit "C".

6. That the Profit and Loss Statement of the plaintiff for the period from January 1, 1961 to July 30,
1961 of its warehouse in Butuan City is incorporated herein as Exhibits "D" to "D-1" to "D-5". In this
Profit and Loss Statement, the defendants claim that the plaintiff is not entitled to a depreciation of
P3,052.63 but only P1,202.55 in which case the profit of plaintiff will be increased from P1,254.44 to
P3,104.52. The plaintiff differs only on the claim of depreciation which the company claims to be
P3,052.62. This is in accordance with the findings of the representative of the undersigned City
Attorney who verified the records of the plaintiff.

7. That beginning November 21, 1960, the price of Pepsi-Cola per case of 24 bottles was increased
to P1.92 which price is uniform throughout the Philippines. Said increase was made due to the
increase in the production cost of its manufacture.

8. That the parties reserve the right to submit arguments on the constitutionality and illegality of
Ordinance No. 110, as amended of the City of Butuan in their respective memoranda.

xxx xxx xxx 1äwphï1.ñët

Section 1 of said Ordinance No. 110, as amended, states what products are "liquors", within the
purview thereof. Section 2 provides for the payment by "any agent and/or consignee" of any dealer
"engaged in selling liquors, imported or local, in the City," of taxes at specified rates. Section 3
prescribes a tax of P0.10 per case of 24 bottles of the soft drinks and carbonated beverages therein
named, and "all other soft drinks or carbonated drinks." Section 3-A, defines the meaning of the term
"consignee or agent" for purposes of the ordinance. Section 4 provides that said taxes "shall be paid
at the end of every calendar month." Pursuant to Section 5, the taxes "shall be based and computed
from the cargo manifest or bill of lading or any other record showing the number of cases of soft
drinks, liquors or all other soft drinks or carbonated drinks received within the month." Sections 6, 7
and 8 specify the surcharge to be added for failure to pay the taxes within the period prescribed and
the penalties imposable for "deliberate and willful refusal to pay the tax mentioned in Sections 2 and
3" or for failure "to furnish the office of the City Treasurer a copy of the bill of lading or cargo
manifest or record of soft drinks, liquors or carbonated drinks for sale in the City." Section 9 makes
the ordinance applicable to soft drinks, liquors or carbonated drinks "received outside" but "sold
within" the City. Section 10 of the ordinance provides that the revenue derived therefrom "shall be
alloted as follows: 40% for Roads and Bridges Fund; 40% for the General Fund and 20% for the
School Fund."

Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakes of the nature
of an import tax; (2) it amounts to double taxation; (3) it is excessive, oppressive and confiscatory;
(4) it is highly unjust and discriminatory; and (5) section 2 of Republic Act No. 2264, upon the
authority of which it was enacted, is an unconstitutional delegation of legislative powers.

The second and last objections are manifestly devoid of merit. Indeed — independently of whether
or not the tax in question, when considered in relation to the sales tax prescribed by Acts of
Congress, amounts to double taxation, on which we need not and do not express any opinion -
double taxation, in general, is not forbidden by our fundamental law. We have not adopted, as part
thereof, the injunction against double taxation found in the Constitution of the United States and of
1
some States of the Union. Then, again, the general principle against delegation of legislative
2
powers, in consequence of the theory of separation of powers is subject to one well-established
exception, namely: legislative powers may be delegated to local governments — to which said
3
theory does not apply — in respect of matters of local concern.

The third objection is, likewise, untenable. The tax of "P0.10 per case of 24 bottles," of soft drinks or
carbonated drinks — in the production and sale of which plaintiff is engaged — or less than P0.0042
per bottle, is manifestly too small to be excessive, oppressive, or confiscatory.

The first and the fourth objections merit, however, serious consideration. In this connection, it is
noteworthy that the tax prescribed in section 3 of Ordinance No. 110, as originally approved, was
imposed upon dealers "engaged in selling" soft drinks or carbonated drinks. Thus, it would seem that
the intent was then to levy a tax upon the sale of said merchandise. As amended by Ordinance No.
122, the tax is, however, imposed only upon "any agent and/or consignee of any person,
association, partnership, company or corporation engaged in selling ... soft drinks or carbonated
drinks." And, pursuant to section 3-A, which was inserted by said Ordinance No. 122:

... — Definition of the Term Consignee or Agent. — For purposes of this Ordinance, a consignee of
agent shall mean any person, association, partnership, company or corporation who acts in the
place of another by authority from him or one entrusted with the business of another or to whom is
consigned or shipped no less than 1,000 cases of hard liquors or soft drinks every month for resale,
either retail or wholesale.

As a consequence, merchants engaged in the sale of soft drink or carbonated drinks, are not subject
to the tax, unless they are agents and/or consignees of another dealer, who, in the very nature of
things, must be one engaged in business outside the City. Besides, the tax would not be applicable
to such agent and/or consignee, if less than 1,000 cases of soft drinks are consigned or shipped to
him every month. When we consider, also, that the tax "shall be based and computed from the
cargo manifest or bill of lading ... showing the number of cases" — not sold — but "received" by the
taxpayer, the intention to limit the application of the ordinance to soft drinks and carbonated drinks
brought into the City from outside thereof becomes apparent. Viewed from this angle, the tax
partakes of the nature of an import duty, which is beyond defendant's authority to impose by express
4
provision of law.

Even however, if the burden in question were regarded as a tax on the sale of said beverages, it
would still be invalid, as discriminatory, and hence, violative of the uniformity required by the
Constitution and the law therefor, since only sales by "agents or consignees" of outside dealers
would be subject to the tax. Sales by local dealers, not acting for or on behalf of other merchants,
regardless of the volume of their sales, and even if the same exceeded those made by said agents
or consignees of producers or merchants established outside the City of Butuan, would be exempt
from the disputed tax.

It is true that the uniformity essential to the valid exercise of the power of taxation does not require
identity or equality under all circumstances, or negate the authority to classify the objects of
5
taxation. The classification made in the exercise of this authority, to be valid, must, however, be
6
reasonable and this requirement is not deemed satisfied unless: (1) it is based upon substantial
distinctions which make real differences; (2) these are germane to the purpose of the legislation or
ordinance; (3) the classification applies, not only to present conditions, but, also, to future conditions
substantially identical to those of the present; and (4) the classification applies equally all those who
7
belong to the same class.

8
These conditions are not fully met by the ordinance in question. Indeed, if its purpose were merely
to levy a burden upon the sale of soft drinks or carbonated beverages, there is no reason why sales
thereof by sealers other than agents or consignees of producers or merchants established outside
the City of Butuan should be exempt from the tax.

WHEREFORE, the decision appealed from is hereby reversed, and another one shall be entered
annulling Ordinance No. 110, as amended by Ordinance No. 122, and sentencing the City of Butuan
to refund to plaintiff herein the amounts collected from and paid under protest by the latter, with
interest thereon at the legal rate from the date of the promulgation of this decision, in addition to the
costs, and defendants herein are, accordingly, restrained and prohibited permanently from enforcing
said Ordinance, as amended. It is so ordered.
Pepsi vs Municipality of Tanauan
GR L-31156, 27 February 1976

Double taxation; delegation of tax powers

FACTS:

In 1963 Pepsi-Cola Bottling Company of the Philippines, Inc., (herein petitioner)

commenced a complaint with preliminary injunction before the CFI Leyte to declare
Section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy Act,
unconstitutional as an undue delegation of taxing authority as well as to declare
Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null
and void. Municipal Ordinance No. 23 levies and collects “on soft drinks produced or
manufactured within the territorial jurisdiction of this municipality a tax of one centavo
P0.01) on each gallon of volume capacity” while Municipal Ordinance No. 27 levies and
collects “on soft drinks produced or manufactured within the territorial jurisdiction of
this municipality a tax of one centavo P0.01) on each gallon of volume capacity.” The
tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal
production tax.”

It was also alleged by petitioner that the aforementioned municipal ordinances

constitute double taxation in two instances: a) double taxation because Ordinance No.
27 covers the same subject matter and impose practically the same tax rate as with
Ordinance No. 23, b) double taxation because the two ordinances impose percentage or
specific taxes.

The CFI of Leyte dismissed the complaint and upheld the constitutionality of [Section 2,
Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and constitutional.
From this judgment, Pepsi-Cola Bottling Company appealed to the CA which, in turn
elevated the case to the SC.

ISSUES:

1. Whether or not there is undue delegation of taxing powers

2. Whether or not there is double taxation.

RULING:

A. No. The Constitution even allows such delegation. Legislative powers may be
delegated to local governments in respect of matters of local concern. By necessary
implication, the legislative power to create political corporations for purposes of local
self-government carries with it the power to confer on such local governmental
agencies the power to tax. Under the New Constitution, local governments are
granted the autonomous authority to create their own sources of revenue and to
levy taxes. Section 5, Article XI provides: “Each local government unit shall have
the power to create its sources of revenue and to levy taxes, subject to such
limitations as may be provided by law.” Withal, it cannot be said that Section 2 of
 Republic Act No. 2264 emanated from beyond the sphere of the legislative power to
enact and vest in local governments the power of local taxation.

B. No. The argument of the Municipality is well taken. Further, Pepsi Cola’s assertion
that the delegation of taxing power in itself constitutes double taxation cannot be
merited. It must be observed that the delegating authority specifies the limitations
and enumerates the taxes over which local taxation may not be exercised. The
reason is that the State has exclusively reserved the same for its own prerogative.
Moreover, double taxation, in general, is not forbidden by our fundamental law
unlike in other jurisdictions. Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same governmental entity or by the
same jurisdiction for the same purpose, but not in a case where one tax is imposed
by the State and the other by the city or municipality.

RATIO DECIDENDI The uniformity required under the Constitution is not absolute uniformity. It
only requires that people belonging to the same class be taxed uniformly. For classification to
be valid, the following must concur: (1) it is based upon substantial distinctions; (2) these are
germane to the purpose of the legislation or ordinance; (3) the classification applies to present
conditions and future ones substantially identical to those of the present; and (4) the
classification applies equally to those belonging to the same class.

FACTS:

Pepsi-Cola Bottling Co. of the Philippines (Pepsi-Cola) has a storage facility in the City of Butuan
for its soft drinks manufactured in Cebu. Products from this facility are sold to consumers in the
said city. The City of Butuan (Butuan) enacted Ordinance No. 110, which imposed a tax on
dealers engaged in selling soft drinks or carbonated drinks. Ordinance No. 110 was later
amended by Ordinance No. 122. Consequently, the tax was now imposed on any agent and/or
consignee of any person, association, partnership, company, or corporation engaged in selling x
x x soft drinks or carbonated drinks. According to the Court, this obviously pertains to a
situation wherein an outside dealer taps a local agent and/or consignee to sell his products in
said agent’s and/or consignee’s locality. Since Pepsi-Cola has a storage facility in the city
receiving soft drinks from Cebu, and since said facility sells the same carbonated beverages to
the people of the city, it was assessed the tax imposed by Ordinance 110, as amended by
Ordinance 122 (Ordinance 110, as amended). Pepsi-Cola paid under protest. Pepsi-Cola brought
the matter of recovering the amounts paid before the lower court. It dismissed the complaint,
hence this appeal.

ISSUE:

W/N the tax imposed by Ordinance 110, as amended, violates the uniformity requirement.
HELD:

YES, Ordinance 110, as amended, unfairly singles out agents and/or consignees of outside
dealers.

The Constitution (what is being referred to here is the 1935 Constitution) provides: “The rule of
taxation shall be uniform and equitable. x x x” (See also par. 1, Sec. 28, Art. VI, 1987
Constitution) Ordinance 110, as amended, defines what it means by “agent” or “consignee,” to
wit: “any person, association, partnership, company, or corporation who acts in the place of
another x x x or one entrusted with the business of another or to whom is consigned or shipped
x x x cases of hard liquor[s] or soft drinks every month for resale, either retail or wholesale.”

For classification to be valid, the following must concur: (1) it is based upon substantial
distinctions; (2) these are germane to the purpose of the legislation or ordinance; (3) the
classification applies to present conditions and future ones substantially identical to those of
the present; and (4) the classification applies equally to those belonging to the same class. The
ordinance exempts local dealers not acting for or in behalf of outside merchants from paying
the tax it imposes. It only applies to local dealers acting for or in behalf of outside merchants.
Butuan did not offer any explanation as to why a distinction between the two was made. If the
purpose of the tax measure was merely to create a new revenue source by levying tax upon the
sale of soft drinks, there is no reason for favoring one over the other.

WHEREFORE, the decision appealed from is hereby reversed, and another one shall be entered
annulling Ordinance No. 110, as amended by Ordinance No. 122, and sentencing the City of
Butuan to refund to plaintiff herein the amounts collected from and paid under protest by the
latter, with interest thereon at the legal rate from the date of the promulgation of this decision,
in addition to the costs, and defendants herein are, accordingly, restrained and prohibited
permanently from enforcing said Ordinance, as amended. It is so ordered.

City Assessor of Cebu City vs. Association of Benevola de Cebu

Is a medical arts center built by a hospital to house its doctors a separate

commercial establishment or an appurtenant to the hospital? This is the core
issue to be resolved in the instant petition where petitioner insists on a 35%
assessment rate on the building which he considers commercial in nature
contrary to respondent's position that it is a special real property entitled to a
10% assessment rate for purposes of realty tax.
 The Case

This Petition for Review on Certiorari 1 under Rule 45 assails the October 31,
2001 Decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 62548, which
affirmed the January 24, 2000 Decision 3 and October 25, 2000 Resolution 4 of
the Central Board of Assessment Appeals (CBAA); and the March 11, 2002
Resolution5 of the same court denying petitioner's Motion for Reconsideration. 6
The CBAA upheld the February 10, 1999 Decision of the Local Board of
Assessment Appeals (LBAA), which overturned the 35% assessment rate of
respondent Cebu City Assessor and ruled that petitioner is entitled to a 10%
assessment.

The Facts

Respondent Association of Benevola de Cebu, Inc. is a non-stock, non-profit

organization organized under the laws of the Republic of the Philippines and is
the owner of Chong Hua Hospital (CHH) in Cebu City. In the late 1990's,
respondent constructed the CHH Medical Arts Center (CHHMAC). Thereafter,
an April 17, 1998 Certificate of Occupancy 7 was issued to the center with a
classification of "Commercial [Clinic]."

Petitioner City Assessor of Cebu City assessed the CHHMAC building under Tax
Declaration (TD) No. '97 GR-04-024-02529 as "commercial" with a market
value of PhP 28,060,520 and an assessed value of PhP 9,821,180 at the
assessment level of 35% for commercial buildings, and not at the 10% special
assessment currently imposed for CHH and its other separate buildings'the
CHH's Dietary and Records Departments.

Thus, respondent filed its September 15, 1998 letter-petition with the Cebu
City LBAA for reconsideration, asserting that CHHMAC is part of CHH and ought
to be imposed the same special assessment level of 10% with that of CHH. On
September 25, 1998, respondent formally filed its appeal with the LBAA which
was docketed as Case No. 4406, TD No. '97 GR-04-024-02529 entitled
Association Benevola de Cebu, Inc. v. City Assessor.

In the September 30, 1998 Order, the LBAA directed petitioner to conduct an
ocular inspection of the subject property and to submit a report on the
scheduled date of hearing. In the October 7, 1998 hearing, the parties were
required to submit their respective position papers.

In its position paper, petitioner argued that CHHMAC is a newly constructed

five-storey building situated about 100 meters away from CHH and, based on
actual inspection, was ascertained that it is not a part of the CHH building but
a separate building which is actually used as commercial clinic/room spaces
for renting out to physicians and, thus, classified as "commercial." Petitioner
contended that in turn the medical specialists in CHHMAC charge consultation
fees for patients who consult for diagnosis and relief of bodily ailment
together with the ancillary (or support) services which include the areas of
anesthesia, radiology, pathology, and more. Petitioner concluded the
foregoing set up to be ultimately geared for commercial purposes, and thus
having the proper classification as "commercial" under Building Permit No.
B01-9750087 pursuant to Section 10 of the Local Assessment Regulations No.
1-92 issued by the Department of Finance (DOF).

On the other hand, respondent contended in its position paper that CHHMAC
building is actually, directly, and exclusively part of CHH and should
have a special assessment level of 10% as provided under City Tax Ordinance
LXX. Respondent asserted that the CHHMAC building is similarly situated as
the buildings of CHH, housing its Dietary and Records Departments, are
completely separate from the main CHH building and are imposed the 10%
special assessment level. In fine, respondent argued that the CHHMAC, though
not actually indispensable, is nonetheless incidental and reasonably necessary
to CHH's operations.

The Ruling of the Local Board of Assessment Appeals

On February 10, 1999, the LBAA rendered a Decision,8 the dispositive portion
of which reads:

WHEREFORE, premises considered, the appealed decision imposing a thirty

five (35) percent assessment level of TD No. '97 GR-04-024-02529 on the
Chong Hua Hospital Medical Arts building is reversed and set aside and other
[sic] one issued declaring that the building is entitled to a ten (10) percent
assessment level.

In reversing the ruling of petitioner City Assessor of Cebu City, the LBAA
reasoned that it is of public knowledge that hospitals have plenty of spaces
leased out to medical practitioners, which is both an accepted and desirable
fact; thus, respondent's claim is not disputed that such is a must for a tertiary
hospital like CHH. The LBAA held that it is inconsequential that a separate
building was constructed for that purpose pointing out that departments or
services of other institutions and establishments are also not always housed in
the same building.

Thus, the LBAA pointed to the fact that respondent's Dietary and Records
Departments which are housed in separate buildings were similarly imposed
with CHH the special assessment level of 10%, ratiocinating in turn that there
is no reason therefore why a higher level would be imposed for CHHMAC as it
is similarly situated with the Dietary and Records Departments of the CHH.

The Ruling of the Central Board of Assessment Appeals

Aggrieved, petitioner filed its March 15, 1999 Notice of Appeal 9 and March 16,
1999 Appeal Memorandum10 before the CBAA Visayas Field Office which
docketed the appeal as CBAA Case No. V-15, In Re: LBAA Case No. 4406, TD
No. '97 GR-04-024-02529 entitled City Assessor of Cebu City v. Local Board of
Assessment Appeals of Cebu City and Associacion Benevola de Cebu, Inc. On
June 3, 1999, respondent filed its Answer11 to petitioner's appeal.

Subsequently, on January 24, 2000, the CBAA rendered a Decision 12 affirming

in toto the LBAA Decision and resolved the issue of whether the subject
building of CHHMAC is part and parcel of CHH. It agreed with the above
disquisition of the LBAA that it is a matter of public knowledge that hospitals
lease out spaces to its accredited medical practitioners, and in particular it is
of public knowledge that before the CHHMAC was constructed, the accredited
doctors of CHH were housed in the main hospital building of CHH. Moreover,
citing Herrera v. Quezon City Board of Assessment Appeals 13 later applied in
Abra Valley College, Inc. v. Aquino,14 the CBAA held that the fact that the
subject building is detached from the main hospital building is of no
consequence as the exemption in favor of property used exclusively for
charitable or educational purposes is not only limited to property actually
indispensable to the hospital, but also extends to facilities which are incidental
and reasonably necessary for the accomplishment of such purposes.

Through its October 25, 2000 Resolution,15 the CBAA denied petitioner's
Motion for Reconsideration.16

The Ruling of the Court of Appeals

Not satisfied, petitioner brought before the CA a Petition for Review 17 under
Rule 43 of the Rules of Court, docketed as CA-G.R. SP No. 62548, ascribing
error on the CBAA in dismissing his appeal and in affirming the February 10,
1999 Decision18 of the LBAA.

On October 31, 2001, the appellate court rendered the assailed Decision 19
which affirmed the January 24, 2000 Decision of the CBAA. It agreed with the
CBAA that CHHMAC is part and parcel of CHH in line with the ruling in Herrera20
on what the term "appurtenant thereto" means. Thus, the CA held that the
facilities and utilities of CHHMAC are undoubtedly necessary and indispensable
for the CHH to achieve its ultimate purpose.

The CA likewise ruled that the fact that rentals are paid by CHH accredited
doctors and medical specialists for spaces in CHHMAC has no bearing on its
classification as a hospital since CHHMAC serves also as a place for medical
check-up, diagnosis, treatment, and care for its patients as well as a
specialized out-patient department of CHH where treatment and diagnosis are
done by accredited medical specialists in their respective fields of anesthesia,
radiology, pathology, and more.

The appellate court also applied Secs. 215 and 216 of the Local Government
Code (Republic Act No. 7160) which classify lands, buildings, and
improvements actually, directly, and exclusively used for hospitals as special
cases of real property and not as commercial. Thus, CHHMAC being an integral
part of CHH is not commercial but special and should be imposed the 10%
special assessment, the same as CHH, instead of the 35% for commercial
establishments.

Lastly, the CA pointed out that courts generally will not interfere in matters
which are addressed to the sound discretion of the government agencies
entrusted with the regulation of activities under their special technical
knowledge and training their findings and conclusions are accorded not only
respect but even finality.

Through the assailed March 11, 2002 Resolution, 21 the CA denied petitioner's
Motion for Reconsideration.

The Issues

Hence, before us is the instant petition with the solitary issue, as follows:

WHETHER OR NOT THERE IS SERIOUS ERROR BY THE COURT OF APPEALS IN

AFFIRMING THE DECISION OF THE CENTRAL BOARD OF ASSESSMENT APPEALS
THAT THE NEW BUILDING "CHONG HUA HOSPITAL AND MEDICAL ARTS
CENTER" (CHHMAC) IS AN ESSENTIAL PART OF THE OLD BUILDING KNOWN AS
"CHONG HUA HOSPITAL." IN THE NEGATIVE, WHETHER OR NOT THE NEW
BUILDING IS LIABLE TO PAY THE 35% ASSESSMENT LEVEL. AND WHETHER OR
NOT THE COURT OF APPEALS COULD INTERFERE WITH THE FINDINGS OF THE
CENTRAL BOARD OF ASSESSMENT APPEALS, A GOVERNMENT AGENCY HAVING
SPECIAL TECHNICAL KNOWLEDGE AND TRAINING ON THE MATTER SUBJECT
OF THE PRESENT CASE.22

The Court's Ruling

The petition is devoid of merit.

It is petitioner's strong belief that the subject building, CHHMAC, which is built
on a rented land and situated about 100 meters from the main building of
CHH, is not an extension nor an integral part of CHH and thus should not enjoy
the 10% special assessment. Petitioner anchors the classification of CHHMAC
as "commercial," first, on Sec. 10 of Local Assessment Regulations No. 1-92
issued by the DOF, which provides:

SEC. 10. Actual use of Real Property as basis of Assessment. Real Property
shall be classified, valued and assessed on the basis of its actual use
regardless of where located, whoever owns it, and whoever uses it. (Sec. 217,
R.A. 7160)

A. "Actual use" refers to the purpose for which the property is principally or
predominantly utilized by the person in possession of the property. (Sec. 199
(b), R.A. 7160)

Secondly, the result of the inspection on subject building by the City

Assessor's inspection team shows that CHHMAC is a commercial establishment
based on the following: (1) CHHMAC is exclusively intended for lease to
doctors; (2) there are neither operating rooms nor beds for patients; and (3)
the doctors renting the spaces earn income from the patients who avail
themselves of their services. Thus, petitioner argues that CHHMAC is
principally and actually used for lease to doctors, and respondent as owner of
CHHMAC derives rental income from it; hence, CHHMAC was built and is
intended for profit and functions commercially.

Moreover, petitioner asserts that CHHMAC is not part of the CHH main building
as it is exclusively used as private clinics of physicians who pay rental fees to
petitioner. And while the private clinics might be considered facilities, they are
not incidental to nor reasonably necessary for the accomplishment of the
hospital's purposes as CHH can still function and accomplish its purpose
without the existence of CHHMAC. In addition, petitioner contends that the
Abra Valley College, Inc.23 ruling is not applicable to the instant case for
schools, the subject matter in said case, are already entitled to special
assessment. Besides, petitioner points CHHMAC is not among the facilities
mentioned in said case. Further, petitioner argues that CHHMAC is not in the
same category as nurses' homes and housing facilities for the hospital staff as
these are clearly not for profit, that is, not commercial, and are clearly
incidental and reasonably necessary for the hospital's purposes.

We are not persuaded.

A careful review of the records compels us to affirm the assailed CA Decision

as we find no reversible error for us to reverse or alter it.

Chong Hua Hospital Medical Arts Center is an integral part of Chong Hua
Hospital

We so hold that CHHMAC is an integral part of CHH.

It is undisputed that the doctors and medical specialists holding clinics in

CHHMAC are those duly accredited by CHH, that is, they are consultants of the
hospital and the ones who can treat CHH's patients confined in it. This fact
alone takes away CHHMAC from being categorized as "commercial" since a
tertiary hospital like CHH is required by law to have a pool of physicians who
comprises the required medical departments in various medical fields. As aptly
pointed out by respondent:

Chong Hua Hospital is a duly licensed tertiary hospital and is covered by Dept.
of Health (DOH) Adm. Order No. 68-A and the "1989 Revised Rules and
Regulations" governing the registration, licensure and operation of hospitals
in the Philippines. Under Sec. 6, sub-sec. 6.3, it is mandated by law, that
respondent appellee in order to retain its classification as a "TERTIARY
HOSPITAL," must be fully departmentalized and equipped with the service
capabilities needed to support certified medical specialists and other licensed
physicians rendering services in the field of medicine, pediatrics, obstetrics
and gynecology, surgery, and their sub-specialties, ICCU and ancillary services
which is precisely the function of the Chong Hua Hospital Medical Arts
Center.24

Sec. 6.3, Administrative Order No. (AO) 68-A, Series of 1989, Revised Rules
and Regulations Governing the Registration, Licensure and Operation of
Hospitals in the Philippines pertinently provides:

Tertiary Hospital '' is fully departmentalized and equipped with the service
capabilities needed to support certified medical specialists and other licensed
physicians rendering services in the field of Medicine, Pediatrics, Obstetrics
and Gynecology, Surgery, their subspecialties and ancillary services.
(Emphasis supplied.)

Moreover, AO 68-A likewise provides what clinic service and medical ancillary
service are, thus:

11.3.2 Clinical Service The medical services to patients shall be performed by

the medical staff appointed by the governing body of the institution. x x x

11.3.3 Medical Ancillary Service These are support services which include
Anesthesia Department, Pathology Department, Radiology Department, Out-
Patient Department (OPD), Emergency Service, Dental, Pharmacy, Medical
Records and Medical Social Services.

Based on these provisions, these physicians holding offices or clinics in

CHHMAC, duly appointed or accredited by CHH, precisely fulfill and carry out
their roles in the hospital's services for its patients through the CHHMAC. The
fact that they are holding office in a separate building, like at CHHMAC, does
not take away the essence and nature of their services vis - Ã -vis the over-all
operation of the hospital and the benefits to the hospital's patients. Given
what the law requires, it is clear that CHHMAC is an integral part of CHH.

These accredited physicians normally hold offices within the premises of the
hospital; in which case there is no question as to the conduct of their business
in the ambit of diagnosis, treatment and/or confinement of patients. This was
the case before 1998 and before CHHMAC was built. Verily, their transfer to a
more spacious and, perhaps, convenient place and location for the benefit of
the hospital's patients does not remove them from being an integral part of
the overall operation of the hospital.

Conversely, it would have been different if CHHMAC was also open for non-
accredited physicians, that is, any medical practitioner, for then respondent
would be running a commercial building for lease only to doctors which would
indeed subject the CHHMAC to the commercial level of 35% assessment.

