G.R. No.

169507
AIR CANADA, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.:

An offline international air carrier selling passage tickets in the Philippines, through a general sales agent, is a resident
foreign corporation doing business in the Philippines. As such, it is taxable under Section 28(A)(l), and not Section 28(A)(3)
of the 1997 National Internal Revenue Code, subject to any applicable tax treaty to which the Philippines is a signatory.
Pursuant to Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air Canada may only be imposed a maximum
tax of 1 % of its gross revenues earned from the sale of its tickets in the Philippines.

This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of Tax Appeals En Banc, which in turn
affirmed the December 22, 2004 Decision3 and April 8, 2005 Resolution4 of the Court of Tax Appeals First Division denying
Air Canadas claim for refund.

Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]" 5 On April 24, 2000, it was granted
an authority to operate as an offline carrier by the Civil Aeronautics Board, subject to certain conditions, which authority
would expire on April 24, 2005.6 "As an off-line carrier, [Air Canada] does not have flights originating from or coming to the
Philippines [and does not] operate any airplane [in] the Philippines[.]" 7

On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales agent in the
Philippines.8 Aerotel "sells [Air Canadas] passage documents in the Philippines."9

For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada, through Aerotel, filed
quarterly and annual income tax returns and paid the income tax on Gross Philippine Billings in the total amount of
5,185,676.77,10 detailed as follows:

Applicable Quarter[/]Year Date Filed/Paid Amount of Tax

3rd Qtr 2000 November 29, 2000 P 395,165.00

Annual ITR 2000 April 16, 2001 381,893.59

1st Qtr 2001 May 30, 2001 522,465.39

2nd Qtr 2001 August 29, 2001 1,033,423.34

3rd Qtr 2001 November 29, 2001 765,021.28

Annual ITR 2001 April 15, 2002 328,193.93

1st Qtr 2002 May 30, 2002 594,850.13

2nd Qtr 2002 August 29, 2002 1,164,664.11

TOTAL P 5,185,676.77 11
On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income taxes amounting to
5,185,676.77 before the Bureau of Internal Revenue,12 Revenue District Office No. 47-East Makati.13It found basis from
the revised definition14 of Gross Philippine Billings under Section 28(A)(3)(a) of the 1997 National Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

....

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two
and onehalf 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. (Emphasis supplied)

To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the Court of Tax Appeals on
November 29, 2002.15 The case was docketed as C.T.A. Case No. 6572.16

On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying the Petition for Review and,
hence, the claim for refund.17 It found that Air Canada was engaged in business in the Philippines through a local agent that
sells airline tickets on its behalf. As such, it should be taxed as a resident foreign corporation at the regular rate of
32%.18 Further, according to the Court of Tax Appeals First Division, Air Canada was deemed to have established a
"permanent establishment"19 in the Philippines under Article V(2)(i) of the Republic of the Philippines-Canada Tax
Treaty20 by the appointment of the local sales agent, "in which [the] petitioner uses its premises as an outlet where sales of
[airline] tickets are made[.]"21

Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the Court of Tax Appeals First
Divisions Resolution dated April 8, 2005 for lack of merit. 22 The First Division held that while Air Canada was not liable for
tax on its Gross Philippine Billings under Section 28(A)(3), it was nevertheless liable to pay the 32% corporate income tax
on income derived from the sale of airline tickets within the Philippines pursuant to Section 28(A)(1). 23

On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc. 24 The appeal was docketed as CTA EB No.
86.25
In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc affirmed the findings of the First Division. 26 The
En Banc ruled that Air Canada is subject to tax as a resident foreign corporation doing business in the Philippines since it
sold airline tickets in the Philippines.27 The Court of Tax Appeals En Banc disposed thus:

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and
accordingly, DISMISSED for lack of merit.28

Hence, this Petition for Review29 was filed.

The issues for our consideration are:

First, whether petitioner Air Canada, as an offline international carrier selling passage documents through a general sales
agent in the Philippines, is a resident foreign corporation within the meaning of Section 28(A)(1) of the 1997 National Internal
Revenue Code;

Second, whether petitioner Air Canada is subject to the 2% tax on Gross Philippine Billings pursuant to Section 28(A)(3).
If not, whether an offline international carrier selling passage documents through a general sales agent can be subject to
the regular corporate income tax of 32%30 on taxable income pursuant to Section 28(A)(1);

Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:

a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

b. Whether the appointment of a local general sales agent in the Philippines falls under the definition of "permanent
establishment" under Article V(2)(i) of the Republic of the Philippines-Canada Tax Treaty; and

Lastly, whether petitioner Air Canada is entitled to the refund of 5,185,676.77 pertaining allegedly to erroneously paid tax
on Gross Philippine Billings from the third quarter of 2000 to the second quarter of 2002.

Petitioner claims that the general provision imposing the regular corporate income tax on resident foreign corporations
provided under Section 28(A)(1) of the 1997 National Internal Revenue Code does not apply to "international
carriers,"31 which are especially classified and taxed under Section 28(A)(3). 32 It adds that the fact that it is no longer subject
to Gross Philippine Billings tax as ruled in the assailed Court of Tax Appeals Decision "does not render it ipso facto subject
to 32% income tax on taxable income as a resident foreign corporation." 33 Petitioner argues that to impose the 32% regular
corporate income tax on its income would violate the Philippine governments covenant under Article VIII of the Republic of
the Philippines-Canada Tax Treaty not to impose a tax higher than 1% of the carriers gross revenue derived from sources
within the Philippines.34 It would also allegedly result in "inequitable tax treatment of on-line and off-line international air
carriers[.]"35

Also, petitioner states that the income it derived from the sale of airline tickets in the Philippines was income from services
and not income from sales of personal property.36 Petitioner cites the deliberations of the Bicameral Conference Committee
on House Bill No. 9077 (which eventually became the 1997 National Internal Revenue Code), particularly Senator Juan
Ponce Enriles statement,37 to reveal the "legislative intent to treat the revenue derived from air carriage as income from
services, and that the carriage of passenger or cargo as the activity that generates the income." 38 Accordingly, applying the
principle on the situs of taxation in taxation of services, petitioner claims that its income derived "from services rendered
outside the Philippines [was] not subject to Philippine income taxation." 39

Petitioner further contends that by the appointment of Aerotel as its general sales agent, petitioner cannot be considered to
have a "permanent establishment"40 in the Philippines pursuant to Article V(6) of the Republic of the Philippines-Canada
Tax Treaty.41 It points out that Aerotel is an "independent general sales agent that acts as such for . . . other international
airline companies in the ordinary course of its business."42 Aerotel sells passage tickets on behalf of petitioner and receives
a commission for its services.43 Petitioner states that even the Bureau of Internal Revenuethrough VAT Ruling No. 003-
04 dated February 14, 2004has conceded that an offline international air carrier, having no flight operations to and from
the Philippines, is not deemed engaged in business in the Philippines by merely appointing a general sales agent. 44 Finally,
petitioner maintains that its "claim for refund of erroneously paid Gross Philippine Billings cannot be denied on the ground
that [it] is subject to income tax under Section 28 (A) (1)" 45 since it has not been assessed at all by the Bureau of Internal
Revenue for any income tax liability.46

On the other hand, respondent maintains that petitioner is subject to the 32% corporate income tax as a resident foreign
corporation doing business in the Philippines. Petitioners total payment of 5,185,676.77 allegedly shows that petitioner
was earning a sizable income from the sale of its plane tickets within the Philippines during the relevant
period.47 Respondent further points out that this court in Commissioner of Internal Revenue v. American Airlines,
Inc.,48 which in turn cited the cases involving the British Overseas Airways Corporation and Air India, had already settled
that "foreign airline companies which sold tickets in the Philippines through their local agents . . . [are] considered resident
foreign corporations engaged in trade or business in the country." 49 It also cites Revenue Regulations No. 6-78 dated April
25, 1978, which defined the phrase "doing business in the Philippines" as including "regular sale of tickets in the Philippines
by offline international airlines either by themselves or through their agents." 50

Respondent further contends that petitioner is not entitled to its claim for refund because the amount of 5,185,676.77 it
paid as tax from the third quarter of 2000 to the second quarter of 2001 was still short of the 32% income tax due for the
period.51 Petitioner cannot allegedly claim good faith in its failure to pay the right amount of tax since the National Internal
Revenue Code became operative on January 1, 1998 and by 2000, petitioner should have already been aware of the
implications of Section 28(A)(3) and the decided cases of this courts ruling on the taxability of offline international carriers
selling passage tickets in the Philippines.52

At the outset, we affirm the Court of Tax Appeals ruling that petitioner, as an offline international carrier with no landing
rights in the Philippines, is not liable to tax on Gross Philippine Billings under Section 28(A)(3) of the 1997 National Internal
Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations.

(A) Tax on Resident Foreign Corporations. -

....
(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. (Emphasis supplied)

Under the foregoing provision, the tax attaches only when the carriage of persons, excess baggage, cargo, and mail
originated from the Philippines in a continuous and uninterrupted flight, regardless of where the passage documents were
sold.

Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine Billings tax.

II

Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner falls within the definition of
resident foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue Code, thus, it may be subject to
32%53 tax on its taxable income:

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%54). (Emphasis supplied)

The definition of "resident foreign corporation" has not substantially changed throughout the amendments of the National
Internal Revenue Code. All versions refer to "a foreign corporation engaged in trade or business within the Philippines."

Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on June 15, 1939, defined
"resident foreign corporation" as applying to "a foreign corporation engaged in trade or business within the Philippines or
having an office or place of business therein."55
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No. 6110, approved on August 4,
1969, reads:

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 life 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.56 (Emphasis supplied)

Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the 1939 National Internal
Revenue Code. Section 24(b)(2) on foreign resident corporations was amended, but it still provides that "[a] corporation
organized, authorized, or existing under the laws of any 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[.]"57

As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways Corporation 58declared British
Overseas Airways Corporation, an international air carrier with no landing rights in the Philippines, as a resident foreign
corporation engaged in business in the Philippines through its local sales agent that sold and issued tickets for the airline
company.59 This court discussed that:

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. "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.["]

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 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. 60 (Emphasis supplied, citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its definition of "doing business"
with regard to foreign corporations. Section 3(d) of the law enumerates the activities that constitute doing business:

d. the phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison"
offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay
in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts
that imply a continuity of commercial dealings or arrangements, and contemplate 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 of the purpose and object of the business organization: Provided, however, That the phrase "doing
business" shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations
duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to
represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account[.]61 (Emphasis supplied)

While Section 3(d) above states that "appointing a representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account" is not considered as "doing business," the Implementing Rules and
Regulations of Republic Act No. 7042 clarifies that "doing business" includes "appointing representatives or
distributors, operating under full control of the foreign corporation, domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totaling one hundred eighty (180) days or more[.]"62

An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who maintains office or who
has designated or appointed agents or employees in the Philippines, who sells or offers for sale any air transportation in
behalf of said foreign air carrier and/or others, or negotiate for, or holds itself out by solicitation, advertisement, or otherwise
sells, provides, furnishes, contracts, or arranges for such transportation." 63

"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil Aeronautics] Board for such
authority."64 Each offline carrier must file with the Civil Aeronautics Board a monthly report containing information on the
tickets sold, such as the origin and destination of the passengers, carriers involved, and commissions received. 65

Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.

Aerotel performs acts or works or exercises functions that are incidental and beneficial to the purpose of petitioners
business. The activities of Aerotel bring direct receipts or profits to petitioner.66 There is nothing on record to show that
Aerotel solicited orders alone and for its own account and without interference from, let alone direction of, petitioner. On the
contrary, Aerotel cannot "enter into any contract on behalf of [petitioner Air Canada] without the express written consent of
[the latter,]"67 and it must perform its functions according to the standards required by petitioner. 68 Through Aerotel,
petitioner is able to engage in an economic activity in the Philippines.

Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline carrier in the Philippines
for a period of five years, or from April 24, 2000 until April 24, 2005. 69
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources within the
Philippines. Petitioners income from sale of airline tickets, through Aerotel, is income realized from the pursuit of its business
activities in the Philippines.

III

However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997 National Internal Revenue Code
must consider the existence of an effective tax treaty between the Philippines and the home country of the foreign air carrier.

In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this court held that Section 28(A)(3)(a)
does not categorically exempt all international air carriers from the coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a)
is applicable to a taxpayer, then the general rule under Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a)
does not apply, an international air carrier would be liable for the tax under Section 28(A)(1). 71

This court in South African Airways declared that the correct interpretation of these provisions is that: "international air
carrier[s] maintain[ing] flights to and from the Philippines . . . shall be taxed at the rate of 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 [like sale of airline tickets] will be taxed at the rate of 32% of such [taxable] income."72

In this case, there is a tax treaty that must be taken into consideration to determine the proper tax rate.

A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating double taxation on income
and capital, preventing fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax
treatment to foreign residents or nationals."73 Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc.74 explained
the purpose of a tax treaty:

The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in
order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More precisely, the tax conventions are
drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods.

The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the
movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and
the protection against double taxation is crucial in creating such a climate. 75 (Emphasis in the original, citations omitted)

Observance of any treaty obligation binding upon the government of the Philippines is anchored on the constitutional
provision that the Philippines "adopts the generally accepted principles of international law as part of the law of the
land[.]"76 Pacta sunt servanda is a fundamental international law principle that requires agreeing parties to comply with their
treaty obligations in good faith.77

Hence, the application of the provisions of the National Internal Revenue Code must be subject to the provisions of tax
treaties entered into by the Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,78 this court stressed the binding effects of tax
treaties. It dealt with the issue of "whether the failure to strictly comply with [Revenue Memorandum Order] RMO No. 1-
200079 will deprive persons or corporations of the benefit of a tax treaty." 80 Upholding the tax treaty over the administrative
issuance, this court reasoned thus:

Our Constitution provides for adherence to the general principles of international law as part of the law of the land. The
time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on
the part of the states that enter into the agreement. Every treaty in force is binding upon the parties, and obligations under
the treaty must be performed by them in good faith. More importantly, treaties have the force and effect of law in this
jurisdiction.

Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in turn, help the
taxpayer avoid simultaneous taxations in two different jurisdictions." CIR v. S.C. Johnson and Son, Inc. further clarifies that
"tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined
as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter
and for identical periods. The apparent rationale for doing away with double taxation is to encourage the free flow of goods
and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating
robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such a climate." Simply put, tax treaties
are entered into to minimize, if not eliminate the harshness of international juridical double taxation, which is why they are
also known as double tax treaty or double tax agreements.

"A state that has contracted valid international obligations is bound to make in its legislations those modifications that may
be necessary to ensure the fulfillment of the obligations undertaken." Thus, laws and issuances must ensure that the reliefs
granted under tax treaties are accorded to the parties entitled thereto. The BIR must not impose additional requirements
that would negate the availment of the reliefs provided for under international agreements. More so, when the RPGermany
Tax Treaty does not provide for any pre-requisite for the availment of the benefits under said agreement.

....

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

The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000. Logically,
noncompliance with tax treaties has negative implications on international relations, and unduly discourages foreign
investors. While the consequences sought to be prevented by RMO No. 1-2000 involve an administrative procedure, these
may be remedied through other system management processes, e.g., the imposition of a fine or penalty. But we cannot
totally deprive those who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance
requiring prior application for tax treaty relief.81 (Emphasis supplied, citations omitted)
On March 11, 1976, the representatives82 for the government of the Republic of the Philippines and for the government of
Canada signed the Convention between the Philippines and Canada for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income (Republic of the Philippines-Canada Tax Treaty). This treaty
entered into force on December 21, 1977.

Article V83 of the Republic of the Philippines-Canada Tax Treaty defines "permanent establishment" as a "fixed place of
business in which the business of the enterprise is wholly or partly carried on." 84

Even though there is no fixed place of business, an enterprise of a Contracting State is deemed to have a permanent
establishment in the other Contracting State if under certain conditions there is a person acting for it.

Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that "[a] person acting in a Contracting
State on behalf of an enterprise of the other Contracting State (other than an agent of independent status to whom paragraph
6 applies) shall be deemed to be a permanent establishment in the first-mentioned State if . . . he has and habitually
exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the
purchase of goods or merchandise for that enterprise[.]" The provision seems to refer to one who would be considered an
agent under Article 186885 of the Civil Code of the Philippines.

On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall not be deemed to have a permanent
establishment in the other Contracting State merely because it carries on business in that other State through a broker,
general commission agent or any other agent of an independent status, where such persons are acting in the ordinary
course of their business."

Considering Article XV86 of the same Treaty, which covers dependent personal services, the term "dependent" would imply
a relationship between the principal and the agent that is akin to an employer-employee relationship.

Thus, an agent may be considered to be dependent on the principal where the latter exercises comprehensive control and
detailed instructions over the means and results of the activities of the agent. 87

Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of the Philippines, defines a
general sales agent as "a person, not a bonafide employee of an air carrier, who pursuant to an authority from an airline,
by itself or through an agent, sells or offers for sale any air transportation, or negotiates for, or holds himself out by
solicitation, advertisement or otherwise as one who sells, provides, furnishes, contracts or arranges for, such air
transportation."88 General sales agents and their property, property rights, equipment, facilities, and franchise are subject
to the regulation and control of the Civil Aeronautics Board.89 A permit or authorization issued by the Civil Aeronautics Board
is required before a general sales agent may engage in such an activity. 90

Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created a "permanent
establishment" in the Philippines as defined under the Republic of the Philippines-Canada Tax Treaty.

Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of transportation on petitioner and
handle reservations, appointment, and supervision of International Air Transport Association approved and petitioner-
approved sales agents, including the following services:
ARTICLE 7
GSA SERVICES

The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following services:
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in every matter relating to this
Agreement;
....
c) Promotion of passenger transportation on AC;
....
e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of the GSA [Philippines], of traffic
documents issued by AC outside the said territory of the GSA [Philippines], as required by the passenger(s);
....
h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs and publicity material provided
by AC in accordance with the reasonable requirements of AC;
....
j) Distribution of official press releases provided by AC to media and reference of any press or public relations inquiries to
AC;
....
o) Submission for ACs approval, of an annual written sales plan on or before a date to be determined by AC and in a form
acceptable to AC;
....
q) Submission of proposals for ACs approval of passenger sales agent incentive plans at a reasonable time in advance of
proposed implementation.

r) Provision of assistance on request, in its relations with Governmental and other authorities, offices and agencies in the
Territory [Philippines].

....

u) Follow AC guidelines for the handling of baggage claims and customer complaints and, unless otherwise stated in the
guidelines, refer all such claims and complaints to AC.91

Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at its own expense and
acceptable to [petitioner Air Canada], adequate and suitable premises, qualified staff, equipment, documentation, facilities
and supervision and in consideration of the remuneration and expenses payable[,] [will] defray all costs and expenses of
and incidental to the Agency."92 "[I]t is the sole employer of its employees and . . . is responsible for [their] actions . . . or
those of any subcontractor."93 In remuneration for its services, Aerotel would be paid by petitioner a commission on sales
of transportation plus override commission on flown revenues. 94 Aerotel would also be reimbursed "for all authorized
expenses supported by original supplier invoices."95

Aerotel is required to keep "separate books and records of account, including supporting documents, regarding all
transactions at, through or in any way connected with [petitioner Air Canada] business." 96
"If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased way." 97 Aerotel cannot "accept
additional appointments as General Sales Agent of any other carrier without the prior written consent of [petitioner Air
Canada]."98
The Passenger General Sales Agency Agreement "may be terminated by either party without cause upon [no] less than 60
days prior notice in writing[.]"99 In case of breach of any provisions of the Agreement, petitioner may require Aerotel "to cure
the breach in 30 days failing which [petitioner Air Canada] may terminate [the] Agreement[.]" 100
The following terms are indicative of Aerotels dependent status:
First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or takes control of another entity or
merges with or is acquired or controlled by another person or entity[.]"101 Except with the written consent of petitioner, Aerotel
must not acquire a substantial interest in the ownership, management, or profits of a passenger sales agent affiliated with
the International Air Transport Association or a non-affiliated passenger sales agent nor shall an affiliated passenger sales
agent acquire a substantial interest in Aerotel as to influence its commercial policy and/or management decisions.102 Aerotel
must also provide petitioner "with a report on any interests held by [it], its owners, directors, officers, employees and their
immediate families in companies and other entities in the aviation industry or . . . industries related to it[.]" 103 Petitioner may
require that any interest be divested within a set period of time.104
Second, in carrying out the services, Aerotel cannot enter into any contract on behalf of petitioner without the express written
consent of the latter;105 it must act according to the standards required by petitioner; 106 "follow the terms and provisions of
the [petitioner Air Canada] GSA Manual [and all] written instructions of [petitioner Air Canada;]" 107 and "[i]n the absence of
an applicable provision in the Manual or instructions, [Aerotel must] carry out its functions in accordance with [its own]
standard practices and procedures[.]"108
Third, Aerotel must only "issue traffic documents approved by [petitioner Air Canada] for all transportation over [its]
services[.]"109 All use of petitioners name, logo, and marks must be with the written consent of petitioner and according to
petitioners corporate standards and guidelines set out in the Manual.110
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the transportation sold by Aerotel are for
the account of petitioner, except in the case of negligence of Aerotel. 111
Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales Agency Agreement
executed between the parties. It has the authority or power to conclude contracts or bind petitioner to contracts entered into
in the Philippines. A third-party liability on contracts of Aerotel is to petitioner as the principal, and not to Aerotel, and liability
to such third party is enforceable against petitioner. While Aerotel maintains a certain independence and its activities may
not be devoted wholly to petitioner, nonetheless, when representing petitioner pursuant to the Agreement, it must carry out
its functions solely for the benefit of petitioner and according to the latters Manual and written instructions. Aerotel is required
to submit its annual sales plan for petitioners approval.
In essence, Aerotel extends to the Philippines the transportation business of petitioner. It is a conduit or outlet through which
petitioners airline tickets are sold.112
Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax Treaty, the "business profits" of an
enterprise of a Contracting State is "taxable only in that State[,] unless the enterprise carries on business in the other
Contracting State through a permanent establishment[.]"113 Thus, income attributable to Aerotel or from business activities
effected by petitioner through Aerotel may be taxed in the Philippines. However, pursuant to the last paragraph114 of Article
VII in relation to Article VIII115 (Shipping and Air Transport) of the same Treaty, the tax imposed on income derived from the
operation of ships or aircraft in international traffic should not exceed 1% of gross revenues derived from Philippine
sources.
IV
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue
Code on its taxable income116 from sale of airline tickets in the Philippines, it could only be taxed at a maximum of 1% of
gross revenues, pursuant to Article VIII of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner as a
"foreign corporation organized and existing under the laws of Canada[.]"117
Tax treaties form part of the law of the land,118 and jurisprudence has applied the statutory construction principle that specific
laws prevail over general ones.119
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and became valid and effective on
that date. On the other hand, the applicable provisions 120 relating to the taxability of resident foreign corporations and the
rate of such tax found in the National Internal Revenue Code became effective on January 1, 1998. 121 Ordinarily, the later
provision governs over the earlier one.122 In this case, however, the provisions of the Republic of the Philippines-Canada
Tax Treaty are more specific than the provisions found in the National Internal Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty and not simply a statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds of
all the Members of the Senate.
This provision states the second of two ways through which international obligations become binding. Article II, Section 2
of the Constitution deals with international obligations that are incorporated, while Article VII, Section 21 deals with
international obligations that become binding through ratification.
"Valid and effective" means that treaty provisions that define rights and duties as well as definite prestations have effects
equivalent to a statute. Thus, these specific treaty provisions may amend statutory provisions. Statutory provisions may
also amend these types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not international obligations erga omnes. We are also not
required to rule in this case on the effect of international customary norms especially those with jus cogens character.
The second paragraph of Article VIII states that "profits from sources within a Contracting State derived by an enterprise of
the other Contracting State from the operation of ships or aircraft in international traffic may be taxed in the first-mentioned
State but the tax so charged shall not exceed the lesser of a) one and one-half per cent of the gross revenues derived from
sources in that State; and b) the lowest rate of Philippine tax imposed on such profits derived by an enterprise of a third
State."
The Agreement between the government of the Republic of the Philippines and the government of Canada on Air Transport,
entered into on January 14, 1997, reiterates the effectivity of Article VIII of the Republic of the Philippines-Canada Tax
Treaty:
ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of the Convention between the Philippines
and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income,
signed at Manila on March 31, 1976 and entered into force on December 21, 1977, and any amendments thereto, in respect
of the operation of aircraft in international traffic.123
Petitioners income from sale of ticket for international carriage of passenger is income derived from international operation
of aircraft. The sale of tickets is closely related to the international operation of aircraft that it is considered incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax limited to a certain
extent[.]"124 Thus, we are bound to extend to a Canadian air carrier doing business in the Philippines through a local sales
agent the benefit of a lower tax equivalent to 1% on business profits derived from sale of international air transportation.
V
Finally, we reject petitioners contention that the Court of Tax Appeals erred in denying its claim for refund of erroneously
paid Gross Philippine Billings tax on the ground that it is subject to income tax under Section 28(A)(1) of the National Internal
Revenue Code because (a) it has not been assessed at all by the Bureau of Internal Revenue for any income tax
liability;125 and (b) internal revenue taxes cannot be the subject of set-off or compensation,126citing Republic v. Mambulao
Lumber Co., et al.127 and Francia v. Intermediate Appellate Court.128
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,129 we have ruled that "[i]n 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."130 The determination of the proper category of tax that should have been paid is
incidental and necessary to resolve the issue of whether a refund should be granted. 131 Thus:
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.
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. 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, 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.
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.
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. 132
Hence, the Court of Tax Appeals properly denied petitioners claim for refund of allegedly erroneously paid tax on its Gross
Philippine Billings, on the ground that it was liable instead for the regular 32% tax on its taxable income received from
sources within the Philippines. Its determination of petitioners liability for the 32% regular income tax was made merely for
the purpose of ascertaining petitioners entitlement to a tax refund and not for imposing any deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited are based on different
circumstances. In both cited cases,133 the taxpayer claimed that his (its) tax liability was off-set by his (its) claim against the
government.
Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber contended that the amounts it paid to the
government as reforestation charges from 1947 to 1956, not having been used in the reforestation of the area covered by
its license, may be set off or applied to the payment of forest charges still due and owing from it. 134Rejecting Mambulaos
claim of legal compensation, this court ruled:
[A]ppellant and appellee are not mutually creditors and debtors of each other. Consequently, the law on compensation is
inapplicable. On this point, the trial court correctly observed:
Under Article 1278, NCC, compensation should take place when two persons in their own right are creditors and debtors of
each other. With respect to the forest charges which the defendant Mambulao Lumber Company has paid to the
government, they are in the coffers of the government as taxes collected, and the government does not owe anything to
defendant Mambulao Lumber Company. So, it is crystal clear that the Republic of the Philippines and the Mambulao Lumber
Company are not creditors and debtors of each other, because compensation refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, can not be
the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off,
which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the
state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on. * * *. (80 C.J.S. 7374.)
The general rule, based on grounds of public policy is well-settled that no set-off is admissible against demands for taxes
levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in
the nature of contracts between the party and party but grow out of a duty to, and are the positive acts of the government,
to the making and enforcing of which, the personal consent of individual taxpayers is not required. * * * If the taxpayer can
properly refuse to pay his tax when called upon by the Collector, because he has a claim against the governmental body
which is not included in the tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the
taxpayers claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and meanwhile the financial
affairs of the government will be thrown into great confusion. (47 Am. Jur. 766767.)135 (Emphasis supplied)
In Francia, this court did not allow legal compensation since not all requisites of legal compensation provided under Article
1279 were present.136 In that case, a portion of Francias property in Pasay was expropriated by the national
government,137 which did not immediately pay Francia. In the meantime, he failed to pay the real property tax due on his
remaining property to the local government of Pasay, which later on would auction the property on account of such
delinquency.138 He then moved to set aside the auction sale and argued, among others, that his real property tax
delinquency was extinguished by legal compensation on account of his unpaid claim against the national
government.139 This court ruled against Francia:
There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are
reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do
not satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the
other;
xxx xxx xxx
(3) that the two debts be due.
 xxx xxx xxx
This principal contention of the petitioner has no merit. 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.
....
There are other factors which compel us to rule against the petitioner. The tax was due to the city government while the
expropriation was effected by the national government. Moreover, the amount of 4,116.00 paid by the national government
for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before the sale at public
auction of his remaining property. Notice of the deposit dated September 28, 1977 was received by the petitioner on
September 30, 1977. The petitioner admitted in his testimony that he knew about the 4,116.00 deposited with the bank
but he did not withdraw it. It would have been an easy matter to withdraw 2,400.00 from the deposit so that he could pay
the tax obligation thus aborting the sale at public auction.140
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v. Commission on Audit141 and Philex
Mining Corporation v. Commissioner of Internal Revenue.142 In Caltex, this court reiterated:
[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.143 (Citations omitted)
Philex Mining ruled that "[t]here 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."144 Rejecting Philex Minings assertion
that the imposition of surcharge and interest was unjustified because it had no obligation to pay the excise tax liabilities
within the prescribed period since, after all, it still had pending claims for VAT input credit/refund with the Bureau of Internal
Revenue, this court explained:
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim
for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature
of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the
taxpayer. If any tax payer can defer the payment of taxes by raising the defense that it still has a pending claim for refund
or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they
fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of
the lawsuit it filed against the government. Moreover, Philexs theory that would automatically apply its VAT input
credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over
the manner by which taxpayers credit and offset their tax liabilities.145 (Citations omitted)
In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to pay tax on the ground that
the tax liabilities were off-set against any alleged claim the taxpayer may have against the government. Such would merely
be in keeping with the basic policy on prompt collection of taxes as the lifeblood of the government.1wphi1
Here, what is involved is a denial of a taxpayers refund claim on account of the Court of Tax Appeals finding of its liability
for another tax in lieu of the Gross Philippine Billings tax that was allegedly erroneously paid.
Squarely applicable is South African Airways where this court rejected similar arguments on the denial of claim for tax
refund:
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax refund with a tax
deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying 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.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above pronouncements are,
therefore, still applicable today.
Here, petitioner's similar tax refund claim assumes that the tax return that it filed was correct. Given, however, the finding
of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(l), the
correctness of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a
refund.146 (Emphasis supplied, citation omitted)
In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue, 147 this court upheld the denial of the
claim for refund based on the Court of Tax Appeals' finding that the taxpayer had, through erroneous deductions on its
gross income, underpaid its Gross Philippine Billing tax on cargo revenues for 1999, and the amount of underpayment was
even greater than the refund sought for erroneously paid Gross Philippine Billings tax on passenger revenues for the same
taxable period.148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the rate of 1 % of its gross
revenues amounting to P345,711,806.08149 from the third quarter of 2000 to the second quarter of 2002. It is quite apparent
that the tax imposable under Section 28(A)(l) of the 1997 National Internal Revenue Code [32% of taxable income, that is,
gross income less deductions] will exceed the maximum ceiling of 1 % of gross revenues as decreed in Article VIII of the
Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.
WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and Resolution dated April 8, 2005 of the
Court of Tax Appeals En Banc are AFFIRMED.
SO ORDERED.
MARVIC M.V.F. LEONEN
Associate Justice
G.R. No. 109289 October 3, 1994

