fG.R. No.

78953 July 31, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.MELCHOR J. JAVIER, JR. and THE COURT OF TAX
APPEALS, respondents.
Elison G. Natividad for accused-appellant.

SARMIENTO, J.:p
Central in this controversy is the issue as to whether or not a taxpayer who
merely states as a footnote in his income tax return that a sum of money that he
erroneously received and already spent is the subject of a pending litigation and
there did not declare it as income is liable to pay the 50% penalty for filing a
fraudulent return.
This question is the subject of the petition for review before the Court of the
portion of the Decision 1 dated July 27, 1983 of the Court of Tax Appeals (CTA) in
C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs. Ruben B. Ancheta, in
his capacity as Commissioner of Internal Revenue," which orders the deletion of
the 50% surcharge from Javier's deficiency income tax assessment on his
income for 1977.
The respondent CTA in a Resolution 2 dated May 25, 1987, denied the
Commissioner's Motion for Reconsideration 3 and Motion for New Trial 4 on the
deletion of the 50% surcharge assessment or imposition.
The pertinent facts as are accurately stated in the petition of private respondent
Javier in the CTA and incorporated in the assailed decision now under review,
read as follows:
xxx xxx xxx
2. That on or about June 3, 1977, Victoria L. Javier, the wife of the
petitioner (private respondent herein), received from the Prudential
Bank and Trust Company in Pasay City the amount of
US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa,

through some banks in the United States, among which is Mellon

Bank, N.A.
3. That on or about June 29, 1977, Mellon Bank, N.A. filed a
complaint with the Court of First Instance of Rizal (now Regional
Trial Court), (docketed as Civil Case No. 26899), against the
petitioner (private respondent herein), his wife and other defendants,
claiming that its remittance of US$1,000,000.00 was a clerical
error and should have been US$1,000.00 only, and praying that
the excess amount of US$999,000.00 be returned on the ground
that the defendants are trustees of an implied trust for the benefit of
Mellon Bank with the clear, immediate, and continuing duty to return
the said amount from the moment it was received.
4. That on or about November 5, 1977, the City Fiscal of Pasay City
filed an Information with the then Circuit Criminal Court (docketed as
CCC-VII-3369-P.C.) charging the petitioner (private respondent
herein) and his wife with the crime of estafa, alleging that they
misappropriated, misapplied, and converted to their own personal
use and benefit the amount of US$999,000.00 which they received
under an implied trust for the benefit of Mellon Bank and as a result
of the mistake in the remittance by the latter.
5. That on March 15, 1978, the petitioner (private respondent
herein) filed his Income Tax Return for the taxable year 1977
showing a gross income of P53,053.38 and a net income of
P48,053.88 and stating in the footnote of the return that
"Taxpayer was recipient of some money received from abroad
which he presumed to be a gift but turned out to be an error
and is now subject of litigation."
6. That on or before December 15, 1980, the petitioner (private
respondent herein) received a letter from the acting Commissioner
of Internal Revenue dated November 14, 1980, together with income
assessment notices for the years 1976 and 1977, demanding that
petitioner (private respondent herein) pay on or before
December 15, 1980 the amount of P1,615.96 and P9,287,297.51

as deficiency assessments for the years 1976 and 1977

respectively. . . .
7. That on December 15, 1980, the petitioner (private respondent
herein) wrote the Bureau of Internal Revenue that he was paying the
deficiency income assessment for the year 1976 but denying that he
had any undeclared income for the year 1977 and requested that the
assessment for 1977 be made to await final court decision on the
case filed against him for filing an allegedly fraudulent return. . . .
8. That on November 11, 1981, the petitioner (private respondent
herein) received from Acting Commissioner of Internal Revenue
Romulo Villa a letter dated October 8, 1981 stating in reply to his
December 15, 1980 letter-protest that "the amount of Mellon Bank's
erroneous remittance which you were able to dispose, is definitely
taxable." . . . 5
The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax Appeals
on December 10, 1981.
The respondent CTA, after the proper proceedings, rendered the challenged
decision. We quote the concluding portion:
We note that in the deficiency income tax assessment under
consideration, respondent (petitioner here) further requested
petitioner (private respondent here) to pay 50% surcharge as
provided for in Section 72 of the Tax Code, in addition to the
deficiency income tax of P4,888,615.00 and interest due thereon.
Since petitioner (private respondent) filed his income tax return for
taxable year 1977, the 50% surcharge was imposed, in all
probability, by respondent (petitioner) because he considered the
return filed false or fraudulent. This additional requirement, to our
mind, is much less called for because petitioner (private
respondent), as stated earlier, reflected in as 1977 return as footnote
that "Taxpayer was recipient of some money received from abroad
which he presumed to be gift but turned out to be an error and is
now subject of litigation."

From this, it can hardly be said that there was actual and intentional
fraud, consisting of deception willfully and deliberately done or
resorted to by petitioner (private respondent) in order to induce the
Government to give up some legal right, or the latter, due to a false
return, was placed at a disadvantage so as to prevent its lawful
agents from proper assessment of tax liabilities. (Aznar vs. Court of
Tax Appeals, L-20569, August 23, 1974, 56 (sic) SCRA 519),
because petitioner literally "laid his cards on the table" for
respondent to examine. Error or mistake of fact or law is not fraud.
(Insular Lumber vs. Collector, L-7100, April 28, 1956.). Besides,
Section 29 is not too plain and simple to understand. Since the
question involved in this case is of first impression in this jurisdiction,
under the circumstances, the 50% surcharge imposed in the
deficiency assessment should be deleted. 7
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's
ruling, elevated the matter to us, by the present petition, raising the main issue as
to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50%
FRAUD PENALTY? 8
On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not
appeal the decision which held him liable for the basic deficiency income tax
(excluding the 50% surcharge for fraud)." However, he submitted in the
same memorandum"that the issue may be raised in the case not for the purpose
of correcting or setting aside the decision which held him liable for deficiency
income tax, but only to show that there is no basis for the imposition of the
surcharge." This subsequent disavowal therefore renders moot and academic the
posturings articulated in as Comment 10 on the non-taxability of the amount he
erroneously received and the bulk of which he had already disbursed. In any
event, an appeal at that time (of the filing of the Comments) would have been
already too late to be seasonable. The petitioner, through the office of the
Solicitor General, stresses that:
xxx xxx xxx

The record however is not ambivalent, as the record clearly shows

that private respondent is self-convinced, and so acted, that he is
the beneficial owner, and of which reason is liable to tax. Put another
way, the studied insinuation that private respondent may not be the
beneficial owner of the money or income flowing to him as enhanced
by the studied claim that the amount is "subject of litigation" is belied
by the record and clearly exposed as a fraudulent ploy, as witness
what transpired upon receipt of the amount.
Here, it will be noted that the excess in the amount erroneously
remitted by MELLON BANK for the amount of private respondent's
wife was $999,000.00 after opening a dollar account with Prudential
Bank in the amount of $999,993.70, private respondent and his wife,
with haste and dispatch, within a span of eleven (11) electric days,
specifically from June 3 to June 14, 1977, effected a total massive
withdrawal from the said dollar account in the sum of $975,000.00 or
P7,020,000.00. . . . 11
In reply, the private respondent argues:
xxx xxx xxx
The petitioner contends that the private respondent committed fraud
by not declaring the "mistaken remittance" in his income tax return
and by merely making a footnote thereon which read: "Taxpayer was
the recipient of some money from abroad which he presumed to be
a gift but turned out to be an error and is now subject of litigation." It
is respectfully submitted that the said return was not fraudulent. The
footnote was practically an invitation to the petitioner to make an
investigation, and to make the proper assessment.
The rule in fraud cases is that the proof "must be clear and
convincing" (Griffiths v. Comm., 50 F [2d] 782), that is, it must be
stronger than the "mere preponderance of evidence" which would be
sufficient to sustain a judgment on the issue of correctness of the
deficiency itself apart from the fraud penalty. (Frank A. Neddas, 40
BTA 672). The following circumstances attendant to the case at bar
show that in filing the questioned return, the private respondent was

guided, not by that "willful and deliberate intent to prevent the

Government from making a proper assessment" which constitute
fraud, but by an honest doubt as to whether or not the "mistaken
remittance" was subject to tax.
First, this Honorable Court will take judicial notice of the fact that socalled "million dollar case" was given very, very wide publicity by
media; and only one who is not in his right mind would have
entertained the idea that the BIR would not make an assessment if
the amount in question was indeed subject to the income tax.
Second, as the respondent Court ruled, "the question involved in this
case is of first impression in this jurisdiction" (See p. 15 of Annex "A"
of the Petition). Even in the United States, the authorities are not
unanimous in holding that similar receipts are subject to the income
tax. It should be noted that the decision in the Rutkin case is a fiveto-four decision; and in the very case before this Honorable Court,
one out of three Judges of the respondent Court was of the opinion
that the amount in question is not taxable. Thus, even without the
footnote, the failure to declare the "mistaken remittance" is not
fraudulent.
Third, when the private respondent filed his income tax return on
March 15, 1978 he was being sued by the Mellon Bank for the return
of the money, and was being prosecuted by the Government for
estafa committed allegedly by his failure to return the money and by
converting it to his personal benefit. The basic tax amounted to
P4,899,377.00 (See p. 6 of the Petition) and could not have been
paid without using part of the mistaken remittance. Thus, it was not
unreasonable for the private respondent to simply state in his
income tax return that the amount received was still under litigation.
If he had paid the tax, would that not constitute estafa for using the
funds for his own personal benefit? and would the Government
refund it to him if the courts ordered him to refund the money to the
Mellon Bank? 12
xxx xxx xxx

Under the then Section 72 of the Tax Code (now Section 248 of the 1988
National Internal Revenue Code), a taxpayer who files a false return is liable to
pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in
case payment has been made on the basis of the return filed before the
discovery of the falsity or fraud.
We are persuaded considerably by the private respondent's contention that there
is no fraud in the filing of the return and agree fully with the Court of Tax Appeals'
interpretation of Javier's notation on his income tax return filed on March 15,
1978 thus: "Taxpayer was the recipient of some money from abroad which he
presumed to be a gift but turned out to be an error and is now subject of litigation
that it was an "error or mistake of fact or law" not constituting fraud, that such
notation was practically an invitation for investigation and that Javier had literally
"laid his cards on the table." 13
In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax
return was discussed in this manner:
. . . The fraud contemplated by law is actual and not constructive. It
must be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give up
some legal right. Negligence, whether slight or gross, is not
equivalent to the fraud with intent to evade the tax contemplated by
law. It must amount to intentional wrong-doing with the sole object of
avoiding the tax. It necessarily follows that a mere mistake cannot
be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed mistakes
in making entries in the returns and in the assessment, respectively,
under the inventory method of determining tax liability, it would be
unfair to treat the mistakes of the petitioner as tainted with fraud and
those of the respondent as made in good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon
circumstances which, at most, create only suspicion and the mere
understatement of a tax is not itself proof of fraud for the purpose of tax
evasion. 15

A "fraudulent return" is always an attempt to evade a tax, but a

merely "false return" may not be, Rick v. U.S., App. D.C., 161 F. 2d
897, 898. 16
In the case at bar, there was no actual and intentional fraud through willful and
deliberate misleading of the government agency concerned, the Bureau of
Internal Revenue, headed by the herein petitioner. The government was not
induced to give up some legal right and place itself at a disadvantage so as to
prevent its lawful agents from proper assessment of tax liabilities because Javier
did not conceal anything. Error or mistake of law is not fraud. The petitioner's
zealousness to collect taxes from the unearned windfall to Javier is highly
commendable. Unfortunately, the imposition of the fraud penalty in this case is
not justified by the extant facts. Javier may be guilty of swindling charges,
perhaps even for greed by spending most of the money he received, but the
records lack a clear showing of fraud committed because he did not conceal the
fact that he had received an amount of money although it was a "subject of
litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge
imposed as fraud penalty by the petitioner against the private respondent
in the deficiency assessment should be deleted.
WHEREFORE, the petition is DENIED and the decision appealed from the Court
of Tax Appeals is AFFIRMED. No costs.
SO ORDERED.

G.R. No. 48532 August 31, 1992

HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA,

BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O.
MICIANO, EDUARDO A. RIALP, LEANDRO G. SANTILLAN, and JAIME A.
SOQUES, petitioners,
vs.THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
G.R. No. 48533 August 31, 1992
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA,
JAIME E. DY-LIACCO, MELQUIADES J. GAMBOA, JR., MANUEL L.
GUZMAN, VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO, ALEXANDER
LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP and JAIME A.
SOQUES, petitioners,
vs.THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioners.

NOCON, J.:
Petitioners pray that his Court reverse the Decision of the public respondent
Court of Tax Appeals, promulgated September 26, 1977 1 denying petitioners'
claim for tax refunds, and order the Commissioner of Internal Revenue to refund
to them their income taxes which they claim to have been erroneously or illegally
paid or collected.
As summarized by the Solicitor General, the facts of the cases are as follows:
Petitioners are Filipino citizens and employees of Procter and
Gamble, Philippine Manufacturing Corporation, with offices at
Sarmiento Building, Ayala Avenue, Makati, Rizal. Said corporation is
a subsidiary of Procter & Gamble, a foreign corporation based in

Cincinnati, Ohio, U.S.A. During the years 1970 and 1971

petitioners were assigned, for certain periods, to other
subsidiaries of Procter & Gamble, outside of the Philippines,
during which petitioners were paid U.S. dollars as
compensation for services in their foreign assignments.
(Paragraphs III, Petitions for Review, C.T.A. Cases Nos. 2511 and
2594, Exhs. D, D-1 to D-19). When petitioners in C.T.A. Case No.
2511 filed their income tax returns for the year 1970, they computed
the tax due by applying the dollar-to-peso conversion on the basis of
the floating rate ordained under B.I.R. Ruling No. 70-027 dated May
14, 1970, as follows:
From January 1 to February 20, 1970 at the conversion
rate of P3.90 to U.S. $1.00;
From February 21 to December 31, 1970 at the
conversion rate of P6.25 to U.S. $1.00
Petitioners in C.T.A. Case No. 2594 likewise used the above
conversion rate in converting their dollar income for 1971 to
Philippine peso. However, on February 8, 1973 and October 8,
1973, petitioners in said cases filed with the office of the
respondent Commissioner, amended income tax returns for the
above-mentioned years, this time using the par value of the
peso as prescribed in Section 48 of Republic Act No. 265 in relation
to Section 6 of Commonwealth Act No. 265 in relation to Section 6 of
Commonwealth Act No. 699 as the basis for converting their
respective dollar income into Philippine pesos for purposes of
computing and paying the corresponding income tax due from them.
The aforesaid computation as shown in the amended income tax
returns resulted in the alleged overpayments, refund and/or tax
credit. Accordingly, claims for refund of said over-payments
were filed with respondent Commissioner. Without awaiting the
resolution of the Commissioner of the Internal Revenue on their
claims, petitioners filed their petitioner for review in the abovementioned cases.

Respondent Commissioner filed his Answer to petitioners' petition for

review in C.T.A. Case No. 2511 on July 31, 1973, while his Answer in
C.T.A. Case No. 2594 was filed on August 7, 1974.
Upon joint motion of the parties on the ground that these two cases
involve common question of law and facts, that respondent Court of
Tax Appeals heard the cases jointly. In its decision dated September
26, 1977, the respondent Court of Tax Appeals held that the proper
conversion rate for the purpose of reporting and paying the
Philippine income tax on the dollar earnings of petitioners are the
rates prescribed under Revenue Memorandum Circulars Nos. 7-71
and 41-71. Accordingly, the claim for refund and/or tax credit of
petitioners in the above-entitled cases was denied and the petitions
for review dismissed, with costs against petitioners. Hence, this
petition for review on certiorari. 2
Petitioners claim that public respondent Court of Tax Appeals erred in holding:
1. That petitioners' dollar earnings are receipts derived from foreign exchange
transactions.
2. That the proper rate of conversion of petitioners' dollar earnings for tax
purposes in the prevailing free market rate of exchange and not the par
value of the peso; and
3. That the use of the par value of the peso to convert petitioners' dollar earnings
for tax purposes into Philippine pesos is "unrealistic" and, therefore, the
prevailing free market rate should be the rate used.
Respondent Commissioner of Internal Revenue, on the other hand, refutes
petitioners' claims as follows:
At the outset, it is submitted that the subject matter of these two
cases are Philippine income tax for the calendar years 1970 (CTA
Case No. 2511) and 1971 (CTA Case No. 2594) and, therefore,
should be governed by the provisions of the National Internal
Revenue Code and its implementing rules and regulations, and
not by the provisions of Central Bank Circular No. 42 dated May
21, 1953, as contended by petitioners.

Section 21 of the National Internal Revenue Code, before its

amendment by Presidential Decrees Nos. 69 and 323 which took
effect on January 1, 1973 and January 1, 1974, respectively,
imposed a tax upon the taxable net income received during
each taxable year from all sources by a citizen of the
Philippines, whether residing here or abroad.
Petitioners are citizens of the Philippines temporarily residing
abroad by virtue of their employment. Thus, in their tax returns for
the period involved herein, they gave their legal residence/address
as c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes
"A" to "A-8" and Annexes "C" to "C-8", Petition for Review, CTA Nos.
2511 and 2594).
Petitioners being subject to Philippine income tax, their dollar
earnings should be converted into Philippine pesos in
computing the income tax due therefrom, in accordance with
the provisions of Revenue Memorandum Circular No. 7-71 dated
February 11, 1971 for 1970 income and Revenue Memorandum
Circular No. 41-71 dated December 21, 1971 for 1971 income,
which reiterated BIR Ruling No. 70-027 dated May 4, 1970, to wit:
For internal revenue tax purposes, the free marker
rate of conversion (Revenue Circulars Nos. 7-71 and
41-71) should be applied in order to determine the
true and correct value in Philippine pesos of the
income of petitioners. 3
After a careful examination of the records, the laws involved and the
jurisprudence on the matter, We are inclined to agree with respondents Court of
Tax Appeals and Commissioner of Internal Revenue and thus vote to deny the
petition.
This basically an income tax case. For the proper resolution of these cases

INCOME may be defined as an amount of money coming to a person or

corporation within a specified time, whether as payment for services,
interest or profit from investment. Unless otherwise specified, it means cash

or its equivalent. 4 Income can also be though of as flow of the fruits of one's
labor. 5
Petitioners are correct as to their claim that their dollar earnings are NOT receipts
derived from foreign exchange transactions. For a foreign

exchange

transaction is simply that a transaction in foreign exchange, foreign

exchange being "the conversion of an amount of money or currency of one
country into an equivalent amount of money or currency of
another." 6 When petitioners were assigned to the foreign subsidiaries of Procter
& Gamble, they were earning in their assigned nation's currency and were ALSO
spending in said currency. There was no conversion, therefore, from one
currency to another.
Public respondent Court of Tax Appeals DID ERR when it concluded that the
dollar incomes of petitioner fell under Section 2(f)(g) and (m) of C.B. Circular No.
42. 7
The issue now is, what exchange rate should be used to determine the peso
equivalent of the foreign earnings of petitioners for income tax purposes.
Petitioners claim that since the dollar earnings do not fall within the classification
of foreign exchange transactions, there occurred no actual inward remittances,
and, therefore, they are not included in the coverage of Central Bank
Circular No. 289 which provides for the specific instances when the par value
of the peso shall not be the conversion rate used. They conclude that their
earnings should be converted for income tax purposes using the par value
of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of
receipts for export products, receipts of sale of foreign exchange or foreign
borrowings and investments BUT NOT INCOME TAX. He also claims that he
had to use the prevailing free market rate of exchange in these cases because of
the need to ascertain the true and correct amount of income in Philippine peso of
dollar earners for Philippine income tax purposes.
A careful reading of said CB Circular No. 289 8 shows that the subject matters
involved therein are export products, invisibles, receipts of foreign exchange,
foreign exchange payments, new foreign borrowing and
investments nothing by way of income tax payments. Thus, petitioners are in

error by concluding that since C.B. Circular No. 289 does not apply to
them, the par value of the peso should be the guiding rate used for income tax
purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign
subsidiaries of Procter & Gamble. It was a definite amount of money which came
to them within a specified period of time of two yeas as payment for their
services.
Section 21 of the National Internal Revenue Code, amended up to August 4,
1969, states as follows:
Sec. 21. Rates of tax on citizens or residents. A tax is hereby
imposed upon the taxable net income received during each
taxable year from all sources by every individual, whether a
citizen of the Philippines residing therein or abroad or an alien
residing in the Philippines, determined in accordance with the
following schedule:
xxx xxx xxx
And in the implementation for the proper enforcement of the National Internal
Revenue Code, Section 338 thereof empowers the Secretary of Finance to
"promulgate all needful rules and regulations" to effectively enforce its
provisions. 9
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and
41-71 11 were issued to prescribed a uniform rate of exchange from US
dollars to Philippine pesos for INTERNAL REVENUE TAX PURPOSES for the
years 1970 and 1971, respectively. Said revenue circulars were a valid exercise
of the authority given to the Secretary of Finance by the Legislature which
enacted the Internal Revenue Code. And these are presumed to be a valid
interpretation of said code until revoked by the Secretary of Finance himself. 12
Petitioners argue that since there were no remittances and acceptances of their
salaries and wages in US dollars into the Philippines, they are exempt from the
coverage of such circulars. Petitioners forget that they are citizens of the
Philippines, and their income, within or without, and in these cases wholly

without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook
any exemption.
Since petitioners have already paid their 1970 and 1971 income taxes under the
uniform rate of exchange prescribed under the aforestated Revenue
Memorandum Circulars, there is no reason for respondent Commissioner to
refund any taxes to petitioner as said Revenue Memorandum Circulars, being of
long standing and not contrary to law, are valid. 13
Although it has become a worn-out cliche, the fact still remains that "taxes are
the lifeblood of the government" and one of the duties of a Filipino citizen is to
pay his income tax.
WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the
respondent Court of Tax Appeals of petitioners' claims for tax refunds for the
income tax period for 1970 and 1971 is AFFIRMED. Costs against petitioners.
SO ORDERED.

G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and
REMEDIOS P. OBILLOS, brothers and sisters, petitioners
vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.

AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold
two parcels of land which they had acquired from their father.

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on
two lots with areas of 1,124 and 963 square meters located at Greenhills, San
Juan, Rizal. The next day he transferred his rights to his four children, the
petitioners, to enable them to build their residences. The company sold the two
lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo).
Presumably, the Torrens titles issued to them would show that they were coowners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners
resold them to the Walled City Securities Corporation and Olga Cruz Canda
for the total sum of P313,050 (Exh. C and D). They derived from the sale a total
profit of P134,341.88 or P33,584 for each of them. They treated the profit as a
capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive
period, the Commissioner of Internal Revenue required the four petitioners
to pay corporate income tax on the total profit of P134,336 in addition to
individual income tax on their shares thereof He assessed P37,018 as corporate
income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42%
accumulated interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the
sum of P33,584 as a " taxable in full (not a mere capital gain of which is
taxable) and required them to pay deficiency income taxes aggregating
P56,707.20 including the 50% fraud surcharge and the accumulated interest.
Thus, the petitioners are being held liable for deficiency income taxes and
penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax
on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed
an unregistered partnership or joint venture within the meaning of sections
24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas
Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court
sustained the same. Judge Roaquin dissented. Hence, the instant appeal.

We hold that it is error to consider the petitioners as having formed a

partnership under article 1767 of the Civil Code simply because they allegedly
contributed P178,708.12 to buy the two lots, resold the same and divided the
profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership
would result in oppressive taxation and confirm the dictum that the power to tax
involves the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners
pure and simple. To consider them as partners would obliterate the distinction
between a co-ownership and a partnership. The petitioners were not engaged in
any joint venture by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on
they found it not feasible to build their residences on the lots because of the high
cost of construction, then they had no choice but to resell the same to dissolve
the co-ownership. The division of the profit was merely incidental to the
dissolution of the co-ownership which was in the nature of things a temporary
state. It had to be terminated sooner or later. Castan Tobeas says:
Como establecer el deslinde entre la comunidad ordinaria o
copropiedad y la sociedad?
El criterio diferencial-segun la doctrina mas generalizada-esta: por
razon del origen, en que la sociedad presupone necesariamente la
convencion, mentras que la comunidad puede existir y existe
ordinariamente sin ela; y por razon del fin objecto, en que el objeto
de la sociedad es obtener lucro, mientras que el de la indivision es
solo mantener en su integridad la cosa comun y favorecer su
conservacion.
Reflejo de este criterio es la sentencia de 15 de Octubre de 1940,
en la que se dice que si en nuestro Derecho positive se ofrecen a
veces dificultades al tratar de fijar la linea divisoria entre comunidad
de bienes y contrato de sociedad, la moderna orientacion de la
doctrina cientifica seala como nota fundamental de diferenciacion
aparte del origen de fuente de que surgen, no siempre uniforme, la
finalidad perseguida por los interesados: lucro comun partible en la

sociedad, y mera conservacion y aprovechamiento en la comunidad.

(Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does
not of itself establish a partnership, whether or not the persons sharing them
have a joint or common right or interest in any property from which the returns
are derived". There must be an unmistakable intention to form a partnership or
joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil.
666, where 15 persons contributed small amounts to purchase a two-peso
sweepstakes ticket with the agreement that they would divide the prize The
ticket won the third prize of P50,000. The 15 persons were held liable for
income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in
joint ventures for profit. Thus, in Oa vs.
** This view is supported by the following rulings of respondent Commissioner:
Co-owership distinguished from partnership.We find that the case
at bar is fundamentally similar to the De Leon case. Thus, like the
De Leon heirs, the Longa heirs inherited the 'hacienda' in
question pro-indiviso from their deceased parents; they did not
contribute or invest additional ' capital to increase or expand
the inherited properties; they merely continued dedicating the
property to the use to which it had been put by their forebears; they
individually reported in their tax returns their corresponding shares in
the income and expenses of the 'hacienda', and they continued for
many years the status of co-ownership in order, as conceded
by respondent, 'to preserve its (the 'hacienda') value and to
continue the existing contractual relations with the Central Azucarera
de Bais for milling purposes. Longa vs. Aranas, CTA Case No. 653,
July 31, 1963).
All co-ownerships are not deemed unregistered pratnership.CoOwnership who own properties which produce income should not
automatically be considered partners of an unregistered partnership,
or a corporation, within the purview of the income tax law. To hold

otherwise, would be to subject the income of all

co-ownerships of inherited properties to the tax on corporations,
inasmuch as if a property does not produce an income at all, it is not
subject to any kind of income tax, whether the income tax on
individuals or the income tax on corporation. (De Leon vs. CI R, CTA
Case No. 738, September 11, 1961, cited in Araas, 1977 Tax Code
Annotated, Vol. 1, 1979 Ed., pp. 77-78).
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where
after an extrajudicial settlement the co-heirs used the inheritance or the
incomes derived therefrom as a common fund to produce profits for
themselves, it was held that they were taxable as an unregistered
partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24
SCRA 198, where father and son purchased a lot and building, entrusted
the administration of the building to an administrator and divided equally
the net income, and from Evangelista vs. Collector of Internal Revenue, 102
Phil. 140, where the three Evangelista sisters bought four pieces of real
property which they leased to various tenants and derived rentals
therefrom. Clearly, the petitioners in these two cases had formed an
unregistered partnership.
In the instant case, what the Commissioner should have investigated was
whether the father donated the two lots to the petitioners and whether he paid the
donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It
might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The
assessments are cancelled. No costs.
SO ORDERED.

G.R. No. 195909

September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
x-----------------------x
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,
vs.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
CARPIO, J.:
The Case
These are consolidated 1 petitions for review on certiorari under Rule 45 of the
Rules of Court assailing the Decision of 19 November 2010 of the Court of Tax
Appeals (CTA) En Banc and its Resolution 2 of 1 March 2011 in CTA Case No.
6746. This Court resolves this case on a pure question of law, which involves the
interpretation of Section 27(B) vis--vis Section 30(E) and (G) of the National
Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a nonstock 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;
xxxx3
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St.
Luke's deficiency taxes amounting toP76,063,116.06 for 1998, comprised of
deficiency income tax, value-added tax, withholding tax on compensation
and expanded withholding tax. The BIR reduced the amount
to P63,935,351.57 during trial in the First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest with the BIR
against the deficiency tax assessments. The BIR did not act on the protest within
the 180-day period under Section 228 of the NIRC. Thus, St. Luke's appealed to
the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a
10% preferential tax rate on the income of proprietary non-profit hospitals, should
be applicable to St. Luke's. According to the BIR, Section 27(B), introduced in
1997, "is a new provision intended to amend the exemption on non-profit
hospitals that were previously categorized as non-stock, non-profit
corporations under Section 26 of the 1997 Tax Code x x x." 5 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 promoting social welfare. 6
The BIR claimed that St. Luke's was actually operating for profit in 1998
because only 13% of its revenues came from charitable purposes.
Moreover, the hospital's board of trustees, officers and employees directly benefit

from its profits and assets. St. Luke's had total revenues of P1,730,367,965 or
approximately P1.73 billion from patient services in 1998. 7
St. Luke's contended that the BIR should not consider its total revenues,
because its free services to patients wasP218,187,498 or 65.20% of its 1998
operating income (i.e., total revenues less operating expenses)
ofP334,642,615. 8 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 P57,659,981.19 as deficiency income and expanded withholding tax for 1998
with surcharges and interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the
treatment and withholding of a part of its income, 9 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 Constitution 10 and the Rules of
Court, 11 this Court's review power is generally limited to "cases in which only an
error or question of law is involved." 12 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 P110,000.00 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 P5,496,963.54
andP778,406.84 or in the sum of P6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%)
delinquency interest on the total amount of P6,275,370.38 counted from October
15, 2003 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of
1997.
SO ORDERED. 13
The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be
paid, arose from the failure of St. Luke's to prove that part of its income in 1998
(declared as "Other Income-Net") 14 came from charitable activities. The CTA
cancelled the remainder of the P63,113,952.79 deficiency assessed by the BIR
based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En
Banc held was not applicable to St. Luke's. 15
The CTA ruled that St. Luke's is a non-stock and non-profit charitable
institution covered by Section 30(E) and (G) of the NIRC. This ruling would
exempt all income derived by St. Luke's from services to its patients, whether
paying or non-paying. The CTA reiterated its earlier decision in St. Luke's Medical
Center, Inc. v. Commissioner of Internal Revenue, 16 which examined the
primary purposes of St. Luke's under its articles of incorporation and
various documents 17 identifying St. Luke's as a charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay
City, 18 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 of the
institution x x x." 19 The generation of income from paying patients does not
per se destroy the charitable nature of St. Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal
Revenue, 20 which ruled that the old NIRC (Commonwealth Act No. 466, as

amended) 21 "positively exempts from taxation those corporations or associations

which, otherwise, would be subject thereto, because of the existence of x x x net
income." 22 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 surplus." 23
The CTA held that Section 27(B) of the present NIRC does not apply to St.
Luke's. 24 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, applying the provision of Section 30(E)
of the NIRC of 1997, as amended." 25
The Issue
The sole issue is whether St. Luke's is liable for deficiency income tax in
1998 under Section 27(B) of the NIRC, which imposes a preferential tax rate
of 10% on the income of proprietary non-profit hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No.
195960 because the petition raises factual issues. Under Section 1, Rule 45 of
the Rules of Court, "[t]he petition shall raise only questions of law which must be
distinctly set forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits
factual review "when the Court of Appeals [in this case, the CTA] manifestly
overlooked certain relevant facts not disputed by the parties and which, if
properly considered, would justify a different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself
stated that the CTA "disregarded the testimony of [its] witness, Romeo B. Mary,
being allegedly self-serving, to show the nature of the 'Other Income-Net' x x
x." 28 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 executed by [the] witnesses
[of St. Luke's] x x x." 29
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay
the 25% surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay
the deficiency tax within the time prescribed for its payment in the notice of
assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under
Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the amount
of P6,275,370.38 in the dispositive portion of the CTA First Division Decision
includes only deficiency interest under Section 249(A) and (B) of the NIRC and
not delinquency interest. 32
The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect of the
introduction of Section 27(B) in the NIRC of 1997 vis--vis Section 30(E)
and (G) on the income tax exemption of charitable and social welfare
institutions. The 10% income tax rate under Section 27(B) specifically
pertains to proprietary educational institutions and proprietary non-profit
hospitals. The BIR argues that Congress intended to remove the exemption that
non-profit hospitals previously enjoyed under Section 27(E) of the NIRC of 1977,
which is now substantially reproduced in Section 30(E) of the NIRC of
1997. 33 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 trade, business or other
activity exceeds fifty percent (50%) of the total gross income derived by such

educational institutions or hospitals from all sources, the tax prescribed in

Subsection (A) hereof shall be imposed on the entire taxable income. For
purposes of this Subsection, the term 'unrelated trade, business or other activity'
means any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such educational
institution or hospital of its primary purpose or function. A 'proprietary educational
institution' is any private school maintained and administered by private
individuals or groups with an issued permit to operate from the Department of
Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA),
as the case may be, in accordance with existing laws and regulations. (Emphasis
supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It
contends that it is a charitable institution and an organization promoting
social welfare. The arguments of St. Luke's focus on the wording of Section
30(E) exempting from income tax non-stock, non-profit charitable
institutions. 34 St. Luke's asserts that the legislative intent of introducing Section
27(B) was only to remove the exemption for "proprietary non-profit"
hospitals.35 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 institutions, namely, proprietary
non-profit educational institutions 36 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 Filipino Inc. de Cebu,37 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 and improving its golf
course. 38 The club was non-profit because of its purpose and there was no
evidence that it was engaged in a profit-making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was
not charitable. The Court defined "charity" in Lung Center of the Philippines
v. Quezon City 40 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 government." 41 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 Treasury. 42

Charitable institutions, however, are not ipso facto entitled to

a tax exemption. The requirements for a tax exemption are specified by the
law granting it. The power of Congress to tax implies the power to exempt from
tax. Congress can create tax exemptions, subject to the constitutional provision
that "[n]o law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of Congress." 43 The requirements
for a tax exemption are strictly construed against the taxpayer 44 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 premise as Hospital de San Juan 45 and Jesus
Sacred Heart College 46 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 the institution. 47
For REAL PROPERTY TAXES, the incidental generation of income is
permissible because the test of exemption is the USE of the property. The
Constitution provides that "[c]haritable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation." 48 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 its income is distributable as dividends to its
members, trustees, or officers" 49 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 organized." 50 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 altogether to
the charitable object which it is intended to achieve." 51
The operations of the charitable institution generally refer to its regular
activities. Section 30(E) of the NIRC requires that these operations be exclusive
to charity. There is also a specific requirement that "no part of [the] net income or
asset shall belong to or inure to the benefit of any member, organizer, officer or
any specific person." The use of lands, buildings and improvements of the
institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and nonprofit 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 P1,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives
approximately P1.73 billion from paying patients is NOT an institution
"operated exclusively" for charitable purposes. Clearly, revenues from
paying patients are income received from "activities conducted for
profit." 52 Indeed, St. Luke's admits that it derived profits from its paying patients.
St. Luke's declaredP1,730,367,965 as "Revenues from Services to Patients" in
contrast to its "Free Services" expenditure ofP218,187,498. In its Comment in
G.R. No. 195909, St. Luke's showed the following "calculation" to support its
claim that 65.20% of its "income after expenses was allocated to free or
charitable services" in 1998. 53
REVENUES FROM SERVICES TO PATIENTS

P1,730,367,965.00

OPERATING EXPENSES
Professional care of patients
Administrative
Household and Property

P1,016,608,394.00
287,319,334.00
91,797,622.00
P1,395,725,350.00

INCOME FROM OPERATIONS

P334,642,615.00

100%

Free Services

-218,187,498.00 -65.20%

INCOME FROM OPERATIONS, Net of FREE

SERVICES

P116,455,117.00

OTHER INCOME

17,482,304.00

34.80%

EXCESS OF REVENUES OVER EXPENSES

P133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and "exclusively" is defined, "in a
manner to exclude; as enjoying a privilege exclusively." x x x The words
"dominant use" or "principal use" cannot be substituted for the words "used
exclusively" without doing violence to the Constitution and the law. Solely is
synonymous with exclusively. 54
The Court cannot expand the meaning of the words "operated exclusively"
without violating the NIRC. Services to paying patients are activities
conducted for profit. They cannot be considered any other way. There is a
"purpose to make profit over and above the cost" of services. 55 The P1.73 billion
total revenues from paying patients is not even incidental to St. Luke's charity
expenditure of P218,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its
operating income in 1998. However, if a part of the remaining 34.80% of the
operating income is reinvested in property, equipment or facilities used for
services to paying and non-paying patients, then it cannot be said that the
income is "devoted or used altogether to the charitable object which it is intended
to achieve." 56 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 Toms que tiene un hospital, no cree

Vd. que es una actividad esencial dicho hospital para el funcionamiento del colegio de
medicina de dicha universidad?
R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa;
pero considerando que el hospital tiene cuartos de pago, y a los mismos generalmente
van enfermos de buena posicin social econmica, lo que se paga por estos enfermos
debe estar sujeto a 'income tax', y es una de las razones que hemos tenido para
insertar las palabras o frase 'or from any activity conducted for profit.' 57
The question was whether having a hospital is essential to an educational institution like
the College of Medicine of the University of Santo Tomas. Senator Cuenco answered
that if the hospital has paid rooms generally occupied by people of good economic
standing, then it should be subject to income tax. He said that this was one of the
reasons Congress inserted the phrase "or any activity conducted for profit."

The question in Jesus Sacred Heart College involves an educational

institution. 58 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.

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

proprietary non-profit hospital, is entitled to the preferential tax rate of

10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC. However, St. Luke's has good reasons to rely on the
letter dated 6 June 1990 by the BIR, which opined that St. Luke's is "a
corporation for purely charitable and social welfare purposes" and thus exempt
from income tax. 60 In Michael J. Lhuillier, Inc. v. Commissioner of Internal
Revenue, 61 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 surcharges and interest." 62
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No.
195909 is PARTLY GRANTED. The Decision of the Court of Tax Appeals En
Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA
Case No. 6746 are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED
TO PAY the deficiency income tax in 1998 based on the 10% preferential
income tax rate under Section 27(B) of the National Internal Revenue Code.
However, it is not liable for surcharges and interest on such deficiency
income tax under Sections 248 and 249 of the National Internal Revenue Code.
All other parts of the Decision and Resolution of the Court of Tax Appeals are
AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for
violating Section 1, Rule 45 of the Rules of Court.
SO ORDERED.

[G.R. No. 124043. October 14, 1998]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF

APPEALS, COURT OF TAX APPEALS and YOUNG MENS CHRISTIAN
ASSOCIATION OF THE PHILIPPINES, INC.,respondents.
DECISION
PANGANIBAN, J.:
Is the INCOME derived from RENTALS of real property owned by the Young Mens
Christian Association of the Philippines, Inc. (YMCA) established as a welfare,
educational and charitable non-profit corporation -- subject to INCOME TAX under the
National Internal Revenue Code (NIRC) and the Constitution?
The Case
This is the main question raised before us in this petition for review
on certiorari challenging two Resolutions issued by the Court of Appeals [1] on September
28, 1995[2] and February 29, 1996[3] in CA-GR SP No. 32007. Both Resolutions affirmed
the Decision of the Court of Tax Appeals (CTA) allowing the YMCA to claim tax
exemption on the latters income from the lease of its real property.
The Facts
The Facts are undisputed.[4] Private Respondent YMCA is a non-stock, non-profit
institution, which conducts various programs and activities that are beneficial to the
public, especially the young people, pursuant to its religious, educational and charitable
objectives.
In 1980, private respondent earned, among others, an income of P676,829.80 from
leasing out a portion of its premises to small shop owners, like restaurants and canteen
operators, andP44,259.00 from parking fees collected from non-members. On July 2,
1984, the commissioner of internal revenue (CIR) issued an assessment to private
respondent, in the total amount ofP415,615.01 including surcharge and interest, for
deficiency income tax, deficiency expanded withholding taxes on rentals and professional

fees and deficiency withholding tax on wages.Private respondent formally protested the
assessment and, as a supplement to its basic protest, filed a letter dated October 8,
1985. In reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court
if Tax Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in
favor of the YMCA:
xxx [T]he leasing of private respondents facilities to small shop owners, to restaurant and
canteen operators and the operation of the parking lot are reasonably incidental to and
reasonably necessary for the accomplishment of the objectives of the [private
respondents]. It appears from the testimonies of the witnesses for the [private respondent]
particularly Mr. James C. Delote, former accountant of YMCA, that these facilities were
leased to members and that they have to service the needs of its members and their
guests. The Rentals were minimal as for example, the barbershop was only charged P300
per month. He also testified that there was actually no lot devoted for parking space but
the parking was done at the sides of the building. The parking was primarily for members
with stickers on the windshields of their cars and they charged P.50 for nonmembers. The rentals and parking fees were just enough to cover the costs of operation
and maintenance only. The earning[s] from these rentals and parking charges including
those from lodging and other charges for the use of the recreational facilities constitute
[the] bulk of its income which [is] channeled to support its many activities and attainment
of its objectives. As pointed out earlier, the membership dues are very insufficient to
support its program. We find it reasonably necessary therefore for [private respondent] to
make [the] most out [of] its existing facilities to earn some income. It would have been
different if under the circumstances, [private respondent] will purchase a lot and convert
it to a parking lot to cater to the needs of the general public for a fee, or construct a
building and lease it out to the highest bidder or at the market rate for commercial
purposes, or should it invest its funds in the buy and sell of properties, real or
personal. Under these circumstances, we could conclude that the activities are already
profit oriented, not incidental and reasonably necessary to the pursuit of the objectives of
the association and therefore, will fall under the last paragraph of section 27 of the Tax
Code and any income derived therefrom shall be taxable.
Considering our findings that [private respondent] was not engaged in the business of
operating or contracting [a] parking lot, we find no legal basis also for the imposition of
[a] deficiency fixed tax and [a] contractors tax in the amount[s] of P353.15
and P3,129.73, respectively.

xxxxxxxxx
WHEREFORE, in view of all the foregoing, the following assessments are hereby
dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractors Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not
to exceed three (3) years pursuant to Section 51 (e)(2) & (3) of the National Internal
Revenue Code effective as of 1984.[5]
Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals
(CA). In its Decision of February 16, 1994, the CA [6] initially decided in favor of the CIR
and disposed of the appeal in the following manner:
Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and Abra
Valley College Inc. vs. Aquino, the ruling of the respondent Court of Tax Appeals that the
leasing of petitioners (herein respondent) facilities to small shop owners, to restaurant
and canteen operators and the operation of the parking lot are reasonably incidental to
and reasonably necessary for the accomplishment of the objectives of the petitioners,' and
the income derived therefrom are tax exempt, must be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed the
assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractors Tax P 3,129.23, &
1980 Deficiency Income Tax P372,578.20,
but the same is AFFIRMED in all other respect.[7]
Aggrieved, the YMCA asked for reconsideration based on the following grounds:
I

The findings of facts of the Public Respondent Court of Tax Appeals being supported
by substantial evidence [are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent
from the income on rentals of small shops and parking fees [are] in accord with the
applicable law and jurisprudence.[8]
Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed
itself and promulgated on September 28, 1995 its first assailed Resolution which, in part,
reads:
The Court cannot depart from the CTAs findings of fact, as they are supported by
evidence beyond what is considered as substantial.
xxxxxxxxx
The second ground raised is that the respondent CTA did not err in saying that the rental
from small shops and parking fees do not result in the loss of the exemption. Not even the
petitioner would hazard the suggestion that YMCA is designed for profit. Consequently,
the little income from small shops and parking fees help[s] to keep its head above the
water, so to speak, and allow it to continue with its laudable work.
The Court, therefore, finds the second ground of the motion to be meritorious and in
accord with law and jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTAs
decision is AFFIRMED in toto.[9]
The internal revenue commissioners own Motion for Reconsideration was denied by
Respondent Court in its second assailed Resolution of February 29, 1996. Hence, this
petition for review under Rule 45 of the Rules of Court.[10]
The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
I

In holding that it had departed from the findings of fact of Respondent Court of Tax
Appeals when it rendered its Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax Appeals that the income of
private respondent from rentals of small shops and parking fees [is] exempt from
taxation.[11]
This Courts Ruling
The Petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed the
factual findings of the CTA. On the other hand, petitioner argues that the CA merely
reversed the rulingof the CTA that the leasing of private respondents facilities to small
shop owners, to restaurant and canteen operators and the operation of parking lots are
reasonably incidental to and reasonably necessary for the accomplishment of the
objectives of the private respondent and that the income derived therefrom are tax
exempt.[12] Petitioner insists that what the appellate court reversed was the legal
conclusion, not the factual finding, of the CTA.[13] The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when
supported by substantial evidence, will not be disturbed on appeal unless it is shown that
the said court committed gross error in the appreciation of facts. [14] In the present case,
this Court finds that the February 16, 1994 Decision of the CA did not deviate from this
rule. The latter merely applied the law to the facts as found by the CTA and ruled on the
issue raised by the CIR: Whether or not the collection or earnings of rental income from
the lease of certain premises and income earned from parking fees shall fall under the last
paragraph of Section 27 of the National Internal Revenue Code of 1977, as amended. [15]
Clearly, the CA did not alter any fact or evidence. It merely resolved the
aforementioned issue, as indeed it was expected to. That it did so in a manner different
from that of the CTA did not necessarily imply a reversal of factual findings.