Moreover, the CHHMAC, being hundred meters away from the CHH main
building, does not denigrate from its being an integral part of the latter. As
aptly applied by the CBAA, the Herrera ruling on what constitutes property
exempt from taxation is indeed applicable in the instant case, thus:

Moreover, the exemption in favor of property used exclusively for charitable or

educational purposes is "not limited to property actually indispensable"
therefore (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which
are "incidental to and reasonably necessary for" the accomplishment of said
purposes, such as, in the case of hospitals, "a school for training nurses, a
nurses' home, property use to provide housing facilities for interns, resident
doctors, superintendents, and other members of the hospital staff, and
recreational facilities for student nurses, interns and residents" (84 C.J.S.,
621), such as "athletic fields," including "a farm used for the inmates of the
institution" (Cooley on Taxation, Vol. 2, p. 1430). 25

Verily, being an integral part of CHH, CHHMAC should be under the same
special assessment level of as that of the former.

The CHHMAC facility is definitely incidental to and reasonably necessary for

the operations of Chong Hua Hospital

Given our discussion above, the CHHMAC facility, while seemingly not
indispensable to the operations of CHH, is definitely incidental to and
reasonably necessary for the operations of the hospital. Considering the legal
requirements and the ramifications of the medical and clinical operations that
have been transferred to the CHHMAC from the CHH main building in light of
the accredited physicians' transfer of offices in 1998 after the CHHMAC
building was finished, it cannot be gainsaid that the services done in CHHMAC
are indispensable and essential to the hospital's operation.

For one, as found by the appellate court, the CHHMAC facility is primarily used
by the hospital's accredited physicians to perform medical check-up,
diagnosis, treatment, and care of patients. For another, it also serves as a
specialized outpatient department of the hospital.

Indubitably, the operation of the hospital is not only for confinement and
surgical operations where hospital beds and operating theaters are required.
Generally, confinement is required in emergency cases and where a patient
necessitates close monitoring. The usual course is that patients have to be
diagnosed, and then treatment and follow-up consultations follow or are
required. Other cases may necessitate surgical operations or other medical
intervention and confinement. Thus, the more the patients, the more
important task of diagnosis, treatment, and care that may or may not require
eventual confinement or medical operation in the CHHMAC.

Thus, the importance of CHHMAC in the operation of CHH cannot be over-

emphasized nor disputed. Clearly, it plays a key role and provides critical
support to hospital operations.
Charging rentals for the offices used by its accredited physicians cannot be
equated to a commercial venture

Finally, respondent's charge of rentals for the offices and clinics its accredited
physicians occupy cannot be equated to a commercial venture, which is mainly
for profit.

Respondent's explanation on this point is well taken. First, CHHMAC is only for
its consultants or accredited doctors and medical specialists. Second, the
charging of rentals is a practical necessity: (1) to recoup the investment cost
of the building, (2) to cover the rentals for the lot CHHMAC is built on, and (3)
to maintain the CHHMAC building and its facilities. Third, as correctly pointed
out by respondent, it pays the proper taxes for its rental income. And, fourth,
if there is indeed any net income from the lease income of CHHMAC, such does
not inure to any private or individual person as it will be used for respondent's
other charitable projects.

Given the foregoing arguments, we fail to see any reason why the CHHMAC
building should be classified as "commercial" and be imposed the commercial
level of 35% as it is not operated primarily for profit but as an integral part of
CHH. The CHHMAC, with operations being devoted for the benefit of the CHH's
patients, should be accorded the 10% special assessment.

In this regard, we point with approbation the appellate court's application of

Sec. 216 in relation with Sec. 215 of the Local Government Code on the proper
classification of the subject CHHMAC building as "special" and not
"commercial." Secs. 215 and 216 pertinently provide:

SEC. 215. Classes of Real Property for Assessment Purposes. For purposes of
assessment, real property shall be classified as residential, agricultural,
commercial, industrial, mineral, timberland or special.

xxx

SEC. 216. Special Classes of Real Property. All lands, buildings, and other
improvements thereon actually, directly and exclusively used for hospitals,
cultural or scientific purposes, and those owned and used by local water
districts, and government-owned or controlled corporations rendering
essential public services in the supply and distribution of water and/or
generation and transmission of electric power shall be classified as special.
(Emphasis supplied.)

Thus, applying the above provisos in line with City Tax Ordinance LXX of Cebu
City, the 10% special assessment should be imposed for the CHHMAC building
which should be classified as "special."

WHEREFORE, the petition is DENIED for lack of merit and the October 31, 2001
Decision and March 11, 2002 Resolution of the CA are hereby AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

Phil. Journalists, Inc. v. CIR GR 162852, Dec. 16, 2004

This is a Petition for Review filed by Philippine Journalists, Incorporated (PJI)

assailing the Decision1 of the Court of Appeals dated August 5, 2003, 2 which
ordered petitioner to pay the assessed tax liability of P111,291,214.46 and the
Resolution3 dated March 31, 2004 which denied the Motion for
Reconsideration.

The case arose from the Annual Income Tax Return filed by petitioner for the
calendar year ended December 31, 1994 which presented a net income of
P30,877,387.00 and the tax due of P10,807,086.00. After deducting tax credits
for the year, petitioner paid the amount of P10,247,384.00.

On August 10, 1995, Revenue District Office No. 33 of the Bureau of Internal
Revenue (BIR) issued Letter of Authority No. 87120 4 for Revenue Officer
Federico de Vera, Jr. and Group Supervisor Vivencio Gapasin to examine
petitioner's books of account and other accounting records for internal
revenue taxes for the period January 1, 1994 to December 31, 1994.

From the examination, the petitioner was told that there were deficiency
taxes, inclusive of surcharges, interest and compromise penalty in the
following amounts:

Value P
Added 229,52
Tax 7.90

Incom 125,00
e Tax 2,892.9
5
 Withho 2,748,0
lding 12.35
Tax

Total P
127,98
0,433.2
0

In a letter dated August 29, 1997, Revenue District Officer Jaime Concepcion
invited petitioner to send a representative to an informal conference on
September 15, 1997 for an opportunity to object and present documentary
evidence relative to the proposed assessment. On September 22, 1997,
petitioner's Comptroller, Lorenza Tolentino, executed a "Waiver of the Statute
of Limitation Under the National Internal Revenue Code (NIRC)". 5 The
document "waive[d] the running of the prescriptive period provided by
Sections 223 and 224 and other relevant provisions of the NIRC and
consent[ed] to the assessment and collection of taxes which may be found
due after the examination at any time after the lapse of the period of
limitations fixed by said Sections 223 and 224 and other relevant provisions of
the NIRC, until the completion of the investigation".6

On July 2, 1998, Revenue Officer De Vera submitted his audit report

recommending the issuance of an assessment and finding that petitioner had
deficiency taxes in the total amount of P136,952,408.97. On October 5, 1998,
the Assessment Division of the BIR issued Pre-Assessment Notices which
informed petitioner of the results of the investigation. Thus, BIR Revenue
Region No. 6, Assessment Division/Billing Section, issued
Assessment/Demand No. 33-1-000757-94 7 on December 9, 1998 stating the
following deficiency taxes, inclusive of interest and compromise penalty:

Inco P108,74
me 3,694.88
Tax
 Value 184,299.
Adde 20
d Tax

Expa 2,363,22
nded 0.38
Withh
oldin
g Tax

Total P111,29
1,214.46

On March 16, 1999, a Preliminary Collection Letter was sent by Deputy

Commissioner Romeo S. Panganiban to the petitioner to pay the assessment
within ten (10) days from receipt of the letter. On November 10, 1999, a Final
Notice Before Seizure8 was issued by the same deputy commissioner giving
the petitioner ten (10) days from receipt to pay. Petitioner received a copy of
the final notice on November 24, 1999. By letters dated November 26, 1999,
petitioner asked to be clarified how the tax liability of P111,291,214.46 was
reached and requested an extension of thirty (30) days from receipt of the
clarification within which to reply.9

The BIR received a follow-up letter from the petitioner asserting that its (PJI)
records do not show receipt of Tax Assessment/Demand No. 33-1-000757-
94.10 Petitioner also contested that the assessment had no factual and legal
basis. On March 28, 2000, a Warrant of Distraint and/or Levy No. 33-06-046 11
signed by Deputy Commissioner Romeo Panganiban for the BIR was received
by the petitioner.

Petitioner filed a Petition for Review 12 with the Court of Tax Appeals (CTA)
which was amended on May 12, 2000. Petitioner complains: (a) that no
assessment or demand was received from the BIR; (b) that the warrant of
distraint and/or levy was without factual and legal bases as its issuance was
premature; (c) that the assessment, having been made beyond the 3-year
prescriptive period, is null and void; (d) that the issuance of the warrant
without being given the opportunity to dispute the same violates its right to
due process; and (e) that the grave prejudice that will be sustained if the
warrant is enforced is enough basis for the issuance of the writ of preliminary
injunction.
On May 14, 2002, the CTA rendered its decision,13 to wit:

As to whether or not the assessment notices were received by the

petitioner, this Court rules in the affirmative.

To disprove petitioner's allegation of non-receipt of the aforesaid

assessment notices, respondent presented a certification issued by
the Post Master of the Central Post Office, Manila to the effect that
Registered Letter No. 76134 sent by the BIR, Region No. 6, Manila
on December 15, 1998 addressed to Phil. Journalists, Inc. at Journal
Bldg., Railroad St., Manila was duly delivered to and received by a
certain Alfonso Sanchez, Jr. (Authorized Representative) on January
8, 1999. Respondent also showed proof that in claiming Registered
Letter No. 76134, Mr. Sanchez presented three identification cards,
one of which is his company ID with herein petitioner.

However, as to whether or not the Waiver of the Statute of

Limitations is valid and binding on the petitioner is another
question. Since the subject assessments were issued beyond the
three-year prescriptive period, it becomes imperative on our part to
rule first on the validity of the waiver allegedly executed on
September 22, 1997, for if this court finds the same to be
ineffective, then the assessments must necessarily fail.

After carefully examining the questioned Waiver of the Statute of

Limitations, this Court considers the same to be without any binding
effect on the petitioner for the following reasons:

The waiver is an unlimited waiver. It does not contain a definite

expiration date. Under RMO No. 20-90, the phrase indicating the
expiry date of the period agreed upon to assess/collect the tax after
the regular three-year period of prescription should be filled up'

Secondly, the waiver failed to state the date of acceptance by the

Bureau which under the aforequoted RMO should likewise be
indicated'

Finally, petitioner was not furnished a copy of the waiver. It is to be

noted that under RMO No. 20-90, the waiver must be executed in
three (3) copies, the second copy of which is for the taxpayer. It is
likewise required that the fact of receipt by the taxpayer of his/her
file copy be indicated in the original copy. Again, respondent failed
to comply.

It bears stressing that RMO No. 20-90 is directed to all concerned

internal revenue officers. The said RMO even provides that the
 procedures found therein should be strictly followed, under pain of
being administratively dealt with should non-compliance result to
prescription of the right to assess/collect'

Thus, finding the waiver executed by the petitioner on September

22, 1997 to be suffering from legal infirmities, rendering the same
invalid and ineffective, the Court finds Assessment/Demand No. 33-
1-000757-94 issued on December 5, 1998 to be time-barred.
Consequently, the Warrant of Distraint and/or Levy issued pursuant
thereto is considered null and void.

WHEREFORE , in view of all the foregoing, the instant Petition for

Review is hereby GRANTED. Accordingly, the deficiency income,
value-added and expanded withholding tax assessments issued by
the respondent against the petitioner on December 9, 1998, in the
total amount of P111,291,214.46 for the year 1994 are hereby
declared CANCELLED, WITHDRAWN and WITH NO FORCE AND
EFFECT. Likewise, Warrant of Distraint and/or Levy No. 33-06-046 is
hereby declared NULL and VOID.

SO ORDERED.14

After the motion for reconsideration of the Commissioner of Internal Revenue

was denied by the CTA in a Resolution dated August 2, 2002, an appeal was
filed with the Court of Appeals on August 12, 2002.

In its decision dated August 5, 2003, the Court of Appeals disagreed with the
ruling of the CTA, to wit:

'The Petition for Review filed on 26 April 2000 with CTA was neither
timely filed nor the proper remedy. Only decisions of the BIR,
denying the request for reconsideration or reinvestigation may be
appealed to the CTA. Mere assessment notices which have become
final after the lapse of the thirty (30)-day reglementary period are
not appealable. Thus, the CTA should not have entertained the
petition at all.

'[T]he CTA found the waiver executed by Phil. Journalists to be

invalid for the following reasons: (1) it does not indicate a definite
expiration date; (2) it does not state the date of acceptance by the
BIR; and (3) Phil. Journalist, the taxpayer, was not furnished a copy
of the waiver. These grounds are merely formal in nature. The date
of acceptance by the BIR does not categorically appear in the
document but it states at the bottom page that the BIR "accepted
and agreed to:"', followed by the signature of the BIR's authorized
representative. Although the date of acceptance was not stated, the
 document was dated 22 September 1997. This date could reasonably
be understood as the same date of acceptance by the BIR since a
different date was not otherwise indicated. As to the allegation that
Phil. Journalists was not furnished a copy of the waiver, this
requirement appears ridiculous. Phil. Journalists, through its
comptroller, Lorenza Tolentino, signed the waiver. Why would it
need a copy of the document it knowingly executed when the reason
why copies are furnished to a party is to notify it of the existence of
a document, event or proceeding?'

As regards the need for a definite expiration date, this is the biggest
flaw of the decision. The period of prescription for the assessment of
taxes may be extended provided that the extension be made in
writing and that it be made prior to the expiration of the period of
prescription. These are the requirements for a valid extension of the
prescriptive period. To these requirements provided by law, the
memorandum order adds that the length of the extension be
specified by indicating its expiration date. This requirement could be
reasonably construed from the rule on extension of the prescriptive
period. But this requirement does not apply in the instant case
because what we have here is not an extension of the prescriptive
period but a waiver thereof. These are two (2) very different things.
What Phil. Journalists executed was a renunciation of its right to
invoke the defense of prescription. This is a valid waiver. When one
waives the prescriptive period, it is no longer necessary to indicate
the length of the extension of the prescriptive period since the
person waiving may no longer use this defense.

WHEREFORE, the 02 August 2002 resolution and 14 May 2002

decision of the CTA are hereby SET ASIDE. Respondent Phil.
Journalists is ordered [to] pay its assessed tax liability of
P111,291,214.46.

SO ORDERED.15

Petitioner's Motion for Reconsideration was denied in a Resolution dated

March 31, 2004. Hence, this appeal on the following assignment of errors:

I.

The Honorable Court of Appeals committed grave error in ruling that

it is outside the jurisdiction of the Court of Tax Appeals to entertain
the Petition for Review filed by the herein Petitioner at the CTA
despite the fact that such case inevitably rests upon the validity of
the issuance by the BIR of warrants of distraint and levy contrary to
the provisions of Section 7(1) of Republic Act No. 1125.

II.

The Honorable Court of Appeals gravely erred when it ruled that

failure to comply with the provisions of Revenue Memorandum
Order (RMO) No. 20-90 is merely a formal defect that does not
invalidate the waiver of the statute of limitations without stating the
legal justification for such conclusion. Such ruling totally
disregarded the mandatory requirements of Section 222(b) of the
Tax Code and its implementing regulation, RMO No. 20-90 which are
substantive in nature. The RMO provides that violation thereof
subjects the erring officer to administrative sanction. This directive
shows that the RMO is not merely cover forms.

III.

The Honorable Court of Appeals gravely erred when it ruled that the
assessment notices became final and unappealable. The assessment
issued is void and legally non-existent because the BIR has no
power to issue an assessment beyond the three-year prescriptive
period where there is no valid and binding waiver of the statute of
limitation.

IV.

The Honorable Court of Appeals gravely erred when it held that the
assessment in question has became final and executory due to the
failure of the Petitioner to protest the same. Respondent had no
power to issue an assessment beyond the three year period under
the mandatory provisions of Section 203 of the NIRC. Such
assessment should be held void and non-existent, otherwise,
Section 203, an expression of a public policy, would be rendered
useless and nugatory. Besides, such right to assess cannot be validly
granted after three years since it would arise from a violation of the
mandatory provisions of Section 203 and would go against the
vested right of the Petitioner to claim prescription of assessment.

V.

The Honorable Court of Appeals committed grave error when it HELD

valid a defective waiver by considering the latter a waiver of the
right to invoke the defense of prescription rather than an extension
of the three year period of prescription (to make an assessment) as
provided under Section 222 in relation to Section 203 of the Tax
Code, an interpretation that is contrary to law, existing
 jurisprudence and outside of the purpose and intent for which they
were enacted.16

We find merit in the appeal.

The first assigned error relates to the jurisdiction of the CTA over the issues in
this case. The Court of Appeals ruled that only decisions of the BIR denying a
request for reconsideration or reinvestigation may be appealed to the CTA.
Since the petitioner did not file a request for reinvestigation or reconsideration
within thirty (30) days, the assessment notices became final and
unappealable. The petitioner now argue that the case was brought to the CTA
because the warrant of distraint or levy was illegally issued and that no
assessment was issued because it was based on an invalid waiver of the
statutes of limitations.

We agree with petitioner. Section 7(1) of Republic Act No. 1125, the Act
Creating the Court of Tax Appeals, provides for the jurisdiction of that special
court:

SEC. 7. Jurisdiction. - The Court of Tax Appeals shall exercise

exclusive appellate jurisdiction to review by appeal, as herein
provided'

(1) Decisions of the Commissioner of Internal Revenue in cases

involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties imposed in relation thereto, or other
matters arising under the National Internal Revenue Code or other
laws or part of law administered by the Bureau of Internal Revenue;
(Emphasis supplied).

The appellate jurisdiction of the CTA is not limited to cases which involve
decisions of the Commissioner of Internal Revenue on matters relating to
assessments or refunds. The second part of the provision covers other cases
that arise out of the NIRC or related laws administered by the Bureau of
Internal Revenue. The wording of the provision is clear and simple. It gives
the CTA the jurisdiction to determine if the warrant of distraint and levy issued
by the BIR is valid and to rule if the Waiver of Statute of Limitations was
validly effected.

This is not the first case where the CTA validly ruled on issues that did not
relate directly to a disputed assessment or a claim for refund. In Pantoja v.
David,17 we upheld the jurisdiction of the CTA to act on a petition to invalidate
and annul the distraint orders of the Commissioner of Internal Revenue. Also,
in Commissioner of Internal Revenue v. Court of Appeals,18 the decision of the
CTA declaring several waivers executed by the taxpayer as null and void, thus
invalidating the assessments issued by the BIR, was upheld by this Court.
The second and fifth assigned errors both focus on Revenue Memorandum
Circular No. 20-90 (RMO No. 20-90) on the requisites of a valid waiver of the
statute of limitations. The Court of Appeals held that the requirements and
procedures laid down in the RMO are only formal in nature and did not
invalidate the waiver that was signed even if the requirements were not
strictly observed.

The NIRC, under Sections 203 and 222, 19 provides for a statute of limitations
on the assessment and collection of internal revenue taxes in order to
safeguard the interest of the taxpayer against unreasonable investigation. 20
Unreasonable investigation contemplates cases where the period for
assessment extends indefinitely because this deprives the taxpayer of the
assurance that it will no longer be subjected to further investigation for taxes
after the expiration of a reasonable period of time. As was held in Republic of
the Phils. v. Ablaza:21

The law prescribing a limitation of actions for the collection of the

income tax is beneficial both to the Government and to its citizens;
to the Government because tax officers would be obliged to act
promptly in the making of assessment, and to citizens because after
the lapse of the period of prescription citizens would have a feeling
of security against unscrupulous tax agents who will always find an
excuse to inspect the books of taxpayers, not to determine the
latter's real liability, but to take advantage of every opportunity to
molest peaceful, law-abiding citizens. Without such a legal defense
taxpayers would furthermore be under obligation to always keep
their books and keep them open for inspection subject to
harassment by unscrupulous tax agents. The law on prescription
being a remedial measure should be interpreted in a way conducive
to bringing about the beneficent purpose of affording protection to
the taxpayer within the contemplation of the Commission which
recommend the approval of the law. (Emphasis supplied) cralawlibrary

RMO No. 20-90 implements these provisions of the NIRC relating to the period
of prescription for the assessment and collection of taxes. A cursory reading of
the Order supports petitioner's argument that the RMO must be strictly
followed, thus:

In the execution of said waiver, the following procedures should be followed:

1. The waiver must be in the form identified hereof. This form may
be reproduced by the Office concerned but there should be no
deviation from such form. The phrase "but not after __________
19___" should be filled up'
2.'

Soon after the waiver is signed by the taxpayer, the Commissioner

of Internal Revenue or the revenue official authorized by him, as
hereinafter provided, shall sign the waiver indicating that the
Bureau has accepted and agreed to the waiver. The date of such
acceptance by the Bureau should be indicated'

3. The following revenue officials are authorized to sign the waiver.

A. In the National Office

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B. In the Regional Offices

1. The Revenue District Officer with respect to

tax cases still pending investigation and the
period to assess is about to prescribe regardless
of amount.

5. The foregoing procedures shall be strictly

followed. Any revenue official found not to have
complied with this Order resulting in
prescription of the right to assess/collect shall
be administratively dealt with. (Emphasis
supplied)22

A waiver of the statute of limitations under the NIRC, to a certain extent, is a

derogation of the taxpayers' right to security against prolonged and
unscrupulous investigations and must therefore be carefully and strictly
construed.23 The waiver of the statute of limitations is not a waiver of the right
to invoke the defense of prescription as erroneously held by the Court of
Appeals. It is an agreement between the taxpayer and the BIR that the period
to issue an assessment and collect the taxes due is extended to a date certain.
The waiver does not mean that the taxpayer relinquishes the right to invoke
prescription unequivocally particularly where the language of the document is
equivocal. For the purpose of safeguarding taxpayers from any unreasonable
examination, investigation or assessment, our tax law provides a statute of
limitations in the collection of taxes. Thus, the law on prescription, being a
remedial measure, should be liberally construed in order to afford such
protection. As a corollary, the exceptions to the law on prescription should
perforce be strictly construed.24 RMO No. 20-90 explains the rationale of a
waiver:

... The phrase "but not after _________ 19___" should be filled up.
This indicates the expiry date of the period agreed upon to
assess/collect the tax after the regular three-year period of
prescription. The period agreed upon shall constitute the time within
which to effect the assessment/collection of the tax in addition to
 the ordinary prescriptive period. (Emphasis supplied)cralawlibrary

As found by the CTA, the Waiver of Statute of Limitations, signed by

petitioner's comptroller on September 22, 1997 is not valid and binding
because it does not conform with the provisions of RMO No. 20-90. It did not
specify a definite agreed date between the BIR and petitioner, within which
the former may assess and collect revenue taxes. Thus, petitioner's waiver
became unlimited in time, violating Section 222(b) of the NIRC.

The waiver is also defective from the government side because it was signed
only by a revenue district officer, not the Commissioner, as mandated by the
NIRC and RMO No. 20-90. The waiver is not a unilateral act by the taxpayer or
the BIR, but is a bilateral agreement between two parties to extend the period
to a date certain. The conformity of the BIR must be made by either the
Commissioner or the Revenue District Officer. This case involves taxes
amounting to more than One Million Pesos (P1,000,000.00) and executed
almost seven months before the expiration of the three-year prescription
period. For this, RMO No. 20-90 requires the Commissioner of Internal
Revenue to sign for the BIR.

The case of Commissioner of Internal Revenue v. Court of Appeals,25 dealt with

waivers that were not signed by the Commissioner but were argued to have
been given implied consent by the BIR. We invalidated the subject waivers and
ruled:

Petitioner's submission is inaccurate'

The Court of Appeals itself also passed upon the validity of the
waivers executed by Carnation, observing thus:

We cannot go along with the petitioner's theory. Section

319 of the Tax Code earlier quoted is clear and explicit
that the waiver of the five-year26 prescriptive period must
be in writing and signed by both the BIR Commissioner
and the taxpayer.

Here, the three waivers signed by Carnation do not bear

the written consent of the BIR Commissioner as required
by law.

We agree with the CTA in holding "these 'waivers' to be

invalid and without any binding effect on petitioner
(Carnation) for the reason that there was no consent by
the respondent (Commissioner of Internal Revenue)."

For sure, no such written agreement concerning the said

 three waivers exists between the petitioner and private
respondent Carnation.

What is more, the waivers in question reveal that they are in no

wise unequivocal, and therefore necessitates for its binding effect
the concurrence of the Commissioner of Internal Revenue'. On this
basis neither implied consent can be presumed nor can it be
contended that the waiver required under Sec. 319 of the Tax Code
is one which is unilateral nor can it be said that concurrence to such
an agreement is a mere formality because it is the very signatures of
both the Commissioner of Internal Revenue and the taxpayer which
give birth to such a valid agreement. 27 (Emphasis supplied)cralawlibrary

The other defect noted in this case is the date of acceptance which makes it
difficult to fix with certainty if the waiver was actually agreed before the
expiration of the three-year prescriptive period. The Court of Appeals held that
the date of the execution of the waiver on September 22, 1997 could
reasonably be understood as the same date of acceptance by the BIR.
Petitioner points out however that Revenue District Officer Sarmiento could
not have accepted the waiver yet because she was not the Revenue District
Officer of RDO No. 33 on such date. Ms. Sarmiento's transfer and assignment
to RDO No. 33 was only signed by the BIR Commissioner on January 16, 1998
as shown by the Revenue Travel Assignment Order No. 14-98. 28 The Court of
Tax Appeals noted in its decision that it is unlikely as well that Ms. Sarmiento
made the acceptance on January 16, 1998 because "Revenue Officials
normally have to conduct first an inventory of their pending papers and
property responsibilities."29

Finally, the records show that petitioner was not furnished a copy of the
waiver. Under RMO No. 20-90, the waiver must be executed in three copies
with the second copy for the taxpayer. The Court of Appeals did not think this
was important because the petitioner need not have a copy of the document it
knowingly executed. It stated that the reason copies are furnished is for a
party to be notified of the existence of a document, event or proceeding.

The flaw in the appellate court's reasoning stems from its assumption that the
waiver is a unilateral act of the taxpayer when it is in fact and in law an
agreement between the taxpayer and the BIR. When the petitioner's
comptroller signed the waiver on September 22, 1997, it was not yet complete
and final because the BIR had not assented. There is compliance with the
provision of RMO No. 20-90 only after the taxpayer received a copy of the
waiver accepted by the BIR. The requirement to furnish the taxpayer with a
copy of the waiver is not only to give notice of the existence of the document
but of the acceptance by the BIR and the perfection of the agreement.
The waiver document is incomplete and defective and thus the three-year
prescriptive period was not tolled or extended and continued to run until April
17, 1998. Consequently, the Assessment/Demand No. 33-1-000757-94 issued
on December 9, 1998 was invalid because it was issued beyond the three (3)
year period. In the same manner, Warrant of Distraint and/or Levy No. 33-06-
046 which petitioner received on March 28, 2000 is also null and void for
having been issued pursuant to an invalid assessment.

WHEREFORE, premises considered, the instant Petition for Review is

GRANTED. The Decision of the Court of Appeals dated August 5, 2003 and its
Resolution dated March 31, 2004 are REVERSED and SET ASIDE. The Decision
of the Court of Tax Appeals in CTA Case No. 6108 dated May 14, 2002,
declaring Warrant of Distraint and/or Levy No. 33-06-046 null and void, is
REINSTATED.

SO ORDERED

TRIDHARMA MARKETING CORPORATION, Petitioner, v. COURT OF TAX

APPEALS, SECOND DIVISION, AND THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.