RUFINO R. TAN, petitioner,

vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL
REVENUE, respondents.

VITUG, J.:

These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of Republic
Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions
of the National Internal Revenue Code and, in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents pursuant to
said law.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation.

In G.R. No. 109289, it is asserted that the enactment of Republic Act

No. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one subject which shall
be expressed in the title thereof.

Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve
a progressive system of taxation.

Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall
any person be denied the equal protection of the laws.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public respondents have
exceeded their rule-making authority in applying SNIT to general professional partnerships.

The Solicitor General espouses the position taken by public respondents.

The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have filed their
respective memoranda.

G.R. No. 109289

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or, at least,
deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals
Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal
Revenue Code, as Amended.

The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now amended,
provide:

Sec. 21. Tax on citizens or residents.

xxx xxx xxx

(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the Practice of Profession. A tax
is hereby imposed upon the taxable net income as determined in Section 27 received during each taxable year from all
 sources, other than income covered by paragraphs (b), (c), (d) and (e) of this section by every individual whether
a citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices his profession herein,
determined in accordance with the following schedule:

Not over P10,000 3%

Over P10,000 P300 + 9%

but not over P30,000 of excess over P10,000

Over P30,000 P2,100 + 15%

but not over P120,00 of excess over P30,000

Over P120,000 P15,600 + 20%

but not over P350,000 of excess over P120,000

Over P350,000 P61,600 + 30%

of excess over P350,000

Sec. 29. Deductions from gross income. In computing taxable income subject to tax under Sections 21(a), 24(a), (b)
and (c); and 25 (a)(1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this
section: Provided, however, That in computing taxable income subject to tax under Section 21 (f) in the case of individuals
engaged in business or practice of profession, only the following direct costs shall be allowed as deductions:

(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or
practice of their profession;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

(e) Depreciation;

(f) Contributions made to the Government and accredited relief organizations for the rehabilitation of
calamity stricken areas declared by the President; and

(g) Interest paid or accrued within a taxable year on loans contracted from accredited financial institutions
which must be proven to have been incurred in connection with the conduct of a taxpayer's profession,
trade or business.

For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty per
cent (40%) of their gross receipts shall be allowed as deductions to answer for business or professional
expenses as the case may be.

On the basis of the above language of the law, it would be difficult to accept petitioner's view that the amendatory law should
be considered as having now adopted a gross income, instead of as having still retained the net income, taxation scheme.
The allowance for deductible items, it is true, may have significantly been reduced by the questioned law in comparison with
that which has prevailed prior to the amendment; limiting, however, allowable deductions from gross income is neither
discordant with, nor opposed to, the net income tax concept. The fact of the matter is still that various deductions, which are
by no means inconsequential, continue to be well provided under the new law.

Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation intended to unite
the members of the legislature who favor any one of unrelated subjects in support of the whole act, (b) to avoid surprises
or even fraud upon the legislature, and (c) to fairly apprise the people, through such publications of its proceedings as are
usually made, of the subjects of legislation.1 The above objectives of the fundamental law appear to us to have been
sufficiently met. Anything else would be to require a virtual compendium of the law which could not have been the intendment
of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be uniform and
equitable" in that the law would now attempt to tax single proprietorships and professionals differently from the manner it
imposes the tax on corporations and partnerships. The contention clearly forgets, however, that such a system of income
taxation has long been the prevailing rule even prior to Republic Act No. 7496.

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation,
similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil.
371). Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not
arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to
both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class
(Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).

What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the
income tax system towards the schedular approach2 in the income taxation of individual taxpayers and to maintain, by and
large, the present global treatment3 on taxable corporations. We certainly do not view this classification to be arbitrary and
inappropriate.

Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes to be an
imbalance between the tax liabilities of those covered by the amendatory law and those who are not. With the legislature
primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects)
and situs (place) of taxation. This court cannot freely delve into those matters which, by constitutional fiat, rightly rest on
legislative judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to confiscation
of property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override
constitutional proscriptions. This stage, however, has not been demonstrated to have been reached within any appreciable
distance in this controversy before us.

Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being violative of due
process must perforce fail. The due process clause may correctly be invoked only when there is a clear contravention of
inherent or constitutional limitations in the exercise of the tax power. No such transgression is so evident to us.

G.R. No. 109446

The several propositions advanced by petitioners revolve around the question of whether or not public respondents have
exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496.

The questioned regulation reads:

Sec. 6. General Professional Partnership The general professional partnership (GPP) and the partners
comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the partnership,
only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses
paid or incurred by partners in their individual capacities in the practice of their profession which are not
reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his
gross income.

The real objection of petitioners is focused on the administrative interpretation of public respondents that would apply SNIT
to partners in general professional partnerships. Petitioners cite the pertinent deliberations in Congress during its enactment
of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez, minority floor leader of the House of
Representatives, in the latter's privilege speech by way of commenting on the questioned implementing regulation of public
respondents following the effectivity of the law, thusly:

MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill. Do
we speak here of individuals who are earning, I mean, who earn through business
enterprises and therefore, should file an income tax return?

MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies
only to individuals.

(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).
 Other deliberations support this position, to wit:

MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is intended to increase
collections as far as individuals are concerned and to make collection of taxes equitable?

MR. PEREZ. That is correct, Mr. Speaker.

(Id. at 6:40 P.M.; Emphasis ours).

In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS, it is
categorically stated, thus:

This bill, Mr. President, is not applicable to business corporations or to partnerships; it is

only with respect to individuals and professionals. (Emphasis ours)

The Court, first of all, should like to correct the apparent misconception that general professional partnerships are subject
to the payment of income tax or that there is a difference in the tax treatment between individuals engaged in business or
in the practice of their respective professions and partners in general professional partnerships. The fact of the matter is
that a general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income
tax purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not
on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed
on their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic
Act 7496, is explicit:

Sec. 23. Tax liability of members of general professional partnerships. (a) Persons exercising a common
profession in general partnership shall be liable for income tax only in their individual capacity, and the
share in the net profits of the general professional partnership to which any taxable partner would be entitled
whether distributed or otherwise, shall be returned for taxation and the tax paid in accordance with the
provisions of this Title.

(b) In determining his distributive share in the net income of the partnership, each partner

(1) Shall take into account separately his distributive share of the partnership's income,
gain, loss, deduction, or credit to the extent provided by the pertinent provisions of this
Code, and

(2) Shall be deemed to have elected the itemized deductions, unless he declares his
distributive share of the gross income undiminished by his share of the deductions.

There is, then and now, no distinction in income tax liability between a person who practices his profession alone or
individually and one who does it through partnership (whether registered or not) with others in the exercise of a common
profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment income, under
the present income tax system all individuals deriving income from any source whatsoever are treated in almost invariably
the same manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496 as an entirely
independent, not merely as an amendatory, piece of legislation. The view can easily become myopic, however, when the
law is understood, as it should be, as only forming part of, and subject to, the whole income tax concept and precepts long
obtaining under the National Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing
term used in the Tax Code, and it practically covers all persons who derive taxable income. The law, in levying the tax,
adopts the most comprehensive tax situs of nationality and residence of the taxpayer (that renders citizens, regardless of
residence, and resident aliens subject to income tax liability on their income from all sources) and of the generally accepted
and internationally recognized income taxable base (that can subject non-resident aliens and foreign corporations to income
tax on their income from Philippine sources). In the process, the Code classifies taxpayers into four main groups, namely:
(1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as
to corpus and as to income).

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no matter
how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for purposes of
the above categorization, are by law assimilated to be within the context of, and so legally contemplated as, corporations.
Except for few variances, such as in the application of the "constructive receipt rule" in the derivation of income, the income
tax approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in
the discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations and
partnerships which are independently subject to the payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as independent
taxable entities for income tax purposes. A general professional partnership is such an example.4 Here, the partners
themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]),
are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of
profits. In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter. In
fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere
mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so modified
by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their non-
compensation income. There is no evident intention of the law, either before or after the amendatory legislation, to place in
an unequal footing or in significant variance the income tax treatment of professionals who practice their respective
professions individually and of those who do it through a general professional partnership.

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

SO ORDERED.

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX
APPEALS,respondents.

T.A. Tejada & C.N. Lim for private respondent.

RESOLUTION

FELICIANO, J.:

For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private respondent
Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent company
and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from which
dividends the amount of P8,457,731.21 representing the thirty-five percent (35%) withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for refund
or tax credit in the amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1) of the National
Internal Revenue Code ("NITC"), 1 as amended by Presidential Decree No. 369, the applicable rate of withholding tax on
the dividends remitted was only fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition for review
with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the CTA
rendered a decision ordering petitioner Commissioner to refund or grant the tax credit in the amount of P4,832,989.00.

On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and held that:
 (a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax credit here
involved;

(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the US tax
due from P&G-USA of taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) which
represents the difference between the regular tax of thirty-five percent (35%) on corporations and the tax of fifteen
percent (15%) on dividends; and

(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends received
by its non-resident parent company in the US (P&G-USA) may be subject to the preferential tax rate of 15% instead
of 35%."

These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with them seriatim in this
Resolution resolving that Motion.

1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim for refund or
tax credit, which need to be examined. This question was raised for the first time on appeal, i.e., in the proceedings before
this Court on the Petition for Review filed by the Commissioner of Internal Revenue. The question was not raised by the
Commissioner on the administrative level, and neither was it raised by him before the CTA.

We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid claim for refund
by raising this question of alleged incapacity for the first time on appeal before this Court. This is clearly a matter of
procedure. Petitioner does not pretend that P&G-Phil., should it succeed in the claim for refund, is likely to run away, as it
were, with the refund instead of transmitting such refund or tax credit to its parent and sole stockholder. It is commonplace
that in the absence of explicit statutory provisions to the contrary, the government must follow the same rules of procedure
which bind private parties. It is, for instance, clear that the government is held to compliance with the provisions of Circular
No. 1-88 of this Court in exactly the same way that private litigants are held to such compliance, save only in respect of the
matter of filing fees from which the Republic of the Philippines is exempt by the Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to raise for
the first time on appeal questions which had not been litigated either in the lower court or on the administrative level. For, if
petitioner had at the earliest possible opportunity, i.e., at the administrative level, demanded that P&G-Phil. produce an
express authorization from its parent corporation to bring the claim for refund, then P&G-Phil. would have been able forthwith
to secure and produce such authorization before filing the action in the instant case. The action here was commenced just
before expiration of the two (2)-year prescriptive period.

2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well which, as will
be seen below, also ultimately relate to fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue is essential
for maintenance of a suit for recovery of taxes allegedly erroneously or illegally assessed or collected:

Sec. 306. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be maintained in any
court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to
have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with
the Commissioner of Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun after
the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: . . . (Emphasis supplied)

Section 309 (3) of the NIRC, in turn, provides:

Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.The Commissioner may:

xxx xxx xxx

(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment
of the tax or penalty. (As amended by P.D. No. 69) (Emphasis supplied)

Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under Section 309
(3) of the NIRC? The term "taxpayer" is defined in our NIRC as referring to "any person subject to taximposed by the Title
[on Tax on Income]." 2 It thus becomes important to note that under Section 53 (c) of the NIRC, the withholding agent who
is "required to deduct and withhold any tax" is made " personally liable for such tax" and indeed is indemnified against any
claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the
withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and
independently liable 3 for the correct amount of the tax that should be withheld from the dividend remittances. The
withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the
amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." 4 The terms
liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually
impossible, to consider a person who is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard,
such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for
refund of taxes he believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that a withholding agent
is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary government
agent:

The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the
withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the
tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction.
Thus, the withholding agent is constituted the agent of both the Government and the taxpayer. With respect to the
collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary income
tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent,
therefore, is no ordinary government agent especially because under Section 53 (c) he is held personally liable for
the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not made liable by law. 6
(Emphasis supplied)

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax return and with
respect to actual payment of the tax to the government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such
claim. This implied authority is especially warranted where, is in the instant case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times,
under the effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to
commence an action for such refund.

We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation by P&G-USA of the subsidiary's authority to claim the
refund or tax credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual payment of the refund or issuance of a tax
credit certificate. What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and any
deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did not demand a written confirmation of P&G-Phil.'s implied authority from the
very beginning. A sovereign government should act honorably and fairly at all times, even vis-a-vis taxpayers.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to
file the claim for refund and the suit to recover such claim.

II

1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in the
following portion of Section 24 (b) (1) of the NIRC:

(b) Tax on foreign corporations.

(1) Non-resident corporation. A foreign corporation not engaged in trade and business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt during
its taxable year from all sources within the Philippines, as . . . dividends . . . Provided, still further, that on dividends received from a domestic corporation liable to tax under this
 Chapter, the tax shall be 15% of the dividends, 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 . . .

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the
country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to
the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to
P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the
Philippines" must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax rate
and the preferred fifteen percent (15%) dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in
making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty
(20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty
(20) percentage points waived by the Philippines.

2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue Code ("Tax Code") are the following:

Sec. 901 Taxes of foreign countries and possessions of United States.

(a) Allowance of credit. If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the applicable limitation of section 904,
be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections
902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the
tax imposed by this chapter for such taxable year. The credit shall not be allowed against the tax imposed by section 531 (relating to the tax on accumulated earnings), against
the additional tax imposed for the taxable year under section 1333 (relating to war loss recoveries) or under section 1351 (relating to recoveries of foreign expropriation losses),
or against the personal holding company tax imposed by section 541.

(b) Amount allowed. Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection (a):

(a) Citizens and domestic corporations. In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and
excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and

xxx xxx xxx

Sec. 902. Credit for corporate stockholders in foreign corporation.

(A) Treatment of Taxes Paid by Foreign Corporation. For purposes of this subject, a domestic corporation which owns at least 10 percent of the voting stock of a
foreign corporation from which itreceives dividends in any taxable year shall

xxx xxx xxx

(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such foreign
corporation is a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed
to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the
amount of such dividends bears to the amount of such accumulated profits.

xxx xxx xxx

(c) Applicable Rules

(1) Accumulated profits defined. For purposes of this section, the term "accumulated profits" means with respect to any foreign corporation,

(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount of the income,
war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country. . . .; and
 (B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, war profits, and excess profits taxes
imposed on or with respect to suchprofits or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating dividends
paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shows otherwise),
and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earning. . . . (Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code 7 shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax
actually paid (i.e., withheld) from the dividend remittances to P&G-USA;

b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8 for a proportionate part of
the corporate income tax actually paid to the Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income taxalthough that tax was actually paid by its Philippine subsidiary, P&G-
Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues
earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out
of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines through the medium of P&G-Phil. and here earning
profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate income taxes actually paid here by P&G-Phil., which are
very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by
P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed because of
the US congressional desire to avoid or reduce double taxation of the same income stream. 9

In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under Section 24
(b) (1), NIRC, it is necessary:

a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1), NIRC, and which hence goes to
P&G-USA;

b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and

c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the Philippine
Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner:

P100.00 Pretax net corporate income earned by P&G-Phil.

x 35% Regular Philippine corporate income tax rate

P35.00 Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.

P100.00
-35.00

P65.00 Available for remittance as dividends to P&G-USA
 P65.00 Dividends remittable to P&G-USA
x 35% Regular Philippine dividend tax rate under Section 24
(b) (1), NIRC
P22.75 Regular dividend tax

P65.00 Dividends remittable to P&G-USA

x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC

P9.75 Reduced dividend tax

P22.75 Regular dividend tax under Section 24 (b) (1), NIRC

-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC

P13.00 Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also the minimum amount of the "deemed paid" tax credit that US
tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be computed arithmetically as follows:

P65.00 Dividends remittable to P&G-USA

- 9.75 Dividend tax withheld at the reduced (15%) rate

P55.25 Dividends actually remitted to P&G-USA

P35.00 Philippine corporate income tax paid by P&G-Phil.

to the BIR

Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
= x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section
902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902, US Tax Code, specifically and clearly complies with
the requirements of Section 24 (b) (1), NIRC.

3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 of the US
Tax Code is identical with the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.

The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal Revenue Efren I. Plana, later Associate Justice of this Court,
the relevant portion of which stated:

However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we
find merit in your contention that our computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax "deemed paid" to the
 Philippine government for purposes of credit against the U.S. tax by the recipient of dividends includes a portion of the amount of income tax paid by the corporation
declaring the dividend in addition to the tax withheld from the dividend remitted. In other words, the U.S. government will allow a credit to the U.S. corporation or
recipient of the dividend, in addition to the amount of tax actually withheld, a portion of the income tax paid by the corporation declaring the dividend. Thus, if a
Philippine corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay P25,000 Philippine income tax thereon in accordance with
Section 24(a) of the Tax Code. The net income, after income tax, which is P75,000, will then be declared as dividend to the U.S. corporation at 15% tax, or P11,250,
will be withheld therefrom. Under the aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as credit against
its U.S. tax payable on said dividends the amount of P30,000 composed of:

(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:

P75,000 x P25,000 = P18,750

100,000 **

(2) The amount of 15% of

P75,000 withheld = 11,250

P30,000

The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S. corporation from a Philippine subsidiary is clearly
more than 20% requirement ofPresidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above example, amounts to P15,000.00
only.

In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the dividends to be remitted by your client to its
parent company shall be subject to the withholding tax at the rate of 15% only.

This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which are the bases of the ruling, are not
revoked, amended and modified, the effect of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on dividends remitted by a
foreign corporation to a U.S. corporation. (Emphasis supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo,
Laman, Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was pending before the CTA and this
Court.

4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US Tax Code, is exactly the same "deemed paid" tax credit
found in our NIRC and which Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United States) and which, therefore, pay income taxes
to the US government.

Section 30 (c) (3) and (8), NIRC, provides:

(d) Sec. 30. Deductions from Gross Income.In computing net income, there shall be allowed as deductions . . .

(c) Taxes. . . .

xxx xxx xxx

(3) Credits against tax for taxes of foreign countries. If the taxpayer signifies in his return his desire to have the benefits of this paragraphs, the tax imposed by
this Title shall be credited with . . .

(a) Citizen and Domestic Corporation. In the case of a citizen of the Philippines and of domestic corporation, the amount of net income, war profits or excess
profits, taxes paid or accrued during the taxable year to any foreign country. (Emphasis supplied)

Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the US governmente.g., for taxes collected
by the US government on dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:
 (8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic corporation which owns a majority of the voting stock of a foreign corporation from
which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such
foreign corporation to any foreign country, upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which
the amount of such dividends bears to the amount of such accumulated profits: Provided, That the amount of tax deemed to have been paid under this subsection
shall in no case exceed the same proportion of the tax against which credit is taken which the amount of such dividends bears to the amount of the entire net income
of the domestic corporation in which such dividends are included. The term"accumulated profits" when used in this subsection reference to a foreign corporation,
means the amount of its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes imposed upon or with respect to such profits
or income; and the Commissioner of Internal Revenue shall have full power to determine from the accumulated profits of what year or years such dividends were
paid; treating dividends paid in the first sixty days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his
satisfaction shown otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings. In the
case of a foreign corporation, the income, war-profits, and excess-profits taxes of which are determined on the basis of an accounting period of less than one year,
the word "year" as used in this subsection shall be construed to mean such accounting period. (Emphasis supplied)

Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the
US by the US subsidiary of a Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under our NIRC to have paid a proportionate part of the
US corporate income tax paid by its US subsidiary, although such US tax was actually paid by the subsidiary and not by the Philippine parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a
Philippine corporation with a wholly- or majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no more a credit for "phantom
taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8), NIRC.

III

1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five percent (35%) rate rather than the reduced rate of fifteen
percent (15%), held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the amount required by Section
24 (b) (1), NIRC.

We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative implementation arising after the legal question has been
answered. The basic legal issue is of course, this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the reduced fifteen percent (15%)
rate? The question of whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the
applicable reduced tax rate.

In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable dividend tax rate goes down
from thirty-five percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA "shall allow a credit against
the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue regulation issued by the Secretary of Finance requiring
the actual grant of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes applicable. Section 24
(b) (1), NIRC, does not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable.