The distinction between a question of law and a question of fact is clear-cut. It has
been held that [t]here is a question of law in a given case when the doubt or difference
arises as to what the law is on a certain state of facts; there is a question of fact when the
doubt or difference arises as to the truth or falsehood of alleged facts. [16] In the present
case, the CA did not doubt, much less change, the facts narrated by the CTA. It merely
applied the law to the facts. That its interpretation or conclusion is different from that of
the CTA is not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real
estate subject to tax? At the outset, we set forth the relevant provision of the NIRC:
SEC. 27. Exemptions from tax on corporations. -- The following organizations shall not
be taxed under this Title in respect to income received by them as such -xxxxxxxxx
(g) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net income of which inures to the benefit of any
private stockholder or member;
xxxxxxxxx
Notwithstanding the provision in the preceding paragraphs, the income of whatever kind
and character of the foregoing organization 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 the tax imposed under this Code. (as amended by Pres.
Decree No. 1457)
Petitioners argues that while the income received by the organizations enumerated in
Section 27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of tax
in respect to income received by them as such, the exemption does not apply to income

derived xxx from any if their properties, real or personal, or from any of their activities
conducted for profit, regardless, of the disposition made of such income xxx.
Petitioner adds that rented income derived by a tax-exempt organization from the
lease of its properties, real or personal, [is] not, therefore, exempt from income taxation,
even if such income [is] exclusively used for the accomplishment of its objectives. [17] We
agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the
doctrine of strict interpretation in construing tax exemptions.[18] Furthermore, a claim of
statutory exemption from taxation should be manifest and unmistakable from the
language of the law on which it is based. Thus, the claimed exemption must expressly be
granted in a statute stated in a language too clear to be mistaken. [19]
In the instant case, the exemption claimed by the YMCA is expressly disallowed by
the very wording of the last paragraph of then Section 27 of the NIRC which mandates
that the income of exempt organizations (such as the YMCA) from any of their
properties, real or personal, be subject to the imposed by the same Code. Because the last
paragraph of said section unequivocally subjects to tax the rent income f the YMCA from
its rental property,[20] the Court is duty-bound to abide strictly by its literal meaning and to
refrain from resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous, its
express terms must be applied.[21] Parenthetically, a consideration of the question of
construction must not even begin, particularly when such question is on whether to apply
a strict construction or a literal one on statutes that grant tax exemptions to religious,
charitable and educational propert[ies] or institutions.[22]
The last paragraph of Section 27, the YMCA argues, should be subject to the
qualification that the income from the properties must arise from activities conducted for
profit before it may be considered taxable.[23] This argument is erroneous. As previously
stated, a reading of said paragraph ineludibly shows that the income from any property of
exempt organizations, as well as that arising from any activity it conducts for profit, is
taxable. The phrase any of their activities conducted for profit does not qualify the word
properties. This makes income from the property of the organization taxable,
regardless of how that income is used -- whether for profit or for lofty non-profit
purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed
reversible error when it allowed, on reconsideration, the tax exemption claimed by
YMCA on income it derived from renting out its real property, on the solitary but

unconvincing ground that the said income is not collected for profit but is merely
incidental to its operation. The law does not make a distinction. The rental income is
taxable regardless of whence such income is derived and how it used or disposed
of. Where the law does not distinguish, neither should we.
Constitutional Provisions
on Taxation
Invoking not only the NIRC but also the fundamental law, private respondent submits
that Article VI, Section 28 of par. 3 of the 1987 Constitution, [24] exempts charitable
institutions from the payment not only of property taxes but also of income tax from any
source.[25] In support of its novel theory, it compares the use of the words charitable
institutions, actually and directly in the 1973 and the 1987 Constitutions, on the hand; and
in Article VI Section 22, par. 3 of the 1935 Constitution, on the other hand.[26]
Private respondent enunciates three points. First, the present provision is divisible
into two categories: (1) [c]haritable institutions, churches and parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries, the incomes of which are, from
whatever source, all tax-exempt;[27] and (2) [a]ll lands, buildings and improvements
actually and directly used for religious, charitable or educational purposes, which are
exempt only from property taxes.[28]Second, Lladoc v. Commissioner of Internal Revenue,
[29]
which limited the exemption only to the payment of property taxes, referred to the
provision of the 1935 Constitution and not to its counterparts in the 1973 and the 1987
Constitutions.[30] Third, the phrase actually, directly and exclusively used for religious,
charitable or educational purposes refers not only to all lands, buildings and
improvements, but also to the above-quoted first category which includes charitable
institutions like the private respondent.[31]
The Court is not persuaded. The debates, interpellations and expressions of opinion
of the framers of the Constitution reveal their intent which, in turn, may have guided the
people in ratifying the Charter.[32] Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner,
who is now a member of this Court, stressed during the Concom debates that xxx what is
exempted is not the institution itself xxx; those exempted from real estate taxes are lands,
buildings and improvements actually, directly and exclusively used for religious,
charitable or educational purposes.[33] Father Joaquin G. Bernas, an eminent authority on

the Constitution and also a member of the Concom, adhered to the same view that the
exemption created by said provision pertained only to property taxes.[34]
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that [t]he tax
exemption covers property taxes only."[35] Indeed, the income tax exemption claimed by
private respondent finds no basis in Article VI, Section 28, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter,
claiming that the YMCA is a non-stock, non-profit educational institution whose
revenues and assets are used actually, directly and exclusively for educational purposes so
it is exempt from taxes on its properties and income. [37] We reiterate that private
respondent is exempt from the payment of property tax, but not income tax on the
rentals from its property. The bare allegation alone that it is a non-stock, non-profit
educational institution is insufficient to justify its exemption from the payment of income
tax.
[36]

As previously discussed, laws allowing tax exemption are construed strictissimi

juris. Hence, for the YMCA to be granted the exemption it claims under the
aforecited provision, it must prove with substantial evidence that (1) it falls under
the classification non-stock, non-profit educational institution; and (2) the income it
seeks to be exempted from taxation is used actually, directly, and exclusively for
educational purposes. However, the Court notes that not a scintilla of evidence was
submitted by private respondent to prove that it met the said requisites.
Is the YMCA an educational institution within the purview of Article XIV, Section 4,
par.3 of the Constitution? We rule that it is not. The term educational institution or
institution of learning has acquired a well-known technical meaning, of which the
members of the Constitutional Commission are deemed cognizant. [38] Under the
Education Act of 1982, such term refers to schools. [39] The school system is synonymous
with formal education,[40] which refers to the hierarchically structured and chronological
graded learnings organized and provided by the formal school system and for which
certification is required in order for the learner to progress through the grades or move to
the higher levels.[41] The Court has examined the Amended Articles of
Incorporation[42] and By-Laws[43] of the YMCA, but found nothing in them that even hints
that it is a school or an educational institution.[44]
Furthermore, under the Education Act of 1982, even non-formal education is
understood to be school-based and private auspices such as foundations and civic-spirited
organizations are ruled out.[45] It is settled that the term educational institution, when used
in laws granting tax exemptions, refers to a xxx school seminary, college or educational

establishment xxx.[46]Therefore, the private respondent cannot be deemed one of the

educational institutions covered by the constitutional provision under consideration.
xxx Words used in the Constitution are to be taken in their ordinary acceptation. While in
its broadest and best sense education embraces all forms and phrases of instruction,
improvement and development of mind and body, and as well of religious and moral
sentiments, yet in the common understanding and application it means a place where
systematic instruction in any or all of the useful branches of learning is given by methods
common to schools and institutions of learning.That we conceive to be the true intent and
scope of the term [educational institutions,] as used in the Constitution.[47]
Moreover, without conceding that Private Respondent YMCA is an educational
institution, the Court also notes that the former did not submit proof of the proportionate
amount of the subject income that was actually, directly and exclusively used for
educational purposes. Article XIII, Section 5 of the YMCA by-laws, which formed part
of the evidence submitted, is patently insufficient, since the same merely signified that
[t]he net income derived from the rentals of the commercial buildings shall be
apportioned to the Federation and Member Associations as the National Board may
decide.[48] In sum, we find no basis for granting the YMCA exemption from income tax
under the constitutional provision invoked
Cases Cited by Private
Respondent Inapplicable
The cases[49] relied on by private respondent do not support its cause. YMCA of
Manila v. Collector of Internal Revenue [50] and Abra Valley College, Inc. v. Aquino[51] are
not applicable, because the controversy in both cases involved exemption from the
payment of property tax, not income tax. Hospital de San Juan de Dios, Inc. v. Pasay
City[52] is not in point either, because it involves a claim for exemption from the payment
of regulatory fees, specifically electrical inspection fees, imposed by an ordinance of
Pasay City -- an issue not at all related to that involved in a claimed exemption from the
payment if income taxes imposed on property leases. InJesus Sacred Heart College v.
Com. Of Internal Revenue,[53] the party therein, which claimed an exemption from the
payment of income tax, was an educational institution which submitted substantial
evidence that the income subject of the controversy had been devoted or used solely for
educational purposes. On the other hand, the private respondent in the present case had

not given any proof that it is an educational institution, or that of its rent income is
actually, directly and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private
respondent. It appreciates the nobility its cause. However, the Courts power and function
are limited merely to applying the law fairly and objectively. It cannot change the law or
bend it to suit its sympathies and appreciations. Otherwise, it would be overspilling its
role and invading the realm of legislation.
We concede that private respondent deserves the help and the encouragement of the
government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But
the Court regrets that, given its limited constitutional authority, it cannot rule on the
wisdom or propriety of legislation. That prerogative belongs to the political departments
of government.Indeed, some of the member of the Court may even believe in the wisdom
and prudence of granting more tax exemptions to private respondent. But such belief,
however well-meaning and sincere, cannot bestow upon the Court the power to change or
amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals
dated September 28, 1995 and February 29, 1996 are hereby dated February 16, 1995
is REVERSEDand SET ASIDE. The Decision of the Court of Appeals dated February
16, 1995 isREINSTATED, insofar as it ruled that the income tax. No pronouncement as
to costs.
SO ORDERED.

G.R. No. 175410

November 12, 2014

SMI-ED PHILIPPINES TECHNOLOGY, INC., Petitioner,

vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.:
In an action for the REFUND of taxes allegedly erroneously paid, the Court
of Tax Appeals may determine whether there are taxes that should have
been paid in lieu of the taxes paid. Determining the proper category of tax
that should have been paid is not an assessment. It is incidental to
determining whether there should be a refund.
A Philippine Economic Zone Authority (PEZA)-registered corporation that
has never commenced operations may NOT avail the tax incentives and
preferential rates given to PEZA-registered enterprises. Such corporation is
subject to ordinary tax rates under the National Internal Revenue Code of
1997.
This is a petition for review1 on certiorari of the November 3, 2006 Court of Tax
Appeals En Banc decision.2 It affirmed the Court of Tax Appeals Second
Divisions decision3 and resolution4 denying petitioner SMI-Ed Philippines
Technology, Inc.s (SMI-Ed Philippines) claim for tax refund.5
SMI-Ed Philippines is a PEZA-registered corporation authorized "to engage in the
business of manufacturing ultra high-density microprocessor unit package."6
After its registration on June 29, 1998, SMI-Ed Philippines constructed buildings
and purchased machineries and equipment.7 As of December 31, 1999, the total
cost of the properties amounted to P3,150,925,917.00.8
SMI-Ed Philippines "failed to commence operations."9 Its factory was
temporarily closed, effective October 15, 1999. On August 1, 2000, it sold its
buildings and some of its installed machineries and equipment to Ibiden
Philippines, Inc., another PEZA-registered enterprise, for 2,100,000,000.00
(P893,550,000.00). SMI-Ed Philippines was dissolved on November 30, 2000.10

In its quarterly income tax return for year 2000, SMI-Ed Philippines
subjected the entire gross sales of its properties to 5% final tax on PEZA
registered corporations. SMI-Ed Philippines paid taxes amounting
to P44,677,500.00.11
On February 2, 2001, after requesting the cancellation of its PEZA
registration and amending its articles of incorporation to shorten its
corporate term, SMI-Ed Philippines filed an administrative claim for the
refund ofP44,677,500.00 with the Bureau of Internal Revenue (BIR). SMIEd
Philippines alleged that the amountwas erroneously paid. It also indicated the
refundable amount in its final income tax return filed on March 1, 2001. It also
alleged that it incurred a net loss of P2,233,464,538.00.12
The BIR did not act on SMI-Ed Philippines claim, which prompted the latter
to file a petition for review before the Court of Tax Appeals on September 9,
2002.13
The Court of Tax Appeals Second Division denied SMI-Ed Philippines claim
for refund in the decision dated December 29, 2004.14
The Court of Tax Appeals Second Division found that SMI-Ed Philippines
administrative claim for refund and the petition for review with the Court of Tax
Appeals were filed within the two-year prescriptive period. 15 However, fiscal
incentives given to PEZA-registered enterprises may be availed only by
PEZA-registered enterprises that had already commenced
operations.16 Since SMI-Ed Philippines had not commenced operations, it
was not entitled to the incentives of either the income tax holiday or the 5%
preferential tax rate.17 Payment of the 5% preferential tax amounting
to P44,677,500.00 was erroneous.18
After finding that SMI-Ed Philippines sold properties that were capital assets
under Section 39(A)(1) of the National Internal Revenue Code of 1997, the Court
of Tax Appeals Second Division subjected the sale of SMIEd Philippines assets
to 6% capital gains tax under Section 27(D)(5) of the same Code and Section 2
of Revenue Regulations No. 8-98.19 It was found liable for capital gains tax
amounting to P53,613,000.00.20 Therefore, SMIEd Philippines must still pay the
balance of P8,935,500.00 as deficiency tax,21 "which respondent should perhaps

look into."22 The dispositive portion of the Court of Tax Appeals Second Divisions
decision reads:
WHEREFORE, premises considered, the instant petition is hereby DENIED.
SO ORDERED.23
The Court of Tax Appeals denied SMI-Ed Philippines motion for reconsideration
in its June 15, 2005 resolution.24
On July 17, 2005, SMI-Ed Philippines filed a petition for review before the Court
of Tax Appeals En Banc.25 It argued that the Court of Tax Appeals Second
Division erroneously assessed the 6% capital gains tax on the sale of SMI-Ed
Philippines equipment, machineries, and buildings.26 It also argued that the Court
of Tax Appeals Second Division cannot make an assessment at the first
instance.27 Even if the Court of Tax Appeals Second Division has such power, the
period to make an assessment had already prescribed.28
In the decision promulgated on November 3, 2006, the Court of Tax Appeals En
Banc dismissed SMI-Ed Philippines petition and affirmed the Court of Tax
Appeals Second Divisions decision and resolution.29 The dispositive portion of
the Court of Tax Appeals En Bancs decision reads:
WHEREFORE, finding no reversible error to reverse the assailed Decision
promulgated on December 29, 2004 and the Resolution dated June 15, 2005, the
instant petition for review is hereby DISMISSED. Accordingly, the assailed
Decision and Resolution are hereby AFFIRMED. SO ORDERED.30
SMI-Ed Philippines filed a petition for review before this court on December 27,
2006,31 praying for the grant of its claim for refund and the reversal of the Court
of Tax Appeals En Bancs decision.32
SMI-Ed Philippines assigned the following errors:
A. The honorable CTA En Banc grievously erred and acted beyond its
jurisdiction when it assessed for deficiency tax in the first instance.
B. Even assuming that the honorable CTA En Banc has the right to make
an assessment against the petitioner-appellant, it grievously erred in

finding that the machineries and equipment sold by the petitioner-appellant

is subject to the six percent (6%) capital gains tax under Section 27(D)(5)
of the Tax Code.33
Petitioner argued that the Court of Tax Appeals has no jurisdiction to make an
assessment since its jurisdiction, with respect to the decisions of respondent, is
merely appellate.34 Moreover, the power to make assessment had already
prescribed under Section 203 of the National Internal Revenue Code of 1997
since the return for the erroneous payment was filed on September 13, 2000.
This is more than three (3) years from the last day prescribed by law for the filing
of the return.35
Petitioner also argued that the Court of Tax Appeals En Banc erroneously
subjected petitioners machineries to 6% capital gains tax.36 Section 27(D)(5) of
the National Internal Revenue Code of 1997 is clear that the 6% capital gains tax
on domestic corporations applies only on the sale of lands and buildings and not
to machineries and equipment.37 Since 1,700,000,000.00 of the
2,100,000,000.00 constituted the consideration for the sale of petitioners
machineries, only 400,000,000.00 or P170,200,000.00 should be subjected to
the 6% capital gains tax.38 Petitioner should be liable only for P10,212,000.00.39 It
should be entitled to a refund of P34,464,500.00 after deducting P10,212,000.00
from the erroneously paid final tax of P44,677,500.00.40
In its comment, respondent argued that the Court of Tax Appeals determination
of petitioners liability for capital gains tax was not an assessment. Such
determination was necessary to settle the question regarding the tax
consequence of the sale of the properties.41 This is clearly within the Court of Tax
Appeals jurisdiction under Section 7 of Republic Act No. 9282.42 Respondent
also argued that "petitioner failed to justify its claim for refund."43
The petition is meritorious.
I
Jurisdiction of the Court of Tax Appeals
The term "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 the determination of the taxes due from a taxpayer under
the National Internal Revenue Code of 1997.
The power and duty to assess national internal revenue taxes are lodged
with the BIR.44 Section 2 of the National Internal Revenue Code of 1997
provides:
SEC. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau of
Internal Revenue shall be under the supervision and control of the Department of
Finance and its powers and duties shall comprehend the assessment and
collection ofall national internal revenue taxes, fees, and charges, and the
enforcement of all forfeitures, penalties, and fines connected therewith, including
the execution of judgments in all cases decided in its favor by the Court of Tax
Appeals and the ordinary courts. The Bureau shall give effect to and administer
the supervisory and police powers conferred to it by this Code or other laws.
(Emphasis supplied) The BIR is not mandated to make an assessment relative to
every return filed with it. Tax returns filed with the BIR enjoy the presumption that
these are in accordance with the law.45 Tax returns are also presumed correct
since these are filed under the penalty of perjury.46 Generally, however, the BIR
assesses taxes when it appears, after a return had been filed, that the taxes paid
were incorrect,47 false,48 or fraudulent.49 The BIR also assesses taxes when taxes
are due but no return is filed.50 Thus:
SEC. 6. Power of the Commissioner to Make assessments and Prescribe
additional Requirements for Tax Administration and Enforcement.
(A) Examination of Returns and Determination of Tax Due. - After a return has
been filed as required under the provisions of this Code, the Commissioner or his
duly authorized representative may authorize the examination of any taxpayer
and the assessment of the correct amount of tax: Provided, however; That failure
to file a return shall not prevent the Commissioner from authorizing the
examination of any taxpayer.The tax or any deficiency tax so assessed shall be
paid upon notice and demand from the Commissioner or from his duly authorized
representative.
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of
Taxes.

(a) In the case of a false or fraudulent return with intent to evade tax or of failure
to file a return, the tax may be assessed, or a preceeding in court for the
collection of such tax may be filed without assessment, at any time within ten
(10) years after the discovery of the falsity, fraud or omission: Provided, That in a
fraud assessment which has become final and executory, the fact of fraud shall
be judicially taken cognizance of in the civil or criminal action for the collection
thereof. (Emphasis supplied)
The Court of Tax Appeals has no power to make an assessment at the first
instance. On matters such as tax collection, tax refund, and others related
to the national internal revenue taxes, the Court of Tax Appeals jurisdiction
is appellate in nature.
Section 7(a)(1) and Section 7(a)(2) of Republic Act No. 1125,51 as amended by
Republic Act No. 9282,52 provide that the Court of Tax Appeals reviews decisions
and inactions of the Commissioner of Internal Revenue in disputed assessments
and claims for tax refunds. Thus: SEC. 7. Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction toreview 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 in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relations thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue, where the National Internal Revenue Code provides a
specific period of action, in which case the inaction shall be deemed a
denial[.] (Emphasis supplied) Based on these provisions, the following
must be present for the Court of Tax Appeals to have jurisdiction over a
case involving the BIRs decisions or inactions:
a) A case involving any of the following:
i. Disputed assessments;

ii. Refunds of internal revenue taxes, fees, or other charges,

penalties in relation thereto; and
iii. Other matters arising under the National Internal Revenue
Code of 1997.
b) Commissioner of Internal Revenues decision or inaction in a case
submitted to him or her
Thus, the BIR first has to make an assessment of the taxpayers liabilities.
When the BIR makes the assessment, the taxpayer is allowed to dispute that
assessment before the BIR. If the BIR issues a decision that is unfavorable to
the taxpayer or if the BIR FAILS to act on a dispute brought by the taxpayer,
the BIRs decision or inaction may be brought on appeal to the Court of Tax
Appeals. The Court of Tax Appeals then acquires jurisdiction over the case.
When the BIRs unfavorable decision is brought on appeal to the Court of Tax
Appeals, the Court of Tax Appeals reviews the correctness of the BIRs
assessment and decision. In reviewing the BIRs assessment and decision,
the Court of Tax Appeals had to make its own determination of the
taxpayers tax liabilities. The Court of Tax Appeals may not make such
determination before the BIR makes its assessment and before a dispute
involving such assessment is brought to the Court of Tax Appeals on
appeal.
The Court of Tax Appeals jurisdiction is not limited to cases when the BIR
makes an assessment or a decision unfavorable to the taxpayer. Because
Republic Act No. 112553 also vests the Court of Tax Appeals with jurisdiction
over the BIRs INACTION on a taxpayers refund claim, there may be
instances when the Court of Tax Appeals has to take cognizance of cases that
have nothing to do with the BIRs assessments or decisions. When the BIR fails
to act on a claim for refund of voluntarily but mistakenly paid taxes, for
example, there is no decision or assessment involved.
Taxes are generally self-assessed. They are initially computed and voluntarily
paid by the taxpayer. The government does not have to demand it. If the tax
payments are correct, the BIR need NOT make an assessment.

The self-assessing and voluntarily paying taxpayer, however, may later find that
he or she has erroneously paid taxes. Erroneously paid taxes may come in the
form of amounts that should not have been paid. Thus, a taxpayer may find that
he or she has paid more than the amount that should have been paid under the
law. Erroneously paid taxes may also come in the form of tax payments for the
wrong category of tax. Thus, a taxpayer may find that he or she has paid a
certain kind of tax that he or she is not subject to.
In these instances, the taxpayer may ask for a refund. If the BIR fails to act

on the request for refund, the taxpayer may bring the matter to the
Court of Tax Appeals.
From the taxpayers self-assessment and tax payment up to his or her request
for refund and the BIRs inaction, the BIRs participation is limited to the receipt of
the taxpayers payment. The BIR does not make an assessment; the BIR issues
no decision; and there is no dispute yet involved. Since there is no BIR
assessment yet, the Court of Tax Appeals may NOT determine the amount
of taxes due from the taxpayer. There is also no decision yet to review.
However, there was INACTION on the part of the BIR. That inaction is within
the Court of Tax Appeals jurisdiction.
In other words, the Court of Tax Appeals may acquire jurisdiction over cases
even if they do not involve BIR assessments or decisions.
In this case, the Court of Tax Appeals jurisdiction was acquired because
petitioner brought the case on appeal before the Court of Tax Appeals after
the BIR had failed to act on petitioners claim for REFUND of
ERRONEOUSLY paid taxes. The Court of Tax Appeals did not acquire
jurisdiction as a result of a disputed assessment of a BIR decision.
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to
6% capital gains tax or other taxes at the first instance. The Court of Tax Appeals
has no power to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In
stating that petitioners transactions are subject to capital gains tax, however, the
Court of Tax Appeals was NOT making an assessment. It was merely
determining the PROPER CATEGORY of tax that petitioner should have

paid, in view of its claim that it erroneously imposed upon itself and paid the 5%
final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have
paid is an incidental matter necessary for the resolution of the principal
issue, which is whether petitioner was entitled to a refund.54
The issue of petitioners claim for tax refund is intertwined with the issue of the
proper taxes that are due from petitioner. A claim for tax refund carries the
assumption that the tax returns filed were correct.55 If the tax return filed was not
proper, the correctness of the amount paid and, therefore, the claim for refund
become questionable. In that case, the court must determine if a taxpayer
claiming refund of erroneously paid taxes is more properly liable for taxes other
than that paid.
In South African Airways v. Commissioner of Internal Revenue,56 South
African Airways claimed for refund of its erroneously paid 2% taxes on its gross
Philippine billings. This court did not immediately grant South Africans claim for
refund. This is because although this court found that South African Airways was
not subject to the 2% tax on its gross Philippine billings, this court also found
that it was subject to 32% tax on its taxable income.57
In this case, petitioners claim that it erroneously paid the 5% final tax is an
admission that the quarterly tax return it filed in 2000 was improper. Hence,
to determine if petitioner was entitled to the refund being claimed, the
Court of Tax Appeals has the duty to determine if petitioner was indeed not
liable for the 5% final tax and, instead, liable for taxes other than the 5%
final tax. As in South African Airways, petitioners request for refund can neither
be granted nor denied outright without such determination.58
If the taxpayer is found liable for taxes other than the erroneously paid 5%
final tax, the amount of the taxpayers liability should be computed and
deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may not be
collected in a case involving solely the issue of the taxpayers entitlement
to refund. The question of tax deficiency is distinct and unrelated to the question
of petitioners entitlement to refund.

Tax deficiencies should be subject to assessment procedures and the rules

of prescription. The court cannot be expected to perform the BIRs duties
whenever it fails to do so either through neglect or oversight. Neither can court
processes be used as a tool to circumvent laws protecting the rights of
taxpayers.
II
Petitioners entitlement to benefits given to PEZA-registered enterprises
Petitioner is not entitled to benefits given to PEZA-registered enterprises,
including the 5% preferential tax rate under Republic Act No. 7916 or the
Special Economic Zone Act of 1995. This is because it never began its
operation.
Essentially, the purpose of Republic Act No. 7916 is to promote development and
encourage investments and business activities that will generate
employment.59 Giving fiscal incentives to businesses is one of the means devised
to achieve this purpose. It comes with the expectation that persons who will avail
these incentives will contribute to the purposes achievement. Hence, to avail
the fiscal incentives under Republic Act No. 7916, the law did not say that
mere PEZA registration is sufficient.
Republic Act No. 7916 or The Special Economic Zone Act of 1995 provides:
SEC. 23. Fiscal Incentives. Business establishments operating within the
ECOZONES shall be entitled to the fiscal incentives as provided for under
Presidential Decree No. 66, the law creating the Export Processing Zone
Authority, or those provided under Book VI of Executive Order No. 226, otherwise
known as the Omnibus Investment Code of 1987.
Furthermore, tax credits for exporters using local materials as inputs shall enjoy
the same benefits provided for in the Export Development Act of 1994.
SEC. 24. Exemption from Taxes Under the National Internal Revenue Code.
Any provision of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu of paying taxes, five
percent (5%) of the gross income earned by all businesses and enterprises

within the ECOZONE shall be remitted tothe national government. This five
percent (5%) shall be shared and distributed as follows:
a. Three percent (3%) to the national government;
b. One percent (1%) to the localgovernment units affected by the
declaration of the ECOZONE inproportion to their population, land area,
and equal sharing factors; and
c. One percent (1%) for the establishment of a development fund to be
utilized for the development of municipalities outside and contiguous to
each ECOZONE: Provided, however, That the respective share of the
affected local government units shall be determined on the basis of the
following formula:
1. Population - fifty percent (50%);
2. Land area - twenty-five percent (25%); and
3. Equal sharing - twenty-five percent (25%). (Emphasis supplied)
Based on these provisions, the fiscal incentives and the 5% preferential tax
rate are available only to businesses operating within the Ecozone.60 A
business is considered in operation when it starts entering into commercial
transactions that are not merely incidental to but are related to the
purposes of the business. It is similar to the definition of "doing business," as
applied in actions involving the right of foreign corporations to maintain court
actions. In Mentholatum Co. Inc., et al. v. Mangaliman, et al.,61 this court said that
the terms "doing" or "engaging in" or "transacting" business":
. . . impl[y] a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of
some of the functions normally incident to, and in progressive prosecution of, the
purpose and object of its organization.62 Petitioner never started its operations
since its registration on June 29, 199863 because of the Asian financial
crisis.64 Petitioner admitted this.65 Therefore, it cannot avail the incentives
provided under Republic Act No. 7916. It is not entitled to the preferential tax rate
of 5% on gross income in lieu of all taxes. Because petitioner is not entitled to a

preferential rate, it is subject to ordinary tax rates under the National Internal
Revenue Code of 1997.
III
Imposition of capital gains tax
The Court of Tax Appeals found that petitioners sale of its properties is subject to
capital gains tax.
For petitioners properties to be subjected to capital gains tax, the
properties must form part of petitioners capital assets.
Section 39(A)(1) of the National Internal Revenue Code of 1997 defines "capital
assets":
SEC. 39. Capital Gains and Losses. (A) Definitions.- As used in this Title (1) Capital Assets.- the term capital assets means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock
in trade of the taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable
year, or property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade orbusiness, or property used in the trade or
business, of a character which is subject to the allowance for depreciation
provided in Subsection (F) of Section 34; or real property used in trade or
business of the taxpayer. (Emphasis supplied) Thus, "capital assets" refers to
taxpayers property that is NOT any of the following:
1. Stock in trade;
2. Property that should be included inthe taxpayers inventory at the close
of the taxable year;
3. Property held for sale in the ordinary course of the taxpayers business;
4. Depreciable property used in the trade or business; and

5. Real property used in the trade or business.

The properties involved in this case include petitioners buildings, equipment, and
machineries. They are not among the exclusions enumerated in Section 39(A)(1)
of the National Internal Revenue Code of 1997. None of the properties were
used in petitioners trade or ordinary course of business because petitioner
never commenced operations. They were not part of the inventory. None of
them were stocks in trade. Based on the definition of capital assets under
Section 39 of the National Internal Revenue Code of 1997, they are capital
assets.
Respondent insists that since petitioners machineries and equipment are
classified as capital assets, their sales should be subject to capital gains tax.
Respondent is mistaken.
In Commissioner of Internal Revenue v. Fortune Tobacco Corporation,66 this
court said:
The rule in the interpretation of tax laws is that a statute will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously. A tax
cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the provisions of a taxing
act are not to be extended by implication. In answering the question of who is
subject to tax statutes, it is basic that in case of doubt, such statutes are to be
construed most strongly against the government and in favor of the subjects or
citizens because burdens are not to be imposed nor presumed to be imposed
beyond what statutes expressly and clearly import. As burdens, taxes should not
be unduly exacted nor assumed beyond the plain meaning of the tax
laws.67 (Citations omitted)
Capital gains of individuals and corporations from the sale of real
properties are taxed differently. Individuals are taxed on capital gains from
sale of all real properties located in the Philippines and classified as capital
assets. Thus:
SEC. 24. Income Tax Rates.
....

(D) Capital Gains from Sale of Real Property.

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six
percent (6%) based on the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this Code, whichever is higher, is
hereby imposed upon capital gains presumed to have been realized from the
sale, exchange, or other disposition of real property located in the Philippines,
classified as capital assets, including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and trusts: Provided, That the
tax liability, if any, on gains from sales or other dispositions of real property to the
government or any of its political subdivisions or agencies or to governmentowned or controlled corporations shall be determined either under Section 24 (A)
or under this Subsection, at the option of the taxpayer.68 (Emphasis supplied)
For corporations, the National Internal Revenue Code of 1997 treats the
sale of land and buildings, and the sale of machineries and equipment,
differently. Domestic corporations are imposed a 6% capital gains tax only on
the presumed gain realized from the sale of lands and/or buildings. The National
Internal Revenue Code of 1997 does not impose the 6% capital gains tax on
the gains realized from the sale of machineries and equipment. Section
27(D)(5) of the National Internal Revenue Code of 1997 provides:
SEC. 27. Rates of Income tax on Domestic Corporations. ....
(D) Rates of Tax on Certain Passive Incomes. ....
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands
and/or Buildings. - A final tax of six percent (6%) is hereby imposed on the gain
presumed to have been realized on the sale, exchange or disposition of lands
and/or buildings which are not actually used in the business of a corporation and
are treated as capital assets, based on the gross selling price of fair market value
as determined in accordance with Section 6(E) of this Code, whichever is higher,
of such lands and/or buildings. (Emphasis supplied)

Therefore, only the presumed gain from the sale of

petitioners land and/or building may be subjected to the 6%
capital gains tax. The income from the sale of petitioners
machineries and equipment is subject to the provisions on normal
corporate income tax.
To determine, therefore, if petitioner is entitled to refund, the amount of
capital gains tax for the sold land and/or building of petitioner and the
amount of corporate income tax for the sale of petitioners machineries and
equipment should be deducted from the total final tax paid.
Petitioner indicated, however, in its March 1, 2001 income tax return for the 11month period ending on November 30, 2000 that it suffered a net loss
of P2,233,464,538.00.69This declaration was made under the pain of perjury.
Section 267 of the National Internal Revenue Code of 1997 provides:
SEC. 267. Declaration under Penalties of Perjury. - Any declaration, return and
other statement required under this Code, shall, in lieu of an oath, contain a
written statement that they are made under the penalties of perjury. Any person
who willfully files a declaration, return or statement containing information which
is not true and correct as to every material matter shall, upon conviction, be
subject to the penalties prescribed for perjury under the Revised Penal Code.
Moreover, Rule 131, Section 3(ff) of the Rules of Court provides for the
presumption that the law has been obeyed unless contradicted or overcome by
other evidence, thus:
SEC. 3. Disputable presumptions. The following presumptions are satisfactory
if uncontradicted, but may be contradicted and overcome by other evidence:
....
(ff) That the law has been obeyed;
The BIR did not make a deficiency assessment for this declaration. Neither
did the BIR dispute this statement in its pleadings filed before this court.
There is, therefore, no reason to doubt the truth that petitioner indeed
suffered a net loss in 2000.

Since petitioner had not started its operations, it was also not subject to
the minimum corporate income tax of 2% on gross income.70 Therefore,
petitioner is not liable for any income tax.
IV
Prescription
Section 203 of the National Internal Revenue Code of 1997 provides that as a
general rule, the BIR has three (3) years from the last day prescribed by law
for the filing of a return to make an assessment. If the return is filed beyond
the last day prescribed by law for filing, the three-year period shall run from
the actual date of filing. Thus:
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 a 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.
This court said that the prescriptive period to make an assessment of
internal revenue taxes is provided "primarily to safeguard the interests of
taxpayers from unreasonable investigation."71 This court explained in
Commissioner of Internal Revenue v. FMF Development Corporation72 the
reason behind the provisions on prescriptive periods for tax assessments:
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 reasonable period of time.73
Rules derogating taxpayers right against prolonged and unscrupulous
investigations are strictly construed against the government.74
[T]he law on prescription 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 recommended the approval of the law.

To the Government, its tax officers are obliged to act promptlyin the making of
assessment so that taxpayers, after the lapse of the period of prescription, would
have a feeling of security against unscrupulous tax agents who will always try to
find an excuse to inspect the books of taxpayers, not to determine the latters real
liability, but to take advantage of a possible opportunity to harass even lawabiding businessmen. Without such legal defense, taxpayers would be open
season to harassment by unscrupulous tax agents.75
Moreover, in Commissioner of Internal Revenue v. BF Goodrich Phils.:76
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[.]
....
. . . . Such instances of negligence or oversight on the part of the BIR cannot
prejudice taxpayers, considering that the prescriptive period was precisely
intended to give them peace of mind.77 (Citation omitted)
The BIR had three years from the filing of petitioners final tax return in 2000 to
assess petitioners taxes. Nothing stopped the BIR from making the correct
assessment. The elevation of the refund claim with the Court of Tax Appeals
was not a bar against the BIRs exercise of its assessment powers.
The BIR, however, did not initiate any assessment for deficiency capital gains
tax.78 Since more than a decade have lapsed from the filing of petitioner's
return, the BIR can no longer assess petitioner for deficiency capital gains
taxes, if petitioner is later found to have capital gains tax liabilities in
excess of the amount claimed for refund.
The Court of Tax Appeals should not be expected to perform the BIR's duties of
assessing and collecting taxes whenever the BIR, through neglect or oversight,
fails to do so within the prescriptive period allowed by law.

WHEREFORE, the Court of Tax Appeals' November 3, 2006 decision is SET

ASIDE. The Bureau of Internal Revenue is ordered to refund petitioner SMIEd Philippines Technology, Inc. the amount of 5% final tax paid to the BIR,
LESS the 6% capital gains tax on the sale of petitioner SMI-Ed Philippines
Technology, Inc. 's land and building. In view of the lapse of the
prescriptive period for assessment, any capital gains tax accrued from the
sale of its land and building that is in excess of the 5% final tax paid to the
Bureau of Internal Revenue may no longer be recovered from petitioner
SMI-Ed Philippines Technology, Inc.
SO ORDERED.

G.R. No. 211666, February 25, 2015

REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE
DEPARTMENT OF PUBLIC WORKS AND
HIGHWAYS, Petitioners, v. ARLENE R. SORIANO, Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review under Rule 45 of the Rules of
Court assailing the Decision1 dated November 15, 2013 and
Order2 dated March 10, 2014 of the Regional Trial Court (RTC),
Valenzuela City, Branch 270, in Civil Case No. 140-V-10.
The antecedent facts are as follows:
On October 20, 2010, petitioner Republic of the Philippines,
represented by the Department of Public Works and Highways
(DPWH), filed a Complaint3 for expropriation against respondent Arlene
R. Soriano, the registered owner of a parcel of land consisting of an
area of 200 square meters, situated at Gen. T. De Leon, Valenzuela

City, and covered by Transfer Certificate of Title (TCT) No. V13790.4 In its Complaint, petitioner averred that pursuant to Republic
Act (RA) No. 8974, otherwise known as An Act to Facilitate the
Acquisition of Right-Of-Way, Site or Location for National Government
Infrastructure Projects and for other Purposes, the property sought to
be expropriated shall be used in implementing the construction of the
North Luzon Expressway (NLEX)- Harbor Link Project (Segment 9)
from NLEX to MacArthur Highway, Valenzuela City.5cralawred
Petitioner duly deposited to the Acting Branch Clerk of Court the
amount of P420,000.00 representing 100% of the zonal value of the
subject property. Consequently, in an Order6 dated May 27, 2011, the
RTC ordered the issuance of a Writ of Possession and a Writ of
Expropriation for failure of respondent, or any of her representatives,
to appear despite notice during the hearing called for the purpose.
In another Order7 dated June 21, 2011, the RTC appointed the
following members of the Board of Commissioners for the
determination of just compensation: (1) Ms. Eunice O. Josue, Officerin-Charge, RTC, Branch 270, Valenzuela City; (2) Atty. Cecilynne R.
Andrade, Acting Valenzuela City Assessor, City Assessors Office,
Valenzuela City; and (3) Engr. Restituto Bautista, of Brgy. Bisig,
Valenzuela City. However, the trial court subsequently revoked the
appointment of the Board for their failure to submit a report as to the
fair market value of the property to assist the court in the
determination of just compensation and directed the parties to submit
their respective position papers.8 Thereafter, the case was set for
hearing giving the parties the opportunity to present and identify all
evidence in support of their arguments therein.
According to the RTC, the records of the case reveal that petitioner
adduced evidence to show that the total amount deposited is just, fair,
and equitable. Specifically, in its Position Paper, petitioner alleged that
pursuant to a Certification issued by the Bureau of Internal Revenue
(BIR), Revenue Region No. 5, the zonal value of the subject property

in the amount of P2,100.00 per square meter is reasonable, fair, and

just to compensate the defendant for the taking of her property in the
total area of 200 square meters.9 In fact, Tax Declaration No. C-01807994, dated November 13, 2009 submitted by petitioner, shows that
the value of the subject property is at a lower rate of P400.00 per
square meter. Moreover, as testified to by Associate Solicitor III Julie P.
Mercurio, and as affirmed by the photographs submitted, the subject
property is poorly maintained, covered by shrubs and weeds, and not
concretely-paved. It is located far from commercial or industrial
developments in an area without a proper drainage system, can only
be accessed through a narrow dirt road, and is surrounded by adjacent
dwellings of sub-standard materials.
Accordingly, the RTC considered respondent to have waived her right
to adduce evidence and to object to the evidence submitted by
petitioner for her continued absence despite being given several
notices to do so.
On November 15, 2013, the RTC rendered its Decision, the dispositive
portion of which reads:
WHEREFORE, with the foregoing determination of just compensation,
judgment is hereby rendered:
1) Declaring plaintiff to have lawful right to acquire possession of and
title to 200 square meters of defendant Arlene R. Sorianos parcel
of land covered by TCT V-13790 necessary for the construction of
the NLEX Harbor Link Project (Segment 9) from NLEX to
MacArthur Highway Valenzuela City;
2) Condemning portion to the extent of 200 square meters of the
above-described parcel of land including improvements thereon, if
there be any, free from all liens and encumbrances;
3) Ordering the plaintiff to pay defendant Arlene R. Soriano
Php2,100.00 per square meter or the sum of Four Hundred Twenty
Thousand Pesos (Php420,000.00) for the 200 square meters as
fair, equitable, and just compensation with legal interest at 12%
per annum from the taking of the possession of the property,

subject to the payment of all unpaid real property taxes and other
relevant taxes, if there be any;
4) Plaintiff is likewise ordered to pay the defendant consequential
damages which shall include the value of the transfer tax necessary
for the transfer of the subject property from the name of the
defendant to that of the plaintiff;
5) The Office of the Register of Deeds of Valenzuela City, Metro Manila
is directed to annotate this Decision in Transfer Certificate of Title
No. V-13790 registered under the name of Arlene R. Soriano.
cralawlawlibrary
Let a certified true copy of this decision be recorded in the Registry of
Deeds of Valenzuela City.
Records of this case show that the Land Bank Managers Check Nos.
0000016913 dated January 21, 2011 in the amount of Php400,000.00
and 0000017263 dated April 28, 2011 in the amount of Php20,000.00
issued by the Department of Public Works and Highways (DPWH) are
already stale. Thus, the said Office is hereby directed to issue another
Managers Check in the total amount Php420,000.00 under the name
of the Office of the Clerk of Court, Regional Trial Court, Valenzuela City
earmarked for the instant case.10cralawlawlibrary
Petitioner filed a Motion for Reconsideration maintaining that pursuant
to Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013,
which took effect on July 1, 2013, the interest rate imposed by the
RTC on just compensation should be lowered to 6% for the instant
case falls under a loan or forbearance of money.11 In its Order12 dated
March 10, 2014, the RTC reduced the interest rate to 6% per annum
not on the basis of the aforementioned Circular, but on Article 2209 of
the Civil Code, viz.:
However, the case of National Power Corporation v. Honorable
Zain B. Angas is instructive.
In the aforementioned case law, which is similar to the instant case,

the Supreme Court had the occasion to rule that it is well-settled that
the aforequoted provision of Bangko Sentral ng Pilipinas Circular
applies only to a loan or forbearance of money, goods or credits.
However, the term judgments as used in Section 1 of the Usury Law
and the previous Central Bank Circular No. 416, should be interpreted
to mean only judgments involving loan or forbearance of money, goods
or credits, following the principle of ejusdem generis. And applying
said rule on statutory construction, the general term judgments can
refer only to judgments in cases involving loans or forbearance of any
money, goods, or credits. Thus, the High Court held that, Art. 2209
of the Civil Code, and not the Central Bank Circular, is the law
applicable.
Art. 2009 of the Civil Code reads:
If the obligation consists in the payment of a sum of money,
and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment
of the interest agreed upon, and in the absence of stipulation,
the legal interest, which is six per cent per annum.
Further in that case, the Supreme Court explained that the transaction
involved is clearly not a loan or forbearance of money, goods or credits
but expropriation of certain parcels of land for a public purpose, the
payment of which is without stipulation regarding interest, and the
interest adjudged by the trial court is in the nature of indemnity for
damages. The legal interest required to be paid on the amount
of just compensation for the properties expropriated is
manifestly in the form of indemnity for damages for the delay
in the payment thereof. It ultimately held that Art. 2209 of the Civil
Code shall apply.13
On May 12, 2014, petitioner filed the instant petition invoking the
following arguments:
I.

RESPONDENT IS NOT ENTITLED TO THE LEGAL INTEREST OF 6% PER

ANNUM ON THE AMOUNT OF JUST COMPENSATION OF THE SUBJECT
PROPERTY AS THERE WAS NO DELAY ON THE PART OF PETITIONER.
II.
BASED ON THE NATIONAL INTERNAL REVENUE CODE OF 1997 AND
THE LOCAL GOVERNMENT CODE, IT IS RESPONDENTS OBLIGATION
TO PAY THE TRANSFER TAXES.
Petitioner maintains that if property is taken for public use before
compensation is deposited with the court having jurisdiction over the
case, the final compensation must include interests on its just value
computed from the time the property is taken up to the time when
compensation is actually paid or deposited with the court. 14 Thus, legal
interest applies only when the property was taken prior to the deposit
of payment with the court and only to the extent that there is delay in
payment. In the instant case, petitioner posits that since it was able to
deposit with the court the amount representing the zonal value of the
property before its taking, it cannot be said to be in delay, and thus,
there can be no interest due on the payment of just compensation. 15
Moreover, petitioner alleges that since the entire subject property was
expropriated and not merely a portion thereof, it did not suffer an
impairment or decrease in value, rendering the award of consequential
damages nugatory. Furthermore, petitioner claims that contrary to the
RTCs instruction, transfer taxes, in the nature of Capital Gains Tax and
Documentary Stamp Tax, necessary for the transfer of the subject
property from the name of the respondent to that of the petitioner are
liabilities of respondent and not petitioner.
The petition is partly meritorious.
At the outset, it must be noted that the RTCs reliance
on National Power Corporation v. Angas is misplaced for the
same has already been overturned by our more recent ruling

in Republic v. Court of Appeals,16 wherein we held that the

payment of just compensation for the expropriated property
amounts to an effective forbearance on the part of the State, to
wit:
Aside from this ruling, Republic notably overturned the Courts
previous ruling in National Power Corporation v. Angas which
held that just compensation due for expropriated properties is
not a loan or forbearance of money but indemnity for damages
for the delay in payment; since the interest involved is in the
nature of damages rather than earnings from loans, then Art.
2209 of the Civil Code, which fixes legal interest at 6%, shall
apply.
In Republic, the Court recognized that the just compensation
due to the landowners for their expropriated property
amounted to an effective forbearance on the part of the
State. Applying the Eastern Shipping Lines ruling, the Court fixed
the applicable interest rate at 12% per annum, computed from
the time the property was taken until the full amount of just
compensation was paid, in order to eliminate the issue of the
constant fluctuation and inflation of the value of the currency
over time. In the Courts own words:
The Bulacan trial court, in its 1979 decision, was correct in imposing
interest[s] on the zonal value of the property to be computed from the
time petitioner instituted condemnation proceedings and "took" the
property in September 1969. This allowance of interest on the amount
found to be the value of the property as of the time of the taking
computed, being an effective forbearance, at 12% per annum should
help eliminate the issue of the constant fluctuation and inflation of the
value of the currency over time.
We subsequently upheld Republics 12% per annum interest rate on
the unpaid expropriation compensation in the following cases: Reyes
v. National Housing Authority, Land Bank of the Philippines v. Wycoco,
Republic v. Court of Appeals, Land Bank of the Philippines v. Imperial,

Philippine Ports Authority v. Rosales-Bondoc, and Curata v. Philippine

Ports Authority.17cralawlawlibrary
Effectively, therefore, the debt incurred by the government on
account of the taking of the property subject of an
expropriation constitutes a forbearance18 which runs contrary
to the trial courts opinion that the same is in the nature of
indemnity for damages calling for the application of Article
2209 of the Civil Code. Nevertheless, in line with the recent circular
of the Monetary Board of the Bangko Sentral ng Pilipinas (BSP-MB) No.
799, Series of 2013, effective July 1, 2013, the prevailing rate of
interest for loans or forbearance of money is six percent (6%) per
annum, in the absence of an express contract as to such rate of
interest.
Notwithstanding the foregoing, We find that the imposition of
interest in this case is unwarranted in view of the fact that as
evidenced by the acknowledgment receipt19 signed by the Branch Clerk
of Court, petitioner was able to deposit with the trial court the amount
representing the zonal value of the property before its taking. As often
ruled by this Court, the award of interest is imposed in the nature of
damages for delay in payment which, in effect, makes the obligation
on the part of the government one of forbearance to ensure prompt
payment of the value of the land and limit the opportunity loss of the
owner.20 However, when there is no delay in the payment of just
compensation, We have not hesitated in deleting the imposition of
interest thereon for the same is justified only in cases where delay has
been sufficiently established.21
The records of this case reveal that petitioner did not delay in its
payment of just compensation as it had deposited the pertinent
amount in full due to respondent on January 24, 2011, or four
(4) months before the taking thereof, which was when the RTC
ordered the issuance of a Writ of Possession and a Writ of
Expropriation on May 27, 2011. The amount deposited was deemed by

the trial court to be just, fair, and equitable, taking into account the
well-established factors in assessing the value of land, such as its size,
condition, location, tax declaration, and zonal valuation as determined
by the BIR. Considering, therefore, the prompt payment by the
petitioner of the full amount of just compensation as
determined by the RTC, We find that the imposition of interest
thereon is unjustified and should be deleted.
Similarly, the award of consequential damages should likewise
be deleted in view of the fact that the ENTIRE area of the subject
property is being expropriated, and not merely a portion
thereof, wherein such remaining portion suffers an impairment
or decrease in value, as enunciated in Republic of the Philippines v.
Bank of the Philippine Islands,22 thus:
x x x The general rule is that the just compensation to which the
owner of the condemned property is entitled to is the market
value. Market value is that sum of money which a person
desirous but not compelled to buy, and an owner willing but
not compelled to sell, would agree on as a price to be paid by
the buyer and received by the seller.
The general rule, however, is modified where only a part of a
certain property is expropriated. In such a case, the owner is
not restricted to compensation for the portion actually taken,
he is also entitled to recover the consequential damage, if any,
to the remaining part of the property.
xxxx
No actual taking of the building is necessary to grant consequential
damages. Consequential damages are awarded if as a result
of the expropriation, the remaining property of the owner suffers
from an impairment or decrease in value. The rules on
expropriation clearly provide a legal basis for the award of

consequential damages. Section 6 of Rule 67 of the Rules of Court

provides:
x x x The commissioners shall assess the consequential
damages to the property not taken and deduct from such
consequential damages the consequential benefits to be derived by the
owner from the public use or public purpose of the property taken, the
operation of its franchise by the corporation or the carrying on of the
business of the corporation or person taking the property. But in no
case shall the consequential benefits assessed exceed the
consequential damages assessed, or the owner be deprived of the
actual value of his property so taken.
In B.H. Berkenkotter & Co. v. Court of Appeals, we held that:
To determine just compensation, the trial court should first ascertain
the market value of the property, to which should be added the
consequential damages after deducting therefrom the consequential
benefits which may arise from the expropriation. If the consequential
benefits exceed the consequential damages, these items should be
disregarded altogether as the basic value of the property should be
paid in every case.2
Considering that the subject property is being expropriated in
its entirety, there is no remaining portion which may suffer an
impairment or decrease in value as a result of the
expropriation. Hence, the award of consequential damages is
improper.
Anent petitioners contention that it cannot be made to pay the
value of the transfer taxes in the nature of capital gains tax and
documentary stamp tax, which are necessary for the transfer of the
subject property from the name of the respondent to that of the
petitioner, the same is partly meritorious.
With respect to the capital gains tax, We find merit in petitioners
posture that pursuant to Sections 24(D) and 56(A)(3) of the 1997

National Internal Revenue Code (NIRC), capital gains tax due on

the sale of real property is a liability for the account of the
seller, to wit:
Section 24. Income Tax Rates
xxxx
(D) Capital Gains from Sale of Real Property.
(1) In General. The provisions of Section 39(B) notwithstanding, a
final tax of six percent (6%) based on the gross selling price or
current fair market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, is hereby
imposed upon capital gains presumed to have been realized
from the sale, exchange, or other disposition of real property
located in the Philippines, classified as capital assets, including
pacto de retro sales and other forms of conditional sales, by
individuals, including estates and trusts: Provided, That the tax
liability, if any, on gains from sales or other disposition of real property
to the government or any of its political subdivisions or agencies or to
government-owned or controlled corporations shall be determined
either under Section 24(A)or under this Subsection, at the option of
the taxpayer.
xxxx
Section 56. Payment and Assessment of Income Tax for Individuals
and Corporations.
(A) Payment of Tax
xxxx
(3) Payment of Capital Gains Tax. - The total amount of tax imposed
and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and
28(B)(5)(c) shall be paid on the date the return prescribed therefor is
filed by the person liable thereto: Provided, That if the seller submits
proof of his intention to avail himself of the benefit of exemption of

capital gains under existing special laws, no such payments shall be

required : Provided, further, That in case of failure to qualify for
exemption under such special laws and implementing rules and
regulations, the tax due on the gains realized from the original
transaction shall immediately become due and payable, subject to the
penalties prescribed under applicable provisions of this Code: Provided,
finally, That if the seller, having paid the tax, submits such proof of
intent within six (6) months from the registration of the document
transferring the real property, he shall be entitled to a refund of such
tax upon verification of his compliance with the requirements for such
exemption.
Thus, it has been held that since capital gains is a tax on
passive income, it is the seller, not the buyer, who generally
would shoulder the tax.24 Accordingly, the BIR, in its BIR Ruling
No. 476-2013, dated December 18, 2013, constituted the DPWH as
a withholding agent to withhold the six percent (6%) final
withholding tax in the expropriation of real property for
infrastructure projects. As far as the government is concerned,
therefore, the capital gains tax remains a liability of the seller
since it is a tax on the seller's gain from the sale of the real
estate.25
As to the documentary stamp tax, however, this Court finds
inconsistent petitioners denial of liability to the same. Petitioner
cites Section 196 of the 1997 NIRC as its basis in saying that
the documentary stamp tax is the liability of the seller, viz:
SECTION 196. Stamp Tax on Deeds of Sale and Conveyances of Real
Property. - On all conveyances, deeds, instruments, or writings, other
than grants, patents or original certificates of adjudication issued by
the Government, whereby any land, tenement or other realty sold
shall be granted, assigned, transferred or otherwise conveyed to the
purchaser, or purchasers, or to any other person or persons designated
by such purchaser or purchasers, there shall be collected a
documentary stamp tax, at the rates herein below prescribed, based

on the consideration contracted to be paid for such realty or on its fair

market value determined in accordance with Section 6(E) of this Code,
whichever is higher: Provided, That when one of the contracting
parties is the Government, the tax herein imposed shall be based on
the actual consideration:
(a) When the consideration, or value received or contracted to be paid
for such realty, after making proper allowance of any encumbrance,
does not exceed One thousand pesos (P1,000), Fifteen pesos
(P15.00).
(b) For each additional One thousand pesos (P1,000), or fractional part
thereof in excess of One thousand pesos (P1,000) of such
consideration or value, Fifteen pesos (P15.00).
When it appears that the amount of the documentary stamp tax
payable hereunder has been reduced by an incorrect statement of the
consideration in any conveyance, deed, instrument or writing subject
to such tax the Commissioner, provincial or city Treasurer, or other
revenue officer shall, from the assessment rolls or other reliable source
of information, assess the property of its true market value and collect
the proper tax thereon.
Yet, a perusal of the provision cited above does not explicitly
impute the obligation to pay the documentary stamp tax on the
seller. In fact, according to the BIR, all the parties to a
transaction are primarily liable for the documentary stamp tax,
as provided by Section 2 of BIR Revenue Regulations No. 9-2000,
which reads:26
SEC. 2. Nature of the Documentary Stamp Tax and Persons Liable for
the Tax.
(a) In General. - The documentary stamp taxes under Title VII of
the Code is a tax on certain transactions. It is imposed against
"the person making, signing, issuing, accepting, or
transferring" the document or facility evidencing the aforesaid
transactions. Thus, in general, it may be imposed on the

transaction itself or upon the document underlying such act.