DECISION

BERSAMIN, J.:

In this special civil action for certiorari,1 the taxpayer assails t he resolutions issued on
July 8, 20142 and December 22, 20143 in CTA Case No. 8833 whereby the Court of Tax
Appeals (CTA), Second Division, granted its motion for suspension of the collection of
tax but required it to post a surety bond amounting to P4,467,391,881.76.

The relevant facts follow.

On August 16, 2013, the petitioner received a Preliminary Assessment Notice (PAN)
from the Bureau of Internal Revenue (BIR) assessing it with various deficiency taxes -
income tax (IT), value-added tax (VAT), withholding tax on compensation (WTC),
expanded withholding tax (EWT) and documentary stamp tax (DST) - totalling
P4,640,394,039.97, inclusive of surcharge and interest. A substantial portion of the
deficiency income tax and VAT arose from the complete disallowance 4 by the BIR of the
petitioner's purchases from Etheria Trading in 2010 amounting to P4,942,937,053.82.
The petitioner replied to the PAN through its letter dated August 30, 2013. 5 chanrobleslaw

On September 23, 2013, the petitioner received from the BIR a Formal Letter of
Demand assessing it with deficiency taxes for the taxable year ending December 31,
2010 amounting to P4,697,696,275.25, inclusive of surcharge and interest. It filed a
protest against the formal letter of demand. Respondent Commissioner of Internal
Revenue (CIR) required the petitioner to submit additional documents in support of its
protest, and the petitioner complied. 6 chanrobleslaw

On February 28, 2014, the petitioner received a Final Decision on Disputed Assessment
worth P4,473,228,667.87, computed as follows:7

Tax Basic Tax Surcharge Interest Total

Type

1. IT 1,527,100,903.9 763,550,451.99 878,605,999.55 P3,169,257,355.5

8 2

2. VAT 612,723,525.25 306,361,762.63 379,049,238.36 1,298,134,526.24

3. 1,679,413.14 1,048,137.84 2,727,550.98

WHT

4. 534,493.40 336,511.18 871,004.58

DST

5. 1,378,127.78 860,102.76 2,238,230.54

EWT

TOTAL 2,143,416,463.5 1,069,912,214.6 1,259,899,989.6 4,473,228,667.87

5 2 9

The petitioner filed with the CIR a protest through a Request for Reconsideration.
However, the CIR rendered a decision dated May 26, 2014 denying the request for
reconsideration.8
chanrobleslaw

Prior to the CIR's decision, the petitioner paid the assessments corresponding to the
WTC, DST and EWT deficiency assessments, inclusive of interest, amounting to
P5,836,786.10. It likewise reiterated its offer to compromise the alleged deficiency
assessments on IT and VAT.9 chanrobleslaw
On June 13, 2014, the petitioner appealed the CIR's decision to the CTA via its so-called
Petition for Review with Motion to Suspend Collection of Tax, which was docketed as
CTA Case No. 8833 and raffled to the CTA Second Division. 10 chanrobleslaw

The CTA in Division issued the first assailed resolution on July 8, 2014, stating
thusly:
ChanRoblesVirtualawlibrary

In the instant case, petitioner's Financial Statements and Independent

Auditor's Report for December 31, 2013 and 2012, as identified by its
witness, indicate that the company's total equity for the year 2012 and 2013
was P955,095,301 and P916,768,767, respectively. To yield to respondent's
alleged assessment and collection in the amount of P4,467,391,881.76
would definitely jeopardize the normal business operations of petitioner
thereby causing irreparable injury to its ability to continue.

Moreover, considering petitioner's willingness to post bond, as manifested

during the June 19, 2014 hearing, in such reasonable amount as may be
fixed by this Court, pursuant to Section 11 of R.A. No. 1125, as amended,
this Court in the interest of substantial justice, resolves to grant petitioner's
Motion.

xxxx

WHEREFORE, considering the urgency of the action to be enjoined,

petitioner's Motion for Suspension of Collection of Tax in the amount of
P4,467,391,881.76 allegedly representing its deficiency Income Tax and
Value Added Tax for taxable year 2010 is GRANTED. Provided, however,
that petitioner deposits with this Court an acceptable surety bond equivalent
to 150% of the assessment or in the amount of SIX BILLION SEVEN
HUNDRED ONE MILLION EIGHTY SEVEN THOUSAND EIGHT HUNDRED
TWENTY TWO and 64/100 PESOS (P6,701,087,822.64) within fifteen (15)
days from notice hereof.

Moreover, pursuant to Supreme Court Circular A.M. No. 04-7-02-SC,

otherwise known as the "Proposed Guidelines on Corporate Surety Bonds",
petitioner is hereby ORDERED to submit the following documents with the
surety bond stated above: ChanRoblesVirtualawlibrary

1. Certified copy of a valid Certificate of Accreditation and

Authority issued by the Office of the Court Administrator;

2. Copy of the Certificate of Compliance with Circular No. 66 of

the Insurance Commission duly certified by the Insurance
Commission;

3. Proof of payment of legal fees under the Rules of Court and

the documentary stamp tax (thirty centavos [P0.30J on each four
pesos [P4.00] or fractional part thereof, of the premium charged,
pursuant to Section 187 Title VII of Rep. Act No. 8424) and
Value Added Tax (VAT) under the National Internal Revenue
Code;

4. Photocopy of the Certificate of Accreditation and Authority

issued by the Court Administrator containing the photograph of
the authorized agent (after presentation to the Clerk of Court of
the original copy thereof as Copy of the Certificate of
Accreditation and Authority containing the photograph of the
agent); and cralawlawlibrary

5. Secretary Certificate containing the specimen signatures of the

agents authorized to transact business with the courts.

In addition, the said bond must be a continuing bond which shall remain
effective until the above-captioned case is finally decided, resolved or
terminated by this Court without necessity of renewal on a yearly basis, or
its validity being dependent on the payment of a renewal premium pursuant
to Section 177 of the Insurance Code.

Failure to comply with the above requirements will cause the setting aside of
this Resolution granting petitioner's motion for the suspension of the
collection of the tax liability.
 xxxx

SO ORDERED.11 chanroblesvirtuallawlibrary

The petitioner filed its Motion for Partial Reconsideration praying, among others, for the
reduction of the bond to an amount it could obtain.

On December 22, 2014, the CTA in Division issued its second assailed resolution
reducing the amount of the petitioner's surety bond to P4,467,391,881.76, which was
the equivalent of the BIR's deficiency assessment for IT and VAT. 12chanrobleslaw

Hence, the petitioner has commenced this special civil action for certiorari, asserting: ChanRoblesVirtualawlibrary

I.

WITH ALL DUE RESPECT, THE CTA SECOND DIVISION COMMITTED GRAVE
ABUSE OF DISCRETION IN REFUSING TO CONSIDER, AND IN COMPLETELY
IGNORING, THE PATENT ILLEGALITY OF THE ASSESSMENT THAT, UNDER
LAW AND JURISPRUDENCE, FULLY JUSTIFIED DISPENSING WITH THE
REQUIREMENT OF POSTING A BOND.

II.

WITH ALL DUE RESPECT, THE CTA SECOND DIVISION COMMITTED GRAVE
ABUSE OF DISCRETION IN IMPOSING A GARGANTUAN BOND IN THE
AMOUNT OF P4,467,391,881.76 THAT PETITIONER HAS DEMONSTRATED BY
UNREFUTED EVIDENCE TO BE FACTUALLY AND LEGALLY IMPOSSIBLE TO
PROCURE.

III.
 WITH ALL DUE RESPECT, THE CTA SECOND DIVISION COMMITTEED GRAVE
ABUSE OF DISCRETION IN GRANTING AN ILLUSORY RELIEF, AND IN
EFFECTIVELY DENYING PETITIONER ACCESS TO THE REMEDY PROVIDED BY
LAW. UPON UNCONTRADICTED EVIDENCE, THE IMPOSITION OF A BOND IS
NOT ONLY UNJUST, BUT WILL CAUSE IRREPARABLE INJURY UPON
PETITIONER EVEN BEFORE IT IS HEARD.13

On February 9, 2015, the Court issued a temporary restraining order 14 enjoining the
implementation of July 8, 2014 and December 22, 2014 resolutions of the CTA in
Division, and the collection of the deficiency assessments.

Issue

Did the CTA in Division commit grave abuse of discretion in requiring the petitioner to
file a surety bond despite the supposedly patent illegality of the assessment that was
beyond the petitioner's net worth but equivalent to the deficiency assessment for IT
and VAT?

Ruling of the Court

The petition for certiorari is meritorious.

Section 11 of Republic Act No. 1125 (R.A. No. 1125), 15 as amended by Republic Act No.
9282 (RA 9282)16 it is stated that: ChanRoblesVirtualawlibrary

Sec. 11. Who may appeal; effect of appeal. � x x x

xxxx

No appeal taken to the Court of Tax Appeals from the decision of the
Collector of Internal Revenue or the Collector of Customs shall suspend the
payment, levy, distraint, and/or sale of any property of the taxpayer for the
satisfaction of his tax liability as provided by existing law: Provided,
however, That when in the opinion of the Court the collection by the Bureau
 of Internal Revenue or the Commissioner of Customs may jeopardize the
interest of the Government and/or the taxpayer the Court at any stage of
the proceeding may suspend the said collection and require the taxpayer
either to deposit the amount claimed or to file a surety bond for not more
than double the amount with the Court. (bold Emphasis supplied.)

Clearly, the CTA may order the suspension of the collection of taxes provided that the
taxpayer either: (1) deposits the amount claimed; or (2) files a surety bond for not
more than double the amount.

The petitioner argues that the surety bond amounting to P4,467,391,881.76 greatly
exceeds its net worth and makes it legally impossible to procure the bond from bonding
companies that are limited in their risk assumptions. 17 As shown in its audited financial
statements for the year ending December 31, 2013, its net worth only amounted to
P916,768,767.00,18 making the amount of P4,467,391,881.76 fixed for the bond nearly
five times greater than such net worth.

The surety bond amounting to P4,467,391,881.76 imposed by the CTA was within the
parameters delineated in Section 11 of R.A. 1125, as amended. The Court holds,
however, that the CTA in Division gravely abused its discretion under Section 11
because it fixed the amount of the bond at nearly five times the net worth of the
petitioner without conducting a preliminary hearing to ascertain whether there were
grounds to suspend the collection of the deficiency assessment on the ground that such
collection would jeopardize the interests of the taxpayer. Although the amount of
P4,467,391,881.76 was itself the amount of the assessment, it behoved the CTA in
Division to consider other factors recognized by the law itself towards suspending the
collection of the assessment, like whether or not the assessment would jeopardize the
interest of the taxpayer, or whether the means adopted by the CIR in determining the
liability of the taxpayer was legal and valid. Simply prescribing such high amount of the
bond like the initial 150% of the deficiency assessment of P4,467,391,881.76 (or
P6,701,087,822.64), or later on even reducing the amount of the bond to equal the
deficiency assessment would practically deny to the petitioner the meaningful
opportunity to contest the validity of the assessments, and would likely even
impoverish it as to force it out of business.

At this juncture, it becomes imperative to reiterate the principle that the power to tax is
not the power to destroy. In Philippine Health Care Providers, Inc. v. Commissioner of
Internal Revenue,19 the Court has stressed that: ChanRoblesVirtualawlibrary

As a general rule, the power to tax is an incident of sovereignty and is

 unlimited in its range, acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who is to pay it. So
potent indeed is the power that it was once opined that the power to tax
involves the power to destroy.

Petitioner claims that the assessed DST to date which amounts to P376
million is way beyond its net worth of P259 million. Respondent never
disputed these assertions. Given the realities on the ground, imposing the
DST on petitioner would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the government
ought to encourage private enterprise. Petitioner, just like any concern
organized for a lawful economic activity, has a right to maintain a legitimate
business. As aptly held in Roxas, et al. v. CTA, et al.:ChanRoblesVirtualawlibrary

The power of taxation is sometimes called also the power to

destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must
be exercised fairly, equally and uniformly, lest the tax collector
"kill the hen that lays the golden egg."

Legitimate enterprises enjoy the constitutional protection not to be taxed

out of existence. Incurring losses because of a tax imposition may be an
acceptable consequence but killing the business of an entity is another
matter and should not be allowed. It is counter-productive and ultimately
subversive of the nation's thrust towards a better economy which will
ultimately benefit the majority of our people.

Moreover, Section 11 of R.A. 1125, as amended, indicates that the requirement of the
bond as a condition precedent to suspension of the collection applies only in cases
where the processes by which the collection sought to be made by means thereof are
carried out in consonance with the law, not when the processes are in plain violation of
the law that they have to be suspended for jeopardizing the interests of the
taxpayer.20chanrobleslaw

The petitioner submits that the patent illegality of the assessment was sufficient ground
to dispense with the bond requirement because the CIR was essentially taxing its sales
revenues without allowing the deduction of the cost of goods sold by virtue of the CIR
refusing to consider evidence showing that it had really incurred costs. 21 However, the
Court is not in the position to rule on the correctness of the deficiency assessment,
which is a matter still pending in the CTA. Conformably with the pronouncement in
Pacquiao v. Court of Tax Appeals, First Division, and the Commissioner of Internal
Revenue,22 a ruling that has precedential value herein, the Court deems it best to
remand the matter involving the petitioner's plea against the correctness of the
deficiency assessment to the CTA for the conduct of a preliminary hearing in order to
determine whether the required surety bond should be dispensed with or reduced.

In Pacquiao, the petitioners were issued deficiency IT and VAT assessments for 2008
and 2009 in the aggregate amount of P2,261,217,439.92, which amount was above
their net worth of P1,185,984,697.00 as reported in their joint Statement of Assets,
Liabilities and Net Worth (SALN). They had paid the VAT assessments but appealed to
the CTA the IT assessments. Notwithstanding their appeal, the CIR still initiated
collection proceedings against them by issuing warrants of distraint or levy against their
properties, and warrants of garnishment against their bank accounts. As a
consequence, they went to the CTA through an urgent motion to lift the warrants and to
suspend the collection of taxes. The CTA in Division found the motion to suspend tax
collection meritorious, and lifted the warrant of distraint or levy and garnishment on the
condition that they post a cash bond of P3,298,514,894.35, or surety bond of
P4,947,772,341.53. They thus came to the Court to challenge the order to post the
cash or surety bond as a condition for the suspension of collection of their deficiency
taxes. In resolving their petition, the Court held and disposed:
ChanRoblesVirtualawlibrary

Absent any evidence and preliminary determination by the CTA, the Court
cannot make any factual finding and settle the issue of whether the
petitioners should comply with the security requirement under Section 11,
R.A. No. 1125. The determination of whether the methods, employed by the
CIR in its assessment, jeopardized the interests of a taxpayer for being
patently in violation of the law is a question of fact that calls for the
reception of evidence which would serve as basis. In this regard, the CTA is
in a better position to initiate this given its time and resources. The remand
of the case to the CTA on this question is, therefore, more sensible and
proper.

For the Court to make any finding of fact on this point would be premature.
As stated earlier, there is no evidentiary basis. All the arguments are mere
allegations from both sides. Moreover, any finding by the Court would pre-
empt the CTA from properly exercising its jurisdiction and settle the main
issues presented before it, that is, whether the petitioners were afforded
due process; whether the CIR has valid basis for its assessment; and
whether the petitioners should be held liable for the deficiency taxes.

xxxx
 In the conduct of its preliminary hearing, the CTA must balance the scale
between the inherent power of the State to tax and its right to prosecute
perceived transgressors of the law, on one side; and the constitutional rights
of petitioners to due process of law and the equal protection of the laws, on
the other. In case of doubt, the tax court must remember that as in all tax
cases, such scale should favor the taxpayer, for a citizen's right to due
process and equal protection of the law is amply protected by the Bill of
Rights under the Constitution.23 chanroblesvirtuallawlibrary

Consequently, to prevent undue and irreparable damage to the normal business

operations of the petitioner, the remand to the CTA of the questions involving the
suspension of collection and the correct amount of the bond is the proper course of
action.

WHEREFORE, the Court GRANTS the petition for certiorari; ANNULS and SETS ASIDE
the resolutions issued on July 8, 2014 and December 22, 2014 in CTA Case No. 8833
requiring the petitioner to post a surety bond of P4,467,391,881.76 as a condition to
restrain the collection of the deficiency taxes assessed against it; PERMANENTLY
ENJOINS the enforcement of the resolutions issued on July 8, 2014 and December 22,
2014 in CTA Case No. 8833; and REQUIRES the Court of Tax Appeals, Second Division,
to forthwith conduct a preliminary hearing in CTA Case No. 8833 to determine and rule
on whether the bond required under Section 11 of Republic Act No. 1125 may be
dispensed with or reduced to restrain the collection of the deficiency taxes assessed
against the petitioner.

G.R. No. 241424

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. LUCIO L. CO, SUSAN P. CO,

FERDINAND VINCENT P. CO, AND PAMELA JUSTINE P. CO, RESPONDENTS.

DECISION

CAGUIOA, J:.

1
Before the Court is a Petition for Review on Certiorari (Petition) under Rule 45 of the Rules of Court
2
filed by petitioner Commissioner of Internal Revenue (CIR), assailing the Decision dated February
3
28, 2018 and Resolution dated August 14, 2018 of the Court of Tax Appeals en banc (CTA EB) in
 4
CTA EB No. 1522, which affirmed the CTA Third Division's (CTA Division) Decision dated June 2,
2016 in CTA Case No. 8831 granting respondents' claim for refund of erroneously paid capital gains
tax (CGT).

Facts

The facts as summarized by the CTA are as follows:

As of March 2012, the four respondents[, Lucio L. Co, Susan P. Co, Ferdinand Vincent P. Co and
Pamela Justine P. Co (respondents),] collectively were the majority shareholders of Kareila
Management Corporation (Kareila), a domestic corporation engaged as managers, managing
agents, consignor, concessionaire, or supplier of business engaged in the operation of hotels,
supermarkets, groceries and the like.

[Kareila had an authorized capital stock of P500,000,000.00, wherein 1,703,125 shares were
subscribed and fully paid. Respondents owned 99.9999% of the total subscribed shares while
Anthony Sy (Sy) owned the remaining 0.0001%.]

[Respondents were also shareholders of Puregold Price
organized under the Philippine laws and primarily engaged
merchandise. From Puregold's authorized capital stock of
shares were subscribed and fully paid. Respondents owned
shares.]
Club, Inc. (Puregold), a corporation
in the wholesale and retail of general
P3,000,000,000.00, 2,000,000,000.00
66.55% of Puregold's total subscribed

xxxx

On March 27, 2012, the Board of Directors of [Puregold] x x x approved the issuance of 766,406,250
Puregold common shares to [respondents] and [Sy] in exchange for the transfer to Puregold of the
1,703,125 shares of Kareila.

On May 8, 2012, during the Puregold annual stockholders meeting, this exchange was approved by
the stockholders representing two-thirds of Puregold's outstanding capital stock.

xxxx

On May 11, 2012, [respondents] and [Sy] entered into a Deed of Exchange with [Puregold] wherein
they agreed to transfer all their Kareila shares to Puregold in exchange for Puregold shares.

Under the Deed of Exchange, [respondents] and [Sy] each would receive four hundred fifty (450)
Puregold shares for every one (1) Kareila share that they would transfer to Puregold. Accordingly,
Puregold issued to [respondents] and [Sy] a total of 766,406,250 Puregold shares from the unissued
portion of its authorized capital stock in exchange for the 1,703,125 Kareila shares:

Share swap per Deed of Exchange:

 Shareholder No. of Kareila Shares No. of Puregold Shares
Transferred to Puregold Exchanged for Kareila Shares

Lucio Co 681,250 306,562,500

Susan Co 681,250 306,562,500

Ferdinand Co 170,312 76,640,400

Pamela Co 170,312 76,640,400

Anthony Sy 1 450

Total 1,703,125 766,406,250

As a result of the share swap under the Deed of Exchange:

1. Puregold acquired majority ownership of Kareila; and,

2. [Respondents,] who, prior to the share swap, already collectively owned 66.5720% of the
outstanding capital stock of Puregold consequently increased their stockholdings to 75.8329% after
the swap:

Puregold Price Club Inc.

Before Swap After Swap

Shareholder No. of Shares Percentage No. of Shares Percentage

Owned Ownership Owned Ownership

Lucio Co 724,376,801 0.362188 1,030,939,302 0.372664

 Susan Co 539,691,310 0.269846 846,253,810 0.305904

Ferdinand Co 33,686,354 0.016843 110,326,754 0.039881

Pamela Co 33,686,354 0.016843 110,326,754 0.039881

Total 1,311,440,820 0.65572 2097846620 0.758329

Total Subscribed 2,000,000,000 2,766,406,250

Capital

On June 26 and 28, 2012, [respondents] collectively paid capital gains tax (CGT) including interest
and/or compromise penalty on the said transfer pursuant to Section 24(C) of the National Internal
Revenue Code of 1997 (NIRC), as amended. x x x

xxxx

[Respondents], however, contend that their payments of CGT were erroneous because, under
Section 40(C)(2) of the NIRC, their transfer of shares through the Deed of Exchange was a tax-
exempt transaction.

Thus, on May 21, 2014, or within the two-year prescriptive period provided under Section 204(c) of
the NIRC of 1997, as amended, [respondents] filed their administrative claims for refund of the CGT
including interest and/or compromise penalty with their respective Revenue District Offices (RDO).

xxxx

[Due to the CIR's inaction, respondents filed a Petition for Review with the CTA Division.]

In the Answer, the CIR alleged that Revenue Regulations No. 18-2001, Revenue Memorandum
Order Nos. 32-2001 and 17-2002 provide that there are certain conditions or requirements which
should be complied with in order to avail of the non-recognition of gain under Section 40(C)(2).
Specifically, for the share swap transaction to qualify as a tax-free exchange, a prior application for a
BIR certification or ruling must have been secured. In this case, however, no such prior request from
the BIR was made. Accordingly, the CIR contended that, since refund claims are construed strictly
against the taxpayer-claimant, the refund sought by [respondents] should be denied.
In Reply, [respondents] contend that it was impossible for them to make any prior request for a ruling
since they were not aware that their transaction was in fact tax free which, thus, establishes that
their CGT payments were erroneously paid. Further, they maintained that Section 40(C)(2) of the
5
NIRC, or any other provision of law or any existing jurisprudence does not impose such condition.

After a Pre-Trial Order was issued, respondents commenced presentation of their witnesses,
namely, Mary S. Demetillo, their consultant on accounting of personal financial transactions, and
Atty. Candy H. Dacanay-Datuon, the Corporate Secretary of Kareila and Assistant Corporate
6
Secretary of Puregold.

xxxx

Witness Mary S. Demetillo, declared that as [respondents'] consultant on accounting of personal

financial transactions for almost 5 years, she did the accounting and computation of tax for the
subject share swap transaction.

By virtue of the Deed of Exchange dated May 11, 2012, [respondents] and [Sy] transferred
1,703,125 [of] their Kareila common shares to Puregold Price Club, Inc. In return, [respondents]
received 766,406,250 common shares in Puregold. At the time of the transaction, Kareila shares had
a par value of P100.00 per share, while Puregold had a par value of P21.50 per share. For the said
share swap transaction, [respondents] paid CGT of P1,647,615,290.07, including interest and
penalty, on June 26 and 28, 2012.

Such payments of CGT, including interest and penalty were rejected in [respondents'] Annual
Income Tax Returns (AITRs) for the year 2012.

On May 21, 2014, [respondents] separately filed administrative claims for refund of the erroneously
paid CGT with their respective RDO followed by their filing of BIR form No. 1914 or the Applications
for Tax Credits/Refund, for which she was consulted. She learned about the actual filing of such
claims for refund only when she was preparing for her testimony before the Court. The said
administrative claims for refund were not acted upon by [the CIR].

Attorney Candy H. Dacanay-Datuon, the Corporate Secretary of Kareila since 2004 and the
Assistant Corporate Secretary of Puregold since 2011, testified that she is the custodian of the
records of the shares of stocks of Kareila and Puregold. She prepares and files the reportorial
requirements under the law of both entities. Kareila is a domestic corporation whose primary
purpose is to act as managers, managing agents, consignor, concessionaire or supplier of
businesses engaged in manufacturing or trading of general merchandise, the operation of resorts,
hotels, supermarkets, groceries and the like. Puregold is also a domestic corporation whose primary
purpose is to engage in the wholesale and retail of general merchandise.

She further testified that [respondents] are shareholders of both corporations. Under a Deed of
Exchange dated May 11, 2012, [respondents] with [Sy], transferred their 1,703,125 common shares
in Kareila to Puregold in exchange for 766,406,250 common shares of Puregold.

Lucio Co and Susan Co each transferred 681,250 Kareila shares in exchange for 306,562,500
Puregold shares, while both Ferdinand Co and Pamela Co each transferred 170,312 Kareila shares
for 76,640,400 Puregold shares.

The 1,703,125 Kareila shares were valued at P16.467 billion or P9,668.47 per share, while the
766,406,250 Puregold shares had a subscription price of P16,477,734,375.00 or P21.50 per share.

As a consequence of the share swap, Puregold acquired ownership of all 1,703,125 Kareila shares,
while [respondents] and [Sy] were each given in trust one share or .0001% of Kareila. On the other
hand, [respondents] collectively owned 1,331,440,820 Puregold shares or 66.55% of the outstanding
capital stock of Puregold. After the share swap, [respondents] gained further control of Puregold as
their collective shareholdings therein increased from 66.55% to 75.83%.

The amount of P1,647,615,290.07 CGT was paid for the share swap transaction, including interest
and penalty, and this amount is the subject of the instant claim for refund.

With the admission of all its evidence, [respondents] rested their case.

On the other hand, [the CIR] did not present any evidence on the ground that no investigation report
7
was submitted to [its] counsel.

CTA Division Ruling

On June 2, 2016, the CTA Division rendered a Decision granting respondents' claim for refund, the
dispositive portion of which reads:

WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly, respondent
Commissioner of Internal Revenue is hereby DIRECTED TO REFUND in favor of petitioners Lucio
Co, Susan Co, Ferdinand Co, and Pamela Co the amounts of P659,045,625.00, P659,050,632.50,
P164,761,860.03 and P164,757,172.54, respectively, or a total amount of P1,647,615,290.07,
representing erroneously paid capital gains tax.

8
SO ORDERED.

The CTA Division found that the administrative and judicial claims for refund were timely filed.
According to the CTA Division, respondents' legal counsel, Zambrano and Gruba Law Offices, had
the authority to represent respondents in their administrative claims for refund filed with the CIR
9
even if the Special Power of Attorney was notarized only after its filing.

The CTA Division further held that all the requisites for the non-recognition of gain or loss under
Section 40(C)(2) of the National Internal Revenue Code (NIRC) of 1997, as amended, which
10
effectively exempts the transaction from income tax, are all present in this case.

The CTA Division also brushed aside the CIR's contention that respondents failed to comply with the
Bureau of Internal Revenue (BIR) issuances relating to the tax exemption under Section 40(C)(2),
particularly the requirement of seeking a prior BIR Ruling. According to the CTA Division,
respondents could not be expected to obtain a BIR Ruling for tax exemption as they previously
believed that they were liable to pay the same based on the computation and recommendation of
their accounting consultant. The CTA Division also noted that the BIR issuances cited by the CIR are
mere guidelines in monitoring tax-free exchange of property and in determining the gain or loss on a
subsequent sale or disposition of such property. Thus, respondents cannot be deprived of their claim
11
for refund simply because they failed to comply with said guidelines.

The CIR moved for reconsideration but the same was denied by the CTA Division in its
12
Resolution dated September 1, 2016.

On appeal to the CTA EB, the CIR claimed that the tax exemption in Section 40(C)(2) of the NIRC of
1997, as amended, does not cover the subject share swap transaction because respondents, prior
13
to the exchange, already had control of Puregold.