In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative circularity. The Second Division in effect held that the reduced
dividend tax rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal Revenue Service to P&G-USA. But, the
US "deemed paid" tax credit cannot be given by the US tax authorities unless dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here
applicable, was actually imposed and collected. 11
It is this practical or operating circularity that is in fact avoided by our BIR when it issues
rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu 12Hongkong, 13 Denmark, 14 etc.) comply
with the requirements set out in Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax rate. Once such a
ruling is rendered, the Philippine subsidiary begins to withhold at the reduced dividend tax rate.

A requirement relating to administrative implementation is not properly imposed as a condition for the applicability, as a
matter of law, of a particular tax rate. Upon the other hand, upon the determination or recognition of the applicability of the
reduced tax rate, there is nothing to prevent the BIR from issuing implementing regulations that would require P&G Phil., or
any Philippine corporation similarly situated, to certify to the BIR the amount of the "deemed paid" tax credit actually
subsequently granted by the US tax authorities to P&G-USA or a US parent corporation for the taxable year involved. Since
the US tax laws can and do change, such implementing regulations could also provide that failure of P&G-Phil. to submit
such certification within a certain period of time, would result in the imposition of a deficiency assessment for the twenty
(20) percentage points differential. The task of this Court is to settle which tax rate is applicable, considering the state of US
law at a given time. We should leave details relating to administrative implementation where they properly belong with
the BIR.

2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone, necessarily
the correct reading of the statute. There are many tax statutes or provisions which are designed, not to trigger off an instant
surge of revenues, but rather to achieve longer-term and broader-gauge fiscal and economic objectives. The task of our
Court is to give effect to the legislative design and objectives as they are written into the statute even if, as in the case at
bar, some revenues have to be foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent (35%)
dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369 which amended Section 24 (b)
(1), NIRC, into its present form:

WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing economyforemost

of which is the financing of economic development programs;

WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their earnings from
dividends at the rate of 35%;

WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need be imposed
on dividends received by non-resident foreign corporations in the same manner as the tax imposed on interest on
foreign loans;

xxx xxx xxx

(Emphasis supplied)

More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines by
reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign
investor, however, would not benefit from the reduction of the Philippine dividend tax rate unless its home country gives it
some relief from double taxation (i.e., second-tier taxation) (the home country would simply have more "post-R.P. tax"
income to subject to its own taxing power) by allowing the investor additional tax credits which would be applicable against
the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC, requires the home or domiciliary country to
give the investor corporation a "deemed paid" tax credit at least equal in amount to the twenty (20) percentage points of
dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would thereby be felt by the
investor.

The net effect upon the foreign investor may be shown arithmetically in the following manner:

P65.00 Dividends remittable to P&G-USA (please

see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.

P55.25 Dividends actually remitted to P&G-USA

P55.25
x 46% Maximum US corporate income tax rate

P25.415US corporate tax payable by P&G-USA
without tax credits

P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)

P15.66 US corporate income tax payable after Section 901
tax credit.
 P55.25
- 15.66

P39.59 Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.

P25.415
- 29.75 "Deemed paid" tax credit under Section 902 US
Tax Code (please see page 18 above)

- 0 - US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.

P55.25 Amount received by P&G-USA net of RP and US

====== taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate income
tax payable on the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after US tax credits,
still wind up with P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine taxes. In the calculation of
the Philippine Government, this should encourage additional investment or re-investment in the Philippines by P&G-USA.

3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on Income," 15the
Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty percent (20%) of the
gross amount of dividends paid to US parent corporations:

Art 11. Dividends

xxx xxx xxx

(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that
Contracting State by a resident of the other Contracting State shall not exceed

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the
paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its
prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation
was owned by the recipient corporation.

xxx xxx xxx

(Emphasis supplied)

The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall allow" to
a US parent corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate amount of taxes
paid or accrued to the Philippines by the Philippine [subsidiary] . 16 This is, of course, precisely the "deemed paid" tax
credit provided for in Section 902, US Tax Code, discussed above. Clearly, there is here on the part of the Philippines a
deliberate undertaking to reduce the regular dividend tax rate of twenty percent (20%) is a maximum rate, there is still a
differential or additional reduction of five (5) percentage points which compliance of US law (Section 902) with the
requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration dated
11 May 1988, to SET ASIDE the Decision of the and Division of the Court promulgated on 15 April 1988, and in lieu thereof,
to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and
to DENY the Petition for Review for lack of merit. No pronouncement as to costs.
Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.
Fernan, C.J., is on leave.

G.R. No. 160756 March 9, 2010

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

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

DECISION

CORONA, J.:

In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders Associations, Inc. is
questioning the constitutionality of Section 27 (E) of Republic Act (RA) 84242 and the revenue regulations (RRs) issued by
the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable withholding taxes.3

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive Secretary
Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal Revenue
Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable
withholding tax (CWT) on sales of real properties classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner argues
that the MCIT violates the due process clause because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii)
and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale of real
properties categorized as ordinary assets. Petitioner contends that these revenue regulations are contrary to law for two
reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second, respondent
Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price or fair market
value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause
because, like the MCIT, the government collects income tax even when the net income has not yet been determined. They
contravene the equal protection clause as well because the CWT is being levied upon real estate enterprises but not on
other business enterprises, more particularly those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets under
RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

Overview of the Assailed Provisions

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its gross
income when such MCIT is greater than the normal corporate income tax imposed under Section 27(A).4 If the regular
income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over the normal tax
shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years.
Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year, as
defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its business operations, when the minimum
income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal income tax as computed
under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the
three (3) immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby authorized to suspend the
imposition of the [MCIT] on any corporation which suffers losses on account of prolonged labor dispute, or because
of force majeure, or because of legitimate business reverses.

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

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

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

For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished goods,
such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or warehouse.

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

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of Internal
Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).5 The pertinent portions thereof read:

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

(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year (whether
calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation
beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its
business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or
whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation.

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

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 Exempt

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

With a selling price of five hundred 1.5%

thousand pesos (500,000.00) or less.

With a selling price of more than five 3.0%

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

With selling price of more than two 5.0%

million pesos (2,000,000.00)

xxx xxx xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the
property received in exchange, as determined in the Income Tax Regulations shall be used.

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

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and
withheld by the buyer on every installment.

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

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

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 Exempt

with Sec. 2.57.5 of these regulations.
 Upon the following values of real property, where the
seller/transferor is habitually engaged in the real estate
business.
With a selling price of Five Hundred Thousand Pesos 1.5%
(500,000.00) or less.
With a selling price of more than Five Hundred Thousand Pesos 3.0%
(500,000.00) but not more than Two Million Pesos
(2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(2,000,000.00).

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. 7-20038 was promulgated, providing for the guidelines in determining whether a particular
real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The pertinent portions
thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale,
exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets;

a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens engaged in trade
or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT] (expanded)
under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or current fair market value as determined
in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax imposed
under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.
xxx xxx xxx

c. In the case of domestic corporations.

xxx xxx xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building
treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be subject
to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary income tax
under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject to
the [MCIT] under Sec. 27(E) of the Code, whichever is applicable.

xxx xxx xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy

Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there must
be an actual case calling for the exercise of judicial review; (2) the question before the court must be ripe for adjudication;
(3) the person challenging the validity of the act must have standing to do so; (4) the question of constitutionality must have
been raised at the earliest opportunity and (5) the issue of constitutionality must be the very lis mota of the case.9

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

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the BIR for the
payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that its members have shut down their
businesses as a result of the payment of the MCIT or CWT. Petitioner has raised concerns in mere abstract and hypothetical
form without any actual, specific and concrete instances cited that the assailed law and revenue regulations have actually
and adversely affected it. Lacking empirical data on which to base any conclusion, any discussion on the constitutionality
of the MCIT or CWT on sales of real property is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating abstract issues. Otherwise,
adjudication would be no different from the giving of advisory opinion that does not really settle legal issues. 10

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

Contrary to respondents assertion, we do not have to wait until 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." In Sison, Jr. v. Ancheta, et al.,38 we held that the due process clause may properly be invoked
to invalidate, in appropriate cases, a revenue 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.44 Income means all the wealth which flows into the taxpayer
other than a mere return on capital. Capital is a fund or property existing at one distinct point in time while income denotes
a flow of wealth during a definite period of time.45 Income is gain derived and severed from capital.46 For income to be
taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation.47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is
income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods48 and other direct expenses from gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the
normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation,
pegging the rate at a very much reduced 2% and uses as the base the 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 payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent
(32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the Secretary, i.e.,
the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the income payable and
the tax is creditable against the income tax liability of the taxpayer for the taxable year.

Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real Estate
Business

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business income tax from
net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax
obligation. 69 They are installments on the annual tax which may be due at the end of the taxable year. 70

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be the
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 theordinary 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 Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary
assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to be
realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at source. 72

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

FWT CWT

a) The amount of income tax withheld by the a) Taxes withheld on certain income
withholding agent is constituted as a full and payments are intended to equal or at least
final payment of the income tax due from the approximate the tax due of the payee on said
payee on the said income. 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 c) The income recipient is still required to file
tax return for the particular income.73 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 to CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable. According to
petitioner, the whole of Section 57 governs the withholding of income tax on passive income. The enumeration in Section
57(A) refers to passive income being subjected to FWT. It follows that Section 57(B) on CWT should also be limited to
passive income:

SEC. 57. Withholding of Tax at Source.

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

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

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive
income. The BIR defines passive income by stating what it is not:

if the income is generated in the active pursuit and performance of the corporations primary purposes, the same is not
passive income76

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.1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor wages,
materials, cost of money and other expenses which can then save the entity from having to obtain loans entailing
considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the
realty industry: huge investments and borrowings; long gestation period; sudden and unpredictable interest rate surges;
continually spiraling development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least 20
government agencies.82

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 of Equal Protection

Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being levied
only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not similarly imposed a
CWT on their sales, even if their manner of doing business is not much different from that of a real estate enterprise. Like
a manufacturing concern, a real estate business is involved in a continuous process of production and it incurs costs and
expenditures on a regular basis. The only difference is that "goods" produced by the real estate business are house and lot
units.84

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the same
protection of laws which is enjoyed by other persons or other classes in the same place and in like circumstances." 85 Stated
differently, all persons belonging to the same class shall be taxed alike. It follows that the guaranty of the equal protection
of the laws is not violated by legislation based on a reasonable classification. Classification, to be valid, must (1) rest on
substantial distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing conditions only and (4) apply
equally to all members of the same class.86

The taxing power has the authority to make reasonable classifications for purposes of taxation. 87 Inequalities which result
from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation. 88 The real estate
industry is, by itself, a class and can be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what
distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is
not their production processes but the prices of their goods sold and the number of transactions involved. The income from
the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the parties to
comply with the withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand
customers every month involving both minimal and substantial amounts. To require the customers of manufacturing
enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds of suppliers may result
in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g. heavy
equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly subjected to the CWT. 89As
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. 215427 December 10, 2014

PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), Petitioner,

vs.
THE BUREAU OF INTERNAL REVENUE, represented by JOSE MARIO BUNAG, in his capacity as Commissioner of
the Bureau of Internal Revenue, and JOHN DOE and JANE DOE, who are Promulgated: persons acting for, in behalf
or under the authority of respondent, Respondents.

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 Bancheld 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:

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 havefiled 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 1 2 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 fallo reads:

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 samewere 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) Income from its casino operations;

b) Income from dollar pit operations;

c) Income from regular bingo operations; and

d) 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, butis 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.10

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 toits 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) Income from its casino operations;

(b) Income from dollar pit operations;

(c) Income from regular bingo operations; and

(d) 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
petitionersincome 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 lieuof
all taxes of any kind or form, as well as fees, charges or leviesof 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 tax for income realized from other necessary and related services, shows and
entertainment of petitioner.16 With 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 gain said, therefore, that the nature of taxes imposable is well defined for each kind of activity oroperation.
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:

Why a special law prevails over a general law has been put by the Court as follows: x x x x

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.20

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:
 (A) Section 13 of R.A. No. 6395 on the exemption from value-added 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 itstax 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 sameterms 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 ofP.D. 1869, as amended, a special law, are
considered repealed, amended and modified, consistent with Section 2 of R.A. No. 9487, thus:

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.23

Given that petitioners Charter is notdeemed 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, inview 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.
33-2013 (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--visour 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.1wphi1 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 l(c)
ofR.A. No. 9337;

2. Petitioner's income from gaming operations is subject to the five percent (5%) franchise tax only; and

3. Petitioner's 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. 33-2013 insofar as it imposes: (1) corporate income tax on petitioner's income derived from its gaming operations;
and (2) franchise tax on petitioner's 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 petitioner's income derived from its
gaming operations; and (2) franchise tax on petitioner's income from other related services.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice

G.R. No. 125355 March 30, 2000

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION, respondents.

PARDO, J.:

What is before the Court is a petition for review on certiorari of the decision of the Court of Appeals,1 reversing that of the
Court of Tax Appeals,2 which affirmed with modification the decision of the Commissioner of Internal Revenue ruling that
Commonwealth Management and Services Corporation, is liable for value added tax for services to clients during taxable
year 1988.

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly organized and
existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co. (Philamlife), organized
by the letter to perform collection, consultative and other technical services, including functioning as an internal auditor, of
Philamlife and its other affiliates.1wphi1.nt

On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private respondent COMASERCO
for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988, computed as follows:

P1,679,155.00
Taxable sale/receipt ===========
=
 10% tax due thereon 167,915.50

25% surcharge 41,978.88

20% interest per annum 125,936.63

Compromise penalty for late payment 16,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE P351,831.01 3

============

COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its operations in the
amount of P6,077.00.

On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of deficiency VAT.
On August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to COMASERCO demanding payment
of the deficiency VAT.

On September 29, 1992, COMASERCO filed with the Court of Tax Appeals 4 a petition for review contesting the
Commissioner's assessment. COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to
collections, consultative and other technical assistance, including functioning as an internal auditor, were on a "no-profit,
reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing services to Philamlife and
its affiliates. COMASERCO was established to ensure operational orderliness and administrative efficiency of Philamlife
and its affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not engaged
in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988. COMASERCO averred that since
it was not engaged in business, it was not liable to pay VAT.

On June 22, 1995, the Court of Tax Appeals rendered decision in favor of the Commissioner of Internal Revenue, the
dispositive portion of which reads:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency value-added
tax for the taxable year 1988 is AFFIRMED with slight modifications. Accordingly, petitioner is ordered to pay
respondent Commissioner of Internal Revenue the amount of P335,831.01 inclusive of the 25% surcharge and
interest plus 20% interest from January 24, 1992 until fully paid pursuant to Section 248 and 249 of the Tax Code.

The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter shall not be included
in the payment as there was no compromise agreement entered into between petitioner and respondent with
respect to the value-added tax deficiency.5

On July 26, 1995, respondent filed with the Court of Appeals, a petition for review of the decision of the Court of Appeals.

After due proceedings, on May 13, 1996, the Court of Appeals rendered decision reversing that of the Court of Tax Appeals,
the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered REVERSING and SETTING ASIDE the
questioned Decision promulgated on 22 June 1995. The assessment for deficiency value-added tax for the taxable
year 1988 inclusive of surcharge, interest and penalty charges are ordered CANCELLED for lack of legal and factual
basis. 6

The Court of Appeals anchored its decision on the ratiocination in another tax case involving the same parties, 7where it was
held that COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife and its affiliates.
The Court of Appeals, in that case, reasoned that COMASERCO was not engaged in business of providing services to
Philamlife and its affiliates. In the same manner, the Court of Appeals held that COMASERCO was not liable to pay VAT
for it was not engaged in the business of selling services.

On July 16, 1996, the Commissioner of Internal Revenue filed with this Court a petition for review on certiorariassailing the
decision of the Court of Appeals.
On August 7, 1996, we required respondent COMASERCO to file comment on the petition, and on September 26, 1996,
COMASERCO complied with the resolution.8

We give due course to the petition.

At issue in this case is whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon.

Petitioner avers that to "engage in business" and to "engage in the sale of services" are two different things. Petitioner
maintains that the services rendered by COMASERCO to Philamlife and its affiliates, for a fee or consideration, are subject
to VAT. VAT is a tax on the value added by the performance of the service. It is immaterial whether profit is derived from
rendering the service.

We agree with the Commissioner.

Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No. 273 in 1988, provides
that:

Sec. 99. Persons liable. Any person who, in the course of trade or business, sells, barters or exchanges goods,
renders services, or engages in similar transactions and any person who, imports goods shall be subject to the
value-added tax (VAT) imposed in Sections 100 to 102 of this Code. 9

COMASERCO contends that the term "in the course of trade or business" requires that the "business" is carried on with a
view to profit or livelihood. It avers that the activities of the entity must be profit-oriented. COMASERCO submits that it is
not motivated by profit, as defined by its primary purpose in the articles of incorporation, stating that it is operating "only on
reimbursement-of-cost basis, without any profit." Private respondent argues that profit motive is material in ascertaining who
to tax for purposes of determining liability for VAT.

We disagree.

On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other
sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act 8424, the National Internal Revenue Code of 1997,
took effect. The amended law provides that:

Sec. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases
goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax
(VAT) imposed in Sections 106 and 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee
or lessee of the goods, properties or services. This rule shall likewise apply to existing sale or lease of goods,
properties or services at the time of the effectivity of Republic Act No. 7716.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto, by any person regardless of whether or not the person
engaged therein is a nonstock, nonprofit organization (irrespective of the disposition of its net income and whether
or not it sells exclusively to members of their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines
by nonresident foreign persons shall be considered as being rendered in the course of trade or business.

Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit, organization or
government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every
stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services,
even in the absence of profit attributable thereto. The term "in the course of trade or business" requires the regular conduct
or pursuit of a commercial or an economic activity regardless of whether or not the entity is profit-oriented.

The definition of the term "in the course of trade or business" present law applies to all transactions even to those made
prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters
or exchanges goods and services, was already liable to pay VAT. The present law merely stresses that even a nonstock,
nonprofit organization or government entity is liable to pay VAT for the sale of goods and services.
Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the "performance of all
kinds of services for others for a fee, remuneration or consideration." It includes "the supply of technical advice, assistance
or services rendered in connection with technical management or administration of any scientific, industrial or commercial
undertaking or project." 11

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 12 emphasizing that a domestic
corporation that provided technical, research, management and technical assistance to its affiliated companies and received
payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services
rendered. In fact, even if such corporation was organized without any intention realizing profit, any income or profit generated
by the entity in the conduct of its activities was subject to income tax.

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services
rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability
for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the
service rendered is subject to VAT.1awp++i1

At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly
against the grantee and liberally in favor of the government. Otherwise stated, any exemption from the payment of a tax
must be clearly stated in the language of the law; it cannot be merely implied therefrom. 13 In the case of VAT, Section 109,
Republic Act 8424 clearly enumerates the transactions exempted from VAT. The services rendered by COMASERCO do
not fall within the exemptions.

Both the Commissioner of Internal Revenue and the Court of Tax Appeals correctly ruled that the services rendered by
COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed out by the Commissioner, the performance of
all kinds of services for others for a fee, remuneration or consideration is considered as sale of services subject to VAT. As
the government agency charged with the enforcement of the law, the opinion of the Commissioner of Internal Revenue, in
the absence of any showing that it is plainly wrong, is entitled to great weight. 14 Also, it has been the long standing policy
and practice of this Court to respect the conclusions of quasi-judicial agencies, such as the Court of Tax Appeals which, by
the nature of its functions, is dedicated exclusively to the study and consideration of tax cases and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident exercise of its authority. 15

There is no merit to respondent's contention that the Court of Appeals' decision in CA-G.R. No. 34042, declaring the
COMASERCO as not engaged in business and not liable for the payment of fixed and percentage taxes, binds petitioner.
The issue in CA-G.R. No. 34042 is different from the present case, which involves COMASERCO's liability for VAT. As
heretofore stated, every person who sells, barters, or exchanges goods and services, in the course of trade or business, as
defined by law, is subject to VAT.

WHEREFORE, the Court GRANTS the petition and REVERSES the decision of the Court of Appeals in CA-G.R. SP No.
37930. The Court hereby REINSTATES the decision of the Court of Tax Appeals in C. T. A. Case No. 4853.

No costs.

G.R. No. 108067 January 20, 2000

CYANAMID PHILIPPINES, INC., petitioner,

vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE,respondent.

QUISUMBING, J.:

Petitioner disputes the decision1 of the Court of Appeals which affirmed the decision2 of the Court of Tax Appeals, ordering
petitioner to pay respondent Commissioner of Internal Revenue the amount of three million, seven hundred seventy-four
thousand, eight hundred sixty seven pesos and fifty centavos (P3,774,867.50) as 25% surtax on improper accumulation of
profits for 1981, plus 10% surcharge and 20% annual interest from January 30, 1985 to January 30, 1987, under Sec. 25
of the National Internal Revenue Code.1wphi1.nt

The Court of Tax Appeals made the following factual findings:

Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a wholly owned subsidiary of
American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical products and chemicals,
a wholesaler of imported finished goods, and an importer/indentor.

On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment of deficiency income tax
of one hundred nineteen thousand eight hundred seventeen (P119,817.00) pesos for taxable year 1981, as follows:

Net income disclosed by the return as audited 14,575,210.00

Add: Discrepancies:

Professional fees/yr. 17018 261,877.00

per investigation 110,399.37

Total Adjustment 152,477.00

Net income per Investigation 14,727,687.00

Less: Personal and additional exemptions

Amount subject to tax 14,727,687.00

Income tax due thereon . . . 25% Surtax 2,385,231.50 3,237,495.00

Less: Amount already assessed 5,161,788.00

BALANCE 75,709.00

monthly interest from 1,389,639.00 44,108.00

Compromise penalties

TOTAL AMOUNT DUE 3,774,867.50 119,817.003

On March 4, 1985, petitioner protested the assessments particularly, (1) the 25% Surtax Assessment of P3,774,867.50; (2)
1981 Deficiency Income Assessment of P119,817.00; and 1981 Deficiency Percentage Assessment of
P8,846.72.4 Petitioner, through its external accountant, Sycip, Gorres, Velayo & Co., claimed, among others, that the surtax
for the undue accumulation of earnings was not proper because the said profits were retained to increase petitioner's
working capital and it would be used for reasonable business needs of the company. Petitioner contended that it availed of
the tax amnesty under Executive Order No. 41, hence enjoyed amnesty from civil and criminal prosecution granted by the
law.

On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow the cancellation of the assessment
notices and rendered its resolution, as follows:

It appears that your client availed of Executive Order No. 41 under File No. 32A-F-000455-41B as certified and
confirmed by our Tax Amnesty Implementation Office on October 6, 1987.

In reply thereto, I have the honor to inform you that the availment of the tax amnesty under Executive Order No. 41,
as amended is sufficient basis, in appropriate cases, for the cancellation of the assessment issued after August 21,
1986. (Revenue Memorandum Order No. 4-87) Said availment does not, therefore, result in cancellation of
assessments issued before August 21, 1986. as in the instant case. In other words, the assessments in this case
issued on January 30, 1985 despite your client's availment of the tax amnesty under Executive Order No. 41, as
amended still subsist.
 Such being the case, you are therefore, requested to urge your client to pay this Office the aforementioned
deficiency income tax and surtax on undue accumulation of surplus in the respective amounts of P119,817.00 and
P3,774,867.50 inclusive of interest thereon for the year 1981, within thirty (30) days from receipt hereof, otherwise
this office will be constrained to enforce collection thereof thru summary remedies prescribed by law.

This constitutes the final decision of this Office on this matter. 5

Petitioner appealed to the Court of Tax Appeals. During the pendency of the case, however, both parties agreed to
compromise the 1981 deficiency income tax assessment of P119,817.00. Petitioner paid a reduced amount twenty-six
thousand, five hundred seventy-seven pesos (P26,577.00) as compromise settlement. However, the surtax on improperly
accumulated profits remained unresolved.

Petitioner claimed that CIR's assessment representing the 25% surtax on its accumulated earnings for the year 1981 had
no legal basis for the following reasons: (a) petitioner accumulated its earnings and profits for reasonable business
requirements to meet working capital needs and retirement of indebtedness; (b) petitioner is a wholly owned subsidiary of
American Cyanamid Company, a corporation organized under the laws of the State of Maine, in the United States of
America, whose shares of stock are listed and traded in New York Stock Exchange. This being the case, no individual
shareholder income taxes by petitioner's accumulation of earnings and profits, instead of distribution of the same.

In denying the petition, the Court of Tax Appeals made the following pronouncements:

Petitioner contends that it did not declare dividends for the year 1981 in order to use the accumulated earnings as
working capital reserve to meet its "reasonable business needs". The law permits a stock corporation to set aside
a portion of its retained earnings for specified purposes (citing Section 43, paragraph 2 of the Corporation Code of
the Philippines). In the case at bar, however, petitioner's purpose for accumulating its earnings does not fall within
the ambit of any of these specified purposes.

More compelling is the finding that there was no need for petitioner to set aside a portion of its retained earnings as
working capital reserve as it claims since it had considerable liquid funds. A thorough review of petitioner's financial
statement (particularly the Balance Sheet, p. 127, BIR Records) reveals that the corporation had considerable liquid
funds consisting of cash accounts receivable, inventory and even its sales for the period is adequate to meet the
normal needs of the business. This can be determined by computing the current asset to liability ratio of the
company:

current ratio = current assets/ current liabilities

= P 47,052,535.00 / P21,275,544.00

= 2.21: 1
========

The significance of this ratio is to serve as a primary test of a company's solvency to meet current obligations from
current assets as a going concern or a measure of adequacy of working capital.

xxx xxx xxx

We further reject petitioner's argument that "the accumulated earnings tax does not apply to a publicly-held
corporation" citing American jurisprudence to support its position. The reference finds no application in the case at
bar because under Section 25 of the NIRC as amended by Section 5 of P.D. No. 1379 [1739] (dated September
17, 1980), the exceptions to the accumulated earnings tax are expressly enumerated, to wit: Bank, non-bank
financial intermediaries, corporations organized primarily, and authorized by the Central Bank of the Philippines to
hold shares of stock of banks, insurance companies, or personal holding companies, whether domestic or foreign.
The law on the matter is clear and specific. Hence, there is no need to resort to applicable cases decided by the
American Federal Courts for guidance and enlightenment as to whether the provision of Section 25 of the NIRC
should apply to petitioner.