Any of the parties thereto shall be liable for the full amount of
the tax due: Provided, however, that as between themselves, the
said parties may agree on who shall be liable or how they may
share on the cost of the tax.
(b) Exception. - Whenever one of the parties to the taxable
transaction is exempt from the tax imposed under Title VII of
the Code, the other party thereto who is not exempt shall be
the one directly liable for the tax.27
As a general rule, therefore, any of the parties to a transaction
shall be liable for the full amount of the documentary stamp tax
due, unless they agree among themselves on who shall be
liable for the same.
In this case, there is no agreement as to the party liable for the
documentary stamp tax due on the sale of the land to be
expropriated. But while petitioner rejects any liability for the same,
this Court must take note of petitioners Citizens Charter,28 which
functions as a guide for the procedure to be taken by the DPWH in
acquiring real property through expropriation under RA 8974. The
Citizens Charter, issued by petitioner DPWH itself on
December 4, 2013, explicitly provides that the documentary
stamp tax, transfer tax, and registration fee due on the transfer
of the title of land in the name of the Republic shall be
shouldered by the implementing agency of the DPWH, while the
capital gains tax shall be paid by the affected property
owner.29 Thus, while there is no specific agreement between
petitioner and respondent, petitioners issuance of the Citizens Charter
serves as its notice to the public as to the procedure it shall generally
take in cases of expropriation under RA 8974. Accordingly, it will be
rather unjust for this Court to blindly accede to petitioners vague
rejection of liability in the face of its issuance of the Citizens Charter,
which contains a clear and unequivocal assumption of accountability

for the documentary stamp tax. Had petitioner provided this Court
with more convincing basis, apart from a mere citation of an indefinite
provision of the 1997 NIRC, showing that it should be respondentseller who shall be liable for the documentary stamp tax due on the
sale of the subject property, its rejection of the payment of the same
could have been sustained.
WHEREFORE, premises considered, the instant petition
is PARTIALLY GRANTED. The Decision and Order, dated November
15, 2013 and March 10, 2014, respectively, of the Regional Trial Court,
Valenzuela City, Branch 270, in Civil Case No. 140-V-10 are
hereby MODIFIED, in that the imposition of interest on the
payment of just compensation as well as the award of
consequential damages are deleted. In addition, respondent
Arlene R. Soriano is ORDERED to pay for the capital gains tax
due on the transfer of the expropriated property, while the
documentary stamp tax, transfer tax, and registration fee shall
be for the account of petitioner.
SO ORDERED.cralawlawlibrary

G.R. No. 198756

January 13, 2015

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION,

METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF
COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS
BANK AND PLANTERS DEVELOPMENT BANK, Petitioners,
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL
CORPORATION, Petitioners-Intervenors,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,
vs. REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL
REVENUE, BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE,
DEPARTMENT OF FINANCE, THE NATIONAL TREASURER AND BUREAU
OF TREASURY, Respondent.
DECISION
LEONEN, J.:
The case involves the proper tax treatment of the discount or interest income
arising from the P35 billion worth of 10-year zero-coupon treasury bonds issued
by the Bureau of Treasury on October 18, 2001 (denominated as the Poverty
Eradication and Alleviation Certificates or the PEA Ce Bonds by the Caucus of
Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling
No. 370-20111 (2011 BIR Ruling), declaring that the PEACe Bonds being deposit
substitutes are subject to the 20% final withholding tax. Pursuant to this ruling,
the Secretary of Finance directed the Bureau of Treasury to withhold a 20% final
tax from the face value of the PEACe Bonds upon their payment at maturity on
October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus2 filed by petitioners
under Rule 65 of the Rules of Court seeking to:

a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011

[and] other related rulings issued by BIR of similar tenor and import, for
being unconstitutional and for having been issued without jurisdiction or
with grave abuse of discretion amounting to lack or excess of
jurisdiction ... ;
b. PROHIBIT Respondents, particularly the BTr; from withholding or
collecting the 20% FWT from the payment of the face value of the
Government Bonds upon their maturity;
c. COMMAND Respondents, particularly the BTr, to pay the full amount of
the face value of the Government Bonds upon maturity ... ; and
d. SECURE a temporary restraining order (TRO), and subsequently a writ
of preliminary injunction, enjoining Respondents, particularly the BIR and
the BTr, from withholding or collecting 20% FWT on the Government
Bonds and the respondent BIR from enforcing the assailed 2011 BIR
Ruling, as well asother related rulings issued by the BIR of similar tenor
and import, pending the resolution by [the court] of the merits of [the]
Petition.3
Factual background
By letter4 dated March 23, 2001, the Caucus of Development NGO Networks
(CODE-NGO) "with the assistance of its financial advisors, Rizal Commercial
Banking Corp. ("RCBC"), RCBC Capital Corp. ("RCBC Capital"), CAPEX Finance
and Investment Corp. ("CAPEX") and SEED Capital Ventures, Inc.
(SEED),"5 requested an approval from the Department of Finance for the
issuance by the Bureau of Treasury of 10-year zerocoupon Treasury Certificates
(T-notes).6 The T-notes would initially be purchased by a special purpose vehicle
on behalf of CODE-NGO, repackaged and sold at a premium to investors as the
PEACe Bonds.7 The net proceeds from the sale of the Bonds"will be used to
endow a permanent fund (Hanapbuhay Fund) to finance meritorious activities
and projects of accredited non-government organizations (NGOs) throughout the
country."8
Prior to and around the time of the proposal of CODE-NGO, other proposals for
the issuance of zero-coupon bonds were also presented by banks and financial
institutions, such as First Metro Investment Corporation (proposal dated March 1,

2001),9 International Exchange Bank (proposal dated July 27, 2000),10 Security
Bank Corporation and SB Capital Investment Corporation (proposal dated July
25, 2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25,
1999).12 "[B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng
Fixed Income indicate that the interest income or discount earned on the
proposed zerocoupon bonds would be subject to the prevailing withholding tax."13
A zero-coupon bondis a bond bought at a price substantially lower than its face
value (or at a deep discount), with the face value repaid at the time of
maturity.14 It does not make periodic interest payments, or have socalled
"coupons," hence the term zero-coupon bond.15 However, the discount to face
value constitutes the return to the bondholder.16
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGOs
letters dated May 10, 15, and 25, 2001, issued BIR Ruling No. 020-200117 on the
tax treatment of the proposed PEACe Bonds. BIR Ruling No. 020-2001, signed
by then Commissioner ofInternal Revenue Ren G. Baez confirmed that the
PEACe Bonds would not be classified as deposit substitutes and would not be
subject to the corresponding withholding tax:
Thus, to be classified as "deposit substitutes", the borrowing of funds must be
obtained from twenty (20) or more individuals or corporate lenders at any one
time. In the light of your representation that the PEACe Bonds will be issued only
to one entity, i.e., Code NGO, the same shall not be considered as "deposit
substitutes" falling within the purview of the above definition. Hence, the
withholding tax on deposit substitutes will not apply.18 (Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001
was subsequently reiterated in BIR Ruling No. 035-200119 dated August 16, 2001
and BIR Ruling No. DA-175-0120 dated September 29, 2001 (collectively, the
2001 Rulings). In sum, these rulings pronounced that to be able to determine
whether the financial assets, i.e., debt instruments and securities are deposit
substitutes, the "20 or more individual or corporate lenders" rule must apply.
Moreover, the determination of the phrase "at any one time" for purposes of
determining the "20 or more lenders" is to be determined at the time of the
original issuance. Such being the case, the PEACe Bonds were not to be treated
as deposit substitutes.

Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo

Sergio G. Edeza (Former Treasurer Edeza) questioned the propriety of issuing
the bonds directly to a special purpose vehicle considering that the latter was not
a Government Securities Eligible Dealer (GSED).22 Former Treasurer Edeza
recommended that the issuance of the Bonds "be done through the
ADAPS"23 and that CODE-NGO "should get a GSED to bid in [sic] its behalf."24
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury
Bonds25 (Public Offering) dated October 9, 2001, the Bureau of Treasury
announced that "P30.0B worth of 10-year Zero[-] Coupon Bonds [would] be
auctioned on October 16, 2001[.]"26 The notice stated that the Bonds "shall be
issued to not morethan 19 buyers/lenders hence, the necessity of a manual
auction for this maiden issue."27 It also required the GSEDs to submit their bids
not later than 12 noon on auction date and to disclose in their bid submissions
the names of the institutions bidding through them to ensure strict compliance
with the 19 lender limit.28 Lastly, it stated that "the issue being limitedto 19
lenders and while taxable shall not be subject to the 20% final withholding
[tax]."29
On October 12, 2001, the Bureau of Treasury released a memo30 on the
"Formula for the Zero-Coupon Bond." The memo stated inpart that the formula (in
determining the purchase price and settlement amount) "is only applicable to the
zeroes that are not subject to the 20% final withholding due to the 19
buyer/lender limit."31
A day before the auction date or on October 15, 2001, the Bureau of Treasury
issued the "Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be
Issued on October 16, 2001" (Auction Guidelines).32 The Auction Guidelines
reiterated that the Bonds to be auctioned are "[n]ot subject to 20% withholding
tax as the issue will be limited to a maximum of 19 lenders in the primary market
(pursuant to BIR Revenue Regulation No. 020 2001)."33The Auction Guidelines,
for the first time, also stated that the Bonds are "[e]ligible as liquidity reserves
(pursuant to MB Resolution No. 1545 dated 27 September 2001)[.]"34
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year
zero-coupon bonds.35 Also on the same date, the Bureau of Treasury issued
another memorandum36 quoting excerpts of the ruling issued by the Bureau of

Internal Revenue concerning the Bonds exemption from 20% final withholding
tax and the opinion of the Monetary Board on reserve eligibility.37
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was
very wide, from as low as 12.248% to as high as 18.000%.39 Nonetheless, the
Bureau of Treasury accepted the auction results.40 The cut-off was at 12.75%.41
After the auction, RCBC which participated on behalf of CODE-NGO was
declared as the winning bidder having tendered the lowest bids.42 Accordingly, on
October 18, 2001, the Bureau of Treasury issued P35 billion worth of Bonds at
yield-to-maturity of 12.75% to RCBC for approximately P10.17 billion,43 resulting
in a discount of approximately P24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting
Agreement44 with CODE-NGO, whereby RCBC Capital was appointed as the
Issue Manager and Lead Underwriter for the offering of the PEACe
Bonds.45RCBC Capital agreed to underwrite46 on a firm basis the offering,
distribution and sale of the 35 billion Bonds at the price
of P11,995,513,716.51.47 In Section 7(r) of the underwriting agreement, CODENGO represented that "[a]ll income derived from the Bonds, inclusive of premium
on redemption and gains on the trading of the same, are exempt from all forms of
taxation as confirmed by Bureau of Internal Revenue (BIR) letter rulings dated 31
May 2001 and 16 August 2001, respectively."48
RCBC Capital sold the Government Bonds in the secondary market for an issue
price of P11,995,513,716.51. Petitioners purchased the PEACe Bonds on
different dates.49
BIR rulings
On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a
20% FWT on the Government Bonds and directing the BTr to withhold said final
tax at the maturity thereof, [allegedly without] consultation with Petitioners as
bond holders, and without conducting any hearing."50
"It appears that the assailed 2011 BIR Ruling was issued in response to a query
of the Secretary of Finance on the proper tax treatment of the discount or interest
income derived from the Government Bonds."51 The Bureau of Internal Revenue,
citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling No.

007-0452 dated July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13,
2004; and BIR Ruling No. 008-0554 dated July 28, 2005, declared the following:
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be
subject to 20% Final Tax on interest income from deposit substitutes. It is now
settled that all treasury bonds (including PEACe Bonds), regardless of the
number of purchasers/lenders at the time of origination/issuance are considered
deposit substitutes. In the case of zero-coupon bonds, the discount (i.e.
difference between face value and purchase price/discounted value of the bond)
is treated as interest income of the purchaser/holder. Thus, the Php 24.3 interest
income should have been properly subject to the 20% Final Tax as provided in
Section 27(D)(1) of the Tax Code of 1997. . . .
....
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was
not able tocollect the final tax on the discount/interest income realized by RCBC
as a result of the 2001 Rulings. Subsequently, the issuance of BIR Ruling No.
007-04 dated July 16, 2004 effectively modifies and supersedes the 2001
Rulings by stating that the [1997] Tax Code is clear that the "term public means
borrowing from twenty (20) or more individual or corporate lenders at any one
time." The word "any" plainly indicates that the period contemplated is the entire
term of the bond, and not merely the point of origination or issuance. . . . Thus,
by taking the PEACe bonds out of the ambit of deposits [sic] substitutes and
exempting it from the 20% Final Tax, an exemption in favour of the PEACe
Bonds was created when no such exemption is found in the law.55
On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued
by the Philippine Dealing System Holdings Corporation and Subsidiaries ("PDS
Group"). The Memo provides that in view of the pronouncement of the DOF and
the BIR on the applicability of the 20% FWT on the Government Bonds, no
transferof the same shall be allowed to be recorded in the Registry of Scripless
Securities ("ROSS") from 12 October 2011 until the redemption payment date on
18 October 2011. Thus, the bondholders of record appearing on the ROSS as of
18 October 2011, which include the Petitioners, shall be treated by the BTr asthe
beneficial owners of such securities for the relevant [tax] payments to be
imposed thereon."56

On October 17, 2011, replying to anurgent query from the Bureau of Treasury,
the Bureau of Internal Revenue issued BIR Ruling No. DA 378-201157 clarifying
that the final withholding tax due on the discount or interest earned on the
PEACe Bonds should "be imposed and withheld not only on RCBC/CODE NGO
but also [on] all subsequent holders of the Bonds."58
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or
mandamus (with urgent application for a temporary restraining order and/or writ
of preliminary injunction)59 before this court.
On October 18, 2011, this court issued a temporary restraining order
(TRO)60 "enjoining the implementation of BIR Ruling No. 370-2011 against the
[PEACe Bonds,] . . . subject to the condition that the 20% final withholding tax on
interest income there from shall be withheld by the petitioner banks and placed in
escrow pending resolution of [the] petition."61
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court
to intervene and to admit petition-in-intervention62 dated October 27, 2011, which
was granted by this court on November 15, 2011.63
Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with
Urgent Ex Parte Motion to Direct Respondents to Comply with the TRO."64 They
alleged that on the same day that the temporary restraining order was issued, the
Bureau of Treasury paid to petitioners and other bondholders the amounts
representing the face value of the Bonds, net however of the amounts
corresponding to the 20% final withholding tax on interest income, and that the
Bureau of Treasury refused to release the amounts corresponding to the 20%
final withholding tax.65On November 15, 2011, this court directed respondents to:
"(1) SHOW CAUSE why they failed to comply with the October 18, 2011
resolution; and (2) COMPLY with the Courts resolution in order that petitioners
may place the corresponding funds in escrow pending resolution of the
petition."66
On the same day, CODE-NGO filed a motion for leave to intervene (and to admit
attached petition-in-intervention with comment on the petitionin-intervention of
RCBC and RCBC Capital).67 The motion was granted by this court on November
22, 2011.68

On December 1, 2011, public respondents filed their compliance.69 They

explained that: 1) "the implementation of [BIR Ruling No. 370-2011], which has
already been performed on October 18, 2011 with the withholding of the 20%
final withholding tax on the face value of the PEACe bonds, is already fait
accompli . . . when the Resolution and TRO were served to and received by
respondents BTr and National Treasurer [on October 19, 2011]";70 and 2) the
withheld amount has ipso facto become public funds and cannot be disbursed or
released to petitioners without congressional appropriation.71 Respondents
further aver that"[i]nasmuch as the . . . TRO has already become moot . . . the
condition attached to it, i.e., that the 20% final withholding tax on interest income
therefrom shall be withheld by the banks and placed in escrow . . .has also been
rendered moot[.]"72
On December 6, 2011, this court noted respondents' compliance.73
On February 22, 2012, respondents filed their consolidated comment74 on the
petitions-in-intervention filed by RCBC and RCBC Capital and On November 27,
2012, petitioners filed their "Manifestation with Urgent Reiterative Motion (To
Direct Respondents to Comply with the Temporary Restraining Order)."75
On December 4, 2012, this court: (a) noted petitioners manifestation with urgent
reiterative motion (to direct respondents to comply with the temporary restraining
order); and (b) required respondents to comment thereon.76
Respondents comment77 was filed on April 15,2013, and petitioners filed their
reply78 on June 5, 2013.
Issues
The main issues to be resolved are:
I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to
20% final withholding tax under the 1997 National Internal Revenue Code.
Related to this question is the interpretation of the phrase "borrowing from
twenty (20) or more individual or corporate lenders at any one time" under
Section 22(Y) of the 1997 National Internal Revenue Code, particularly on
whether the reckoning of the 20 lenders includes trading of the bonds in
the secondary market; and

II. If the PEACe Bonds are considered "deposit substitutes," whether the
government or the Bureau of Internal Revenue is estopped from imposing
and/or collecting the 20% final withholding tax from the face value of these
Bonds
a. Will the imposition of the 20% final withholding tax violate the nonimpairment clause of the Constitution?
b. Will it constitute a deprivation of property without due process of
law?
c. Will it violate Section 245 of the 1997 National Internal Revenue
Code on non-retroactivity of rulings?
Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO
Petitioners argue that "[a]s the issuer of the Government Bonds acting through
the BTr, the Government is obligated . . . to pay the face value amount of PhP35
Billion upon maturity without any deduction whatsoever."79They add that "the
Government cannot impair the efficacy of the [Bonds] by arbitrarily, oppressively
and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a
mere eleven (11) days before maturity and after several, consistent categorical
declarations that such bonds are exempt from the 20% FWT, without violating
due process"80 and the constitutional principle on non-impairment of
contracts.81 Petitioners aver that at the time they purchased the Bonds, they had
the right to expect that they would receive the full face value of the Bonds upon
maturity, in view of the 2001 BIR Rulings.82 "[R]egardless of whether or not the
2001 BIR Rulings are correct, the fact remains that [they] relied [on] good faith
thereon."83
At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes
as defined under Section 22(Y) of the 1997 National Internal Revenue Code
because there was only one lender (RCBC) to whom the Bureau of Treasury
issued the Bonds.84 They allege that the 2004, 2005, and 2011 BIR Rulings
"erroneously interpreted that the number of investors that participate in the
secondary market is the determining factor in reckoning the existence or nonexistence of twenty (20) or more individual or corporate lenders."85 Furthermore,
they contend that the Bureau of Internal Revenue unduly expanded the definition

of deposit substitutes under Section 22 of the 1997 National Internal Revenue

Code in concluding that "the mere issuance of government debt instruments and
securities is deemed as falling within the coverage of deposit
substitutes[.]"86 Thus, "[t]he 2011 BIR Ruling clearly amount[ed] to an
unauthorized act of administrative legislation[.]"87
Petitioners further argue that their income from the Bonds is a "trading gain,"
which is exempt from income tax.88They insist that "[t]hey are not lenders whose
income is considered as interest income or yield subject to the 20% FWT under
Section 27 (D)(1) of the [1997 National Internal Revenue Code]"89 because they
"acquired the Government Bonds in the secondary or tertiary market."90
Even assuming without admitting that the Government Bonds are deposit
substitutes, petitioners argue that the collection of the final tax was barred by
prescription.91 They point out that under Section 7 of DOF Department Order No.
141-95,92 the final withholding tax "should have been withheld at the time of their
issuance[.]"93 Also, under Section 203 of the 1997 National Internal Revenue
Code, "internal revenuetaxes, such as the final tax, [should] be assessed within
three (3) years after the last day prescribed by law for the filing of the return."94
Moreover, petitioners contend that the retroactive application of the 2011 BIR
Ruling without prior notice to them was in violation of their property rights,95 their
constitutional right to due process96 as well as Section 246 of the 1997 National
Internal Revenue Code on non-retroactivity of rulings.97 Allegedly, it would also
have "an adverse effect of colossal magnitude on the investors, both localand
foreign, the Philippine capital market, and most importantly, the countrys
standing in the international commercial community."98 Petitioners explained that
"unless enjoined, the governments threatened refusal to pay the full value of the
Government Bonds will negatively impact on the image of the country in terms of
protection for property rights (including financial assets), degree of legal
protection for lenders rights, and strength of investor protection."99 They cited the
countrys ranking in the World Economic Forum: 75th in the world in its 2011
2012 Global Competitiveness Index, 111th out of 142 countries worldwide and
2nd to the last among ASEAN countries in terms of Strength of Investor
Protection, and 105th worldwide and last among ASEAN countries in terms of
Property Rights Index and Legal Rights Index.100 It would also allegedly "send a
reverberating message to the whole world that there is no certainty, predictability,
and stability of financial transactions in the capital markets[.]"101 "[T]he integrity of

Government-issued bonds and notes will be greatly shattered and the credit of
the Philippine Government will suffer"102 if the sudden turnaround of the
government will be allowed,103 and it will reinforce "investors perception that the
level of regulatory risk for contracts entered into by the Philippine Government is
high,"104 thus resulting in higher interestrate for government-issued debt
instruments and lowered credit rating.105
Petitioners-intervenors RCBC and RCBC Capital contend that respondent
Commissioner of Internal Revenue "gravely and seriously abused her discretion
in the exercise of her rule-making power"106 when she issued the assailed 2011
BIR Ruling which ruled that "all treasury bonds are deposit substitutes
regardless of the number of lenders, in clear disregard of the requirement of
twenty (20)or more lenders mandated under the NIRC."107 They argue that "[b]y
her blanket and arbitrary classification of treasury bonds as deposit substitutes,
respondent CIR not only amended and expanded the NIRC, but effectively
imposed a new tax on privately-placed treasury bonds."108Petitioners-intervenors
RCBC and RCBC Capital further argue that the 2011 BIR Ruling will cause
substantial impairment of their vested rights109 under the Bonds since the ruling
imposes new conditions by "subjecting the PEACe Bonds to the twenty percent
(20%) final withholding tax notwithstanding the fact that the terms and conditions
thereof as previously represented by the Government, through respondents BTr
and BIR, expressly state that it is not subject to final withholding tax upon their
maturity."110 They added that "[t]he exemption from the twenty percent (20%) final
withholding tax [was] the primary inducement and principal consideration for
[their] participat[ion] in the auction and underwriting of the PEACe Bonds."111
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend
that respondent Commissioner of Internal Revenue violated their rights to due
process when she arbitrarily issued the 2011 BIR Ruling without prior notice and
hearing, and the oppressive timing of such ruling deprived them of the
opportunity to challenge the same.112
Assuming the 20% final withholding tax was due on the PEACe Bonds,
petitioners-intervenors RCBC and RCBC Capital claim that respondents Bureau
of Treasury and CODE-NGO should be held liable "as [these] parties explicitly
represented . . . that the said bonds are exempt from the final withholding tax."113

Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the

implementation of the [2011 assailed BIR Ruling and BIR Ruling No. DA 3782011] will have pernicious effects on the integrity of existing securities, which is
contrary to the State policies of stabilizing the financial system and of developing
capital markets."114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No.
DA 378-2011 are "invalid because they contravene Section 22(Y) of the 1997
[NIRC] when the said rulings disregarded the applicability of the 20 or more
lender rule to government debt instruments"[;]115 (b) "when [it] sold the PEACe
Bonds in the secondary market instead of holding them until maturity, [it]
derived . . . long-term trading gain[s], not interest income, which [are] exempt . . .
under Section 32(B)(7)(g) of the 1997 NIRC"[;]116 (c) "the tax exemption privilege
relating to the issuance of the PEACe Bonds . . . partakes of a contractual
commitment granted by the Government in exchange for a valid and material
consideration [i.e., the issue price paid and savings in borrowing cost derived by
the Government,] thus protected by the non-impairment clause of the 1987
Constitution"[;]117 and (d) the 2004, 2005, and 2011 BIR Rulings "did not validly
revoke the 2001 BIR Rulings since no notice of revocation was issued to [it],
RCBC and [RCBC Capital] and petitioners[-bondholders], nor was there any BIR
administrative guidance issued and published[.]"118 CODE-NGO additionally
argues that impleading it in a Rule 65 petition was improper because: (a) it
involves determination of a factual question;119 and (b) it is premature and states
no cause of action as it amounts to an anticipatory third-party claim.120
Arguments of respondents
Respondents argue that petitioners direct resort to this court to challenge the
2011 BIR Ruling violates the doctrines of exhaustion of administrative remedies
and hierarchy ofcourts, resulting in a lack of cause of action that justifies the
dismissal of the petition.121 According to them, "the jurisdiction to review the
rulings of the [Commissioner of Internal Revenue], after the aggrieved party
exhausted the administrative remedies, pertains to the Court of Tax
Appeals."122 They point out that "a case similar to the present Petition was [in
fact] filed with the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351
[and] entitled, Rizal Commercial Banking Corporation and RCBC Capital
Corporation vs. Commissioner of Internal Revenue, et al."123

Respondents further take issue on the timeliness of the filing of the petition and
petitions-in-intervention.124 They argue that under the guise of mainly assailing
the 2011 BIR Ruling, petitioners are indirectly attacking the 2004 and 2005 BIR
Rulings, of which the attack is legally prohibited, and the petition insofar as it
seeks to nullify the 2004 and 2005 BIR Rulings was filed way out of time
pursuant to Rule 65, Section 4.125
Respondents contend that the discount/interest income derived from the PEACe
Bonds is not a trading gain but interest income subject to income tax.126 They
explain that "[w]ith the payment of the PhP35 Billion proceeds on maturity of the
PEACe Bonds, Petitioners receive an amount of money equivalent to about
PhP24.8 Billion as payment for interest. Such interest is clearly an income of the
Petitioners considering that the same is a flow of wealth and not merely a return
of capital the capital initially invested in the Bonds being approximately
PhP10.2 Billion[.]"127
Maintaining that the imposition of the 20% final withholding tax on the PEACe
Bonds does not constitute an impairment of the obligations of contract,
respondents aver that: "The BTr has no power to contractually grant a tax
exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be
considered a material term of the Bonds"[;]128 "[t]here has been no change in the
laws governing the taxability of interest income from deposit substitutes and said
laws are read into every contract"[;]129 "[t]he assailed BIR Rulings merely interpret
the term "deposit substitute" in accordance with the letter and spirit of the Tax
Code"[;]130 "[t]he withholding of the 20% FWT does not result in a default by the
Government as the latter performed its obligations to the bondholders in
full"[;]131 and "[i]f there was a breach of contract or a misrepresentation it was
between RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the
PEACe Bonds."132
Similarly, respondents counter that the withholding of "[t]he 20% final withholding
tax on the PEACe Bonds does not amount to a deprivation of property without
due process of law."133 Their imposition of the 20% final withholding tax is not
arbitrary because they were only performing a duty imposed by law;134 "[t]he 2011
BIR Ruling is an interpretative rule which merely interprets the meaning of
deposit substitutes [and upheld] the earlier construction given to the termby the
2004 and 2005 BIR Rulings."135 Hence, respondents argue that "there was no
need to observe the requirements of notice, hearing, and publication[.]"136

Nonetheless, respondents add that "there is every reason to believe that

Petitioners all major financial institutions equipped with both internal and
external accounting and compliance departments as wellas access to both
internal and external legal counsel; actively involved in industry organizations
such as the Bankers Association of the Philippines and the Capital Market
Development Council; all actively taking part in the regular and special debt
issuances of the BTr and indeed regularly proposing products for issue by BTr
had actual notice of the 2004 and 2005 BIR Rulings."137 Allegedly, "the sudden
and drastic drop including virtually zero trading for extended periods of six
months to almost a year in the trading volume of the PEACe Bonds after the
release of BIR Ruling No. 007-04 on July 16, 2004 tend to indicate that market
participants, including the Petitioners herein, were aware of the ruling and its
consequences for the PEACe Bonds."138
Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of
the Commissioner of Internal Revenues rule-making power;139 that it and the
2004 and 2005 BIR Rulings did not unduly expand the definition of deposit
substitutes by creating an unwarranted exception to the requirement of having 20
or more lenders/purchasers;140 and the word "any" in Section 22(Y) of the
National Internal Revenue Code plainly indicates that the period contemplated is
the entire term of the bond and not merely the point of origination or issuance.141
Respondents further argue that a retroactive application of the 2011 BIR Ruling
will not unjustifiably prejudice petitioners.142 "[W]ith or without the 2011 BIR
Ruling, Petitioners would be liable topay a 20% final withholding tax just the
same because the PEACe Bonds in their possession are legally in the nature of
deposit substitutes subject to a 20% final withholding tax under the
NIRC."143 Section 7 of DOF Department Order No. 141-95 also provides that
incomederived from Treasury bonds is subject to the 20% final withholding
tax.144 "[W]hile revenue regulations as a general rule have no retroactive effect, if
the revocation is due to the fact that the regulation is erroneous or contrary to
law, such revocation shall have retroactive operation as to affect past
transactions, because a wrong construction of the law cannot give rise to a
vested right that can be invoked by a taxpayer."145
Finally, respondents submit that "there are a number of variables and factors
affecting a capital market."146 "[C]apital market itself is inherently
unstable."147 Thus, "[p]etitioners argument that the 20% final withholding tax . . .

will wreak havoc on the financial stability of the country is a mere supposition that
is not a justiciable issue."148
On the prayer for the temporary restraining order, respondents argue that this
order "could no longer be implemented [because] the acts sought to be enjoined
are already fait accompli."149 They add that "to disburse the funds withheld to the
Petitioners at this time would violate Section 29[,] Article VI of the Constitution
prohibiting money being paid out of the Treasury except in pursuance of an
appropriation made by law[.]"150 "The remedy of petitioners is to claim a tax
refund under Section 204(c) of the Tax Code should their position be upheld by
the Honorable Court."151
Respondents also argue that "the implementation of the TRO would violate
Section 218 of the Tax Code in relation to Section 11 of Republic Act No. 1125
(as amended by Section 9 of Republic Act No. 9282) which prohibits courts,
except the Court of Tax Appeals, from issuing injunctions to restrain the collection
of any national internal revenue tax imposed by the Tax Code."152
Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital,
and CODE-NGO argue that:
1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997
National Internal Revenue Code when it declared that all government debt
instruments are deposit substitutes regardless of the 20-lender rule; and
2. The 2011 BIR Ruling cannot be applied retroactively because:
a) It will violate the contract clause;
It constitutes a unilateral amendment of a material term (tax
exempt status) in the Bonds, represented by the government as an
inducement and important consideration for the purchase of the
Bonds;
b) It constitutes deprivation ofproperty without due process because
there was no prior notice to bondholders and hearing and
publication;

c) It violates the rule on non-retroactivity under the 1997 National

Internal Revenue Code;
d) It violates the constitutional provision on supporting activities of
non-government organizations and development of the capital
market; and
e) The assessment had already prescribed.
Respondents counter that:
1) Respondent Commissioner of Internal Revenue did not act with grave abuse
of discretion in issuing the challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue
of the Commissioner of Internal Revenues power to interpret the
provisions of the 1997 National Internal Revenue Code and other tax laws;
b. Commissioner of Internal Revenue merely restates and confirms the
interpretations contained in previously issued BIR Ruling Nos. 007-2004,
DA-491-04,and 008-05, which have already effectively abandoned or
revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by his or her
predecessors rulings especially when the latters rulings are not in
harmony with the law; and
d. The wrong construction of the law that the 2001 BIR Rulings have
perpetrated cannot give rise to a vested right. Therefore, the 2011 BIR
Ruling can be given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and
adequate remedy in the ordinary course of law:
a. Petitioners had the basic remedy offiling a claim for refund of the 20% final
withholding tax they allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and
of hierarchy of courts.

Courts ruling
Procedural Issues
Non-exhaustion of
administrative remedies proper
Under Section 4 of the 1997 National Internal Revenue Code, interpretative
rulings are reviewable by the Secretary of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax
Cases. -The power to interpret the provisions of this Code and other tax laws
shall be under the exclusive and original jurisdiction of the Commissioner, subject
to review by the Secretary of Finance. (Emphasis supplied)
Thus, it was held that "[i]f superior administrative officers [can] grant the relief
prayed for, [then] special civil actions are generally not entertained."153 The
remedy within the administrative machinery must be resorted to first and pursued
to its appropriate conclusion before the courts judicial power can be sought.154
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of
administrative remedies:
[The doctrine of exhaustion of administrative remedies] is a relative one and its
flexibility is called upon by the peculiarity and uniqueness of the factual and
circumstantial settings of a case. Hence, it is disregarded (1) when there is a
violation of due process, (2) when the issue involved is purely a legal
question,155 (3) when the administrative action is patently illegal amounting to lack
or excess of jurisdiction,(4) when there is estoppel on the part of the
administrative agency concerned,(5) when there is irreparable injury, (6) when
the respondent is a department secretary whose acts as an alter ego of the
President bears the implied and assumed approval of the latter, (7) when to
require exhaustion of administrative remedies would be unreasonable, (8) when
it would amount to a nullification of a claim, (9) when the subject matter is a
private land in land case proceedings, (10) when the rule does not provide a
plain, speedy and adequate remedy, (11) when there are circumstances
indicating the urgency of judicial intervention.156 (Emphasis supplied, citations
omitted)

The exceptions under (2) and (11)are present in this case. The question involved
is purely legal, namely: (a) the interpretation of the 20-lender rule in the definition
of the terms public and deposit substitutes under the 1997 National Internal
Revenue Code; and (b) whether the imposition of the 20% final withholding tax
on the PEACe Bonds upon maturity violates the constitutional provisions on nonimpairment of contracts and due process. Judicial intervention is likewise urgent
with the impending maturity of the PEACe Bonds on October 18, 2011.
The rule on exhaustion of administrative remedies also finds no application when
the exhaustion will result in an exercise in futility.157
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR
Ruling would be a futile exercise because it was upon the request of the
Secretary of Finance that the 2011 BIR Ruling was issued by the Bureau of
Internal Revenue. It appears that the Secretary of Finance adopted the
Commissioner of Internal Revenues opinions as his own.158 This position was in
fact confirmed in the letter159 dated October 10, 2011 where he ordered the
Bureau of Treasury to withhold the amount corresponding to the 20% final
withholding tax on the interest or discounts allegedly due from the bondholders
on the strength of the 2011 BIR Ruling. Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the rulings of the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals. The
questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in
connection with the implementation of the 1997 National Internal Revenue Code
on the taxability of the interest income from zero-coupon bonds issued by the
government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as
amended by Republic Act No. 9282,160 such rulings of the Commissioner of
Internal Revenue are appealable to that court, thus:
SEC. 7.Jurisdiction.- The CTA shall exercise:
a. 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 in relation thereto, or other matters arising under the National Internal
Revenue or other laws administered by the Bureau of Internal Revenue;
....
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 rulingor
after the expiration of the period fixed by law for action as referred toin Section
7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding
involving matters arising under the National Internal Revenue Code, the Tariff
and Customs Code or the Local Government Code shall be maintained, except
as herein provided, until and unless an appeal has been previously filed with the
CTA and disposed of in accordance with the provisions of this Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v.
Blaquera,162 this court emphasized the jurisdiction of the Court of Tax Appeals
over rulings of the Bureau of Internal Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari,
however, let it be stressed that the jurisdiction to review the rulings of the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to
the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or
opinions of the Commissioner implementing the Tax Code on the taxability of
pawnshops.. . .
....
Such revenue orders were issued pursuant to petitioner's powers under Section
245 of the Tax Code, which states:

"SEC. 245. Authority of the Secretary of Finance to promulgate rules and

regulations. The Secretary of Finance, upon recommendation of the
Commissioner, shall promulgate all needful rules and regulations for the effective
enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or
analogous to those subject to a rate of sales tax under certain category
enumerated in Section 163 and 165 of this Code shall be without prejudice to the
power of the Commissioner of Internal Revenue to make rulings or opinions in
connection with the implementation of the provisionsof internal revenue laws,
including ruling on the classification of articles of sales and similar purposes."
(Emphasis in the original)
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the Collector of
Internal Revenue, but merely an attempt to nullify General Circular No. V-148,
which does not adjudicate or settle any controversy, and that, accordingly, this
case is not within the jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers
charged with the collection of taxes and license fees to adhere strictly to the
interpretation given by the defendant tothe statutory provisions abovementioned,
as set forth in the Circular. The same incorporates, therefore, a decision of the
Collector of Internal Revenue (now Commissioner of Internal Revenue) on the
manner of enforcement of the said statute, the administration of which is
entrusted by law to the Bureau of Internal Revenue. As such, it comes within the
purview of Republic Act No. 1125, Section 7 of which provides that the Court of
Tax Appeals shall exercise exclusive appellate jurisdiction to review by
appeal . . . decisions of the Collector of Internal Revenue in . . . matters arising
under the National Internal Revenue Code or other law or part of the law
administered by the Bureau of Internal Revenue."163
In exceptional cases, however, this court entertained direct recourse to it when
"dictated by public welfare and the advancement of public policy, or demanded
by the broader interest of justice, or the orders complained of were found to be

patent nullities, or the appeal was considered as clearly an inappropriate

remedy."164
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The
Secretary, Department of Interior and Local Government,165 this court noted that
the petition for prohibition was filed directly before it "in disregard of the rule on
hierarchy of courts. However, [this court] opt[ed] to take primary jurisdiction over
the . . . petition and decide the same on its merits in viewof the significant
constitutional issues raised by the parties dealing with the tax treatment of
cooperatives under existing laws and in the interest of speedy justice and prompt
disposition of the matter."166
Here, the nature and importance of the issues raised167 to the investment and
banking industry with regard to a definitive declaration of whether government
debt instruments are deposit substitutes under existing laws, and the novelty
thereof, constitute exceptional and compelling circumstances to justify resort to
this court in the first instance.
The tax provision on deposit substitutes affects not only the PEACe Bonds but
also any other financial instrument or product that may be issued and traded in
the market. Due to the changing positions of the Bureau of Internal Revenue on
this issue, there isa need for a final ruling from this court to stabilize the
expectations in the financial market.
Finally, non-compliance with the rules on exhaustion of administrative remedies
and hierarchy of courts had been rendered moot by this courts issuance of the
temporary restraining order enjoining the implementation of the 2011 BIR Ruling.
The temporary restraining order effectively recognized the urgency and necessity
of direct resort to this court.
Substantive issues
Tax treatment of deposit
substitutes
Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal
Revenue Code, a final withholdingtax at the rate of 20% is imposed on interest
on any currency bank deposit and yield or any other monetary benefit from

deposit substitutes and from trust funds and similar arrangements. These
provisions read:
SEC. 24. Income Tax Rates.
....
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount of interest fromany
currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements; . . . Provided, further,
That interest income from long-term deposit or investment in the form of savings,
common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax
imposed under this Subsection: Provided, finally, That should the holder of the
certificate pre-terminate the deposit or investment before the fifth (5th) year, a
final tax shall be imposed on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of the long-term deposit or
investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%. (Emphasis supplied)
SEC. 27. Rates of Income Tax on Domestic Corporations. ....
(D) Rates of Tax on Certain Passive Incomes. (1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A
final tax at the rate of twenty percent (20%) is hereby imposed upon the amount
of interest on currency bank deposit and yield or any other monetary benefit from

deposit substitutes and from trust funds and similar arrangements received by
domestic corporations, and royalties, derived from sources within the Philippines:
Provided, however, That interest income derived by a domestic corporation from
a depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of
such interest income. (Emphasis supplied)
SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. ....
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. (a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from
any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements and royalties derived
from sources within the Philippines shall be subject to a final income tax at the
rate of twenty percent (20%) of such interest: Provided, however, That interest
income derived by a resident foreign corporation from a depository bank under
the expanded foreign currency deposit system shall be subject to a final income
tax at the rate of seven and one-half percent (7 1/2%) of such interest income.
(Emphasis supplied)
This tax treatment of interest from bank deposits and yield from deposit
substitutes was first introduced in the 1977 National Internal Revenue Code
through Presidential Decree No. 1739168 issued in 1980. Later, Presidential
Decree No. 1959, effective on October 15, 1984, formally added the definition of
deposit substitutes, viz:
(y) Deposit substitutes shall mean an alternative form of obtaining funds from
the public, other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower's own account, for the purpose
of relending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer.These promissory notes,
repurchase agreements, certificates of assignment or participation and similar
instrument with recourse as may be authorized by the Central Bank of the

Philippines, for banks and non-bank financial intermediaries or by the Securities

and Exchange Commission of the Philippines for commercial, industrial, finance
companies and either non-financial companies: Provided, however, that only debt
instruments issued for inter-bank call loans to cover deficiency in reserves
against deposit liabilities including those between or among banks and quasibanks shall not be considered as deposit substitute debt instruments. (Emphasis
supplied)
Revenue Regulations No. 17-84, issued to implement Presidential Decree No.
1959, adopted verbatim the same definition and specifically identified the
following borrowings as "deposit substitutes":
SECTION 2. Definitions of Terms. . . .
(h) "Deposit substitutes" shall mean
....
(a) All interbank borrowings by or among banks and non-bank financial
institutions authorized to engage in quasi-banking functions evidenced by
deposit substitutes instruments, except interbank call loans to cover
deficiency in reserves against deposit liabilities as evidenced by interbank
loan advice or repayment transfer tickets.
(b) All borrowings of the national and local government and its
instrumentalities including the Central Bank of the Philippines, evidenced
by debt instruments denoted as treasury bonds, bills, notes, certificates of
indebtedness and similar instruments.
(c) All borrowings of banks, non-bank financial intermediaries, finance
companies, investment companies, trust companies, including the trust
department of banks and investment houses, evidenced by deposit
substitutes instruments. (Emphasis supplied)
The definition of deposit substitutes was amended under the 1997 National
Internal Revenue Code with the addition of the qualifying phrase for public
borrowing from 20 or more individual or corporate lenders at any one time. Under
Section 22(Y), deposit substitute is defined thus: SEC. 22. Definitions- When
used in this Title:

....
(Y) The term deposit substitutes shall mean an alternative form of obtaining
funds from the public(the term 'public' means borrowing from twenty (20) or more
individual or corporate lenders at any one time) other than deposits, through the
issuance, endorsement, or acceptance of debt instruments for the borrowers
own account, for the purpose of relending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their agent or dealer.
These instruments may include, but need not be limited to, bankers
acceptances, promissory notes, repurchase agreements, including reverse
repurchase agreements entered into by and between the Bangko Sentral ng
Pilipinas (BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse: Provided, however, That debt
instruments issued for interbank call loans with maturity of not more than five (5)
days to cover deficiency in reserves against deposit liabilities, including those
between or among banks and quasi-banks, shall not be considered as deposit
substitute debt instruments. (Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined
"public" to mean "twenty (20) or more individual or corporate lenders at any one
time." Hence, the number of lenders is determinative of whether a debt
instrument should be considered a deposit substitute and consequently subject
to the 20% final withholding tax.
20-lender rule
Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the
BTr issued the Government Bonds."169 On the other hand, respondents theorize
that the word "any" "indicates that the period contemplated is the entire term of
the bond and not merely the point of origination or issuance[,]"170 such that if the
debt instruments "were subsequently sold in secondary markets and so on,
insuch a way that twenty (20) or more buyers eventually own the instruments,
then it becomes indubitable that funds would be obtained from the "public" as
defined in Section 22(Y) of the NIRC."171 Indeed, in the context of the financial
market, the words "at any one time" create an ambiguity.
Financial markets

Financial markets provide the channel through which funds from the surplus units
(households and business firms that have savings or excess funds) flow to the
deficit units (mainly business firms and government that need funds to finance
their operations or growth). They bring suppliers and users of funds together and
provide the means by which the lenders transform their funds into financial
assets, and the borrowers receive these funds now considered as their financial
liabilities. The transfer of funds is represented by a security, such as stocks and
bonds. Fund suppliers earn a return on their investment; the return is necessary
to ensure that funds are supplied to the financial markets.172
"The financial markets that facilitate the transfer of debt securities are commonly
classified by the maturity of the securities[,]"173 namely: (1) the money market,
which facilitates the flow of short-term funds (with maturities of one year or less);
and (2) the capital market, which facilitates the flow of long-term funds (with
maturities of more than one year).174
Whether referring to money marketsecurities or capital market securities,
transactions occur either in the primary market or in the secondary
market.175 "Primary markets facilitate the issuance of new securities. Secondary
markets facilitate the trading of existing securities, which allows for a change in
the ownership of the securities."176 The transactions in primary markets exist
between issuers and investors, while secondary market transactions exist among
investors.177
"Over time, the system of financial markets has evolved from simple to more
complex ways of carrying out financial transactions."178 Still, all systems perform
one basic function: the quick mobilization of money from the lenders/investors to
the borrowers.179
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect
finance; and (3) indirect finance.180
With direct financing, the "borrower and lender meet each other and exchange
funds in returnfor financial assets"181(e.g., purchasing bonds directly from the
company issuing them). This method provides certain limitations such as: (a)
"both borrower and lender must desire to exchange the same amount of funds at
the same time"[;]182 and (b) "both lender and borrower must frequently incur
substantial information costs simply to find each other."183

In semidirect financing, a securities broker or dealer brings surplus and deficit

units together, thereby reducing information costs.184 A Broker185 is "an individual
or financial institution who provides information concerning possible purchases
and sales of securities. Either a buyer or a seller of securities may contact a
broker, whose job is simply to bring buyers and sellers together."186 A
dealer187 "also serves as a middleman between buyers and sellers, but the dealer
actually acquires the sellers securities in the hope of selling them at a later time
at a more favorable price."188Frequently, "a dealer will split up a large issue of
primary securities into smaller units affordable by . . . buyers . . . and thereby
expand the flow of savings into investment."189 In semi direct financing, "[t]he
ultimate lender still winds up holding the borrowers securities, and therefore the
lender must be willing to accept the risk, liquidity, and maturity characteristics of
the borrowers [debt security]. There still must be a fundamental coincidence of
wants and needs between [lenders and borrowers] for semidirect financial
transactions to take place."190
"The limitations of both direct and semidirect finance stimulated the development
of indirect financial transactions, carried out with the help of financial
intermediaries"191 or financial institutions, like banks, investment banks, finance
companies, insurance companies, and mutual funds.192 Financial intermediaries
accept funds from surplus units and channel the funds to deficit
units.193 "Depository institutions [such as banks] accept deposits from surplus
units and provide credit to deficit units through loans and purchase of [debt]
securities."194 Nondepository institutions, like mutual funds, issue securities of
their own (usually in smaller and affordable denominations) to surplus units and
at the same time purchase debt securities of deficit units.195 "By pooling the
resources of[small savers, a financial intermediary] can service the credit needs
of large firms simultaneously."196
The financial market, therefore, is an agglomeration of financial transactions in
securities performed by market participants that works to transfer the funds from
the surplus units (or investors/lenders) to those who need them (deficit units or
borrowers).
Meaning of "at any one time"
Thus, from the point of view of the financial market, the phrase "at any one time"
for purposes of determining the "20 or more lenders" would mean every

transaction executed in the primary or secondary market in connection with the

purchase or sale of securities.
For example, where the financial assets involved are government securities like
bonds, the reckoning of "20 or more lenders/investors" is made at any
transaction in connection with the purchase or sale of the Government Bonds,
such as:
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the
primary market;
2. Sale and distribution by GSEDs to various lenders/investors in the
secondary market;
3. Subsequent sale or trading by a bondholder to another lender/investor in
the secondary market usually through a broker or dealer; or
4. Sale by a financial intermediary-bondholder of its participation interests
in the bonds to individual or corporate lenders in the secondary market.
When, through any of the foregoing transactions, funds are simultaneously
obtained from 20 or morelenders/investors, there is deemed to be a public
borrowing and the bonds at that point intime are deemed deposit
substitutes. Consequently, the seller is required to withhold the 20% final
withholding tax on the imputed interest income from the bonds.
For debt instruments that are
not deposit substitutes, regular
income tax applies
It must be emphasized, however, that debt instruments that do not qualify as
deposit substitutes under the 1997 National Internal Revenue Code are subject
to the regular income tax.
The phrase "all income derived from whatever source" in Chapter VI,
Computation of Gross Income, Section 32(A) of the 1997 National Internal
Revenue Code discloses a legislative policy to include all income not expressly
exempted as within the class of taxable income under our laws.