CTA EB Ruling

In the assailed Decision, the CTA EB affirmed respondents' entitlement to refund.

The CTA EB ruled that following the Court's pronouncement in the case of Commissioner of Internal
14
Revenue v. Filinvest Dev't. Corp. (Filinvest), Section 40(C)(2) covers instances of further control,
when, as a result of the exchange, the transferors collectively increase their control of the transferee
15
corporation, as in this case.

The CTA EB reiterated the Division's ruling that respondents' counsel was properly authorized to file
16
the administrative claim on their behalf. The CTA EB also held that, contrary to the CIR's claim, a
prior confirmatory ruling is not a condition sine qua non for the availment of tax exemption and a
17
claim for refund of erroneously paid tax.

The CIR moved for reconsideration but the same was denied by the CTA EB in the assailed
Resolution.

Hence, this Petition.

Issue

Whether the CTA EB erred in finding that respondents are entitled to the claim for refund for
erroneously paid CGT.

The Court's Ruling

The Petition lacks merit.

The subject transaction falls under
Section 40(C)(2) of the NIRC of
1997, as amended

Respondents anchor their claim for refund on the tax-free exchange provision under Section 40(C)
(2) of the NIRC of 1997, as amended. Said provision reads:

"(C) Exchange of Property. -

xxxx

"No gain or loss shall also be recognized if property is transferred to a corporation by a person in
exchange for stock or unit of participation in such a corporation of which as a result of such
exchange said person, alone or together with others, not exceeding four (4) persons, gains control of
said corporation: Provided, That stocks issued for services shall not be considered as issued in
return for property.["]

In relation thereto, Section 40(C)(6)(c) of the same Code defines the term "control" as "ownership of
stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all
classes of stocks entitled to vote."

Based on the foregoing, the requisites for the non-recognition of gain or loss are as follows: (a) the
transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies of the
transferor; (c) the transfer is made by a person, acting alone or together with others, not exceeding
four persons; and, (d) as a result of the exchange the transferor, alone or together with others, not
18
exceeding four, gains control of the transferee.

As regards the element of control, the Court, in Filinvest, clarified that it is not necessary that, after
the exchange, each of the transferors individually gains control of the transferee corporation. It also
does not prohibit instances when the transferor gains further control of the transferee corporation.
The Court explained that the element of control is satisfied even if one of the transferors is already
owning at least 51% of the shares of the transferee corporation, as long as after the exchange, the
transferors, not more than five, collectively increase their equity in the transferee corporation by 51%
or more.

In the said case, Filinvest Development Corporation (FDC) and Filinvest Alabang Incorporated (FAI),
entered into a Deed of Exchange with Filinvest Land Incorporated (FLI), whereby the former both
19
transferred in favor of the latter parcels of land in exchange for FLI shares. Prior to the exchange,
FDC owned 80% of FAI and 67.42% of FLI. After the exchange, FDC retained 80% ownership of FAI
but decreased its ownership of FLI to only 61.03%. As a result, FDC together with FAI owned
20
70.99% of FLI.

The Court held that neither FDC nor FAI is liable for income tax because both collectively gained
control of FLI, the transferee corporation, as a result of the exchange:
Then as now, the CIR argues that taxable gain should be recognized for the exchange considering
that FDC's controlling interest in FLI was actually decreased as a result thereof. For said purpose,
the CIR calls attention to the fact that, prior to the exchange, FDC owned 2,537,358,000 or 67.42%
of FLI's 3,763,535,000 outstanding capital stock. Upon the issuance of 443,094,000 additional FLI
shares as a consequence of the exchange and with only 42,217,000 thereof accruing in favor of
FDC for a total of 2,579,575,000 shares, said corporation's controlling interest was supposedly
reduced to [61.03%] when reckoned from the transferee's aggregate 4,226,629,000 outstanding
shares. Without owning a share from FLI's initial 3,763,535,000 outstanding shares, on the other
hand, FAI's acquisition of 420,877,000 FLI shares as a result of the exchange purportedly resulted in
its control of only 9.96% of said transferee corporation's 4,226,629,000 outstanding shares. On the
principle that the transaction did not qualify as a tax-free exchange under Section 34 (c) (2) of the
1993 NIRC, the CIR asseverates that taxable gain in the sum of P263,386,921.00 should be
recognized on the part of FDC and in the sum of P3,088,711,367.00 on the part of FAI.

The paucity of merit in the CIR's position is, however, evident from the categorical language of
Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss will not be recognized in case
the exchange of property for stocks results in the control of the transferee by the transferor, alone or
with other transferors not exceeding four persons. Rather than isolating the same as proposed by
the CIR, FDC's 2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000 outstanding shares
should, therefore, be appreciated in combination with the 420,877,000 new shares issued to FAI
which represents 9.96% control of said transferee corporation. Together FDC's 2,579,575,000
shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to 3,000,452,000 shares or
70.99% of FLI's 4,226,629,000 shares. Since the term "control" is clearly defined as "ownership
of stocks in a corporation possessing at least fifty-one percent of the total voting power of
classes of stocks entitled to one vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the
exchange of property for stocks between FDC, FAI and FLI clearly qualify as a tax-free
transaction under paragraph 34 (c) (2) of the same provision.

Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then Supreme Court
Justice Jose Vitug and CTA Justice Ernesto D. Acosta who, in their book Tax Law and
Jurisprudence, opined that said provision could be inapplicable if control is already vested in the
exchangor prior to exchange. Aside from the fact that that the 10 September 2002 Decision in CTA
Case No. 6182 upholding the tax-exempt status of the exchange between FDC, FAI and FLI was
penned by no less than Justice Acosta himself, FDC and FAI significantly point out that said authors
have acknowledged that the position taken by the BIR is to the effect that "the law would apply even
when the exchangor already has control of the corporation at the time of the exchange." This was
confirmed when, apprised in FLI's request for clarification about the change of percentage of
ownership of its outstanding capital stock, the BIR opined as follows:

Please be informed that regardless of the foregoing, the transferors, Filinvest Development Corp.
and Filinvest Alabang, Inc. still gained control of Filinvest Land, Inc. The term 'control' shall mean
ownership of stocks in a corporation by possessing at least 51% of the total voting power of all
classes of stocks entitled to vote. Control is determined by the amount of stocks received, i.e., total
subscribed, whether for property or for services by the transferor or transferors. In determining the
51% stock ownership, only those persons who transferred property for stocks in the same
transaction may be counted up to the maximum of five (BIR Ruling No. 547-93 dated December 29,
1993.)
At any rate, it also appears that the supposed reduction of FDC's shares in FLI posited by the CIR is
more apparent than real. As the uncontested owner of 80% of the outstanding shares of FAI, it
cannot be gainsaid that FDC ideally controls the same percentage of the 420,877,000 shares issued
to its said co-transferor which, by itself, represents 7.968% of the outstanding shares of FLI.
Considered alongside FDC's 61.03% control of FLI as a consequence of the 29 November 1996
Deed of Transfer, said 7.968% add up to an aggregate of 68.998% of said transferee corporation's
outstanding shares of stock which is evidently still greater than the 67.42% FDC initially held prior to
the exchange. This much was admitted by the parties in the 14 February 2001 Stipulation of Facts,
Documents and Issues they submitted to the CTA. Inasmuch as the combined ownership of FDC
and FAI of FLI's outstanding capital stock adds up to a total of 70.99%, it stands to reason that
neither of said transferors can be held liable for deficiency income taxes the CIR assessed on the
21
supposed gain which resulted from the subject transfer.

Thus, based on Filinvest, the CIR clearly has no basis to claim that the share swap transaction
between respondents and Puregold is not covered by the tax-free exchange as provided in Section
40(C)(2) in relation to Section 40(C)(6)(c) of the NIRC of 1997, as amended. It is undisputed that
after the exchange, respondents collectively increased their control over Puregold from 66.57% to
75.83%. Accordingly, respondents cannot be held liable for income taxes on the supposed gain
which may have resulted from such transfer. The CGT paid by respondents on the subject transfer
22
are considered erroneously paid taxes and must perforce be refunded pursuant to Section 229 of
the NIRC of 1997, as amended.

Respondents filed a valid

administrative claim for refund

The CIR, however, assails the validity and timeliness of respondents' administrative claim, which
was filed through respondents' counsel of record. According to the CIR, such administrative claim
was defective because respondents' counsel failed to show in said letters that they were authorized
23
by respondents to file the same on their behalf. The CIR further contends that the subsequent
submission of a Special Power of Attorney did not cure the defect because the same was filed
24
beyond the two-year prescriptive period.

The CIR is mistaken.

The filing of the administrative claim by respondents' counsel of record on behalf of their client gave
rise to the presumption that they have the authority to file the same. This is anchored on the rule that
"[a] lawyer is presumed to be properly authorized to represent any cause in which he appears, and
25
no written power of attorney is required to authorize him to appear in court for his client."

26
The presumption in favor of the counsel's authority to appear in behalf of its client is a strong one,
as it arises from the lawyer's pledge to act with honesty, candor and fairness and not to do any
 27
falsehood or misrepresentation. If a lawyer corruptly or willfully appears as an attorney for a party
to a case without authority, he may be disciplined or punished for contempt as an officer of the court
28
who has misbehaved in his official transaction.

In addition, an attorney's appearance is also presumed to be with the previous knowledge and
29
consent of the litigant until the contrary is shown. In this case, the presumption of authority of
respondents' counsel remains unrebutted because the CIR failed to represent any proof to the
contrary.

In any event, the supposed lack of authority of respondents' counsel of record was thereafter cured
when respondents executed a Special Power of Attorney and submitted the same with the CIR and
before the court a quo. The CTA held that the said instrument clearly spells out the extent of
authority granted to respondents' counsel and ratifies all prior acts done in pursuit of said authority,
which includes the filing of respondents' administrative claim for refund.

30
In Land Bank of the Philippines v. Pamintuan Dev't. Co., the Court held that "[r]atification retroacts
to the date of the lawyer's first appearance and validates the action taken by him." The effect is as if
respondents themselves filed the administrative claim for refund on May 21, 2014, within the two-
31
year prescriptive period provided under the NIRC of 1997, as amended. Thus, the Court agrees
with the CTA that respondents' administrative claim was valid and timely filed.

No prior confirmatory ruling is

required for tax exemption or refund

The CIR also insists that the claim should be denied because respondents failed to secure a prior
32
confirmatory ruling that the subject transaction qualifies as a tax-free exchange. According to the
CIR, the certification or ruling is important so as to confirm whether the transaction satisfies the
33
conditions set by law; and the authority to do such is vested upon the BIR.

Again, the CIR is mistaken.

BIR rulings are the official position of the Bureau to queries raised by taxpayers and other
34
stakeholders relative to clarification and interpretation of tax laws. In this regard, the primary
purpose of a BIR Ruling is simply to determine whether a certain transaction, under the law, is
taxable or not based on the circumstances provided by the taxpayer. As admitted by the CIR, rulings
merely operate to "confirm" the existence of the conditions for exemption provided under the law. If
all the requirements for exemption set forth under the law are complied with, the transaction is
considered exempt, whether or not a prior BIR ruling was secured by the taxpayer.

In practice, a taxpayer often secures a BIR ruling, prior to entering into a transaction, to prepare for
any tax liability. However, in case a taxpayer already paid the tax, believing to be liable therefor, and
later on files a claim for refund on the basis of an exemption provided under the law, requiring a prior
BIR ruling as a condition for the approval of the refund claim is clearly illogical. In this light, the Court
echoes its pronouncement in Deutsche Bank AG Manila Branch v. Commissioner of Internal
Revenue, to wit:

The underlying principle of prior application with the BIR becomes moot in refund cases, such as the
present case, where the very basis of the claim is erroneous or there is excessive payment arising
from non-availment of a tax treaty relief at the first instance. In this case, petitioner should not be
faulted for not complying with RMO No. 1-2000 prior to the transaction. It could not have applied for
a tax treaty relief within the period prescribed, or 15 days prior to the payment of its BPRT, precisely
because it erroneously paid the BPRT not on the basis of the preferential tax rate under the RP-
Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence, the prior application
requirement becomes illogical. Therefore, the fact that petitioner invoked the provisions of the RP-
Germany Tax Treaty when it requested for a confirmation from the ITAD before filing an
administrative claim for a refund should be deemed substantial compliance with RMO No. 1-2000.

Corollary thereto, Section 229 of the NIRC provides the taxpayer a remedy for tax recovery when
there has been an erroneous payment of tax. The outright denial of petitioner's claim for a refund, on
the sole ground of failure to apply for a tax treaty relief prior to the payment of the BPRT, would
36
defeat the purpose of Section 229.

Moreover, as correctly pointed out by the CTA EB, there is nothing in Section 40(C)(2) of the NIRC
of 1997, as amended, which requires the taxpayer to first secure a prior confirmatory ruling before
the transaction may be considered as a tax-free exchange. The BIR should not impose additional
37
requirements not provided by law, which would negate the availment of the tax exemption.
Instead of resorting to formalities and technicalities, the BIR should have made its own determination
of the merits of respondents' claim for exemption in respondents' administrative application for
refund. However, the Court notes that, in this case, the CIR not only failed to act on respondents'
administrative claim for refund, it also failed to present any evidence during trial before the CTA to
prove that the subject transaction is not covered by the tax exemption.

Indeed, cases filed before the CTA are litigated de novo. As such, party litigants should prove every
38
minute aspect of their cases. Based on the evidence on record, the CTA found that respondents
were able to establish their entitlement to the claimed refund. Accordingly, the Court finds no reason
to reverse the findings of the CTA.

At this juncture, the Court emphasizes that while tax refunds are strictly construed against the
taxpayer, the Government should not resort to technicalities and legalisms, much less frivolous
39
appeals, to keep the money it is not entitled to at the expense of the taxpayers.

Substantial justice, equity and fair play are on the side of [respondents]. Technicalities and
legalisms, however exalted, should not be misused by the government to keep money not belonging
to it and thereby enrich itself at the expense of its law-abiding citizens. If the State expects its
taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard
against itself in refunding excess payments of such taxes. Indeed, the State must lead by its own
40
example of honor, dignity and uprightness.

WHEREFORE, premises considered the Decision dated February 28, 2018 and Resolution dated
August 14, 2018 of the Court of Tax Appeals en banc in CTA EB No. 1522 are hereby AFFIRMED.

G.R. No. 180356 February 16, 2010

SOUTH AFRICAN AIRWAYS, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19, 2007
1 2
Decision and October 30, 2007 Resolution of the Court of Tax Appeals (CTA) En Banc in CTA
E.B. Case No. 210, entitled South African Airways v. Commissioner of Internal Revenue. The
3
assailed decision affirmed the Decision dated May 10, 2006 and Resolution dated August 11,
4
2006 rendered by the CTA First Division.

The Facts

Petitioner South African Airways is a foreign corporation organized and existing under and by virtue
of the laws of the Republic of South Africa. Its principal office is located at Airways Park, Jones
Road, Johannesburg International Airport, South Africa. In the Philippines, it is an internal air carrier
having no landing rights in the country. erotelPetitioner has a general sales agent in the Philippines,
Aerotel Limited Corporation (Aerotel). A sells passage documents for compensation or commission
for petitioner’s off-line flights for the carriage of passengers and cargo between ports or points
outside the territorial jurisdiction of the Philippines. Petitioner is not registered with the Securities and
Exchange Commission as a corporation, branch office, or partnership. It is not licensed to do
business in the Philippines.

For the taxable year 2000, petitioner filed separate quarterly and annual income tax returns for its
off-line flights, summarized as follows:

Period Date Filed 2.5% Gross

Phil. Billings

For Passenger 1st Quarter May 30, 2000

2nd Quarter August 29, 2000 PhP 222,531.25
3rd Quarter November 29, 2000
 4th Quarter April 16, 2000 424,046.95
422,466.00
453,182.91

Sub-total
PhP 1,522,227.11

For Cargo 1st Quarter May 30, 2000

2nd Quarter August 29, 2000 PhP 81,531.00
3rd Quarter November 29, 2000
50,169.65
4th Quarter April 16, 2000
36,383.74
37,454.88

Sub-total
PhP 205,539.27

TOTAL 1,727,766.38

Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue, Revenue
District Office No. 47, a claim for the refund of the amount of PhP 1,727,766.38 as erroneously paid
tax on Gross Philippine Billings (GPB) for the taxable year 2000. Such claim was unheeded. Thus,
on April 14, 2003, petitioner filed a Petition for Review with the CTA for the refund of the
abovementioned amount. The case was docketed as CTA Case No. 6656.

On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack of merit. The
CTA ruled that petitioner is a resident foreign corporation engaged in trade or business in the
Philippines. It further ruled that petitioner was not liable to pay tax on its GPB under Section 28(A)(3)
(a) of the National Internal Revenue Code (NIRC) of 1997. The CTA, however, stated that petitioner
is liable to pay a tax of 32% on its income derived from the sales of passage documents in the
Philippines. On this ground, the CTA denied petitioner’s claim for a refund.

Petitioner’s Motion for Reconsideration of the above decision was denied by the CTA First Division
in a Resolution dated August 11, 2006.

Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim for a refund
of its tax payment on its GPB. This was denied by the CTA in its assailed decision. A subsequent
Motion for Reconsideration by petitioner was also denied in the assailed resolution of the CTA En
Banc.

Hence, petitioner went to us.

The Issues

Whether or not petitioner, as an off-line international carrier selling passage documents through an
independent sales agent in the Philippines, is engaged in trade or business in the Philippines subject
to the 32% income tax imposed by Section 28 (A)(1) of the 1997 NIRC.
Whether or not the income derived by petitioner from the sale of passage documents covering
petitioner’s off-line flights is Philippine-source income subject to Philippine income tax.

Whether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax on Gross
5
Philippine Billings for the taxable year 2000 in the amount of P1,727,766.38.

The Court’s Ruling

This petition must be denied.

Petitioner Is Subject to Income Tax at the Rate of 32% of Its Taxable Income

Preliminarily, we emphasize that petitioner is claiming that it is exempted from being taxed for its
sale of passage documents in the Philippines. Petitioner, however, failed to sufficiently prove such
contention.

6
In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, we held, "Since an
action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless
granted in the most explicit and categorical language, it is strictly construed against the claimant who
must discharge such burden convincingly."

Petitioner has failed to overcome such burden.

In essence, petitioner calls upon this Court to determine the legal implication of the amendment to
Sec. 28(A)(3)(a) of the 1997 NIRC defining GPB. It is petitioner’s contention that, with the new
definition of GPB, it is no longer liable under Sec. 28(A)(3)(a). Further, petitioner argues that
because the 2 1/2% tax on GPB is inapplicable to it, it is thereby excluded from the imposition of any
income tax.

Sec. 28(b)(2) of the 1939 NIRC provided:

(2) Resident Corporations. – A corporation organized, authorized, or existing under the laws of a
foreign country, engaged in trade or business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income received in the preceding taxable year from
all sources within the Philippines: Provided, however, that international carriers shall pay a tax of two
and one-half percent on their gross Philippine billings.

This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined GPB as follows:

"Gross Philippine billings" include gross revenue realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of passage documents sold therein, whether
for passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines.

In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:

"Gross Philippine Billings" means gross revenue realized from uplifts of passengers anywhere in the
world and excess baggage, cargo and mail originating from the Philippines, covered by passage
documents sold in the Philippines.
Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world,
provided that the passage documents were sold in the Philippines. Legislature departed from such
concept in the 1997 NIRC where GPB is now defined under Sec. 28(A)(3)(a):

"Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons,
excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage
document.

Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to
or from the Philippines, income is included in GPB.

As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or from the
Philippines, it is not taxable under Sec. 28(A)(3)(a) of the 1997 NIRC. This much was also found by
the CTA. But petitioner further posits the view that due to the non-applicability of Sec. 28(A)(3)(a) to
it, it is precluded from paying any other income tax for its sale of passage documents in the
Philippines.

Such position is untenable.

In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas

7
Airways), which was decided under similar factual circumstances, this Court ruled that off-line air
carriers having general sales agents in the Philippines are engaged in or doing business in the
Philippines and that their income from sales of passage documents here is income from within the
Philippines. Thus, in that case, we held the off-line air carrier liable for the 32% tax on its taxable
income.

Petitioner argues, however, that because British Overseas Airways was decided under the 1939
NIRC, it does not apply to the instant case, which must be decided under the 1997 NIRC. Petitioner
alleges that the 1939 NIRC taxes resident foreign corporations, such as itself, on all income from
sources within the Philippines. Petitioner’s interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that,
since it is an international carrier that does not maintain flights to or from the Philippines, thereby
having no GPB as defined, it is exempt from paying any income tax at all. In other words, the
existence of Sec. 28(A)(3)(a) according to petitioner precludes the application of Sec. 28(A)(1) to it.

Its argument has no merit.

First, the difference cited by petitioner between the 1939 and 1997 NIRCs with regard to the taxation
of off-line air carriers is more apparent than real.

We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all
international air carriers from the coverage of Sec. 28(A)(1) of the 1997 NIRC. Certainly, had
legislature’s intentions been to completely exclude all international air carriers from the application of
the general rule under Sec. 28(A)(1), it would have used the appropriate language to do so; but the
legislature did not. Thus, the logical interpretation of such provisions is that, if Sec. 28(A)(3)(a) is
applicable to a taxpayer, then the general rule under Sec. 28(A)(1) would not apply. If, however,
Sec. 28(A)(3)(a) does not apply, a resident foreign corporation, whether an international air carrier or
not, would be liable for the tax under Sec. 28(A)(1).
Clearly, no difference exists between British Overseas Airways and the instant case, wherein
petitioner claims that the former case does not apply. Thus, British Overseas Airways applies to the
instant case. The findings therein that an off-line air carrier is doing business in the Philippines and
that income from the sale of passage documents here is Philippine-source income must be upheld.

Petitioner further reiterates its argument that the intention of Congress in amending the definition of
GPB is to exempt off-line air carriers from income tax by citing the pronouncements made by
Senator Juan Ponce Enrile during the deliberations on the provisions of the 1997 NIRC. Such
8
pronouncements, however, are not controlling on this Court. We said in Espino v. Cleofe:

A cardinal rule in the interpretation of statutes is that the meaning and intention of the law-making
body must be sought, first of all, in the words of the statute itself, read and considered in their
natural, ordinary, commonly-accepted and most obvious significations, according to good and
approved usage and without resorting to forced or subtle construction. Courts, therefore, as a rule,
cannot presume that the law-making body does not know the meaning of words and rules of
grammar. Consequently, the grammatical reading of a statute must be presumed to yield its correct
sense. x x x It is also a well-settled doctrine in this jurisdiction that statements made by individual
members of Congress in the consideration of a bill do not necessarily reflect the sense of that body
and are, consequently, not controlling in the interpretation of law. (Emphasis supplied.)

Moreover, an examination of the subject provisions of the law would show that petitioner’s
interpretation of those provisions is erroneous.

Sec. 28(A)(1) and (A)(3)(a) provides:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or
existing under the laws of any foreign country, engaged in trade or business within the Philippines,
shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income
derived in the preceding taxable year from all sources within the Philippines: provided, That effective
January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999,
the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate
shall be thirty-two percent (32%).

xxxx

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of
two and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:

(a) International Air Carrier. – ‘Gross Philippine Billings’ refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in
a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of
payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross Philippine Billings if the passenger
boards a plane in a port or point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger takes place at any port outside the
Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the
leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine
Billings.

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32%
tax on all income from sources within the Philippines. Sec. 28(A)(3) is an exception to this general
rule.

An exception is defined as "that which would otherwise be included in the provision from which it is
9
excepted. It is a clause which exempts something from the operation of a statue by express words."
Further, "an exception need not be introduced by the words ‘except’ or ‘unless.’ An exception will be
10
construed as such if it removes something from the operation of a provision of law."

In the instant case, the general rule is that resident foreign corporations shall be liable for a 32%
income tax on their income from within the Philippines, except for resident foreign corporations that
are international carriers that derive income "from carriage of persons, excess baggage, cargo and
mail originating from the Philippines" which shall be taxed at 2 1/2% of their Gross Philippine Billings.
Petitioner, being an international carrier with no flights originating from the Philippines, does not fall
under the exception. As such, petitioner must fall under the general rule. This principle is embodied
in the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not
11
being excepted must be regarded as coming within the purview of the general rule.

To reiterate, the correct interpretation of the above provisions is that, if an international air carrier
maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross
Philippine Billings, while international air carriers that do not have flights to and from the Philippines
but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of
such income.

As to the denial of petitioner’s claim for refund, the CTA denied the claim on the basis that petitioner
is liable for income tax under Sec. 28(A)(1) of the 1997 NIRC. Thus, petitioner raises the issue of
whether the existence of such liability would preclude their claim for a refund of tax paid on the basis
of Sec. 28(A)(3)(a). In answer to petitioner’s motion for reconsideration, the CTA First Division ruled
in its Resolution dated August 11, 2006, thus:

On the fourth argument, petitioner avers that a deficiency tax assessment does not, in any way,
disqualify a taxpayer from claiming a tax refund since a refund claim can proceed independently of a
tax assessment and that the assessment cannot be offset by its claim for refund.

Petitioner’s argument is erroneous. Petitioner premises its argument on the existence of an

assessment. In the assailed Decision, this Court did not, in any way, assess petitioner of any
deficiency corporate income tax. The power to make assessments against taxpayers is lodged with
the respondent. For an assessment to be made, respondent must observe the formalities provided in
Revenue Regulations No. 12-99. This Court merely pointed out that petitioner is liable for the regular
corporate income tax by virtue of Section 28(A)(3) of the Tax Code. Thus, there is no assessment to
12
speak of.
Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with
their liability under Sec. 28(A)(1), considering that there has not yet been any assessment of their
obligation under the latter provision. Petitioner argues that such offsetting is in the nature of legal
compensation, which cannot be applied under the circumstances present in this case.

Article 1279 of the Civil Code contains the elements of legal compensation, to wit:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.

13
And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue, thus:

In several instances prior to the instant case, we have already made the pronouncement that taxes
cannot be subject to compensation for the simple reason that the government and the taxpayer are
not creditors and debtors of each other. There is a material distinction between a tax and debt.
Debts are due to the Government in its corporate capacity, while taxes are due to the Government in
its sovereign capacity. We find no cogent reason to deviate from the aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that
taxes cannot be subject to set-off or compensation, thus:

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

The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v.
Commission on Audit, which reiterated that:

. . . a taxpayer may not offset taxes due from the claims that he may have against the government.
Taxes cannot be the subject of compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.

Verily, petitioner’s argument is correct that the offsetting of its tax refund with its alleged tax
deficiency is unavailing under Art. 1279 of the Civil Code.
 14
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a
tax refund with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s
supplemental motion for reconsideration alleging bringing to said court’s attention the existence of
the deficiency income and business tax assessment against Citytrust. The fact of such deficiency
assessment is intimately related to and inextricably intertwined with the right of respondent bank to
claim for a tax refund for the same year. To award such refund despite the existence of that
deficiency assessment is an absurdity and a polarity in conceptual effects. Herein private respondent
cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for the
same year.