Equally clear and specific are the provisions of E.O. 41 particularly with respect to its effectivity and coverage . . .
 . . . Said availment does not result in cancellation of assessments issued before August 21, 1986 as petitioner seeks
to do in the case at bar. Therefore, the assessments in this case, issued on January 30, 1985 despite petitioner's
availment of the tax amnesty under E.O. 41 as amended, still subsist.

xxx xxx xxx

WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay respondent Commissioner of Internal
Revenue the sum of P3,774,867.50 representing 25% surtax on improper accumulation of profits for 1981, plus
10% surcharge and 20% annual interest from January 30, 1985 to January 30, 1987. 6

Petitioner appealed the Court of Tax Appeal's decision to the Court of Appeals. Affirming the CTA decision, the appellate
court said:

In reviewing the instant petition and the arguments raised herein, We find no compelling reason to reverse the
findings of the respondent Court. The respondent Court's decision is supported by evidence, such as petitioner
corporation's financial statement and balance sheets (p. 127, BIR Records). On the other hand the petitioner
corporation could only come up with an alternative formula lifted from a decision rendered by a foreign court (Bardahl
Mfg. Corp. vs. Commissioner, 24 T.C.M. [CCH] 1030). Applying said formula to its particular financial position, the
petitioner corporation attempts to justify its accumulated surplus earnings. To Our mind, the petitioner corporation's
alternative formula cannot overturn the persuasive findings and conclusion of the respondent Court based, as it is,
on the applicable laws and jurisprudence, as well as standards in the computation of taxes and penalties practiced
in this jurisdiction.

WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED and the decision of the Court of
Tax Appeals dated August 6, 1992 in C.T.A. Case No. 4250 is AFFIRMED in toto.7

Hence, petitioner now comes before us and assigns as sole issue:

WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE PETITIONER IS LIABLE FOR THE
ACCUMULATED EARNINGS TAX FOR THE YEAR 1981.8

Sec. 259 of the old National Internal Revenue Code of 1977 states:

Sec. 25. Additional tax on corporation improperly accumulating profits or surplus

(a) Imposition of tax. If any corporation is formed or availed of for the purpose of preventing the imposition of the
tax upon its shareholders or members or the shareholders or members of another corporation, through the medium
of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed
against such corporation, for each taxable year, a tax equal to twenty-five per-centum of the undistributed portion
of its accumulated profits or surplus which shall be in addition to the tax imposed by section twenty-four, and shall
be computed, collected and paid in the same manner and subject to the same provisions of law, including penalties,
as that tax.

(b) Prima facie evidence. The fact that any corporation is mere holding company shall be prima facieevidence of
a purpose to avoid the tax upon its shareholders or members. Similar presumption will lie in the case of an
investment company where at any time during the taxable year more than fifty per centum in value of its outstanding
stock is owned, directly or indirectly, by one person.

(c) Evidence determinative of purpose. The fact that the earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax
upon its shareholders or members unless the corporation, by clear preponderance of evidence, shall prove the
contrary.

(d) Exception. The provisions of this sections shall not apply to banks, non-bank financial intermediaries,
corporation organized primarily, and authorized by the Central Bank of the Philippines to hold shares of stock of
banks, insurance companies, whether domestic or foreign.

The provision discouraged tax avoidance through corporate surplus accumulation. When corporations do not declare
dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The tax on improper
accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said
earnings by shareholders could, in turn, be taxed.

Relying on decisions of the American Federal Courts, petitioner stresses that the accumulated earnings tax does not apply
to Cyanamid, a wholly owned subsidiary of a publicly owned company. 10 Specifically, petitioner cites Golconda Mining
Corp. vs. Commissioner, 507 F.2d 594, whereby the U.S. Ninth Circuit Court of Appeals had taken the position that the
accumulated earnings tax could only apply to a closely held corporation.

A review of American taxation history on accumulated earnings tax will show that the application of the accumulated
earnings tax to publicly held corporations has been problematic. Initially, the Tax Court and the Court of Claims held that
the accumulated earnings tax applies to publicly held corporations. Then, the Ninth Circuit Court of Appeals ruled
in Golconda that the accumulated earnings tax could only apply to closely held corporations. Despite Golconda, the Internal
Revenue Service asserted that the tax could be imposed on widely held corporations including those not controlled by a
few shareholders or groups of shareholders. The Service indicated it would not follow the Ninth Circuit regarding publicly
held corporations.11 In 1984, American legislation nullified the Ninth Circuit's Golconda ruling and made it clear that the
accumulated earnings tax is not limited to closely held corporations. 12 Clearly, Golconda is no longer a reliable precedent.

The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the corporations exempt from
the imposition of improperly accumulated tax: (a) banks; (b) non-bank financial intermediaries; (c) insurance companies;
and (d) corporations organized primarily and authorized by the Central Bank of the Philippines to hold shares of stocks of
banks. Petitioner does not fall among those exempt classes. Besides, the rule on enumeration is that the express mention
of one person, thing, act, or consequence is construed to exclude all others. 13 Laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.14 Taxation is the rule and exemption
is the exception.15 The burden of proof rests upon the party claiming exemption to prove that it is, in fact, covered by the
exemption so claimed,16 a burden which petitioner here has failed to discharge.

Another point raised by the petitioner in objecting to the assessment, is that increase of working capital by a corporation
justifies accumulating income. Petitioner asserts that respondent court erred in concluding that Cyanamid need not infuse
additional working capital reserve because it had considerable liquid funds based on the 2.21:1 ratio of current assets to
current liabilities. Petitioner relies on the so-called "Bardahl" formula, which allowed retention, as working capital reserve,
sufficient amounts of liquid assets to carry the company through one operating cycle. The "Bardahl" 17 formula was developed
to measure corporate liquidity. The formula requires an examination of whether the taxpayer has sufficient liquid assets to
pay all of its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate the business
during one operating cycle. Operating cycle is the period of time it takes to convert cash into raw materials, raw materials
into inventory, and inventory into sales, including the time it takes to collect payment for the
sales.18

Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00 pesos as working capital. As of 1981,
its liquid asset was only P25,776,991.00. Thus, petitioner asserts that Cyanamid had a working capital deficit of
P7,986,633.00.19 Therefore, the P9,540,926.00 accumulated income as of 1981 may be validly accumulated to increase the
petitioner's working capital for the succeeding year.

We note, however, that the companies where the "Bardahl" formula was applied, had operating cycles much shorter than
that of petitioner. In Atlas Tool Co., Inc, vs. CIR,20 the company's operating cycle was only 3.33 months or 27.75% of the
year. In Cataphote Corp. of Mississippi vs. United States,21 the corporation's operating cycle was only 56.87 days, or
15.58% of the year. In the case of Cyanamid, the operating cycle was 288.35 days, or 78.55% of a year, reflecting that
petitioner will need sufficient liquid funds, of at least three quarters of the year, to cover the operating costs of the business.
There are variations in the application of the "Bardahl" formula, such as average operating cycle or peak operating cycle.
In times when there is no recurrence of a business cycle, the working capital needs cannot be predicted with accuracy. As
stressed by American authorities, although the "Bardahl" formula is well-established and routinely applied by the courts, it
is not a precise rule. It is used only for administrative convenience. 22 Petitioner's application of the "Bardahl" formula merely
creates a false illusion of exactitude.

Other formulas are also used, e.g. the ratio of current assets to current liabilities and the adoption of the industry
standard.23 The ratio of current assets to current liabilities is used to determine the sufficiency of working capital. Ideally, the
working capital should equal the current liabilities and there must be 2 units of current assets for every unit of current liability,
hence the so-called "2 to 1" rule.24

As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its current liabilities. That current ratio
of Cyanamid, therefore, projects adequacy in working capital. Said working capital was expected to increase further when
more funds were generated from the succeeding year's sales. Available income covered expenses or indebtedness for that
year, and there appeared no reason to expect an impending "working capital deficit" which could have necessitated an
increase in working capital, as rationalized by petitioner.

In Basilan Estates, Inc. vs. Commissioner of Internal Revenue,25 we held that:

. . . [T]here is no need to have such a large amount at the beginning of the following year because during the year,
current assets are converted into cash and with the income realized from the business as the year goes, these
expenses may well be taken care of. [citation omitted]. Thus, it is erroneous to say that the taxpayer is entitled to
retain enough liquid net assets in amounts approximately equal to current operating needs for the year to cover
"cost of goods sold and operating expenses:" for "it excludes proper consideration of funds generated by the
collection of notes receivable as trade accounts during the course of the year."26

If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or profits to accumulate,
and the taxpayer contested such a determination, the burden of proving the determination wrong, together with the
corresponding burden of first going forward with evidence, is on the taxpayer. This applies even if the corporation is not a
mere holding or investment company and does not have an unreasonable accumulation of earnings or profits.27

In order to determine whether profits are accumulated for the reasonable needs to avoid the surtax upon shareholders, it
must be shown that the controlling intention of the taxpayer is manifest at the time of accumulation, not intentions declared
subsequently, which are mere afterthoughts.28 Furthermore, the accumulated profits must be used within a reasonable time
after the close of the taxable year. In the instant case, petitioner did not establish, by clear and convincing evidence, that
such accumulation of profit was for the immediate needs of the business.

In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue,29 we ruled:

To determine the "reasonable needs" of the business in order to justify an accumulation of earnings, the Courts of
the United States have invented the so-called "Immediacy Test" which construed the words "reasonable needs of
the business" to mean the immediate needs of the business, and it was generally held that if the corporation did not
prove an immediate need for the accumulation of the earnings and profits, the accumulation was not for the
reasonable needs of the business, and the penalty tax would apply. (Mertens. Law of Federal Income Taxation,
Vol. 7, Chapter 39, p, 103).30

In the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio between current
assets to current liabilities. The working capital needs of a business depend upon nature of the business, its credit policies,
the amount of inventories, the rate of the turnover, the amount of accounts receivable, the collection rate, the availability of
credit to the business, and similar factors. Petitioner, by adhering to the "Bardahl" formula, failed to impress the tax court
with the required definiteness envisioned by the statute. We agree with the tax court that the burden of proof to establish
that the profits accumulated were not beyond the reasonable needs of the company, remained on the taxpayer. This Court
will not set aside lightly the conclusion reached by the Court of Tax Appeals which, by the very nature of its function, is
dedicated exclusively to the consideration of tax problems and has necessarily developed an expertise on the subject,
unless there has been an abuse or improvident exercise of authority. 31 Unless rebutted, all presumptions generally are
indulged in favor of the correctness of the CIR's assessment against the taxpayer. With petitioner's failure to prove the CIR
incorrect, clearly and conclusively, this Court is constrained to uphold the correctness of tax court's ruling as affirmed by the
Court of Appeals.

WHEREFORE, the instant petition is DENIED, and the decision of the Court of Appeals, sustaining that of the Court of Tax
Appeals, is hereby AFFIRMED. Costs against petitioner.1wphi1.nt

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 FIRST THIRD TOTAL OF

QUARTER QUARTER FIRST and
(three months (three months THIRD quarters
ended 3.31.81) ended 9.30.81)
(In Pesos)

Cash Dividends Paid 849,720.44 849,720.00 1,699,440.00

10% Dividend Tax 84,972.00 84,972.00 169,944.00

Withheld

Cash Dividend net of 10% 764,748.00 764,748.00 1,529,496.00

Dividend Tax Withheld

15% Branch Profit 114,712.20 114,712.20 229,424.40 3

Remittance Tax Withheld

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

Petitioner

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

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

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

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

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

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

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

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

Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation, Japan is subject to 25 % tax,
and that the taxes withheld of 10 % as intercorporate dividend tax and 15 % as profit remittance tax totals
(sic) 25 %, the amount refundable offsets the liability, hence, nothing is left to be refunded. 8

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

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

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

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

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

Dividends received by a domestic or resident foreign corporation liable to tax under this Code (1) Shall
be subject to a final tax of 10% on the total amount thereof, which shall be collected and paid as provided
in Sections 53 and 54 of this Code ....

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

(b) Tax on foreign corporations (1) Non-resident corporations. A foreign corporation not engaged in
trade or business in the Philippines shall pay a tax equal to thirty-five per cent of the gross income received
during each taxable year from all sources within the Philippines as ... dividends ....

but expressly made subject to the special rate of 25% under Article 10(2) (b) of the Tax Treaty of 1980 concluded between
the Philippines and Japan. 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 non-resident foreign corporation, as a general
rule, is taxed 35 % of its gross income from all sources within the Philippines. [Section 24 (b) (1)].

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

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

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

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

Cash dividend net of 15 % tax

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

Amount to be refunded to petitioner

representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========
It is readily apparent that the 15 % tax rate imposed on the dividends received by a foreign non-resident stockholder from
a domestic corporation under Section 24 (b) (1) (iii) is easily within the maximum ceiling of 25 % of the gross amount of the
dividends as decreed in Article 10 (2) (b) of the Tax Treaty.

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

This is completely untenable. The cited BP Blg. 129 does not include the Court of Tax Appeals which has been created by
virtue of a special law, Republic Act No. 1125. Respondent court is not among those courts specifically mentioned in Section
2 of BP Blg. 129 as falling within its scope.

Thus, under Section 18 of Republic Act No. 1125, a party adversely affected by an order, ruling or decision of the Court of
Tax Appeals is given thirty (30) days from notice to appeal therefrom. Otherwise, said order, ruling, or decision shall become
final.

Records show that petitioner received notice of the Court of Tax Appeals's decision denying its claim for refund on April 15,
1986. On the 30th day, or on May 15, 1986 (the last day for appeal), petitioner filed a motion for reconsideration which
respondent court subsequently denied on November 17, 1986, and notice of which was received by petitioner on November
26, 1986. Two days later, or on November 28, 1986, petitioner simultaneously filed a notice of appeal with the Court of Tax
Appeals and a petition for review with the Supreme Court. 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. L-54908 January 22, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and
the COURT OF TAX APPEALS, respondents.

G.R. No. 80041 January 22, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and
the COURT OF TAX APPEALS, respondents.

Gadioma Law Offices for respondents.

REGALADO, J.:

These cases, involving the same issue being contested by the same parties and having originated from the same factual
antecedents generating the claims for tax credit of private respondents, the same were consolidated by resolution of this
Court dated May 31, 1989 and are jointly decided herein.
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation (hereinafter, Atlas)
entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for brevity), a Japanese corporation
licensed to engage in business in the Philippines, for purposes of the projected expansion of the productive capacity of the
former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of
$20,000,000.00, United States currency, for the installation of a new concentrator for copper production. Atlas, in turn
undertook to sell to Mitsubishi all the copper concentrates produced from said machine for a period of fifteen (15) years. It
was contemplated that $9,000,000.00 of said loan was to be used for the purchase of the concentrator machinery from
Japan. 1

Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short) obviously for purposes of
its obligation under said contract. Its loan application was approved on May 26, 1970 in the sum of 4,320,000,000.00, at
about the same time as the approval of its loan for 2,880,000,000.00 from a consortium of Japanese banks. The total
amount of both loans is equivalent to $20,000,000.00 in United States currency at the then prevailing exchange rate. The
records in the Bureau of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject to the
condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing copper concentrates
from Atlas, and that Mitsubishi had to pay back the total amount of loan by September 30, 1981. 2

Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter totalling
P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the amount of P1,971,595.01 was
withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code, as amended by
Presidential Decree No. 131, and duly remitted to the Government. 3

On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01 be applied
against their existing and future tax liabilities. Parenthetically, it was later noted by respondent Court of Tax Appeals in its
decision that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax credit in
favor of Atlas. 4

The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a petition for review
with respondent court, docketed therein as CTA Case No. 2801. 5 The petition was grounded on the claim that Mitsubishi
was a mere agent of Eximbank, which is a financing institution owned, controlled and financed by the Japanese
Government. Such governmental status of Eximbank, if it may be so called, is the basis for private repondents' claim for
exemption from paying the tax on the interest payments on the loan as earlier stated. It was further claimed that the interest
payments on the loan from the consortium of Japanese banks were likewise exempt because said loan supposedly came
from or were financed by Eximbank. The provision of the National Internal Revenue Code relied upon is Section 29 (b) (7)
(A), 6 which excludes from gross income:

(A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic securities,
or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2) financing institutions
owned, controlled, or enjoying refinancing from them, and (3) international or regional financing institutions
established by governments.

Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was later reset upon
manifestation of petitioner that the claim for tax credit of the alleged erroneous payment was still being reviewed by the
Appellate Division of the Bureau of Internal Revenue. The records show that on November 16, 1976, the said division
recommended to petitioner the approval of private respondent's claim. However, before action could be taken thereon,
respondent court scheduled the case for hearing on September 30, 1977, during which trial private respondents presented
their evidence while petitioner submitted his case on the basis of the records of the Bureau of Internal Revenue and the
pleadings. 7

On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in favor of Atlas in the
amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted the material averments of private
respondents when he supposedly prayed "for judgment on the pleadings without off-spring proof as to the truth of his
allegations." 8 Furthermore, the court declared that all papers and documents pertaining to the loan of 4,320,000,000.00
obtained by Mitsubishi from Eximbank show that this was the same amount given to Atlas. It also observed that the money
for the loans from the consortium of private Japanese banks in the sum of 2,880,000,000.00 "originated" from Eximbank.
From these, respondent court concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere
"arranger or conduit through which the loans flowed from the creditor Export-Import Bank of Japan to the debtor Atlas
Consolidated Mining & Development Corporation." 9
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to this Court, docketed
herein as G.R. No. 54908.

While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the amount of P439,167.95
on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld and remitted to the Government. Atlas
again filed a claim for tax credit with the petitioner, repeating the same basis for exemption.

On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals docketed as CTA Case No.
3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private respondents dated November 12,
1979, denied said claim for tax credit for lack of factual or legal basis. 10

On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered judgment ordering the
petitioner to credit Atlas the aforesaid amount of tax paid. A motion for reconsideration, filed on March 10, 1981, was denied
by respondent court in a resolution dated September 7, 1987. A notice of appeal was filed on September 22, 1987 by
petitioner with respondent court and a petition for review was filed with this Court on December 19, 1987. Said later case is
now before us as G.R. No. 80041 and is consolidated with G.R. No. 54908.

The principal issue in both petitions is whether or not the interest income from the loans extended to Atlas by Mitsubishi is
excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code and, therefore, exempt from
withholding tax. Apropos thereto, the focal question is whether or not Mitsubishi is a mere conduit of Eximbank which will
then be considered as the creditor whose investments in the Philippines on loans are exempt from taxes under the code.

Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that petitioner should be deemed
to have admitted the allegations of the private respondents when it submitted the case on the basis of the pleadings and
records of the bureau. There is nothing to indicate such admission on the part of petitioner nor can we accept respondent
court's pronouncement that petitioner did not offer to prove the truth of its allegations. The records of the Bureau of Internal
Revenue relevant to the case were duly submitted and admitted as petitioner's supporting evidence. Additionally, a hearing
was conducted, with presentation of evidence, and the findings of respondent court were based not only on the pleadings
but on the evidence adduced by the parties. There could, therefore, not have been a judgment on the pleadings, with the
theorized admissions imputed to petitioner, as mistakenly held by respondent court.

Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest respect and can
only be disturbed on appeal if they are not supported by substantial evidence or if there is a showing of gross error or abuse
on the part of the tax court. 11 Thus, ordinarily, we could give due consideration to the holding of respondent court that
Mitsubishi is a mere agent of Eximbank. Compelling circumstances obtaining and proven in these cases, however, warrant
a departure from said general rule since we are convinced that there is a misapprehension of facts on the part of the tax
court to the extent that its conclusions are speculative in nature.

The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential reference to Eximbank
whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract of loan and Atlas as the seller of the
copper concentrates. From the categorical language used in the document, one prestation was in consideration of the other.
The specific terms and the reciprocal nature of their obligations make it implausible, if not vacuous to give credit to the
cavalier assertion that Mitsubishi was a mere agent in said transaction.

Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi stated in its loan
application with the former was that the amount being procured would be used as a loan to and in consideration for importing
copper concentrates from Atlas. 12 Such an innocuous statement of purpose could not have been intended for, nor could it
legally constitute, a contract of agency. If that had been the purpose as respondent court believes, said corporations would
have specifically so stated, especially considering their experience and expertise in financial transactions, not to speak of
the amount involved and its purchasing value in 1970.

A thorough analysis of the factual and legal ambience of these cases impels us to give weight to the following arguments
of petitioner:

The nature of the above contract shows that the same is not just a simple contract of loan. It is not a mere creditor-
debtor relationship. It is more of a reciprocal obligation between ATLAS and MITSUBISHI where the latter shall
provide the funds in the installation of a new concentrator at the former's Toledo mines in Cebu, while ATLAS in
consideration of which, shall sell to MITSUBISHI, for a term of 15 years, the entire copper concentrate that will be
produced by the installed concentrator.
 Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified term was the consideration
of the granting of the amount of $20 million to ATLAS. MITSUBISHI, in order to fulfill its part of the contract, had to
obtain funds. Hence, it had to secure a loan or loans from other sources. And from what sources, it is immaterial as
far as ATLAS in concerned. In this case, MITSUBISHI obtained the $20 million from the EXIMBANK, of Japan and
the consortium of Japanese banks financed through the EXIMBANK, of Japan.

When MITSUBISHI therefore secured such loans, it was in its own independent capacity as a private entity and not
as a conduit of the consortium of Japanese banks or the EXIMBANK of Japan. While the loans were secured by
MITSUBISHI primarily "as a loan to and in consideration for importing copper concentrates from ATLAS," the fact
remains that it was a loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.

Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and separate contract from
that entered into by MITSUBISHI and ATLAS. Surely, in the latter contract, it is not EXIMBANK, that was intended
to be benefited. It is MITSUBISHI which stood to profit. Besides, the Loan and Sales Contract cannot be any clearer.
The only signatories to the same were MITSUBISHI and ATLAS. Nowhere in the contract can it be inferred that
MITSUBISHI acted for and in behalf of EXIMBANK, of Japan nor of any entity, private or public, for that matter.

Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when a contract of loan is
completed, the money ceases to be the property of the former owner and becomes the sole property of the obligor
(Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).

In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK, of Japan, said amount
ceased to be the property of the bank and became the property of MITSUBISHI.

The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of ATLAS, the former being
the owner of the $20 million upon completion of its loan contract with EXIMBANK of Japan.

The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely different from the interest income
paid by MITSUBISHI to EXIMBANK, of Japan. What was the subject of the 15% withholding tax is not the interest
income paid by MITSUBISHI to EXIMBANK, but the interest income earned by MITSUBISHI from the loan to
ATLAS. . . . 13

To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does not appear to be
suppletory or collateral to another contract and is, therefore, not to be distorted by other considerations aliunde. The
application for the loan was approved on May 20, 1970, or more than a month after the contract between Mitsubishi and
Atlas was entered into on April 17, 1970. It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use
the amount as a loan to and in consideration for importing copper concentrates from Atlas, but all that this proves is the
justification for the loan as represented by Mitsubishi, a standard banking practice for evaluating the prospects of due
repayment. There is nothing wrong with such stipulation as the parties in a contract are free to agree on such lawful terms
and conditions as they see fit. Limiting the disbursement of the amount borrowed to a certain person or to a certain purpose
is not unusual, especially in the case of Eximbank which, aside from protecting its financial exposure, must see to it that the
same are in line with the provisions and objectives of its charter.

Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from making loans except
to Japanese individuals and corporations. We are not impressed. Not only is there a failure to establish such submission by
adequate evidence but it posits the unfair and unexplained imputation that, for reasons subject only of surmise, said
financing institution would deliberately circumvent its own charter to accommodate an alien borrower through a manipulated
subterfuge, but with it as a principal and the real obligee.

The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming the truth thereof, is
too tenuous and conjectural to support the proposition that Mitsubishi is a mere conduit. Furthermore, the remittance of the
interest payments may also be logically viewed as an arrangement in paying Mitsubishi's obligation to Eximbank. Whatever
arrangement was agreed upon by Eximbank and Mitsubishi as to the manner or procedure for the payment of the latter's
obligation is their own concern. It should also be noted that Eximbank's loan to Mitsubishi imposes interest at the rate of
75% per annum, while Mitsubishis contract with Atlas merely states that the "interest on the amount of the loan shall be the
actual cost beginning from and including other dates of releases against loan." 14

It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting exemption from tax
are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered
by the exemption so claimed, which onus petitioners have failed to discharge. Significantly, private respondents are not
even among the entities which, under Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which should
indispensably be the party in interest in this case.

Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic analysis"
alone without substantial supportive evidence, lest governmental operations suffer due to diminution of much needed funds.
Nor can we close this discussion without taking cognizance of petitioner's warning, of pervasive relevance at this time, that
while international comity is invoked in this case on the nebulous representation that the funds involved in the loans are
those of a foreign government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax
laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans or other domestic
securities with private foreign entities, which in turn will negotiate independently with their governments, could be availed of
to take advantage of the tax exemption law under discussion.

WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April 18, 1980 and
January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.

SO ORDERED.

[G.R. No. L-28398. August 6, 1975.]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN L. MANNING, W.D. McDONALD, E.E. SIMMONS and
THE COURT OF TAX APPEALS, Respondents.