"The definition of gross income isbroad enough to include all passive incomes
subject to specific tax rates or final taxes."197 Hence, interest income from deposit
substitutes are necessarily part of taxable income. "However, since these passive
incomes are already subject to different rates and taxed finally at source, they
are no longer included in the computation of gross income, which determines
taxable income."198 "Stated otherwise . . . if there were no withholding tax system
in place in this country, this 20 percent portion of the passive income of
[creditors/lenders] would actually be paid to the [creditors/lenders] and then
remitted by them to the government in payment of their income tax."199
This court, in Chamber of Real Estate and Builders Associations, Inc. v.
Romulo,200 explained the rationale behind the withholding tax system:
The withholding [of tax at source] was devised for three primary reasons: first, to
provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be
lost or substantially reduced through failure to file the corresponding returns[;]
and third, to improve the governments cash flow. This results in administrative
savings, prompt and efficient collection of taxes, prevention of delinquencies and
reduction of governmental effort to collect taxes through more complicated
means and remedies.201 (Citations omitted)
"The application of the withholdings system to interest on bank deposits or yield
from deposit substitutes is essentially to maximize and expedite the collection of
income taxes by requiring its payment at the source."202
Hence, when there are 20 or more lenders/investors in a transaction for a
specific bond issue, the seller isrequired to withhold the 20% final income tax on
the imputed interest income from the bonds.
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with the "gains"
contemplated under Section 32(B)(7)(g)203 of the 1997 National Internal Revenue
Code, which exempts gains derived from trading, redemption, or retirement of
long-term securities from ordinary income tax.
The term "gain" as used in Section 32(B)(7)(g) does not include interest, which
represents forbearance for the use of money. Gains from sale or exchange or

retirement of bonds orother certificate of indebtedness fall within the general

category of "gainsderived from dealings in property" under Section 32(A)(3),
while interest from bonds or other certificate of indebtedness falls within the
category of "interests" under Section 32(A)(4).204 The use of the term "gains from
sale" in Section 32(B)(7)(g) shows the intent of Congress not toinclude interest
as referred under Sections 24, 25, 27, and 28 in the exemption.205
Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain
realized from the trading of the bonds before their maturity date, which is the
difference between the selling price of the bonds in the secondary market and
the price at which the bonds were purchased by the seller; and (2) gain realized
by the last holder of the bonds when the bonds are redeemed at maturity, which
is the difference between the proceeds from the retirement of the bonds and the
price atwhich such last holder acquired the bonds. For discounted
instruments,like the zero-coupon bonds, the trading gain shall be the excess of
the selling price over the book value or accreted value (original issue price plus
accumulated discount from the time of purchase up to the time of sale) of the
instruments.206
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenues interpretation as expressed in the three 2001
BIR Rulings is not consistent with law.207 Its interpretation of "at any one time" to
mean at the point of origination alone is unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the
2004 and 2005 BIR Rulings) that "all treasury bonds . . . regardlessof the number
of purchasers/lenders at the time of origination/issuance are considered deposit
substitutes."208 Being the subject of this petition, it is, thus, declared void because
it completely disregarded the 20 or more lender rule added by Congress in the
1997 National Internal Revenue Code. It also created a distinction for
government debt instruments as against those issued by private corporations
when there was none in the law.
Tax statutes must be reasonably construed as to give effect to the whole act.
Their constituent provisions must be read together, endeavoring to make every
part effective, harmonious, and sensible.209 That construction which will leave

every word operative will be favored over one that leaves some word, clause, or
sentence meaningless and insignificant.210
It may be granted that the interpretation of the Commissioner of Internal Revenue
in charge of executing the 1997 National Internal Revenue Code is an
authoritative construction ofgreat weight, but the principle is not absolute and
may be overcome by strong reasons to the contrary. If through a
misapprehension of law an officer has issued an erroneous interpretation, the
error must be corrected when the true construction is ascertained.
In Philippine Bank of Communications v. Commissioner of Internal
Revenue,211 this court upheld the nullification of Revenue Memorandum Circular
(RMC) No. 7-85 issued by the Acting Commissioner of Internal Revenue because
it was contrary to the express provision of Section 230 of the 1977 National
Internal Revenue Codeand, hence, "[cannot] be given weight for to do so would,
in effect, amend the statute."212 Thus:
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing
the prescriptive period of two years to ten years on claims of excess quarterly
income tax payments, such circular created a clear inconsistency with the
provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret
the law; rather it legislated guidelines contrary to the statute passed by
Congress.
It bears repeating that Revenue memorandum-circulars are considered
administrative rulings (in the sense of more specific and less general
interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous. Thus, courts will
not countenance administrative issuances that override, instead of remaining
consistent and in harmony with, the law they seek to apply and
implement.213 (Citations omitted)
This court further held that "[a] memorandum-circular of a bureau head could not
operate to vest a taxpayer with a shield against judicial action [because] there
are no vested rights to speak of respecting a wrong construction of the law by the

administrative officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the same."214 In Commissioner of
Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,215 this court nullified
Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which
imposed a 5% lending investor's tax on pawnshops.216 It was held that "the
[Commissioner] cannot, in the exercise of [its interpretative] power, issue
administrative rulings or circulars not consistent with the law sought to be
applied. Indeed, administrative issuances must not override, supplant or modify
the law, but must remain consistent with the law they intend to carry out. Only
Congress can repeal or amend the law."217
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance
Secretary,218 this court stated that the Commissioner of Internal Revenue is not
bound by the ruling of his predecessors,219 but, to the contrary, the overruling of
decisions is inherent in the interpretation of laws:
[I]n considering a legislative rule a court is free to make three inquiries: (i)
whether the rule is within the delegated authority of the administrative agency; (ii)
whether itis reasonable; and (iii) whether it was issued pursuant to proper
procedure. But the court is not free to substitute its judgment as to the desirability
or wisdom of the rule for the legislative body, by its delegation of administrative
judgment, has committed those questions to administrative judgments and not to
judicial judgments. In the case of an interpretative rule, the inquiry is not into the
validity but into the correctness or propriety of the rule. As a matter of power a
court, when confronted with an interpretative rule, 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.
In the case at bar, we find no reason for holding that respondent Commissioner
erred in not considering copra as an "agricultural food product" within the
meaning of 103(b) of the NIRC. As the Solicitor General contends, "copra per
se is not food, that is, it is not intended for human consumption. Simply stated,
nobody eats copra for food." That previous Commissioners considered it so, is
not reason for holding that the present interpretation is wrong. The Commissioner
of Internal Revenue is not bound by the ruling of his predecessors. To the
contrary, the overruling of decisions is inherent in the interpretation of
laws.220 (Emphasis supplied, citations omitted)

Tax treatment of income

derived from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the 35 billion Bonds by the Bureau of Treasury to
RCBC/CODE-NGO at 10.2 billion; and
2. The sale and distribution by RCBC Capital (underwriter) on behalf of
CODE-NGO of the PEACe Bonds to undisclosed investors at P11.996
billion.
It may seem that there was only one lender RCBC on behalf of CODE-NGO
to whom the PEACe Bonds were issued at the time of origination. However, a
reading of the underwriting agreement221 and RCBC term sheet222 reveals that
the settlement dates for the sale and distribution by RCBC Capital (as
underwriter for CODE-NGO) of the PEACe Bonds to various undisclosed
investors at a purchase price of approximately P11.996 would fall on the same
day, October 18, 2001, when the PEACe Bonds were supposedly issued to
CODE-NGO/RCBC. In reality, therefore, the entire P10.2 billion borrowing
received by the Bureau of Treasury in exchange for the P35 billion worth of
PEACe Bonds was sourced directly from the undisclosed number of investors to
whom RCBC Capital/CODE-NGO distributed the PEACe Bonds all at the time
of origination or issuance. At this point, however, we do not know as to how many
investors the PEACe Bonds were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more lenders/investors, the
PEACe Bonds are deemed deposit substitutes within the meaning of Section
22(Y) of the 1997 National Internal Revenue Code and RCBC Capital/CODENGO would have been obliged to pay the 20% final withholding tax on the
interest or discount from the PEACe Bonds. Further, the obligation to withhold
the 20% final tax on the corresponding interest from the PEACe Bonds would
likewise be required of any lender/investor had the latter turnedaround and sold
said PEACe Bonds, whether in whole or part, simultaneously to 20 or more
lenders or investors.
We note, however, that under Section 24223 of the 1997 National Internal
Revenue Code, interest income received by individuals from longterm deposits or

investments with a holding period of not less than five (5) years is exempt from
the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of deposit
substitutes, the proper procedure was for the Bureau of Treasury to pay the face
value of the PEACe Bonds to the bondholders and for the Bureau of Internal
Revenue to collect the unpaid final withholding tax directly from RCBC
Capital/CODE-NGO, orany lender or investor if such be the case, as the
withholding agents.
The collection of tax is not
barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997 National
Internal Revenue Code to assess and collect internal revenue taxes is extended
to 10 years in cases of (1) fraudulent returns; (2) false returns with intent to
evade tax; and (3) failureto file a return, to be computed from the time of
discovery of the falsity, fraud, or omission. Section 203 states:
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 a 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)
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of
Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure
to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be filed without assessment, at any time within ten
(10) years after the discovery of the falsity, fraud or omission: Provided, That in a
fraud assessment which has become final and executory, the fact of fraud shall

be judicially taken cognizance of in the civil or criminal action for the collection
thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds
to 20 or more lenders/investors, the Bureau of Internal Revenue may still collect
the unpaid tax from RCBC Capital/CODE-NGO within 10 years after the
discovery of the omission.
In view of the foregoing, there is no need to pass upon the other issues raised by
petitioners and petitioners-intervenors.
Reiterative motion on the temporary restraining order
Respondents withholding of the
20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be "served upon the
parties affected."224 Moreover, service may be made personally or by mail.225 And,
"[p]ersonal service is complete upon actual delivery [of the order.]"226This courts
temporary restraining order was received only on October 19, 2011, or a day
after the PEACe Bonds had matured and the 20% final withholding tax on the
interest income from the same was withheld.
Publication of news reports in the print and broadcast media, as well as on the
internet, is not a recognized mode of service of pleadings, court orders, or
processes. Moreover, the news reports227 cited by petitioners were posted
minutes before the close of office hours or late in the evening of October 18,
2011, and they did not givethe exact contents of the temporary restraining order.
"[O]ne cannot be punished for violating an injunction or an order for an injunction
unless it is shown that suchinjunction or order was served on him personally or
that he had notice of the issuance or making of such injunction or order."228
At any rate, "[i]n case of doubt, a withholding agent may always protect himself or
herself by withholding the tax due"229 and return the amount of the tax withheld
should it be finally determined that the income paid is not subject to
withholding.230 Hence, respondent Bureau of Treasury was justified in withholding
the amount corresponding to the 20% final withholding tax from the proceeds of

the PEACe Bonds, as it received this courts temporary restraining order only on
October 19, 2011, or the day after this tax had been withheld.
Respondents retention of the
amounts withheld is a defiance
of the temporary restraining
order
Nonetheless, respondents continued failure to release to petitioners the amount
corresponding to the 20% final withholding tax in order that it may be placed in
escrow as directed by this court constitutes a defiance of this courts temporary
restraining order.231
The temporary restraining order is not moot. The acts sought to be enjoined are
not fait accompli. For an act to be considered fait accompli, the act must have
already been fully accomplished and consummated.232 It must be irreversible,
e.g., demolition of properties,233 service of the penalty of imprisonment,234 and
hearings on cases.235When the act sought to be enjoined has not yet been fully
satisfied, and/or is still continuing in nature,236 the defense of fait accomplicannot
prosper.
The temporary restraining order enjoins the entire implementation of the 2011
BIR Ruling that constitutes both the withholding and remittance of the 20% final
withholding tax to the Bureau of Internal Revenue. Even though the Bureau of
Treasury had already withheld the 20% final withholding tax237 when it received
the temporary restraining order, it had yet to remit the monies it withheld to the
Bureau of Internal Revenue, a remittance which was due only on November 10,
2011.238 The act enjoined by the temporary restraining order had not yet been
fully satisfied and was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which
prescribes to national government agencies such as the Bureau of Treasury the
procedure for the remittance of all taxes it withheld to the Bureau of Internal
Revenue, a national agency shall file before the Bureau of Internal Revenue a
Tax Remittance Advice (TRA) supported by withholding tax returns on or before
the 10th day of the following month after the said taxes had been withheld.240 The
Bureau of Internal Revenue shall transmit an original copy of the TRA to the
Bureau of Treasury,241 which shall be the basis for recording the remittance of the

tax collection.242 The Bureau of Internal Revenue will then record the amount of
taxes reflected in the TRA as tax collection in the Journal ofTax Remittance by
government agencies based on its copies of the TRA.243 Respondents did not
submit any withholding tax return or TRA to provethat the 20% final withholding
tax was indeed remitted by the Bureau of Treasury to the Bureau of Internal
Revenue on October 18, 2011.
Respondent Bureau of Treasurys Journal Entry Voucher No. 11-1010395244 dated October 18, 2011 submitted to this court shows:
Account
Code

Debit Amount

442-360

35,000,000,000.00

Sinking Fund-Cash (BSF)

198-001

30,033,792,203.59

Due to BIR

412-002

4,966,207,796.41

Bonds Payable-L/T, Dom-Zero

Coupon T/Bonds

Credit
Amount

(Peace Bonds) 10 yr

To record redemption of 10yr

Zero
coupon (Peace Bond) net of the
20% final
withholding tax pursuant to BIR
Ruling No.
378-2011, value date, October
18, 2011 per
BTr letter authority and BSP
Bank
Statements.
The foregoing journal entry, however, does not prove that the amount
of P4,966,207,796.41, representing the 20% final withholding tax on the PEACe
Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue on
October 18, 2011. The entries merely show that the monies corresponding to
20% final withholding tax was set aside for remittance to the Bureau of Internal
Revenue.

We recall the November 15, 2011 resolution issued by this court directing
respondents to "show cause why they failed to comply with the [TRO]; and [to]
comply with the [TRO] in order that petitioners may place the corresponding
funds in escrow pending resolution of the petition."245 The 20% final withholding
tax was effectively placed in custodia legiswhen this court ordered the deposit of
the amount in escrow. The Bureau of Treasury could still release the money
withheld to petitioners for the latter to place in escrow pursuant to this courts
directive. There was no legal obstacle to the release of the 20% final withholding
tax to petitioners. Congressional appropriation is not required for the servicing of
public debts in view of the automatic appropriations clause embodied in
Presidential Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. All expenditures for (a) personnel
retirement premiums, government service insurance, and other similar fixed
expenditures, (b) principal and interest on public debt, (c) national government
guarantees of obligations which are drawn upon, are automatically appropriated:
provided, that no obligations shall be incurred or payments made from funds thus
automatically appropriated except as issued in the form of regular budgetary
allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the National
Treasury not otherwise appropriated, such amounts as may be necessary to
effect payments on foreign or domestic loans, or foreign or domestic loans
whereon creditors make a call on the direct and indirect guarantee of the
Republic of the Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent to
government-owned or controlled corporations and/or government financial
institutions;
b. government-owned or controlled corporations and/or government
financial institutions the proceeds of which were relent to public or private
institutions;

c. government-owned or controlled corporations and/or financial

institutions and guaranteed by the Republic of the Philippines;
d. other public or private institutions and guaranteed by government owned
or controlled corporations and/or government financial institutions.
The amount of P35 billion that includes the monies corresponding to 20% final
withholding tax is a lawfuland valid obligation of the Republic under the
Government Bonds. Since said obligation represents a public debt, the release of
the monies requires no legislative appropriation.
Section 2 of Republic Act No. 245 likewise provides that the money to be used
for the payment of Government Bonds may be lawfully taken from the continuing
appropriation out of any monies in the National Treasury and is not required to be
the subject of another appropriation legislation: SEC. 2. The Secretary of Finance
shall cause to be paid out of any moneys in the National Treasury not otherwise
appropriated, or from any sinking funds provided for the purpose by law, any
interest falling due, or accruing, on any portion of the public debt authorized by
law. He shall also cause to be paid out of any such money, or from any such
sinking funds the principal amount of any obligations which have matured, or
which have been called for redemption or for which redemption has been
demanded in accordance with terms prescribed by him prior to date of issue. . .
In the case of interest-bearing obligations, he shall pay not less than their face
value; in the case of obligations issued at a discount he shall pay the face value
at maturity; or if redeemed prior to maturity, such portion of the face value as is
prescribed by the terms and conditions under which such obligations were
originally issued. There are hereby appropriated as a continuing appropriation
out of any moneys in the National Treasury not otherwise appropriated, such
sums as may be necessary from time to time to carry out the provisions of this
section. The Secretary of Finance shall transmit to Congress during the first
month of each regular session a detailed statement of all expenditures made
under this section during the calendar year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states that payment for
Treasury bills and bonds shall be made through the National Treasurys account
with the Bangko Sentral ng Pilipinas, to wit:

Section 38. Demand Deposit Account. The Treasurer of the Philippines

maintains a Demand Deposit Account with the Bangko Sentral ng Pilipinas to
which all proceeds from the sale of Treasury Bills and Bonds under R.A. No. 245,
as amended, shall be credited and all payments for redemption of Treasury Bills
and Bonds shall be charged.1wphi1
Regarding these legislative enactments ordaining an automatic appropriations
provision for debt servicing, this court has held:
Congress . . . deliberates or acts on the budget proposals of the President, and
Congress in the exercise of its own judgment and wisdom formulates an
appropriation act precisely following the process established by the Constitution,
which specifies that no money may be paid from the Treasury except in
accordance with an appropriation made by law.
Debt service is not included inthe General Appropriation Act, since authorization
therefor already exists under RA Nos. 4860 and 245, as amended, and PD 1967.
Precisely in the light of this subsisting authorization as embodied in said Republic
Acts and PD for debt service, Congress does not concern itself with details for
implementation by the Executive, butlargely with annual levels and approval
thereof upon due deliberations as part of the whole obligation program for the
year. Upon such approval, Congress has spoken and cannot be said to
havedelegated its wisdom to the Executive, on whose part lies the
implementation or execution of the legislative wisdom.246(Citation omitted)
Respondent Bureau of Treasury had the duty to obey the temporary restraining
order issued by this court, which remained in full force and effect, until set aside,
vacated, or modified. Its conduct finds no justification and is reprehensible.247
WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR
Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued
retention of the amount corresponding to the 20% final withholding tax despite this
court's directive in the temporary restraining order and in the resolution dated November
15, 2011 to deliver the amounts to the banks to be placed in escrow pending resolution
of this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay
to the bondholders the amount corresponding-to the 20% final withholding tax that it
withheld on October 18, 2011.

DUMAGUETE CATHEDRAL
CREDIT COOPERATIVE
[DCCCO], Represented by
Felicidad L. Ruiz, its General
Manager,
Petitioner,
-versus-

G.R. No. 182722

Present:
CARPIO, J., Chairperson,
BRION,
DEL CASTILLO,
ABAD, and
PEREZ, JJ.

COMMISSIONER OF
INTERNAL REVENUE,
Promulgated:
Respondent.
January 22, 2010
x------------------------------------------------------------------x

DECISION

DEL CASTILLO, J.:

The clashing interests of the State and the taxpayers are again pitted against each
other. Two basic principles, the States inherent power of taxation and its declared policy of
fostering the creation and growth of cooperatives come into play. However, the one that
embodies the spirit of the law and the true intent of the legislature prevails.
This Petition for Review on Certiorari under Section 11 of Republic Act (RA) No. 9282,
in relation to Rule 45 of the Rules of Court, seeks to set aside the December 18, 2007
Decision[2] of the Court of Tax Appeals (CTA), ordering petitioner to pay deficiency withholding
taxes on interest from savings and time deposits of its members for taxable years 1999 and 2000,
pursuant to Section 24(B)(1) of the National Internal Revenue Code of 1997 (NIRC), as well as
the delinquency interest of 20% per annum under Section 249(C) of the same Code. It also
assails the April 11, 2008 Resolution[3] denying petitioners Motion for Reconsideration.
[1]

Factual Antecedents
Petitioner Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit

cooperative duly registered with and regulated by the Cooperative Development

Authority (CDA).[4] It was established on February 17, 1968[5] with the following objectives
and purposes: (1) to increase the income and purchasing power of the members; (2) to pool the
resources of the members by encouraging savings and promoting thrift to mobilize capital
formation for development activities; and (3) to extend loans to members for provident and
productive purposes.[6] It has the power (1) to draw, make, accept, endorse, guarantee, execute,
and issue promissory notes, mortgages, bills of exchange, drafts, warrants, certificates and all
kinds of obligations and instruments in connection with and in furtherance of its business
operations; and (2) to issue bonds, debentures, and other obligations; to contract indebtedness;
and to secure the same with a mortgage or deed of trust, or pledge or lien on any or all of its real
and personal properties.[7]
On November 27, 2001, the Bureau of Internal Revenue (BIR) Operations Group
Deputy Commissioner, Lilian B. Hefti, issued Letters of Authority Nos. 63222 and 63223,
authorizing BIR Officers Tomas Rambuyon and Tarcisio Cubillan of Revenue Region No. 12,
Bacolod City, to examine petitioners books of accounts and other accounting records for all
internal revenue taxes for the taxable years 1999 and 2000.[8]
Proceedings before the BIR Regional Office
On June 26, 2002, petitioner received two Pre-Assessment Notices for deficiency
withholding taxes for taxable years 1999 and 2000 which were protested by petitioner onJuly 23,
2002.[9] Thereafter, on October 16, 2002, petitioner received two other Pre-Assessment Notices
for deficiency withholding taxes also for taxable years 1999 and 2000.[10] The deficiency

withholding taxes cover the payments of the honorarium of the Board of Directors,
security and janitorial services, legal and professional fees, and interest on savings and
time deposits of its members.
On October 22, 2002, petitioner informed BIR Regional Director Sonia L. Flores that it
would only pay the deficiency withholding taxes corresponding to the honorarium of the Board
of Directors, security and janitorial services, legal and professional fees for the year 1999 in the
amount of P87,977.86, excluding penalties and interest.[11]
In another letter dated November 8, 2002, petitioner also informed the BIR Assistant
Regional Director, Rogelio B. Zambarrano, that it would pay the withholding taxes due on the
honorarium and per diems of the Board of Directors, security and janitorial services,
commissions and legal & professional fees for the year 2000 in the amount of P119,889.37,

excluding penalties and interest, and that it would avail of the Voluntary Assessment and
Abatement Program (VAAP) of the BIR under Revenue Regulations No. 17-2002.[12]
On November 29, 2002, petitioner availed of the VAAP and paid the amounts
ofP105,574.62 and P143,867.24[13] corresponding to the withholding taxes on the payments for
the compensation, honorarium of the Board of Directors, security and janitorial services, and
legal and professional services, for the years 1999 and 2000, respectively.
On April 24, 2003, petitioner received from the BIR Regional Director, Sonia L. Flores,
Letters of Demand Nos. 00027-2003 and 00026-2003, with attached Transcripts of Assessment
and Audit Results/Assessment Notices, ordering petitioner to pay the deficiency withholding
taxes, inclusive of penalties, for the years 1999 and 2000 in the amounts of P1,489,065.30
and P1,462,644.90, respectively.[14]
Proceedings before the Commissioner of Internal Revenue
On May 9, 2003, petitioner protested the Letters of Demand and Assessment Notices
with the Commissioner of Internal Revenue (CIR).[15] However, the latter failed to act on the
protest within the prescribed 180-day period. Hence, on December 3, 2003, petitioner filed a
Petition for Review before the CTA, docketed as C.T.A. Case No. 6827.[16]
Proceedings before the CTA First Division
The case was raffled to the First Division of the CTA which rendered its Decision
on February 6, 2007, disposing of the case in this wise:
IN VIEW OF ALL THE FOREGOING, the Petition for Review is hereby
PARTIALLY GRANTED. Assessment Notice Nos. 00026-2003 and 00027-2003
are hereby MODIFIED and the assessment for deficiency withholding taxes on
the honorarium and per diems of petitioners Board of Directors, security and
janitorial services, commissions and legal and professional fees are hereby
CANCELLED. However, the assessments for deficiency withholding

taxes on interests are hereby AFFIRMED.

Accordingly, petitioner is ORDERED TO PAY the respondent the

respective amounts of P1,280,145.89 and P1,357,881.14 representing

deficiency withholding taxes on interests from savings and time deposits
of its members for the taxable years 1999 and 2000. In addition, petitioner is

ordered to pay the 20% delinquency interest from May 26, 2003 until the amount
of deficiency withholding taxes are fully paid pursuant to Section 249 (C) of the
Tax Code.
SO ORDERED.[17]
Dissatisfied, petitioner moved for a partial reconsideration, but it was denied by the First
Division in its Resolution dated May 29, 2007.[18]
Proceedings before the CTA En Banc
On July 3, 2007, petitioner filed a Petition for Review with the CTA En Banc,
interposing the lone issue of whether or not petitioner is liable to pay the deficiency

[19]

withholding taxes on interest from savings and time deposits of its members for taxable
years 1999 and 2000, and the consequent delinquency interest of 20% per annum. [20]
Finding no reversible error in the Decision dated February 6, 2007 and the Resolution
dated May 29, 2007 of the CTA First Division, the CTA En Banc denied the Petition for
Review[21] as well as petitioners Motion for Reconsideration.[22]

The CTA En Banc held that Section 57 of the NIRC requires the withholding of
tax at source. Pursuant thereto, Revenue Regulations No. 2-98 was issued enumerating the
income payments subject to final withholding tax, among which is interest from any peso bank
deposit and yield, or any other monetary benefit from deposit substitutes and from trust funds
and similar arrangements x x x. According to the CTA En Banc, petitioners business falls

under the phrase similar arrangements; as such, it should have withheld the
corresponding 20% final tax on the interest from the deposits of its members.
Issue
Hence, the present recourse, where petitioner raises the issue of whether or not it is

liable to pay the deficiency withholding taxes on interest from savings and time deposits
of its members for the taxable years 1999 and 2000, as well as the delinquency interest of
20% per annum.

Petitioners Arguments
Petitioner argues that Section 24(B)(1) of the NIRC which reads in part, to wit:
SECTION 24. Income Tax Rates.
xxxx
(B) Rate of Tax on Certain Passive Income:
(1)
Interests, Royalties, Prizes, and Other Winnings. A final
tax at the rate of twenty percent (20%) is hereby imposed upon the amount of
interest from any currency bank deposit and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements; x x x

applies only to banks and not to cooperatives, since the phrase similar arrangements is
preceded by terms referring to banking transactions that have deposit peculiarities. Petitioner
thus posits that the savings and time deposits of members of cooperatives are not included in the
enumeration, and thus not subject to the 20% final tax. To bolster its position, petitioner cites

BIR Ruling No. 551-888[23] and BIR Ruling [DA-591-2006][24]where the BIR ruled that
interests from deposits maintained by members of cooperative are NOT subject to
withholding tax under Section 24(B)(1) of the NIRC. Petitioner further contends that
pursuant to Article XII, Section 15 of the Constitution[25] and Article 2 of Republic Act No. 6938
(RA 6938) or the Cooperative Code of the Philippines, [26]cooperatives enjoy a preferential tax

treatment which exempts their members from the application of Section 24(B)(1) of the
NIRC.
Respondents Arguments
As a counter-argument, respondent invokes the legal maxim Ubi lex non distinguit nec
nos distinguere debemos (where the law does not distinguish, the courts should not
distinguish). Respondent maintains that Section 24(B)(1) of the NIRC applies to

cooperatives as the phrase similar arrangements is not limited to banks, but includes
cooperatives that are depositaries of their members. Regarding the exemption relied upon by
petitioner, respondent adverts to the jurisprudential rule that tax exemptions are highly disfavored
and construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. In

this connection, respondent likewise points out that the deficiency tax assessments were

issued against petitioner not as a taxpayer but as a withholding agent.

Our Ruling
The petition has merit.

Petitioners invocation of BIR Ruling No.

551-888, reiterated in BIR Ruling [DA591-2006], is proper.
On November 16, 1988, the BIR declared in BIR Ruling No. 551-888 that cooperatives
are not required to withhold taxes on interest from savings and time deposits of their
members. The pertinent BIR Ruling reads:
November 16, 1988
BIR RULING NO. 551-888
24 369-88 551-888
Gentlemen:
This refers to your letter dated September 5, 1988 stating that you are a
corporation established under P.D. No. 175 and duly registered with the Bureau of
Cooperatives Development as full fledged cooperative of good standing with
Certificate of Registration No. FF 563-RR dated August 8, 1985; and that one of
your objectives is to provide and strengthen cooperative endeavor and extend
assistance to members and non-members through credit scheme both in cash and
in kind.
Based on the foregoing representations, you now request in effect a ruling as to
whether or not you are exempt from the following:
1.
2.

Payment of sales tax

Filing and payment of income tax

3.

Withholding taxes from compensation of employees and savings

account and time deposits of members. (Underscoring ours)

In reply, please be informed that Executive Order No. 93 which took effect on
March 10, 1987 withdrew all tax exemptions and preferential privileges e.g.,
income tax and sales tax, granted to cooperatives under P.D. No. 175 which were
previously withdrawn by P.D. No. 1955 effective October 15, 1984 and restored
by P.D. No. 2008 effective January 8, 1986.However, implementation of said
Executive Order insofar as electric, agricultural, irrigation and waterworks
cooperatives are concerned was suspended until June 30, 1987.(Memorandum
Order No. 65 dated January 21, 1987 of the President) Accordingly, your tax
exemption privilege expired as of June 30, 1987. Such being the case, you are
now subject to income and sales taxes.
Moreover, under Section 72(a) of the Tax Code, as amended, every employer
making payment of wages shall deduct and withhold upon such wages a tax at the
rates prescribed by Section 21(a) in relation to section 71, Chapter X, Title II, of
the same Code as amended by Batas Pambansa Blg. 135 and implemented by
Revenue Regulations No. 6-82 as amended. Accordingly, as an employer you are
required to withhold the corresponding tax due from the compensation of your
employees.
Furthermore, under Section 50(a) of the Tax Code, as amended, the tax imposed
or prescribed by Section 21(c) of the same Code on specified items of income
shall be withheld by payor-corporation and/or person and paid in the same
manner and subject to the same conditions as provided in Section 51 of the Tax
Code, as amended. Such being the case, and since interest from any Philippine
currency bank deposit and yield or any other monetary benefit from deposit
substitutes are paid by banks, you are not the party required to withhold the
corresponding tax on the aforesaid savings account and time deposits of your
members. (Underscoring ours)
Very truly yours,
(SGD.) BIENVENIDO A. TAN, JR.
Commissioner

The CTA First Division, however, disregarded the above quoted ruling in determining
whether petitioner is liable to pay the deficiency withholding taxes on interest from the deposits
of its members. It ratiocinated in this wise:
This Court does not agree. As correctly pointed out by respondent in his
Memorandum, nothing in the above quoted resolution will give the conclusion
that savings account and time deposits of members of a cooperative are taxexempt. What is entirely clear is the opinion of the Commissioner that the proper
party to withhold the corresponding taxes on certain specified items of income is
the payor-corporation and/or person. In the same way, in the case of interests
earned from Philippine currency deposits made in a bank, then it is the bank
which is liable to withhold the corresponding taxes considering that the bank is
the payor-corporation. Thus, the ruling that a cooperative is not the proper party to
withhold the corresponding taxes on the aforementioned accounts is
correct. However, this ruling does not hold true if the savings and time deposits
are being maintained in the cooperative, for in this case, it is the cooperative
which becomes the payor-corporation, a separate entity acting no more than an
agent of the government for the collection of taxes, liable to withhold the
corresponding taxes on the interests earned. [27](Underscoring ours)
The CTA En Banc affirmed the above-quoted Decision and found petitioners invocation
of BIR Ruling No. 551-88 misplaced. According to the CTA En Banc, the BIR Ruling was

based on the premise that the savings and time deposits were placed by the members of
the cooperative in the BANK[28] Consequently, it ruled that the BIR Ruling does not
apply when the deposits are maintained in the cooperative such as the instant case.
We disagree.
There is nothing in the ruling to suggest that it applies only when deposits are maintained
in a bank. Rather, the ruling clearly states, without any qualification, that since interest

from any Philippine currency bank deposit and yield or any other monetary benefit from
deposit substitutes are paid by banks, cooperatives are not required to withhold the
corresponding tax on the interest from savings and time deposits of their members . This
interpretation was reiterated in BIR Ruling [DA-591-2006] dated October 5, 2006, which was
issued by Assistant Commissioner James H. Roldan upon the request of the cooperatives for a
confirmatory ruling on several issues, among which is the alleged exemption of interest income

on members deposit (over and above the share capital holdings) from the 20% final withholding
tax. In the said ruling, the BIR opined that:
xxxx
3. Exemption of interest income on members deposit (over and above the share
capital holdings) from the 20% Final Withholding Tax.
The National Internal Revenue Code states that a final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount of interest on currency
bank deposit and yield or any other monetary benefit from the deposit substitutes
and from trust funds and similar arrangement x x x for individuals under Section
24(B)(1) and for domestic corporations under Section 27(D)(1). Considering the
members deposits with the cooperatives are not currency bank deposits nor
deposit substitutes, Section 24(B)(1) and Section 27(D)(1), therefore, do not apply
to members of cooperatives and to deposits of primaries with federations,
respectively.
It bears stressing that interpretations of administrative agencies in charge of enforcing a
law are entitled to great weight and consideration by the courts, unless such interpretations are in
a sharp conflict with the governing statute or the Constitution and other laws.[29] In this case, BIR
Ruling No. 551-888 and BIR Ruling [DA-591-2006] are in perfect harmony with the
Constitution and the laws they seek to implement. Accordingly, the interpretation in BIR Ruling
No. 551-888 that cooperatives are not required to withhold the corresponding tax on the interest
from savings and time deposits of their members, which was reiterated in BIR Ruling [DA-5912006], applies to the instant case.

Members of cooperatives deserve a

preferential tax treatment pursuant to RA
6938, as amended by RA 9520.
Given that petitioner is a credit cooperative duly registered with the Cooperative
Development Authority (CDA), Section 24(B)(1) of the NIRC must be read together with

RA 6938, as amended by RA 9520.

Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State
to foster the creation and growth of cooperatives as a practical vehicle for promoting self-reliance

and harnessing people power towards the attainment of economic development and social
justice. Thus, to encourage the formation of cooperatives and to create an atmosphere conducive
to their growth and development, the State extends all forms of assistance to them, one of which
is providing cooperatives a preferential tax treatment.
The legislative intent to give cooperatives a preferential tax treatment is apparent in
Articles 61 and 62 of RA 6938, which read:
ART. 61. Tax Treatment of Cooperatives. Duly registered cooperatives under this
Code which do not transact any business with non-members or the general public
shall not be subject to any government taxes and fees imposed under the Internal
Revenue Laws and other tax laws. Cooperatives not falling under this article shall
be governed by the succeeding section.
ART. 62. Tax and Other Exemptions. Cooperatives transacting business with both
members and nonmembers shall not be subject to tax on their transactions to
members.Notwithstanding the provision of any law or regulation to the contrary,
such cooperatives dealing with nonmembers shall enjoy the following tax
exemptions; x x x.
This exemption extends to members of cooperatives . It must be emphasized that
cooperatives exist for the benefit of their members. In fact, the primary objective of every

cooperative is to provide goods and services to its members to enable them to attain
increased income, savings, investments, and productivity.[30] Therefore, limiting the
application of the tax exemption to cooperatives would go against the very purpose of a credit
cooperative. Extending the exemption to members of cooperatives, on the other hand, would be
consistent with the intent of the legislature. Thus, although the tax exemption only mentions
cooperatives, this should be construed to include the members, pursuant to Article 126 of
RA 6938, which provides:
ART. 126. Interpretation and Construction. In case of doubt as to the meaning of
any provision of this Code or the regulations issued in pursuance thereof, the
same shall be resolved liberally in favor of the cooperatives and their members.
We need not belabor that what is within the spirit is within the law even if it is not within
the letter of the law because the spirit prevails over the letter.[31] Apropos is the ruling in the case
of Alonzo v. Intermediate Appellate Court,[32] to wit:

But as has also been aptly observed, we test a law by its results; and
likewise, we may add, by its purposes. It is a cardinal rule that, in seeking the
meaning of the law, the first concern of the judge should be to discover in its
provisions the intent of the lawmaker. Unquestionably, the law should never be
interpreted in such a way as to cause injustice as this is never within the legislative
intent. An indispensable part of that intent, in fact, for we presume the good
motives of the legislature, is to render justice.
Thus, we interpret and apply the law not independently of but in
consonance with justice. Law and justice are inseparable, and we must keep them
so. To be sure, there are some laws that, while generally valid, may seem arbitrary
when applied in a particular case because of its peculiar circumstances. In such a
situation, we are not bound, because only of our nature and functions, to apply
them just the same, [is] slavish obedience to their language. What we do instead is
find a balance between the word and the will, that justice may be done even as the
law is obeyed.
As judges, we are not automatons. We do not and must not unfeelingly
apply the law as it is worded, yielding like robots to the literal command without
regard to its cause and consequence. Courts are apt to err by sticking too closely
to the words of a law, so we are warned, by Justice Holmes again, where these
words import a policy that goes beyond them. While we admittedly may not
legislate, we nevertheless have the power to interpret the law in such a way as to
reflect the will of the legislature. While we may not read into the law a purpose
that is not there, we nevertheless have the right to read out of it the reason for its
enactment. In doing so, we defer not to the letter that killeth but to the spirit that
vivifieth, to give effect to the lawmakers will.
The spirit, rather than the letter of a statute determines its
construction, hence, a statute must be read according to its spirit or
intent.For what is within the spirit is within the statute although it
is not within the letter thereof, and that which is within the letter
but not within the spirit is not within the statute. Stated
differently, a thing which is within the intent of the lawmaker is as
much within the statute as if within the letter;and a thing which is

within the letter of the statute is not within the statute unless within
the intent of the lawmakers. (Underscoring ours)
It is also worthy to note that the tax exemption in RA 6938 was retained in RA 9520. The
only difference is that Article 61 of RA 9520 (formerly Section 62 of RA 6938) now expressly
states that transactions of members with the cooperatives are not subject to any taxes and
fees. Thus:
ART. 61. Tax and Other Exemptions. Cooperatives transacting business with both
members and non-members shall not be subjected to tax on their transactions with
members. In relation to this, the transactions of members with the cooperative
shall not be subject to any taxes and fees, including but not limited to final
taxes on members deposits and documentary tax. Notwithstanding the
provisions of any law or regulation to the contrary, such cooperatives dealing with
nonmembers shall enjoy the following tax exemptions: (Underscoring ours)
xxxx
This amendment in Article 61 of RA 9520, specifically providing that members of cooperatives
are not subject to final taxes on their deposits, affirms the interpretation of the BIR that Section
24(B)(1) of the NIRC does not apply to cooperatives and confirms that such ruling carries out
the legislative intent. Under the principle of legislative approval of administrative interpretation
by reenactment, the reenactment of a statute substantially unchanged is persuasive indication of
the adoption by Congress of a prior executive construction.[33]
Moreover, no less than our Constitution guarantees the protection of cooperatives. Section 15,
Article XII of the Constitution considers cooperatives as instruments for social justice and
economic development. At the same time, Section 10 of Article II of the Constitution declares
that it is a policy of the State to promote social justice in all phases of national development. In
relation thereto, Section 2 of Article XIII of the Constitution states that the promotion of social
justice shall include the commitment to create economic opportunities based on freedom of
initiative and self-reliance. Bearing in mind the foregoing provisions, we find that an
interpretation exempting the members of cooperatives from the imposition of the final tax under
Section 24(B)(1) of the NIRC is more in keeping with the letter and spirit of our Constitution.
All told, we hold that petitioner is not liable to pay the assessed deficiency

withholding taxes on interest from the savings and time deposits of its members, as
well as the delinquency interest of 20% per annum.

In closing, cooperatives, including their members, deserve a preferential tax treatment

because of the vital role they play in the attainment of economic development and social
justice. Thus, although taxes are the lifeblood of the government, the States power to tax must
give way to foster the creation and growth of cooperatives. To borrow the words of Justice
Isagani A. Cruz: The power of taxation, while indispensable, is not absolute and may be
subordinated to the demands of social justice.[34]
WHEREFORE, the Petition is hereby GRANTED. The assailed December 18, 2007 Decision
of the Court of Tax Appeals and the April 11, 2008 Resolution areREVERSED and SET
ASIDE. Accordingly, the assessments for deficiency withholding taxes on interest from the savings and
time deposits of petitioners members for the taxable years 1999 and 2000 as well as the delinquency
interest of 20% per annum are herebyCANCELLED. SO ORDERED.

COMMISSIONER OF INTERNAL G.R. No. 172231

REVENUE,
Petitioner,
Present:
- versus - Ynares-Santiago, J. (Chairperson),
Austria-Martinez,
Callejo, Sr.,
Chico-Nazario, and
Nachura, JJ.
ISABELA CULTURAL
CORPORATION, Promulgated:
Respondent.
February 12, 2007
x ---------------------------------------------------------------------------------------- x
DECISION
YNARES-SANTIAGO, J.:

Petitioner Commissioner of Internal Revenue (CIR) assails the September 30,

2005 Decision[1] of the Court of Appeals in CA-G.R. SP No. 78426 affirming the
February 26, 2003 Decision[2] of the Court of Tax Appeals (CTA) in CTA Case No. 5211,
which cancelled and set aside the Assessment Notices for deficiency income tax and

expanded withholding tax issued by the Bureau of Internal Revenue (BIR) against
respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation,
received from the BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency
income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90000681 for deficiency expanded withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIRs disallowance of ICCs claimed expense deductions
for professional and security services billed to and paid by ICC in 1986,
to wit:
(a) Expenses for the auditing services of SGV & Co., [3] for the
year endingDecember 31, 1985;[4]
(b) Expenses for the legal services [inclusive of retainer fees] of
the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson for the years 1984 and 1985.[5]
(c) Expense for security services of El Tigre Security &
Investigation Agency for the months of April and May 1986.[6]
(2) The alleged understatement of ICCs interest income on the
three promissory notes due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest
and surcharge) was allegedly due to the failure of ICC to withhold 1% expanded
withholding tax on its claimed P244,890.00 deduction for security services.[7]
On March 23, 1990, ICC sought a reconsideration of the subject assessments.
On February 9, 1995, however, it received a final notice before seizure demanding
payment of the amounts stated in the said notices. Hence, it brought the case to the
CTA which held that the petition is premature because the final notice of assessment
cannot be considered as a final decision appealable to the tax court. This was

reversed by the Court of Appeals holding that a demand letter of the BIR reiterating
the payment of deficiency tax, amounts to a final decision on the protested
assessment and may therefore be questioned before the CTA. This conclusion was
sustained by this Court on July 1, 2001, in G.R. No. 135210.[8] The case was thus
remanded to the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside
the assessment notices issued against ICC. It held that the claimed deductions for
professional and security services were properly claimed by ICC in 1986 because it
was only in the said year when the bills demanding payment were sent to
ICC. Hence, even if some of these professional services were rendered to ICC in
1984 or 1985, it could not declare the same as deduction for the said years as the
amount thereof could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the
subject promissory notes. It found that it was the BIR which made an overstatement
of said income when it compounded the interest income receivable by ICC from the
promissory notes of Realty Investment, Inc., despite the absence of a stipulation in the
contract providing for a compounded interest; nor of a circumstance, like delay in
payment or breach of contract, that would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding
tax on its claimed deduction for security services as shown by the various payment
orders and confirmation receipts it presented as evidence. The dispositive portion of
the CTAs Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No.
FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for
deficiency expanded withholding tax in the amount of P4,897.79, inclusive
of surcharges and interest, both for the taxable year 1986, are hereby
CANCELLED and SET ASIDE.
SO ORDERED.[9]
Petitioner filed a petition for review with the Court of Appeals, which
affirmed the CTA decision,[10] holding that although the professional services (legal and

auditing services) were rendered to ICC in 1984 and 1985, the cost of the services was
not yet determinable at that time, hence, it could be considered as deductible expenses
only in 1986 when ICC received the billing statements for said services. It further ruled
that ICC did not understate its interest income from the promissory notes of Realty
Investment, Inc., and that ICC properly withheld and remitted taxes on the
payments for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant
petition contending that since ICC is using the accrual method of accounting, the
expenses for the professional services that accrued in 1984 and 1985, should have
been declared as deductions from income during the said years and the failure of
ICC to do so bars it from claiming said expenses as deduction for the taxable year
1986. As to the alleged deficiency interest income and failure to withhold expanded
withholding tax assessment, petitioner invoked the presumption that the assessment
notices issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained
the deduction of the expenses for professional and security services from ICCs gross
income; and (2) held that ICC did not understate its interest income from the promissory
notes of Realty Investment, Inc; and that ICC withheld the required 1% withholding tax
from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are: (a) the
expense must be ordinary and necessary; (b) it must have been paid or incurred during
the taxable year; (c) it must have been paid or incurred in carrying on the trade or
business of the taxpayer; and (d) it must be supported by receipts, records or other
pertinent papers.[11]
The requisite that it must have been paid or incurred during the taxable year is
further qualified by Section 45 of the National Internal Revenue Code (NIRC) which
states that: [t]he deduction provided for in this Title shall be taken for the taxable year in
which paid or accrued or paid or incurred, dependent upon the method of
accounting upon the basis of which the net income is computed x x x.

Accounting methods for tax purposes comprise a set of rules for determining when
and how to report income and deductions.[12] In the instant case, the accounting method
used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual
method of accounting, expenses not being claimed as deductions by a taxpayer in the
current year when they are incurred cannot be claimed as deduction from income for the
succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other
allowable deductions for the current year but failed to do so cannot deduct the same for
the next year.[13]
The accrual method relies upon the taxpayers right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which characterizes
the cash method of accounting. Amounts of income accrue where the right to receive
them become fixed, where there is created an enforceable liability. Similarly, liabilities
are accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.[14]
For a taxpayer using the accrual method, the determinative question is, when do
the facts present themselves in such a manner that the taxpayer must recognize income or
expense? The accrual of income and expense is permitted when the all-events test has
been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the
availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the
amount of such income or liability be determined with reasonable accuracy. However, the
test does not demand that the amount of income or liability be known absolutely, only
that a taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains uncertain,
if its basis is unchangeable; the test is satisfied where a computation may be unknown,
but is not as much as unknowable, within the taxable year. The amount of liability does
not have to be determined exactly; it must be determined with reasonable
accuracy. Accordingly, the term reasonable accuracy implies something less than an
exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew,
or could reasonably be expected to have known, at the closing of its books for the
taxable year.[16] Accrual method of accounting presents largely a question of fact;

such that the taxpayer bears the burden of proof of establishing the accrual of an
item of income or deduction.[17]
Corollarily, it is a governing principle in taxation that tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority; and one who claims an exemption must be able to justify the same by the
clearest grant of organic or statute law. An exemption from the common burden cannot be
permitted to exist upon vague implications. And since a deduction for income tax
purposes partakes of the nature of a tax exemption, then it must also be strictly construed.
[18]

In the instant case, the expenses for professional fees consist of expenses for legal
and auditing services. The expenses for legal services pertain to the 1984 and 1985 legal
and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, and for reimbursement of the expenses of said firm in connection with ICCs tax
problems for the year 1984. As testified by the Treasurer of ICC, the firm has been its
counsel since the 1960s.[19] From the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be expected to have reasonably known
the retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the taxable year
when they could have been claimed as deductions cannot thus be attributed solely to the
delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due
diligence could have inquired into the amount of their obligation to the firm, especially so
that it is using the accrual method of accounting. For another, it could have reasonably
determined the amount of legal and retainer fees owing to its familiarity with the rates
charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and
that the taxpayer bears the burden of establishing the accrual of an expense or
income. However, ICC failed to discharge this burden. As to when the firms performance
of its services in connection with the 1984 tax problems were completed, or whether ICC
exercised reasonable diligence to inquire about the amount of its liability, or whether it
does or does not possess the information necessary to compute the amount of said
liability with reasonable accuracy, are questions of fact which ICC never established. It
simply relied on the defense of delayed billing by the firm and the company, which under
the circumstances, is not sufficient to exempt it from being charged with knowledge of
the reasonable amount of the expenses for legal and auditing services.