The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts
stated therein are true and correct. The deficiency assessment, although not yet final, created a
doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said
return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the
refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law
when the claim of Citytrust was filed, provides that "(w)hen an assessment is made in case of any
list, statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or
fraudulent or contained any understatement or undervaluation, no tax collected under such
assessment shall be recovered by any suits unless it is proved that the said list, statement, or return
was not false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith regarding annual
depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper assessment and the tax due would
inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should
subsequently be upheld, the Government will be forced to institute anew a proceeding for the
recovery of erroneously refunded taxes which recourse must be filed within the prescriptive period of
ten years after discovery of the falsity, fraud or omission in the false or fraudulent return
involved.This would necessarily require and entail additional efforts and expenses on the part of the
Government, impose a burden on and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental operations. 1avvphi1

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically
necessary and legally appropriate that the issue of the deficiency tax assessment against Citytrust
be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding
the true and correct amount of tax due or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded,it would be only just and fair that
the taxpayer and the Government alike be given equal opportunities to avail of remedies under the
law to defeat each other’s claim and to determine all matters of dispute between them in one single
case. It is important to note that in determining whether or not petitioner is entitled to the refund of
the amount paid, it would [be] necessary to determine how much the Government is entitled to
collect as taxes. This would necessarily include the determination of the correct liability of the
taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as
to all the matters subject thereof or necessarily involved therein. (Emphasis supplied.)

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above
pronouncements are, therefore, still applicable today.

Here, petitioner’s similar tax refund claim assumes that the tax return that it filed was correct. Given,
however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the
1997 NIRC, is liable under Sec. 28(A)(1), the correctness of the return filed by petitioner is now put
in doubt. As such, we cannot grant the prayer for a refund.

Be that as it may, this Court is unable to affirm the assailed decision and resolution of the CTA En
Banc on the outright denial of petitioner’s claim for a refund. Even though petitioner is not entitled to
a refund due to the question on the propriety of petitioner’s tax return subject of the instant
controversy, it would not be proper to deny such claim without making a determination of petitioner’s
liability under Sec. 28(A)(1).

It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is
based on taxable income, that is, gross income less deductions and exemptions, if any. It cannot be
assumed that petitioner’s liabilities under the two provisions would be the same. There is a need to
make a determination of petitioner’s liability under Sec. 28(A)(1) to establish whether a tax refund is
forthcoming or that a tax deficiency exists. The assailed decision fails to mention having computed
for the tax due under Sec. 28(A)(1) and the records are bereft of any evidence sufficient to establish
petitioner’s taxable income. There is a necessity to receive evidence to establish such amount vis-à-
vis the claim for refund. It is only after such amount is established that a tax refund or deficiency may
be correctly pronounced.

WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution of the CTA En
Banc in CTA E.B. Case No. 210 are SET ASIDE. The instant case is REMANDED to the CTA En
Banc for further proceedings and appropriate action, more particularly, the reception of evidence for
both parties and the corresponding disposition of CTA E.B. Case No. 210 not otherwise inconsistent
with our judgment in this Decision.

SO ORDERED.

CIR v. St. Luke’s GR 195909, Sept. 26, 2012

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;

3
xxxx

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
4
amount to ₱63,935,351.57 during trial in the First Division of the CTA.

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
5
non-stock, non-profit corporations under Section 26 of the 1997 Tax Code x x x." It is a
specific provision which prevails over the general exemption on income tax granted under
Section 30(E) and (G) for non-stock, non-profit charitable institutions and civic organizations
6
promoting social welfare.

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
7
revenues of ₱1,730,367,965 or approximately ₱1.73 billion from patient services in 1998.

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
8
revenues less operating expenses) of ₱334,642,615. St. Luke's also claimed that its income
does not inure to the 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
9
withholding of a part of its income, as well as the payment of surcharge and delinquency
interest. There is no ground for this Court to undertake such a factual review. Under the
10 11
Constitution and the Rules of Court, this Court's review power is generally limited to
12
"cases in which only an error or question of law is involved." This Court cannot depart
from this limitation if a party fails to invoke a recognized 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.

13
SO ORDERED.

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
14
Income-Net") came 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)
15
of the NIRC, which the CTA En Banc held was not applicable to St. Luke's.

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
16
decision in St. Luke's Medical Center, Inc. v. Commissioner of Internal Revenue, which
examined the primary purposes of St. Luke's under its articles of incorporation and various
17
documents identifying St. Luke's as a charitable institution.

18
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, which states
that "a 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
19
of the institution x x x." The generation of income from paying patients does not per se
destroy the charitable nature of St. Luke's.

20
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue,
21
which ruled that the old NIRC (Commonwealth Act No. 466, as amended) "positively
exempts from taxation those corporations or associations which, otherwise, would be
22
subject thereto, because of the existence of x x x net income." The NIRC of 1997
substantially reproduces the provision on 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
23
surplus."

24
The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. The CTA
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,
25
applying the provision of Section 30(E) of the NIRC of 1997, as amended."

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
26
cites Martinez v. Court of Appeals which permits factual review "when the Court of
Appeals [in this case, the CTA] manifestly overlooked certain relevant facts not disputed by
27
the parties and which, if properly considered, would justify a different conclusion."

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-
 28
serving, to show the nature of the 'Other Income-Net' x x x." This is not a case of
overlooking or failing to consider 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
29
executed by [the] witnesses [of St. Luke's] x x x."

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
30
within the time prescribed for its payment in the notice of assessment[.]" St. Luke's is also
31
liable to pay 20% delinquency interest under Section 249(C)(3) of the NIRC. As explained
by the CTA En Banc, the 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
32
and not delinquency interest.

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
33
substantially reproduced in Section 30(E) of the NIRC of 1997. Section 27(B) of the present
NIRC provides:

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 trad e, 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-
 34
profit charitable institutions. St. Luke's asserts that the legislative intent of introducing
35
Section 27(B) was only to remove the exemption for "proprietary non-profit" hospitals.
The relevant provisions of Section 30 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
36
institutions, namely, proprietary non-profit educational institutions and proprietary non-
profit hospitals, among the institutions covered by 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
37
Filipino Inc. de Cebu, this Court considered as non-profit a sports club organized for
recreation and 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
 38
and improving its golf course. The club was non-profit because of its purpose and there
39
was no evidence that it was engaged in a profit-making enterprise.

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The
40
Court defined "charity" in Lung Center of the Philippines v. Quezon City as "a gift, to be
applied 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
41
government." A non-profit club for the 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
42
Treasury.

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
43
without the concurrence of a majority of all the Members of Congress." The requirements
44
for a tax exemption are strictly construed against the taxpayer because an exemption
restricts the collection of taxes necessary for the existence of the 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
45 46
premise as Hospital de San Juan and Jesus Sacred Heart College which says that
receiving income from 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
47
the institution.
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
48
religious, charitable, or educational purposes shall be exempt from taxation." The test of
exemption is not strictly a 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
49
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 necessary or proper, be
used for the furtherance of the purpose or purposes for which the corporation was
50
organized." However, under Lung Center, any profit by a charitable institution must not
only be plowed back "whenever necessary or proper," but must be "devoted or used
51
altogether to the charitable object which it is intended to achieve."

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,
52
revenues from paying patients are income received from "activities conducted for profit."
Indeed, St. Luke's admits that it derived 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
53
allocated to free or charitable services" in 1998.

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
54
the law. Solely is synonymous with exclusively.

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
55
services. The ₱1.73 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
 56
charitable object which it is intended to achieve." The income is plowed back to the
corporation not entirely for charitable purposes, but for 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
57
frase 'or from any activity conducted for profit.'

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."

58
The question in Jesus Sacred Heart College involves an educational institution. However,
it is 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
60
purposes"59 and thus exempt from income tax. In Michael J. Lhuillier, Inc. v.
61
Commissioner of Internal Revenue, the 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
62
surcharges and interest."

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.

G.R. No. 181277 July 3, 2013

SWEDISH MATCH PHILIPPINES, INC., Petitioner,

vs.
THE TREASURER OF THE CITYOF MANILA, Respondent.

DECISION

SERENO, CJ.:

1
This is a Petition for Review on Certiorari filed by Swedish Match Philippines, Inc. (petitioner) under
Rule 45 of the 1997 Rules of Civil Procedure assailing the Court of Tax Appeals En Bane (CTA En
2 3
Bane) Decision dated 1 October 2007 and Resolution dated 14 January 2008 in C.T.A. EB No.
241.

THE FACTS
On 20 October 2001, petitioner paid business taxes in the total amount of ₱470,932.21. The
assessed amount was based on Sections 14 and 21 of Ordinance No. 7794, otherwise known as the
Manila Revenue Code, as amended by Ordinance Nos. 7988 and 8011. Out of that amount,
₱164,552.04 corresponded to the payment under Section 21.

Assenting that it was not liable to pay taxes under Section 21, petitioner wrote a letter dated 17
September 2003 to herein respondent claiming a refund of business taxes the former had paid
pursuant to the said provision. Petitioner argued that payment under Section 21 constituted double
taxation in view of its payment under Section 14.

On 17 October 2003, for the alleged failure of respondent to act on its claim for a refund, petitioner
9
filed a Petition for Refund of Taxes with the RTC of Manila in accordance with Section 196 of the
Local Government Code of 1991. The Petition was docketed as Civil Case No. 03-108163.

10
On 14 June 2004, the Regional Trial Court (RTC), Branch 21 of Manila rendered a Decision in
Civil Case No. 03-108163 dismissing the Petition for the failure of petitioner to plead the latter’s
capacity to sue and to state the authority of Tiarra T. Batilaran-Beleno (Ms. Beleno), who had
executed the Verification and Certification of Non-Forum Shopping.

In denying petitioner’s Motion for Reconsideration, the RTC went on to say that Sections 14 and 21
pertained to taxes of a different nature and, thus, the elements of double taxation were wanting in
this case.

On appeal, the CTA Second Division affirmed the RTC’s dismissal of the Petition for Refund of
Taxes on the ground that petitioner had failed to state the authority of Ms. Beleno to institute the suit.

The CTA En Banc likewise denied the Petition for Review, ruling as follows:

In this case, the plaintiff is the Swedish Match Philippines, Inc. However, as found by the RTC as
well as the Court in Division, the signatory of the verification and/or certification of non-forum
shopping is Ms. Beleno, the company’s Finance Manager, and that there was no board resolution or
secretary's certificate showing proof of Ms. Beleno’s authority in acting in behalf of the corporation at
the time the initiatory pleading was filed in the RTC. It is therefore, correct that the case be
dismissed.

WHEREFORE, premises considered, the petition for review is hereby DENIED. Accordingly, the
assailed Decision and the Resolution dated August 8, 2006 and November 27, 2006, respectively,
are hereby AFFIRMED in toto.

11
SO ORDERED.

ISSUES

In order to determine the entitlement of petitioner to a refund of taxes, the instant Petition requires
the resolution of two main issues, to wit:

1) Whether Ms. Beleno was authorized to file the Petition for Refund of Taxes with the RTC; and
2) Whether the imposition of tax under Section 21 of the Manila Revenue Code constitutes double
12
taxation in view of the tax collected and paid under Section 14 of the same code.

THE COURT’S RULING

Authority from the board to sign the

Verification and Certification of
Non-Forum Shopping

Anent the procedural issue, petitioner argues that there can be no dispute that Ms. Beleno was
acting within her authority when she instituted the Petition for Refund before the RTC,
notwithstanding that the Petition was not accompanied by a Secretary’s Certificate. Her authority
was ratified by the Board in its Resolution adopted on 19 May 2004. Thus, even if she was not
authorized to execute the Verification and Certification at the time of the filing of the Petition, the
ratification by the board of directors retroactively applied to the date of her signing.

On the other hand, respondent contends that petitioner failed to establish the authority of Ms. Beleno
to institute the present action on behalf of the corporation. Citing Philippine Airlines v. Flight
13
Attendants and Stewards Association of the Philippines (PAL v. FASAP), respondent avers that
the required certification of non-forum shopping should have been valid at the time of the filing of the
Petition. The Petition, therefore, was defective due to the flawed Verification and Certification of
Non-Forum Shopping, which were insufficient in form and therefore a clear violation of Section 5,
Rule 7 of the 1997 Rules of Civil Procedure.

We rule for petitioner.

Time and again, this Court has been faced with the issue of the validity of the verification and
certification of non-forum shopping, absent any authority from the board of directors.

The power of a corporation to sue and be sued is lodged in the board of directors, which exercises
14
its corporate powers. It necessarily follows that "an individual corporate officer cannot solely
exercise any corporate power pertaining to the corporation without authority from the board of
15
directors." Thus, physical acts of the corporation, like the signing of documents, can be performed
only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of
16
the board of directors.

Consequently, a verification signed without an authority from the board of directors is defective.
However, the requirement of verification is simply a condition affecting the form of the pleading and
17
non-compliance does not necessarily render the pleading fatally defective. The court may in fact
order the correction of the pleading if verification is lacking or, it may act on the pleading although it
may not have been verified, where it is made evident that strict compliance with the rules may be
18
dispensed with so that the ends of justice may be served.

19
Respondent cites this Court’s ruling in PAL v. FASAP, where we held that only individuals vested
with authority by a valid board resolution may sign a certificate of non-forum shopping on behalf of a
corporation. The petition is subject to dismissal if a certification was submitted unaccompanied by
20
proof of the signatory’s authority. In a number of cases, however, we have recognized exceptions
21
to this rule. Cagayan Valley Drug Corporation v. Commissioner of Internal Revenue provides:

In a slew of cases, however, we have recognized the authority of some corporate officers to sign the
verification and certification against forum shopping. In Mactan-Cebu International Airport Authority
v. CA, we recognized the authority of a general manager or acting general manager to sign the
verification and certificate against forum shopping; in Pfizer v. Galan, we upheld the validity of a
verification signed by an "employment specialist" who had not even presented any proof of her
authority to represent the company; in Novelty Philippines, Inc., v. CA, we ruled that a personnel
officer who signed the petition but did not attach the authority from the company is authorized to sign
the verification and non-forum shopping certificate; and in Lepanto Consolidated Mining Company v.
WMC Resources International Pty. Ltd. (Lepanto), we ruled that the Chairperson of the Board and
President of the Company can sign the verification and certificate against non-forum shopping even
without the submission of the board’s authorization.

In sum, we have held that the following officials or employees of the company can sign the
verification and certification without need of a board resolution: (1) the Chairperson of the Board of
Directors, (2) the President of a corporation, (3) the General Manager or Acting General Manager,
(4) Personnel Officer, and (5) an Employment Specialist in a labor case.

While the above cases do not provide a complete listing of authorized signatories to the verification
and certification required by the rules, the determination of the sufficiency of the authority was done
on a case to case basis. The rationale applied in the foregoing cases is to justify the authority of
corporate officers or representatives of the corporation to sign the verification or certificate against
forum shopping, being "in a position to verify the truthfulness and correctness of the allegations in
the petition." (Emphases supplied)

Given the present factual circumstances, we find that the liberal jurisprudential exception may be
applied to this case.

A distinction between noncompliance and substantial compliance with the requirements of a

22
certificate of non-forum shopping and verification as provided in the Rules of Court must be made.
In this case, it is undisputed that the Petition filed with the RTC was accompanied by a Verification
and Certification of Non-Forum Shopping signed by Ms. Beleno, although without proof of authority
from the board. However, this Court finds that the belated submission of the Secretary’s Certificate
constitutes substantial compliance with Sections 4 and 5, Rule 7 of the 1997 Revised Rules on Civil
Procedure.

A perusal of the Secretary’s Certificate signed by petitioner’s Corporate Secretary Rafael Khan and
submitted to the RTC shows that not only did the corporation authorize Ms. Beleno to execute the
required Verifications and/or Certifications of Non-Forum Shopping, but it likewise ratified her act of
filing the Petition with the RTC. The Minutes of the Special Meeting of the Board of Directors of
petitioner-corporation on 19 May 2004 reads:

RESOLVED, that Tiarra T. Batilaran-Beleno, Finance Director of the Corporation, be authorized, as

she is hereby authorized and empowered to represent, act, negotiate, sign, conclude and deliver, for
and in the name of the Corporation, any and all documents for the application, prosecution, defense,
arbitration, conciliation, execution, collection, compromise or settlement of all local tax refund cases
pertaining to payments made to the City of Manila pursuant to Section 21 of the Manila Revenue
Code, as amended;

RESOLVED, FURTHER, that Tiarra T. Batilaran-Beleno be authorized to execute Verifications

and/or Certifications as to Non-Forum Shopping of Complaints/Petitions that may be filed by the
Corporation in the above-mentioned tax-refund cases;

RESOLVED, FURTHER, that the previous institution by Tiarra T. Batilaran-Beleno of tax refund
cases on behalf of the Corporation, specifically Civil Cases Nos. 01-102074, 03-108163, and, 04-
109044, all titled "Swedish Match Philippines, Inc. v. The Treasurer of the City of Manila" and
pending in the Regional Trial Court of Manila, as well as her execution of the Verifications and/or
Certifications as to Non-Forum Shopping in these tax refund cases, are hereby, approved and
ratified in all respects. (Emphasis supplied)

Clearly, this is not an ordinary case of belated submission of proof of authority from the board of
directors. Petitioner-corporation ratified the authority of Ms. Beleno to represent it in the Petition filed
before the RTC, particularly in Civil Case No. 03-108163, and consequently to sign the verification
and certification of non-forum shopping on behalf of the corporation. This fact confirms and affirms
23
her authority and gives this Court all the more reason to uphold that authority.

Additionally, it may be remembered that the Petition filed with the RTC was a claim for a refund of
business taxes. It should be noted that the nature of the position of Ms. Beleno as the corporation’s
finance director/manager is relevant to the determination of her capability and sufficiency to verify
the truthfulness and correctness of the allegations in the Petition. A finance director/manager looks
after the overall management of the financial operations of the organization and is normally in
charge of financial reports, which necessarily include taxes assessed and paid by the corporation.
Thus, for this particular case, Ms. Beleno, as finance director, may be said to have been in a position
to verify the truthfulness and correctness of the allegations in the claim for a refund of the
corporation’s business taxes.

24
In Mediserv v. Court of Appeals, we said that a liberal construction of the rules may be invoked in
situations in which there may be some excusable formal deficiency or error in a pleading, provided
that the invocation thereof does not subvert the essence of the proceeding, but at least connotes a
reasonable attempt at compliance with the rules. After all, rules of procedure are not to be applied in
25
a very rigid, technical manner, but are used only to help secure substantial justice.

More importantly, taking into consideration the substantial issue of this case, we find a special
circumstance or compelling reason to justify the relaxation of the rule. Therefore, we deem it more in
accord with substantive justice that the case be decided on the merits.

Double taxation

As to the substantive issues, petitioner maintains that the enforcement of Section 21 of the Manila
Revenue Code constitutes double taxation in view of the taxes collected under Section 14 of the
same code. Petitioner points out that Section 21 is not in itself invalid, but the enforcement of this
provision would constitute double taxation if business taxes have already been paid under Section
14 of the same revenue code. Petitioner further argues that since Ordinance Nos. 7988 and 8011
26
have already been declared null and void in Coca-Cola Bottlers Philippines, Inc. v. City of Manila,
all taxes collected and paid on the basis of these ordinances should be refunded.

In turn, respondent argues that Sections 14 and 21 pertain to two different objects of tax; thus, they
are not of the same kind and character so as to constitute double taxation. Section 14 is a tax on
manufacturers, assemblers, and other processors, while Section 21 applies to businesses subject to
excise, value-added, or percentage tax. Respondent posits that under Section 21, petitioner is
merely a withholding tax agent of the City of Manila.

At the outset, it must be pointed out that the issue of double taxation is not novel, as it has already
27
been settled by this Court in The City of Manila v. Coca-Cola Bottlers Philippines, Inc., in this wise:

Petitioners obstinately ignore the exempting proviso in Section 21 of Tax Ordinance No. 7794, to
their own detriment. Said exempting proviso was precisely included in said section so as to avoid
double taxation.

Double taxation means taxing the same property twice when it should be taxed only once; that is,
"taxing the same person twice by the same jurisdiction for the same thing." It is obnoxious when the
taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate
taxation," the two taxes must be imposed on the same subject matter, for the same purpose, by the
same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes
must be of the same kind or character.

Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is
subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are
being imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila;
(2) for the same purpose – to make persons conducting business within the City of Manila contribute
to city revenues; (3) by the same taxing authority – petitioner City of Manila; (4) within the same
taxing jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing
periods – per calendar year; and (6) of the same kind or character – a local business tax imposed on
gross sales or receipts of the business.

The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax
Ordinance No. 7794 is specious. The Court revisits Section 143 of the LGC, the very source of the
power of municipalities and cities to impose a local business tax, and to which any local business tax
imposed by petitioner City of Manila must conform. It is apparent from a perusal thereof that when a
municipality or city has already imposed a business tax on manufacturers, etc. of liquors, distilled
spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC, said
municipality or city may no longer subject the same manufacturers, etc. to a business tax under
Section 143(h) of the same Code. Section 143(h) may be imposed only on businesses that are
subject to excise tax, VAT, or percentage tax under the NIRC, and that are "not otherwise specified
in preceding paragraphs." In the same way, businesses such as respondent’s, already subject to a
local business tax under Section 14 of Tax Ordinance No. 7794 [which is based on Section 143(a) of
the LGC], can no longer be made liable for local business tax under Section 21 of the same Tax
 28
Ordinance [which is based on Section 143(h) of the LGC]. (Emphases supplied)

Based on the foregoing reasons, petitioner should not have been subjected to taxes under Section
21 of the Manila Revenue Code for the fourth quarter of 2001, considering that it had already been
paying local business tax under Section 14 of the same ordinance.

Further, we agree with petitioner that Ordinance Nos. 7988 and 8011 cannot be the basis for the
29
collection of business taxes. In Coca-Cola, this Court had the occasion to rule that Ordinance Nos.
7988 and 8011 were null and void for failure to comply with the required publication for three (3)
consecutive days. Pertinent portions of the ruling read:

It is undisputed from the facts of the case that Tax Ordinance No. 7988 has already been declared
by the DOJ Secretary, in its Order, dated 17 August 2000, as null and void and without legal effect
due to respondents’ failure to satisfy the requirement that said ordinance be published for three
consecutive days as required by law. Neither is there quibbling on the fact that the said Order of the
DOJ was never appealed by the City of Manila, thus, it had attained finality after the lapse of the
period to appeal.1âwphi1

Furthermore, the RTC of Manila, Branch 21, in its Decision dated 28 November 2001, reiterated the
findings of the DOJ Secretary that respondents failed to follow the procedure in the enactment of tax
measures as mandated by Section 188 of the Local Government Code of 1991, in that they failed to
publish Tax Ordinance No. 7988 for three consecutive days in a newspaper of local circulation. From
the foregoing, it is evident that Tax Ordinance No. 7988 is null and void as said ordinance was
published only for one day in the 22 May 2000 issue of the Philippine Post in contravention of the
unmistakable directive of the Local Government Code of 1991.

Despite the nullity of Tax Ordinance No. 7988, the court a quo, in the assailed Order, dated 8 May
2002, went on to dismiss petitioner’s case on the force of the enactment of Tax Ordinance No. 8011,
amending Tax Ordinance No. 7988. Significantly, said amending ordinance was likewise declared
null and void by the DOJ Secretary in a Resolution, dated 5 July 2001, elucidating that "Instead of
amending Ordinance No. 7988, herein respondent should have enacted another tax measure which
strictly complies with the requirements of law, both procedural and substantive. The passage of the
assailed ordinance did not have the effect of curing the defects of Ordinance No. 7988 which, any
way, does not legally exist." Said Resolution of the DOJ Secretary had, as well, attained finality by
virtue of the dismissal with finality by this Court of respondents’ Petition for Review on Certiorari in
G.R. No. 157490 assailing the dismissal by the RTC of Manila, Branch 17, of its appeal due to lack
30
of jurisdiction in its Order, dated 11 August 2003. (Emphasis in the original)

Accordingly, respondent’s assessment under both Sections 14 and 21 had no basis. Petitioner is
indeed liable to pay business taxes to the City of Manila; nevertheless, considering that the former
has already paid these taxes under Section 14 of the Manila Revenue Code, it is exempt from the
same payments under Section 21 of the same code. Hence, payments made under Section 21 must
be refunded in favor of petitioner.

It is undisputed that petitioner paid business taxes based on Sections 14 and 21 for the fourth
31
quarter of 2001 in the total amount of ₱470,932.21. Therefore, it is entitled to a refund of
 32
₱164,552.04 corresponding to the payment under Section 21 of the Manila Revenue Code.

WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the Court of
Tax Appeals En Banc Decision dated 1 October 2007 and Resolution dated 14 January 2008 are
REVERSED and SET ASIDE.

Spouses Pacquiao v. CTA GR 213394, April 6, 2016; (DE GUZMAN)

MENDOZA, J.:

1
Before this Court is a petition for review on certiorari under Rule 65 of the Rules of
Court filed by petitioner spouses, now Congressman Emmanuel D. Pacquiao (Pacquiao) and
Vice-Governor Jinkee J. Pacquiao (Jinkee), to set aside and annul the April 22, 2014
2 3
Resolution and the July 11, 2014 Resolution of the Court of Tax Appeals (CTA), First
Division, in CTA Case No. 8683.

Through the assailed issuances, the CTA granted the petitioners' Urgent Motion to Lift
Warrants of Distraint & Levy and Garnishment and for the Issuance of an Order to Suspend
4
the Collection of Tax (with Prayer for the Issuance of a Temporary Restraining Order
[Urgent Motion], dated October 18, 2013, but required them, as a condition, to deposit a cash
bond in the amount of ₱3,298,514,894.35-or post a bond of ₱4,947,772,341.53.

The Antecedents

The genesis of the foregoing controversy began a few years before the petitioners
became elected officials in their own right. Prior to their election as public officers, the
petitioners relied heavily on Pacquiao's claim to fame as a world-class professional boxer.
Due to his success, Pacquiao was able to amass income from both the Philippines and the
United States of America (US). His income from the US came primarily from the purses he
received for the boxing matches he took part under Top Rank, Inc. On the other hand, his
income from the Philippines consisted of talent fees received from various Philippine
corporations for product endorsements, advertising commercials and television
appearances.

In compliance with his duty to his home country, Pacquiao filed his 2008 income tax
5
return on April 15, 2009 reporting his Philippine-sourced income. It was subsequently
6
amended to include his US-sourced income.
 7
The controversy began on March 25, 2010, when Pacquiao received a Letter of Authority
(March LA) from the Regional District Office No. 43 (RDO) of the Bureau of Internal Revenue
(BIR) for the examination of his books of accounts and other accounting records for the
period covering January 1, 2008 to December 31, 2008.

8
On April 15, 2010, Pacquiao filed his 2009 income tax return, which although reflecting
his Philippines-sourced income, failed to include his income derived from his earnings in the
9 10
US. He also failed to file his Value Added Tax (VAT) returns for the years 2008 and 2009.

Finding the need to directly conduct the investigation and determine the tax liabilities of
the petitioners, respondent Commissioner on Internal Revenue (CIR) issued another Letter of
Authority, dated July 27, 2010 (July LA), authorizing the BIR's National Investigation Division
(NID) to examine the books of accounts and other accounting records of both Pacquiao and
11
Jinkee for the last 15 years, from 1995 to 2009. On September 21, 2010 and September 22,
12 13
2010, the CIR replaced the July LA by issuing to both Pacquiao and Jinkee separate
electronic versions of the July LA pursuant to Revenue Memorandum Circular ( RMC) No. 56-
14
2010.

15
Due to these developments, the petitioners, through counsel, wrote a letter
questioning the propriety of the CIR investigation. According to the petitioners, they were
1aшphi1

already subjected to an earlier investigation by the BIR for the years prior to 2007, and no
fraud was ever found to have been committed. They added that pursuant to the March LA
issued by the RDO, they were already being investigated for the year 2008.

16
In its letter, dated December 13, 2010, the NID informed the counsel of the petitioners
that the July LA issued by the CIR had effectively cancelled and superseded the March LA
issued by its RDO. The same letter also stated that:

Although fraud had been established in the instant case as determined by the
Commissioner, your clients would still be given the opportunity to present
documents as part of their procedural rights to due process with regard to the
civil aspect thereof. Moreover, any tax credits and/or payments from the taxable
year 2007 & prior years will be properly considered and credited in the current
17
investigation.