Solicitor General Antonio P. Barredo, Solicitor Lolita O. Gal-lang and Special Attorney Virgilio J. Saldajena
for Petitioner.

Manuel O. Chan for Private Respondents.

SYNOPSIS

Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common shares of MANTRASCO, and the
three private respondents who owned the rest, at 100 shares each, deposited all their shares with the Trustees. The trust
agreement provided that upon Reeses death MANTRASCO shall purchase Reeses shares. The trust agreement was
executed in view of Reeses desire that upon his death the Company would continue under the management of respondents.
Upon Reeses death and partial payment by the company of Reesess share, a new certificate was issued in the name of
MANTRASCO, and the certificate indorsed to the Trustees. Subsequently, the stockholders reverted the 24,700 shares in
the Treasury to the capital account of the company as stock dividends to be distributed to the stockholders. When the entire
purchase price of Reeses interest in the company was paid in full by the latter, the trust agreement was terminated, and
the shares held in trust were delivered to the company.

The Bureau of Internal Revenue concluded that the distribution of the 24,700 shares of Reese as stock dividends was in
effect a distribution of the "assets or property of the corporation." It therefore assessed respondents for deficiency income
taxes as well as for fraud penalty and interest charges. The Court of Tax Appeals absolved respondent from any liability for
receiving the questioned stock dividends on the ground that their respective one-third interest in the Company remained
the same before and after the declaration of the stock dividends and only the number of shares held by each of them had
changed.

On a petition for review, the Supreme Court held that the newly acquired shares were not treasury shares; their declaration
as treasury stock dividends was a complete nullity and that the assessment by the Commissioner of fraud penalty and the
imposition of interest charges pursuant to the provision of the Tax Code were made in accordance with law.

Judgment of the Court of Tax Appeals se aside.

SYLLABUS

1. PRIVATE CORPORATIONS; SHARES OF STOCKS; TREASURY; SHARES. Treasury shares are stocks issued and
fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other means. They are therefore
issued shares, but being in the treasury they do not have the status of outstanding shares. Consequently, although a
treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such share, as
long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be
declared by the corporation to itself, nor in the meetings of the corporations as voting stock, for otherwise equal distribution
of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the
corporation though it still represent a paid for interest in the property of the corporation.

2. ID.; ID.; ID.; DECLARATION OF QUESTIONED SHARES AS TREASURY STOCK DIVIDENDS, A NULLITY. Where
the manifest intention of the parties to the trust agreement was, in sum and substance, to treat the shares of a deceased
stockholder as absolutely outstanding shares of said stockholders estate until they were fully paid. the declaration of said
shares as treasury stock dividend was a complete nullity and plainly violative of public policy.

3. ID.; ID.; STOCK DIVIDEND PAYABLE ONLY FROM RETAINED EARNINGS. A stock dividend, being one payable in
capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings.

4. ID.; ID.; PURCHASE OF HOLDING RESULTING IN DISTRIBUTION OF EARNINGS TAXABLE. Where by the use of
a trust instrument as a convenient technical device, respondents bestowed unto themselves the full worth and value of a
deceased stockholders corporate holding acquired with the very earnings of the companies, such package device which
obviously is not designed to carry out the usual stock dividend purpose of corporate expansion reinvestment, e.g., the
acquisition of additional facilities and other capital budget items, but exclusively for expanding the capital base of the
surviving stockholders in the company, cannot be allowed to deflect the latters responsibilities toward our income tax laws.
The conclusion is ineluctable that whenever the company parted with a portion of its earnings "to buy" the corporate holdings
of the deceased stockholders, it was in ultimate effect and result making a distribution of such earnings to the surviving
stockholders. All these amounts are consequently subject to income tax as being, in truth and in fact, a flow of cash benefits
to the surviving stockholders.

5. ID.; ID.; ID.; COMMISSIONER ASSESSMENT BASED ON THE TOTAL ACQUISITION COST OF THE ALLEGED
TREASURY STOCK DIVIDENDS, ERROR. Where the surviving stockholders, by resolution, partitioned among
themselves, as treasury stock dividends, the deceased stockholders interest, and earnings of the corporation over a period
of years were used to gradually wipe out the holdings therein of said deceased stockholder, the earnings (which in effect
have been distributed to the surviving stockholders when they appropriated among themselves the deceased stockholders
interest), should be taxed for each of the corresponding years when payments were made to the deceaseds estate on
account of his shares. In other words, the Tax Commissioner may not asses the surviving stockholders, for income tax
purposes, the total acquisition cost of the alleged treasury stock dividends in one lump sum. However, with regard to
payment made with the corporations earnings before the passage of the resolution declaring as stock dividends the
deceased stockholders interest (while indeed those earnings were utilized in those years to gradually pay off the value of
the deceased stockholders holdings), the surviving stockholders should be liable (in the absence of evidence that prior to
the passage of the stockholders resolution the contributed of each of the surviving stockholder rose corresponding), for
income tax purposes, to the extent of the aggregate amount paid by the corporation (prior to such resolution) to buy off the
deceased stockholders shares. The reason is that it was only by virtue of the authority contained in said resolution that the
surviving stockholders actually, albeit illegally, appropriated and petitioned among themselves the stockholders equity
representing the deceased stockholders interest.

6. TAXATION; INCOME TAX; ASSESSMENT OF FRAUD PENALTY AND IMPOSITION OF INTEREST CHARGES IN
ACCORDANCE WITH LAW DESPITE NULLITY OF RESOLUTION AUTHORIZING DISTRIBUTION OF EARNINGS.
The fact that the resolution authorizing the distribution of earnings is null and void is of no moment. Under the National
Internal Revenue Code, income tax is assessed on income received from any property, activity or service that produces
income. The Tax Code stands as an indifferent, neutral party on the matter of where the income comes from. The action
taken by the Commissioner of assessing fraud penalty and imposing interest charges pursuant to the provisions of the Tax
Code is in accordance with law.

DECISION

CASTRO, J.:

This is a petition for review of the decision of the Court of Tax Appeals, in CTA case 1626, which set aside the income tax
assessments issued by the Commissioner of Internal Revenue against John L. Manning, W.D. McDonald and E.E. Simmons
(hereinafter referred to as the respondents), for alleged undeclared stock dividends received in 1958 from the Manila Trading
and Supply Co. (hereinafter referred to as the MANTRASCO) valued at P7,973,660.

In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common shares; 24,700 of
these were owned by Julius S. Reese, and the rest, at 100 shares each, by the three respondents.

On February 29, 1952, in view of Reeses desire that upon his death MANTRASCO and its two subsidiaries, MANTRASCO
(Guam), Inc. and the Port Motors, Inc., would continue under the management of the respondents, a trust agreement on his
and the respondents interests in MANTRASCO was executed by and among Reese (therein referred to as OWNER),
MANTRASCO (therein referred to as COMPANY), the law firm of Ross, Selph, Carrascoso and Janda (therein referred to
as TRUSTEES), and the respondents (therein referred to as MANAGERS).

The trust agreement pertinently provides as follows:jgc:chanrobles.com.ph

"1. Upon the execution of this agreement the OWNER shall deposit with the TRUSTEES, duly endorsed and ready for
transfer Twenty-Four Thousand Seven Hundred (24,700) shares of the capital stock of the COMPANY, these shares being
all shares of the capital stock of the COMPANIES belonging to him . . .

"2. Upon the execution of this Agreement the MANAGERS shall deposit with the TRUSTEES, duly endorsed and ready for
transfer, all shares of the capital stock of the COMPANIES belonging to any of them.

"3. (a) The OWNER and the MANAGERS, and each of them, agree that if any of them shall at any time during the life of
this trust acquire any additional shares of stock of any of the COMPANIES, or of any successor company, or any shares in
substitution, exchange or replacement of the shares subject to this agreement, they shall forthwith endorse and deposit
such shares with the TRUSTEES hereunder and such additional or other shares shall become subject to this agreement;
shares deposited by the OWNER and shares received by the TRUSTEES as stock dividends on, or in substitution, exchange
or replacement of, such shares so deposited under this agreement being MANAGERS SHARES.

"(b) All shares deposited under paragraphs 1, 2 and 3(a) hereof shall, during the life of the OWNER, remain in the name of
and shall be voted by the respective parties making the deposit ...

"4. (a) Upon the death of the OWNER and the receipt by the TRUSTEES of the initial payment from the company purchasing
the OWNERS SHARES, the TRUSTEES shall cause the OWNERS SHARES to be transferred into the name of such
company and such company shall thereupon transfer such shares into the name of the TRUSTEES and the TRUSTEES
shall hold such shares until payment for all such shares shall have been made by the company as provided in this
agreement.

x x x

"(c) The TRUSTEES shall vote all stock standing in their name or the name of their nominees at all meetings and shall be
in all respects entitled to all the rights as owners of said shares, subject, however, to the provisions of this agreement of
trust.

"(d) Any and all dividends paid on said shares after the death of the OWNER shall be subject to the provisions of this
agreement.

x x x

"5. (b) It is expressly agreed and understood, however, that the declaration of dividends and amount of earnings transferred
to surplus shall be subject to the approval of the TRUSTEES and the TRUSTEES shall participate to such extent in the
affairs of the COMPANIES as they deem necessary to insure the carrying out of this agreement and the discharge of the
obligations of the COMPANIES and each of them and of the MANAGERS hereunder.

"(c) The TRUSTEES shall designate one or more directors of each of the COMPANIES as they shall consider advisable
and corresponding shares shall be transferred to such directors to qualify them to act.

x x x

"8. (a) Upon the death of the OWNER, the COMPANIES or any one or more of them shall purchase the OWNERS SHARES;
it being the intent that any of the COMPANIES shall purchase all or a proportionate part of the OWNERS SHARES . . .

"(b) The purchase price of such shares shall be the book value of such share computed in United States dollars . . .
x x x

"(d) All dividends paid on stock that had been OWNERS SHARES, from the time of the transfer of such shares by one or
more of the COMPANIES to the TRUSTEES as provided in Article 4 until payment in full for such OWNERS SHARES shall
have been made by each of the COMPANIES which shall have purchased the same, shall be credited as payments on
account of the purchase price of such shares and shall be a prepayment on account of the next due installment or
installments of such purchase price.

x x x

"12. The TRUSTEES may from time to time increase or decrease the unpaid balance of the purchase price of the shares
being purchased by any COMPANY or COMPANIES should they in their exclusive discretion determine that such increase
or decrease would be necessary to carry out the intention of the parties that the Estate and heirs of the OWNER shall
receive the fair value of the shares deposited in Trust as such value existed at the date of the death of the OWNER. . .

"13. Should the said COMPANIES or any of them be unable or unwilling to comply with their obligations hereunder when
due, the TRUSTEES may terminate this agreement and dispose of all the shares of stock deposited hereunder, whether or
not payment shall have been made for part of such stock, applying the proceeds of such sale or disposition to the unpaid
balance of the purchase price:jgc:chanrobles.com.ph

"(a) If, upon any such sale or disposition of the stock, the TRUSTEES shall receive an amount in excess of the unpaid
balance of the purchase price agreed to be paid by the COMPANIES for the OWNERS SHARES such excess, after
deducting all expenses, charges and taxes, shall be paid to the then MANAGERS.

x x x

"17. Until the delivery to him of the shares purchased by him, no MANAGER, shall sell, assign, mortgage, pledge, transfer
or in anywise encumber or hypothecate such shares or his interest in this agreement.

x x x

"19. After the death of the OWNER and during the period of this trust the COMPANIES shall pay no dividends except as
may be authorized by the TRUSTEES. Dividends on MANAGERS SHARES shall, so long as they shall not be in default
under this agreement, be paid over by the TRUSTEES to the MANAGERS. Dividends on OWNERS SHARES shall be
applied in liquidation of the COMPANIES liabilities hereunder as provided in Article 8(d).

x x x

"26. The TRUSTEES may, after the death of the OWNER and during the life of this trust, vote any and all shares held in
trust, at any general and special meeting of stockholders for all purposes, including but not limited to wholly or partially
liquidating or reducing the capital of any COMPANY or COMPANIES, authorizing the sale of any or all assets, and election
of directors . . .

x x x

"28. The COMPANIES and each of them undertake and agree by proper corporate act to reduce their capitalization, sell or
encumber their assets, amend their articles of incorporation, reorganize, liquidate, dissolve and do all other things the
TRUSTEES in their discretion determine to be necessary to enable them to comply with their obligations hereunder and the
TRUSTEES are hereby irrevocably authorized to vote all shares of the COMPANIES and each of them at any general or
special meeting for the accomplishment of such purposes. . . ."cralaw virtua1aw library

On October 19, 1954 Reese died. The projected transfer of his shares in the name of MANTRASCO could not, however,
be immediately effected for lack of sufficient funds to cover initial payment on the shares.

On February 2, 1955, after MANTRASCO made a partial payment of Reeses shares, the certificate for the 24,700 shares
in Reeses name was cancelled and a new certificate was issued in the name of MANTRASCO. On the same date, and in
the meantime that Reeses interest had not been fully paid, the new certificate was endorsed to the law firm of Ross, Selph,
Carrascoso and Janda, as trustees for and in behalf of MANTRASCO.

On December 22, 1958, at a special meeting of MANTRASCO stockholders, the following resolution was
passed:jgc:chanrobles.com.ph

"RESOLVED, that the 24,700 shares in the Treasury be reverted back to the capital account of the company as a stock
dividend to be distributed to shareholders of record at the close of business on December 22, 1958, in accordance with the
action of the Board of Directors at its meeting on December 19, 1958 which action is hereby approved and confirmed."cralaw
virtua1aw library

On November 25, 1963 the entire purchase price of Reeses interest in MANTRASCO was finally paid in full by the latter,
On May 4, 1964 the trust agreement was terminated and the trustees delivered to MANTRASCO all the shares which they
were holding in trust.

Meanwhile, on September 14, 1962, an examination of MANTRASCOs books was ordered by the Bureau of Internal
Revenue. The examination disclosed that (a) as of December 31, 1958 the 24,700 shares declared as dividends had been
proportionately distributed to the respondents, representing a total book value or acquisition cost of P7,973,660; (b) the
respondents failed to declare the said stock dividends as part of their taxable income for the year 1958; and (c) from 1956
to 1961 the following amounts were paid by MANTRASCO to Reeses estate by virtue of the trust agreement, to
wit:chanrob1es virtual 1aw library

Amounts

Year Liabilities Paid

1956 P5,830,587.86 P 2,143,073.00

1957 5,317,137.86 513,450.00

1958 4,824,059.28 493,078.58

1959 4,319,420.14 504,639.14

1960 3,849,720.14 469,700.00

1961 3,811,387.69 38,332.45

On the basis of their examination, the BIR examiners concluded that the distribution of Reeses shares as stock dividends
was in effect a distribution of the "asset or property of the corporation as may be gleaned from the payment of cash for the
redemption of said stock and distributing the same as stock dividend." On April 14, 1965 the Commissioner of Internal
Revenue issued notices of assessment for deficiency income taxes to the respondents for the year 1958, as
follows:chanrob1es virtual 1aw library

J.L. Manning W.D. McDonald E.E. Simmons

Deficiency Income Tax P1,416,469.00 P1,442,719.00 P1,450,434.00

Add 50% surcharge* 723,234.50 721,359.507 25,217.00

1/2% monthly interest from

6-20-59 to 6-20-62 260,364.42 259,689.42 261,078.12

TOTAL AMOUNT DUE

& COLLECTIBLE P2,430,067.92 P2,423,767.92 2,436,729.12

The respondents unsuccessfully challenged the foregoing assessments and, failing to secure a favorable reconsideration,
appealed to the Court of Tax Appeals.
On October 30, 1967 the CTA rendered judgment absolving the respondents from any liability for receiving the questioned
stock dividends on the ground that their respective one-third interest in MANTRASCO remained the same before and after
the declaration of stock dividends and only the number of shares held by each of them had changed.

Hence, the present recourse.

All the parties rely upon the same provisions of the Tax Code and internal revenue regulations to bolster their respective
positions. These are:chanrob1es virtual 1aw library

A. National Internal Revenue Code

"SEC. 83. Distribution of dividends or assets by corporations (a) Definition of Dividends The term dividends when
used in this Title means any distribution made by a corporation to its shareholders out of its earnings or profits accrued
since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in money or in other property.

"Where a corporation distributes all of its assets in complete liquidation or dissolution the gain realized or loss sustained by
the stockholder, whether individual or corporate, is a taxable income or deductible loss, as the case may be.

"(b) Stock dividend. A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.
However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend,
the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that
it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen."cralaw
virtua1aw library

B. B.I.R. Regulations

"SEC. 251. Dividends paid in property. Dividends paid in securities or other property (other than its own stock), in which
the earnings of the corporation have been invested, are income to the recipients to the amount of the full market value of
such property when receivable by individual stockholders . . .

"SEC. 252. Stock dividend. A stock dividend which represents the transfer of surplus to capital account is not subject to
income tax. However, a dividend in stock may constitute taxable income to the recipients thereof notwithstanding the fact
that the officers or directors of the corporation (as defined in section 84) choose to call such distribution as a stock dividend.
The distinction between a stock dividend which does not, and one which does, constitute income taxable to the shareholders
is the distinction between a stock dividend which works no change in the corporate entity, the same interest in the same
corporation being represented after the distribution by more shares of precisely the same character, and a stock dividend
where there either has been change of corporate identity or a change in the nature of the shares issued as dividends
whereby the proportional interest of the shareholder after the distribution is essentially different from the former interest. A
stock dividend constitutes income if it gives the shareholder an interest different from that which his former stockholdings
represented. A stock dividend does not constitute income if the new shares confer no different rights or interests than did
the old the new certificate plus the old representing the same proportionate interest in the net assets of the corporation
as did the old."cralaw virtua1aw library

The parties differ, however, on the taxability of the "treasury" stock dividends received by the respondents.

The respondents anchor their argument on the same basis as the Court of Tax Appeals; whereas the Commissioner
maintains that the full value (P7,973,660) of the shares redeemed from Reese by MANTRASCO which were subsequently
distributed to the respondents as stock dividends in 1958 should be taxed as income of the respondents for that year, the
said distribution being in effect a distribution of cash. The respondents interests in MANTRASCO, he further argues, were
only .4% prior to the declaration of the stock dividends in 1958, but rose to 33 1/3% each after the said declaration.

In submitting their respective contentions, it is the assumption of both parties that the 24,700 shares declared as stock
dividends were treasury shares. We are however convinced, after a careful study of the trust agreement, that the said
shares were not, on December 22, 1958 or at anytime before or after that date, treasury shares. The reasons are quite
plain.

Although authorities may differ on the exact legal and accounting status of so-called "treasury shares," 1 they are more or
less in agreement that treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by
purchase, donation, forfeiture or other means. 2 Treasury shares are therefore issued shares, but being in the treasury they
do not have the status of outstanding shares. 3 Consequently, although a treasury share, not having been retired by the
corporation re-acquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury
share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, 4 nor in the
meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be
effectively lost and the directors will be able to perpetuate their control of the corporation, 5 though it still represents a paid-
for interest in the property of the corporation. 6 The foregoing essential features of a treasury stock are lacking in the
questioned shares. Thus,

(a) under paragraph 4(c) of the trust agreement, the trustees were authorized to vote all stock standing in their names at all
meetings and to exercise all rights "as owners of said shares" this authority is reiterated in paragraphs 26 and 28 of the
trust agreement;

(b) under paragraph 4(d), "Any and all dividends paid on said shares after the death of the OWNER shall be subject to the
provisions of this agreement;"

(c) under paragraph 5(b), the amount of retained earnings to be declared as dividends was made subject to the approval of
the trustees of the 24,700 shares;

(d) under paragraph 5(c), the choice of corporate directors was delegated exclusively to the trustees who were also given
the authority to transfer qualifying shares to such directors; and

(e) under paragraph 19, MANTRASCO and its two subsidiaries were expressly prohibited from paying "dividends except as
may be authorized by the TRUSTEES;" in the same paragraph mention was also made of "dividends on OWNERS
SHARES" which shall be applied to the liquidation of the liabilities of the three companies for the price of Reeses shares.

The manifest intention of the parties to the trust agreement was, in sum and substance, to treat the 24,700 shares of Reese
as absolutely outstanding shares of Reeses estate until they were fully paid. Such being the true nature of the 24,700
shares, their declaration as treasury stock dividend in 1958 was a complete nullity and plainly violative of public policy. A
stock dividend, being one payable in capital stock, cannot be declared out of outstanding corporate stock, but only from
retained earnings: 7

Of pointed relevance is this useful discussion of the nature of a stock dividend: 8

"A stock dividend always involves a transfer of surplus (or profit) to capital stock. Graham and Katz, Accounting in Law
Practice, 2d ed. 1938, No. 70. As the court said in United States v. Siegel, 8 Cir., 1931, 52 F 2d 63, 65, 78 ALR 672: A
stock dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to stockholders in lieu of
a cash dividend. Congress itself has defined the term dividend in No. 115(a) of the Act as meaning any distribution made
by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits. In Eisner v.
Macomber, 1920, 252 US 189, 40 S Ct 189, 64 L Ed 521, 9 ALR 1570, both the prevailing and the dissenting opinions
recognized that within the meaning of the revenue acts the essence of a stock dividend was the segregation out of surplus
account of a definite portion of the corporate earnings as part of the permanent capital resources of the corporation by the
device of capitalizing the same, and the issuance to the stockholders of additional shares of stock representing the profits
so capitalized."cralaw virtua1aw library

The declaration by the respondents and Reeses trustees of MANTRASCOs alleged treasury stock dividends in favor of
the former, brings, however, into clear focus the ultimate purpose which the parties to the trust instrument aimed to realize:
to make the respondents the sole owners of Reeses interest in MANTRASCO by utilizing the periodic earnings of that
company and its subsidiaries to directly subsidize their purchase of the said interests, and by making it appear outwardly,
through the formal declaration of non-existent stock dividends in the treasury, that they have not received any income from
those firms when, in fact, by that declaration they secured to themselves the means to turn around as full owners of Reeses
shares. In other words, the respondents, using the trust instrument as a convenient technical device, bestowed unto
themselves the full worth and value of Reeses corporate holdings with the use of the very earnings of the companies. Such
package device, obviously not designed to carry out the usual stock dividend purpose of corporate expansion reinvestment,
e.g. the acquisition of additional facilities and other capital budget items, but exclusively for expanding the capital base of
the respondents in MANTRASCO, cannot be allowed to deflect the respondents responsibilities toward our income tax
laws. The conclusion is thus ineluctable that whenever the companies involved herein parted with a portion of their earnings
"to buy" the corporate holdings of Reese, they were in ultimate effect and result making a distribution of such earnings to
the respondents. All these amounts are consequently subject to income tax as being, in truth and in fact, a flow of cash
benefits to the respondents.

We are of the opinion, however, that the Commissioner erred in assessing the respondents the total acquisition cost
(P7,973,660) of the alleged treasury stock dividends in one lump sum. The record shows that the earnings of MANTRASCO
over a period of years were used to gradually wipe out the holdings therein of Reese. Consequently, those earnings, which
we hold, under the facts disclosed in the case at bar, as in effect having been distributed to the respondents, should be
taxed for each of the corresponding years when payments were made to Reeses estate on account of his 24,700 shares.
With regard to payments made with MANTRASCO earnings in 1958 and the years before, while indeed those earnings
were utilized in those years to gradually pay off the value of Reeses holdings in MANTRASCO, there is no evidence from
which it can be inferred that prior to the passage of the stockholders resolution of December 22, 1958 the contributed equity
of each of the respondents rose correspondingly. It was only by virtue of the authority contained in the said resolution that
the respondents actually, albeit illegally, appropriated and partitioned among themselves the stockholders equity
representing Reeses interests in MANTRASCO. As those payments accrued in favor of the respondents in 1958 they are
and should be liable, for income tax purposes, to the extent of the aggregate amount paid, from 1955 to 1958, by
MANTRASCO to buy off Reeses shares.

The fact that the resolution authorizing the distribution of the said earnings is null and void is of no moment. Under the
National Internal Revenue Code, income tax is assessed on income received from any property, activity or service that
produces income. 9 The Tax Code stands as an indifferent, neutral party on the matter of where the income comes from.
10

Subject to the foregoing qualifications, we find the action taken by the Commissioner in all other respects that is, the
assessment of a fraud penalty and imposition of interest charges pursuant to the provisions of the Tax Code to be in
accordance with law.

ACCORDINGLY, the judgment of the Court of Tax Appeals absolving the respondents from any deficiency income tax
liability is set aside, and this case is hereby remanded to the Court of Tax Appeals for further proceedings. More specifically,
the Court of Tax Appeals shall recompute the income tax liabilities of the respondents in accordance with this decision and
with the Tax Code, and thereafter pronounce and enter judgment accordingly. No costs.

Makasiar, Esguerra, Muoz Palma and Martin, JJ., concur.

Teehankee, J., is on leave.

G.R. No. 112024 January 28, 1999

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF APPEALS, respondent.

QUISUMBING, J.:

This petition for review assails the Resolution 1 of the Court of Appeals dated September 22, 1993 affirming the
Decision2 and a Resolution 3 of the Court Of Tax Appeals which denied the claims of the petitioner for tax refund and tax
credits, and disposing as follows:

IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED due course. The Decision
of the Court of Tax Appeals dated May 20, 1993 and its resolution dated July 20, 1993, are hereby
AFFIRMED in toto.

SO ORDERED.4

The Court of Tax Appeals earlier ruled as follows:

WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for 1985 in the amount of
P5,299,749.95 is hereby denied for having been filed beyond the reglementary period. The 1986 claim for
refund amounting to P234,077.69 is likewise denied since petitioner has opted and in all likelihood
automatically credited the same to the succeeding year. The petition for review is dismissed for lack of
merit.
 SO ORDERED.5

The facts on record show the antecedent circumstances pertinent to this case.

Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine
laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total
income tax of P5,016,954.00. The taxes due were settled by applying PBCom's tax credit memos and accordingly, the
Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and P1,615,253.00,
respectively.

Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended
December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the
year.

But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the
BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.

On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of
P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property
rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review
on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309 entitled:
"Philippine Bank of Communications vs. Commissioner of Internal Revenue."

The losses petitioner incurred as per the summary of petitioner's claims for refund and tax credit for 1985 and 1986, filed
before the Court of Tax Appeals, are as follows:

1985 1986

Net Income (Loss) (P25,317,288.00) (P14,129,602.00)

Tax Due NIL NIL

Quarterly tax.

Payments Made 5,016,954.00

Tax Withheld at Source 282,795.50 234,077.69

Excess Tax Payments P5,299,749.50* P234,077.69

=============== =============

* CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95. A forty five centavo
difference was noted.

On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a tax
refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year reglementary
period provided for by law. The petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on the
assumption that it was automatically credited by PBCom against its tax payment in the succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the same was denied due course
for lack of merit. 6

Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of Appeals. However
on September 22, 1993, the Court of Appeals affirmed in toto the CTA's resolution dated July 20, 1993. Hence this petition
now before us.

The issues raised by the petitioner are:

I. Whether taxpayer PBCom which relied in good faith on the formal assurances of BIR
in RMC No. 7-85 and did not immediately file with the CTA a petition for review asking for
the refund/tax credit of its 1985-86 excess quarterly income tax payments can be
prejudiced by the subsequent BIR rejection, applied retroactivity, of its assurances in RMC
No. 7-85 that the prescriptive period for the refund/tax credit of excess quarterly income
tax payments is not two years but ten (10).7

II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied
PBCom's claim for the refund of P234,077.69 income tax overpaid in 1986 on the mere
speculation, without proof, that there were taxes due in 1987 and that PBCom availed of
tax-crediting that year.8

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax
credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing the prescriptive period of two
years to ten years?

Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the applicability of
Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states that overpaid income taxes are not
covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax credits for the
excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. The pertinent portions
of the circular reads:

REVENUE MEMORANDUM CIRCULAR NO. 7-85

SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS

CORPORATE INCOME TAX RESULTING FROM THE FILING OF THE
FINAL ADJUSTMENT RETURN.

TO: All Internal Revenue Officers and Others Concerned.

Sec. 85 And 86 Of the National Internal Revenue Code provide:

xxx xxx xxx

The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which provide;

xxx xxx xxx

It has been observed, however, that because of the excess tax payments, corporations file claims for
recovery of overpaid income tax with the Court of Tax Appeals within the two-year period from the date of
payment, in accordance with sections 292 and 295 of the National Internal Revenue Code. It is obvious
that the filing of the case in court is to preserve the judicial right of the corporation to claim the refund or tax
credit.

It should he noted, however, that this is not a case of erroneously or illegally paid tax under the provisions
of Sections 292 and 295 of the Tax Code.

In the above provision of the Regulations the corporation may request for the refund of the overpaid income
tax or claim for automatic tax credit. To insure prompt action on corporate annual income tax returns
showing refundable amounts arising from overpaid quarterly income taxes, this Office has promulgated
 Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in processing said
returns. Under these procedures, the returns are merely pre-audited which consist mainly of checking
mathematical accuracy of the figures of the return. After which, the refund or tax credit is granted, and, this
procedure was adopted to facilitate immediate action on cases like this.

In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to
preserve the right to claim refund or tax credit the two year period. As already stated, actions hereon by the
Bureau are immediate after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may
recover from the Bureau of Internal Revenue excess income tax paid under the provisions of Section 86 of
the Tax Code within 10 years from the date of payment considering that it is an obligation created by law
(Article 1144 of the Civil Code).9 (Emphasis supplied.)

Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would result to
injustice to taxpayers. Citing ABS CBN Broadcasting Corporation vs. Court of Tax Appeals 10 petitioner claims that rulings
or circulars promulgated by the Commissioner of Internal Revenue have no retroactive effect if it would be prejudicial to
taxpayers, In ABS-CBN case, the Court held that the government is precluded from adopting a position inconsistent with
one previously taken where injustice would result therefrom or where there has been a misrepresentation to the taxpayer.

Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rules as follows:

Sec. 246 Non-retroactivity of rulings Any revocation, modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding section or any of the rulings or circulars
promulgated by the Commissioner shall not be given retroactive application if the revocation, modification
or reversal will be prejudicial to the taxpayers except in the following cases:

a). where the taxpayer deliberately misstates or omits material facts from
his return or in any document required of him by the Bureau of Internal
Revenue;

b). where the facts subsequently gathered by the Bureau of Internal

Revenue are materially different from the facts on which the ruling is
based;

c). where the taxpayer acted in bad faith.

Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two-year prescriptive period for
filing tax cases in court concerning income tax payments of Corporations is reckoned from the date of filing the Final
Adjusted Income Tax Return, which is generally done on April 15 following the close of the calendar year. As precedents,
respondent Commissioner cited cases which adhered to this principle, to wit ACCRA Investments Corp. vs. Court of
Appeals, et al., 11 and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al.. 12 Respondent Commissioner also
states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed to be filed
on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court. Further, respondent Commissioner
stresses that when the petitioner filed the case before the CTA on November 18, 1988, the same was filed beyond the time
fixed by law, and such failure is fatal to petitioner's cause of action.

After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to the petitioner's
contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards the two-year prescriptive
period set by law.

Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to
finance the needs of the citizenry and to advance the common weal. 13 Due process of law under the Constitution does not
require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiefly
relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the
collection of taxes levied should be summary and interfered with as little as possible. 14

From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR
being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental
matters.
Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the prescriptive
period for filing a court proceeding for the recovery of tax erroneously or illegally collected, viz.:

Sec. 230. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be maintained
in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously
or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of
any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether
or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceedings shall begun after the expiration of two years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment; Provided
however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where
on the face of the return upon which payment was made, such payment appears clearly to have been
erroneously paid. (Emphasis supplied)

The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within two
(2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period provided, should be
computed from the time of filing the Adjustment Return and final payment of the tax for the year.

In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., 15 this Court explained the application of
Sec. 230 of 1977 NIRC, as follows:

Clearly, the prescriptive period of two years should commence to run only from the time that the refund is
ascertained, which can only be determined after a final adjustment return is accomplished. In the present
case, this date is April 16, 1984, and two years from this date would be April 16, 1986. . . . As we have
earlier said in the TMX Sales case, Sections 68. 16 69, 17 and 70 18 on Quarterly Corporate Income Tax
Payment and Section 321 should be considered in conjunction with it 19

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten
years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of
Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the
statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific
and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue.
It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially
found to be erroneous. 20 Thus, courts will not countenance administrative issuances that override, instead of remaining
consistent and in harmony with the law they seek to apply and implement. 21

In the case of People vs. Lim, 22 it was held that rules and regulations issued by administrative officials to implement a law
cannot go beyond the terms and provisions of the latter.

Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with but is
contrary to the provisions and spirit of Act. No 4003 as amended, because whereas the prohibition
prescribed in said Fisheries Act was for any single period of time not exceeding five years duration, FAO
No 37-1 fixed no period, that is to say, it establishes an absolute ban for all time. This discrepancy between
Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the part of Secretary of Agriculture
and Natural Resources. Of course, in case of discrepancy, the basic Act prevails, for the reason that the
regulation or rule issued to implement a law cannot go beyond the terms and provisions of the
latter. . . . In this connection, the attention of the technical men in the offices of Department Heads who draft
rules and regulation is called to the importance and necessity of closely following the terms and provisions
of the law which they intended to implement, this to avoid any possible misunderstanding or confusion as
in the present case.23

Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or
agents. 24 As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of
Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC. for being contrary
to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend
the statute.

It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7-85, is
estopped by the principle of non-retroactively of BIR rulings. Again We do not agree. The Memorandum
Circular, stating that a taxpayer may recover the excess income tax paid within 10 years from date of
payment because this is an obligation created by law, was issued by the Acting Commissioner of Internal
Revenue. On the other hand, the decision, stating that the taxpayer should still file a claim for a refund or
tax credit and corresponding petition fro review within the
two-year prescription period, and that the lengthening of the period of limitation on refund from two to ten
years would be adverse to public policy and run counter to the positive mandate of Sec. 230, NIRC, - was
the ruling and judicial interpretation of the Court of Tax Appeals. Estoppel has no application in the case at
bar because it was not the Commissioner of Internal Revenue who denied petitioner's claim of refund or
tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the claim and in effect, ruled
that the RMC No. 7-85 issued by the Commissioner of Internal Revenue is an administrative interpretation
which is out of harmony with or contrary to the express provision of a statute (specifically Sec. 230, NIRC),
hence, cannot be given weight for to do so would in effect amend the statute. 25

Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting statutes as part of the legal system of the
country. But administrative decisions do not enjoy that level of recognition. A memorandum-circular of a bureau head could
not operate to vest a taxpayer with shield against judicial action. For there are no vested rights to speak of respecting a
wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government
in estoppel to correct or overrule the same. 27 Moreover, the non-retroactivity of rulings by the Commissioner of Internal
Revenue is not applicable in this case because the nullity of RMC No. 7-85 was declared by respondent courts and not by
the Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund is
in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer.28

On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTA's decision denying its
claim for refund of P234,077.69 (tax overpaid in 1986), based on mere speculation, without proof, that PBCom availed of
the automatic tax credit in 1987.

Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over
the actual income tax computed in the adjustment or final corporate income tax return, shall either(a) be refunded to the
corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding
taxable year.

The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form)
its intention, whether to request for a refund or claim for an automatic tax credit for the succeeding taxable year. To ease
the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the other.

As stated by respondent Court of Appeals:

Finally, as to the claimed refund of income tax over-paid in 1986 the Court of Tax Appeals, after
examining the adjusted final corporate annual income tax return for taxable year 1986, found out that
petitioner opted to apply for automatic tax credit. This was the basis used (vis-avis the fact that the 1987
annual corporate tax return was not offered by the petitioner as evidence) by the CTA in concluding that
petitioner had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can
no longer ask for refund, as to [sic] the two remedies of refund and tax credit are alternative. 30

That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as specified in its 1986
Final Adjusted Income Tax Return, is a finding of fact which we must respect. Moreover, the 1987 annual corporate tax
return of the petitioner was not offered as evidence to contovert said fact. Thus, we are bound by the findings of fact by
respondent courts, there being no showing of gross error or abuse on their part to disturb our reliance thereon. 31

WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from is AFFIRMED, with
COSTS against the petitioner.1wphi1.nt

SO ORDERED.

G.R. Nos. 106949-50 December 1, 1995

PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP), petitioner,
vs.
COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

G.R. Nos. 106984-85 December 1, 1995

COMMISSIONER INTERNAL REVENUE, petitioner,

vs.
PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES, THE COURT OF APPEALS and THE COURT OF TAX
APPEALS, respondents.

FELICIANO, J.:

The Paper Industries Corporation of the Philippines ("Picop"), which is petitioner in G.R. Nos. 106949-50 and private
respondent in G.R. Nos. 106984-85, is a Philippine corporation registered with the Board of Investments ("BOI") as a
preferred pioneer enterprise with respect to its integrated pulp and paper mill, and as a preferred non-pioneerenterprise with
respect to its integrated plywood and veneer mills.

On 21 April 1983, Picop received from the Commissioner of Internal Revenue ("CIR") two (2) letters of assessment and
demand both dated 31 March 1983: (a) one for deficiency transaction tax and for documentary and science stamp tax; and
(b) the other for deficiency income tax for 1977, for an aggregate amount of P88,763,255.00. These assessments were
computed as follows:

Transaction Tax

Interest payments on

money market

borrowings P 45,771,849.00

35% Transaction tax due

thereon 16,020,147.00

Add: 25% surcharge 4,005,036.75

T o t a l P 20,025,183.75

Add:

14% int. fr.

1-20-78 to

7-31-80 P 7,093,302.57

20% int, fr.

8-1-80 to

3-31-83 10,675,523.58


17,768,826.15

P 37,794,009.90

Documentary and Science Stamps Tax

Total face value of

debentures P100,000,000.00

Documentary Stamps

Tax Due

(P0.30 x P100,000.000 )

( P200 ) P 150,000.00

Science Stamps Tax Due

(P0.30 x P100,000,000 )

( P200 ) P 150,000.00

T o t a l P 300,000.00

Add: Compromise for

non-affixture 300.00

300,300.00

TOTAL AMOUNT DUE AND COLLECTIBLE P 38,094,309.90

===========

Deficiency Income Tax for 1977

Net income per return P 258,166.00

Add: Unallowable deductions

1) Disallowed deductions

availed of under
R.A. No. 5186 P 44,332,980.00

2) Capitalized interest

expenses on funds

used for acquisition

of machinery & other

equipment 42,840,131.00

3) Unexplained financial

guarantee expense 1,237,421.00

4) Understatement

of sales 2,391,644.00

5) Overstatement of

cost of sales 604,018.00

P91,406,194.00

Net income per investigation P91,664,360.00

Income tax due thereon 34,734,559.00

Less: Tax already assessed per return 80,358.00

Deficiency P34,654,201.00

Add:

14% int. fr.

4-15-78 to

7-31-81 P 11,128,503.56

20% int. fr.

8-1-80 to

4-15-81 4,886,242.34

P16,014,745.90


TOTAL AMOUNT DUE AND COLLECTIBLE P 50,668,946.90 1

===========

On 26 April 1983, Picop protested the assessment of deficiency transaction tax and documentary and science stamp taxes.
Picop also protested on 21 May 1983 the deficiency income tax assessment for 1977. These protests were not formally
acted upon by respondent CIR. On 26 September 1984, the CIR issued a warrant of distraint on personal property and a
warrant of levy on real property against Picop, to enforce collection of the contested assessments; in effect, the CIR denied
Picop's protests.

Thereupon, Picop went before the Court of Tax Appeals ("CTA") appealing the assessments. After trial, the CTA rendered
a decision dated 15 August 1989, modifying the findings of the CIR and holding Picop liable for the reduced aggregate
amount of P20,133,762.33, which was itemized in the dispositive portion of the decision as follows:

35% Transaction Tax P 16,020,113.20

Documentary & Science

Stamp Tax 300,300.00

Deficiency Income Tax Due 3,813,349.33

TOTAL AMOUNT DUE AND PAYABLE P 20,133,762.53 2

===========

Picop and the CIR both went to the Supreme Court on separate Petitions for Review of the above decision of the CTA. In
two (2) Resolutions dated 7 February 1990 and 19 February 1990, respectively, the Court referred the two (2) Petitions to
the Court of Appeals. The Court of Appeals consolidated the two (2) cases and rendered a decision, dated 31 August 1992,
which further reduced the liability of Picop to P6,338,354.70. The dispositive portion of the Court of Appeals decision reads
as follows:

WHEREFORE, the appeal of the Commissioner of Internal Revenue is denied for lack of merit. The
judgment against PICOP is modified, as follows:

1. PICOP is declared liable for the 35% transaction tax in the amount of P3,578,543.51;

2. PICOP is absolved from the payment of documentary and science stamp tax of P300,000.00 and the
compromise penalty of P300.00;

3. PICOP shall pay 20% interest per annum on the deficiency income tax of P1,481,579.15, for a period of
three (3) years from 21 May 1983, or in the total amount of P888,947.49, and a surcharge of 10% on the
latter amount, or P88,984.75.

No pronouncement as to costs.

SO ORDERED.

Picop and the CIR once more filed separate Petitions for Review before the Supreme Court. These cases were consolidated
and, on 23 August 1993, the Court resolved to give due course to both Petitions in G.R. Nos. 106949-50 and 106984-85
and required the parties to file their Memoranda.

Picop now maintains that it is not liable at all to pay any of the assessments or any part thereof. It assails the propriety of
the thirty-five percent (35%) deficiency transaction tax which the Court of Appeals held due from it in the amount of
P3,578,543.51. Picop also questions the imposition by the Court of Appeals of the deficiency income tax of P1,481,579.15,
resulting from disallowance of certain claimed financial guarantee expenses and claimed year-end adjustments of sales
and cost of sales figures by Picop's external auditors. 3

The CIR, upon the other hand, insists that the Court of Appeals erred in finding Picop not liable for surcharge and interest
on unpaid transaction tax and for documentary and science stamp taxes and in allowing Picop to claim as deductible
expenses:

(a) the net operating losses of another corporation (i.e., Rustan Pulp and Paper Mills, Inc.); and

(b) interest payments on loans for the purchase of machinery and equipment.

The CIR also claims that Picop should be held liable for interest at fourteen percent (14%) per annum from 15 April
1978 for three (3) years, and interest at twenty percent (20%) per annum for a maximum of three (3) years; and for
a surcharge of ten percent (10%), on Picop's deficiency income tax. Finally, the CIR contends that Picop is liable
for the corporate development tax equivalent to five percent (5%) of its correct 1977 net income.

The issues which we must here address may be sorted out and grouped in the following manner:

I. Whether Picop is liable for:

(1) the thirty-five percent (35%) transaction tax;

(2) interest and surcharge on unpaid transaction tax; and

(3) documentary and science stamp taxes;

II. Whether Picop is entitled to deductions against income of:

(1) interest payments on loans for the purchase of machinery and

equipment;

(2) net operating losses incurred by the Rustan Pulp and Paper Mills, Inc.;
and

(3) certain claimed financial guarantee expenses; and

III. (1) Whether Picop had understated its sales and overstated its cost of sales for 1977;
and

(2) Whether Picop is liable for the corporate development tax of five
percent (5%) of its net income for 1977.

We will consider these issues in the foregoing sequence.

I.

(1) Whether Picop is liable

for the thirty-five percent
(35%) transaction tax.

With the authorization of the Securities and Exchange Commission, Picop issued commercial paper consisting of serially
numbered promissory notes with the total face value of P229,864,000.00 and a maturity period of one (1) year, i.e., from 24
December 1977 to 23 December 1978. These promissory notes were purchased by various commercial banks and financial
institutions. On these promissory notes, Picop paid interest in the aggregate amount of P45,771,849.00. In respect of these
interest payments, the CIR required Picop to pay the thirty-five percent (35%) transaction tax.

The CIR based this assessment on Presidential Decree No. 1154 dated 3 June 1977, which reads in part as follows:
 Sec. 1. The National Internal Revenue Code, as amended, is hereby further amended by adding a new
section thereto to read as follows:

Sec. 195-C. Tax on certain interest. There shall be levied, assessed, collected and paid on every
commercial paper issued in the primary market as principal instrument, a transaction tax equivalent to thirty-
five percent (35%) based on the gross amount of interest thereto as defined hereunder, which shall be paid
by the borrower/issuer: Provided, however, that in the case of a long-term commercial paper whose maturity
exceeds more than one year, the borrower shall pay the tax based on the amount of interest corresponding
to one year, and thereafter shall pay the tax upon accrual or actual payment (whichever is earlier) of the
untaxed portion of the interest which corresponds to a period not exceeding one year.

The transaction tax imposed in this section shall be a final tax to be paid by the borrower and shall be
allowed as a deductible item for purposes of computing the borrower's taxable income.

For purposes of this tax

(a) "Commercial paper" shall be defined as an instrument evidencing indebtedness of any person or entity,
including banks and non-banks performing quasi-banking functions, which is issued, endorsed, sold,
transferred or in any manner conveyed to another person or entity, either with or without recourse and
irrespective of maturity. Principally, commercial papers are promissory notes and/or similar
instruments issued in the primary market and shall not include repurchase agreements, certificates of
assignments, certificates of participations, and such other debt instruments issued in the secondary market.

(b) The term "interest" shall mean the difference between what the principal borrower received and the
amount it paid upon maturity of the commercial paper which shall, in no case, be lower than the interest
rate prevailing at the time of the issuance or renewal of the commercial paper. Interest shall be deemed
synonymous with discount and shall include all fees, commissions, premiums and other payments which
form integral parts of the charges imposed as a consequence of the use of money.

In all cases, where no interest rate is stated or if the rate stated is lower than the prevailing interest rate at
the time of the issuance or renewal of commercial paper, the Commissioner of Internal Revenue, upon
consultation with the Monetary Board of the Central Bank of the Philippines, shall adjust the interest rate in
accordance herewith, and assess the tax on the basis thereof.

The tax herein imposed shall be remitted by the borrower to the Commissioner of Internal Revenue or his
Collection Agent in the municipality where such borrower has its principal place of business within five (5)
working days from the issuance of the commercial paper. In the case of long term commercial paper, the
tax upon the untaxed portion of the interest which corresponds to a period not exceeding one year shall be
paid upon accrual payment, whichever is earlier. (Emphasis supplied)

Both the CTA and the Court of Appeals sustained the assessment of transaction tax.

In the instant Petition, Picop reiterates its claim that it is exempt from the payment of the transaction tax by virtue of its tax
exemption under R.A. No. 5186, as amended, known as the Investment Incentives Act, which in the form it existed in 1977-
1978, read in relevant part as follows:

Sec. 8. Incentives to a Pioneer Enterprise. In addition to the incentives provided in the preceding section,
pioneer enterprises shall be granted the following incentive benefits:

(a) Tax Exemption. Exemption from all taxes under the National Internal Revenue Code, except income
tax, from the date the area of investment is included in the Investment Priorities Plan to the following extent:

(1) One hundred per cent (100%) for the first five years;

(2) Seventy-five per cent (75%) for the sixth through the eighth years;

(3) Fifty per cent (50%) for the ninth and tenth years;

(4) Twenty per cent (20%) for the eleventh and twelfth years; and
 (5) Ten per cent (10%) for the thirteenth through the fifteenth year.

xxx xxx xxx 4

We agree with the CTA and the Court of Appeals that Picop's tax exemption under R.A. No. 5186, as amended,
does not include exemption from the thirty-five percent (35%) transaction tax. In the first place, the thirty-five percent (35%)
transaction tax 5 is an income tax, that is, it is a tax on the interest income of the lenders or creditors. In Western Minolco
Corporation v. Commissioner of Internal Revenue, 6 the petitioner corporation borrowed funds from several financial
institutions from June 1977 to October 1977 and paid the corresponding thirty-five (35%) transaction tax thereon in the
amount of P1,317,801.03, pursuant to Section 210 (b) of the 1977 Tax Code. Western Minolco applied for refund of that
amount alleging it was exempt from the thirty-five (35%) transaction tax by reason of Section 79-A of C.A. No. 137, as
amended, which granted new mines and old mines resuming operation "five (5) years complete tax exemptions, except
income tax, from the time of its actual bonafide orders for equipment for commercial production." In denying the claim for
refund, this Court held:

The petitioner's contentions deserve scant consideration. The 35% transaction tax is imposed on interest
income from commercial papers issued in the primary money market. Being a tax on interest, it is a tax on
income.

As correctly ruled by the respondent Court of Tax Appeals:

Accordingly, we need not and do not think it necessary to discuss further the nature of the
transaction tax more than to say that the incipient scheme in the issuance of Letter of
Instructions No. 340 on November 24, 1975 (O.G. Dec. 15, 1975), i.e., to achieve
operational simplicity and effective administration in capturing the interest-income
"windfall" from money market operations as a new source of revenue, has lost none of its
animating principle in parturition of amendatory Presidential Decree No. 1154, now Section
210 (b) of the Tax Code. The tax thus imposed is actually a tax on interest earnings of the
lenders or placers who are actually the taxpayers in whose income is imposed. Thus "the
borrower withholds the tax of 35% from the interest he would have to pay the lender so
that he (borrower) can pay the 35% of the interest to the Government." (Citation omitted) .
. . . Suffice it to state that the broad consensus of fiscal and monetary authorities is that
"even if nominally, the borrower is made to pay the tax, actually, the tax is on the interest
earning of the immediate and all prior lenders/placers of the money. . . ." (Rollo, pp. 36-37)

The 35% transaction tax is an income tax on interest earnings to the lenders or placers. The latter are
actually the taxpayers. Therefore, the tax cannot be a tax imposed upon the petitioner. In other words, the
petitioner who borrowed funds from several financial institutions by issuing commercial papers merely
withheld the 35% transaction tax before paying to the financial institutions the interests earned by them and
later remitted the same to the respondent Commissioner of Internal Revenue. The tax could have been
collected by a different procedure but the statute chose this method. Whatever collecting procedure is
adopted does not change the nature of the tax.

xxx xxx xxx 7

(Emphasis supplied)

Much the same issue was passed upon in Marinduque Mining Industrial Corporation v. Commissioner of Internal
Revenue 8 and resolved in the same way:

It is very obvious that the transaction tax, which is a tax on interest derived from commercial paper issued
in the money market, is not a tax contemplated in the above-quoted legal provisions. The petitioner admits
that it is subject to income tax. Its tax exemption should be strictly construed.

We hold that petitioner's claim for refund was justifiably denied. The transaction tax, although nominally
categorized as a business tax, is in reality a withholding tax as positively stated in LOI No. 340. The
petitioner could have shifted the tax to the lenders or recipients of the interest. It did not choose to do so. It
cannot be heard now to complain about the tax. LOI No. 340 is an extraneous or extrinsic aid to the
construction of section 210 (b).
 xxx xxx xxx 9

(Emphasis supplied)

It is thus clear that the transaction tax is an income tax and as such, in any event, falls outside the scope of the tax exemption
granted to registered pioneer enterprises by Section 8 of R.A. No. 5186, as amended. Picop was the withholding agent,
obliged to withhold thirty-five percent (35%) of the interest payable to its lenders and to remit the amounts so withheld to
the Bureau of Internal Revenue ("BIR"). As a withholding agent, Picop is made personally liable for the thirty-five percent
(35%) transaction tax 10 and if it did not actually withhold thirty-five percent (35%) of the interest monies it had paid to its
lenders, Picop had only itself to blame.