In the same vein, the professional fees of SGV & Co. for auditing the financial
statements of ICC for the year 1985 cannot be validly claimed as expense deductions in
1986. This is so because ICC failed to present evidence showing that even with only
reasonable accuracy, as the standard to ascertain its liability to SGV & Co. in the year
1985, it cannot determine the professional fees which said company would charge for its
services.
ICC thus failed to discharge the burden of proving that the claimed expense
deductions for the professional services were allowable deductions for the taxable
year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot
be validly deducted from its gross income for the said year and were therefore
properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses
were incurred by ICC in 1986 [20] and could therefore be properly claimed as
deductions for the said year.
Anent the purported understatement of interest income from the promissory notes
of Realty Investment, Inc., we sustain the findings of the CTA and the Court of Appeals
that no such understatement exists and that only simple interest computation and not a
compounded one should have been applied by the BIR. There is indeed no stipulation
between the latter and ICC on the application of compounded interest. [21] Under Article
1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should
not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly
withheld the required withholding tax from its claimed deductions for security services
and remitted the same to the BIR is supported by payment order and confirmation
receipts.[22] Hence, the Assessment Notice for deficiency expanded withholding tax was
properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of
P333,196.86 for deficiency income tax should be cancelled and set aside but only insofar
as the claimed deductions of ICC for security services. Said Assessment is valid as to the
BIRs disallowance of ICCs expenses for professional services. The Court of Appeals

cancellation of Assessment Notice No. FAS-1-86-90-000681 in the amount of P4,897.79

for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30,
2005 Decision of the Court of Appeals in CA-G.R. SP No. 78426, isAFFIRMED with
the MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which
disallowed the expense deduction of Isabela Cultural Corporation for professional and
security services, is declared valid only insofar as the expenses for the professional fees
of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, are concerned. The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural
Corporations liability under Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.

EN BANC
COMMISSIONER
OF G. R. No. 163653
INTERNAL REVENUE,
Petitioner,
-versusFILINVEST
DEVELOPMENT
CORPORATION,
Respondent.

x-------------------------------------x
COMMISSIONER
INTERNAL REVENUE,
Petitioner,

OF

G. R. No. 167689
-versusPresent:
CORONA, C.J.,
FILINVEST
DEVELOPMENT CARPIO,
CORPORATION,
VELASCO, JR.,
Respondent.
LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO,* JJ.

Promulgated:
July 19, 2011
x----------------------------------------------------------------------------------------------- x
DECISION

PEREZ, J.:
Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45
of the 1997 Rules of Civil Procedure are the decisions rendered by the Court of Appeals
(CA) in the following cases: (a) Decision dated 16 December 2003 of the then Special
Fifth Division in CA-G.R. SP No. 72992;[1] and, (b) Decision dated 26 January 2005 of
the then Fourteenth Division in CA-G.R. SP No. 74510.[2]

The Facts
The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc.
(FAI), respondent Filinvest Development Corporation (FDC) is a holding company
which also owned 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI).On
29 November 1996, FDC and FAI entered into a Deed of Exchange with FLI
whereby the former both transferred in favor of the latter parcels of land appraised
atP4,306,777,000.00. In exchange for said parcels which were intended to facilitate
development of medium-rise residential and commercial buildings, 463,094,301
shares of stock of FLI were issued to FDC and FAI. [3] As a result of the exchange,
FLIs ownership structure was changed to the extent reflected in the following
tabular prcis, viz.:
Stockholde Number and Percentage Number
of Number and Percentage
r
of Shares Held Prior to Additional
of Shares Held After the
the Exchange
Shares Issued Exchange
FDC

2,537,358,000 67.42%

42,217,000

FAI

00

420,877,000 420,877,000 9.96%

OTHERS

1,226,177,000 32.58%

----------------- ----------- -------------3,763,535,000 100%

2,579,575,000 61.03%

1,226,177,000 29.01%
---------------

463,094,301 4,226,629,000 (100%)

On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue
(BIR) to the effect that no gain or loss should be recognized in the aforesaid transfer
of real properties. Acting on the request, the BIR issued Ruling No. S-34-046-97 dated
3 February 1997, finding that the exchange is among those contemplated under
Section 34 (c) (2) of the old National Internal Revenue Code (NIRC) [4] which
provides that (n)o gain or loss shall be recognized if property is transferred to a
corporation by a person in exchange for a stock in such 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."[5] With the BIRs reiteration of the

foregoing ruling upon the 10 February 1997 request for clarification filed by FLI, [6] the
latter, together with FDC and FAI, complied with all the requirements imposed in the
ruling.[7]
On various dates during the years 1996 and 1997, in the meantime, FDC also extended
advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central
Corporation (DSCC) and Filinvest Capital, Inc. (FCI). [8] Duly evidenced by
instructional letters as well as cash and journal vouchers, said cash advances amounted
to P2,557,213,942.60 in 1996[9] and P3,360,889,677.48 in 1997.[10] On 15 November
1996, FDC also entered into a Shareholders Agreement with Reco Herrera PTE Ltd.
(RHPL) for the formation of a Singapore-based joint venture company called
Filinvest Asia Corporation (FAC), tasked to develop and manage FDCs 50%
ownership of its PBCom Office Tower Project (the Project). With their equity
participation in FAC respectively pegged at 60% and 40% in the Shareholders
Agreement, FDC subscribed to P500.7 million worth of shares in said joint venture
company to RHPLs subscription worth P433.8 million. Having paid its subscription by
executing a Deed of Assignment transferring to FAC a portion of its rights and interest in
the Project worth P500.7 million, FDC eventually reported a net loss of P190,695,061.00
in its Annual Income Tax Return for the taxable year 1996.[11]
On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay
deficiency income and documentary stamp taxes, plus interests and compromise
penalties,[12] covered by the following Assessment Notices, viz.: (a) Assessment Notice
No. SP-INC-96-00018-2000 for deficiency income taxes in the sum ofP150,074,066.27
for 1996; (b) Assessment Notice No. SP-DST-96-00020-2000 for deficiency
documentary stamp taxes in the sum of P10,425,487.06 for 1996; (c) Assessment Notice
No. SP-INC-97-00019-2000 for deficiency income taxes in the sum of P5,716,927.03 for
1997; and (d) Assessment Notice No. SP-DST-97-00021-2000 for deficiency
documentary stamp taxes in the sum of P5,796,699.40 for 1997.[13] The foregoing
deficiency taxes were assessed on the taxable gain supposedly realized by FDC from
the Deed of Exchange it executed with FAI and FLI, on the dilution resulting from
the Shareholders Agreement FDC executed with RHPL as well as the arms-length
interest rate and documentary stamp taxes imposable on the advances FDC
extended to its affiliates.[14]
On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand
for deficiency income taxes in the sum of P1,477,494,638.23 for the year 1997.

[15]

Covered by Assessment Notice No. SP-INC-97-0027-2000, [16] said deficiency tax

was also assessed on the taxable gain purportedly realized by FAI from the Deed of
Exchange it executed with FDC and FLI.[17] On 26 January 2000 or within the
reglementary period of thirty (30) days from notice of the assessment, both FDC and FAI
filed their respective requests for reconsideration/protest, on the ground that the
deficiency income and documentary stamp taxes assessed by the BIR were bereft of
factual and legal basis.[18] Having submitted the relevant supporting documents pursuant
to the 31 January 2000 directive from the BIR Appellate Division, FDC and FAI filed on
11 September 2000 a letter requesting an early resolution of their request for
reconsideration/protest on the ground that the 180 days prescribed for the resolution
thereof under Section 228 of the NIRC was going to expire on 20 September 2000.[19]
In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to
resolve their request for reconsideration/protest within the aforesaid period, FDC
and FAI filed on 17 October 2000 a petition for review with the Court of Tax
Appeals (CTA) pursuant to Section 228 of the 1997 NIRC. Docketed before said court
as CTA Case No. 6182, the petition alleged, among other matters, that as previously
opined in BIR Ruling No. S-34-046-97, no taxable gain should have been assessed from
the subject Deed of Exchange since FDC and FAI collectively gained further control of
FLI as a consequence of the exchange; that correlative to the CIR's lack of authority to
impute theoretical interests on the cash advances FDC extended in favor of its affiliates,
the rule is settled that interests cannot be demanded in the absence of a stipulation to the
effect; that not being promissory notes or certificates of obligations, the instructional
letters as well as the cash and journal vouchers evidencing said cash advances were not
subject to documentary stamp taxes; and, that no income tax may be imposed on the
prospective gain from the supposed appreciation of FDC's shareholdings in FAC. As a
consequence, FDC and FAC both prayed that the subject assessments for deficiency
income and documentary stamp taxes for the years 1996 and 1997 be cancelled and
annulled.[20]
On 4 December 2000, the CIR filed its answer, claiming that the transfer of property
in question should not be considered tax free since, with the resultant diminution of
its shares in FLI, FDC did not gain further control of said corporation. Likewise
calling attention to the fact that the cash advances FDC extended to its affiliates were
interest free despite the interest bearing loans it obtained from banking institutions, the
CIR invoked Section 43 of the old NIRC which, as implemented by Revenue Regulations
No. 2, Section 179 (b) and (c), gave him "the power to allocate, distribute or apportion

income or deductions between or among such organizations, trades or business in order to

prevent evasion of taxes." The CIR justified the imposition of documentary stamp taxes
on the instructional letters as well as cash and journal vouchers for said cash advances on
the strength of Section 180 of the NIRC and Revenue Regulations No. 9-94 which
provide that loan transactions are subject to said tax irrespective of whether or not they
are evidenced by a formal agreement or by mere office memo. The CIR also argued that
FDC realized taxable gain arising from the dilution of its shares in FAC as a result of its
Shareholders' Agreement with RHPL.[21]
At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and
Issues[22] which was admitted in the 16 February 2001 resolution issued by the CTA. With
the further admission of the Formal Offer of Documentary Evidence subsequently filed
by FDC and FAI[23] and the conclusion of the testimony of Susana Macabelda anent the
cash advances FDC extended in favor of its affiliates, [24] the CTA went on to render the
Decision dated 10 September 2002 which, with the exception of the deficiency income
tax on the interest income FDC supposedly realized from the advances it extended in
favor of its affiliates, cancelled the rest of deficiency income and documentary stamp
taxes assessed against FDC and FAI for the years 1996 and 1997, [25] thus:
WHEREFORE, in view of all the foregoing, the court finds the
instant petition partly meritorious. Accordingly, Assessment Notice No.
SP-INC-96-00018-2000 imposing deficiency income tax on FDC for
taxable year 1996, Assessment Notice No. SP-DST-96-00020-2000 and
SP-DST-97-00021-2000 imposing deficiency documentary stamp tax on
FDC for taxable years 1996 and 1997, respectively and Assessment
Notice No. SP-INC-97-0027-2000 imposing deficiency income tax on
FAI for the taxable year 1997 are hereby CANCELLEDand SET
ASIDE. However, [FDC] is hereby ORDERED to PAY the amount
ofP5,691,972.03 as deficiency income tax for taxable year 1997. In
addition, petitioner is also ORDERED to PAY 20% delinquency interest
computed from February 16, 2000 until full payment thereof pursuant to
Section 249 (c) (3) of the Tax Code.[26]

Finding that the collective increase of the equity participation of FDC and FAI in
FLI rendered the gain derived from the exchange tax-free, the CTA also ruled that the
increase in the value of FDC's shares in FAC did not result in economic advantage in the

absence of actual sale or conversion thereof. While likewise finding that the documents
evidencing the cash advances FDC extended to its affiliates cannot be considered as loan
agreements that are subject to documentary stamp tax, the CTA enunciated, however, that
the CIR was justified in assessing undeclared interests on the same cash advances
pursuant to his authority under Section 43 of the NIRC in order to forestall tax
evasion. For persuasive effect, the CTA referred to the equivalent provision in the Internal
Revenue Code of theUnited States (IRC-US), i.e., Sec. 482, as implemented by Section
1.482-2 of 1965-1969 Regulations of the Law of Federal Income Taxation.[27]
Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the petition for
review docketed before the CA as CA-G.R. No. 72992, pursuant to Rule 43 of the 1997
Rules of Civil Procedure. Calling attention to the fact that the cash advances it extended
to its affiliates were interest-free in the absence of the express stipulation on interest
required under Article 1956 of the Civil Code, FDC questioned the imposition of an
arm's-length interest rate thereon on the ground, among others, that the CIR's authority
under Section 43 of the NIRC: (a) does not include the power to impute imaginary
interest on said transactions; (b) is directed only against controlled taxpayers and not
against mother or holding corporations; and, (c) can only be invoked in cases of
understatement of taxable net income or evident tax evasion. [28] Upholding FDC's
position, the CA's then Special Fifth Division rendered the herein assailed decision dated
16 December 2003,[29] the decretal portion of which states:
WHEREFORE, premises considered, the instant petition is
hereby GRANTED.The assailed Decision dated September 10, 2002
rendered by the Court of Tax Appeals in CTA Case No. 6182 directing
petitioner Filinvest Development Corporation to pay the amount
of P5,691,972.03 representing deficiency income tax on allegedly
undeclared interest income for the taxable year 1997, plus 20% delinquency
interest computed from February 16, 2000 until full payment thereof
isREVERSED and SET ASIDE and, a new one entered annulling
Assessment Notice No. SP-INC-97-00019-2000 imposing deficiency
income tax on petitioner for taxable year 1997. No pronouncement as to
costs.[30]
With the denial of its partial motion for reconsideration of the same 11 December
2002 resolution issued by the CTA,[31] the CIR also filed the petition for review docketed
before the CA as CA-G.R. No. 74510. In essence, the CIR argued that the CTA reversibly

erred in cancelling the assessment notices: (a) for deficiency income taxes on the
exchange of property between FDC, FAI and FLI; (b) for deficiency documentary stamp
taxes on the documents evidencing FDC's cash advances to its affiliates; and (c) for
deficiency income tax on the gain FDC purportedly realized from the increase of the
value of its shareholdings in FAC.[32]The foregoing petition was, however, denied due
course and dismissed for lack of merit in the herein assailed decision dated 26 January
2005[33] rendered by the CA's then Fourteenth Division, upon the following findings and
conclusions, to wit:
1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the 29
November 1996 Deed of Exchange resulted in the combined control
by FDC and FAI of more than 51% of the outstanding shares of FLI,
hence, no taxable gain can be recognized from the transaction under
Section 34 (c) (2) of the old NIRC;
2. The instructional letters as well as the cash and journal vouchers
evidencing the advances FDC extended to its affiliates are not
subject to documentary stamp taxes pursuant to BIR Ruling No. 11698, dated 30 July 1998, since they do not partake the nature of loan
agreements;
3. Although BIR Ruling No. 116-98 had been subsequently modified by
BIR Ruling No. 108-99, dated 15 July 1999, to the effect that
documentary stamp taxes are imposable on inter-office memos
evidencing cash advances similar to those extended by FDC, said
latter ruling cannot be given retroactive application if to do so would
be prejudicial to the taxpayer;
4. FDC's alleged gain from the increase of its shareholdings in FAC as a
consequence of the Shareholders' Agreement it executed with RHPL
cannot be considered taxable income since, until actually converted
thru sale or disposition of said shares, they merely represent
unrealized increase in capital.[34]
Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the
CIR's petitions for review on certiorari assailing the 16 December 2003 decision in CAG.R. No. 72992 and the 26 January 2005 decision in CA-G.R. SP No. 74510 were

consolidated pursuant to the 1 March 2006 resolution issued by this Courts Third
Division.
The Issues
In G.R. No. 163653, the CIR urges the grant of its petition on the following ground:
THE COURT OF APPEALS ERRED IN REVERSING THE
DECISION OF THE COURT OF TAX APPEALS AND IN HOLDING
THAT THE ADVANCES EXTENDED BY RESPONDENT TO ITS
AFFILIATES ARE NOT SUBJECT TO INCOME TAX.[35]
In G.R. No. 167689, on the other hand, petitioner proffers the following issues for
resolution:
I
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE
ABUSE OF DISCRETION IN HOLDING THAT THE EXCHANGE
OF SHARES OF STOCK FOR PROPERTY AMONG FILINVEST
DEVELOPMENT CORPORATION (FDC), FILINVEST ALABANG,
INCORPORATED (FAI) AND FILINVEST LAND INCORPORATED
(FLI) MET ALL THE REQUIREMENTS FOR THE NONRECOGNITION OF TAXABLE GAIN UNDER SECTION 34 (c) (2)
OF THE OLD NATIONAL INTERNAL REVENUE CODE (NIRC)
(NOW SECTION 40 (C) (2) (c) OF THE NIRC.
II
THE HONORABLE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR IN HOLDING THAT THE LETTERS OF
INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO
ITS AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS
SUBJECT TO DOCUMENTARY STAMP TAXES UNDER SECTION
180 OF THE NIRC.
III

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN

HOLDING THAT GAIN ON DILUTION AS A RESULT OF THE
INCREASE IN THE VALUE OF FDCS SHAREHOLDINGS IN FAC
IS NOT TAXABLE.[36]
The Courts Ruling
While the petition in G.R. No. 163653 is bereft of merit, we find the CIRs petition in
G.R. No. 167689 impressed with partial merit.
In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTAs finding that
theoretical interests can be imputed on the advances FDC extended to its affiliates in
1996 and 1997 considering that, for said purpose, FDC resorted to interest-bearing fund
borrowings from commercial banks. Since considerable interest expenses were deducted
by FDC when said funds were borrowed, the CIR theorizes that interest income should
likewise be declared when the same funds were sourced for the advances FDC extended
to its affiliates. Invoking Section 43 of the 1993 NIRC in relation to Section 179(b) of
Revenue Regulation No. 2, the CIR maintains that it is vested with the power to allocate,
distribute or apportion income or deductions between or among controlled organizations,
trades or businesses even in the absence of fraud, since said power is intended to prevent
evasion of taxes or clearly to reflect the income of any such organizations, trades or
businesses. In addition, the CIR asseverates that the CA should have accorded weight and
respect to the findings of the CTA which, as the specialized court dedicated to the study
and consideration of tax matters, can take judicial notice of US income tax laws and
regulations.[37]
Admittedly, Section 43 of the 1993 NIRC[38] provides that, (i)n any case of two or
more organizations, trades or businesses (whether or not incorporated and whether or not
organized in the Philippines) owned or controlled directly or indirectly by the same
interests, the Commissioner of Internal Revenue is authorized to distribute, apportion or
allocate gross income or deductions between or among such organization, trade or
business, if he determines that such distribution, apportionment or allocation is necessary
in order to prevent evasion of taxes or clearly to reflect the income of any such
organization, trade or business. In amplification of the equivalent provision [39] under
Commonwealth Act No. 466,[40] Sec. 179(b) of Revenue Regulation No. 2 states as
follows:

Determination of the taxable net income of controlled

taxpayer. (A)DEFINITIONS. When used in this section
(1)
The term organization includes any kind, whether it be a
sole proprietorship, a partnership, a trust, an estate, or a corporation or
association, irrespective of the place where organized, where operated, or
where its trade or business is conducted, and regardless of whether
domestic or foreign, whether exempt or taxable, or whether affiliated or
not.
(2)
The terms trade or business include any trade or
business activity of any kind, regardless of whether or where organized,
whether owned individually or otherwise, and regardless of the place where
carried on.
(3)
The term controlled includes any kind of control, direct
or indirect, whether legally enforceable, and however exercisable or
exercised. It is the reality of the control which is decisive, not its form or
mode of exercise. A presumption of control arises if income or deductions
have been arbitrarily shifted.
(4)
The term controlled taxpayer means any one of two or
more organizations, trades, or businesses owned or controlled directly or
indirectly by the same interests.
(5)
The term group and group of controlled taxpayers means
the organizations, trades or businesses owned or controlled by the same
interests.
(6)
The term true net income means, in the case of a
controlled taxpayer, the net income (or as the case may be, any item or
element affecting net income) which would have resulted to the controlled
taxpayer, had it in the conduct of its affairs (or, as the case may be, any item
or element affecting net income) which would have resulted to the
controlled taxpayer, had it in the conduct of its affairs (or, as the case may
be, in the particular contract, transaction, arrangement or other act) dealt
with the other members or members of the group at arms length.It does not
mean the income, the deductions, or the item or element of either, resulting
to the controlled taxpayer by reason of the particular contract, transaction,
or arrangement, the controlled taxpayer, or the interest controlling it, chose
to make (even though such contract, transaction, or arrangement be legally
binding upon the parties thereto).

(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax

Code is to place a controlled taxpayer on a tax parity with an uncontrolled
taxpayer, by determining, according to the standard of an uncontrolled
taxpayer, the true net income from the property and business of a controlled
taxpayer. The interests controlling a group of controlled taxpayer are
assumed to have complete power to cause each controlled taxpayer so to
conduct its affairs that its transactions and accounting records truly reflect
the net income from the property and business of each of the controlled
taxpayers. If, however, this has not been done and the taxable net income
are thereby understated, the statute contemplates that the Commissioner of
Internal Revenue shall intervene, and, by making such distributions,
apportionments, or allocations as he may deem necessary of gross income
or deductions, or of any item or element affecting net income, between or
among the controlled taxpayers constituting the group, shall determine the
true net income of each controlled taxpayer. The standard to be applied in
every case is that of an uncontrolled taxpayer. Section 44 grants no right to
a controlled taxpayer to apply its provisions at will, nor does it grant any
right to compel the Commissioner of Internal Revenue to apply its
provisions.
(C) APPLICATION Transactions between controlled taxpayer and
another will be subjected to special scrutiny to ascertain whether the
common control is being used to reduce, avoid or escape taxes. In
determining the true net income of a controlled taxpayer, the Commissioner
of Internal Revenue is not restricted to the case of improper accounting, to
the case of a fraudulent, colorable, or sham transaction, or to the case of a
device designed to reduce or avoid tax by shifting or distorting income or
deductions. The authority to determine true net income extends to any case
in which either by inadvertence or design the taxable net income in whole
or in part, of a controlled taxpayer, is other than it would have been had the
taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing
at arms length with another uncontrolled taxpayer.[41]
As may be gleaned from the definitions of the terms controlled and "controlled
taxpayer" under paragraphs (a) (3) and (4) of the foregoing provision, it would appear
that FDC and its affiliates come within the purview of Section 43 of the 1993
NIRC. Aside from owning significant portions of the shares of stock of FLI, FAI, DSCC

and FCI, the fact that FDC extended substantial sums of money as cash advances to its
said affiliates for the purpose of providing them financial assistance for their operational
and capital expenditures seemingly indicate that the situation sought to be addressed by
the subject provision exists. From the tenor of paragraph (c) of Section 179 of Revenue
Regulation No. 2, it may also be seen that the CIR's power to distribute, apportion or
allocate gross income or deductions between or among controlled taxpayers may be
likewise exercised whether or not fraud inheres in the transaction/s under scrutiny. For as
long as the controlled taxpayer's taxable income is not reflective of that which it would
have realized had it been dealing at arm's length with an uncontrolled taxpayer, the CIR
can make the necessary rectifications in order to prevent evasion of taxes.
Despite the broad parameters provided, however, we find that the CIR's powers of
distribution, apportionment or allocation of gross income and deductions under Section
43 of the 1993 NIRC and Section 179 of Revenue Regulation No. 2 does not include the
power to impute "theoretical interests" to the controlled taxpayer's transactions. Pursuant
to Section 28 of the 1993 NIRC, [42] after all, the term gross income is understood to mean
all income from whatever source derived, including, but not limited to the following
items: compensation for services, including fees, commissions, and similar items; gross
income derived from business; gains derived from dealings in property; interest; rents;
royalties; dividends; annuities; prizes and winnings; pensions; and partners distributive
share of the gross income of general professional partnership.[43] While it has been held
that the phrase "from whatever source derived" indicates a legislative policy to include all
income not expressly exempted within the class of taxable income under our laws, the
term "income" has been variously interpreted to mean "cash received or its equivalent",
"the amount of money coming to a person within a specific time" or "something distinct
from principal or capital."[44] Otherwise stated, there must be proof of the actual or, at the
very least, probable receipt or realization by the controlled taxpayer of the item of gross
income sought to be distributed, apportioned or allocated by the CIR.
Our circumspect perusal of the record yielded no evidence of actual or possible
showing that the advances FDC extended to its affiliates had resulted to the interests
subsequently assessed by the CIR. For all its harping upon the supposed fact that FDC
had resorted to borrowings from commercial banks, the CIR had adduced no concrete
proof that said funds were, indeed, the source of the advances the former provided its
affiliates. While admitting that FDC obtained interest-bearing loans from commercial
banks,[45] Susan Macabelda - FDC's Funds Management Department Manager who was
the sole witness presented before the CTA - clarified that the subject advances were

sourced from the corporation's rights offering in 1995 as well as the sale of its investment
in Bonifacio Land in 1997.[46]More significantly, said witness testified that said advances:
(a) were extended to give FLI, FAI, DSCC and FCI financial assistance for their
operational and capital expenditures; and, (b) were all temporarily in nature since they
were repaid within the duration of one week to three months and were evidenced by mere
journal entries, cash vouchers and instructional letters.[47]
Even if we were, therefore, to accord precipitate credulity to the CIR's bare
assertion that FDC had deducted substantial interest expense from its gross income, there
would still be no factual basis for the imputation of theoretical interests on the subject
advances and assess deficiency income taxes thereon. More so, when it is borne in mind
that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall be due
unless it has been expressly stipulated in writing. Considering that taxes, being burdens,
are not to be presumed beyond what the applicable statute expressly and clearly declares,
[48]
the rule is likewise settled that tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer.[49] Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar strictness to
tax laws and the provisions of a taxing act are not to be extended by implication. [50] While
it is true that taxes are the lifeblood of the government, it has been held that their
assessment and collection should be in accordance with law as any arbitrariness will
negate the very reason for government itself.[51]
In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the
imposition of deficiency income taxes on the transfer FDC and FAI effected in exchange
for the shares of stock of FLI. With respect to the Deed of Exchange executed between
FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC pertinently provides as follows:
Sec. 34. Determination of amount of and recognition of gain or
loss.xxxx
(c) Exception x x x x
No gain or loss shall also be recognized if property is transferred to a
corporation by a person in exchange for shares of stock in such
corporation of which as a result of such exchange said person, alone or
together with others, not exceeding four persons, gains control of said

corporation; Provided, That stocks issued for services shall not be

considered as issued in return of property.

As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties,
[52]
the requisites for the non-recognition of gain or loss under the foregoing provision 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 exceeding four, gains control of the
transferee.[53] Acting on the 13 January 1997 request filed by FLI, the BIR had, in fact,
acknowledged the concurrence of the foregoing requisites in the Deed of Exchange the
former executed with FDC and FAI by issuing BIR Ruling No. S-34-046-97. [54] With the
BIR's reiteration of said ruling upon the request for clarification filed by FLI, [55] there is
also no dispute that said transferee and transferors subsequently complied with the
requirements provided for the non-recognition of gain or loss from the exchange of
property for tax, as provided under Section 34 (c) (2) of the 1993 NIRC.[56]
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 corporations 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 ofP263,386,921.00 should be recognized on the part of FDC and
in the sum ofP3,088,711,367.00 on the part of FAI.[57]
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. [58] 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,[59] 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."[60] 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.[61]

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. [62] 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 supposed gain which resulted from the
subject transfer.
On the other hand, insofar as documentary stamp taxes on loan agreements and
promissory notes are concerned, Section 180 of the NIRC provides follows:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of
exchange, drafts, instruments and securities issued by the government
or any of its instrumentalities, certificates of deposit bearing interest
and others not payable on sight or demand. On all loan agreements
signed abroad wherein the object of the contract is located or used in the
Philippines; bill of exchange (between points within the Philippines),
drafts, instruments and securities issued by the Government or any of its
instrumentalities or certificates of deposits drawing interest, or orders for
the payment of any sum of money otherwise than at sight or on demand, or
on all promissory notes, whether negotiable or non-negotiable, except bank
notes issued for circulation, and on each renewal of any such note, there
shall be collected a documentary stamp tax of Thirty centavos (P0.30) on
each two hundred pesos, or fractional part thereof, of the face value of any
such agreement, bill of exchange, draft, certificate of deposit or
note: Provided, That only one documentary stamp tax shall be imposed on
either loan agreement, or promissory notes issued to secure such loan,
whichever will yield a higher tax:Provided however, That loan
agreements or promissory notes the aggregate of which does not exceed
Two hundred fifty thousand pesos (P250,000.00) executed by an individual

for his purchase on installment for his personal use or that of his family
and not for business, resale, barter or hire of a house, lot, motor vehicle,
appliance or furniture shall be exempt from the payment of documentary
stamp tax provided under this Section.
When read in conjunction with Section 173 of the 1993 NIRC, [63] the foregoing provision
concededly applies to "(a)ll loan agreements, whether made or signed in the Philippines,
or abroad when the obligation or right arises from Philippine sources or the property or
object of the contract is located or used in the Philippines." Correlatively, Section 3 (b)
and Section 6 of Revenue Regulations No. 9-94 provide as follows:
Section 3. Definition of Terms. For purposes of these Regulations, the
following term shall mean:
(b) 'Loan agreement' refers to a contract in writing where one of the parties
delivers to another money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid. The term
shall include credit facilities, which may be evidenced by credit memo,
advice or drawings.
The terms 'Loan Agreement" under Section 180 and "Mortgage' under
Section 195, both of the Tax Code, as amended, generally refer to distinct
and separate instruments. A loan agreement shall be taxed under Section
180, while a deed of mortgage shall be taxed under Section 195."
"Section 6. Stamp on all Loan Agreements. All loan agreements whether
made or signed in the Philippines, or abroad when the obligation or right
arises from Philippine sources or the property or object of the contract is
located in the Philippines shall be subject to the documentary stamp tax of
thirty centavos (P0.30) on each two hundred pesos, or fractional part
thereof, of the face value of any such agreements, pursuant to Section 180
in relation to Section 173 of the Tax Code.
In cases where no formal agreements or promissory notes have been
executed to cover credit facilities, the documentary stamp tax shall be based
on the amount of drawings or availment of the facilities, which may be

evidenced by credit/debit memo, advice or drawings by any form of check

or withdrawal slip, under Section 180 of the Tax Code.
Applying the aforesaid provisions to the case at bench, we find that the
instructional letters as well as the journal and cash vouchers evidencing the advances
FDC extended to its affiliates in 1996 and 1997 qualified as loan agreements upon which
documentary stamp taxes may be imposed. In keeping with the caveat attendant to every
BIR Ruling to the effect that it is valid only if the facts claimed by the taxpayer are
correct, we find that the CA reversibly erred in utilizing BIR Ruling No. 116-98, dated 30
July 1998 which, strictly speaking, could be invoked only by ASB Development
Corporation, the taxpayer who sought the same.In said ruling, the CIR opined that
documents like those evidencing the advances FDC extended to its affiliates are not
subject to documentary stamp tax, to wit:
On the matter of whether or not the inter-office memo covering the
advances granted by an affiliate company is subject to documentary stamp
tax, it is informed that nothing in Regulations No. 26 (Documentary Stamp
Tax Regulations) and Revenue Regulations No. 9-94 states that the same is
subject to documentary stamp tax. Such being the case, said inter-office
memo evidencing the lendings or borrowings which is neither a form of
promissory note nor a certificate of indebtedness issued by the corporationaffiliate or a certificate of obligation, which are, more or less, categorized
as 'securities', is not subject to documentary stamp tax imposed under
Section 180, 174 and 175 of the Tax Code of 1997, respectively.Rather, the
inter-office memo is being prepared for accounting purposes only in order
to avoid the co-mingling of funds of the corporate affiliates.

In its appeal before the CA, the CIR argued that the foregoing ruling was later modified
in BIR Ruling No. 108-99 dated 15 July 1999, which opined that inter-office memos
evidencing lendings or borrowings extended by a corporation to its affiliates are akin to
promissory notes, hence, subject to documentary stamp taxes. [64] In brushing aside the
foregoing argument, however, the CA applied Section 246 of the 1993 NIRC [65] from
which proceeds the settled principle that rulings, circulars, rules and regulations
promulgated by the BIR have no retroactive application if to so apply them would be
prejudicial to the taxpayers.[66]Admittedly, this rule does not apply: (a) where the taxpayer
deliberately misstates or omits material facts from his return or in any document required

of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by
the Bureau of Internal Revenue are materially different from the facts on which the ruling
is based; or (c) where the taxpayer acted in bad faith. [67] Not being the taxpayer who, in
the first instance, sought a ruling from the CIR, however, FDC cannot invoke the
foregoing principle on non-retroactivity of BIR rulings.
Viewed in the light of the foregoing considerations, we find that both the CTA and the
CA erred in invalidating the assessments issued by the CIR for the deficiency
documentary stamp taxes due on the instructional letters as well as the journal and cash
vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997. In
Assessment Notice No. SP-DST-96-00020-2000, the CIR correctly assessed the sum
of P6,400,693.62 for documentary stamp tax, P3,999,793.44 in interests and P25,000.00
as compromise penalty, for a total of P10,425,487.06.Alongside the sum
of P4,050,599.62 for documentary stamp tax, the CIR similarly assessed P1,721,099.78
in interests and P25,000.00 as compromise penalty in Assessment Notice No. SP-DST97-00021-2000 or a total of P5,796,699.40. The imposition of deficiency interest is
justified under Sec. 249 (a) and (b) of the NIRC which authorizes the assessment of the
same at the rate of twenty percent (20%), or such higher rate as may be prescribed by
regulations, from the date prescribed for the payment of the unpaid amount of tax until
full payment.[68] The imposition of the compromise penalty is, in turn, warranted under
Sec. 250[69] of the NIRC which prescribes the imposition thereof in case of each failure to
file an information or return, statement or list, or keep any record or supply any
information required on the date prescribed therefor.
To our mind, no reversible error can, finally, be imputed against both the CTA and
the CA for invalidating the Assessment Notice issued by the CIR for the deficiency
income taxes FDC is supposed to have incurred as a consequence of the dilution of
its shares in FAC. Anent FDCs Shareholders Agreement with RHPL, the record shows
that the parties were in agreement about the following factual antecedents narrated in the
14 February 2001 Stipulation of Facts, Documents and Issues they submitted before the
CTA,[70] viz.:
1.11. On November 15, 1996, FDC entered into a Shareholders Agreement
(SA) with Reco Herrera Pte. Ltd. (RHPL) for the formation of a joint
venture company named Filinvest Asia Corporation (FAC) which is based
in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and 7, Answer).

1.12. FAC, the joint venture company formed by FDC and RHPL, is tasked
to develop and manage the 50% ownership interest of FDC in its PBCom
Office Tower Project (Project) with the Philippine Bank of
Communications (par. 6.12, Petition; par. 7, Answer).
1.13. Pursuant to the SA between FDC and RHPL, the equity participation
of FDC and RHPL in FAC was 60% and 40% respectively.
1.14. In accordance with the terms of the SA, FDC subscribed to P500.7
million worth of shares of stock representing a 60% equity participation in
FAC. In turn, RHPL subscribed to P433.8 million worth of shares of stock
of FAC representing a 40% equity participation in FAC.
1.15. In payment of its subscription in FAC, FDC executed a Deed
of Assignment transferring to FAC a portion of FDCs right and interests in
the Project to the extent of P500.7 million.
1.16. FDC reported a net loss of P190,695,061.00 in its Annual
Income Tax Return for the taxable year 1996.[71]

Alongside the principle that tax revenues are not intended to be liberally
construed,[72] the rule is settled that the findings and conclusions of the CTA are accorded
great respect and are generally upheld by this Court, unless there is a clear showing of a
reversible error or an improvident exercise of authority.[73] Absent showing of such error
here, we find no strong and cogent reasons to depart from said rule with respect to the
CTA's finding that no deficiency income tax can be assessed on the gain on the supposed
dilution and/or increase in the value of FDC's shareholdings in FAC which the CIR, at
any rate, failed to establish. Bearing in mind the meaning of "gross income" as above
discussed, it cannot be gainsaid, even then, that a mere increase or appreciation in the
value of said shares cannot be considered income for taxation purposes. Since a mere
advance in the value of the property of a person or corporation in no sense constitute the
income specified in the revenue law, it has been held in the early case of Fisher vs.
Trinidad,[74] that it constitutes and can be treated merely as an increase of capital. Hence,
the CIR has no factual and legal basis in assessing income tax on the increase in the value
of FDC's shareholdings in FAC until the same is actually sold at a profit.

WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R.
No. 163653 is DENIED for lack of merit and the CAs 16 December 2003 Decision in
G.R. No. 72992 is AFFIRMED in toto. The CIRs petition in G.R. No. 167689
is PARTIALLY GRANTED and the CAs 26 January 2005 Decision in CA-G.R. SP No.
74510 is MODIFIED.
Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-9700021-2000 issued for deficiency documentary stamp taxes due on the instructional
letters as well as journal and cash vouchers evidencing the advances FDC extended to its
affiliates are declared valid.
The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC97-00019-2000 and SP-INC-97-0027-2000 issued for deficiency income assessed on (a)
the arms-length interest from said advances; (b) the gain from FDCs Deed of Exchange
with FAI and FLI; and (c) income from the dilution resulting from FDCs Shareholders
Agreement with RHPL is, however, upheld.
SO ORDERED.

SOUTH AFRICAN AIRWAYS,

Petitioner,

G.R. No. 180356

Present:

- versus -

COMMISSIONER OF INTERNAL
REVENUE,
Respondent.

CORONA, J., Chairperson,

VELASCO, JR.,
LEONARDO-DE CASTRO,*
PERALTA, and
MENDOZA, JJ.
Promulgated:
February 16, 2010

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

DECISION
VELASCO, JR., J.:
The Case

This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July
19, 2007 Decision[1] and October 30, 2007 Resolution[2] 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 assailed decision affirmed the Decision dated
May 10, 2006[3] and Resolution dated August 11, 2006[4] 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. Petitioner has a general sales agent in the Philippines, Aerotel Limited
Corporation (Aerotel). Aerotel sells passage documents for compensation or commission
for petitioners 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 thePhilippines.
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

Sub-total
For Cargo

1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
st

1 Quarter
2nd Quarter
3rd Quarter
4th Quarter

May 30, 2000

August 29, 2000
November 29, 2000
April 16, 2000
May 30, 2000
August 29, 2000
November 29, 2000
April 16, 2000

Sub-total
TOTAL

PhP

PhP
PhP

PhP

222,531.25
424,046.95
422,466.00
453,182.91
1,522,227.11
81,531.00
50,169.65
36,383.74
37,454.88
205,539.27
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 thePhilippines. On this ground, the CTA
denied petitioners claim for a refund.
Petitioners 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 petitioners 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 Philippine Billings for the taxable year 2000
in the amount of P1,727,766.38.[5]
The Courts 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.
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.
[6]

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 petitioners
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 thePhilippines.
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 Airways),[7] 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 thePhilippines. Petitioners 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 legislatures 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 pronouncements, however, are not controlling
on this Court. We said in Espino v. Cleofe:[8]
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
petitioners 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 thePhilippines. 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 excepted. It is a clause which exempts something from the
operation of a statue by express words. [9] Further, an exception need not be introduced by
the words except or unless. An exception will be construed as such if it removes
something from the operation of a provision of law.[10]
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 thePhilippines, 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 being excepted must be regarded as coming within the purview of the
general rule.[11]
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 petitioners 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 petitioners
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.
Petitioners 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
speak of.[12]
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, petitioners argument is correct that the offsetting of its tax refund with its
alleged tax deficiency is unavailing under Art. 1279 of the Civil Code.
Commissioner of Internal Revenue v. Court of Tax Appeals,[14] 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 petitioners supplemental motion for reconsideration alleging
bringing to said courts 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.

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
others 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, petitioners 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 petitioners claim for a refund. Even though
petitioner is not entitled to a refund due to the question on the propriety of petitioners tax
return subject of the instant controversy, it would not be proper to deny such claim
without making a determination of petitioners 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 petitioners liabilities under the two
provisions would be the same. There is a need to make a determination of petitioners

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
petitioners taxable income. There is a necessity to receive evidence to establish such
amount vis--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.

G.R. No. L-65773-74 April 30, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS, respondents.
Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British
Airways.

MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari
of the joint Decision of the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373
and 2561, dated 26 January 1983, which set aside petitioner's assessment of
deficiency income taxes against respondent British Overseas Airways

Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71,
respectively, as well as its Resolution of 18 November, 1983 denying
reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing
under the laws of the United Kingdom It is engaged in the international airline
business and is a member-signatory of the Interline Air Transport Association
(IATA). As such it operates air transportation service and sells transportation
tickets over the routes of the other airline members. During the periods covered
by the disputed assessments, it is admitted that BOAC had no landing rights for
traffic purposes in the Philippines, and was not granted a Certificate of public
convenience and necessity to operate in the Philippines by the Civil Aeronautics
Board (CAB), except for a nine-month period, partly in 1961 and partly in 1962,
when it was granted a temporary landing permit by the CAB. Consequently, it did
not carry passengers and/or cargo to or from the Philippines, although during the
period covered by the assessments, it maintained a general sales agent in the
Philippines Wamer Barnes and Company, Ltd., and later Qantas Airways
which was responsible for selling BOAC tickets covering passengers and
cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity)
assessed BOAC the aggregate amount of P2,498,358.56 for deficiency income
taxes covering the years 1959 to 1963. This was protested by BOAC.
Subsequent investigation resulted in the issuance of a new assessment, dated
16 January 1970 for the years 1959 to 1967 in the amount of P858,307.79.
BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79,
which claim was denied by the CIR on 16 February 1972. But before said denial,
BOAC had already filed a petition for review with the Tax Court on 27 January
1972, assailing the assessment and praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests,
and penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount
of P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as

compromise penalties for violation of Section 46 (requiring the filing of

corporation returns) penalized under Section 74 of the National Internal Revenue
Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be
countermanded and set aside. In a letter, dated 16 February 1972, however, the
CIR not only denied the BOAC request for refund in the First Case but also reissued in the Second Case the deficiency income tax assessment for
P534,132.08 for the years 1969 to 1970-71 plus P1,000.00 as compromise
penalty under Section 74 of the Tax Code. BOAC's request for reconsideration
was denied by the CIR on 24 August 1973. This prompted BOAC to file the
Second Case before the Tax Court praying that it be absolved of liability for
deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision
reversing the CIR. The Tax Court held that the proceeds of sales of BOAC
passage tickets in the Philippines by Warner Barnes and Company, Ltd., and
later by Qantas Airways, during the period in question, do not constitute BOAC
income from Philippine sources "since no service of carriage of passengers or
freight was performed by BOAC within the Philippines" and, therefore, said
income is not subject to Philippine income tax. The CTA position was that income
from transportation is income from services so that the place where services are
rendered determines the source. Thus, in the dispositive portion of its Decision,
the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79,
and to cancel the deficiency income tax assessments against BOAC in the
amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues,
thus:
1. Whether or not the revenue derived by private respondent British
Overseas Airways Corporation (BOAC) from sales of tickets in the
Philippines for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and,
accordingly, taxable.

2. Whether or not during the fiscal years in question BOAC s a

resident foreign corporation doing business in the Philippines or has
an office or place of business in the Philippines.
3. In the alternative that private respondent may not be considered a
resident foreign corporation but a non-resident foreign corporation,
then it is liable to Philippine income tax at the rate of thirty-five per
cent (35%) of its gross income received from all sources within the
Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or
business within the Philippines or having an office or place of
business therein.
(i) The term "non-resident foreign corporation" applies to a foreign
corporation not engaged in trade or business within the Philippines
and not having any office or place of business therein
It is our considered opinion that BOAC is a resident foreign corporation. There is
no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the performance of
acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the
business organization. 2 "In order that a foreign corporation may be regarded as
doing business within a State, there must be continuity of conduct and intention
to establish a continuous business, such as the appointment of a local agent, and
not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments, maintained a
general sales agent in the Philippines, That general sales agent, from 1959 to
1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the
whole trip into series of trips each trip in the series corresponding to a different
airline company; (3) receiving the fare from the whole trip; and (4) consequently
allocating to the various airline companies on the basis of their participation in the
services rendered through the mode of interline settlement as prescribed by

Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those activities
were in exercise of the functions which are normally incident to, and are in
progressive pursuit of, the purpose and object of its organization as an
international air carrier. In fact, the regular sale of tickets, its main activity, is the
very lifeblood of the airline business, the generation of sales being the paramount
objective. There should be no doubt then that BOAC was "engaged in" business
in the Philippines through a local agent during the period covered by the
assessments. Accordingly, it is a resident foreign corporation subject to tax upon
its total net income received in the preceding taxable year from all sources within
the Philippines. 5
Sec. 24. Rates of tax on corporations. ...
(b) Tax on foreign corporations. ...
(2) Resident corporations. A corporation organized, authorized, or
existing under the laws of any foreign country, except a foreign fife
insurance company, 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. (Emphasis supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales
of tickets by BOAC in the Philippines constitutes income from Philippine sources
and, accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived from
salaries, wages or compensation for personal service of whatever
kind and in whatever form paid, or from profession, vocations,
trades,business, commerce, sales, or dealings in property, whether
real or personal, growing out of the ownership or use of or interest in
such property; also from interests, rents, dividends, securities, or
thetransactions of any business carried on for gain or profile, or
gains, profits, and income derived from any source whatever (Sec.
29[3]; Emphasis supplied)

The definition is broad and comprehensive to include proceeds from sales of

transport documents. "The words 'income from any source whatever' disclose a
legislative policy to include all income not expressly exempted within the class of
taxable income under our laws." Income means "cash received or its equivalent";
it is the amount of money coming to a person within a specific time ...; it means
something distinct from principal or capital. For, while capital is a fund, income is
a flow. As used in our income tax law, "income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the fiscal years
1968-69 to 1970-71 amounted to P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the
income. 8 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 BOAC's case, the sale of tickets in the Philippines is the activity
that produces the income. The tickets exchanged hands here and payments for
fares were also made here in Philippine currency. The site of the source of
payments is the Philippines. 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.
A transportation ticket is not a mere piece of paper. When issued by a common
carrier, it constitutes the contract between the ticket-holder and the carrier. It
gives rise to the obligation of the purchaser of the ticket to pay the fare and the
corresponding obligation of the carrier to transport the passenger upon the terms
and conditions set forth thereon. The ordinary ticket issued to members of the
traveling public in general embraces within its terms all the elements to constitute
it a valid contract, binding upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income
from sources within the Philippines, namely: (1) interest, (21) dividends, (3)
service, (4) rentals and royalties, (5) sale of real property, and (6) sale of
personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income from
sources within the Philippines. Section 37, by its language, does not intend the

enumeration to be exclusive. It merely directs that the types of income listed

therein be treated as income from sources within the Philippines. A cursory
reading of the section will show that it does not state that it is an all-inclusive
enumeration, and that no other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income derived from
transportation is income for services, with the result that the place where the
services are rendered determines the source; and since BOAC's service of
transportation is performed outside the Philippines, the income derived is from
sources without the Philippines and, therefore, not taxable under our income tax
laws. The Tax Court upholds that stand in the joint Decision under review.
The absence of flight operations to and from the Philippines is not determinative
of the source of income or the site of income taxation. Admittedly, BOAC was an
off-line international airline at the time pertinent to this case. The test of taxability
is the "source"; and the source of an income is that activity ... which produced the
income. 11 Unquestionably, the passage documentations in these cases were
sold in the Philippines and the revenue therefrom was derived from a activity
regularly pursued within the Philippines. business a And even if the BOAC tickets
sold covered the "transport of passengers and cargo to and from foreign
cities", 12 it cannot alter the fact that income from the sale of tickets was derived
from the Philippines. The word "source" conveys one essential idea, that of
origin, and the origin of the income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only
to the fiscal years covered by the questioned deficiency income tax assessments
in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For, pursuant to
Presidential Decree No. 69, promulgated on 24 November, 1972, international
carriers are now taxed as follows:
... Provided, however, That international carriers shall pay a tax of 2 per cent on their cross Philippine billings. (Sec. 24[b] [21, Tax
Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a
statutory definition of the term "gross Philippine billings," thus:
... "Gross Philippine billings" includes 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. ...
The foregoing provision ensures that international airlines are taxed on their
income from Philippine sources. The 2- % tax on gross Philippine billings is an
income tax. If it had been intended as an excise or percentage tax it would have
been place under Title V of the Tax Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of
merit by this Court of the appeal inJAL vs. Commissioner of Internal
Revenue (G.R. No. L-30041) on February 3, 1969, is res judicata to the present
case. The ruling by the Tax Court in that case was to the effect that the mere sale
of tickets, unaccompanied by the physical act of carriage of transportation, does
not render the taxpayer therein subject to the common carrier's tax. As elucidated
by the Tax Court, however, the common carrier's tax is an excise tax, being a tax
on the activity of transporting, conveying or removing passengers and cargo from
one place to another. It purports to tax the business of transportation. 14 Being
an excise tax, the same can be levied by the State only when the acts, privileges
or businesses are done or performed within the jurisdiction of the Philippines.
The subject matter of the case under consideration is income tax, a direct tax on
the income of persons and other entities "of whatever kind and in whatever form
derived from any source." Since the two cases treat of a different subject matter,
the decision in one cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby
SET ASIDE. Private respondent, the British Overseas Airways Corporation
(BOAC), is hereby ordered to pay the amount of P534,132.08 as deficiency
income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1%
monthly interest from April 16, 1972 for a period not to exceed three (3) years in
accordance with the Tax Code. The BOAC claim for refund in the amount of
P858,307.79 is hereby denied. Without costs.
SO ORDERED.
EN BANC
CHAMBER OF REAL G.R. No. 160756
ESTATE AND BUILDERS
ASSOCIATIONS, INC.,

Petitioner, Present:

-versus-

PUNO, C.J.,
CARPIO,
CORONA,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,
LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ and
MENDOZA, JJ.