[Emphasis Supplied]

The CIR informed the petitioners that its reinvestigation of years prior to 2007 was
justified because the assessment thereof was pursuant to a "fraud investigation" against the
petitioners under the "Run After Tax Evaders" (RATE) program of the BIR.
 On January 5 and 21, 2011, the petitioners submitted various income tax related
18
documents for the years 2007-2009. As for the years 1995 to 2006, the petitioners
explained that they could not furnish the bureau with the books of accounts and other, tax
related documents as they had already been disposed in accordance with Section 235 of the
19
Tax Code. They added that even if they wanted to, they could no longer find copies of the
documents because during those years, their accounting records were then managed by
previous counsels, who had since passed away. Finally, the petitioners pointed out that their
tax liabilities for the said years had already been fully settled with then CIR Jose Mario
20
Buñag, who after a review, found no fraud against them.

On June 21, 2011, on the same day that the petitioners made their last compliance in
21
submitting their tax-related documents, the CIR issued a subpoena duces tecum requiring
the petitioners rto submit additional income tax and VAT-related documents for the years
1995-2009.

After conducting its own- investigation, the CIR made its initial assessment finding that
the petitioners were unable to fully settle their tax liabilities. Thus, the CIR issued its Notice
22
of Initial Assessment-Informal Conference (NIC), dated January 31, 2012, directly
addressed to the petitioners, informing them that based on the best evidence obtainable,
they were liable for deficiency income taxes in the amount of ₱714,061,116.30 for 2008 and
₱1,446,245,864.33 for 2009, inclusive of interests and surcharges. After being informed of this
development, the counsel for the petitioners sought to have the conference reset but he
never received a response.

23
Then, on "February 20, 2012, the CIR issued the Preliminary Assessment Notice (PAN),
24
informing the petitioners that based on third-party information allowed under Section 5(B)
25
and 6 of the National Internal Revenue Code (NIRC), they found the petitioners liable not
only for deficiency income taxes in the amount of ₱714,061,116.30 for 2008 and
₱1,446;245,864.33 for 2009, but aiso for their non-payment of their VAT liabilities in the
amount ₱4,104,360.01 for 2008 and ₱ 24,901,276.77 for 2009.

26
The petitioners filed their protest against the PAN.

27
After denying the protest, the BIR issued its Formal Letter Demand (FLD), dated May 2,
2012, finding the petitioners liable for deficiency income tax and VAT amounting to
₱766,899,530.62 for taxable years 2008 and ₱1,433,421,214.61 for 2009, inclusive of interests
28
and surcharges. Again, the petitioners questioned the findings of the CIR.
 29
On May 14, 2013, the BIR issued its Final Decision on Disputed Assessment (FDDA),
addressed to Pacquiao only, informing him that the CIR found him liable for deficiency
income tax and VAT for taxable years 2008 and 2009 which, inclusive of interests and
surcharges, amounted to a total of ₱2,261,217,439.92.

Seeking to collect the total outstanding tax liabilities of the petitioners, the Accounts
Receivable Monitoring Division of the BIR (BIR-ARMD), issued the Preliminary Collection
30
Letter (PCL), dated July 19, 2013, demanding that both Pacquiao and Jinkee pay the
amount of ₱2,261,217,439.92, inclusive of interests and surcharges.

Then, on August 7, 2013, the BIR-ARMD sent Pacquiao and Jinkee the Final Notice Before
31
Seizure (FNBS), informing the petitioners of their last opportunity to make the necessary
settlement of deficiency income and VAT liabilities before the bureau would proceed against
their property.

Although they no longer questioned the BIR's assessment of their deficiency VAT
liability, the petitioners requested that they be allowed to pay the same in four (4) quarterly
installments. Eventually, through a series of installments, Pacquiao and Jinkee paid a total
32
₱32,196,534.40 in satisfaction of their liability for deficiency VAT.

Proceedings at the CTA

Aggrieved that they were being made liable for deficiency income taxes for the years 2008
33
and 2009, the petitioners sought redress and filed a petition for review with the CTA.

Before the CTA, the petitioners contended that the assessment of the CIR was defective
34
because it was predicated on its mere allegation that they were guilty of fraud.

They also questioned the validity of the attempt by the CIR to collect deficiency taxes
from Jinkee, arguing that she was denied due process. According to the petitioners, as all
previous communications and notices from the CIR were addressed to both petitioners, the
FDDA was void because it was only addressed to Pacquiao. Moreover, considering that the
35
PCL and FNBS were based on the FDDA, the same should likewise be declared void.

The petitioners added that the CIR assessment, which was not based on actual
transaction documents but simply on "best possible sources," was not sanctioned by the
Tax Code. They also argue that the assessment failed to consider not only the taxes paid by
Pacquiao to the US authorities for his fights, but also the deductions claimed by him for his
36
expenses.
 Pending the resolution by the CTA of their appeal, the petitioners sought the suspension
37
of the issuance of warrants of distraint and/or levy and warrants of garnishment.

38
Meanwhile, in a letter, dated October 14, 2013, the BIR-ARMD informed the petitioners
that they were denying their request to defer the collection enforcement action for lack of
legal basis. The same letter also informed the petitioners that despite their initial payment,
the amount to be collected from both of them still amounted to ₱3,259,643,792.24, for
deficiency income tax for taxable years 2008 and 2009, and ₱46,920,235.74 for deficiency VAT
39
for the same period. A warrant of distraint and/or levy against Pacquiao and Jinkee was
included in the letter.

Aggrieved, the petitioners filed the subject Urgent Motion for the CTA to lift the warrants
of distraint, levy and garnishments issued by the CIR against their .assets and to enjoin the
CIR from collecting the assessed deficiency taxes pending the resolution of their appeal. As
for- the cash deposit and bond requirement under Section 11 of Republic Act (R.A.) No. 1125,
the petitioners question the necessity thereof, arguing that the CIR's assessment of their tax
liabilities was highly questionable. At the same time, the petitioners manifested that they
were willing to file a bond for such reasonable amount to be fixed by the tax court.

On April 22, 2014, the CTA issued the first assailed resolution granting the petitioner's
Urgent Motion, ordering the CIR to desist from collecting on the deficiency tax assessments
against the petitioners. In its resolution, the CTA noted that the amount sought to be
collected was way beyond the petitioners' net worth, which, based on Pacquiao's Statement
of Assets, Liabilities and Net Worth (SALN), only amounted to ₱1,185,984,697.00. Considering
that the petitioners still needed to cover the costs of their daily subsistence, the CTA opined
that the collection of the total amount of ₱3,298,514,894.35 from the petitioners would be
highly prejudicial to their interests and should, thus, be suspended pursuant to Section 11 of
R.A. No. 1125, as amended.

The CTA, however, saw no justification that the petitioners should deposit less than the
disputed amount. They were, thus, required to deposit the amount of P3,298,514,894.35 or
post a bond in the amount of ₱4,947,772,341.53.

The petitioners sought partial reconsideration of the April 22, 2014 CTA resolution,
praying for the reduction of the amount of the bond required or an extension of 30 days to file
40
the same. On July 11, 2014, the CTA issued the second assailed resolution denying the
petitioner's motion to reduce the required cash deposit or bond, but allowed them an
extension of thirty (30) days within which to file the same.

Hence, this petition, raising the following

GROUNDS

A.
Respondent Court acted with grave abuse of discretion amounting to lack or
excess of jurisdiction in presuming the correctness of a fraud assessment
without evidentiary support other than the issuance of the fraud assessments
themselves, thereby violating Petitioner's constitutional right to due process.

B.

Respondent Court acted with grave abuse of discretion amounting to lack or

excess of jurisdiction when it required the Petitioners to post a bond even if the
tax collection processes employed by Respondent Commissioner against
Petitioners was patently in violation of law thereby blatantly breaching
Petitioners' constitutional right to due process, to wit:

1. Respondent Commissioner commenced tax collection process

against Jinkee without issuing or serving an FDDA against her.

2. Respondent Commissioner failed to comply with the procedural

due process requirements for summary tax collection remedies
under Sections 207(A) and (B) of the Tax Code when she
commenced summary collection remedies before the expiration of
the period for Petitioners to pay the assessed deficiency taxes.

3. Respondent Commissioner failed to comply with the procedural

due process requirements for summary tax collection remedies
under Section 208 of the Tax Code when she failed to serve
Petitioners with warrants of garnishment against their bank
accounts.

4. The Chief of the ARMD, without any authority from Respondent

Commissioner, increased the aggregate amount of deficiency
income tax and VAT assessed against Petitioners from
₱2,261,217,439.92 to ₱3,298,514,894.35 after the filing of the
Petition for Review with the Court of Tax Appeals.

5. Respondent Commissioner arbitrarily refused to admit that

Petitioners had already paid the deficiency VAT assessments for
the years 2008 and 2009.

C.

Respondent Court acted with grave abuse of discretion amounting to lack or

excess of jurisdiction in requiring Petitioners to post a cash bond in the amount
of ₱3,298,514,894.35 or a surety bond in the amount of ₱4,947,772,341.53, which
is effectively an impossible condition given that their undisputed net worth is
only ₱1,185,984,697.00.

D.

Respondent Court acted with grave abuse of discretion amounting to lack or

 excess of jurisdiction when it imposed a bond requirement which will effectively
prevent Petitioners from continuing the prosecution of its appeal from the
41
arbitrary and bloated assessments issued by Respondent Commissioner.

Arguments of the Petitioners

Contending that the CTA En Bane has no certiorari jurisdiction over interlocutory orders
issued by its division, the petitioners come before the Court, asking it to 1 direct the CTA to
dispense with the bond requirement imposed under Section 11 of R.A. No. 1125, as amended;
and 2 direct the CIR to suspend the collection of the deficiency income tax and VAT for the
years 2008 and 2009. The petitioners also pray that a temporary restraining order (TRO) be
issued seeking a similar relief pending the disposition of the subject petition.

In support of their position, the petitioners assert that the CTA acted with grave abuse of
discretion amounting to lack or excess of jurisdiction in requiring them to provide security
required under Section 11 of R.A. No. 1125. Under the circumstances, they claim that they
should not be required to make a cash deposit or post a bond to stay the collection of the
questioned deficiency taxes considering that the assessment and collection efforts of the
BIR was marred by both procedural and substantive errors. They are synthesized as follows:

First. The CTA erred when it required them to make a cash deposit or post a bond on the
basis of the fraud assessment by the CIR. Similar to the argument they raised in their petition
for review with the CTA, they insist that the fraud assessment by the CIR could not serve as
basis for security because the amount assessed by the CIR was made without evidentiary
42
basis, but just grounded on the "best possible sources," without any detail.

Second. The BIR failed to accord them procedural due process when it initiated summary
collection remedies even before the expiration of the period allowed for them to pay the
43
assessed deficiency taxes. They also claimed that they were not served with warrants of
garnishment and that the warrants of garnishment served on their banks of account were
44
made even before they received the FDDA and PCL.

Third. The BIR only served the FDDA to Pacquiao. There was no similar notice to Jinkee.
Considering such failure, the CIR effectively did not find Jinkee liable for deficiency taxes.
The collection of deficiency taxes against Jinkee was improper as it violated her right to due
45
process of law. Accordingly, the petitioners question the propriety of the CIR's attempt to
collect deficiency taxes from Jinkee.

Fourth. The amount assessed by the BIR as deficiency taxes included the deficiency VAT
for the years 2008 and 2009 which they had already paid, albeit in installments.

Fifth. The posting of the required security is effectively an impossible condition given
that their undisputed net worth is only ₱1,185,984,697.00
 Considering the issues raised, it is the position of the petitioners that the circumstances
of the case warrant the application of the exception provided under Section 11 of R.A. No.
46
1125 as affirmed by the ruling of the Court in Collector of Internal Revenue v. Avelino
47
(Avelino) and Collector of Internal Revenue v. Zulueta, (Zulueta) and that they should have
been exempted from posting the required security as a prerequisite to suspend the collection
of deficiency taxes from them.

On August 18, 2014, the Court resolved to grant the petitioners' prayer for the issuance of
48
a TRO and to require the CIR to file its comment.

Arguments of the CIR

For its part,- the CIR asserts that the CTA was correct in insisting that the petitioners post
the required cash deposit or bond as a condition to suspend the collection of deficiency
taxes. According to. the tax administrator, Section 11 of R.A. No. 1125, as amended, is
without exception when it states that notwithstanding an appeal to the CTA, a taxpayer, in
order to suspend the payment of his tax liabilities, is required to deposit the amount claimed
49
by the CIR or to file a surety bond for not more than double the amount due.

As for the Court's rulings in Avelino and Zulueta invoked by the petitioners, the CIR
argues that they are inapplicable considering that in the said cases, it was ruled that the
requirement of posting a bond to suspend the collection of taxes could be dispensed with
only if the methods employed by the CIR in the tax collection were clearly null and void and
50
prejudicial to the taxpayer. The CIR points out that, in this case, the CTA itself made, no
finding that its collection by summary methods was void and even ruled that "the alleged
illegality of the methods employed by the respondent (CIR) to effect the collection of tax [is]
51
not at all patent or evident xxx" and could only be determined after a full-blown trial. The
CIR even suggests that the Court revisit its ruling in Avelino and Zulueta as Section 11 of
R.A. No. 1125, as amended, gives the CTA no discretion to allow the dispensation of the
required bond as a condition to suspend the collection of taxes.

Finally, the CIR adds that whether the assessment and collection of the petitioners' tax
liabilities were proper as to justify the application of Avelino and Zulueta is a question of fact
which is not proper in a petition for certiorari under Rule 65, considering that the rule is only
52
confined to issues of jurisdiction. 1aшphi1

The Court's Ruling

Appeal will not suspend the

collection of tax; Exception
 53
Section 11 of R.A. No. 1125, as amended by R.A. No. 9282, embodies the rule that an
appeal to the CTA from the decision of the CIR will not suspend the payment, levy, distraint,
and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided
by existing law. When, in the view of the CTA, the collection may jeopardize the interest of
the Government and/or the taxpayer, it may suspend the said collection and require the
taxpayer either to deposit the amount claimed or to file a surety bond.

The application of the exception to the rule is the crux of the subject controversy.
Specifically, Section 11 provides:

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party
adversely affected by a decision, ruling or inaction of the Commissioner of
Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry or the Secretary of Agriculture or the Central
Board of Assessment Appeals or the Regional Trial Courts may file an appeal
with the CTA within thirty (30) days after the receipt of such decision or ruling or
after the expiration of the period fixed by law for action as referred to in Section
7(a)(2) herein.

xxxx

No appeal taken to the CTA from the decision of the Commissioner of Internal
Revenue or the Commissioner of Customs or the Regional Trial Court, provincial,
city or municipal treasurer or the Secretary of Finance, the Secretary of Trade
and Industry and Secretary of Agriculture, as the case may be shall suspend the
payment, levy, distraint, and/or sale of any property of the taxpayer for the
satisfaction of his tax liability as provided by existing law:

Provided, however, That when in the opinion of the Court the collection by the
aforementioned government agencies may jeopardize the interest of the
Government and/or the taxpayer, the Court at any stage of the proceeding may
suspend the said collection and require the taxpayer either to deposit the amount
claimed or to file a surety bond for not more than double the amount with the
Court.

xxxx

[Emphasis Supplied]

Essentially, the petitioners ascribe grave abuse of discretion on the part of the CTA when
it issued the subject resolutions requiring them to deposit-the amount of P3,298,514,894.35
or post a bond in the amount of P4,947,772,341.53 as a condition for its order enjoining the
CIR from collecting the taxes from them. The petitioners anchor their contention on the
premise that the assessment and collection processes employed by the CIR in exacting their
tax liabilities were in patent violation of their constitutional right to due process of law. They,
thus, posit that pursuant to Avelino and Zulueta, the tax court should have not only ordered
the CIR to suspend the collection efforts it was pursuing in satisfaction of their tax liability,
but also dispensed with the requirement of depositing a cash or filing a surety bond.

To recall, the Court in Avelino upheld the decision of the CTA to declare the warrants of
garnishment, distraint and levy and the notice of sale of the properties of Jose Avelino null
and void and ordered the CIR to desist from collecting the deficiency income taxes which
were assessed for the years 1946 to 1948 through summary administrative methods. The
Court therein found that the demand of the then CIR was made without authority of law
because it was made five (5) years and thirty-five (35) days after the last two returns of Jose
Avelino were filed - clearly beyond the three (3)-year prescriptive period provided under what
was then Section 51(d) of the National Internal Revenue Code. Dismissing the contention of
the CIR that the deposit of the amount claimed or the filing of a bond as required by law was
a requisite before relief was granted, the Court therein concurred with the opinion of the CTA
that the courts were clothed with authority to dispense with the requirement "if the method
employed by the Collector of Internal Revenue in the collection of tax is not sanctioned by
54
law."

In Zulueta, the Court likewise dismissed the argument that the CTA erred in issuing the
injunction without requiring the taxpayer either to deposit the amount claimed or to file a
surety bond for an amount not more than double the tax sought to be collected. The Court
55
cited Collector of Internal Revenue v. Aurelio P. Reyes and the Court of Tax Appeals where
it was written:

Xxx. At first blush it might be as contended by the Solicitor General, but a

careful analysis of the second paragraph of said Section 11 will lead Us to the
conclusion that the requirement of the bond as a condition precedent to the
issuance of a writ of injunction applies only in cases where the processes by
which the collection sought to be made by means thereof are carried out in
consonance with law for such cases provided and not when said processes are
obviously in violation of the law to the extreme that they have to be SUSPENDED
56
for jeopardizing the interests of the taxpayer.

[Italics included]

The Court went on to explain the reason for empowering the courts to issue such
injunctive writs. It wrote:

"Section 11 of Republic Act No. 1125 is therefore premised on the

assumption that the collection by summary proceedings is by itself in
accordance with existing laws; and then what is suspended is the act of
collecting, whereas, in the case at bar what the respondent Court suspended was
the use of the method employed to verify the collection which was evidently
illegal after the lapse of the three-year limitation period. The respondent Court
issued the injunction in question on the basis of its findings that the means
intended to be used by petitioner in the collection of the alleged deficiency taxes
were in violation of law. It would certainly be an absurdity on the part of the Court
 of Tax Appeals to declare that the collection by the summary methods of distraint
and levy was violative of the law, and then, on the same breath require the
petitioner to deposit or file a bond as a prerequisite of the issuance of a writ of
injunction. Let us suppose, for the sake of argument, that the Court a quo would
have required the petitioner to post the bond in question and that the taxpayer
would refuse or fail to furnish said bond, would the Court a quo be obliged to
authorize or allow the Collector of Internal Revenue to proceed with the collection
from the petitioner of the taxes due by a means it previously declared to be
57
contrary to law?"

[Italics included. Emphases and Underlining Supplied]

Thus, despite the amendments to the law, the Court still holds that the CTA has ample
authority to issue injunctive writs to restrain the collection of tax and to even dispense with
the deposit of the amount claimed or the filing of the required bond, whenever the method
employed by the CIR in the collection of. tax jeopardizes the interests of a taxpayer for being
patently in violation of the law. Such authority emanates from the jurisdiction conferred to it
not only by Section 11 of R.A. No. 1125, but also by Section 7 of the same law, which, as
amended provides:

Sec. 7. Jurisdiction. - The Court of Tax Appeals shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

l. Decisions of the Commissioner of Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal
Revenue or other laws administered by the Bureau of Internal Revenue;

xxxx

[Emphasis Supplied]

From all the foregoing, it is clear that the authority of the courts to issue injunctive writs
to restrain the collection of tax and to dispense with the deposit of the amount claimed or the
filing of the required bond is not simply confined to cases where prescription has set in. As
explained by the Court in those cases, whenever it is determined by the courts that the
method employed by the Collector of Internal Revenue in the collection of tax is not
sanctioned by law, the bond requirement under Section 11 of R.A. No. 1125 should be
dispensed with. The purpose of the rule is not only to prevent jeopardizing the interest of the
taxpayer, but more importantly, to prevent the absurd situation wherein the court would
declare "that the collection by the summary methods of distraint and levy was violative of
law, and then, in the same breath require the petitioner to deposit or file a bond as a
58
prerequisite for the issuance of a writ of injunction."

The determination of
whether the petitioners.'
case falls within the
exception provided under
Section 11, R.A No. 1125
cannot be determined at this
point

Applying the foregoing precepts to the subject controversy, the Court finds no sufficient
basis in the records for the Court to determine whether the dispensation of the required cash
deposit or bond provided under Section 11, R.A No. 1125 is appropriate.

It should first be highlighted that in rendering the assailed resolution, the CTA, without
stating the facts and law, made a determination that the illegality of the methods employed by
the CIR to effect the collection of tax was not patent. To quote the CTA:

In this case, the alleged illegality of the methods employed by respondent to

effect the collection of tax is not at all patent or evident as in the foregoing cases.
At this early stage of the proceedings, it is premature for this Court to rule on the
issues of whether or not the warrants were defectively issued; or whether the
service thereof was done in violation of the rules; or whether or not respondent's
assessments were valid. These matters are evidentiary in nature, the resolution
of which can only be made after a full blown trial.

Apropos, the Court finds no legal basis to apply Avelino and Zulueta to the
instant case and exempt petitioners from depositing a cash bond or filing a
59
surety bond before a suspension order may be effected.

Though it may be true that it would have been premature for the CTA to immediately
determine whether the assessment made against the petitioners was valid or whether the
warrants were properly issued and served, still, it behooved upon the CTA to properly
determine, at least preliminarily, whether the CIR, in its assessment of the tax liability of the
petitioners, and its effort of collecting the same, complied with the law and the pertinent
issuances of the BIR itself. The CTA should have conducted a preliminary hearing and
received evidence so it could have properly determined whether the requirement of providing
the required security under Section 11, R.A. No. 1125 could be reduced or dispensed with
pendente lite.

The Court cannot make a

preliminary determination
on whether the CIR used
methods not sanctioned by
law

Absent any evidence and preliminary determination by the CTA, the Court cannot make
any factual finding and settle the issue of whether the petitioners should comply with the
security requirement under Section 11, R.A. No. 1125. The determination of whether the
methods, employed by the CIR in its assessment, jeopardized the interests of a taxpayer for
being patently in violation of the law is a question of fact that calls for the reception of
evidence which would serve as basis. In this regard, the CTA is in a better position to initiate
this given its time and resources. The remand of the "case to the CTA on this question is,
therefore, more sensible and proper.

For the Court to make any finding of fact on this point would be premature. As stated
earlier, there is no evidentiary basis. All the arguments are mere allegations from both sides.
Moreover, any finding by the Court would pre-empt the CTA from properly exercising its
jurisdiction and settle the main issues presented before it, that is, whether the petitioners
were afforded due process; whether the CIR has valid basis for its assessment; and whether
the petitioners should be held liable for the deficiency taxes.

Petition to be remanded to
the CTA; CTA to conduct
preliminary hearing

As the CTA is in a better, position to make such a preliminary determination, a remand to

the CTA is in order. To resolve the issue of whether the petitioners should be required to post
the security bond under Section 11 of R.A. No. 1125, and, if so, in what, amount, the CTA
must take into account, among others, the following:

First. Whether the requirement of a Notice of Informal Conference was complied with -
The petitioners contend that the BIR issued the PAN without first sending a NIC to
petitioners. One of the first requirements of Section 3 of Revenue Regulation (R.R.) No. 12-
60
99, the then prevailing regulation on the due process requirement in tax audits and/or
61
investigation, is that a NIC be first accorded to the taxpayer. The use of the word "shall" in
subsection 3.1.1 describes the mandatory nature of the service of a NIC. As with the other
notices required under the regulation, the purpose of sending a NIC is but part of the "due
process requirement in the issuance of a deficiency tax assessment," the absence of which
62
renders nugatory any assessment made by the tax authorities.

Second. Whether the 15-year period subject of the CIR's investigation is arbitrary and
63
excessive. - Section 203 of the Tax Code provides a 3-year limit for the assessment. of
internal revenue taxes. While the prescriptive period to assess deficiency taxes may be
extended to 10 years in cases where there is false, fraudulent, or non-filing of a tax return -
the fraud contemplated by law must be actual. It must be intentional, consisting of deception
willfully and deliberately done or resorted to in order to induce another to give up some
64
right.

Third. Whether fraud was duly established. - In its letter, dated December 13, 2010, the
NID had been conducting a fraud investigation against the petitioners under its RATE
program and that it found that "fraud had been established in the instant case as determined
by the Commissioner." Under Revenue Memorandum Order (RMO) No. 27-10, it is required
 65
that a preliminary investigation must first be conducted before a LA is issued.

Fourth. Whether the FLD issued against the petitioners was irregular. - The FLD issued
against the petitioners allegedly stated that the amounts therein were "estimates based on
best possible sources." A taxpayer should be informed in writing of the law and the facts on
66
which the assessment is made, otherwise, the assessment is void. An assessment, in
order to stand judicial scrutiny, must be based on facts. The presumption of the correctness
of an assessment, being a mere presumption, cannot be made to rest on another
67
presumption.

To stress, the petitioners had asserted that the assessment of the CIR was not based on
actual transactions but on "estimates based on best possible sources." This assertion has
not been satisfactorily addressed by the CIR in detail. Thus, there is a need for the CTA to
conduct a preliminary hearing.

Fifth. Whether the FDDA, the PCL, the FNBS, and the Warrants of Distraint and/or Levy
were validly issued. In its hearing, the CTA must also determine if the following allegations of
the petitioners have merit:,

a. The FDDA and PCL were issued against petitioner Pacquiao only. The
Warrant of Distraint and/or Levy/Garnishment issued by the CIR, however, were
made against the assets of both petitioners;

b. The warrants of garnishment had been served on the banks of both

petitioners even before the petitioners received the FDDA and PCL;

c. The Warrant of Distraint and/or Levy/Garnishment against the petitioners

was allegedly made prior to the expiration of the period allowed for the
petitioners to pay the assessed deficiency taxes;

d. The Warrant of Distraint and/or Levy/Garnishment against petitioners failed

to take into consideration that the deficiency VAT was already paid in full; and

68
e. Petitioners were not given a copy of the Warrants. Sections 207 and
69
208 of the Tax Code require the Warrant of Distraint and/or Levy/Garnishment
be served upon the taxpayer.

Additional Factors

In case the CTA finds that the petitioners should provide the necessary security under
Section 11 of R.A. 1125, a recomputation of the amount thereof is in order.- If there would be
a need for a bond or to reduce the same, the CTA should take note that the Court, in A.M. No.
15-92-01-CTA, resolved to approve the CTA En Banc Resolution No. 02-2015, where the
phrase "amount claimed" stated in Section 11 of R.A. No. 1125 was construed to refer to the
principal amount of the deficiency taxes, excluding penalties, interests and surcharges.

Moreover, the CTA should.also consider the claim of the petitioners that they already paid
a total of P32,196,534.40 deficiency VAT assessed against' them.. Despite said payment, the
CIR still assessed them the total amount of P3,298,514,894.35, including the amount
assessed as VAT deficiency, plus surcharges, penalties and interest. If so, these should also
be deducted from the.amount of the bond to be computed and required.

In the conduct of its preliminary hearing, the CTA must balance the scale between the
inherent power of the State to tax and its right to prosecute perceived transgressors of the
law, on one side; and the constitutional rights of petitioners to due process of law and the
equal protection of the laws, on the other. In case of doubt, the tax court must remember that
as in all tax cases, such scale should favor the taxpayer, for a citizen's right to due process
and equal protection of the law is amply protected by the Bill of Rights under the
70
Constitution.