Picop claims that it had relied on a ruling, dated 6 October 1977, issued by the CIR, which held that Picop was not liable for
the thirty-five (35%) transaction tax in respect of debenture bonds issued by Picop. Prior to the issuance of the promissory
notes involved in the instant case, Picop had also issued debenture bonds P100,000,000.00 in aggregate face value. The
managing underwriter of this debenture bond issue, Bancom Development Corporation, requested a formal ruling from the
Bureau of Internal Revenue on the liability of Picop for the thirty-five percent (35%) transaction tax in respect of such bonds.
The ruling rendered by the then Acting Commissioner of Internal Revenue, Efren I. Plana, stated in relevant part:

It is represented that PICOP will be offering to the public primary bonds in the aggregate principal sum of
one hundred million pesos (P100,000,000.00); that the bonds will be issued as debentures in
denominations of one thousand pesos (P1,000.00) or multiples, to mature in ten (10) years at 14%
interest per annum payable semi-annually; that the bonds are convertible into common stock of the
issuer at the option of the bond holder at an agreed conversion price; that the issue will be covered by
a "Trust Indenture" with a duly authorized trust corporation as required by the Securities and Exchange
Commission, which trustee will act for and in behalf of the debenture bond holders as beneficiaries; that
once issued, the bonds cannot be preterminated by the holder and cannot be redeemed by the issuer until
after eight (8) years from date of issue; that the debenture bonds will be subordinated to present and future
debts of PICOP; and that said bonds are intended to be listed in the stock exchanges, which will place them
alongside listed equity issues.

In reply, I have the honor to inform you that although the bonds hereinabove described are commercial
papers which will be issued in the primary market, however, it is clear from the abovestated facts that said
bonds will not be issued as money market instruments. Such being the case, and considering that the
purposes of Presidential Decree No. 1154, as can be gleaned from Letter of Instruction No. 340, dated
November 21, 1975, are (a) to regulate money market transactions and (b) to ensure the collection of the
tax on interest derived from money market transactions by imposing a withholding tax thereon, said bonds
do not come within the purview of the "commercial papers" intended to be subjected to the 35% transaction
tax prescribed in Presidential Decree No. 1154, as implemented by Revenue Regulations No. 7-77.
(See Section 2 of said Regulation) Accordingly, PICOP is not subject to 35% transaction tax on its issues
of the aforesaid bonds. However, those investing in said bonds should be made aware of the fact that the
transaction tax is not being imposed on the issuer of said bonds by printing or stamping thereon, in bold
letters, the following statement: "ISSUER NOT SUBJECT TO TRANSACTION TAX UNDER P.D. 1154.
BONDHOLDER SHOULD DECLARE INTEREST EARNING FOR INCOME TAX." 11 (Emphases supplied)

In the above quoted ruling, the CIR basically held that Picop's debenture bonds did not constitute "commercial papers"
within the meaning of P.D. No. 1154, and that, as such, those bonds were not subject to the thirty-five percent (35%)
transaction tax imposed by P.D. No. 1154.

The above ruling, however, is not applicable in respect of the promissory notes which are the subject matter of the instant
case. It must be noted that the debenture bonds which were the subject matter of Commissioner Plana's ruling were long-
term bonds maturing in ten (10) years and which could not be pre-terminated and could not be redeemed by Picop until
after eight (8) years from date of issue; the bonds were moreover subordinated to present and future debts of Picop and
convertible into common stock of Picop at the option of the bondholder. In contrast, the promissory notes involved in the
instant case are short-term instruments bearing a one-year maturity period. These promissory notes constitute the very
archtype of money market instruments. For money market instruments are precisely, by custom and usage of the financial
markets, short-term instruments with a tenor of one (1) year or less. 12 Assuming, therefore, (without passing upon) the
correctness of the 6 October 1977 BIR ruling, Picop's short-term promissory notes must be distinguished, and treated
differently, from Picop's long-term debenture bonds.
We conclude that Picop was properly held liable for the thirty-five percent (35%) transaction tax due in respect of interest
payments on its money market borrowings.

At the same time, we agree with the Court of Appeals that the transaction tax may be levied only in respect of the interest
earnings of Picop's money market lenders accruing after P.D. No. 1154 went into effect, and not in respect of all the 1977
interest earnings of such lenders. The Court of Appeals pointed out that:

PICOP, however contends that even if the tax has to be paid, it should be imposed only for the interests
earned after 20 September 1977 when PD 1154 creating the tax became effective. We find merit in this
contention. It appears that the tax was levied on interest earnings from January to October, 1977. However,
as found by the lower court, PD 1154 was published in the Official Gazette only on 5 September 1977,
and became effective only fifteen (15) days after the publication, or on 20 September 1977, no other
effectivity date having been provided by the PD. Based on the Worksheet prepared by the Commissioner's
office, the interests earned from 20 September to October 1977 was P10,224,410.03. Thirty-five (35%) per
cent of this is P3,578,543.51 which is all PICOP should pay as transaction tax. 13 (Emphasis supplied)

P.D. No. 1154 is not, in other words, to be given retroactive effect by imposing the thirty-five percent (35%) transaction tax
in respect of interest earnings which accrued before the effectivity date of P.D. No. 1154, there being nothing in the statute
to suggest that the legislative authority intended to bring about such retroactive imposition of the tax.

(2) Whether Picop is liable

for interest and surcharge
on unpaid transaction tax.

With respect to the transaction tax due, the CIR prays that Picop be held liable for a twenty-five percent (25%) surcharge
and for interest at the rate of fourteen percent (14%) per annum from the date prescribed for its payment. In so praying, the
CIR relies upon Section 10 of Revenue Regulation 7-77 dated 3 June 1977, 14 issued by the Secretary of Finance. This
Section reads:

Sec. 10. Penalties. Where the amount shown by the taxpayer to be due on its return or part of such
payment is not paid on or before the date prescribed for its payment, the amount of the tax shall be
increased by twenty-five (25%) per centum, the increment to be a part of the tax and the entire amount
shall be subject to interest at the rate of fourteen (14%) per centum per annum from the date prescribed for
its payment.

In the case of willful neglect to file the return within the period prescribed herein or in case a false or
fraudulent return is willfully made, there shall be added to the tax or to the deficiency tax in case any
payment has been made on the basis of such return before the discovery of the falsity or fraud, a surcharge
of fifty (50%) per centum of its amount. The amount so added to any tax shall be collected at the same time
and in the same manner and as part of the tax unless the tax has been paid before the discovery of the
falsity or fraud, in which case the amount so added shall be collected in the same manner as the tax.

In addition to the above administrative penalties, the criminal and civil penalties as provided for under
Section 337 of the Tax Code of 1977 shall be imposed for violation of any provision of Presidential Decree
No. 1154. 15 (Emphases supplied)

The 1977 Tax Code itself, in Section 326 in relation to Section 4 of the same Code, invoked by the Secretary of
Finance in issuing Revenue Regulation 7-77, set out, in comprehensive terms, the rule-making authority of the
Secretary of Finance:

Sec. 326. Authority of Secretary of Finance to Promulgate Rules and Regulations. The Secretary of
Finance, upon recommendation of the Commissioner of Internal Revenue, shall promulgate all needful
rules and regulations for the effective enforcement of the provisions of this Code. (Emphasis supplied)

Section 4 of the same Code contains a list of subjects or areas to be dealt with by the Secretary of Finance through
the medium of an exercise of his quasi-legislative or rule-making authority. This list, however, while it purports to
be open-ended, does not include the imposition of administrative or civil penalties such as the payment of amounts
additional to the tax due. Thus, in order that it may be held to be legally effective in respect of Picop in the present
case, Section 10 of Revenue Regulation 7-77 must embody or rest upon some provision in the Tax Code itself
which imposes surcharge and penalty interest for failure to make a transaction tax payment when due.
P.D. No. 1154 did not itself impose, nor did it expressly authorize the imposition of, a surcharge and penalty interest in case
of failure to pay the thirty-five percent (35%) transaction tax when due. Neither did Section 210 (b) of the 1977 Tax Code
which re-enacted Section 195-C inserted into the Tax Code by P.D. No. 1154.

The CIR, both in its petition before the Court of Appeals and its Petition in the instant case, points to Section 51 (e) of the
1977 Tax Code as its source of authority for assessing a surcharge and penalty interest in respect of the thirty-five percent
(35%) transaction tax due from Picop. This Section needs to be quoted in extenso:

Sec. 51. Payment and Assessment of Income Tax.

(c) Definition of deficiency. As used in this Chapter in respect of a tax imposed by this Title, the term
"deficiency" means:

(1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer
upon his return; but the amount so shown on the return shall first be increased by the amounts previously
assessed (or collected without assessment) as a deficiency, and decreased by the amount previously
abated, credited, returned, or otherwise in respect of such tax; . . .

xxx xxx xxx

(e) Additions to the tax in case of non-payment.

(1) Tax shown on the return. Where the amount determined by the taxpayer as the tax imposed by this
Title or any installment thereof, or any part of such amount or installment is not paid on or before the date
prescribed for its payment, there shall be collected as a part of the tax, interest upon such unpaid amount
at the rate of fourteen per centum per annum from the date prescribed for its payment until it is
paid: Provided, That the maximum amount that may be collected as interest on deficiency shall in no case
exceed the amount corresponding to a period of three years, the present provisions regarding prescription
to the contrary notwithstanding.

(2) Deficiency. Where a deficiency, or any interest assessed in connection therewith under paragraph
(d) of this section, or any addition to the taxes provided for in Section seventy-two of this Code is not paid
in full within thirty days from the date of notice and demand from the Commissioner of Internal Revenue,
there shall be collected upon the unpaid amount as part of the tax, interest at the rate of fourteen per centum
per annum from the date of such notice and demand until it is paid: Provided, That the maximum amount
that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a
period of three years, the present provisions regarding prescription to the contrary notwithstanding.

(3) Surcharge. If any amount of tax included in the notice and demand from the Commissioner of Internal
Revenue is not paid in full within thirty days after such notice and demand, there shall be collected in
addition to the interest prescribed herein and in paragraph (d) above and as part of the tax a surcharge of
five per centum of the amount of tax unpaid. (Emphases supplied)

Section 72 of the 1977 Tax Code referred to in Section 51 (e) (2) above, provides:

Sec. 72. Surcharges for failure to render returns and for rendering false and fraudulent returns. In case
of willful neglect to file the return or list required by this Title within the time prescribed by law, or in case a
false or fraudulent return or list is wilfully made, the Commissioner of Internal Revenue shall add to the tax
or to the deficiency tax, in case any payment has been made on the basis of such return before the
discovery of the falsity or fraud, as surcharge of fifty per centum of the amount of such tax or deficiency tax.
In case of any failure to make and file a return or list within the time prescribed by law or by the
Commissioner or other Internal Revenue Officer, not due to willful neglect, the Commissioner of Internal
Revenue shall add to the tax twenty-five per centum of its amount, except that, when a return is voluntarily
and without notice from the Commissioner or other officer filed after such time, and it is shown that the
failure to file it was due to a reasonable cause, no such addition shall be made to the tax. The amount so
added to any tax shall be collected at the same time, in the same manner and as part of the tax unless the
tax has been paid before the discovery of the neglect, falsity, or fraud, in which case the amount so added
shall be collected in the same manner as the tax. (Emphases supplied)
It will be seen that Section 51 (c) (1) and (e) (1) and (3), of the 1977 Tax Code, authorize the imposition of surcharge and
interest only in respect of a "tax imposed by this Title," that is to say, Title II on "Income Tax." It will also be seen that Section
72 of the 1977 Tax Code imposes a surcharge only in case of failure to file a return or list "required by this Title," that is, Title
II on "Income Tax." The thirty-five percent (35%) transaction tax is, however, imposed in the 1977 Tax Code by Section 210
(b) thereof which Section is embraced in Title V on "Taxes on Business" of that Code. Thus, while the thirty-five percent
(35%) transaction tax is in truth a tax imposed on interest income earned by lenders or creditors purchasing commercial
paper on the money market, the relevant provisions, i.e., Section 210 (b), were not inserted in Title II of the 1977 Tax Code.
The end result is that the thirty-five percent (35%) transaction tax is not one of the taxes in respect of which Section 51 (e)
authorized the imposition of surcharge and interest and Section 72 the imposition of a fraud surcharge.

It is not without reluctance that we reach the above conclusion on the basis of what may well have been an inadvertent error
in legislative draftsmanship, a type of error common enough during the period of Martial Law in our country. Nevertheless,
we are compelled to adopt this conclusion. We consider that the authority to impose what the present Tax Code calls (in
Section 248) civil penalties consisting of additions to the tax due, must be expressly given in the enabling statute, in
language too clear to be mistaken. The grant of that authority is not lightly to be assumed to have been made to
administrative officials, even to one as highly placed as the Secretary of Finance.

The state of the present law tends to reinforce our conclusion that Section 51 (c) and (e) of the 1977 Tax Code did not
authorize the imposition of a surcharge and penalty interest for failure to pay the thirty-five percent (35%) transaction tax
imposed under Section 210 (b) of the same Code. The corresponding provision in the current Tax Code very clearly
embraces failure to pay all taxes imposed in the Tax Code, without any regard to the Title of the Code where provisions
imposing particular taxes are textually located. Section 247 (a) of the NIRC, as amended, reads:

Title X

Statutory Offenses and Penalties

Chapter I

Additions to the Tax

Sec. 247. General Provisions. (a) The additions to the tax or deficiency tax prescribed in this Chapter
shall apply to all taxes, fees and charges imposed in this Code. The amount so added to the tax shall be
collected at the same time, in the same manner and as part of the tax. . . .

Sec. 248. Civil Penalties. (a) There shall be imposed, in addition to the tax required to be paid, penalty
equivalent to twenty-five percent (25%) of the amount due, in the following cases:

xxx xxx xxx

(3) failure to pay the tax within the time prescribed for its payment; or

xxx xxx xxx

(c) the penalties imposed hereunder shall form part of the tax and the entire amount shall be subject to the
interest prescribed in Section 249.

Sec. 249. Interest. (a) In General. There shall be assessed and collected on any unpaid amount of
tax, interest at the rate of twenty percent (20%) per annum or such higher rate as may be prescribed by
regulations, from the date prescribed for payment until the amount is fully paid. . . . (Emphases supplied)

In other words, Section 247 (a) of the current NIRC supplies what did not exist back in 1977 when Picop's liability
for the thirty-five percent (35%) transaction tax became fixed. We do not believe we can fill that legislative lacuna by
judicial fiat. There is nothing to suggest that Section 247 (a) of the present Tax Code, which was inserted in 1985,
was intended to be given retroactive application by the legislative authority. 16

(3) Whether Picop is Liable

for Documentary and
Science Stamp Taxes.
As noted earlier, Picop issued sometime in 1977 long-term subordinated convertible debenture bonds with an aggregate
face value of P100,000,000.00. Picop stated, and this was not disputed by the CIR, that the proceeds of the debenture
bonds were in fact utilized to finance the BOI-registered operations of Picop. The CIR assessed documentary and science
stamp taxes, amounting to P300,000.00, on the issuance of Picop's debenture bonds. It is claimed by Picop that its tax
exemption "exemption from all taxes under the National Internal Revenue Code, except income tax" on a declining basis
over a certain period of time includes exemption from the documentary and science stamp taxes imposed under the
NIRC.

The CIR, upon the other hand, stresses that the tax exemption under the Investment Incentives Act may be granted or
recognized only to the extent that the claimant Picop was engaged in registered operations, i.e., operations forming part of
its integrated pulp and paper project. 17 The borrowing of funds from the public, in the submission of the CIR, was not an
activity included in Picop's registered operations. The CTA adopted the view of the CIR and held that "the issuance of
convertible debenture bonds [was] not synonymous [with] the manufactur[ing] operations of an integrated pulp and paper
mill." 18

The Court of Appeals took a less rigid view of the ambit of the tax exemption granted to registered pioneer enterprises. Said
the Court of Appeals:

. . . PICOP's explanation that the debenture bonds were issued to finance its registered operation is logical
and is unrebutted. We are aware that tax exemptions must be applied strictly against the beneficiary in
order to deter their abuse. It would indeed be altogether a different matter if there is a showing that the
issuance of the debenture bonds had no bearing whatsoever on the registered operations PICOP and that
they were issued in connection with a totally different business undertaking of PICOP other than its
registered operation. There is, however, a dearth of evidence in this regard. It cannot be denied that PICOP
needed funds for its operations. One of the means it used to raise said funds was to issue debenture
bonds. Since the money raised thereby was to be used in its registered operation, PICOP should enjoy the
incentives granted to it by R.A. 5186, one of which is the exemption from payment of all taxes under the
National Internal Revenue Code, except income taxes, otherwise the purpose of the incentives would be
defeated. Documentary and science stamp taxes on debenture bonds are certainly not income
taxes. 19 (Emphasis supplied)

Tax exemptions are, to be sure, to be "strictly construed," that is, they are not to be extended beyond the ordinary and
reasonable intendment of the language actually used by the legislative authority in granting the exemption. The issuance of
debenture bonds is certainly conceptually distinct from pulping and paper manufacturing operations. But no one contends
that issuance of bonds was a principal or regular business activity of Picop; only banks or other financial institutions are in
the regular business of raising money by issuing bonds or other instruments to the general public. We consider that the
actual dedication of the proceeds of the bonds to the carrying out of Picop's registered operations constituted a sufficient
nexus with such registered operations so as to exempt Picop from stamp taxes ordinarily imposed upon or in connection
with issuance of such bonds. We agree, therefore, with the Court of Appeals on this matter that the CTA and the CIR had
erred in rejecting Picop's claim for exemption from stamp taxes.

It remains only to note that after commencement of the present litigation before the CTA, the BIR took the position that the
tax exemption granted by R.A. No. 5186, as amended, does include exemption from documentary stamp taxes on
transactions entered into by BOI-registered enterprises. BIR Ruling No. 088, dated 28 April 1989, for instance, held that a
registered preferred pioneer enterprise engaged in the manufacture of integrated circuits, magnetic heads, printed circuit
boards, etc., is exempt from the payment of documentary stamp taxes. The Commissioner said:

You now request a ruling that as a preferred pioneer enterprise, you are exempt from the payment of
Documentary Stamp Tax (DST).

In reply, please be informed that your request is hereby granted. Pursuant to Section 46 (a) of Presidential
Decree No. 1789, pioneer enterprises registered with the BOI are exempt from all taxes under the National
Internal Revenue Code, except from all taxes under the National Internal Revenue Code, except income
tax, from the date the area of investment is included in the Investment Priorities Plan to the following extent:

xxx xxx xxx

Accordingly, your company is exempt from the payment of documentary stamp tax to the extent of the
percentage aforestated on transactions connected with the registered business activity. (BIR Ruling No.
111-81) However, if said transactions conducted by you require the execution of a taxable document with
 other parties, said parties who are not exempt shall be the one directly liable for the tax. (Sec. 173, Tax
Code, as amended; BIR Ruling No. 236-87) In other words, said parties shall be liable to the same
percentage corresponding to your tax exemption. (Emphasis supplied)

Similarly, in BIR Ruling No. 013, dated 6 February 1989, the Commissioner held that a registered pioneer enterprise
producing polyester filament yarn was entitled to exemption "from the documentary stamp tax on [its] sale of real
property in Makati up to December 31, 1989." It appears clear to the Court that the CIR, administratively at least,
no longer insists on the position it originally took in the instant case before the CTA.

II

(1) Whether Picop is entitled

to deduct against current
income interest payments
on loans for the purchase
of machinery and equipment.

In 1969, 1972 and 1977, Picop obtained loans from foreign creditors in order to finance the purchase of machinery and
equipment needed for its operations. In its 1977 Income Tax Return, Picop claimed interest payments made in 1977,
amounting to P42,840,131.00, on these loans as a deduction from its 1977 gross income.

The CIR disallowed this deduction upon the ground that, because the loans had been incurred for the purchase of machinery
and equipment, the interest payments on those loans should have been capitalized instead and claimed as a depreciation
deduction taking into account the adjusted basis of the machinery and equipment (original acquisition cost plus interest
charges) over the useful life of such assets.

Both the CTA and the Court of Appeals sustained the position of Picop and held that the interest deduction claimed by Picop
was proper and allowable. In the instant Petition, the CIR insists on its original position.

We begin by noting that interest payments on loans incurred by a taxpayer (whether BOI-registered or not) are allowed by
the NIRC as deductions against the taxpayer's gross income. Section 30 of the 1977 Tax Code provided as follows:

Sec. 30. Deduction from Gross Income. The following may be deducted from gross income:

(a) Expenses:

xxx xxx xxx

(b) Interest:

(1) In general. The amount of interest paid within the taxable year on indebtedness,
except on indebtedness incurred or continued to purchase or carry obligations the interest
upon which is exempt from taxation as income under this Title: . . . (Emphasis supplied)

Thus, the general rule is that interest expenses are deductible against gross income and this certainly includes
interest paid under loans incurred in connection with the carrying on of the business of the taxpayer. 20 In the instant
case, the CIR does not dispute that the interest payments were made by Picop on loans incurred in connection with
the carrying on of the registered operations of Picop, i.e., the financing of the purchase of machinery and equipment
actually used in the registered operations of Picop. Neither does the CIR deny that such interest payments
were legally due and demandable under the terms of such loans, and in fact paid by Picop during the tax year 1977.

The CIR has been unable to point to any provision of the 1977 Tax Code or any other Statute that requires the disallowance
of the interest payments made by Picop. The CIR invokes Section 79 of Revenue Regulations No. 2 as amended which
reads as follows:

Sec. 79. Interest on Capital. Interest calculated for cost-keeping or other purposes on account of capital
or surplus invested in the business, which does not represent a charge arising under an interest-bearing
obligation, is not allowable deduction from gross income. (Emphases supplied)
 We read the above provision of Revenue Regulations No. 2 as referring to so called "theoretical interest," that is to
say, interest "calculated" or computed (and not incurred or paid) for the purpose of determining the "opportunity
cost" of investing funds in a given business. Such "theoretical" or imputed interest does not arise from a legally
demandable interest-bearing obligation incurred by the taxpayer who however wishes to find out, e.g., whether he
would have been better off by lending out his funds and earning interest rather than investing such funds in his
business. One thing that Section 79 quoted above makes clear is that interest which does constitute a charge
arising under an interest-bearing obligation is an allowable deduction from gross income.

It is claimed by the CIR that Section 79 of Revenue Regulations No. 2 was "patterned after" paragraph 1.266-1 (b), entitled
"Taxes and Carrying Charges Chargeable to Capital Account and Treated as Capital Items" of the U.S. Income Tax
Regulations, which paragraph reads as follows:

(B) Taxes and Carrying Charges. The items thus chargeable to capital accounts are

(11) In the case of real property, whether improved or unimproved and whether productive or nonproductive.

(a) Interest on a loan (but not theoretical interest of a taxpayer using his own funds). 21

The truncated excerpt of the U.S. Income Tax Regulations quoted by the CIR needs to be related to the relevant provisions
of the U.S. Internal Revenue Code, which provisions deal with the general topic of adjusted basis for determining allowable
gain or loss on sales or exchanges of property and allowable depreciation and depletion of capital assets of the taxpayer:

Present Rule. The Internal Revenue Code, and the Regulations promulgated thereunder provide that "No
deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under
regulations prescribed by the Secretary or his delegate, are chargeable to capital account with respect to
property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so
chargeable."

At the same time, under the adjustment of basis provisions which have just been discussed, it is provided
that adjustment shall be made for all "expenditures, receipts, losses, or other items" properly chargeable to
a capital account, thus including taxes and carrying charges; however, an exception exists, in which event
such adjustment to the capital account is not made, with respect to taxes and carrying charges which the
taxpayer has not elected to capitalize but for which a deduction instead has been taken. 22 (Emphasis
supplied)

The "carrying charges" which may be capitalized under the above quoted provisions of the U.S. Internal Revenue
Code include, as the CIR has pointed out, interest on a loan "(but not theoretical interest of a taxpayer using his
own funds)." What the CIR failed to point out is that such "carrying charges" may, at the election of the
taxpayer, either be (a) capitalized in which case the cost basis of the capital assets, e.g., machinery and equipment,
will be adjusted by adding the amount of such interest payments or alternatively, be (b) deducted from gross
income of the taxpayer. Should the taxpayer elect to deduct the interest payments against its gross income, the
taxpayer cannot at the same time capitalize the interest payments. In other words, the taxpayer is not entitled
to both the deduction from gross income and the adjusted (increased) basis for determining gain or loss and the
allowable depreciation charge. The U.S. Internal Revenue Code does not prohibit the deduction of interest on a
loan obtained for purchasing machinery and equipment against gross income, unless the taxpayer has also or
previously capitalized the same interest payments and thereby adjusted the cost basis of such assets.

We have already noted that our 1977 NIRC does not prohibit the deduction of interest on a loan incurred for acquiring
machinery and equipment. Neither does our 1977 NIRC compel the capitalization of interest payments on such a loan. The
1977 Tax Code is simply silent on a taxpayer's right to elect one or the other tax treatment of such interest payments.
Accordingly, the general rule that interest payments on a legally demandable loan are deductible from gross income must
be applied.

The CIR argues finally that to allow Picop to deduct its interest payments against its gross income would be to encourage
fraudulent claims to double deductions from gross income:

[t]o allow a deduction of incidental expense/cost incurred in the purchase of fixed asset in the year it was
incurred would invite tax evasion through fraudulent application of double deductions from gross
income. 23 (Emphases supplied)
 The Court is not persuaded. So far as the records of the instant cases show, Picop has not claimed to be entitled
to double deduction of its 1977 interest payments. The CIR has neither alleged nor proved that Picop had previously
adjusted its cost basis for the machinery and equipment purchased with the loan proceeds by capitalizing the
interest payments here involved. The Court will not assume that the CIR would be unable or unwilling to disallow
"a double deduction" should Picop, having deducted its interest cost from its gross income, also attempt
subsequently to adjust upward the cost basis of the machinery and equipment purchased and claim, e.g., increased
deductions for depreciation.