THE HON. EXECUTIVE

SECRETARY ALBERTO ROMULO,
THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG,
and THE HON. COMMISSIONER OF
INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
Respondents.
Promulgated:
March 9, 2010
x------------------------------------------------x
DECISION
CORONA, J.:
In this original petition for certiorari and mandamus,[1] petitioner
Chamber of Real Estate and Builders Associations, Inc. is questioning
the constitutionality of Section 27 (E) of Republic Act (RA) 8424 [2] and
the revenue regulations (RRs) issued by the Bureau of Internal
Revenue (BIR) to implement said provision and those involving
creditable withholding taxes.[3]
Petitioner is an association of real estate developers and
builders in the Philippines.It impleaded former Executive Secretary
Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong
and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as
respondents.

Petitioner assails the validity of the imposition of minimum

corporate income tax (MCIT) on corporations and creditable
withholding tax (CWT) on sales of real properties classified as
ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations
and is implemented by RR 9-98. Petitioner argues that the MCIT
violates the due process clause because it levies income tax even if
there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by
RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR
7-2003, all of which prescribe the rules and procedures for the
collection of CWT on the sale of real properties categorized as
ordinary assets. Petitioner contends that these revenue regulations
are contrary to law for two reasons: first, they ignore the different
treatment by RA 8424 of ordinary assets and capital assets
and second, respondent Secretary of Finance has no authority to
collect CWT, much less, to base the CWT on the gross selling price or
fair market value of the real properties classified as ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject
revenue regulations violate the due process clause because, like the
MCIT, the government collects income tax even when the net income
has not yet been determined. They contravene the equal protection
clause as well because the CWT is being levied upon real estate
enterprises but not on other business enterprises, more particularly
those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the
present case;
(2) whether or not the imposition of the MCIT on domestic
corporations is unconstitutional and

(3) whether or not the imposition of CWT on income from sales of

real properties classified as ordinary assets under RRs 2-98,
6-2001 and 7-2003, is unconstitutional.
OVERVIEW OF THE ASSAILED
PROVISIONS
Under the MCIT scheme, a corporation, beginning on its fourth
year of operation, is assessed an MCIT of 2% of its gross
income when such MCIT is greater than the normal corporate
income tax imposed under Section 27(A).[4] If the regular income
tax is higher than the MCIT, the corporation does not pay the
MCIT. Any excess of the MCIT over the normal tax shall be
carried forward and credited against the normal income tax for
the three immediately succeeding taxable years. Section 27(E) of
RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. (1)
Imposition of Tax. A [MCIT] of two percent (2%) of
the gross income as of the end of the taxable year, as
defined herein, is hereby imposed on a corporation taxable
under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation
commenced its business operations, when the minimum
income tax is greater than the tax computed under
Subsection (A) of this Section for the taxable year.
(2)
Carry Forward of Excess Minimum Tax. Any
excess of the [MCIT] over the normal income tax as
computed under Subsection (A) of this Section shall be
carried forward and credited against the normal income tax
for the three (3) immediately succeeding taxable years.

(3)

Relief from the [MCIT] under certain conditions.

The
Secretary
of
Finance
is
hereby
authorized to suspend the imposition of the

[MCIT] on any corporation which suffers

losses on account of prolonged labor dispute, or
because of force majeure, or because of legitimate
business reverses.

The Secretary of Finance is hereby authorized

to promulgate, upon recommendation of the
Commissioner, the necessary rules and regulations
that shall define the terms and conditions under
which he may suspend the imposition of the [MCIT]
in a meritorious case.

(4)

Gross Income Defined. For purposes of

applying the [MCIT] provided under Subsection
(E) hereof, the term gross income shall mean
gross sales less sales returns, discounts and
allowances and cost of goods sold. Cost of
goods sold shall include all business
expenses directly incurred to produce the
merchandise to bring them to their present
location and use.

For trading or merchandising concern, cost

of goods sold shall include the invoice cost of
the goods sold, plus import duties, freight in
transporting the goods to the place where the
goods are actually sold including insurance while
the goods are in transit.

For a manufacturing concern, cost of

goods manufactured and sold shall include all
costs of production of finished goods, such as

raw materials used, direct labor and

manufacturing
overhead,
freight
cost,
insurance premiums and other costs incurred
to bring the raw materials to the factory or
warehouse.
In the case of taxpayers engaged in the
sale of service, gross income means gross
receipts less sales returns, allowances,
discounts and cost of services. Cost of
services shall mean all direct costs and
expenses necessarily incurred to provide the
services required by the customers and clients
including (A) salaries and employee benefits of
personnel, consultants and specialists directly
rendering the service and(B) cost of facilities
directly utilized in providing the service such as
depreciation or rental of equipment used and cost
of supplies: Provided, however, that in the case of
banks, cost of services shall include interest
expense.

On August 25, 1998, respondent Secretary of Finance

(Secretary), on the recommendation of the Commissioner of
Internal Revenue (CIR), promulgated RR 9-98 implementing
Section 27(E).[5] The pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1)

Imposition of the Tax. A [MCIT] of two percent

(2%) of the gross income as of the end of the
taxable year (whether calendar or fiscal year,

depending on the accounting period employed) is

hereby imposed upon any domestic corporation
beginning the fourth (4th) taxable year immediately
following the taxable year in which such
corporation commenced its business operations.
The MCIT shall be imposed whenever such
corporation has zero or negative taxable
income or whenever the amount of minimum
corporate income tax is greater than the
normal
income
tax
due
from
such
corporation.

For purposes of these Regulations, the term,

normal income tax means the income tax rates
prescribed under Sec. 27(A) and Sec. 28(A)(1) of
the Code xxx at 32% effective January 1, 2000 and
thereafter.

xxx xxx xxx

(2)

Carry forward of excess [MCIT]. Any excess of

the [MCIT] over the normal income tax as
computed under Sec. 27(A) of the Code shall be
carried forward on an annual basis and
credited against the normal income tax for
the three (3) immediately succeeding
taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon

recommendation of respondent CIR, promulgated RR 2-98
implementing certain provisions of RA 8424 involving the
withholding of taxes.[6] Under Section 2.57.2(J) of RR No. 2-98,
income payments from the sale, exchange or transfer of real
property, other than capital assets, by persons residing in the
Philippines and habitually engaged in the real estate business
were subjected to CWT:

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

rates prescribed thereon:
xxx xxx xxx

(J) Gross selling price or total amount of consideration

or its equivalent paid to the seller/owner for the sale,
exchange or transfer of. Real property, other than capital
assets, sold by an individual, corporation, estate, trust, trust
fund or pension fund and the seller/transferor is habitually
engaged in the real estate business in accordance with the
following schedule

Those which are exempt

from a withholding tax at
source as prescribed in
Sec. 2.57.5 of these
regulations.

With a selling price of

five hundred thousand
pesos (P500,000.00) or
less.

With a selling price of

more than five hundred
thousand pesos
(P500,000.00) but not
more than two million
pesos (P2,000,000.00).

With selling price of more

than two million pesos
(P2,000,000.00)

xxx x
xxxx
x
Exempt

1.5%

Gross
selling
price
shall
mean the

3.0%

5.0%

consideration stated in the sales document or the fair

market value determined in accordance with Section 6 (E) of the
Code, as amended, whichever is higher. In an exchange, the
fair market value of the property received in exchange, as
determined in the Income Tax Regulations shall be used.

Where the consideration or part thereof is payable

on installment, no withholding tax is required to be
made on the periodic installment payments where
the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based
on the entire consideration shall be withheld on the last
installment or installments to be paid to the seller.

However, if the buyer is engaged in trade or business,

whether a corporation or otherwise, the tax shall be
deducted and withheld by the buyer on every
installment.

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

Sec. 2.57.2. Income payment subject to [CWT]
and rates prescribed thereon:
xxx xxx xxx
(J)

Gross selling price or total amount of

consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of
real property classified as ordinary asset. - A
[CWT] based on the gross selling price/total
amount of consideration or the fair market
value determined in accordance with Section
6(E) of the Code, whichever is higher, paid to
the seller/owner for the sale, transfer or exchange
of real property, other than capital asset, shall be
imposed upon the withholding agent,/buyer,
in accordance with the following schedule:

Where the seller/transferor

is
exempt from [CWT] in accordance

with
Sec.
regulations.

2.57.5

of

these
Exempt

Upon the following values of real

property,
where
the
seller/transferor
is
habitually
engaged in the real estate
business.

With a selling price

Hundred
Thousand
(P500,000.00) or less.

of

Five
Pesos

1.5%

With a selling price of more than

Five Hundred Thousand Pesos
(P500,000.00) but not more than
Two Million Pesos (P2,000,000.00).
3.0%

With a selling price of more than

two Million Pesos (P2,000,000.00).

5.0%

xxx xxx xxx

Gross selling price shall remain the consideration

stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as
amended, whichever is higher. In an exchange, the fair
market value of the property received in exchange shall be
considered as the consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business,

whether a corporation or otherwise, these rules shall apply:

(i) If the sale is a sale of property on the

installment plan (that is, payments in the year
of sale do not exceed 25% of the selling price),
the tax shall be deducted and withheld by the
buyer on every installment.

(ii) If, on the other hand, the sale is on a cash

basis or is a deferred-payment sale not on the
installment plan (that is, payments in the year
of sale exceed 25% of the selling price), the
buyer shall withhold the tax based on the gross
selling price or fair market value of the property,
whichever is higher, on the first installment.

In any case, no Certificate Authorizing Registration

(CAR) shall be issued to the buyer unless the [CWT] due on
the sale, transfer or exchange of real property other than
capital asset has been fully paid. (Underlined amendments
in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424

provides that any sale, barter or exchange subject to the CWT will not
be recorded by the Registry of Deeds until the CIR has certified that
such transfers and conveyances have been reported and the taxes
thereof have been duly paid:[7]

Sec. 2.58.2. Registration with the Register of Deeds. Deeds

of conveyances of land or land and building/improvement
thereon arising from sales, barters, or exchanges subject to
the creditable expanded withholding tax shall not be
recorded by the Register of Deeds unless the [CIR] or his
duly authorized representative has certified that such
transfers and conveyances have been reported and the
expanded withholding tax, inclusive of the documentary
stamp tax, due thereon have been fully paid xxxx.

On February 11, 2003, RR No. 7-2003 [8] was promulgated, providing for
the guidelines in determining whether a particular real property is a
capital or an ordinary asset for purposes of imposing the MCIT, among
others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or
other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of
real properties shall, unless otherwise exempt, be
subject to applicable taxes imposed under the Code,
depending on whether the subject properties are
classified as capital assets or ordinary assets;

a.

In the case of individual citizen (including

estates and trusts), resident aliens, and non-

resident aliens engaged in trade or business in

the Philippines;

xxx xxx xxx

(ii)

The sale of real property located in

the Philippines, classified as ordinary
assets, shall be subject to the [CWT]
(expanded) under Sec. 2.57..2(J) of [RR 298], as amended, based on the gross
selling price or current fair market value as
determined in accordance with Section
6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax
imposed under Sec. 24(A)(1)(c) or 25(A)(1)
of the Code, as the case may be, based on
net taxable income.

xxx xxx xxx

c.

In the case of domestic corporations.

xxx xxx xxx

(ii)

The sale of land and/or building classified

as ordinary asset and other real property (other
than land and/or building treated as capital
asset), regardless of the classification thereof, all
of which are located in the Philippines, shall be
subject to the [CWT] (expanded) under Sec.

2.57.2(J) of [RR 2-98], as amended, and

consequently, to the ordinary income tax under
Sec. 27(A) of the Code. In lieu of the ordinary
income tax, however, domestic corporations
may become subject to the [MCIT] under Sec.
27(E) of the Code, whichever is applicable.

xxx xxx xxx

We shall now tackle the issues raised.

EXISTENCE
OF
CONTROVERSY

JUSTICIABLE

Courts will not assume jurisdiction over a constitutional question

unless the following requisites are satisfied: (1) there must be an
actual case calling for the exercise of judicial review; (2) the question
before
the
court
must
be
ripe
for
adjudication; (3) the person challenging the validity of the act must
have standing to do so; (4) the question of constitutionality must have
been raised at the earliest opportunity and (5) the issue of
constitutionality must be the very lis mota of the case.[9]

Respondents aver that the first three requisites are absent in this
case.According to them, there is no actual case calling for the exercise
of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity,

or any of its members, has been assessed by the BIR for the
payment of [MCIT] or [CWT] on sales of real
property. Neither did petitioner allege that its members
have shut down their businesses as a result of the payment
of the MCIT or CWT. Petitioner has raised concerns in mere
abstract and hypothetical form without any actual, specific
and concrete instances cited that the assailed law and
revenue regulations have actually and adversely affected
it. Lacking empirical data on which to base any conclusion,
any discussion on the constitutionality of the MCIT or CWT
on sales of real property is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not an

adequate justification for adjudicating abstract issues.
Otherwise, adjudication would be no different from the
giving of advisory opinion that does not really settle legal
issues.[10]

An actual case or controversy involves a conflict of legal rights or

an assertion of opposite legal claims which is susceptible of judicial
resolution as distinguished from a hypothetical or abstract difference
or dispute.[11] On the other hand, a question is considered ripe for
adjudication when the act being challenged has a direct adverse effect
on the individual challenging it.[12]

Contrary to respondents assertion, we do not have to wait until

petitioners members have shut down their operations as a result of the
MCIT
or
CWT. The
assailed
provisions
are
already
being
implemented. As we stated in Didipio Earth-Savers Multi-Purpose
Association, Incorporated (DESAMA) v. Gozun:[13]

By the mere enactment of the questioned law or the

approval of the challenged act, the dispute is said to have
ripened into a judicial controversy even without any other
overt act. Indeed, even a singular violation of the
Constitution and/or the law is enough to awaken judicial
duty.[14]

If the assailed provisions are indeed unconstitutional, there is no better

time than the present to settle such question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate

developers and builders in the Philippines. Petitioners did
not allege that [it] itself is in the real estate business. It did
not allege any material interest or any wrong that it may
suffer from the enforcement of [the assailed provisions].[15]

Legal standing or locus standi is a partys personal and substantial

interest in a case such that it has sustained or will sustain direct injury
as a result of the governmental act being challenged. [16] In Holy Spirit
Homeowners Association, Inc. v. Defensor,[17] we held that the
association had legal standing because its members stood to be
injured by the enforcement of the assailed provisions:

Petitioner association has the legal standing to

institute the instant petition xxx. There is no dispute that
the individual members of petitioner association are
residents of the NGC. As such they are covered and stand to
be either benefited or injured by the enforcement of the
IRR, particularly as regards the selection process of

beneficiaries and lot allocation to qualified beneficiaries.

Thus, petitioner association may assail those provisions in
the IRR which it believes to be unfavorable to the rights of
its members. xxx Certainly, petitioner and its members
have sustained direct injury arising from the enforcement of
the IRR in that they have been disqualified and eliminated
from the selection process.[18]

In any event, this Court has the discretion to take cognizance of a suit
which does not satisfy the requirements of an actual case, ripeness or
legal standing when paramount public interest is involved. [19] The
questioned MCIT and CWT affect not only petitioners but practically all
domestic corporate taxpayers in our country. The transcendental
importance of the issues raised and their overreaching significance to
society make it proper for us to take cognizance of this petition. [20]
CONCEPT AND RATIONALE OF THE
MCIT
The MCIT on domestic corporations is a new concept introduced by RA
8424 to the Philippine taxation system. It came about as a result of the
perceived inadequacy of the self-assessment system in capturing the
true income of corporations.[21] It was devised as a relatively simple
and effective revenue-raising instrument compared to the normal
income tax which is more difficult to control and enforce. It is a means
to ensure that everyone will make some minimum contribution to the
support of the public sector. The congressional deliberations on this are
illuminating:

Senator Enrile. Mr. President, we are not unmindful of the

practice of certain corporations of reporting constantly a
loss in their operations to avoid the payment of taxes, and

thus avoid sharing in the cost of government. In this regard,

the Tax Reform Act introduces for the first time a new
concept called the [MCIT] so as to minimize tax evasion, tax
avoidance, tax manipulation in the country and for
administrative convenience. This will go a long way in
ensuring that corporations will pay their just share in
supporting our public life and our economic advancement.
[22]

Domestic corporations owe their corporate existence and their

privilege to do business to the government. They also benefit from the
efforts of the government to improve the financial market and to
ensure a favorable business climate. It is therefore fair for the
government to require them to make a reasonable contribution to the
public expenses.

Congress intended to put a stop to the practice of corporations

which, while having large turn-overs, report minimal or negative net
income resulting in minimal or zero income taxes year in and year out,
through under-declaration of income or over-deduction of expenses
otherwise called tax shelters.[23]

Mr. Javier (E.) [This] is what the Finance Dept. is trying to

remedy, that is why
they
have proposed the
[MCIT]. Because from experience too, you have corporations
which have been losing year in and year out and paid no
tax. So, if the corporation has been losing for the past five
years to ten years, then that corporation has no business to
be in business. It is dead. Why continue if you are losing
year in and year out? So, we have this provision to avoid
this type of tax shelters, Your Honor.[24]

The primary purpose of any legitimate business is to earn a

profit. Continued and repeated losses after operations of a corporation
or consistent reports of minimal net income render its financial
statements and its tax payments suspect. For sure, certain tax
avoidance schemes resorted to by corporations are allowed in our
jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax
on gross income, it prevents tax evasion and minimizes tax avoidance
schemes achieved through sophisticated and artful manipulations of
deductions and other stratagems.Since the tax base was broader, the
tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following

safeguards were incorporated into the law:

First, recognizing the birth pangs of businesses and the reality of

the need to recoup initial major capital expenditures, the imposition of
the MCIT commences only on the fourth taxable year immediately
following the year in which the corporation commenced its operations.
[25]
This grace period allows a new business to stabilize first and make
its ventures viable before it is subjected to the MCIT. [26]

Second, the law allows the carrying forward of any excess of the
MCIT paid over the normal income tax which shall be credited against
the normal income tax for the three immediately succeeding years. [27]
Third, since certain businesses may be incurring genuine
repeated losses, the law authorizes the Secretary of Finance to
suspend the imposition of MCIT if a corporation suffers losses due to
prolonged labor dispute, force majeure and legitimate business
reverses.[28]
Even before the legislature introduced the MCIT to the Philippine
taxation system, several other countries already had their own system
of minimum corporate income taxation. Our lawmakers noted that

most developing countries, particularly Latin American and Asian

countries, have the same form of safeguards as we do. As pointed out
during the committee hearings:

[Mr. Medalla:] Note that most developing countries where

you have of course quite a bit of room for underdeclaration
of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), theres a

minimum of income tax of half a percent (0.5%) of gross
assessable income. In Korea a 25% of taxable income
before deductions and exemptions. Of course the different
countries have different basis for that minimum income tax.

The other thing youll notice is the preponderance of Latin

American countries that employed this method. Okay,
those are additional Latin American countries.[29]

At present, the United States of America, Mexico, Argentina, Tunisia,

Panama and Hungary have their own versions of the MCIT. [30]
MCIT IS NOT VIOLATIVE OF DUE
PROCESS
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is
unconstitutional because it is highly oppressive, arbitrary and
confiscatory which amounts to deprivation of property without due
process of law. It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct
expenses; other major expenditures, such as administrative and

interest expenses which are equally necessary to produce gross

income, were not taken into account. [31] Thus, pegging the tax base of
the MCIT to a corporations gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not
realized gain.[32]

We disagree.

Taxes are the lifeblood of the government. Without taxes, the

government can neither exist nor endure. The exercise of taxing power
derives its source from the very existence of the State whose social
contract with its citizens obliges it to promote public interest and the
common good.[33]

Taxation is an inherent attribute of sovereignty. [34] It is a power

that is purely legislative.[35] Essentially, this means that in the
legislature primarily lies the discretion to determine the nature (kind),
object (purpose), extent (rate), coverage (subjects) and situs (place) of
taxation.[36] It has the authority to prescribe a certain tax at a specific
rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define
what tax shall be imposed, why it should be imposed, how much tax
shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its

range, acknowledging in its very nature no limits, so that the principal
check against its abuse is to be found only in the responsibility of the
legislature (which imposes the tax) to its constituency who are to pay
it.[37] Nevertheless, it is circumscribed by constitutional limitations. At
the same time, like any other statute, tax legislation carries a
presumption of constitutionality.

The constitutional safeguard of due process is embodied in the

fiat [no] person shall be deprived of life, liberty or property without due
process of law. InSison, Jr. v. Ancheta, et al.,[38] we held that the due
process clause may properly be invoked to invalidate, in appropriate
cases, a revenue measure[39] when it amounts to a confiscation of
property.[40] But in the same case, we also explained that we will not
strike down a revenue measure as unconstitutional (for being violative
of the due process clause) on the mere allegation of arbitrariness by
the taxpayer.[41]There must be a factual foundation to such an
unconstitutional taint.[42] This merely adheres to the authoritative
doctrine that, where the due process clause is invoked, considering
that it is not a fixed rule but rather a broad standard, there is a need
for proof of such persuasive character.[43]

Petitioner is correct in saying that income is distinct from capital.

Income means all the wealth which flows into the taxpayer other
than a mere return on capital. Capital is a fund or property existing at
one distinct point in time while income denotes a flow of wealth during
a definite period of time.[45] Income is gain derived and severed from
capital.[46] For income to be taxable, the following requisites must exist:
[44]

(1) there must be gain;

(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from
taxation.[47]

Certainly, an income tax is arbitrary and confiscatory if it taxes capital

because capital is not income. In other words, it is income, not capital,
which is subject to income tax. However, the MCIT is not a tax on
capital.

The MCIT is imposed on gross income which is arrived at by

deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods[48] and other direct expenses from gross
sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is

imposed in lieu ofthe normal net income tax, and only if the normal
income tax is suspiciously low.The MCIT merely approximates the
amount of net income tax due from a corporation, pegging the rate at
a very much reduced 2% and uses as the base the corporations gross
income.

Besides, there is no legal objection to a broader tax base or taxable

income by eliminating all deductible items and at the same time
reducing the applicable tax rate.[49]

Statutes taxing the gross "receipts," "earnings," or

"income" of particular corporations are found in many
jurisdictions. Tax thereon is generally held to be within the
power of a state to impose; or constitutional, unless it
interferes with interstate commerce or violates the
requirement as to uniformity of taxation.[50]

The United States has a similar alternative minimum tax (AMT)

system which is generally characterized by a lower tax rate but a
broader tax base.[51]Since our income tax laws are of American origin,
interpretations by American courts of our parallel tax laws have
persuasive effect on the interpretation of these laws. [52] Although our
MCIT is not exactly the same as the AMT, the policy behind them and
the procedure of their implementation are comparable. On the

question of the AMTs constitutionality, the United States Court of

Appeals for the Ninth Circuit stated in Okin v. Commissioner:[53]

In enacting the minimum tax, Congress attempted to

remedy general taxpayer distrust of the system growing
from large numbers of taxpayers with large incomes who
were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the

constitutionality of the [AMT]. xxx [It] is a rational means of
obtaining a broad-based tax, and therefore is constitutional.
[54]

The U.S. Court declared that the congressional intent to ensure that
corporate taxpayers would contribute a minimum amount of taxes was
a legitimate governmental end to which the AMT bore a reasonable
relation.[55]
American courts have also emphasized that Congress has the power to
condition, limit or deny deductions from gross income in order to arrive
at the net that it chooses to tax.[56] This is because deductions are a
matter of legislative grace.[57]

Absent any other valid objection, the assignment of gross

income, instead of net income, as the tax base of the MCIT, taken with
the reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.

Moreover, petitioner does not cite any actual, specific and

concrete negative experiences of its members nor does it present
empirical data to show that the implementation of the MCIT resulted in
the confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis,
its allegation that the MCIT is arbitrary and confiscatory. The Court
cannot strike down a law as unconstitutional simply because of its
yokes.[58] Taxation is necessarily burdensome because, by its nature, it
adversely affects property rights.[59] The party alleging the laws
unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.[60]

RR 9-98 MERELY CLARIFIES

SECTION 27(E) OF RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property

without due process of law because the MCIT is being imposed and
collected even when there is actually a loss, or a zero or negative
taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. xxx The MCIT shall be imposed

whenever such corporation has zero or negative taxable
income or whenever the amount of [MCIT] is greater than
the normal income tax due from such corporation.(Emphasis
supplied)

RR 9-98, in declaring that MCIT should be imposed whenever

such corporation has zero or negative taxable income, merely defines

the coverage of Section 27(E). This means that even if a corporation

incurs a net loss in its business operations or reports zero income after
deducting its expenses, it is still subject to an MCIT of 2% of its gross
income. This is consistent with the law which imposes the MCIT on
gross income notwithstanding the amount of the net income. But the
law also states that the MCIT is to be paid only if it is greater than the
normal net income. Obviously, it may well be the case that the MCIT
would be less than the net income of the corporation which posts a
zero or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes

(including income taxes) are collected.[61] Under Section 57 of RA 8424,
the types of income subject to withholding tax are divided into three
categories: (a) withholding of final tax on certain incomes; (b)
withholding of creditable tax at source and (c) tax-free covenant
bonds. Petitioner is concerned with the second category (CWT) and
maintains that the revenue regulations on the collection of CWT on
sale of real estate categorized as ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and
ordinary assets under RA 8424, contends that Sections 2.57.2(J) and
2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were
promulgated with grave abuse of discretion amounting to lack of
jurisdiction and patently in contravention of law[62]because they ignore
such distinctions. Petitioners conclusion is based on the following
premises: (a) the revenue regulations use gross selling price (GSP) or
fair market value (FMV) of the real estate as basis for determining the
income tax for the sale of real estate classified as ordinary assets
and (b) they mandate the collection of income tax on a per transaction
basis, i.e., upon consummation of the sale via the CWT, contrary to RA
8424 which calls for the payment of the net income at the end of the
taxable period.[63]

Petitioner theorizes that since RA 8424 treats capital assets and

ordinary assets differently, respondents cannot disregard the
distinctions set by the legislators as regards the tax base, modes of
collection and payment of taxes on income from the sale of capital and
ordinary assets.
Petitioners arguments have no merit.

AUTHORITY OF THE SECRETARY

OF FINANCE TO ORDER THE
COLLECTION OF CWT ON SALES
OF
REAL
PROPERTY
CONSIDERED
AS
ORDINARY
ASSETS

The Secretary of Finance is granted, under Section 244 of RA

8424, the authority to promulgate the necessary rules and regulations
for the effective enforcement of the provisions of the law. Such
authority is subject to the limitation that the rules and regulations must
not override, but must remain consistent and in harmony with, the law
they seek to apply and implement.[64] It is well-settled that an
administrative agency cannot amend an act of Congress. [65]

We have long recognized that the method of withholding tax at source

is a procedure of collecting income tax which is sanctioned by our tax
laws.[66] The withholding tax system was devised for three primary
reasons: first, to provide the taxpayer a convenient manner to meet his
probable income tax liability; second, to ensure the collection of
income tax which can otherwise be lost or substantially reduced
through failure to file the corresponding returns and third, to improve
the governments cash flow.[67] This results in administrative savings,
prompt and efficient collection of taxes, prevention of delinquencies

and reduction of governmental effort to collect taxes through more

complicated means and remedies.[68]
Respondent Secretary has the authority to require the
withholding of a tax on items of income payable to any person,
national or juridical, residing in the Philippines. Such authority is
derived from Section 57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source.

xxx xxx xxx

(B)

Withholding of Creditable Tax at Source. The

[Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items
of income payable to natural or juridical persons,
residing
in
the
Philippines,
by
payorcorporation/persons as provided for by law, at the
rate of not less than one percent (1%) but not
more than thirty-two percent (32%) thereof, which
shall be credited against the income tax liability of
the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well

within the authority given by Section 57(B) to the Secretary, i.e., the
graduated rate of 1.5%-5% is between the 1%-32% range; the
withholding tax is imposed on the income payable and the tax is
creditable against the income tax liability of the taxpayer for the
taxable year.

EFFECT OF RRS ON THE TAX

BASE FOR THE INCOME TAX OF
INDIVIDUALS
OR
CORPORATIONS ENGAGED IN
THE REAL ESTATE BUSINESS

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the

tax base of a real estate business income tax from net income to GSP
or FMV of the property sold.
Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a

taxpayer in order to extinguish its possible tax obligation. [69] They are
installments on the annual tax which may be due at the end of the
taxable year.[70]
Under RR 2-98, the tax base of the income tax from the sale of
real property classified as ordinary assets remains to be the entitys net
income imposed under Section 24 (resident individuals) or Section 27
(domestic corporations) in relation to Section 31 of RA 8424, i.e. gross
income less allowable deductions. The CWT is to be deducted from the
net income tax payable by the taxpayer at the end of the taxable year.
[71]
Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the
tax base for the sale of real property classified as ordinary assets
remains to be the net taxable income:

Section 4. Applicable taxes on sale, exchange or other

disposition of real property. - Gains/Income derived from
sale, exchange, or other disposition of real properties shall
unless otherwise exempt, be subject to applicable taxes
imposed under the Code, depending on whether the subject

properties are classified as capital assets or ordinary

assets;

xxx xxx xxx

a. In the case of individual citizens (including estates

and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines,

classified as ordinary assets, shall be subject to the [CWT]
(expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended,
based on the [GSP] or current [FMV] as determined in
accordance with Section 6(E) of the Code, whichever is
higher, and consequently, to the ordinary income tax
imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on net taxable
income.

xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset

and other real property (other than land and/or building
treated as capital asset), regardless of the classification
thereof, all of which are located in the Philippines, shall

be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of

[RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the
ordinary income tax, however, domestic corporations may
become subject to the [MCIT] under Sec. 27(E) of the same
Code, whichever is applicable.(Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its
income tax return and credit the taxes withheld (by the withholding
agent/buyer) against its tax due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference. If, on the other
hand, the tax due is less than the tax withheld, the taxpayer will be
entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed
on its net income.
The use of the GSP/FMV as basis to determine the withholding
taxes
is
evidently
for
purposes
of
practicality
and
convenience. Obviously, the withholding agent/buyer who is obligated
to withhold the tax does not know, nor is he privy to, how much the
taxpayer/seller will have as its net income at the end of the taxable
year. Instead, said withholding agents knowledge and privity are
limited only to the particular transaction in which he is a party. In such
a case, his basis can only be the GSP or FMV as these are the only
factors reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent.

NO BLURRING OF DISTINCTIONS
BETWEENORDINARY
ASSETS
AND CAPITAL ASSETS

RR 2-98 imposes a graduated CWT on income based on the GSP or

FMV of the real property categorized as ordinary assets. On the other
hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of
6% on the gain presumed to be realized from the sale of a capital asset
based on its GSP or FMV. This final tax is also withheld at source. [72]
The differences between the two forms of withholding tax, i.e.,
creditable and final, show that ordinary assets are not treated in the
same manner as capital assets. Final withholding tax (FWT) and CWT
are distinguished as follows:

FWT

CWT

a) The amount of income

tax withheld by the
withholding
agent
is
constituted as a full and
final payment of the
income tax due from the
payee
on
the
said
income.

a) Taxes withheld on certain

income
payments
are
intended to equal or at least
approximate the tax due of
the payee on said income.

b)The
liability
for payment of the tax
rests primarily on the
payor as a withholding
agent.

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

c) The payee is not

required
to
file
an
income tax return for the

c) The income recipient is

particular income.[73]

still required to file an

income tax return,
as
prescribed in Sec. 51 and
Sec. 52 of the NIRC, as
amended.[74]

As previously stated, FWT is imposed on the sale of capital assets. On

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

Petitioner insists that the levy, collection and payment of CWT at

the time of transaction are contrary to the provisions of RA 8424 on the
manner and time of filing of the return, payment and assessment of
income tax involving ordinary assets.[75]
The fact that the tax is withheld at source does not automatically
mean that it is treated exactly the same way as capital gains. As
aforementioned, the mechanics of the FWT are distinct from those of
the CWT. The withholding agent/buyers act of collecting the tax at the
time of the transaction by withholding the tax due from the income
payable is the essence of the withholding tax method of tax collection.

NO RULE THAT ONLY PASSIVE

INCOMES CAN BE SUBJECT
CWT

TO

Petitioner submits that only passive income can be subjected to

withholding tax, whether final or creditable. According to petitioner, the
whole of Section 57 governs the withholding of income tax on passive
income. The enumeration in Section 57(A) refers to passive income

being subjected to FWT. It follows that Section 57(B) on CWT should

also be limited to passive income:

SEC. 57. Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes. Subject to

rules and regulations, the [Secretary] may promulgate,
upon the recommendation of the [CIR], requiring the filing
of income tax return by certain income payees, the tax
imposed or prescribed by Sections 24(B)(1), 24(B)(2),
24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C),
25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5);
28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)
(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)
(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code
on specified items of income shall be withheld by payorcorporation and/or person and paid in the same manner and
subject to the same conditions as provided in Section 58 of
this Code.

(B) Withholding
of Creditable
Tax at
Source.
The
[Secretary] may, upon the recommendation of the [CIR],
require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in
the Philippines, by payor-corporation/persons as provided
for by law, at the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof, which shall
be credited against the income tax liability of the taxpayer
for the taxable year.(Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on

certain kinds of income and enumerates these as passive income. The
BIR defines passive income by stating what it is not:

if the income is generated in the active pursuit and

performance of the corporations primary purposes, the
same is not passive income[76]

It is income generated by the taxpayers assets. These assets can be in

the form of real properties that return rental income, shares of stock in
a corporation that earn dividends or interest income received from
savings.

On the other hand, Section 57(B) provides that the Secretary can
require a CWT on income payable to natural or juridical persons,
residing in the Philippines.There is no requirement that this income be
passive income. If that were the intent of Congress, it could have easily
said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT
while Section 57(B) pertains to CWT. The former covers the kinds of
passive income enumerated therein and the latter encompasses any
income other than those listed in 57(A). Since the law itself makes
distinctions, it is wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not

modify or deviate from the text of Section 57(B). RR 2-98 merely
implements the law by specifying what income is subject to CWT. It has
been held that, where a statute does not require any particular
procedure to be followed by an administrative agency, the agency may

adopt any reasonable method to carry out its functions. [77]Similarly,

considering that the law uses the general term income, the Secretary
and CIR may specify the kinds of income the rules will apply to based
on what is feasible. In addition, administrative rules and regulations
ordinarily deserve to be given weight and respect by the courts [78] in
view of the rule-making authority given to those who formulate them
and their specific expertise in their respective fields.

NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS
Petitioner avers that the imposition of CWT on GSP/FMV of real
estate classified as ordinary assets deprives its members of their
property without due process of law because, in their line of business,
gain is never assured by mere receipt of the selling price. As a result,
the government is collecting tax from net income not yet gained or
earned.
Again, it is stressed that the CWT is creditable against the tax due from
the seller of the property at the end of the taxable year. The seller will
be able to claim a tax refund if its net income is less than the taxes
withheld. Nothing is taken that is not due so there is no confiscation of
property repugnant to the constitutional guarantee of due
process. More importantly, the due process requirement applies to the
power to tax.[79] The CWT does not impose new taxes nor does it
increase taxes.[80] It relates entirely to the method and time of
payment.

Petitioner protests that the refund remedy does not make the
CWT less burdensome because taxpayers have to wait years and may
even resort to litigation before they are granted a refund. [81] This
argument is misleading. The practical problems encountered in
claiming a tax refund do not affect the constitutionality and validity of
the CWT as a method of collecting the tax.

Petitioner complains that the amount withheld would have

otherwise been used by the enterprise to pay labor wages, materials,
cost of money and other expenses which can then save the entity from
having to obtain loans entailing considerable interest expense.
Petitioner also lists the expenses and pitfalls of the trade which add to
the burden of the realty industry: huge investments and
borrowings; long gestation period; sudden and unpredictable interest
rate surges; continually spiraling development/construction costs;
heavy taxes and prohibitive up-front regulatory fees from at least 20
government agencies.[82]
Petitioners lamentations will not support its attack on the
constitutionality of the CWT. Petitioners complaints are essentially
matters of policy best addressed to the executive and legislative
branches of the government. Besides, the CWT is applied only on the
amounts actually received or receivable by the real estate entity.Sales
on installment are taxed on a per-installment basis. [83] Petitioners
desire to utilize for its operational and capital expenses money
earmarked for the payment of taxes may be a practical business option
but it is not a fundamental right which can be demanded from the
court or from the government.

NO
VIOLATION
PROTECTION

OF

EQUAL

Petitioner claims that the revenue regulations are violative of the equal
protection clause because the CWT is being levied only on real estate
enterprises. Specifically, petitioner points out that manufacturing
enterprises are not similarly imposed a CWT on their sales, even if their

manner of doing business is not much different from that of a real

estate enterprise. Like a manufacturing concern, a real estate business
is involved in a continuous process of production and it incurs costs
and expenditures on a regular basis. The only difference is that goods
produced by the real estate business are house and lot units. [84]

Again, we disagree.

The equal protection clause under the Constitution means that no

person or class of persons shall be deprived of the same protection of
laws which is enjoyed by other persons or other classes in the same
place and in like circumstances. [85]Stated differently, all persons
belonging to the same class shall be taxed alike. It follows that the
guaranty of the equal protection of the laws is not violated by
legislation based on a reasonable classification. Classification, to be
valid, must (1) rest on substantial distinctions; (2) be germane to the
purpose of the law; (3) not be limited to existing conditions only and
(4) apply equally to all members of the same class.[86]

The taxing power has the authority to make reasonable classifications

for purposes of taxation.[87] Inequalities which result from a singling out
of one particular class for taxation, or exemption, infringe no
constitutional limitation.[88] The real estate industry is, by itself, a class
and can be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as

manufacturing enterprises, fails to realize that what distinguishes the
real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production
processes but the prices of their goods sold and the number of
transactions involved. The income from the sale of a real property is
bigger and its frequency of transaction limited, making it less

cumbersome for the parties to comply with the withholding tax

scheme.

On the other hand, each manufacturing enterprise may have tens of

thousands of transactions with several thousand customers every
month involving both minimal and substantial amounts. To require the
customers of manufacturing enterprises, at present, to withhold the
taxes on each of their transactions with their tens or hundreds of
suppliers may result in an inefficient and unmanageable system of
taxation and may well defeat the purpose of the withholding tax
system.
Petitioner counters that there are other businesses wherein expensive
items are also sold infrequently, e.g. heavy equipment, jewelry,
furniture, appliance and other capital goods yet these are not similarly
subjected to the CWT.[89] As already discussed, the Secretary may
adopt any reasonable method to carry out its functions. [90] Under
Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that
petitioners argument is not accurate. The sales of manufacturers who
have clients within the top 5,000 corporations, as specified by the BIR,
are also subject to CWT for their transactions with said 5,000
corporations.[91]

SECTION 2.58.2 OF RR NO.

2-98 MERELY IMPLEMENTS
SECTION 58 OF RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which

provides that the Registry of Deeds should not effect the regisration of
any document transferring real property unless a certification is issued

by the CIR that the withholding tax has been paid. Petitioner proffers
hardly any reason to strike down this rule except to rely on its
contention that the CWT is unconstitutional. We have ruled that it is
not.Furthermore, this provision uses almost exactly the same wording
as Section 58(E) of RA 8424 and is unquestionably in accordance with
it:

Sec. 58. Returns and Payment of Taxes Withheld at Source.

(E) Registration with Register of Deeds. - No registration

of any document transferring real property shall be
effected by the Register of Deeds unless the [CIR] or
his duly authorized representative has certified that
such transfer has been reported, and the capital
gains or [CWT], if any, has been paid: xxxx any
violation of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269 of this
Code. (Emphasis supplied)

CONCLUSION

The renowned genius Albert Einstein was once quoted as saying [the]
hardest thing in the world to understand is the income tax. [92] When a
party questions the constitutionality of an income tax measure, it has
to contend not only with Einsteins observation but also with the vast
and well-established jurisprudence in support of the plenary powers of
Congress to impose taxes. Petitioner has miserably failed to discharge

its burden of convincing the Court that the imposition of MCIT and CWT
is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

SO ORDERED.

G.R. No. 179259

September 25, 2013

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.PHILIPPINE AIRLINES, INC. (PAL), Respondent.
DECISION
PEREZ, J.:
Before the Court is a Petition for Review on Certiorari seeking to reverse and set
aside the 19 July 2007 Decision1and 23 August 2007 Resolution2 of the Court of
Tax Appeals (CTA) En Bane in CTA EB No. 271 which affirmed the cancellation
and withdrawal of Assessment Notice No. INC-FY -99-2000-000085 and Formal
Letter of Demand for the payment by the respondent Philippine Airlines, Inc.
(respondent), of deficiency Minimum Corporate Income Tax (MCIT) in the amount
of P326,778,723.35, covering the fiscal year ending 31 March 2000.
The Facts
The factual antecedents of the case are undisputed:
Petitioner, the Commissioner of Internal Revenue, has the power to assess and
collect national internal revenue taxes, fees, and charges, including the 2% per

centum MCIT imposed under Section 27(E) of the National Internal Revenue
Code (NIRC) of 1997, as amended. Respondent, on the other hand, is a
domestic corporation duly organized and existing under and by virtue of the laws
of the Philippines.
For the fiscal year that ended 31 March 2000, respondent filed on 17July 2000
its Tentative Corporate Income Tax Return, reflecting a creditable tax
withheld for the fourth quarter amounting to P524,957.00, and a zero
taxable income for said year. Hence, respondent filed on 16 July 2001 a
written claim for refund before the petitioner.
As a consequence thereof, respondent received on 10 September 2001 the
Letter of Authority No. 200000002247 from the Bureau of Internal Revenue
(BIR) Large Taxpayers Service, dated 3 September 2001,authorizing the
revenue officers named therein to examine respondents books of accounts
and other accounting records for the purpose of evaluating respondents
"Claim for Refund on Creditable Withholding Tax Income Tax" covering
the fiscal year ending 31 March 2000.
Numerous correspondences between respondent and the Group Supervisor of
the BIR Large Taxpayers Service, the revenue officers examining its accounting
records, and the Chief of LT Audit & Investigation Division I of the BIR ensued,
particularly as to the submission of various supporting documents and
presentation of records.
On 16 July 2003, respondent received a "Summary of Creditable
Withholding Tax at Source Certified by RAD Fiscal Year Ending March
31,2000," together with a computation labeled "Compromise Penalties for
Late Filing of Return." Likewise, on same date, respondent received a letter
dated 8 July 2003 issued by the Chief of LT Audit & Investigation Division I,
informing the former that the results of the investigation of its claim for
refund on creditable withholding tax for fiscal year ending 31 March
2000had already been submitted, and that an informal conference was set
on 17July 2003 to be held on the latters office.
On 11 August 2003, respondent received from the same revenue officers a
computation of their initial deficiency MCIT assessment in the amount
of P537,477,867.64. Consequently, respondent received on 20October 2003 a

Preliminary Assessment Notice and Details of Assessment issued by the

Large Taxpayers Service dated 22 September 2003, assessing respondent
deficiency MCIT including interest, in the aggregate amount
ofP315,566,368.68. A written protest to said preliminary assessment was
filed by respondent on 3 November 2003.
Thereafter, on 16 December 2003, respondent received a Formal Letter of
Demand and Details of Assessment dated 1 December 2003 from the Large
Taxpayers Service demanding the payment of the total amount
ofP326,778,723.35, inclusive of interest, as contained in Assessment Notice
No. INC-FY-99-2000-000085. In response thereto, respondent filed its formal
written protest on 13 January 2004 reiterating the following defenses:(1)
that it is exempt from, or is not subject to, the 2% MCIT by virtue of its
charter, Presidential Decree No. (PD) 1590;3 and (2) that the three-year period
allowed by law for the BIR to assess deficiency internal revenue taxes for
the taxable year ending 31 March 2000 had already lapsed on 15July 2003.
Since no final action has been taken by petitioner on respondents formal
written protest, respondent filed a Petition for Review before the Second
Division of the CTA on 4 August 2004 docketed as CTA Case No.7029.
The Ruling of the CTA Second Division
In a Decision dated 22 August 2006,4 the CTA Second Division granted
respondents petition and accordingly ordered for the cancellation and
withdrawal of Assessment Notice No. INC-FY-99-2000-000085 and Formal
Letter of Demand for the payment of deficiency MCIT in the amount
of P326,778,723.35, covering the fiscal year ending 31 March 2000, issued
against respondent.
The CTA Second Division made the following factual and legal findings, to wit:
(a) Section 13 of PD 1590 acquiring and limiting the extent of the tax
liability of respondent under its franchise is coached in a clear, plain
and unambiguous manner, and needs no further interpretation or
construction;
(b) Section 13 clearly provides that respondent is liable only for either
the basic corporate income tax based on its annual net taxable

income, or the 2% franchise tax based on gross revenue, whichever

is lower;
(c) Respondent-grantee must only choose between the two alternatives
mentioned in Section 13 in the payment of its tax liability to the
government, and its choice must be that which will result in a lower tax
liability;
(d) Since the income tax return of respondent reflected a zero taxable
income for the fiscal year ending 31 March 2000,obviously being
lower than the 2% franchise tax, its choice of the former is definitely a
better alternative as basis for its tax liability to the government;5
(e) The basic corporate income tax mentioned in Section 13 of
PD1590 does not refer to the MCIT under Section 27(E) of the NIRC of
1997, as amended, but particularly to the applicable rate of 32%
income tax under Section 27(A) of the same Code, on the taxable
income of domestic corporations;
(f) The MCIT is regarded to belong to "other taxes" as it was not
included in the choices provided by the franchise. To hold otherwise
would be to give another option to respondent which is evidently not within
the ambit of PD 1590;6
(g) The "in lieu of all other taxes" clause under Section 13 of respondents
legislative franchise exempts it from all taxes necessary in the
conduct of its business covered by the franchise, except the tax on
its real property for which respondent is expressly made payable;7 and
(h) The rationale or purpose for the exemption from all other taxes
except the income tax and real property tax granted to respondent upon
the payment of the basic corporate income tax or the 2% franchise tax is
that such tax exemption is part of inducement for the acceptance of
the franchise and the rendition of public service by the grantee.8
Simply put, it pronounced that the only qualification provided for in the law
is the OPTION given to respondent to choose between the taxes which will
yield the lesser liability. Thus, if as a result of the exercise of the option, the

respondent ends up without any tax liability, it should not be held liable for any
other tax, such as the MCIT, except for real property tax.9
On 30 January 2007, the CTA Second Division denied petitioners Motion for
Reconsideration for lack of merit.10
Aggrieved, petitioner appealed to the CTA En Banc by filing a Petition for
Review pursuant to Section 18 of Republic Act (RA) No. 9282(should be RA No.
1125, as amended by RA No. 9282)11 on 1 March 2007,docketed as CTA EB No.
271.12
The Ruling of the CTA En Banc
The CTA En Banc affirmed both the aforesaid Decision and Resolution
rendered by the CTA Second Division in CTA Case No. 7029,ruling that under
Section 13 of PD 1590, respondent, as consideration for the franchise, is
indeed granted the privilege to choose between two options in the payment
of its tax liability to the government. Naturally, its choice will be that which will
result in a lower tax liability since such choice is "in lieu of all other taxes"
imposed by all government entities in the country.13 The only exception is the
real property tax.
The appellate court pointed out that even if respondent opted to be covered
by the Income Tax provisions of the NIRC, it does not follow that it is
covered by the MCIT provisions of the same Code. There is nothing in PD
1590 which obliges the respondent to pay other taxes, much less the MCIT,
in case it suffers a net operating loss. Otherwise, it would negate the tax relief
granted under Section 13 of its franchise and would render it useless. The tax
relief allows respondent to carry over as a deduction from taxable income
any net loss incurred in any year up to five years following the year of such
loss.14
Likewise, it elucidated that the MCIT is not the basic corporate income tax
referred to in Section 13 of PD 1590. There is a distinction between the MCIT
and the basic corporate income tax. The MCIT under Section 27(E)(1) of the
NIRC of 1997, as amended, is imposed upon gross income; while the basic
corporate income tax refers to the 32% income tax on the taxable income of
domestic corporations under Section 27(A) of the same Code. In other
words, the court a quo ruled that since the MCIT is imposed upon gross

income, it cannot be made to apply to respondent by virtue of the express

provision in its franchise that its basic corporate income tax shall be based
on its annual net taxable income. Hence, it is in this sense that the MCIT
qualifies as "other taxes" from which the respondent had been granted tax
exemption by its franchise.15
Moreover, the provision on MCIT, Section 27(E) of the NIRC of 1997, as
amended, did not repeal respondents franchise considering that it is a
general law which cannot impliedly repeal, alter, or amend PD 1590, being a
special law. Neither can Revenue Memorandum Circular (RMC) No. 66-2003
amend respondents franchise as it is merely an administrative issuance.
Lastly, there is no provision in RA No. 842416 which provides and specifies
that the MCIT shall be in addition to the taxes for which respondent is
liable. To rule otherwise would be violative of Section 24 of PD 1590 which
states that respondents franchise may only be modified, amended, or
repealed expressly by a special law or decree that shall specifically modify,
amend or repeal the franchise or any section or provision thereof. Therefore, in
the absence of a law expressly repealing PD1590 at the time the subject
assessment was issued and for the period covered by the assessment,
respondents tax exemption privilege under the "in lieu of all other taxes" clause
of Section 13 thereof must be applied.
Upon denial of petitioners Motion for Reconsideration of the 19 July2007
Decision of the CTA En Banc, it filed this Petition for Review on Certiorari
before this Court seeking the reversal of the aforementioned Decision and the
23 August 2007 Resolution17 rendered in CTA EB No. 271.
The Issues
The issues submitted before this Court for consideration are as follows:
(1) Whether or not the CTA En Banc erred in holding that the MCIT is
properly categorized as "other taxes" pursuant to respondents charter; and
(2) Whether or not the CTA En Banc erred in ruling that respondent is not
liable for the 2% MCIT deficiency for the fiscal year ending 31March
2000.18