In view of all the foregoing, the April 22, 2014 and July 11, 2014 Resolutions of the CTA, in
so far as it required the petitioners to deposit first a cash bond in the amount of
₱3,298,514,894.35 or post a bond of ₱4,947,772,341.53, should be further enjoined until the
issues aforementioned are settled in a preliminary hearing to be conducted by it. Thereafter,
it should make a determination if the posting of a bond would still be required and, if so,
compute it taking into account the CTA En Banc Resolution, which was approved by the
Court in A.M. No. 15-02-01-CTA, and the claimed payment of ₱32,196,534.40, among others.

WHEREFORE, the petition is PARTIALLY GRANTED. Let a Writ of Preliminary Injunction

be issued, enjoining the implementation of the April 22, 2014 and July 11, 2014 Resolutions of
the Court of Tax Appeals, First Division, in CTA Case No. 8683, requiring the petitioners to
first deposit a cash bond in the amount of ₱3,298,514,894.35 or post a bond of
₱4,947,772,341.53, as a condition to restrain the collection of the deficiency taxes assessed
against them.

The writ shall remain in effect until the issues aforementioned are settled in a preliminary
hearing to be conducted by the Court of Tax Appeals, First Division.

Accordingly, the case is hereby REMANDED to the Court of Tax Appeals, First Division,
which is ordered to conduct a preliminary hearing to determine whether the dispensation or
reduction of the required cash deposit or bond provided under Section 11, Republic Act No.
1125 is proper to restrain the collection of deficiency taxes assessed against the petitioners.

If required, the Court of Tax Appeals, First Division, shall proceed to compute the amount
of the bond in accordance with the guidelines aforestated, particularly the provisions of A.M.
No. 15-02-01-CTA. It should also take into account the amounts already paid by the
petitioners.

After the posting of the required bond, or if the Court of Tax Appeals, First Division,
determines that no bond is necessary, it shall proceed to hear and resolve the petition for
review pending before it.
CIR v. Fitness by Design GR 215957, Nov. 9, 2016(CELESPARA)

FACTS:

On April 11, 1996, Fitness filed its Annual Income Tax Return for the taxable year of 1995.
According to Fitness, it was still in its pre-operating stage during the covered period.

On June 9, 2004, Fitness received a copy of the Final Assessment Notice issued under a
Letter of Authority which assessed that Fitness had a tax deficiency in the amount of
P10,647,529.69.

Fitness filed a protest to the Final Assessment Notice, contending that the Commissioner’s
period to assess had already been prescribed. Further, the assessment was without basis
since the company was only incorporated on May 30, 1995.

The Commissioner later issued a Warrant of Distraint and/or Levy to Fitness.

Fitness filed before the First Division of the Court of Tax Appeals (CTA) a Petition for
Review (With Motion to Suspend Collection of Income Tax, Value Added Tax,
Documentary Stamp Tax and Surcharges and Interests).

The Commissioner, in its Answer to Fitness’ Petition, posited that the Warrant of Distraint
and/or Levy was issued in accordance with law, and that its right to assess had not yet
prescribed under Section 222(a)16 of the National Internal Revenue Code (NIRC). Because
the 1995 Income Tax Return filed by Fitness was false and fraudulent for its alleged
intentional failure to reflect its true sales, Fitness’ respective taxes may be assessed at any
time within 10 years from the discovery of fraud or omission.

The Commissioner asserted further that the assessment already became final and
executory for Fitness’ failure to file a protest within the reglementary period.

The alleged fraudulent return was discovered through a tip from a confidential informant.

Through the report, the revenue officers recommended the filing of a civil case for
collection of taxes and a criminal case for failure to declare Fitness’ purported sales in its
1995 Income Tax Return. Hence, a criminal complaint against Fitness was filed before the
Department of Justice.

The CTA First Division granted Fitness’ Petition on the ground that the assessment has
already prescribed. It cancelled and set aside the Final Assessment Notice, as well as the
Warrant of Distraint and/or Levy issued by the Commissioner, for failure to comply with
the requirements of Section 228 of the NIRC.

The Commissioner’s Motion for Reconsideration and Supplemental Motion for

Reconsideration were denied by the CTA First Division.

Aggrieved, the Commissioner filed an appeal before the CTA En Banc, which affirmed the
Decision of the CTA First Division.

Hence, this Petition for Review.

ISSUE:

Whether the Final Assessment Notice issued against respondent Fitness by Design, Inc. is a
valid assessment under Section 228 of the National Internal Revenue Code.

RULING:

The Petition has no merit.

The disputed Final Assessment Notice is not a valid assessment.

First, it lacks the definite amount of tax liability for which respondent is accountable. It
does not purport to be a demand for payment of tax due, which a final assessment notice
should supposedly be.

Second, there are no due dates in the Final Assessment Notice. This negates petitioner’s
demand for payment.

Thus, the Warrant of Distraint and/or Levy is void since an invalid assessment bears no
valid effect.
An assessment “refers to the determination of amounts due from a person obligated to
make payments.”

“In the context of national internal revenue collection, it refers to the determination of the
taxes due from a taxpayer under the NIRC.”

The assessment process starts with the filing of tax return and payment of tax by the
taxpayer.

The initial assessment evidenced by the tax return is a self-assessment of the taxpayer.

After filing a return, the Commissioner or his or her representative may allow the
examination of any taxpayer for assessment of proper tax liability.

The Commissioner or his or her authorized representative is responsible for the

“appropriate review and issuance of a deficiency tax assessment, if warranted.”

If, after a review conducted, there exists sufficient basis to assess the taxpayer with
deficiency taxes, the officer shall issue a preliminary assessment notice showing in detail the
facts, jurisprudence, and law on which the assessment is based.

The taxpayer is given 15 days from receipt of the pre-assessment notice to respond. If the
taxpayer fails to respond, he or she will be considered in default, and a formal letter of
demand and assessment notice will be issued.

The formal letter of demand and assessment notice shall state the facts, jurisprudence, and
law on which the assessment was based; otherwise, these shall be void. The taxpayer or the
authorized representative may administratively protest the formal letter of demand and
assessment notice within 30 days from receipt of the notice.

The indispensability of affording taxpayers sufficient written notice of his or her tax
liability is a clear definite requirement.

Section 228 of the National Internal Revenue Code and Revenue Regulations No. 12-99, as
amended, transparently outline the procedure in tax assessment.

The word “shall” in Section 228 of the National Internal Revenue Code and Revenue
Regulations No. 12-99 means the act of informing the taxpayer of both the legal and factual
bases of the assessment is mandatory. The law requires that the bases be reflected in the
formal letter of demand and assessment notice.83 This cannot be presumed.

The rationale behind the requirement that taxpayers should be informed of the facts and
the law on which the assessments are based conforms with the constitutional mandate that
no person shall be deprived of his or her property without due process of law.

Between the power of the State to tax and an individual’s right to due process, the scale
favors the right of the taxpayer to due process.

The essential nature of taxes for the existence of the State grants government with vast
remedies to ensure its collection. However, taxpayers are guaranteed their fundamental
right to due process of law, as articulated in various ways in the process of tax assessment.
After all, the State’s purpose is to ensure the well-being of its citizens, not simply to deprive
them of their fundamental rights.

The petition is denied.

CIR v. La Flor dela Isabela GR 211289, Jan. 14, 2019; (CHING)

waiver is defective - did not comply with the RMO

Facts:

La Flor dela Isabela, Inc. (La Flor) is a domestic corporation duly

organized and existing under Philippine Law. It filed monthly returns
for the EWT and WTC for CY 2005. On 9/3/2008, 2/16/2009, and
12/2/2009, it executed Waivers of the Statute of Limitations. On 1/7/2010,
it received four Formal Letters of Demand and Final Assessment Notices
(FANs), all dated 12/17/2009. On 1/15/2010, it filed its Letter of Protest
contesting the assessment notices.

Commissioner of Internal Revenue (CIR)

On 7/20/2010, it issued the Final Decision on Disputed Assessment
(FDDA) involving the alleged deficiency withholding taxes in the
aggregate amount of P6,835,994.76.

CTA Third Division Decision

In its 8/3/2012 Decision, it ruled in favor of La Flor and cancelled the

deficiency tax assessments against it.

It ruled that based on the dates when La Flor filed its returns for EWT
and WTC, the CIR had until 2/15/2008 to 3/1/2009 to issue an assessment
pursuant to the three-year prescriptive period under Section 203 of the
NIRC. The Waivers entered into by the CIR and La Flor did not
effectively extend the prescriptive period for the issuance of the tax
assessments.

CTA En Banc Decision

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In its 9/30/2013 Decision, it affirmed the Decision of the CTA Division. It

ruled that the EWT and WTC assessments were barred by prescription.
The 9/3/2008 and 12/2/2009 Waivers were inadmissible because they
were never offered in evidence. Further, the 2/16/2009 Waiver was
defective because it failed to comply with RMO No. 20-90 as it did not
specify the kind and amount of tax involved.

Issues:

1. WHETHER THE PRESCRIPTIVE PERIOD UNDER SECTION

 203 OF THE NIRC APPLIES TO EWT AND WTC
ASSESSMENTS.
2. WHETHER LA FLOR’S EWT AND WTC ASSESSMENTS FOR
2005 WERE BARRED BY PRESCRIPTION.

Held:

1. Yes, the prescriptive period under Section 203 of the NIRC applies
to EWT and WTC assessments.

Yes, La Flor’s EWT and WTC assessments for 2005 were barred by
prescription.

Withholding taxes are internal revenue taxes covered by Section 203 of

the NIRC.

SEC. 203. Period of Limitation Upon Assessment and Collection. – Except

as provided in Section 222, internal revenue taxes shall be assessed
within three (3) years after the last day prescribed by law for the filing of
the return, and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration of such
period: Provided, That in case where a return is filed beyond the period
prescribed by law, the three (3)-year period shall be counted from the
day the return was filed. For purposes of this Section, a return filed
before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day. (Emphasis supplied)

Under the existing withholding tax system, the withholding agent retains
a portion of the amount received by the income earner. In turn, the said
amount is credited to the total income tax payable in transactions
covered by the EWT. On the other hand, in cases of income payments
subject to WTC and Final Withholding Tax, the amount withheld is
already the entire tax to be paid for the particular source of income.
Thus, it can readily be seen that the payee is the taxpayer, the person on
whom the tax is imposed, while the payor, a separate entity, acts as the
government’s agent for the collection of the tax in order to ensure its
payment.

Thus, withholding tax assessments such as EWT and WTC clearly

contemplate deficiency internal revenue taxes. Their aim is to collect
unpaid income taxes and not merely to impose a penalty on the
withholding agent for its failure to comply with its statutory duty.

Second Issue

In Commissioner of Internal Revenue v. Systems Technology Institute,

Inc., the Court ruled that waivers extending the prescriptive period of
tax assessments must be compliant with RMO No. 20-90 and must
indicate the nature and amount of the tax due.

WHEREFORE, the petition is DENIED.

The September 30, 2013 Decision and the February 10, 2014 Resolution
of the Court of Tax Appeals En Banc in CTA EB No. 951 are
AFFIRMED.

CIR v. STI GR 220835, July 26, 2017; (DE GUZMAN)

Facts:

STI filed its Amended Annual Income Tax Return for fiscal year 2003 on August 15,
2003; its Quarterly VAT Returns on July 23, 2002, October 25, 2002, January 24, 2003,
and May 23, 2003; and its Bureau of Internal Revenue (BIR) Form 1601E for EWT from
May 10, 2002 to April 15, 2003.[5]On May 30, 2006, STI's Amiel C. Sangalang signed a
Waiver of the Defense of Prescription Under the Statute of Limitations of the National
Internal Revenue Code (NIRC), with the proviso that the assessment and collection of
taxes of fiscal year 2003 shall come "no later than December 31, 2006."[6] On June 2,
2006, the waiver was accepted by Virgilio R. Cembrano, Large Taxpayers District
Officer of Makati and was notarized on even date.[7]On December 12, 2006, another
waiver was executed extending the period to assess and collect the assessed taxes
to March 31, 2007.[8] It was also signed by Sangalang and accepted by Cembrano
and notarized on the same date.[9] A third waiver was executed by the same
signatories extending further the period to June 30, 2007.[10]On June 28, 2007, STI
received a Formal Assessment Notice from the CIR, assessing STI for deficiency
income tax, VAT and EWT for fiscal year 2003, in the aggregate amount of
P161,835,737.98.[11]On July 25, 2007, STI filed a request for
reconsideration/reinvestigation dated July 23, 2007.[12]On September 11, 2009, STI
received from the CIR the Final Decision on Disputed Assessment (FDDA) dated
August 17, 2009 finding STI liable for deficiency income tax, VAT and EWT in the
lesser amount of P124,257,764.20.[13]On October 12, 2009, STI appealed the FDDA by
filing a petition for review with the CTA.[14] The case was docketed as CTA Case No.
7984 and was heard by the CTA Second Division.[15]On April 17, 2013, the CTA
Second Division promulgated its Decision denying the assessment on the ground of
prescription, the dispositive portion of which reads as follows:

WHEREFORE, premises considered, the instant Petition for Review is hereby

GRANTED. Accordingly, the assessments against petitioner for deficiency income
tax, deficiency expanded withholding tax, and deficiency value-added tax for fiscal
year ending March 31, 2003 are hereby CANCELLED and SET ASIDE on the ground of
prescription.[16]The CTA Division found the waivers executed by STI defective for
failing to strictly comply with the requirements provided by Revenue Memorandum
Order (RMO) No. 20-90 issued on April 4, 1990 and Revenue Delegation Authority
Order (RDAO) No. 05-01 issued on August 2, 2001.

Consequently, the periods for the CIR to assess or collect internal revenue taxes
were never extended; and the subject assessment for deficiency income tax, VAT
and EWT against STI, which the CIR issued beyond the three-year prescriptive period
provided by law, was already barred by prescription.[17]On May 9, 2013, the CIR filed
a motion for reconsideration, but this was denied by the CTA Division in its
Resolution dated July 17, 2013.[18]Undaunted, the CIR appealed to the CTA En Banc.
[19]In the assailed Decision,[20] the CTA En Banc denied the CIR's petition for lack of
merit. The CTA En Banc affirmed the Decision and Resolution of the CTA Division,
reiterating that the requirements for the execution of a waiver must be strictly
complied with; otherwise, the waiver will be rendered defective and the period to
assess or collect taxes will not be extended. It further held that the execution of a
waiver did not bar STI from questioning the validity thereof or invoking the defense
of prescription.[21]On September 2, 2015, the CTA En Banc issued the assailed
Resolution[22] denying the CIR's motion for reconsideration for lack of merit.

The CIR asserts that prescription had not set in on the subject assessments because
the waivers executed by the parties are valid.[24] It also claims that STI's active
participation in the administrative investigation by filing a request for reinvestigation,
which resulted in a reduced assessment, amounts to estoppel that prescription can
no longer be invoked.[25] To support its contention, the CIR cites the case of Rizal
Commercial Banking Corporation v. Commissioner of Internal Revenue,[26] where
the Court considered the taxpayer's partial payment of the revised assessment as an
implied admission of the validity of the waivers.[27]For its part, STI contends that the
requisites under RMO No. 20-90 are mandatory and no less than this Court has
affirmed that the failure to comply therewith results in the nullity of the waiver and
consequently, the assessments.[28] Tested against these requisites and settled
jurisprudence, the subject waivers are defective and invalid and, thus, did not extend
the period to assess.[29]STI further claims, that contrary to the CIR's insistence, it is
not estopped from invoking the defense of prescription because: (1) STI did not
admit the validity or correctness of the deficiency assessments; (2) it did not receive
or accept any benefit from the execution of the waivers since it continued to dispute
the assessment; and (3) STI did not, in any way, lead the CIR to believe that the
waivers were valid.[30]Finally, STI avers that the doctrine in RCBC does not apply to
this case because the estoppel upheld in said case arose from the act of payment,
which is not obtaining in the instant case.

Issues:

WHETHER OR NOT PRESCRIPTION HAD SET IN AGAINST THE ASSESSMENTS FOR

DEFICIENCY INCOME TAX, DEFICIENCY VAT AND DEFICIENCY EXPANDED
WITHHOLDING TAX.[23]

Ruling:

The petition lacks merit.The Waivers of Statute of Limitations, being defective and
invalid, did not extend the CIR's period to issue the subject assessments. Thus, the
right of the government to assess or collect the alleged deficiency taxes is already
barred by prescription.

Section 203 of the NIRC of 1997, as amended, limits the CIR's period to assess and
collect internal revenue taxes to three (3) years counted from the last day prescribed
by law for the filing of the return or from the day the return was filed, whichever
comes later.[32] Thus, assessments issued after the expiration of such period are no
longer valid and effective.[33]In SMI-Ed Philippines Technology, Inc. v.
Commissioner of Internal Revenue,[34] the Court explained the primary reason
behind the prescriptive period on the CIR's right to assess or collect internal revenue
taxes: that is, to safeguard the interests of taxpayers from unreasonable
investigation.[35] Accordingly, the government must assess internal revenue taxes
on time so as not to extend indefinitely the period of assessment and deprive the
taxpayer of the assurance that it will no longer be subjected to further investigation
for taxes after the expiration of a reasonable period of time.[36]

In this regard, the CTA Division found that the last day for the CIR to issue an
assessment on STI's income tax for fiscal year ending March 31, 2003 was on August
15, 2006; while the latest date for the CIR to assess STI of EWT for the fiscal year
ending March 31, 2003 was on April 17, 2006; and the latest date for the CIR to assess
STI of deficiency VAT for the four quarters of the same fiscal year was on May 25,
2006.[37] Clearly, on the basis of these dates, the final assessment notice dated June
16, 2007,[38] assessing STI for deficiency income tax, VAT and EWT for fiscal year
2003, in the aggregate amount of P161,835,737.98, which STI received on June 28,
2007,[39] was issued beyond the three-year prescriptive period.However, the CIR
maintains that prescription had not set in because the parties validly executed a
waiver of statute of limitations under Section 222(b) of the NIRC, as amended.

in a number of cases, this Court did not hesitate to strike down waivers which failed
to strictly comply with the provisions of RMO 20-90 and RDAO 05-01.In Philippine
Journalists, Inc. v. Commissioner of Internal Revenue,[41] the Court declared the
waiver invalid because: (1) it did not specify the date within which the BIR may
assess and collect revenue taxes, such that the waiver became unlimited in time; (2)
it was signed only by a revenue district officer, and not the CIR; (3) there was no date
of acceptance; and (4) the taxpayer was not furnished a copy of the waiver.[42]In
Commissioner of Internal Revenue v. FMF Development Corporation,[43] the waiver
was found defective and thus did not validly extend the original three-year
prescriptive period because: (1) it was not proven that the taxpayer was furnished a
copy of the waiver; (2) it was signed only by a revenue district officer, and not the
CIR as mandated by law; and (3) it did not contain the date of acceptance by the CIR,
which is necessary to determine whether the waiver was validly accepted before the
expiration of the original three-year period.[44]In another case,[45] the waivers
executed by the taxpayer's accountant were found defective for the following
reasons: (1) the waivers were executed without the notarized written authority of the
taxpayer's representative to sign the waiver on its behalf; (2) the waivers failed to
indicate the date of acceptance; and (3) the fact of receipt by the taxpayer of its file
copy was not indicated in the original copies of the waivers.[46]In Commissioner of
Internal Revenue v. The Stanley Works Sales (Phils.), Inc.,[47] the Court nullified the
waivers because the following requisites were absent: (1) conformity of either the
CIR or a duly authorized representative; (2) date of acceptance showing that both
parties had agreed on the waiver before the expiration of the prescriptive period; and
(3) proof that the taxpayer was furnished a copy of the waiver.[48]The Court also
invalidated the waivers executed by the taxpayer in the case of Commissioner of
Internal Revenue v. Standard Chartered Bank,[49] because: (1) they were signed by
Assistant Commissioner-Large Taxpayers Service and not by the CIR; (2) the date of
acceptance was not shown; (3) they did not specify the kind and amount of the tax
due; and (4) the waivers speak of a request for extension of time within which to
present additional documents and not for reinvestigation and/or reconsideration of
the pending internal revenue case as required under RMO No. 20-90.[50]Tested
against the requirements of RMO 20-90 and relevant jurisprudence, the Court cannot
but agree with the CTA's finding that the waivers subject of this case suffer from the
following defects:At the time when the first waiver took effect, on June 2, 2006, the
period for the CIR to assess STI for deficiency EWT and deficiency VAT for fiscal year
ending March 31, 2003, had already prescribed.

To recall, the CIR only had until April 17, 2006 (for EWT) and May 25, 2006 (for VAT),
to issue the subject assessments.STI's signatory to the three waivers had no
notarized written authority from the corporation's board of directors. It bears to
emphasize that RDAO No. 05-01 mandates the authorized revenue official to ensure
that the waiver is duly accomplished and signed by the taxpayer or his authorized
representative before affixing his signature to signify acceptance of the same; and in
case the authority is delegated by the taxpayer to a representative, as in this case,
the concerned revenue official shall see to it that such delegation is in writing and
duly notarized. The waiver should not be accepted by the concerned BIR office and
official unless notarized.[51]Similar to Standard Chartered Bank, the waivers in this
case did not specify the kind of tax and the amount of tax due. It is established that a
waiver of the statute of limitations is a bilateral agreement between the taxpayer and
the BIR to extend the period to assess or collect deficiency taxes on a certain date.
[52] Logically, there can be no agreement if the kind and amount of the taxes to be
assessed or collected were not indicated. Hence, specific information in the waiver is
necessary for its validity.Verily, considering the foregoing defects in the waivers
executed by STI, the periods for the CIR to assess or collect the alleged deficiency
income tax, deficiency EWT and deficiency VAT were not extended. The assessments
subject of this case, which were issued by the BIR beyond the three-year
prescriptive, are therefore considered void and of no legal effect. Hence, the CTA
committed no reversible error in cancelling and setting aside the subject
assessments on the ground of prescription.STI is not estopped from invoking the
defense of prescription.As regards the CIR's reliance on the case of RCBC and its
insistence that STI's request for reinvestigation, which resulted in a reduced
assessment, bars STI from raising the defense of prescription, the Court finds the
same bereft of merit.As correctly stated by the CTA, RCBC is not on all fours with the
instant case. The estoppel upheld in the said case arose from the taxpayer's act of
payment and not on the reduction in the amount of the assessed taxes. The Court
explained that RCBC's partial payment of the revised assessments effectively belied
its insistence that the waivers are invalid and the assessments were issued beyond
the prescriptive period. Here, as no such payment was made by STI, mere reduction
of the amount of the assessment because of a request for reinvestigation should not
bar it from raising the defense of prescription.At this juncture, the Court deems it
important to reiterate its ruling in Commissioner of Internal Revenue v. Kudos Metal
Corporation,[53] that the doctrine of estoppel cannot be applied as an exception to
the statute of limitations on the assessment of taxes considering that there is a
detailed procedure for the proper execution of the waiver, which the BIR must strictly
follow. The BIR cannot hide behind the doctrine of estoppel to cover its failure to
comply with RMO 20-90 and RDAO 05-01, which the BIR itself had issued. Having
caused the defects in the waivers, the BIR must bear the consequence. It cannot
simply shift the blame to the taxpayer.[54]WHEREFORE, premises considered, the
instant petition for review is hereby DENIED.

Principles:
Taxation Law

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of

Taxes. -x x x x(b) If before the expiration of the time prescribed in Section 203 for the
assessment of the tax, both the Commissioner and the taxpayer have agreed in
writing to its assessment after such time, the tax may be assessed within the period
agreed upon. The period so agreed upon may be extended by subsequent written
agreement made before the expiration of the period previously agreed upon.x x x x

RMO 20-90 and RDAO 05-01, outlining the procedures for the proper execution of a
valid waiver, viz.:1. The waiver must be in the proper form prescribed by RMO 20-90.
The phrase "but not after ______ 19 ___",which indicates the expiry date of the
period agreed upon to assess/collect the tax after the regular three-year period of
prescription, should be filled up.2. The waiver must be signed by the taxpayer
himself or his duly authorized representative. In the case of a corporation, the waiver
must be signed by any of its responsible officials. In case the authority is delegated
by the taxpayer to a representative, such delegation should be in writing and duly
notarized.3. The waiver should be duly notarized.4. The CIR or the revenue official
authorized by him must sign the waiver indicating that the BIR has accepted and
agreed to the waiver. The date of such acceptance by the BIR should be indicated.
However, before signing the waiver, the CIR or the revenue official authorized by him
must make sure that the waiver is in the prescribed form, duly notarized, and
executed by the taxpayer or his duly authorized representative.5. Both the date of
execution by the taxpayer and date of acceptance by the Bureau should be before the
expiration of the period of prescription or before the lapse of the period agreed upon
in case a subsequent agreement is executed.6. The waiver must be executed in three
copies, the original copy to be attached to the docket of the case, the second copy
for the taxpayer and the third copy for the Office accepting the waiver. The fact of
receipt by the taxpayer of his/her file copy must be indicated in the original copy to
show that the taxpayer was notified of the acceptance of the BIR and the perfection
of the agreement.

CIR v. Co GR 241424, Feb. 26, 2020 (OLIVAREZ)

Madrigal v. Rafferty 38 P 414; (CELESPARA)

FACTS:

Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The
marriage was contracted under the provisions of conjugal partnerships. On 1915,
Madrigal filed a sworn declaration showing his total net income for the year 1914 the sum
of P296,302.73. Subsequently, Madrigal submitted the claim that it did not represent his
income for the year 1914 but instead the income of the conjugal partnership existing
between him and his wife Susana.

Petitioner averred that in computing and assessing the additional income tax provided
by the Act of Congress of October 1913, the income declared by Vicente Madrigal should
be divided into two equal parts, one-half to be considered the income of Vicente Madrigal
and the other half the income of Susana.

The question had been submitted to the Attorney-General who in an opinion held in favor
of petitioner Madrigal. The revenue officers being still unsatisfied, the correspondence
together with this opinion was forwarded to US for a decision by the US Treasury
Department. The US Commissioner of Internal Revenue reversed the opinion of the
Attorney-General, and thus decided against the claim of Madrigal.

Then, after payment under protest, an action was filed by Vicente and Susana in the CFI
Manila against the Collector of Internal Revenue and the Deputy Collector for the
recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally assessed
and collected from the plaintiff, Madrigal, under the provisions of Income Tax Law.

The burden of the complaint was that if the income tax for the year 1914 had been
correctly and lawfully computed there would have been due and payable by each of the
plaintiffs the sum of P2,921.09, which taken together amounts to a total of P5,842.18
instead of P9,668.21, with the result that plaintiff Madrigal has paid ' as income tax for the
year 1914, P3,786.08, in excess of the sum lawfully due and payable.

Respondent’s Initial Contention:

The income of Vicente Madrigal and his wife Susana Paterno for the year 1914 was made
up of three items:

(1) P362,407.67, the profits made by Vicente Madrigal in his coal and
shipping business;

(2) P4,086.50, the profits made by Susana Paterno in her embroidery

business;

(3) P16,687.80, the profits made by Vicente Madrigal in a pawnshop company.

The sum of these three items is P383,181.97, the gross income of Vicente Madrigal and
Susana Paterno for the year 1914. General deductions were claimed and allowed in the
sum of P86,879.24. The resulting net income was P296,302.73. For the purpose of
assessing the normal tax of one per cent on the net income there were allowed as
specific deductions the following: (1) P16,687.80, the tax upon which was to be paid at
source, and (2) P8,000, the specific exemption granted to Vicente Madrigal and Susana
Paterno, husband and wife. The remainder, P271,614.93 was the sum upon which the
normal tax of one percent was assessed. The normal tax thus arrived at was P2,716.15.