The above mentioned issues may be consolidated and restated as follows:

whether or not the CTA En Banc erred when it affirmed the cancellation of
Assessment Notice No. INC-FY-99-2000-000085 and Formal Letter of Demand
issued by petitioner against respondent for the payment of deficiency MCIT in the
amount of P326,778,723.35, covering the fiscal year ending 31 March 2000.
In support thereof, petitioner submits the following arguments: (a) respondent
clearly opted to be covered by the income tax provision of the NIRC of 1997, as
amended; hence, it is covered by the MCIT provision of the same Code and
liable to pay the same; (b) the MCIT does not belong to the category of "other
taxes" which may enable respondent to avail of the "in lieu of all other taxes"
clause under Section 13 of PD 1590 because it is a category of an income tax
pursuant to Section 27 (E) (1) of the NIRC of 1997,as amended; (c) the MCIT
provision of the NIRC of 1997, as amended, is not an amendment of
respondents charter, but an amendment of the same Code. Hence, respondents
obligation to pay the MCIT is not the result of an implied amendment of PD 1590,
but rather, the consequence of respondents option of paying income tax rather
than franchise tax; (d) respondent is not only given the privilege to choose
between what will give it the benefit of a lower tax, but also the responsibility of
paying its share of the tax burden. Otherwise stated, it is the legislative intent to
give respondent a privilege in the form of an option in paying its taxes which
would result in paying a lower tax liability, but not in dispensing the sharing of a
tax burden to which every taxpayer is obligated to bear; and (e) a claim for
exemption from taxation is never presumed; thus, respondent is liable for the
deficiency MCIT.
Respondent, in its Comment thereto, counters among others, that there is
nothing in PD 1590 which obliges respondent to pay other taxes, much less the
MCIT, in case it suffers a net operating loss. Since the MCIT is not the basic
corporate income tax, nor the 2% franchise tax, nor the real property tax
mentioned by Section 13 thereof, then it is but logical to conclude that the MCIT
belongs to the category of "other taxes" for which respondent is not liable.
Our Ruling
Respondents exemption from the MCIT is already a settled matter.
Section 27 of the NIRC of 1997, as amended, provides as follows:

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

(A) In General. Except as otherwise provided in this Code, an income tax of
thirty-five percent (35%) is hereby imposed upon the taxable income derived
during each taxable year from all sources within and without the Philippines by
every corporation, as defined in Section 22(B) of this Code and taxable under
this Title as a corporation, organized in, or existing under the law of 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 thirtythree percent (33%); and effective January 1, 2000 and thereafter, the rate shall
be thirty-two percent (32%).
xxxx
(E) Minimum Corporate Income Tax on Domestic Corporations.
(1) Imposition of Tax A minimum corporate income tax of two percent (2%) of
the gross income as of the end of the taxable year, as defined herein, is hereby
imposed on a corporation taxable under this Title, beginning on the fourth taxable
year immediately following the year in which such corporation commenced its
business operations, when the minimum income tax is greater than the tax
computed under Subsection(A) of this Section for the taxable year. (Emphasis
supplied)
Based on the foregoing, a domestic corporation must pay whichever is the higher
of: (1) the income tax under Section 27(A) of the NIRC of 1997,as amended,
computed by applying the tax rate therein to the taxable income of the
corporation; or (2) the MCIT under Section 27(E), also of the same Code,
equivalent to 2% of the gross income of the corporation. The Court would like to
underscore that although this may be the general rule in determining the income
tax due from a domestic corporation under the provisions of the NIRC of 1997, as
amended, such rule can only be applied to respondent only as to the extent
allowed by the provisions of its franchise.
Relevant thereto, PD 1590, the franchise of respondent, contains the following
pertinent provisions governing its taxation:

Section 13. In consideration of the franchise and rights hereby granted, the
grantee shall pay to the Philippine Government during the life of this franchise
whichever of subsections (a) and (b) hereunder will result in a lower tax:
(a) The basic corporate income tax based on the grantees annual net
taxable income computed in accordance with the provisions of the National
Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues derived by
the grantee from all sources, without distinction as to transport or non
transport operations; provided, that with respect to international airtransport service, only the gross passenger, mail, and freight revenues
from its outgoing flights shall be subject to this tax.
The tax paid by the grantee under either of the above alternatives shall be in lieu
of all other taxes, duties, royalties, registration, license, and other fees and
charges of any kind, nature, or description, imposed, levied, established,
assessed, or collected by any municipal, city, provincial, or national authority or
government agency, now or in the future, including but not limited to the
following:
xxxx
The grantee, shall, however, pay the tax on its real property in conformity with
existing law.
For purposes of computing the basic corporate income tax as provided herein,
the grantee is authorized:
(a) To depreciate its assets to the extent of not more than twice as fast the
normal rate of depreciation; and
(b) To carry over as a deduction from taxable income any net loss incurred
in any year up to five years following the year of such loss.
Section 14. The grantee shall pay either the franchise tax or the basic corporate
income tax on quarterly basis to the Commissioner of Internal Revenue. Within
sixty (60) days after the end of each of the first three quarters of the taxable

calendar or fiscal year, the quarterly franchise or income-tax return shall be filed
and payment of either the franchise or income tax shall be made by the grantee.
A final or an adjustment return covering the operation of the grantee for the
preceding calendar or fiscal year shall be filed on or before the fifteenth day of
the fourth month following the close of the calendar or fiscal year. The amount of
the fiscal franchise or income tax to be paid by the grantee shall be the balance
of the total franchise or income tax shown in the final or adjustment return after
deducting therefrom the total quarterly franchise or income taxes already paid
during the preceding first three quarters of the same taxable year.
Any excess of the total quarterly payments over the actual annual franchise of
income tax due as shown in the final or adjustment franchise or income-tax
return shall either be refunded to the grantee or credited against the grantees
quarterly franchise or income-tax liability for the succeeding taxable year or years
at the option of the grantee.
The term "gross revenue" is herein defined as the total gross income earned by
the grantee; (a) transport, nontransport, and other services; (b) earnings realized
from investments in money-market placements, bank deposits, investments in
shares of stock and other securities, and other investments; (c) total gains net of
total losses realized from the disposition of assets and foreign-exchange
transactions; and (d) gross income from other sources. (Emphasis supplied)
From the foregoing provisions, during the lifetime of the franchise of respondent,
its taxation shall be strictly governed by two fundamental rules, to wit: (1)
respondent shall pay the Government either the basic corporate income tax or
franchise tax, whichever is lower; and (2) the tax paid by respondent, under
either of these alternatives, shall be in lieu of all other taxes, duties, royalties,
registration, license, and other fees and charges, except only real property tax.
Parenthetically, the basic corporate income tax of respondent shall be based on
its annual net taxable income, computed in accordance with the NIRC of 1997,
as amended. PD 1590 also explicitly authorizes respondent, in the computation
of its basic corporate income tax, to: (1) depreciate its assets twice as fast the
normal rate of depreciation;19 and (2) carry over deduction from taxable income
any net loss incurred in any year up to five years following the year of such loss.20

The franchise tax, on the other hand, shall be 2% of the gross revenues derived
by respondent from all sources, whether transport or nontransport operations.
However, with respect to international air-transport service, the franchise tax shall
only be imposed on the gross passenger, mail, and freight revenues of
respondent from its outgoing flights.21
Accordingly, considering the foregoing precepts, this Court had the opportunity
to finally settle this matter and categorically enunciated in Commissioner
of Internal Revenue v. Philippine Airlines, Inc.,22 that respondent cannot be
subjected to MCIT for the following reasons:
First, Section 13(a) of [PD] 1590 refers to "basic corporate income tax." In
Commissioner of Internal Revenue v. Philippine Airlines, Inc.,23 the Court already
settled that the "basic corporate income tax, "under Section 13(a) of [PD] 1590,
relates to the general rate of 35%(reduced to 32% by the year 2000) as
stipulated in Section 27(A) of the NIRC of 1997.
Section 13(a) of [PD] 1590 requires that the basic corporate income tax be
computed in accordance with the NIRC. This means that PAL shall compute its
basic corporate income tax using the rate and basis prescribed by the NIRC of
1997 for the said tax. There is nothing in Section 13(a) of [PD] 1590 to support
the contention of the CIR that PAL is subject to the entire Title II of the NIRC of
1997, entitled "Tax on Income."
Second, Section 13(a) of Presidential Decree No. 1590 further provides that the
basic corporate income tax of PAL shall be based on its annual net taxable
income. This is consistent with Section 27(A) of the NIRC of 1997, which
provides that the rate of basic corporate income tax, which is 32% beginning 1
January 2000, shall be imposed on the taxable income of the domestic
corporation.
Taxable income is defined under Section 31 of the NIRC of 1997as the pertinent
items of gross income specified in the said Code, less the deductions and/or
personal and additional exemptions, if any, authorized for such types of income
by the same Code or other special laws.
The gross income, referred to in Section 31, is described in Section32 of the
NIRC of 1997 as income from whatever source, including compensation for
services; the conduct of trade or business or the exercise of profession; dealings

in property; interests; rents; royalties; dividends; annuities; prizes and winnings;

pensions; and a partners distributive share in the net income of a general
professional partnership.
Pursuant to the NIRC of 1997, the taxable income of a domestic corporation may
be arrived at by subtracting from gross income deductions authorized, not just by
the NIRC of 1997, but also by special laws. [PD] 1590 may be considered as one
of such special laws authorizing PAL, in computing its annual net taxable income,
on which its basic corporate income tax shall be based, to deduct from its gross
income the following: (1) depreciation of assets at twice the normal rate; and (2)
net loss carry-over up to five years following the year of such loss.
In comparison, the 2% MCIT under Section 27 (E) of the NIRC of 1997 shall be
based on the gross income of the domestic corporation. The Court notes that
gross income, as the basis for MCIT, is given a special definition under Section
27(E) (4) of the NIRC of 1997, different from the general one under Section 34 of
the same Code.
According to the last paragraph of Section 27 (E) (4) of the NIRC of 1997, gross
income of a domestic corporation engaged in the sale of service means gross
receipts, less sales returns, allowances, discounts and cost of services. "Cost of
services" refers to all direct costs and expenses necessarily incurred to provide
the services required by the customers and clients including (a) salaries and
employee benefits of personnel, consultants, and specialists directly rendering
the service; and (b) cost of facilities directly utilized in providing the service, such
as depreciation or rental of equipment used and cost of supplies. Noticeably,
inclusions in and exclusions/deductions from gross income for MCIT purposes
are limited to those directly arising from the conduct of the taxpayers business. It
is, thus, more limited than the gross income used in the computation of basic
corporate income tax.
In light of the foregoing, there is an apparent distinction under the NIRC of 1997
between taxable income, which is the basis for basic corporate income tax under
Section 27(A); and gross income, which is the basis for the MCIT under Section
27(E). The two terms have their respective technical meanings, and cannot be
used interchangeably. The same reasons prevent this Court from declaring that
the basic corporate income tax, for which PAL is liable under Section 13(a) of
[PD] 1590, also covers MCIT under Section 27(E) of the NIRC of 1997, since the

basis for the first is the annual net taxable income, while the basis for the second
is gross income.
Third, even if the basic corporate income tax and the MCIT are both income
taxes under Section 27 of the NIRC of 1997, and one is paid in place of the other,
the two are distinct and separate taxes.
The Court again cites Commissioner of Internal Revenue v. Philippine Airlines,
Inc.,24 wherein it held that income tax on the passive income of a domestic
corporation, under Section 27(D) of the NIRC of 1997, is different from the basic
corporate income tax on the taxable income of a domestic corporation, imposed
by Section 27(A), also of the NIRC of 1997. Section 13 of [PD] 1590 gives PAL
the option to pay basic corporate income tax or franchise tax, whichever is lower;
and the tax so paid shall be in lieu of all other taxes, except real property tax. The
income tax on the passive income of PAL falls within the category of "allot her
taxes" from which PAL is exempted, and which, if already collected, should be
refunded to PAL.
The Court herein treats MCIT in much the same way. Although both are income
taxes, the MCIT is different from the basic corporate income tax, not just in the
rates, but also in the bases for their computation. Not being covered by Section
13(a) of [PD] 1590,which makes PAL liable only for basic corporate income tax,
then MCIT is included in "all other taxes" from which PAL is exempted.
That, under general circumstances, the MCIT is paid in place of the basic
corporate income tax, when the former is higher than the latter, does not mean
that these two income taxes are one and the same. The said taxes are merely
paid in the alternative, giving the Government the opportunity to collect the higher
amount between the two. The situation is not much different from Section 13 of
[PD] 1590, which reversely allows PAL to pay, whichever is lower of the basic
corporate income tax or the franchise tax. It does not make the basic corporate
income tax in distinguishable from the franchise tax.
Given the fundamental differences between the basic corporate income tax and
the MCIT, presented in the preceding discussion, it is not baseless for this Court
to rule that, pursuant to the franchise of PAL, said corporation is subject to the
first tax, yet exempted from the second.

Fourth, the evident intent of Section 13 of [PD] 1520 (sic) is to extend to PAL tax
concessions not ordinarily available to other domestic corporations. Section 13 of
[PD] 1520 (sic) permits PAL to pay whichever is lower of the basic corporate
income tax or the franchise tax; and the tax so paid shall be in lieu of all other
taxes, except only real property tax. Hence, under its franchise, PAL is to pay the
least amount of tax possible.
Section 13 of [PD] 1520 (sic) is not unusual. A public utility is granted special tax
treatment (including tax exceptions/exemptions) under its franchise, as an
inducement for the acceptance of the franchise and the rendition of public service
by the said public utility. In this case, in addition to being a public utility providing
air-transport service, PAL is also the official flag carrier of the country.
The imposition of MCIT on PAL, as the CIR insists, would result in a situation that
contravenes the objective of Section 13 of [PD] 1590. In effect, PAL would not
just have two, but three tax alternatives, namely, the basic corporate income tax,
MCIT, or franchise tax. More troublesome is the fact that, as between the basic
corporate income tax and the MCIT, PAL shall be made to pay whichever is
higher, irrefragably, in violation of the avowed intention of Section 13 of [PD]
1590 to make PAL pay for the lower amount of tax.
Fifth, the CIR posits that PAL may not invoke in the instant case the "in lieu of all
other taxes" clause in Section 13 of [PD] No. 1520 (sic),if it did not pay anything
at all as basic corporate income tax or franchise tax. As a result, PAL should be
made liable for "other taxes" such as MCIT. This line of reasoning has been
dubbed as the Substitution Theory, and this is not the first time the CIR raised
the same. The Court already rejected the Substitution Theory in
Commissioner of Internal Revenue v. Philippine Airlines, Inc.,25 to wit:
"Substitution Theory"
of the CIR Untenable
A careful reading of Section 13 rebuts the argument of the CIR that the "in lieu of
all other taxes "proviso is a mere incentive that applies only when PAL actually
pays something.
It is clear that PD 1590 intended to give respondent the option to avail itself of
Subsection (a) or (b) as consideration for its franchise. Either option excludes the

payment of other taxes and dues imposed or collected by the national or the local
government. PAL has the option to choose the alternative that results in lower
taxes. It is not the fact of tax payment that exempts it, but the exercise of its
option.
Under Subsection (a), the basis for the tax rate is respondents annual net
taxable income, which (as earlier discussed) is computed by subtracting
allowable deductions and exemptions from gross income. By basing the tax rate
on the annual net taxable income, PD 1590 necessarily recognized the situation
in which taxable income may result in a negative amount and thus translate into
a zero tax liability.
Notably, PAL was owned and operated by the government at the time the
franchise was last amended. It can reasonably be contemplated that PD 1590
sought to assist the finances of the government corporation in the form of lower
taxes. When respondent operates at a loss(as in the instant case), no taxes are
due; in this instances, it has a lower tax liability than that provided by Subsection
(b).
The fallacy of the CIRs argument is evident from the fact that the payment of a
measly sum of one peso would suffice to exempt PAL from other taxes, whereas
a zero liability arising from its losses would not. There is no substantial distinction
between a zero tax and a one-peso tax liability. (Emphasis theirs)
Based on the same ratiocination, the Court finds the Substitution Theory
unacceptable in the present Petition.
The CIR alludes as well to Republic Act No. 9337, for reasons similar to those
behind the Substitution Theory. Section 22 of Republic Act No. 9337, more
popularly known as the Expanded Value Added Tax(E-VAT) Law, abolished the
franchise tax imposed by the charters of particularly identified public utilities,
including [PD] 1590 of PAL. PAL may no longer exercise its options or
alternatives under Section 13 of [PD] 1590, and is now liable for both corporate
income tax and the 12% VAT on its sale of services. The CIR alleges that
Republic Act No. 9337reveals the intention of the Legislature to make PAL share
the tax burden of other domestic corporations.
The CIR seems to lose sight of the fact that the Petition at bar involves the
liability of PAL for MCIT for the fiscal year ending 31March 2001. Republic Act

No. 9337, which took effect on 1 July 2005,cannot be applied retroactively and
any amendment introduced by said statute affecting the taxation of PAL is
immaterial in the present case.
And sixth, [PD] 1590 explicitly allows PAL, in computing its basic corporate
income tax, to carry over as deduction any net loss incurred in any year, up to
five years following the year of such loss. Therefore, [PD] 1590 does not only
consider the possibility that, at the end of a taxable period, PAL shall end up with
zero annual net taxable income (when its deductions exactly equal its gross
income), as what happened in the case at bar, but also the likelihood that PAL
shall incur net loss (when its deductions exceed its gross income). If PAL is
subjected to MCIT, the provision in [PD] 1590 on net loss carry-over will be
rendered nugatory. Net loss carry-over is material only in computing the annual
net taxable income to be used as basis for the basic corporate income tax of
PAL; but PAL will never be able to avail itself of the basic corporate income tax
option when it is in a net loss position, because it will always then be compelled
to pay the necessarily higher MCIT.
Consequently, the insistence of the CIR to subject PAL to MCIT cannot be done
without contravening [PD] 1520 (sic).
Between [PD] 1520 (sic), on one hand, which is a special law specifically
governing the franchise of PAL, issued on 11 June 1978;and the NIRC of 1997,
on the other, which is a general law on national internal revenue taxes, that took
effect on 1 January 1998, the former prevails. The rule is that on a specific
matter, the special law shall prevail over the general law, which shall be resorted
to only to supply deficiencies in the former. In addition, where there are two
statutes, the earlier special and the later general the terms of the general broad
enough to include the matter provided for in the special the fact that one is
special and the other is general creates a presumption that the special is to be
considered as remaining an exception to the general, one as a general law of the
land, the other as the law of a particular case. It is a canon of statutory
construction that a later statute, general in its terms and not expressly repealing
a prior special statute, will ordinarily not affect the special provisions of such
earlier statute.
xxxx

The MCIT was a new tax introduced by Republic Act No.8424. Under the
doctrine of strict interpretation, the burden is upon the CIR to primarily prove that
the new MCIT provisions of the NIRC of 1997, clearly, expressly, and
unambiguously extend and apply to PAL, despite the latters existing tax
exemption. To do this, the CIR must convince the Court that the MCIT is a basic
corporate income tax, and is not covered by the "in lieu of all other taxes" clause
of [PD] 1590. Since the CIR failed in this regard, the Court is left with no choice
but to consider the MCIT as one of "all other taxes," from which PAL is exempt
under the explicit provisions of its charter. (Emphasis supplied)
Based on the foregoing pronouncements, it is clear that respondent is exempt
from the MCIT imposed under Section 27(E) of the NIRC of 1997,as amended.
Thus, respondent cannot be held liable for the assessed deficiency MCIT
of P326,778,723.35 for fiscal year ending 31 March 2000.1wphi1
More importantly, as to petitioners contention that respondent needs to actually
pay a certain amount as basic corporate income tax or franchise tax before it can
enjoy the tax exemption granted to it since it should retain the responsibility of
paying its share of the tax burden, this Court has categorically ruled in the
above-cited cases that it is not the fact of tax payment that exempts it, but
the exercise of its option..
Notably, in another case involving the same parties,26 the Court further expressed
that a strict interpretation of the word "pay" in Section 13of PD 1590 would
effectively render nugatory the other rights categorically conferred upon the
respondent by its franchise. Hence, there being no qualification to the exercise of
its options under Section 13, then respondent is free to choose basic corporate
income tax, even if it would have zero liability for the same in light of its net loss
position for the taxable year.
By way of, reiteration, although it appears that respondent is not completely
exempt from all forms of taxes under PD 1590 considering that Section 13
thereof requires it to pay, either the lower amount of the basic corporate income
tax or franchise tax (which are both direct taxes), at its option, mere exercise of
such option already relieves respondent of liability for all other taxes and/or
duties, whether direct or indirect taxes. This is an expression of the same thought
in Our ruling that, to repeat, it is not the fact of tax payment that exempts it,
but the exercise of its option. All told, the CTA En Bane was correct in

dismissing the petition in CTA EB No. 271, and affirming the CTA Second
Division's Decision and Resolution dated 22 August 2006 and 30 January 2007,
respectively, in CTA Case No. 7029.
WHEREFORE, the petition is DENIED for lack of merit. No costs.
SO ORDERED.

G.R. No. 76573 September 14, 1989

MARUBENI CORPORATION (formerly Marubeni Iida, Co., Ltd.), petitioner,
vs.COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX
APPEALS, respondents.
Melquiades C. Gutierrez for petitioner.
The Solicitor General for respondents.
FERNAN, C.J.:
Petitioner, Marubeni Corporation, representing itself as a foreign
corporation duly organized and existing under the laws of Japan and duly
licensed to engage in business under Philippine laws with branch office at
the 4th Floor, FEEMI Building, Aduana Street, Intramuros, Manila seeks the
reversal of the decision of the Court of Tax Appeals 1dated February 12, 1986
denying its claim for refund or tax credit in the amount of P229,424.40
representing alleged overpayment of branch profit remittance tax withheld from
dividends by Atlantic Gulf and Pacific Co. of Manila (AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has equity
investments in AG&P of Manila. For the first quarter of 1981 ending March
31, AG&P declared and paid cash dividends to petitioner in the amount of
P849,720 and withheld the corresponding 10% final dividend tax thereon.
Similarly, for the third quarter of 1981 ending September 30, AG&P declared

and paid P849,720 as cash dividends to petitioner and withheld the

corresponding 10% final dividend tax thereon. 2
AG&P directly remitted the cash dividends to petitioner's head office in
Tokyo, Japan, net not only of the 10% final dividend tax in the amounts of
P764,748 for the first and third quarters of 1981, but also of the withheld
15% profit remittance tax based on the remittable amount after deducting
the final withholding tax of 10%. A schedule of dividends declared and paid by
AG&P to its stockholder Marubeni Corporation of Japan, the 10% final
intercorporate dividend tax and the 15% branch profit remittance tax paid
thereon, is shown below:
1981

Cash Dividends
Paid

FIRST
QUARTER
(three
months
ended
3.31.81) (In
Pesos)

THIRD
QUARTER
(three
months
ended
9.30.81)

849,720.44

849,720.00 1,699,440.00
84,972.00

TOTAL OF
FIRST and
THIRD
quarters

10% Dividend Tax

Withheld

84,972.00

169,944.00

Cash Dividend net

of 10% Dividend
Tax Withheld

764,748.00

764,748.00 1,529,496.00

15% Branch Profit

Remittance Tax
Withheld

114,712.20

114,712.20

Net Amount
Remitted to
Petitioner

650,035.80

650,035.80 1,300,071.60

229,424.40 3

The 10% final dividend tax of P84,972 and the 15% branch profit remittance
tax of P114,712.20 for the first quarter of 1981 were paid to the Bureau of

Internal Revenue by AG&P on April 20, 1981 under Central Bank Receipt No.
6757880. Likewise, the 10% final dividend tax of P84,972 and the 15% branch
profit remittance tax of P114,712 for the third quarter of 1981 were paid to the
Bureau of Internal Revenue by AG&P on August 4, 1981 under Central Bank
Confirmation Receipt No. 7905930. 4
Thus, for the first and third quarters of 1981, AG&P as withholding agent
paid 15% branch profit remittance on cash dividends declared and remitted
to petitioner at its head office in Tokyo in the total amount of P229,424.40
on April 20 and August 4, 1981. 5
In a letter dated January 29, 1981, petitioner, through the accounting firm
Sycip, Gorres, Velayo and Company, sought a ruling from the Bureau of
Internal Revenue on whether or not the dividends petitioner received from
AG&P are effectively connected with its conduct or business in the
Philippines as to be considered branch profits subject to the 15% profit
remittance tax imposed under Section 24 (b) (2) of the National Internal
Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only
profits remitted abroad by a branch office to its head office
which are effectively connected with its trade or business in the
Philippines are subject to the 15% profit remittance tax. To be
effectively connected it is not necessary that the income be
derived from the actual operation of taxpayer-corporation's
trade or business; it is sufficient that the income arises from
the business activity in which the corporation is engaged. For
example, if a resident foreign corporation is engaged in the buying
and selling of machineries in the Philippines and invests in some
shares of stock on which dividends are subsequently received, the
dividends thus earned are not considered 'effectively connected' with
its trade or business in this country. (Revenue Memorandum Circular
No. 55-80).
In the instant case, the dividends received by Marubeni from
AG&P are not income arising from the business activity in

which Marubeni is engaged. Accordingly, said dividends if

remitted abroad are not considered branch profits for purposes
of the 15% profit remittance tax imposed by Section 24 (b) (2) of
the Tax Code, as amended . . . 6
Consequently, in a letter dated September 21, 1981 and filed with the
Commissioner of Internal Revenue on September 24, 1981, petitioner claimed
for the refund or issuance of a tax credit of P229,424.40 "representing profit
tax remittance erroneously paid on the dividends remitted by Atlantic Gulf
and Pacific Co. of Manila (AG&P) on April 20 and August 4, 1981 to ... head
office in Tokyo. 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied
petitioner's claim for refund/credit of P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the
15% profit remittance tax as the same were not income earned by a
Philippine Branch of Marubeni Corporation of Japan; and neither is it
subject to the 10% intercorporate dividend tax, the recipient of the
dividends, being a non-resident stockholder, nevertheless, said
dividend income is subject to the 25 % tax pursuant to Article
10 (2) (b) of the Tax Treaty dated February 13, 1980 between the
Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni
Corporation, Japan is subject to 25 % tax, and that the taxes
withheld of 10 % as intercorporate dividend tax and 15 % as profit
remittance tax totals (sic) 25 %, the amount refundable offsets the
liability, hence, nothing is left to be refunded. 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of
the refund by the Commissioner of Internal Revenue in its assailed judgment of
February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court
explained:
Whatever the dialectics employed, no amount of sophistry can
ignore the fact that the dividends in question are income taxable

to the Marubeni Corporation of Tokyo, Japan. The said dividends

were distributions made by the Atlantic, Gulf and Pacific
Company of Manila to its shareholder out of its profits on the
investments of the Marubeni Corporation of Japan, a nonresident foreign corporation. The investments in the Atlantic Gulf &
Pacific Company of the Marubeni Corporation of Japan were directly
made by it and the dividends on the investments were likewise
directly remitted to and received by the Marubeni Corporation of
Japan. Petitioner Marubeni Corporation Philippine Branch has no
participation or intervention, directly or indirectly, in the investments
and in the receipt of the dividends. And it appears that the funds
invested in the Atlantic Gulf & Pacific Company did not come out of
the funds infused by the Marubeni Corporation of Japan to the
Marubeni Corporation Philippine Branch. As a matter of fact, the
Central Bank of the Philippines, in authorizing the remittance of the
foreign exchange equivalent of (sic) the dividends in question,
treated the Marubeni Corporation of Japan as a non-resident
stockholder of the Atlantic Gulf & Pacific Company based on the
supporting documents submitted to it.
Subject to certain exceptions not pertinent hereto, income is taxable
to the person who earned it. Admittedly, the dividends under
consideration were earned by the Marubeni Corporation of
Japan, and hence, taxable to the said corporation. While it is true
that the Marubeni Corporation Philippine Branch is duly
licensed to engage in business under Philippine laws, such
dividends are not the income of the Philippine Branch and are
not taxable to the said Philippine branch. We see no significance
thereto in the identity concept or principal-agent relationship theory
of petitioner because such dividends are the income of and taxable
to the Japanese corporation in Japan and not to the Philippine
branch. 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent
relationship theory, Marubeni Japan is likewise a resident foreign corporation
subject only to the 10 % intercorporate final tax on dividends received from a

domestic corporation in accordance with Section 24(c) (1) of the Tax Code of
1977 which states:
Dividends received by a domestic or resident foreign corporation
liable to tax under this Code (1) Shall be subject to a final tax of
10% on the total amount thereof, which shall be collected and paid
as provided in Sections 53 and 54 of this Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan,
being a non-resident foreign corporation and not engaged in trade or business in
the Philippines, is subject to tax on income earned from Philippine sources at the
rate of 35 % of its gross income under Section 24 (b) (1) of the same Code which
reads:
(b) Tax on foreign corporations (1) Non-resident corporations.
A foreign corporation not engaged in trade or business in the
Philippines shall pay a tax equal to thirty-five per cent of the gross
income received during each taxable year from all sources within the
Philippines as ... dividends ....
but expressly made subject to the special rate of 25% under Article 10(2) (b) of
the Tax Treaty of 1980 concluded between the Philippines and Japan. 11 Thus:
Article 10 (1) Dividends paid by a company which is a resident of a
Contracting State to a resident of the other Contracting State may be
taxed in that other Contracting State.
(2) However, such dividends may also be taxed in the Contracting
State of which the company paying the dividends is a resident, and
according to the laws of that Contracting State, but if the recipient is
the beneficial owner of the dividends the tax so charged shall not
exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in all other
cases.

Central to the issue of Marubeni Japan's tax liability on its dividend income from
Philippine sources is therefore the determination of whether it is a resident or a
non-resident foreign corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in
trade or business" within the Philippines. Petitioner contends that precisely
because it is engaged in business in the Philippines through its Philippine branch
that it must be considered as a resident foreign corporation. Petitioner reasons
that since the Philippine branch and the Tokyo head office are one and the same
entity, whoever made the investment in AG&P, Manila does not matter at all. A
single corporate entity cannot be both a resident and a non-resident corporation
depending on the nature of the particular transaction involved. Accordingly,
whether the dividends are paid directly to the head office or coursed through its
local branch is of no moment for after all, the head office and the office branch
constitute but one corporate entity, the Marubeni Corporation, which, under both
Philippine tax and corporate laws, is a resident foreign corporation because it is
transacting business in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise:
The general rule that a foreign corporation is the same juridical entity
as its branch office in the Philippines cannot apply here. This rule is
based on the premise that the business of the foreign corporation is
conducted through its branch office, following the principal agent
relationship theory. It is understood that the branch becomes its
agent here. So that when the foreign corporation transacts
business in the Philippines independently of its branch, the
principal-agent relationship is set aside. The transaction
becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not the branch
or the resident foreign corporation.
Corollarily, if the business transaction is conducted through the
branch office, the latter becomes the taxpayer, and not the foreign
corporation. 12
In other words, the alleged overpaid taxes were incurred for the remittance of
dividend income to the head office in Japan which is a separate and distinct

income taxpayer from the branch in the Philippines. There can be no other logical
conclusion considering the undisputed fact that the investment (totalling 283.260
shares including that of nominee) was made for purposes peculiarly germane to
the conduct of the corporate affairs of Marubeni Japan, but certainly not of the
branch in the Philippines. It is thus clear that petitioner, having made this
independent investment attributable only to the head office, cannot now claim the
increments as ordinary consequences of its trade or business in the Philippines
and avail itself of the lower tax rate of 10 %.
But while public respondents correctly concluded that the dividends in dispute
were neither subject to the 15 % profit remittance tax nor to the 10 %
intercorporate dividend tax, the recipient being a non-resident stockholder, they
grossly erred in holding that no refund was forthcoming to the petitioner because
the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan
Tax Convention pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic
rule in taxation that each tax has a different tax basis. While the tax on dividends
is directly levied on the dividends received, "the tax base upon which the 15 %
branch profit remittance tax is imposed is the profit actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate under
Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. A closer look at the
Treaty reveals that the tax rates fixed by Article 10 are the maximum rates as
reflected in the phrase "shall not exceed." This means that any tax imposable by
the contracting state concerned should not exceed the 25 % limitation and that
said rate would apply only if the tax imposed by our laws exceeds the same. In
other words, by reason of our bilateral negotiations with Japan, we have agreed
to have our right to tax limited to a certain extent to attain the goals set forth in
the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the
transaction in question, the applicable provision of the Tax Code is Section 24 (b)
(1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Said section
provides:
(b) Tax on foreign corporations. (1) Non-resident corporations
... (iii) On dividends received from a domestic corporation liable to

tax under this Chapter, the tax shall be 15% of the dividends
received, which shall be collected and paid as provided in Section
53 (d) of this Code, subject to the condition that the country in which
the non-resident foreign corporation is domiciled shall allow a credit
against the tax due from the non-resident foreign corporation, taxes
deemed to have been paid in the Philippines equivalent to 20 %
which represents the difference between the regular tax (35 %) on
corporations and the tax (15 %) on dividends as provided in this
Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a nonresident foreign corporation, as a general rule, is taxed 35 % of its gross income
from all sources within the Philippines. [Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends received
from a domestic corporation (AG&P) on the condition that its domicile state
(Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the
dividends received. This 20 % represents the difference between the regular tax
of 35 % on non-resident foreign corporations which petitioner would have
ordinarily paid, and the 15 % special rate on dividends received from a domestic
corporation.
Consequently, petitioner is entitled to a refund on the transaction in question to
be computed as follows:
Total cash dividend paid ................P1,699,440.00
less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
-----------------Cash dividend net of 15 % tax
due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
------------------Amount to be refunded to petitioner
representing overpayment of

taxes on dividends remitted ..............P 144 452.40

===========
It is readily apparent that the 15 % tax rate imposed on the dividends received by
a foreign non-resident stockholder from a domestic corporation under Section 24
(b) (1) (iii) is easily within the maximum ceiling of 25 % of the gross amount of the
dividends as decreed in Article 10 (2) (b) of the Tax Treaty.
There is one final point that must be settled. Respondent Commissioner of
Internal Revenue is laboring under the impression that the Court of Tax Appeals
is covered by Batas Pambansa Blg. 129, otherwise known as the Judiciary
Reorganization Act of 1980. He alleges that the instant petition for review was not
perfected in accordance with Batas Pambansa Blg. 129 which provides that "the
period of appeal from final orders, resolutions, awards, judgments, or decisions
of any court in all cases shall be fifteen (15) days counted from the notice of the
final order, resolution, award, judgment or decision appealed from ....
This is completely untenable. The cited BP Blg. 129 does not include the Court of
Tax Appeals which has been created by virtue of a special law, Republic Act No.
1125. Respondent court is not among those courts specifically mentioned in
Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by
an order, ruling or decision of the Court of Tax Appeals is given thirty (30) days
from notice to appeal therefrom. Otherwise, said order, ruling, or decision shall
become final.
Records show that petitioner received notice of the Court of Tax Appeals's
decision denying its claim for refund on April 15, 1986. On the 30th day, or on
May 15, 1986 (the last day for appeal), petitioner filed a motion for
reconsideration which respondent court subsequently denied on November 17,
1986, and notice of which was received by petitioner on November 26, 1986.
Two days later, or on November 28, 1986, petitioner simultaneously filed a notice
of appeal with the Court of Tax Appeals and a petition for review with the
Supreme Court. 14 From the foregoing, it is evident that the instant appeal was
perfected well within the 30-day period provided under R.A. No. 1125, the whole
30-day period to appeal having begun to run again from notice of the denial of
petitioner's motion for reconsideration.

WHEREFORE, the questioned decision of respondent Court of Tax Appeals

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

G.R. No. 215427, December 10, 2014

PHILIPPINE AMUSEMENT AND GAMING CORPORATION
(PAGCOR), Petitioner, v. THE BUREAU OF INTERNAL REVENUE,
REPRESENTED BY JOSE MARIO BUAG, IN HIS CAPACITY AS
COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, AND
JOHN DOE AND JANE DOE, WHO ARE PERSONS ACTING FOR, IN
BEHALF OR UNDER THE AUTHORITY OF
RESPONDENT,Respondent.
DECISION
PERALTA, J.:
The present petition stems from the Motion for Clarification filed by
petitioner Philippine Amusement and Gaming
Corporation (PAGCOR) on September 13, 2013 in the case
entitled Philippine Amusement and Gaming Corporation (PAGCOR) v.
The Bureau of Internal Revenue, et al.,1 which was promulgated on
March 15, 2011. The Motion for Clarification essentially prays for the
clarification of our Decision in the aforesaid case, as well the issuance
of a Temporary Restraining Order and/or Writ of Preliminary Injunction
against the Bureau of Internal Revenue (BIR), their employees, agents

and any other persons or entities acting or claiming any right on BIRs
behalf, in the implementation of BIR Revenue Memorandum
Circular(RMC) No. 33-2013 dated April 17, 2013.
At the onset, it bears stressing that while the instant motion was
denominated as a Motion for Clarification, in the session of the
Court En Banc held on November 25, 2014, the members thereof ruled
to treat the same as a new petition for certiorari under Rule 65 of the
Rules of Court, given that petitioner essentially alleges grave abuse of
discretion on the part of the BIR amounting to lack or excess of
jurisdiction in issuing RMC No. 33-2013. Consequently, a new docket
number has been assigned thereto, while petitioner has been ordered
to pay the appropriate docket fees pursuant to the Resolution dated
November 25, 2014, the pertinent portion of which
reads:chanroblesvirtuallawlibrary
G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs.
Bureau of Internal Revenue, et al.). The Court Resolved to
(a) TREAT as a new petition the Motion for Clarification with
Temporary Restraining Order and/or Preliminary Injunction
Application dated September 6, 2013 filed by PAGCOR;
(b) DIRECT the Judicial Records Office to RE-DOCKET the aforesaid
Motion for Clarification, subject to payment of the appropriate
docket fees; and
(c) REQUIRE petitioner PAGCOR to PAY the filing fees for the subject
Motion for Clarification within five (5) days from notice hereof.
Brion, J., no part and on leave. Perlas-Bernabe, J., on official leave.
Considering that the parties have filed their respective pleadings
relative to the instant petition, and the appropriate docket fees have
been duly paid by petitioner, this Court considers the instant petition
submitted for resolution.
The facts are briefly summarized as follows:
On April 17, 2006, petitioner filed before this Court a Petition for

Review on Certiorari and Prohibition (With Prayer for the

Issuance of a Temporary Restraining Order and/or Preliminary
Injunction) seeking the declaration of nullity of Section 12 of
Republic Act (R.A.) No. 93373 insofar as it amends Section
27(C)4 of R.A. No. 8424,5 otherwise known as the National
Internal Revenue Code (NIRC) by excluding petitioner from the
enumeration of government-owned or controlled
corporations (GOCCs) exempted from liability for corporate
income tax.
On March 15, 2011, this Court rendered a Decision6 granting in
part the petition filed by petitioner. Its falloreads:
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of
Republic Act No. 9337, amending Section 27(c) of the National Internal
Revenue Code of 1997, by excluding petitioner Philippine Amusement
and Gaming Corporation from the enumeration of government-owned
and controlled corporations exempted from corporate income tax is
valid and constitutional, while BIR Revenue Regulations No.
16-2005 insofar as it subjects PAGCOR to 10% VAT is null and
void for being contrary to the National Internal Revenue Code of 1997,
as amended by Republic Act No. 9337.
No costs.
SO ORDERED.7
Both petitioner and respondent filed their respective motions
for partial reconsideration, but the same were denied by this
Court in a Resolution8 dated May 31, 2011.
Resultantly, respondent issued RMC No. 33-2013 on April 17,
2013 pursuant to the Decision dated March 15, 2011 and the
Resolution dated May 31, 2011, which clarifies the Income Tax and
Franchise Tax Due from the Philippine Amusement and Gaming

Corporation (PAGCOR), its Contractees and Licensees. Relevant

portions thereof state:
II. INCOME TAX
Pursuant to Section 1 of R.A. 9337, amending Section 27(C) of
the NIRC, as amended, PAGCOR is no longer exempt from
corporate income tax as it has been effectively omitted from
the list of government-owned or controlled corporations
(GOCCs) that are exempt from income tax. Accordingly, PAGCORs
income from its operations and licensing of gambling casinos, gaming
clubs and other similar recreation or amusement places, gaming pools,
and other related operations, are subject to corporate income tax
under the NIRC, as amended. This includes, among others:
a)
b)
c)
d)

Income from its casino operations;

Income from dollar pit operations;
Income from regular bingo operations; and
Income from mobile bingo operations operated by it, with
agents on commission basis. Provided, however, that the
agents commission income shall be subject to regular income
tax, and consequently, to withholding tax under existing
regulations.

Income from other related operations includes, but is not limited to:
a) Income from licensed private casinos covered by authorities to
operate issued to private operators;
b) Income from traditional bingo, electronic bingo and other bingo
variations covered by authorities to operate issued to private
operators;
c) Income from private internet casino gaming, internet sports betting
and private mobile gaming operations;
d) Income from private poker operations;
e) Income from junket operations;
f) Income from SM demo units; and
g) Income from other necessary and related services, shows and

entertainment.
PAGCORs other income that is not connected with the foregoing
operations are likewise subject to corporate income tax under the
NIRC, as amended.
PAGCORs contractees and licensees are entities duly
authorized and licensed by PAGCOR to perform gambling
casinos, gaming clubs and other similar recreation or
amusement places, and gaming pools. These contractees and
licensees are subject to income tax under the NIRC, as
amended.
III. FRANCHISE TAX
Pursuant to Section 13(2) (a) of P.D. No. 1869, 9 PAGCOR is
subject to a franchise tax of five percent (5%) of the gross
revenue or earnings it derives from its operations and licensing
of gambling casinos, gaming clubs and other similar recreation or
amusement places, gaming pools, and other related operations as
described above.
On May 20, 2011, petitioner wrote the BIR Commissioner
requesting for reconsideration of the tax treatment of its
income from gaming operations and other related operations
under RMC No. 33-2013. The request was, however, denied by
the BIR Commissioner.
On August 4, 2011, the Decision dated March 15, 2011 became
final and executory and was, accordingly, recorded in the Book of
Entries of Judgment.
Consequently, petitioner filed a Motion for Clarification alleging
that RMC No. 33-2013 is an erroneous interpretation and

application of the aforesaid Decision, and seeking clarification

with respect to the following:
1. Whether PAGCORs tax privilege of paying 5% franchise
tax in lieu of all other taxes with respect to its gaming
income, pursuant to its Charter P.D. 1869, as amended by
R.A. 9487, is deemed repealed or amended by Section 1 (c)
of R.A. 9337.
2. If it is deemed repealed or amended, whether PAGCORs
gaming income is subject to both 5% franchise tax and
income tax.
3. Whether PAGCORs income from operation of related
services is subject to both income tax and 5% franchise
tax.
4. Whether PAGCORs tax privilege of paying 5% franchise tax
inures to the benefit of third parties with contractual relationship
with PAGCOR in connection with the operation of casinos. 11

In our Decision dated March 15, 2011, we have already

declared petitioners income tax liability in view of the
withdrawal of its tax privilege under R.A. No. 9337. However, we
made no distinction as to which income is subject to corporate
income tax, considering that the issue raised therein was only
the constitutionality of Section 1 of R.A. No. 9337, which
excluded petitioner from the enumeration of GOCCs exempted from
corporate income tax.
For clarity, it is worthy to note that under P.D. 1869, as
amended, PAGCORs income is classified into two: (1) income
from its operations conducted under its Franchise, pursuant to Section
13(2) (b) thereof (income from gaming operations); and (2)
income from its operation of necessary and related services under
Section 14(5) thereof (income from other related services). In

RMC No. 33-2013, RESPONDENT further classified the aforesaid

income as follows:
1. PAGCORs income from its operations and licensing of
gambling casinos, gaming clubs and other similar recreation or
amusement places, gaming pools, includes, among others:
a)
b)
c)
d)

Income from its casino operations;

Income from dollar pit operations;
Income from regular bingo operations; and
Income from mobile bingo operations operated by it, with
agents on commission basis. Provided, however, that the
agents commission income shall be subject to regular income
tax, and consequently, to withholding tax under existing
regulations.

2. Income from other related operations includes, but is not

limited to:
a) Income from licensed private casinos covered by authorities to
operate issued to private operators;
b) Income from traditional bingo, electronic bingo and other bingo
variations covered by authorities to operate issued to private
operators;
c) Income from private internet casino gaming, internet sports betting
and private mobile gaming operations;
d) Income from private poker operations;
e) Income from junket operations;
f) Income from SM demo units; and
g) Income from other necessary and related services, shows and
entertainment.12
After a thorough study of the arguments and points raised by the
parties, and in accordance with our Decision dated March 15, 2011, we
sustain petitioners contention that its income from gaming
operations is subject only to five percent (5%) franchise tax
under P.D. 1869, as amended, while its income from other related

services is subject to corporate income tax pursuant to P.D. 1869,

as amended, as well as R.A. No. 9337. This is demonstrable.
First. Under P.D. 1869, as amended, petitioner is subject to income
tax only with respect to its operation of related services. Accordingly,
the income tax exemption ordained under Section 27(c) of R.A. No.
8424 clearly pertains only to petitioners income from operation of
related services. Such income tax exemption could not have been
applicable to petitioners income from gaming operations as it is
already exempt therefrom under P.D. 1869, as amended, to wit:
SECTION 13. Exemptions.
xxxx
(2) Income and other taxes. (a) Franchise Holder: No tax of any
kind or form, income or otherwise, as well as fees, charges or
levies of whatever nature, whether National or Local, shall be
assessed and collected under this Franchise from the
Corporation; nor shall any form of tax or charge attach in any
way to the earnings of the Corporation, except a Franchise Tax
of five (5%) percent of the gross revenue or earnings derived
by the Corporation from its operation under this
Franchise. Such tax shall be due and payable quarterly to the
National Government and shall be in lieu of all kinds of taxes, levies,
fees or assessments of any kind, nature or description, levied,
established or collected by any municipal, provincial, or national
government authority.13
Indeed, the grant of tax exemption or the withdrawal thereof assumes
that the person or entity involved is subject to tax. This is the most
sound and logical interpretation because petitioner could not have
been exempted from paying taxes which it was not liable to pay in the
first place. This is clear from the wordings of P.D. 1869, as amended,
imposing a franchise tax of five percent (5%) on its gross revenue or
earnings derived by petitioner from its operation under the

Franchise in lieu of all taxes of any kind or form, as well as fees,

charges or levies of whatever nature, which necessarily include
corporate income tax.
In other words, there was no need for Congress to grant tax
exemption to petitioner with respect to its income from gaming
operations as the same is already exempted from all taxes of any kind
or form, income or otherwise, whether national or local, under its
Charter, save only for the five percent (5%) franchise tax. The
exemption attached to the income from gaming operations exists
independently from the enactment of R.A. No. 8424. To adopt an
assumption otherwise would be downright ridiculous, if not deleterious,
since petitioner would be in a worse position if the exemption was
granted (then withdrawn) than when it was not granted at all in the
first place.
Moreover, as may be gathered from the legislative records of the
Bicameral Conference Meeting of the Committee on Ways and Means
dated October 27, 1997, the exemption of petitioner from the payment
of corporate income tax was due to the acquiescence of the Committee
on Ways and Means to the request of petitioner that it be exempt from
such tax. Based on the foregoing, it would be absurd for petitioner to
seek exemption from income tax on its gaming operations when under
its Charter, it is already exempted from paying the same.
Second. Every effort must be exerted to avoid a conflict between
statutes; so that if reasonable construction is possible, the laws must
be reconciled in that manner.14
As we see it, there is no conflict between P.D. 1869, as amended, and
R.A. No. 9337. The former lays down the taxes imposable upon
petitioner, as follows: (1) a five percent (5%) franchise tax of the
gross revenues or earnings derived from its operations conducted
under the Franchise, which shall be due and payable in lieu of all kinds
of taxes, levies, fees or assessments of any kind, nature or

description, levied, established or collected by any municipal,

provincial or national government authority;15 (2) income taxfor
income realized from other necessary and related services, shows and
entertainment of petitioner.16With the enactment of R.A. No. 9337,
which withdrew the income tax exemption under R.A. No. 8424,
petitioners tax liability on income from other related services was
merely reinstated.
It cannot be gainsaid, therefore, that the nature of taxes imposable is
well defined for each kind of activity or operation. There is no
inconsistency between the statutes; and in fact, they complement
each other.
Third. Even assuming that an inconsistency exists, P.D. 1869, as
amended, which expressly provides the tax treatment of petitioners
income prevails over R.A. No. 9337, which is a general law. It is a
canon of statutory construction that a special law prevails over a
general law regardless of their dates of passage and the special is
to be considered as remaining an exception to the
general.17 The rationale is:chanroblesvirtuallawlibrary
Why a special law prevails over a general law has been put by the
Court as follows:ChanRoblesVirtualawlibrary
xxxx
x x x The Legislature consider and make provision for all the
circumstances of the particular case. The Legislature having
specially considered all of the facts and circumstances in the
particular case in granting a special charter, it will not be
considered that the Legislature, by adopting a general law
containing provisions repugnant to the provisions of the
charter, and without making any mention of its intention to
amend or modify the charter, intended to amend, repeal, or
modify the special act. (Lewis vs. Cook County, 74 I11. App., 151;
Philippine Railway Co. vs. Nolting 34 Phil., 401.)18

Where a general law is enacted to regulate an industry, it is common

for individual franchises subsequently granted to restate the rights and
privileges already mentioned in the general law, or to amend the later
law, as may be needed, to conform to the general law.19 However, if no
provision or amendment is stated in the franchise to effect the
provisions of the general law, it cannot be said that the same is the
intent of the lawmakers, for repeal of laws by implication is not
favored.20chanRoblesvirtualLawlibrary
In this regard, we agree with petitioner that if the lawmakers had
intended to withdraw petitioners tax exemption of its gaming income,
then Section 13(2)(a) of P.D. 1869 should have been amended
expressly in R.A. No. 9487, or the same, at the very least, should have
been mentioned in the repealing clause of R.A. No. 9337.21 However,
the repealing clause never mentioned petitioners Charter as one of the
laws being repealed. On the other hand, the repeal of other special
laws, namely, Section 13 of R.A. No. 6395 as well as Section 6, fifth
paragraph of R.A. No. 9136, is categorically provided under Section
24(a) (b) of R.A. No. 9337, to wit:
SEC. 24. Repealing Clause. - The following laws or provisions of laws
are hereby repealed and the persons and/or transactions affected
herein are made subject to the value-added tax subject to the
provisions of Title IV of the National Internal Revenue Code of 1997,
as amended:ChanRoblesVirtualawlibrary
(A) Section 13 of R.A. No. 6395 on the exemption from valueadded tax of the National Power Corporation (NPC);
(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT
rate imposed on the sales of generated power by generation
companies; and
(C) All other laws, acts, decrees, executive orders, issuances and rules
and regulations or parts thereof which are contrary to and
inconsistent with any provisions of this Act are hereby repealed,
amended or modified accordingly.22

When petitioners franchise was extended on June 20, 2007 without

revoking or withdrawing its tax exemption, it effectively reinstated and
reiterated all of petitioners rights, privileges and authority granted
under its Charter. Otherwise, Congress would have painstakingly
enumerated the rights and privileges that it wants to withdraw, given
that a franchise is a legislative grant of a special privilege to a person.
Thus, the extension of petitioners franchise under the same terms and
conditions means a continuation of its tax exempt status with respect
to its income from gaming operations. Moreover, all laws, rules and
regulations, or parts thereof, which are inconsistent with the provisions
of P.D. 1869, as amended, a special law, are considered repealed,
amended and modified, consistent with Section 2 of R.A. No. 9487,
thus:chanroblesvirtuallawlibrary
SECTION 2. Repealing Clause. All laws, decrees, executive orders,
proclamations, rules and regulations and other issuances, or parts
thereof, which are inconsistent with the provisions of this Act, are
hereby repealed, amended and modified.
It is settled that where a statute is susceptible of more than one
interpretation, the court should adopt such reasonable and beneficial
construction which will render the provision thereof operative and
effective, as well as harmonious with each
other.23chanRoblesvirtualLawlibrary
Given that petitioners Charter is not deemed repealed or amended by
R.A. No. 9337, petitioners income derived from gaming operations is
subject only to the five percent (5%) franchise tax, in accordance with
P.D. 1869, as amended. With respect to petitioners income from
operation of other related services, the same is subject to income tax
only. The five percent (5%) franchise tax finds no application with
respect to petitioners income from other related services, in view of
the express provision of Section 14(5) of P.D. 1869, as amended, to
wit:

Section 14. Other Conditions.

xxxx
(5) Operation of related services. The Corporation is authorized to
operate such necessary and related services, shows and
entertainment. Any income that may be realized from these
related services shall not be included as part of the income of
the Corporation for the purpose of applying the franchise
tax, but the same shall be considered as a separate income of the
Corporation and shall be subject to income tax.24
Thus, it would be the height of injustice to impose franchise tax upon
petitioner for its income from other related services without basis
therefor.
For proper guidance, the first classification of PAGCORs income under
RMC No. 33-2013 (i.e., income from its operations and licensing of
gambling casinos, gaming clubs and other similar recreation or
amusement places, gambling pools) should be interpreted in relation
to Section 13(2) of P.D. 1869, which pertains to the income derived
from issuing and/or granting the license to operate casinos to
PAGCORs contractees and licensees, as well as earnings derived by
PAGCOR from its own operations under the Franchise. On the other
hand, the second classification of PAGCORs income under RMC No. 332013 (i.e., income from other related operations) should be interpreted
in relation to Section 14(5) of P.D. 1869, which pertains to income
received by PAGCOR from its contractees and licensees in the latters
operation of casinos, as well as PAGCORs own income from operating
necessary and related services, shows and entertainment.
As to whether petitioners tax privilege of paying five percent (5%)
franchise tax inures to the benefit of third parties with contractual
relationship with petitioner in connection with the operation of casinos,
we find no reason to rule upon the same. The resolution of the instant

petition is limited to clarifying the tax treatment of petitioners income

vis--vis our Decision dated March 15, 2011. This Decision is not
meant to expand our original Decision by delving into new issues
involving petitioners contractees and licensees. For one, the latter are
not parties to the instant case, and may not therefore stand to benefit
or bear the consequences of this resolution. For another, to answer the
fourth issue raised by petitioner relative to its contractees and
licensees would be downright premature and iniquitous as the same
would effectively countenance sidesteps to judicial process.
In view of the foregoing disquisition, respondent, therefore, committed
grave abuse of discretion amounting to lack of jurisdiction when it
issued RMC No. 33-2013 subjecting both income from gaming
operations and other related services to corporate income tax and five
percent (5%) franchise tax. This unduly expands our Decision dated
March 15, 2011 without due process since the imposition creates
additional burden upon petitioner. Such act constitutes an overreach
on the part of the respondent, which should be immediately struck
down, lest grave injustice results. More, it is settled that in case of
discrepancy between the basic law and a rule or regulation issued to
implement said law, the basic law prevails, because the said rule or
regulation cannot go beyond the terms and provisions of the basic law.
In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337,
amending Section 27(c) of R.A. No. 8424, by excluding petitioner from
the enumeration of GOCCs exempted from corporate income tax, is
valid and constitutional. In addition, we hold that:
1. Petitioners tax privilege of paying five percent (5%) franchise

tax in lieu of all other taxes with respect to its income from
gaming operations, pursuant to P.D. 1869, as amended, is not
repealed or amended by Section 1(c) of R.A. No. 9337;
2. Petitioners income from gaming operations is subject to the five

percent (5%) franchise tax only; and

3. Petitioners income from other related services is subject to

corporate income tax only.

In view of the above-discussed findings, this Court ORDERS the

respondent to cease and desist the implementation of RMC No. 332013 insofar as it imposes: (1) corporate income tax on petitioners
income derived from its gaming operations; and (2) franchise tax on
petitioners income from other related services.
WHEREFORE, the Petition is hereby GRANTED. Accordingly,
respondent is ORDERED to cease and desist the implementation of
RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on
petitioners income derived from its gaming operations; and (2)
franchise tax on petitioners income from other related services.
SO ORDERED.cralawlawlibrary

COMMISSIONER OF G.R. No. 153793

INTERNAL REVENUE,
Petitioner, Present:
Panganiban, C.J. (Chairperson),
- versus - Ynares-Santiago,
Austria-Martinez,
Callejo, Sr., and
Chico-Nazario, JJ.
JULIANE BAIER-NICKEL, as
represented by Marina Q. Guzman Promulgated:
(Attorney-in-fact)
Respondent. August 29, 2006
x ---------------------------------------------------------------------------------------- x

DECISION

YNARES-SANTIAGO, J.:

Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002
Decision[1] of the Court of Appeals in CA-G.R. SP No. 59794, which granted the tax
refund of respondent Juliane Baier-Nickel and reversed the June 28, 2000 Decision [2] of
the Court of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May
8, 2002 Resolution[3] of the Court of Appeals denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is
the President of JUBANITEX, Inc., a domestic corporation engaged in [m]anufacturing,
marketing on wholesale only, buying or otherwise acquiring, holding, importing and
exporting, selling and disposing embroidered textile products.[4] Through JUBANITEXs
General Manager, Marina Q. Guzman, the corporation appointed and engaged the
services of respondent as commission agent.It was agreed that respondent will receive
10% sales commission on all sales actually concluded and collected through her efforts. [5]
In 1995, respondent received the amount of P1,707,772.64, representing her sales
commission income from which JUBANITEX withheld the corresponding 10%
withholding tax amounting to P170,777.26, and remitted the same to the Bureau of
Internal Revenue (BIR). On October 17, 1997, respondent filed her 1995 income tax
return reporting a taxable income of P1,707,772.64 and a tax due of P170,777.26.[6]
On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged
to have been mistakenly withheld and remitted by JUBANITEX to the BIR.Respondent
contended that her sales commission income is not taxable in thePhilippines because the
same was a compensation for her services rendered inGermany and therefore considered
as income from sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA contending that
no action was taken by the BIR on her claim for refund. [7] On June 28, 2000, the CTA
rendered a decision denying her claim. It held that the commissions received by
respondent were actually her remuneration in the performance of her duties as President
of JUBANITEX and not as a mere sales agent thereof. The income derived by respondent

is therefore an income taxable in the Philippines because JUBANITEX is a domestic

corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the CTA,
holding that respondent received the commissions as sales agent of JUBANITEX and not
as President thereof. And since the source of income means the activity or service that
produce the income, the sales commission received by respondent is not taxable in
the Philippines because it arose from the marketing activities performed by respondent
in Germany. The dispositive portion of the appellate courts Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court of
Tax Appeals dated June 28, 2000 is hereby REVERSED and SET ASIDE
and the respondent court is hereby directed to grant petitioner a tax refund
in the amount of Php 170,777.26.
SO ORDERED.[8]
Petitioner filed a motion for reconsideration but was denied. [9] Hence, the instant
recourse.
Petitioner maintains that the income earned by respondent is taxable in
thePhilippines because the source thereof is JUBANITEX, a domestic corporation
located in the City of Makati. It thus implied that source of income means the physical
source where the income came from. It further argued that since respondent is the
President of JUBANITEX, any remuneration she received from said corporation should
be construed as payment of her overall managerial services to the company and should
not be interpreted as a compensation for a distinct and separate service as a sales
commission agent.
Respondent, on the other hand, claims that the income she received was payment
for her marketing services. She contended that income of nonresident aliens like her is
subject to tax only if the source of the income is within thePhilippines. Source, according
to respondent is the situs of the activity which produced the income. And since the source
of her income were her marketing activities in Germany, the income she derived from
said activities is not subject to Philippine income taxation.

The issue here is whether respondents sales commission income is taxable in

the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in Trade or Business Within
thePhilippines.
(1) In General. A nonresident alien individual engaged in trade or
business in the Philippines shall be subject to an income tax in the same
manner as an individual citizen and a resident alien individual, on taxable
income received from all sources within the Philippines. A nonresident
alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days during any
calendar year shall be deemed a nonresident alien doing business in the
Philippines, Section 22(G) of this Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business
Within the Philippines. There shall be levied, collected and paid for each
taxable year upon the entire income received from all sources within the
Philippines by every nonresident alien individual not engaged in trade or
business within the Philippines x x x a tax equal to twenty-five percent
(25%) of such income. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or
not engaged in trade or business, are subject to Philippine income taxation on their
income received from all sources within the Philippines. Thus, the keyword in
determining the taxability of non-resident aliens is the incomes source.In construing the
meaning of source in Section 25 of the NIRC, resort must be had on the origin of the
provision.
The first Philippine income tax law enacted by the Philippine Legislature was Act No.
2833,[10] which took effect on January 1, 1920.[11] Under Section 1 thereof, nonresident

aliens are likewise subject to tax on income from all sources within the Philippine
Islands, thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding calendar year
from all sources by every individual, a citizen or resident of the Philippine
Islands, a tax of two per centum upon such income; and a like tax shall be
levied, assessed, collected, and paid annually upon the entire net income
received in the preceding calendar year from all sources within the
Philippine Islands by every individual, a nonresident alien, including
interest on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of
1916 as amended by U.S. Revenue Law of 1917.[12] Being a law of American origin, the
authoritative decisions of the official charged with enforcing it in the U.S.have peculiar
persuasive force in the Philippines.[13]
The Internal Revenue Code of the U.S. enumerates specific types of income to be
treated as from sources within the U.S. and specifies when similar types of income are to
be treated as from sources outside the U.S. [14] Under the said Code, compensation for
labor and personal services performed in the U.S., is generally treated as income from
U.S. sources; while compensation for said services performed outside the U.S., is treated
as income from sources outside the U.S. [15] A similar provision is found in Section 42 of
our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. Compensation for labor or personal services performed
in thePhilippines;
xxxx

(C) Gross Income From Sources Without the Philippines. x x x

xxxx
(3) Compensation for labor or personal services performed without
thePhilippines;
The following discussions on sourcing of income under the Internal Revenue Code
of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources only: (1)
capital and/or (2) labor; and/or (3) the sale of capital assets. While the three
elements of this attempt at definition need not be accepted as all-inclusive,
they serve as useful guides in any inquiry into whether a particular item is
from sources within the United Statesand suggest an investigation into the
nature and location of the activities or property which produce the income.
If the income is from labor the place where the labor is done should
be decisive; if it is done in this country, the income should be from sources
within theUnited States. If the income is from capital, the place where the
capital is employed should be decisive; if it is employed in this country, the
income should be from sources within the United States. If the income is
from the sale of capital assets, the place where the sale is made should be
likewise decisive.
Much confusion will be avoided by regarding the term source in this
fundamental light. It is not a place, it is an activity or property. As such, it
has a situs or location, and if that situs or location is within the United
States the resulting income is taxable to nonresident aliens and foreign
corporations.
The intention of Congress in the 1916 and subsequent statutes was to
discard the 1909 and 1913 basis of taxing nonresident aliens and foreign
corporations and to make the test of taxability the source, or situs of the
activities or property which produce the income. The result is that, on the
one hand, nonresident aliens and nonresident foreign corporations are

prevented from deriving income from the United States free from tax, and,
on the other hand, there is no undue imposition of a tax when the activities
do not take place in, and the property producing income is not employed in,
this country. Thus, if income is to be taxed, the recipient thereof must be
resident within the jurisdiction, or the property or activities out of which the
income issues or is derived must be situated within the jurisdiction so that
the source of the income may be said to have a situs in this country.
The underlying theory is that the consideration for taxation is
protection of life and property and that the income rightly to be levied upon
to defray the burdens of the United States Government is that income which
is created by activities and property protected by this Government or
obtained by persons enjoying that protection. [16]
The important factor therefore which determines the source of income of personal
services is not the residence of the payor, or the place where the contract for service is
entered into, or the place of payment, but the place where the services were actually
rendered.[17]
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,[18] the Court
addressed the issue on the applicable source rule relating to reinsurance premiums paid
by a local insurance company to a foreign insurance company in respect of risks located
in the Philippines. It was held therein that the undertaking of the foreign insurance
company to indemnify the local insurance company is the activity that produced the
income. Since the activity took place in the Philippines, the income derived therefrom is
taxable in our jurisdiction. Citing Mertens, The Law of Federal Income Taxation, the
Court emphasized that the technical meaning of source of income is the property, activity
or service that produced the same. Thus:
The source of an income is the property, activity or service that
produced the income. The reinsurance premiums remitted to appellants by
virtue of the reinsurance contracts, accordingly, had for their source the
undertaking to indemnify Commonwealth Insurance Co. against
liability. Said undertaking is the activity that produced the reinsurance
premiums, and the same took place in thePhilippines. x x x the reinsured,
the liabilities insured and the risk originally underwritten by

Commonwealth Insurance Co., upon which the reinsurance premiums and

indemnity were based, were all situated in the Philippines. x x x[19]

In Commissioner of Internal Revenue v. British Overseas Airways

Corporation (BOAC),[20] the issue was whether BOAC, a foreign airline company which
does not maintain any flight to and from the Philippines is liable for Philippine income
taxation in respect of sales of air tickets in the Philippines, through a general sales agent
relating to the carriage of passengers and cargo between two points both outside the
Philippines. Ruling in the affirmative, the Court applied the case of Alexander Howden &
Co., Ltd. v. Collector of Internal Revenue,and reiterated the rule that the source of income
is that activity which produced the income. It was held that the sale of tickets in
the Philippines is the activity that produced the income and therefore BOAC should pay
income tax in the Philippinesbecause it undertook an income producing activity in the
country.
Both the petitioner and respondent cited the case of Commissioner of Internal
Revenue v. British Overseas Airways Corporation in support of their arguments, but the
correct interpretation of the said case favors the theory of respondent that it is thesitus of
the activity that determines whether such income is taxable in thePhilippines. The
conflict between the majority and the dissenting opinion in the said case has nothing to
do with the underlying principle of the law on sourcing of income. In fact, both applied
the case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue. The
divergence in opinion centered on whether the sale of tickets in the Philippines is to be
construed as the activity that produced the income, as viewed by the majority, or merely
the physical source of the income, as ratiocinated by Justice Florentino P. Feliciano in his
dissent. The majority, through Justice Ameurfina Melencio-Herrera, as ponente,
interpreted the sale of tickets as a business activity that gave rise to the income of
BOAC. Petitioner cannot therefore invoke said case to support its view that source of
income is the physical source of the money earned. If such was the interpretation of the
majority, the Court would have simply stated that source of income is not the business
activity of BOAC but the place where the person or entity disbursing the income is
located or where BOAC physically received the same. But such was not the import of the
ruling of the Court. It even explained in detail the business activity undertaken by
BOAC in the Philippines to pinpoint the taxable activity and to justify its conclusion that
BOAC is subject to Philippine income taxation. Thus

BOAC, during the periods covered by the subject assessments,

maintained a general sales agent in the Philippines. That general sales
agent, from 1959 to 1971, was engaged in (1) selling and issuing tickets; (2)
breaking down the whole trip into series of trips each trip in the series
corresponding to a different airline company; (3) receiving the fare from the
whole trip; and (4) consequently allocating to the various airline companies
on the basis of their participation in the services rendered through the mode
of interline settlement as prescribed by Article VI of the Resolution No. 850
of the IATA Agreement. Those activities were in exercise of the functions
which are normally incident to, and are in progressive pursuit of, the
purpose and object of its organization as an international air carrier. In fact,
the regular sale of tickets, its main activity, is the very lifeblood of the
airline business, the generation of sales being the paramount objective.
There should be no doubt then that BOAC was engaged in business in
the Philippinesthrough a local agent during the period covered by the
assessments. x x x[21]
xxxx
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 thePhilippines, it is sufficient that the income is derived from activity
within thePhilippines. In BOAC's case, the sale of tickets in
the Philippines is the activity that produces the income. The tickets
exchanged hands here and payments for fares were also made here in
Philippine currency. The situs of the source of payments is the Philippines.
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.
A transportation ticket is not a mere piece of paper. When issued by
a common carrier, it constitutes the contract between the ticket-holder and
the carrier. It gives rise to the obligation of the purchaser of the ticket to pay
the fare and the corresponding obligation of the carrier to transport the
passenger upon the terms and conditions set forth thereon. The ordinary
ticket issued to members of the traveling public in general embraces within

its terms all the elements to constitute it a valid contract, binding upon the
parties entering into the relationship.[22]
The Court reiterates the rule that source of income relates to the property, activity
or service that produced the income. With respect to rendition of labor or personal
service, as in the instant case, it is the place where the labor or service was performed that
determines the source of the income. There is therefore no merit in petitioners
interpretation which equates source of income in labor or personal service with the
residence of the payor or the place of payment of the income.
Having disposed of the doctrine applicable in this case, we will now determine
whether respondent was able to establish the factual circumstances showing that her
income is exempt from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent
received the income, but the sufficiency of evidence to prove that the services she
rendered were performed in Germany. Though not raised as an issue, the Court is clothed
with authority to address the same because the resolution thereof will settle the vital
question posed in this controversy.[23]
The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the taxpayer.[24] To those therefore, who claim a refund
rest the burden of proving that the transaction subjected to tax is actually exempt from
taxation.
In the instant case, the appointment letter of respondent as agent of JUBANITEX
stipulated that the activity or the service which would entitle her to 10% commission
income, are sales actually concluded and collected through [her] efforts. [25] What she
presented as evidence to prove that she performed income producing activities abroad,
were copies of documents she allegedly faxed to JUBANITEX and bearing instructions
as to the sizes of, or designs and fabrics to be used in the finished products as well as
samples of sales orders purportedly relayed to her by clients. However, these documents
do not show whether the instructions or orders faxed ripened into concluded or collected
sales in Germany. At the very least, these pieces of evidence show that while respondent
was in Germany, she sent instructions/orders to JUBANITEX. As to whether these
instructions/orders gave rise to consummated sales and whether these sales were truly
concluded inGermany, respondent presented no such evidence. Neither did she establish

reasonable connection between the orders/instructions faxed and the reported monthly
sales purported to have transpired in Germany.
The paucity of respondents evidence was even noted by Atty. Minerva Pacheco,
petitioners counsel at the hearing before the Court of Tax Appeals. She pointed out that
respondent presented no contracts or orders signed by the customers in Germany to prove
the sale transactions therein.[26] Likewise, in her Comment to the Formal Offer of
respondents evidence, she objected to the admission of the faxed documents bearing
instruction/orders marked as Exhibits R,[27] V, W, and X,[28] for being self serving.[29] The
concern raised by petitioners counsel as to the absence of substantial evidence that would
constitute proof that the sale transactions for which respondent was paid commission
actually transpired outside thePhilippines, is relevant because respondent stayed in
the Philippines for 89 days in 1995. Except for the months of July and September 1995,
respondent was in thePhilippines in the months of March, May, June, and August 1995,
[30]
the same months when she earned commission income for services allegedly
performed abroad. Furthermore, respondent presented no evidence to prove that
JUBANITEX does not sell embroidered products in the Philippines and that her
appointment as commission agent is exclusively for Germany and other European
markets.
In sum, we find that the faxed documents presented by respondent did not
constitute substantial evidence, or that relevant evidence that a reasonable mind might
accept as adequate to support the conclusion [31] that it was in Germany where she
performed the income producing service which gave rise to the reported monthly sales in
the months of March and May to September of 1995. She thus failed to discharge the
burden of proving that her income was from sources outside the Philippines and exempt
from the application of our income tax law. Hence, the claim for tax refund should be
denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,[32] a
previous case for refund of income withheld from respondents remunerations for services
rendered abroad, the Court in a Minute Resolution dated February 17, 2003,[33] sustained
the ruling of the Court of Appeals that respondent is entitled to refund the sum withheld
from her sales commission income for the year 1994. This ruling has no bearing in the
instant controversy because the subject matter thereof is the income of respondent for the
year 1994 while, the instant case deals with her income in 1995. Otherwise, stated, res
judicata has no application here. Its elements are: (1) there must be a final judgment or

order; (2) the court that rendered the judgment must have jurisdiction over the subject
matter and the parties; (3) it must be a judgment on the merits; (4) there must be between
the two cases identity of parties, of subject matter, and of causes of action. [34] The instant
case, however, did not satisfy the fourth requisite because there is no identity as to the
subject matter of the previous and present case of respondent which deals with income
earned and activities performed for different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision
and May 8, 2002 Resolution of the Court of Appeals in CA-G.R. SP No. 59794,
are REVERSED and SET ASIDE. The June 28, 2000 Decision of the Court of Tax
Appeals in C.T.A. Case No. 5633, which denied respondents claim for refund of income
tax paid for the year 1995 is REINSTATED.
SO ORDERED.

G.R. No. 180529

November 13, 2013

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
BANK OF COMMERCE, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
This is a Petition (or Review on Certiorari1 filed by the Commissioner of Internal
Revenue (CIR) wherein the September 17 2007 Amended Decision2 and
November 15 2007 Resolution3 of the Court of Tax Appeals En Bane (CTA) in
C.T.A. EB No. 259, are sought to be nullified and set aside.4
The facts of the case, as stipulated by the parties are as follows:

1. [Bank of Commerce (BOC)] is a banking corporation duly organized and

existing under and by virtue of the laws of the Republic of the Philippines,
with principal office address at 12th Floor, Bankers Centre Building, 6764
Ayala Avenue, Makati City.
2. Respondent is the Commissioner of the Bureau of Internal Revenue
[(CIR)], duly appointed to perform the duties of his office, including, among
others, the power to decide, cancel and abate tax liabilities pursuant to
Section 244(B) of the Tax Code, as amended by Republic Act ("RA" No.)
8424, otherwise known as the Tax Reform Act ("TRA") of 1997.
3. On November 9, 2001, [BOC] and Traders Royal Bank (TRB) executed
a Purchase and Sale Agreement5whereby it stipulated the TRBs desire to
sell and the BOCs desire to purchase identified recorded assets of TRB in
consideration of BOC assuming identified recorded liabilities. 4. Under the
Purchase and Sale Agreement, BOC and TRB shall continue to exist as
separate corporations with distinct corporate personalities.
5. On September 27, 2002, [BOC] received copies of the Formal Letter of
Demand and Assessment Notice No. DST-99-00-000049 dated September
11, 2002, addressed to "TRADERS ROYAL BANK (now Bank of
Commerce)", issued by the CIR demanding payment of the amount
of P41,467,887.51, as deficiency documentary stamp taxes (DST) on
Special Savings Deposit (SSD) account of TRB for taxable year 1999.
6. On October 11, 2002, [TRB] filed its protest letter contesting the Formal
Letter of Demand and Assessment Notice No. DST-99-00-000049 dated
September 11, 2002, pursuant to Sec. 228 of the Tax Code.
7. On March 31, 2004, [BOC] received the Decision dated March 22, 2004
denying the protest filed by [TRB] on October 11, 2002. The last two
paragraphs of the Decision stated that:
"WHEREFORE, in view of all the foregoing, Assessment Notice No. DST-99-00000049 demanding payment of the amount of P41,467,887.51, as deficiency
stamp tax for the taxable year 1999 is hereby MODIFIED AND/OR REDUCED
to P41,442,887.51. Consequently, Traders Royal Bank (now Bank of Commerce)
is hereby ordered to pay the above-stated amount, plus interest that have
accrued thereon until the actual date of payment, to the Large Taxpayers

Service, B.I.R. National Office Building, Diliman, Quezon City, within thirty (30)
days from receipt hereof; otherwise, collection thereof shall be effected through
the summary remedies provided by law.
This constitutes the Final Decision of this Office on the matter."6
On April 30, 2004, the Bank of Commerce (BOC) filed a Petition for
Review,7 assigned to the CTA 2nd Division, praying that it be held not liable for
the subject Documentary Stamp Taxes (DST).
As also stipulated by the parties, the issues before the CTA 2nd Division were:
1. Whether [BOC] can be held liable for [TRB]s alleged deficiency [DST]
liability on [its SSD] Accounts for taxable year 1999 in the amount
of P41,442,887.51, inclusive of penalties.
2. Whether TRBs [SSD] Accounts for taxable year 1999 is subject to
[DST].8
In support of the first issue, BOC called the attention of the CTA 2nd Division to
the fact that as stated in Article III of the Purchase and Sale Agreement, it and
Traders Royal Bank (TRB) continued to exist as separate corporations with
distinct corporate personalities. BOC emphasized that there was no merger
between it and TRB as it only acquired certain assets of TRB in return for its
assumption of some of TRBs liabilities.9
Ruling of the CTA 2nd Division
In a Decision10 dated August 31, 2006, the CTA 2nd Division dismissed the
petition for lack of merit. It held that the Special Savings Deposit (SSD) account
in issue is subject to DST because its nature and substance are akin to that of a
certificate of deposit bearing interest, which under the then Section 180 of the
National Internal Revenue Code (NIRC), is subject to DST.
As for BOCs liability, the CTA 2nd Division said that since the issue of nonmerger between BOC and TRB was not raised in the administrative level, it could
not be raised for the first time on appeal. The CTA 2nd Division also noted how
BOC "actively participated in the proceedings before the administrative body
without questioning the legitimacy of the proper party in interest."11

When its Motion for Reconsideration12 was denied13 on January 8, 2007, BOC
filed a Petition for Review14 before the CTA En Banc, adducing the following
grounds:
THE HOLDING OF THE HONORABLE SECOND DIVISION THAT [BOC]
IS DEEMED TO HAVE ADMITTED THAT IT IS THE PROPER PARTY
ASSESSED BY THE [CIR] BECAUSE IT DID NOT RAISE THE ISSUE OF
MERGER IN THE LETTER OF PROTEST FILED WITH THE [CIR] IS
WITHOUT BASIS AND VIOLATES ELEMENTARY RULES OF DUE
PROCESS.
THE HONORABLE SECOND DIVISION ERRED IN HOLDING THAT
TRBS SSD ACCOUNTS FOR TAXABLE YEAR 1999 ARE SUBJECT TO
[DST] UNDER THEN SECTION 180 OF THE TAX CODE.15
Ruling of the CTA En Banc
on BOCs Petition for Review
On June 27, 2007, the CTA En Banc affirmed the CTA 2nd Divisions Decision
and Resolution, ruling that BOC was liable for the DST on TRBs SSD accounts. 16
Citing this Courts decision in International Exchange Bank v. Commissioner of
Internal Revenue,17 the CTA En Banc said that the CTA 2nd Division was correct
when it deemed TRBs SSD accounts to be certificates of deposit bearing
interest, subject to DST under Section 180 of the NIRC, as they involved
deposits, which though may be withdrawn anytime, earned a higher rate of
interest when kept in the bank for a specified number of days.18
Proceeding then to what it considered to be the pivotal issue, the CTA En Banc,
agreeing with the decision of the CTA 2nd Division, held that BOC was liable for
the DST on the subject SSD accounts. The CTA En Banc also noted that BOC
was inconsistent in its position, for claiming that it was the one that filed the
protest letter with the BIR, in its Petition for Review before the CTA 2nd Division
and Pre-Trial Brief, while stating that it was TRB that filed the protest letter, in its
Joint Stipulation of Facts and Issues. The CTA En Banc added that it would not
be unfair to hold BOC liable for the subject DST as TRB constituted an Escrow
Fund in the amount of Fifty Million Pesos (P50,000,000.00) to answer for all
claims against TRB, which are excluded from the Agreement.19

Undaunted, BOC filed before the CTA En Banc a Motion for Reconsideration20 of
its June 27, 2007 Decision, positing the following grounds for reconsideration:
I
There was no merger between [BOC] and [TRB] as already decided by this
Honorable Court in a decision dated 18 June 2007; hence [BOC] cannot be held
liable for the tax liability of [TRB.]
II
[BOC] could not have raised the issue of non-merger of [BOC] and [TRB] in the
proceedings before the [CIR] because it was never a party to the proceedings
before the [CIR]. Contrary to the Courts findings, the issue of non-merger is no
longer an issue but a fact stipulated by both parties.
III
The [CIR]s decision holding [BOC] liable for TRBs tax liability is void since
[BOC] was not a party to the proceedings before the [CIR].21
Ruling of the CTA En Banc
on BOCs Motion for Reconsideration
On September 17, 2007, the CTA En Banc, in its Amended Decision, reversed
itself and ruled that BOC could not be held liable for the deficiency DST of TRB
on its SSD accounts. The dispositive portion of the CTA En Banc s Amended
Decision reads:
WHEREFORE, [BOC]s Motion for Reconsideration is hereby GRANTED. The
Decision in the case at bar promulgated on June 27, 2007 is REVERSED. The
appealed Decision in C.T.A. Case No. 6975 is SET ASIDE and a new one is
hereby ENTERED finding petitioner Bank of Commerce NOT LIABLE for the
amount ofP41,442,887.51 representing the assessment of deficiency
Documentary Stamp Tax on the Special Savings Deposit accounts of Traders
Royal Bank for taxable year 1999.22
In its Amended Decision, the CTA En Banc said that while it did not make a
categorical ruling in its June 27, 2007 Decision on the issue of merger between

BOC and TRB, the CTA 1st Division did in its June 18, 2007 Resolution23in C.T.A.
Case No. 6392, entitled Traders Royal Bank v. Commissioner of Internal
Revenue.
The Traders Royal Bank case, just like the case at bar, involved a deficiency DST
assessment against TRB on its SSD accounts, albeit for taxable years 1996 and
1997. When the CIR attempted to implement a writ of execution against BOC,
which was not a party to the case, by simply inserting its name beside TRBs in
the motion for execution, BOC filed a Motion to Quash (By Way of Special
Appearance) with the CTA 1st Division,24 which the CTA 1st Division granted in a
Resolution on June 18, 2007, primarily on the ground that there was no merger
between BOC and TRB.
With the foregoing ruling, the CTA En Banc declared that BOC could not be held
liable for the deficiency DST assessed on TRBs SSD accounts for taxable year
1999 in the interest of substantial justice and to be consistent with the CTA 1st
Divisions Resolution in the Traders Royal Bank case.25
The CTA En Banc also gave weight to BIR Ruling No. 10-200626 dated October 6,
2006 wherein the CIR expressly recognized the fact that the Purchase and Sale
Agreement between BOC and TRB did not result in their merger.27Elaborating on
this point the CTA En Banc said:
By practice, a BIR ruling contains the official written interpretative opinion of the
Commissioner of Internal Revenue addressed to a particular taxpayer regarding
his taxability over certain matters. Moreover, well-settled is the rule that the
interpretation of an administrative government agency like the BIR, is accorded
great respect and ordinarily controls the construction of the courts. The reason
behind this rule was explained in Nestle Philippines, Inc. vs. Court of Appeals, in
this wise: "The rationale for this rule relates not only to the emergence of the
multifarious needs of a modern or modernizing society and the establishment of
diverse administrative agencies for addressing and satisfying those needs; it also
relates to the accumulation of experience and growth of specialized capabilities
by the administrative agency charged with implementing a particular statute.
Here, We have no reason to disregard the interpretation made by the
Commissioner as it is in accord with the aforementioned Resolution of the First
Division.28 (Citation omitted.)

With the reversal of the CTA En Banc s June 27, 2007 Decision, the CIR filed a
Motion for Reconsideration29praying that BOC be held liable for the deficiency
DST of TRB on its SSD accounts for taxable year 1999. In support of its motion,
the CIR presented the following arguments:
[BOC] is estopped from raising the issue that it is not the party held liable for
Trader[s] Royal Bank (TRB)s deficiency DST assessment because it was not a
party to the proceeding before [the] Bureau of Internal Revenue (BIR).30
Issues not raised in the administrative level cannot be raised for the first time on
appeal.31
The deficiency Assessment of TRB can be enforced and collected against
[BOC].32
The Honorable Court En Banc erred in considering BIR Ruling No. 10-2006 as
basis to justify its conclusion.33
The Honorable Court En Banc has no sufficient justification for not considering
the Escrow fund in its Amended Decision.34
On November 15, 2007, the CTA En Banc denied the motion for lack of merit.
The CTA En Banc said that the rule that no issue may be raised for the first time
on appeal is not a hard and fast rule as "jurisprudence declares that the appellate
court is clothed with ample authority to review matters, even if they are not
assigned as errors in their appeal, if it finds that their consideration is necessary
in arriving at a just decision of the case." Thus, in the interest of justice, the CTA
En Banc found it necessary to consider and resolve issues, even though not
previously raised in the administrative level, if it is necessary for the complete
adjudication of the rights and obligations of the parties and it falls within the
issues they already identified.35
The CTA En Banc also reiterated its ruling in its Amended Decision, that BOC
could not be held liable for the deficiency DST on the SSD accounts of TRB, in
consonance with the Resolution of the CTA 1st Division in the Traders Royal
Bank case; and BIR Ruling No. 10-2006, which has not been shown to have
been revoked or nullified by the CIR.36

With the foregoing disquisition rendering the issue on the Escrow Fund moot, the
CTA En Banc found no more reason to discuss it.37
Unsuccessful in its Motion for Reconsideration, the CIR is now before this Court,
praying for the reinstatement of the CTA 2nd Divisions August 31, 2006 Decision,
which found BOC liable for the subject DST. The CIR posits the following
grounds in its Petition for Review:
I.
THE DEFICIENCY ASSESSMENT OF TRADERS ROYAL BANK (TRB) CAN BE
ENFORCED AND COLLECTED AGAINST RESPONDENT BANK OF
COMMERCE (BOC) BECAUSE THE LATTER ASSUMED THE OBLIGATIONS
AND LIABILITIES OF TRB PURSUANT TO THE PURCHASE AND SALE
AGREEMENT EXECUTED BETWEEN THEM AND THE APPLICABLE LAW ON
MERGER OF CORPORATIONS (SECTION 80 OF THE CORPORATION
CODE).
II.
THE COURT OF TAX APPEALS EN BANC GRAVELY ERRED IN REVERSING
ITS PREVIOUS DECISION WHICH AFFIRMED THE ASSESSMENT AND
ENFORCEMENT OF DEFICIENCY TAXES BY PETITIONER AGAINST
RESPONDENT, CONTRARY TO LAW AND JURISPRUDENCE.38
In response, BOC presented in its Comment,39 the following grounds in support
of its prayer that the CIRs petition be denied:
I. THE PETITION FOR REVIEW DID NOT RAISE QUESTIONS OF LAW.
II. THE COURT OF TAX APPEALS EN BANC WAS CORRECT AND DID NOT
COMMIT GRAVE ABUSE OF DISCRETION WHEN IT FOUND RESPONDENT
NOT LIABLE FOR THE SUBJECT TAX BECAUSE:
A. THERE WAS NO MERGER CREATED BETWEEN THE
RESPONDENT BANK OF COMMERCE AND TRADERS ROYAL BANK
(TRB).

B. THE PETITIONER ITSELF RULED AND RENDERED AN OPINION

UNDER BIR REVENUE RULING NO. 10-2006 THAT THERE WAS NO
MERGER BETWEEN THE RESPONDENT AND TRB.
III. RESPONDENT IS NOT ESTOPPED FROM RAISING THE ISSUE OF NONMERGER BETWEEN RESPONDENT AND TRB BECAUSE IT WAS NOT A
PARTY TO THE PROCEEDINGS BEFORE THE PETITIONER.
IV. THE PETITIONERS DECISION HOLDING RESPONDENT LIABLE FOR
TRBS TAX LIABILITY IS VOID SINCE RESPONDENT WAS NOT A PARTY TO
[THE] PROCEEDINGS BEFORE THE PETITIONER.40
This Courts Ruling
The petition is denied for lack of merit.
As the CTA En Banc stated in its Amended Decision, the issue boils down to
whether or not BOC is liable for the deficiency DST of TRB for taxable year 1999.
In resolving this issue, the CTA En Banc relied on 1) the Resolution in the
Traders Royal Bank case, wherein the CTA 1st Division made a categorical
pronouncement on the issue of merger based on the evidence at its disposal,
which included the Purchase and Sale Agreement; and 2) the CIRs own
administrative ruling on the issue of merger in BIR Ruling No. 10-2006 dated
October 6, 2006.
Unlike the Decision of the CTA 2nd Division in this case, which focused on the
taxability of the SSD accounts, the CTA 1st Divisions Resolution in Traders
Royal Bank, explicitly addressed the issue of merge between BOC and TRB. The
CTA 1st Division, relying on the provisions in both the Purchase and Sale
Agreement and the Tax Code, determined that the agreement did not result in a
merger, to wit:
In the Motion, [BOC] moves to have the Writ of Execution dated March 09, 2007
issued against it quashed on the ground that it is a separate entity from [TRB];
that there was no merger or consolidation between the two entities. Further,
[BOC] claims that the deficiency [DST] amounting to P27,698,562.92 for the
taxable years 1996 and 1997 of [TRB] was not one of the liabilities assumed by
[BOC] in the Purchase and Sale Agreement.

After carefully evaluating the records, the [CTA 1st Division] agrees with [BOC]
for the following reasons:
First, a close reading of the Purchase and Sale Agreement shows the following
self-explanatory provisions:
a) Items in litigation, both actual and prospective, against [TRB] are
excluded from the liabilities to be assumed by the Bank of Commerce
(Article II, paragraph 2); and
b) The Bank of Commerce and Traders Royal Bank shall continue to exist
as separate corporations with distinct corporate personalities (Article III,
paragraph 1).
Second, aside from the foregoing, the Purchase and Sale Agreement does not
contain any provision that the [BOC] acquired the identified assets of [TRB]
solely in exchange for the latters stocks. Merger is defined under Section 40 (C)
(6)(b) of the Tax Code as follows:
"b) The term "merger" or "consolidation", when used in this Section, shall be
understood to mean: (i) the ordinary merger or consolidation, or (ii) the
acquisition by one corporation of all or substantially all the properties of another
corporation solely for stock: Provided, [t]hat for a transaction to be regarded as a
merger or consolidation within the purview of this Section, it must be undertaken
for a bona fide business purpose and not solely for the purpose of escaping the
burden of taxation: x x x."
Since the purchase and sale of identified assets between the two companies
does not constitute a merger under the foregoing definition, the Bank of
Commerce is considered an entity separate from petitioner. Thus, it cannot be
held liable for the payment of the deficiency DST assessed against
petitioner.41 (Citation omitted.)
Thus, when the CTA En Banc took into consideration the above ruling in its
Amended Decision, it necessarily affirmed the findings of the CTA 1st Division
and found them to be correct. This Court likewise finds the foregoing ruling to be
correct. The CTA 1st Division was spot on when it interpreted the Purchase and
Sale Agreement to be just that and not a merger.

The Purchase and Sale Agreement, the document that is supposed to have tied
BOC and TRB together, was replete with provisions that clearly stated the intent
of the parties and the purpose of its execution, viz:
1. Article I of the Purchase and Sale Agreement set the terms of the assets sold
to BOC, while Article II was about the consideration for those assets. Moreover, it
was explicitly stated that liabilities not included in the Consolidated Statement of
Condition were excluded from the liabilities BOC was to assume, to wit:
ARTICLE II
CONSIDERATION: ASSUMPTION OF LIABILITIES
In consideration of the sale of identified recorded assets and properties covered
by this Agreement, [BOC] shall assume identified recorded TRBs liabilities
including booked contingent liabilities as listed and referred to in its Consolidated
Statement of Condition as of August 31, 2001, in the total amount of PESOS:
TEN BILLION FOUR HUNDRED ONE MILLION FOUR HUNDRED THIRTY-SIX
THOUSAND (P10,401,436,000.00), provided that the liabilities so assumed shall
not include:
xxxx
2. Items in litigation, both actual and prospective, against TRB which include but
are not limited to the following:
xxxx
2.3 Other liabilities not included in said Consolidated Statement of
Condition.42 (Emphases supplied.)
2. Article III of the Purchase and Sale Agreement enumerated in no uncertain
terms the effects and consequences of such agreement as follows:
ARTICLE III
EFFECTS AND CONSEQUENCES
The effectivity of this Agreement shall have the following effects and
consequences:

1. [BOC] and TRB shall continue to exist as separate corporations with

distinct corporate personalities;
2. With the transfer of its branching licenses to [BOC] and upon surrender
of its commercial banking license to BSP, TRB shall exist as an ordinary
corporation placed outside the supervisory jurisdiction of BSP. To this end,
TRB shall cause the amendment of its articles and by-laws to delete the
terms "bank" and "banking" from its corporate name and purpose.
3. There shall be no employer-employee relationship between [BOC] and
the personnel and officers of TRB.43 (Emphases supplied.)
Moreover, the second whereas clause, which served as the premise for the
subsequent terms in the agreement, stated that the sale of TRBs assets to BOC
were in consideration of BOCs assumption of some of TRBs liabilities, viz:
WHEREAS, TRB desires to sell and [BOC] desires to purchase identified
recorded assets of TRB in consideration of [BOC] assuming identified recorded
liabilities of TRB x x x.44
The clear terms of the above agreement did not escape the CIR itself when it
issued BIR Ruling No. 10-2006, wherein it was concluded that the Purchase and
Sale Agreement did not result in a merger between BOC and TRB.
In this petition however, the CIR insists that BIR Ruling No. 10-2006 cannot be
used as a basis for the CTA En Bancs Amended Decision, due to BOCs failure,
at the time it requested for such ruling, to inform the CIR of TRBs deficiency DST
assessments for taxable years 1996, 1997, and 1999.45
The CIRs contention is untenable.
A perusal of BIR Ruling No. 10-2006 will show that the CIR ruled on the issue of
merger without any reference to TRBs subject tax liabilities. The relevant
portions of such ruling are quoted below:
One distinctive characteristic for a merger to exist under the second part of
[Section 40(C)(b) of the 1997 NIRC] is that, it is not enough for a corporation to
acquire all or substantially all the properties of another corporation but it is also
necessary that such acquisition is solely for stock of the absorbing corporation.

Stated differently, the acquiring corporation will issue a block of shares equal to
the net asset value transferred, which stocks are in turn distributed to the
stockholders of the absorbed corporation in proportion to the respective share.
After a careful perusal of the facts presented as well as the details of the instant
case, it is observed by this Office that the transaction was purely concerning
acquisition and assumption by [BOC] of the recorded liabilities of TRB. The
[Purchase and Sale] Agreement did not mention with respect to the issuance of
shares of stock of [BOC] in favor of the stockholders of TRB. Such transaction is
absent of the requisite of a stock transfer and same belies the existence of a
merger. As such, this Office considers the Agreement between [BOC] and TRB
as one of "a sale of assets with an assumption of liabilities rather than merger."
xxxx
In the case at bar, [BOC] purchased identified recorded assets and properties of
TRB.1wphi1 In consideration thereof, [BOC] assumed certain liabilities of TRB
which were identified in the Consolidated Statement of Condition as of August
31, 2001. In this wise, the liabilities of TRB assumed by [BOC] were limited only
to those already identified as of August 31, 2001 amounting in all to Ten Billion
Four Hundred One Million Four Hundred Thirty-Six Thousand Pesos (P10,401,
436,000.00) x x x. More so, liabilities that were not assumed by [BOC] should not
be enforced against it. x x x. (Emphasis supplied.)
xxxx
2. Much have been said that the transaction between TRB and [BOC] is not a
merger within the contemplation of Section 40(C)(b) of the Tax Code of 1997. To
reiterate, this Office has ruled in the foregoing discussion that the transaction is
one of sale of assets with assumption of identified recorded liabilities of TRB. As
such, the liabilities assumed by [BOC] amounted only to P10,401,436,000.00
with some enumerated exclusion in the Agreeement. x x x.46
Clearly, the CIR, in BIR Ruling No. 10-2006, ruled on the issue of merger without
taking into consideration TRBs pending tax deficiencies. The ruling was based
on the Purchase and Sale Agreement, factual evidence on the status of both
companies, and the Tax Code provision on merger. The CIRs knowledge then of
TRBs tax deficiencies would not be material as to affect the CIRs ruling. The
resolution of the issue on merger depended on the agreement between TRB and

BOC, as detailed in the Purchase and Sale Agreement, and not contingent on
TRBs tax liabilities.
It is worthy to note that in the Joint Stipulation of Facts and Issues submitted by
the parties, it was explicitly stated that both BOC and TRB continued to exist as
separate corporations with distinct corporate personalities, despite the effectivity
of the Purchase and Sale Agreement.47
Considering the foregoing, this Court finds no reason to reverse the CTA En
Bancs Amended Decision. In reconsidering its June 27, 2007 Decision, the CTA
En Banc not only took into account the CTA 1st Divisions ruling in Traders Royal
Bank, which, save for the facts that BOC was not made a party to the case, and
the deficiency DST assessed were for taxable years 1996 and 1997, is almost
identical to the case herein; but more importantly, the CIRs very own ruling on
the issue of merger between BOC
WHEREFORE, the petition is hereby DENIED.
SO ORDERED.