CFI- In favor of respondent commissioners.

Petitioner-plaintiff: Additional income tax, is that it should be divided into two equal
parts, because of the conjugal partnership existing between them

Respondent-defendant:

(NOTE) The appellees contend that the taxes imposed by the Income Tax Law are as the
name implies taxes upon income and not upon capital and property; that the fact that
Madrigal was a married man, and his marriage contracted under the provisions
governing the conjugal partnership, has no bearing on income considered as income,
and that the distinction must be drawn between the ordinary form of commercial
partnership and the conjugal partnership of spouses resulting from the relation of
marriage.

ISSUE: WON the assessment on the income tax of Madrigal was proper.

RULING: YES.

The Income Tax Law of the US, extended to the Philippines, is the result of an effect on
the part of legislators to put into statutory form this canon of taxation and of social
reform. The aim has been to mitigate the evils arising from inequalities of wealth by a
progressive scheme of taxation, which places the burden on those best able to pay. To
carry out this idea, public considerations have demanded an exemption roughly
equivalent to the minimum of subsistence. With these exceptions, the income tax is
supposed to reach the earnings of the entire non-governmental property of the country.

(INCOME vs CAPITAL) Income as against capital or property is to be the test. The

essential difference between capital and income is that CAPITAL BEING A FUND;
INCOME IS A FLOW. A fund of property existing at an instant of time is called capital. A
flow of services rendered by that capital, through payment of money or other benefit
rendered by a fund of capital is called income. Capital is wealth, while income is the
service of wealth. "The fact is that property is a tree, income is the fruit; labor is a tree,
income the fruit; capital is a tree, income the fruit."

A regulation of the United States Treasury Department relative to returns by the husband
and wife not living apart, contains the following:

The husband, as the head and legal representative of the household and general
custodian of its income, should make and render the return of the aggregate
income of himself and wife, and for the purpose of levying the income tax it is
assumed that he can ascertain the total amount of said income.

(Gist- They are jointly and separately liable for such return and for the payment of
the tax. Connected. Attaching each other’s income tax return whenever they have
separate returns)

Then, we turn for a moment to consider the provisions of the Civil Code dealing with the
conjugal partnership. "Prior to the liquidation, the interest of the wife, and in case of her
death, of her heirs, is an interest inchoate, a mere expectancy, which constitutes neither
a legal nor an equitable estate, and does not ripen into title until there appears that there
are assets in the community as a result of the liquidation and settlement."

Susana Paterno, wife, has an INCHOATE RIGHT in the property of her husband Madrigal
during the life of the conjugal partnership. She has an interest in the ultimate property
rights and in the ultimate ownership of property acquired as income after such income
has become capital. Susana has no absolute right to one-half the income of the conjugal
partnership. Not being seized of a separate estate,

(NOTE) Susana cannot make a separate return in order to receive the benefit of the
exemption which would arise by reason of the additional tax. As she has no estate and
income, actually and legally vested in her and entirely distinct from her husband's
property, the income cannot properly be considered the separate income of the wife for
the purposes of the additional tax.

Moreover, the Income Tax Law does not look on the spouses as individual partners in an
ordinary partnership. The husband and wife are only entitled to the exemption of P8,000,
specifically granted by the law.

(NOTE) The higher schedules of the additional tax directed at the incomes of the wealthy
may not be partially defeated by reliance on provisions in our Civil Code dealing with the
conjugal partnership and having no application to the Income Tax Law. The aims and
purposes of the Income Tax Law must be given effect.

The Income Tax Law was drafted by the Congress of the United States and has been by
the Congress extended to the Philippine Islands. Being thus a law of American origin and
being peculiarly intricate in its provisions, the authoritative decision of the official who is
charged with enforcing it has peculiar force for the Philippines. It has come to be a well-
settled rule that great weight should be given to the construction placed upon a revenue
law, whose meaning is doubtful, by the department charged with its execution.

We conclude that the judgment should be as it is hereby AFFIRMED with costs against
appellants. So ordered.

CIR v. BOAC 149 S 395; (CHING)

FACTS

British Overseas Airways Corporation (BOAC), a 100 percent British Government-owned corporation
and existing under the laws of the United Kingdom, was assessed by the CIR for deficiency income
taxes for the years 1959 to 1963.

BOAC challenged the validity of the assessment, arguing that while it has local sales agents who sell
airline tickets, its revenue was really derived from rendering transportation services, not from the
mere ticket sales. Further, it argued that since it did not transport passengers and cargo to and
from the Philippines, its income did not come from Philippine sources, therefore not taxable.

The Tax Court reversed the CIR, holding that the proceeds of sales of BOAC passage tickets in the
Philippines by its sale agents did not constitute BOAC income from Philippine sources, hence not
subject to Philippine income tax.

RULING

The Supreme Court ruled in favor of the CIR.

Being a resident foreign corporation, BOAC is subject to tax upon its total net income in the
preceding taxable year from all sources within the Philippines. The source of an income is the
property, activity or service that produced the income.

For the source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. In the present case, the BOAC derived its
revenue from ticket sales in the Philippines; payment for the tickets were made in the Philippines
and handed in Philippine currency; and the flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share the burden of supporting the
government.

CIR v. Marubenii GR 137377, Dec. 18, 2001; (DE GUZMAN)

ACTS

The CIR assessed Marubeni, a Japanese corporation engaged in business, for deficiency income,
branch profit remittance, contractors and commercial brokers taxes arising from undeclared
income from two contracts in the Philippines.

Marubeni filed two petitions before the CTA questioning the said assessment, followed by an
application for tax amnesty pursuant to E.O. No. 41.

Subsequently, the coverage of E.O. No. 41 was expanded, prompting Marubeni to file a
supplementary tax amnesty return.

The CIR was contending that Marubeni did not properly avail of the tax amnesty because Section
4(b) of E.O. No. 41 provided that "those with income tax cases already filed in Court as of the
effectivity hereof" may not avail themselves of the amnesty.

RULING

SC ruled in favor of Marubeni.

With respect to income taxes, Marubeni properly availed of the tax amnesty because the point of
reference is the date of effectivity of E.O. No. 41.

The filing of income tax cases in court must have been made before and as of the date of
effectivity of E.O. No. 41.

In this case, the 2 CTA cases were filed last September while E.O. 41 took effect in October.
However, with respect to contractors tax assessment and estate and donors tax and tax on
business, Marubeni cannot avail of the tax amnesty.
E.O. No. 64 has no provision on who cannot avail of the tax amnesty but it provides that provisions
of E.O. 41 which are not contradicting are applicable also. A tax amnesty, much like a tax
exemption, is never favored nor presumed in law.

If granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly
against the taxpayer and liberally in favor of the taxing authority. For the right of taxation is
inherent in government.

South African Airways v. CIR GR 180356, Feb. 16, 2010; (OLIVAREZ)

Association of Non-Profit Clubs v. CIR, GR 228539, June 26, 2019

(CELESPARA)

Lessons Applicable: doctrine of hierarchy of courts, rule-making authority of BIR

Laws Applicable: RMC No. 35-2012

FACTS:
■ August 3, 2012: Bureau of Internal Revenue (BIR) issued issued Revenue
Memorandum Circular (RMC) No. 35-2012 entitled “"Clarifying the Taxability of
Clubs Organized and Operated Exclusively for Pleasure, Recreation, and Other
Non-Profit Purposes” which was addressed to all revenue officials, employees,
and others concerned for their guidance regarding the income tax and Valued
Added Tax (VAT) liability of the said recreational clubs.
■ RMC No. 35-2012 states that "clubs which are organized and operated exclusively
for pleasure, recreation, and other non-profit purposes are subject to income tax
under the National Internal Revenue Code of 1997, as amended (1997 NIRC)." In
justifying the interpration, the BIR raised the doctrine of casus omissus pro
omisso habendus est, a person, object, or thing omitted from an enumeration
must be held to have been omitted intentionally. The provision in the 1977 Tax
Code which granted income tax exemption to such recreational clubs was omitted
in the 1997 NIRC, as amended and Section 105, Chapter I, Title IV of the 1997
NIRC, which states that even a nonstock, nonprofit private organization or
government entity is liable to pay VAT on the sale of goods or services.

■ October 25, 2012: During the meeting of ANPC and other club member
representatives with Atty. Elenita Quimosing (Atty. Quimosing), Chief of Staff and
Operations Group of the BIR, Atty. Quimosing suggested the attendees to submit
a position paper to the BIR regarding their concerts about the Circular.
■ September Since the BIR has not action upon NPC’s request on its position paper
for the non-application of RMC No. 35-2012, ANPC, filed before the RTC a petition
 for declaratory relief to declare RMC no. 35-2012 invalid, unjust, oppressive,
confiscatory, and in violation of the due process clause of the Constitution for it is
beyond the BIR’s rule-making authority.
■ RTC: Denied the petition for declaratory relief and upheld RMC No. 35-2012
■ ANPC filed a petition for review on certiorari raising pure questions of law
ISSUES:
1. W/N the doctrine of hierarchy of courts should apply and the matter should be first
elevated the matter to the Secretary of Finance for review pursuant to Section 4, Title I of the
1997 NIRC.
2. W/N RMC No. 35-2012 is constitutional.

HELD: Partly meritorious.

1. NO. The petition for review on certiorari, filed pursuant to Section 2 (c), Rule 41 in
relation to Rule 45 of the Rules of Court, is the sole remedy to appeal a decision of the RTC in
cases involving pure questions of law
■ The doctrine of hierarchy of courts is violated only when relief may be had
through multiple fora having concurrent jurisdiction over the case, such as in
petitions for certiorari, mandamus, and prohibition which are concurrently
cognizable either by the Regional Trial Courts, the Court of Appeals, or the
Supreme Court.
■ Uy v. Contreras: This Court, the Court of Appeals, and the Regional Trial Courts
have concurrent original jurisdiction to issue writs of certiorari, prohibition,
mandamus, quo warranto, and habeas corpus, such concurrence does not accord
litigants unrestrained freedom of choice of the court to which application therefor
may be directed. There is a hierarchy of courts determinative of the venue of
appeals which should also serve as a general determinant of the proper forum for
the application for the extraordinary writs.

2. Yes.
■ RMC No. 35-2012 erroneously foisted a sweeping interpretation that membership
fees and assessment dues are sources of income of recreational clubs from which
income tax liability may accrue. As correctly argued by ANPC, membership fees,
assessment dues, and other fees of similar nature only constitute contributions to
and/or replenishment of the funds for the maintenance and operations of the
facilities offered by recreational clubs to their exclusive members. They represent
funds "held in trust" by these clubs to defray their operating and general costs
and hence, only constitute infusion of capital.
■ Well-enshrined principle in our jurisdiction that the State cannot impose a tax on
capital as it constitutes an unconstitutional confiscation of property. An income
tax is arbitrary and confiscatory if it taxes capital because capital is not income.
■ Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance
Secretary (G.R. No. 108524, November 10, 1994): Court held that "as a matter of
power, a court, when confronted with an interpretative rule, [such as RMC No. 35-
2012] is free to (i) give the force of law to the rule; (ii) go to the opposite extreme
and substitute its judgment; or (iii) give some intermediate degree of authoritative
weight to the interpretative rule." By sweepingly including in RMC No. 35-2012 all
 membership fees and assessment dues in its classification of "income of
recreational clubs from whatever source'' that are "subject to income tax,"the BIR
exceeded its rule-making authority.
■ In the same way, the Court declares as invalid the BIR's interpretation in RMC No.
35-2012 that membership fees, assessment dues, and the like are part of "the
gross receipts of recreational clubs" that are "subject to VAT. Basic principle that
before a transaction is imposed VAT, a sale, barter or exchange of goods or
properties, or sale of a service is required. This is true even if such sale is on a
cost-reimbursement basis.

1st WEEK: Introduction & Policies; Lecture on State Powers and the
Inherent Limitations on the Power of Taxation

Cases: 1st Set: Gaston v. Republic 158 S 626; Planters v. Fertiphil GR

166006, March 14, 2008; John Hay Case 414 S 356; Sta. Lucia Realty v.
Pasig GR 166838, June 11, 2011; Mactan-Cebu Int’l Airport v. City of
Lapu-Lapu GR 181756, June 15, 2015; CIR v. Judge Apolinario Santos,
GR 119252, Aug. 18, 1997; Deutsche Bank v. CIR GR 188550, Aug. 19,
2003

Cases: 2nd Set: Coca Cola Bottlers v. Manila GR 156252, June 27, 2006;
Pepsi v. Tanauan 69 S 461; Pepsi v. Butuan 24 S 789; City Assessor v.
Benevola GR 152904, June 8, 2007; CIR v. St. Luke’s GR 195909, Sept.
26, 2012; Lung Center v. QC GR 144104, June 29, 2004; CIR v. DLSU GR
196596, Nov. 9, 2016

Cases 3rd Set: Villanueva v. Iloilo 26 S 578; Swedish Match V. Treasurer

GR 181277, July 2, 2013; Villegas v. Hiu 86 S 270; Abaya v. Ebdane GR
167919, Feb. 14, 2007

2nd WEEK: Introduction to the Constitutional Provisions Relevant to

Taxation and Other Important Fundamental Doctrines/ Concepts in
Taxation
3rd WEEK: Continue Discussion of Topics commenced in the 2 nd week
above and HOT SEAT on cases assigned in the above 3 sets

4th WEEK: HOT SEAT continued on cases assigned in the above 3 sets
and Introduction to the Fundamental Doctrines/Concepts in Taxation
Remedies

Cases: First Set: CIR v. Primetown GR 162155, Aug. 28, 2007; Phil.
Journalists, Inc. v. CIR GR 162852, Dec. 16, 2004; Adamson v. CIR GR
120935, May 21, 2009; CIR v. Kudos GR 178087, May 5, 2010;

Second Set:

Spouses Pacquiao v. CTA GR 213394, April 6, 2016;

Tridharma Marketing Corp. v. CTA & CIR GR 215950, June 20, 2016;
Third Set:

CIR v. La Flor dela Isabela GR 211289, Jan. 14, 2019; ;

CIR v. STI GR 220835, July 26, 2017;

CIR v. Co GR 241424, Feb. 26, 2020

Cases:

Madrigal v. Rafferty 38 P 414;

CIR v. BOAC 149 S 395;

CIR v. Marubenii GR 137377, Dec. 18, 2001;

Facts:

Commissioner of Internal Revenue assails the decision dated January 15, 1999 of the
Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision dated July 29,
1996 of the Court of Tax Appeals... tax court ordered the Commissioner of Internal
Revenue to desist from collecting the 1985 deficiency income, branch profit
remittance and contractor's taxes from Marubeni Corporation after finding the latter
to have properly availed of the tax amnesty

Respondent Marubeni Corporation is a foreign corporation organized and existing

under the laws of Japan. It is engaged in general import and export trading, financing
and the construction business. It is duly registered to engage in such business in the
Philippines and maintains... a branch office in Manila.

petitioner Commissioner of Internal Revenue issued a letter of authority to examine

the books of accounts of the Manila branch office of respondent corporation for the
fiscal year ending March 1985. In the course of the examination, petitioner found...
respondent to have undeclared income from two (2) contracts in the Philippines, both
of which were completed in 1984.

One of the contracts was with the National Development Company (NDC) in
connection with the construction and installation of a wharf/port complex at the
Leyte

Industrial Development Estate in the municipality of Isabel, province of Leyte. The

other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for
the construction of an ammonia storage complex also at the Leyte Industrial
Development Estate.

respondent corporation received a letter dated August 15, 1986 from petitioner
assessing respondent several deficiency taxes.

respondent filed two (2) petitions for review with the Court of Tax Appeals. The first
petition, CTA Case No. 4109, questioned the deficiency income, branch profit
remittance and contractor's tax assessments in petitioner's assessment letter. The
second,... CTA Case No. 4110, questioned the deficiency commercial broker's as

Executive Order (E.O.) No. 41[2] declaring a one-time amnesty covering unpaid
income taxes for the years 1981 to 1985 was issued.

In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return
dated October 30, 1986 and attached thereto its sworn... he scope and coverage of
E.O. No. 41 was expanded by Executive Order (E.O.) No. 64. In addition to the income
tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No. 64[3] included
estate and donor's taxes... respondent filed a supplemental tax amnesty return under
the benefit of E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR
equivalent to five percent (5%) of the increase of its net worth between 1981 and
1986.

The tax court found that respondent had properly availed of the tax amnesty under
E.O. Nos. 41 and 64 and declared the deficiency taxes subject of... said case as
deemed cancelled and withdrawn.

Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518
with the Court of Appeals.

Court of Appeals dismissed the petition and affirmed the decision of the Court of Tax
Appeals. Hence, this recourse.

"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court
of Tax Appeals which ruled that herein respondent's deficiency tax liabilities were
extinguished upon respondent's availment of tax amnesty under Executive Orders
Nos. 41 and

64.

(2) Whether or not respondent is liable to pay the income, branch profit remittance,
and contractor's taxes assessed by petitioner."[5]

Issues:

"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court
of Tax Appeals which ruled that herein respondent's deficiency tax liabilities were
extinguished upon respondent's availment of tax amnesty under Executive Orders
Nos. 41 and

64.

(2) Whether or not respondent is liable to pay the income, branch profit remittance,
and contractor's taxes assessed by petitioner."[5]

Ruling:

Petitioner argues that at the time respondent filed for income tax amnesty on October
30, 1986, CTA Case No. 4109 had already been filed and was pending before the
Court of Tax Appeals. Respondent therefore fell under the exception in Section 4 (b)
of E.O. No. 41.

Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It excepts from income
tax amnesty those taxpayers "with income tax cases already filed in court as of the
effectivity hereof." The point of reference is the date of... effectivity of E.O. No. 41.
The filing of income tax cases in court must have been made before and as of the
date of effectivity of E.O. No. 41.

E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985
deficiency income, branch profit remittance and contractor's tax assessments was
filed by respondent with the Court of Tax Appeals on September 26, 1986. When E.O.
No. 41 became effective on

August 22, 1986, CTA Case No. 4109 had not yet been filed in court.
respondent was not disqualified from availing of the amnesty for income tax under
E.O. No. 41.

There is nothing in E.O. No. 64 that provides that it should retroact to the date of
effectivity of E.O. No. 41, the original issuance. Neither is it necessarily implied from
E.O. No. 64 that it or any of its provisions should apply retroactively. Executive
Order No.

64 is a substantive amendment of E.O. No. 41. It does not merely change provisions
in E.O. No. 41. It supplements the original act by adding other taxes not covered in
the first.

Since Executive Order No. 64 took effect on November 17, 1986, consequently,
insofar as the taxes in E.O. No. 64 are concerned, the date of effectivity referred to in
Section 4 (b) of E.O. No. 41 should be November 17, 1986.

it is still not liable for the deficiency contractor's tax because the income from the
projects came from the "Offshore Portion" of the contract... two... contracts were
divided into two parts, i.e., the Onshore Portion and the Offshore Portion. All
materials and equipment in the contract under the "Offshore Portion" were
manufactured and completed in Japan, not in the Philippines, and are therefore not
subject to Philippine... taxes.

Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent
entered into an agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port
Development Project Between National Development Company and Marubeni
Corporation."[

A few months after execution of the NDC contract, Philphos opened for public
bidding a project to construct and install two ammonia storage tanks in Isabel. Like
the NDC contract, it was Marubeni Head Office in Japan that participated in and won
the bidding. Thus, on May 2,... 1982, Philphos and respondent corporation entered
into an agreement entitled "Turn-Key Contract for Ammonia Storage Complex
Between Philippine Phosphate Fertilizer Corporation and Marubeni Corporation."

Like the NDC contract, the price was divided into three portions. The price in
Japanese currency was broken down into the Japanese Yen Portion I and Japanese
Yen Portion II while the price in Philippine... currency was classified as the Philippine
Pesos Portion. Both

The division of the price into Japanese Yen Portions I and II and the Philippine Pesos
Portion under the two contracts corresponds to the two parts into which the
contracts were classified--the Foreign Offshore Portion and the Philippine Onshore
Portion. In both contracts, the

Japanese Yen Portion I corresponds to the Foreign Offshore Portion.[37] Japanese

Yen Portion II and the Philippine Pesos Portion correspond to the Philippine Onshore
Portion.

Respondent, however, argues that the work therein were not all performed in the
Philippines because some of them were completed in Japan in accordance... with the
provisions of the contracts.

the service of "design and engineering, supply and delivery, construction, erection
and installation, supervision, direction and control of testing and commissioning,
coordination..."[72] of the two projects involved two taxing jurisdictions.

These acts occurred in two countries - Japan and the Philippines. While the
construction and installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and supplies were completely
designed and engineered in Japan. The two sets... of ship unloader and loader, the
boats and mobile equipment for the NDC project and the ammonia storage tanks and
refrigeration units were made and completed in Japan.

All... services for the design, fabrication, engineering and manufacture of the
materials and equipment under Japanese Yen Portion I were made and completed in
Japan. These services were rendered outside the taxing jurisdiction of the
Philippines and are therefore not subject to... contractor's tax.

petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.

Principles:

Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty
granted thereunder,... A tax amnesty is a general pardon or intentional overlooking
by the State of its authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law.[15] It... partakes of an absolute
forgiveness or waiver by the government of its right to collect what is due it and to
give tax evaders who wish to relent a chance to start with a clean slate.

never favored nor... presumed in law.

A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as

follows:

"Sec. 205. Contractors, proprietors or operators of dockyards, and others.--A

contractor's tax of four percent of the gross receipts is hereby imposed on
proprietors or operators of the following business establishments and/or persons
engaged in the business... of selling or rendering the following services for a fee or
compensation:

(a) General engineering, general building and specialty contractors, as defined in

Republic Act No. 4566;... an independent contractor is a person whose activity
consists essentially of the sale of all kinds of services for a fee, regardless of
whether or not the performance of the service calls for the exercise or use of the
physical or mental... faculties of such contractors or their employees. The word
"contractor" refers to a person who, in the pursuit of independent business,
undertakes to do a specific job or piece of work for other persons, using his own
means and methods without submitting himself to control as to... the petty details.
[44]

A contractor's tax is a tax imposed upon the privilege of engaging in business.[45] It

is generally in the nature of an excise tax on the exercise of a privilege of selling
services or labor rather than a sale on products;[46] and is... directly collectible from
the person exercising the privilege.[47] Being an excise tax, it can be levied by the
taxing authority only when the acts, privileges or business are done or performed
within the jurisdiction of said authority.[48] Like property taxes, it cannot be imposed
on an occupation or privilege outside the taxing district.

South African Airways v. CIR GR 180356, Feb. 16, 2010;

Association of Non-Profit Clubs v. CIR, GR 228539, June 26, 2019

Association of Non-Profit Clubs, Inc. v. Bureau of Internal Revenue

G.R. No. 228539, June 26, 2019
Second Division
Perlas-Bernabe, J.:

Lessons Applicable: doctrine of hierarchy of courts, rule-making authority of BIR

Laws Applicable: RMC No. 35-2012

FACTS:

■ August 3, 2012: Bureau of Internal Revenue (BIR) issued issued Revenue

Memorandum Circular (RMC) No. 35-2012 entitled “"Clarifying the Taxability of
Clubs Organized and Operated Exclusively for Pleasure, Recreation, and Other
Non-Profit Purposes” which was addressed to all revenue officials, employees,
and others concerned for their guidance regarding the income tax and Valued
Added Tax (VAT) liability of the said recreational clubs.
■ RMC No. 35-2012 states that "clubs which are organized and operated exclusively
 for pleasure, recreation, and other non-profit purposes are subject to income tax
under the National Internal Revenue Code of 1997, as amended (1997 NIRC)." In
justifying the interpration, the BIR raised the doctrine of casus omissus pro
omisso habendus est, a person, object, or thing omitted from an enumeration
must be held to have been omitted intentionally. The provision in the 1977 Tax
Code which granted income tax exemption to such recreational clubs was omitted
in the 1997 NIRC, as amended and Section 105, Chapter I, Title IV of the 1997
NIRC, which states that even a nonstock, nonprofit private organization or
government entity is liable to pay VAT on the sale of goods or services.
■ October 25, 2012: During the meeting of ANPC and other club member
representatives with Atty. Elenita Quimosing (Atty. Quimosing), Chief of Staff and
Operations Group of the BIR, Atty. Quimosing suggested the attendees to submit
a position paper to the BIR regarding their concerts about the Circular.
■ September Since the BIR has not action upon NPC’s request on its position paper
for the non-application of RMC No. 35-2012, ANPC, filed before the RTC a petition
for declaratory relief to declare RMC no. 35-2012 invalid, unjust, oppressive,
confiscatory, and in violation of the due process clause of the Constitution for it is
beyond the BIR’s rule-making authority.
■ RTC: Denied the petition for declaratory relief and upheld RMC No. 35-2012
■ ANPC filed a petition for review on certiorari raising pure questions of law
ISSUES:
1. W/N the doctrine of hierarchy of courts should apply and the matter should be first
elevated the matter to the Secretary of Finance for review pursuant to Section 4, Title I of the
1997 NIRC.
2. W/N RMC No. 35-2012 is constitutional.

HELD: Partly meritorious.

1. NO. The petition for review on certiorari, filed pursuant to Section 2 (c), Rule 41 in
relation to Rule 45 of the Rules of Court, is the sole remedy to appeal a decision of the RTC in
cases involving pure questions of law
■ The doctrine of hierarchy of courts is violated only when relief may be had
through multiple fora having concurrent jurisdiction over the case, such as in
petitions for certiorari, mandamus, and prohibition which are concurrently
cognizable either by the Regional Trial Courts, the Court of Appeals, or the
Supreme Court.
■ Uy v. Contreras: This Court, the Court of Appeals, and the Regional Trial Courts
have concurrent original jurisdiction to issue writs of certiorari, prohibition,
mandamus, quo warranto, and habeas corpus, such concurrence does not accord
litigants unrestrained freedom of choice of the court to which application therefor
may be directed. There is a hierarchy of courts determinative of the venue of
appeals which should also serve as a general determinant of the proper forum for
the application for the extraordinary writs.

2. Yes.

■ RMC No. 35-2012 erroneously foisted a sweeping interpretation that membership

 fees and assessment dues are sources of income of recreational clubs from which
income tax liability may accrue. As correctly argued by ANPC, membership fees,
assessment dues, and other fees of similar nature only constitute contributions to
and/or replenishment of the funds for the maintenance and operations of the
facilities offered by recreational clubs to their exclusive members. They represent
funds "held in trust" by these clubs to defray their operating and general costs
and hence, only constitute infusion of capital.

■ Well-enshrined principle in our jurisdiction that the State cannot impose a tax on
capital as it constitutes an unconstitutional confiscation of property. An income
tax is arbitrary and confiscatory if it taxes capital because capital is not income.

■ Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance

Secretary (G.R. No. 108524, November 10, 1994): Court held that "as a matter of
power, a court, when confronted with an interpretative rule, [such as RMC No. 35-
2012] is free to (i) give the force of law to the rule; (ii) go to the opposite extreme
and substitute its judgment; or (iii) give some intermediate degree of authoritative
weight to the interpretative rule." By sweepingly including in RMC No. 35-2012 all
membership fees and assessment dues in its classification of "income of
recreational clubs from whatever source'' that are "subject to income tax,"the BIR
exceeded its rule-making authority.

■ In the same way, the Court declares as invalid the BIR's interpretation in RMC No.
35-2012 that membership fees, assessment dues, and the like are part of "the
gross receipts of recreational clubs" that are "subject to VAT. Basic principle that
before a transaction is imposed VAT, a sale, barter or exchange of goods or
properties, or sale of a service is required. This is true even if such sale is on a
cost-reimbursement basis.