We conclude that the CTA and the Court of Appeals did not err in allowing the deductions of Picop's 1977 interest payments
on its loans for capital equipment against its gross income for 1977.

(2) Whether Picop is entitled

to deduct against current
income net operating losses
incurred by Rustan Pulp
and Paper Mills, Inc.

On 18 January 1977, Picop entered into a merger agreement with the Rustan Pulp and Paper Mills, Inc. ("RPPM") and
Rustan Manufacturing Corporation ("RMC"). Under this agreement, the rights, properties, privileges, powers and franchises
of RPPM and RMC were to be transferred, assigned and conveyed to Picop as the surviving corporation. The entire
subscribed and outstanding capital stock of RPPM and RMC would be exchanged for 2,891,476 fully paid up Class "A"
common stock of Picop (with a par value of P10.00) and 149,848 shares of preferred stock of Picop (with a par value of
P10.00), to be issued by Picop, the result being that Picop would wholly own both RPPM and RMC while the stockholders
of RPPM and RMC would join the ranks of Picop's shareholders. In addition, Picop paid off the obligations of RPPM to the
Development Bank of the Philippines ("DBP") in the amount of P68,240,340.00, by issuing 6,824,034 shares of preferred
stock (with a par value of P10.00) to the DBP. The merger agreement was approved in 1977 by the creditors and
stockholders of Picop, RPPM and RMC and by the Securities and Exchange Commission. Thereupon, on 30 November
1977, apparently the effective date of merger, RPPM and RMC were dissolved. The Board of Investments approved the
merger agreement on 12 January 1978.

It appears that RPPM and RMC were, like Picop, BOI-registered companies. Immediately before merger effective date,
RPPM had over preceding years accumulated losses in the total amount of P81,159,904.00. In its 1977 Income Tax Return,
Picop claimed P44,196,106.00 of RPPM's accumulated losses as a deduction against Picop's 1977 gross income. 24

Upon the other hand, even before the effective date of merger, on 30 August 1977, Picop sold all the outstanding shares of
RMC stock to San Miguel Corporation for the sum of P38,900,000.00, and reported a gain of P9,294,849.00 from this
transaction. 25

In claiming such deduction, Picop relies on section 7 (c) of R.A. No. 5186 which provides as follows:

Sec. 7. Incentives to Registered Enterprise. A registered enterprise, to the extent engaged in a preferred
area of investment, shall be granted the following incentive benefits:

xxx xxx xxx

(c) Net Operating Loss Carry-over. A net operating loss incurred in any of the first ten years of operations
may be carried over as a deduction from taxable income for the six years immediately following the year of
such loss. The entire amount of the loss shall be carried over to the first of the six taxable years following
the loss, and any portion of such loss which exceeds the taxable income of such first year shall be deducted
in like manner from the taxable income of the next remaining five years. The net operating loss shall be
computed in accordance with the provisions of the National Internal Revenue Code, any provision of this
Act to the contrary notwithstanding, except that income not taxable either in whole or in part under this or
other laws shall be included in gross income. (Emphasis supplied)

Picop had secured a letter-opinion from the BOI dated 21 February 1977 that is, after the date of the agreement
of merger but before the merger became effective relating to the deductibility of the previous losses of RPPM
under Section 7 (c) of R.A. No. 5186 as amended. The pertinent portions of this BOI opinion, signed by BOI
Governor Cesar Lanuza, read as follows:
 2) PICOP will not be allowed to carry over the losses of Rustan prior to the legal dissolution of the latter
because at that time the two (2) companies still had separate legal personalities;

3) After BOI approval of the merger, PICOP can no longer apply for the registration of the registered
capacity of Rustan because with the approved merger, such registered capacity of Rustan transferred to
PICOP will have the same registration date as that of Rustan. In this case, the previous losses of Rustan
may be carried over by PICOP, because with the merger, PICOP assumes all the rights and obligations of
Rustan subject, however, to the period prescribed for carrying over of such
losses. 26 (Emphasis supplied)

Curiously enough, Picop did not also seek a ruling on this matter, clearly a matter of tax law, from the Bureau of
Internal Revenue. Picop chose to rely solely on the BOI letter-opinion.

The CIR disallowed all the deductions claimed on the basis of RPPM's losses, apparently on two (2) grounds. Firstly, the
previous losses were incurred by "another taxpayer," RPPM, and not by Picop in connection with Picop's own registered
operations. The CIR took the view that Picop, RPPM and RMC were merged into one (1) corporate personality only on 12
January 1978, upon approval of the merger agreement by the BOI. Thus, during the taxable year 1977, Picop on the one
hand and RPPM and RMC on the other, still had their separate juridical personalities. Secondly, the CIR alleged that these
losses had been incurred by RPPM "from the borrowing of funds" and not from carrying out of RPPM's registered operations.
We focus on the first ground. 27

The CTA upheld the deduction claimed by Picop; its reasoning, however, is less than crystal clear, especially in respect of
its view of what the U.S. tax law was on this matter. In any event, the CTA apparently fell back on the BOI opinion of 21
February 1977 referred to above. The CTA said:

Respondent further averred that the incentives granted under Section 7 of R.A. No. 5186 shall be available
only to the extent in which they are engaged in registered operations, citing Section 1 of Rule IX of the
Basic Rules and Regulations to Implement the Intent and Provisions of the Investment Incentives Act, R.A.
No. 5186.

We disagree with respondent. The purpose of the merger was to rationalize the container board industry
and not to take advantage of the net losses incurred by RPPMI prior to the stock swap. Thus, when stock
of a corporation is purchased in order to take advantage of the corporation's net operating loss incurred in
years prior to the purchase, the corporation thereafter entering into a trade or business different from that
in which it was previously engaged, the net operating loss carry-over may be entirely lost. [IRC (1954), Sec.
382(a), Vol. 5, Mertens, Law of Federal Income Taxation, Chap. 29.11a, p. 103]. 28 Furthermore, once the
BOI approved the merger agreement, the registered capacity of Rustan shall be transferred to PICOP, and
the previous losses of Rustan may be carried over by PICOP by operation of law. [BOI ruling dated February
21, 1977 (Exh. J-1)] It is clear therefrom, that the deduction availed of under Section 7(c) of R.A. No. 5186
was only proper." (pp. 38-43, Rollo of SP No. 20070) 29 (Emphasis supplied)

In respect of the above underscored portion of the CTA decision, we must note that the CTA in fact overlooked the
statement made by petitioner's counsel before the CTA that:

Among the attractions of the merger to Picop was the accumulated net operating loss carry-over of RMC
that it might possibly use to relieve it (Picop) from its income taxes, under Section 7 (c) of R.A.5186. Said
section provides:

xxx xxx xxx

With this benefit in mind, Picop addressed three (3) questions to the BOI in a letter dated November 25,
1976. The BOI replied on February 21, 1977 directly answering the three (3) queries. 30 (Emphasis
supplied)

The size of RPPM's accumulated losses as of the date of the merger more than P81,000,000.00 must have
constituted a powerful attraction indeed for Picop.

The Court of Appeals followed the result reached by the CTA. The Court of Appeals, much like the CTA, concluded that
since RPPM was dissolved on 30 November 1977, its accumulated losses were appropriately carried over by Picop in the
latter's 1977 Income Tax Return "because by that time RPPMI and Picop were no longer separate and different
taxpayers." 31

After prolonged consideration and analysis of this matter, the Court is unable to agree with the CTA and Court of Appeals
on the deductibility of RPPM's accumulated losses against Picop's 1977 gross income.

It is important to note at the outset that in our jurisdiction, the ordinary rule that is, the rule applicable in respect of
corporations not registered with the BOI as a preferred pioneer enterprise is that net operating losses cannot be carried
over. Under our Tax Code, both in 1977 and at present, losses may be deducted from gross income only if such losses
were actually sustained in the same year that they are deducted or charged off. Section 30 of the 1977 Tax Code provides:

Sec. 30. Deductions from Gross Income. In computing net income, there shall be allowed as deduction

xxx xxx xxx

(d) Losses:

(1) By Individuals. In the case of an individual, losses actually sustained during the taxable year and not
compensated for by an insurance or otherwise

(A) If incurred in trade or business;

xxx xxx xxx

(2) By Corporations. In a case of a corporation, all losses actually sustained and charged off within the
taxable year and not compensated for by insurance or otherwise.

(3) By Non-resident Aliens or Foreign Corporations. In the case of a non-resident alien individual or a
foreign corporation, the losses deductible are those actually sustained during the year incurred in business
or trade conducted within the Philippines, . . . 32 (Emphasis supplied)

Section 76 of the Philippine Income Tax Regulations (Revenue Regulation No. 2, as amended) is even more explicit
and detailed:

Sec. 76. When charges are deductible. Each year's return, so far as practicable, both as to gross income
and deductions therefrom should be complete in itself, and taxpayers are expected to make every
reasonable effort to ascertain the facts necessary to make a correct return. The expenses, liabilities, or
deficit of one year cannot be used to reduce the income of a subsequent year. A taxpayer has the right to
deduct all authorized allowances and it follows that if he does not within any year deduct certain of his
expenses, losses, interests, taxes, or other charges,
he can not deduct them from the income of the next or any succeeding year. . . .

xxx xxx xxx

. . . . If subsequent to its occurrence, however, a taxpayer first ascertains the amount of a loss sustained
during a prior taxable year which has not been deducted from gross income, he may render an amended
return for such preceding taxable year including such amount of loss in the deduction from gross income
and may in proper cases file a claim for refund of the excess paid by reason of the failure to deduct such
loss in the original return. A loss from theft or embezzlement occurring in one year and discovered in another
is ordinarily deductible for the year in which sustained. (Emphases supplied)

It is thus clear that under our law, and outside the special realm of BOI-registered enterprises, there is no such thing
as a carry-over of net operating loss. To the contrary, losses must be deducted against current income in the taxable
year when such losses were incurred. Moreover, such losses may be charged off only against income earned in
the same taxable year when the losses were incurred.

Thus it is that R.A. No. 5186 introduced the carry-over of net operating losses as a very special incentive to be granted only
to registered pioneer enterprises and only with respect to their registered operations. The statutory purpose here may be
seen to be the encouragement of the establishment and continued operation of pioneer industries by allowing the registered
enterprise to accumulate its operating losses which may be expected during the early years of the enterprise and to permit
the enterprise to offset such losses against income earned by it in later years after successful establishment and regular
operations. To promote its economic development goals, the Republic foregoes or defers taxing the income of the pioneer
enterprise until after that enterprise has recovered or offset its earlier losses. We consider that the statutory purpose can be
served only if the accumulated operating losses are carried over and charged off against income subsequently earned and
accumulated by the same enterprise engaged in the same registered operations.

In the instant case, to allow the deduction claimed by Picop would be to permit one corporation or enterprise, Picop, to
benefit from the operating losses accumulated by another corporation or enterprise, RPPM. RPPM far from benefiting from
the tax incentive granted by the BOI statute, in fact gave up the struggle and went out of existence and its former
stockholders joined the much larger group of Picop's stockholders. To grant Picop's claimed deduction would be to permit
Picop to shelter its otherwise taxable income (an objective which Picop had from the very beginning) which had not been
earned by the registered enterprise which had suffered the accumulated losses. In effect, to grant Picop's claimed deduction
would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses. Under the
CTA and Court of Appeals decisions, Picop would benefit by immunizing P44,196,106.00 of its income from taxation thereof
although Picop had not run the risks and incurred the losses which had been encountered and suffered by RPPM.
Conversely, the income that would be shielded from taxation is not income that was, after much effort, eventually generated
by the same registered operations which earlier had sustained losses. We consider and so hold that there is nothing in
Section 7 (c) of R.A. No. 5186 which either requires or permits such a result. Indeed, that result makes non-sense of the
legislative purpose which may be seen clearly to be projected by Section 7 (c), R.A. No. 5186.

The CTA and the Court of Appeals allowed the offsetting of RPPM's accumulated operating losses against Picop's 1977
gross income, basically because towards the end of the taxable year 1977, upon the arrival of the effective date of merger,
only one (1) corporation, Picop, remained. The losses suffered by RPPM's registered operations and the gross income
generated by Picop's own registered operations now came under one and the same corporate roof. We consider that this
circumstance relates much more to form than to substance. We do not believe that that single purely technical factor is
enough to authorize and justify the deduction claimed by Picop. Picop's claim for deduction is not only bereft of statutory
basis; it does violence to the legislative intent which animates the tax incentive granted by Section 7 (c) of R.A. No. 5186.
In granting the extraordinary privilege and incentive of a net operating loss carry-over to BOI-registered pioneer enterprises,
the legislature could not have intended to require the Republic to forego tax revenues in order to benefit a corporation which
had run no risks and suffered no losses, but had merely purchased another's losses.

Both the CTA and the Court of Appeals appeared much impressed not only with corporate technicalities but also with the
U.S. tax law on this matter. It should suffice, however, simply to note that in U.S. tax law, the availability to companies
generally of operating loss carry-overs and of operating loss carry-backs is expressly provided and regulated in great detail
by statute. 33 In our jurisdiction, save for Section 7 (c) of R.A. No. 5186, no statute recognizes or permits loss carry-overs
and loss carry-backs. Indeed, as already noted, our tax law expressly rejects the very notion of loss carry-overs and carry-
backs.

We conclude that the deduction claimed by Picop in the amount of P44,196,106.00 in its 1977 Income Tax Return must be
disallowed.

(3) Whether Picop is entitled

to deduct against current
income certain claimed
financial guarantee expenses.

In its Income Tax Return for 1977, Picop also claimed a deduction in the amount of P1,237,421.00 as financial guarantee
expenses.

This deduction is said to relate to chattel and real estate mortgages required from Picop by the Philippine National Bank
("PNB") and DBP as guarantors of loans incurred by Picop from foreign creditors. According to Picop, the claimed deduction
represents registration fees and other expenses incidental to registration of mortgages in favor of DBP and PNB.

In support of this claimed deduction, Picop allegedly showed its own vouchers to BIR Examiners to prove disbursements to
the Register of Deeds of Tandag, Surigao del Sur, of particular amounts. In the proceedings before the CTA, however,
Picop did not submit in evidence such vouchers and instead presented one of its employees to testify that the amount
claimed had been disbursed for the registration of chattel and real estate mortgages.
The CIR disallowed this claimed deduction upon the ground of insufficiency of evidence. This disallowance was sustained
by the CTA and the Court of Appeals. The CTA said:

No records are available to support the abovementioned expenses. The vouchers merely showed that the
amounts were paid to the Register of Deeds and simply cash account. Without the supporting papers such
as the invoices or official receipts of the Register of Deeds, these vouchers standing alone cannot prove
that the payments made were for the accrued expenses in question. The best evidence of payment is the
official receipts issued by the Register of Deeds. The testimony of petitioner's witness that the official
receipts and cash vouchers were shown to the Bureau of Internal Revenue will not suffice if no records
could be presented in court for proper marking and identification. 34 Emphasis supplied)

The Court of Appeals added:

The mere testimony of a witness for PICOP and the cash vouchers do not suffice to establish its claim that
registration fees were paid to the Register of Deeds for the registration of real estate and chattel mortgages
in favor of Development Bank of the Philippines and the Philippine National Bank as guarantors of PICOP's
loans. The witness could very well have been merely repeating what he was instructed to say regardless
of the truth, while the cash vouchers, which we do not find on file, are not said to provide the necessary
details regarding the nature and purpose of the expenses reflected therein. PICOP should have presented,
through the guarantors, its owner's copy of the registered titles with the lien inscribed thereon as well as an
official receipt from the Register of Deeds evidencing payment of the registration fee. 35 (Emphasis
supplied)

We must support the CTA and the Court of Appeals in their foregoing rulings. A taxpayer has the burden of proving
entitlement to a claimed deduction. 36 In the instant case, even Picop's own vouchers were not submitted in evidence and
the BIR Examiners denied that such vouchers and other documents had been exhibited to them. Moreover, cash vouchers
can only confirm the fact of disbursement but not necessarily the purpose thereof. 37 The best evidence that Picop should
have presented to support its claimed deduction were the invoices and official receipts issued by the Register of Deeds.
Picop not only failed to present such documents; it also failed to explain the loss thereof, assuming they had existed
before. 38 Under the best evidence rule, 39 therefore, the testimony of Picop's employee was inadmissible and was in any
case entitled to very little, if any, credence.

We consider that entitlement to Picop's claimed deduction of P1,237,421.00 was not adequately shown and that such
deduction must be disallowed.

III

(1) Whether Picop had understated

its sales and overstated its
cost of sales for 1977.

In its assessment for deficiency income tax for 1977, the CIR claimed that Picop had understated its sales by P2,391,644.00
and, upon the other hand, overstated its cost of sales by P604,018.00. Thereupon, the CIR added back both sums to Picop's
net income figure per its own return.

The 1977 Income Tax Return of Picop set forth the following figures:

Sales (per Picop's Income Tax Return):

Paper P 537,656,719.00

Timber P 263,158,132.00

Total Sales P 800,814,851.00

============
 Upon the other hand, Picop's Books of Accounts reflected higher sales figures:

Sales (per Picop's Books of Accounts):

Paper P 537,656,719.00

Timber P 265,549,776.00

Total Sales P 803,206,495.00

============

The above figures thus show a discrepancy between the sales figures reflected in Picop's Books of Accounts and
the sales figures reported in its 1977 Income Tax Return, amounting to: P2,391,644.00.

The CIR also contended that Picop's cost of sales set out in its 1977 Income Tax Return, when compared with the cost
figures in its Books of Accounts, was overstated:

Cost of Sales
(per Income Tax Return) P607,246,084.00
Cost of Sales
(per Books of Accounts) P606,642,066.00

Discrepancy P 604,018.00
============

Picop did not deny the existence of the above noted discrepancies. In the proceedings before the CTA, Picop presented
one of its officials to explain the foregoing discrepancies. That explanation is perhaps best presented in Picop's own words
as set forth in its Memorandum before this Court:

. . . that the adjustment discussed in the testimony of the witness, represent the best and most objective
method of determining in pesos the amount of the correct and actual export sales during the year. It was
this correct and actual export sales and costs of sales that were reflected in the income tax return and in
the audited financial statements. These corrections did not result in realization of income and should not
give rise to any deficiency tax.

xxx xxx xxx

What are the facts of this case on this matter? Why were adjustments necessary at the year-end?

Because of PICOP's procedure of recording its export sales (reckoned in U.S. dollars) on the basis of a
fixed rate, day to day and month to month, regardless of the actual exchange rate and without waiting when
the actual proceeds are received. In other words, PICOP recorded its export sales at a pre-determined
fixed exchange rate. That pre-determined rate was decided upon at the beginning of the year and continued
to be used throughout the year.

At the end of the year, the external auditors made an examination. In that examination, the auditors
determined with accuracy the actual dollar proceeds of the export sales received. What exchange rate was
used by the auditors to convert these actual dollar proceeds into Philippine pesos? They used the average
of the differences between (a) the recorded fixed exchange rate and (b) the exchange rate at the time the
proceeds were actually received. It was this rate at time of receipt of the proceeds that determined the
amount of pesos credited by the Central Bank (through the agent banks) in favor of PICOP. These
accumulated differences were averaged by the external auditors and this was what was used at the year-
end for income tax and other government-report purposes. (T.s.n., Oct. 17/85, pp. 20-25) 40
The above explanation, unfortunately, at least to the mind of the Court, raises more questions than it resolves. Firstly, the
explanation assumes that all of Picop's sales were export sales for which U.S. dollars (or other foreign exchange) were
received. It also assumes that the expenses summed up as "cost of sales" were all dollar expenses and that no peso
expenses had been incurred. Picop's explanation further assumes that a substantial part of Picop's dollar proceeds for its
export sales were not actually surrendered to the domestic banking system and seasonably converted into pesos; had all
such dollar proceeds been converted into pesos, then the peso figures could have been simply added up to reflect the
actual peso value of Picop's export sales. Picop offered no evidence in respect of these assumptions, no explanation why
and how a "pre-determined fixed exchange rate" was chosen at the beginning of the year and maintained throughout.
Perhaps more importantly, Picop was unable to explain why its Books of Accounts did not pick up the same adjustments
that Picop's External Auditors were alleged to have made for purposes of Picop's Income Tax Return. Picop attempted to
explain away the failure of its Books of Accounts to reflect the same adjustments (no correcting entries, apparently) simply
by quoting a passage from a case where this Court refused to ascribe much probative value to the Books of Accounts of a
corporate taxpayer in a tax case. 41What appears to have eluded Picop, however, is that its Books of Accounts, which are
kept by its own employees and are prepared under its control and supervision, reflect what may be deemed to be admissions
against interest in the instant case. For Picop's Books of Accounts precisely show higher sales figures and lower cost of
sales figures than Picop's Income Tax Return.

It is insisted by Picop that its Auditors' adjustments simply present the "best and most objective" method of reflecting in
pesos the "correct and ACTUAL export sales" 42 and that the adjustments or "corrections" "did not result in realization of
[additional] income and should not give rise to any deficiency tax." The correctness of this contention is not self-evident. So
far as the record of this case shows, Picop did not submit in evidence the aggregate amount of its U.S. dollar proceeds of
its export sales; neither did it show the Philippine pesos it had actually received or been credited for such U.S. dollar
proceeds. It is clear to this Court that the testimonial evidence submitted by Picop fell far short of demonstrating the
correctness of its explanation.

Upon the other hand, the CIR has made out at least a prima facie case that Picop had understated its sales and overstated
its cost of sales as set out in its Income Tax Return. For the CIR has a right to assume that Picop's Books of Accounts
speak the truth in this case since, as already noted, they embody what must appear to be admissions against Picop's own
interest.

Accordingly, we must affirm the findings of the Court of Appeals and the CTA.

(2) Whether Picop is liable for

the corporate development
tax of five percent (5%)
of its income for 1977.

The five percent (5%) corporate development tax is an additional corporate income tax imposed in Section 24 (e) of the
1977 Tax Code which reads in relevant part as follows:

(e) Corporate development tax. In addition to the tax imposed in subsection (a) of this section, an
additional tax in an amount equivalent to 5 per cent of the same taxable net income shall be paid by a
domestic or a resident foreign corporation; Provided, That this additional tax shall be imposed only if the
net income exceeds 10 per cent of the net worth, in case of a domestic corporation, or net assets in the
Philippines in case of a resident foreign corporation: . . . .

The additional corporate income tax imposed in this subsection shall be collected and paid at the same
time and in the same manner as the tax imposed in subsection (a) of this section.

Since this five percent (5%) corporate development tax is an income tax, Picop is not exempted from it under the
provisions of Section 8 (a) of R.A. No. 5186.

For purposes of determining whether the net income of a corporation exceeds ten percent (10%) of its net worth, the term
"net worth" means the stockholders' equity represented by the excess of the total assets over liabilities as reflected in the
corporation's balance sheet provided such balance sheet has been prepared in accordance with generally accepted
accounting principles employed in keeping the books of the corporation. 43

The adjusted net income of Picop for 1977, as will be seen below, is P48,687,355.00. Its net worth figure or total
stockholders' equity as reflected in its Audited Financial Statements for 1977 is P464,749,528.00. Since its adjusted net
income for 1977 thus exceeded ten percent (10%) of its net worth, Picop must be held liable for the five percent (5%)
corporate development tax in the amount of P2,434,367.75.

Recapitulating, we hold:

(1) Picop is liable for the thirty-five percent (35%) transaction tax in the amount of P3,578,543.51.

(2) Picop is not liable for interest and surcharge on unpaid transaction tax.

(3) Picop is exempt from payment of documentary and science stamp taxes in the amount of P300,000.00 and the
compromise penalty of P300.00.

(4) Picop is entitled to its claimed deduction of P42,840,131.00 for interest payments on loans for, among other things, the
purchase of machinery and equipment.

(5) Picop's claimed deduction in the amount of P44,196,106.00 for the operating losses previously incurred by RPPM, is
disallowed for lack of merit.

(6) Picop's claimed deduction for certain financial guarantee expenses in the amount P1,237,421.00 is disallowed for failure
adequately to prove such expenses.

(7) Picop has understated its sales by P2,391,644.00 and overstated its cost of sales by P604,018.00, for 1977.

(8) Picop is liable for the corporate development tax of five percent (5%) of its adjusted net income for 1977 in the amount
of P2,434,367.75.

Considering conclusions nos. 4, 5, 6, 7 and 8, the Court is compelled to hold Picop liable for deficiency income tax for the
year 1977 computed as follows:

Deficiency Income Tax

Net Income Per Return P 258,166.00

Add:

Unallowable Deductions

(1) Deduction of net

operating losses
incurred by RPPM P 44,196,106.00

(2) Unexplained financial

guarantee expenses P 1,237,421.00

(3) Understatement of
Sales P 2,391,644.00

(4) Overstatement of
Cost of Sales P 604,018.00

Total P 48,429,189.00

Net Income as Adjusted P 48,687,355.00

 ===========

Income Tax Due Thereon 44 P 17,030,574.00

Less:

Tax Already Assessed per

Return 80,358.00

Deficiency Income Tax P 16,560,216.00

Add:

Five percent (5%) Corporate

Development Tax P 2,434,367.00

Total Deficiency Income Tax P 18,994,583.00

===========

Add:

Five percent (5%) surcharge 45 P 949,729.15

Total Deficiency Income Tax

with surcharge P 19,944,312.15

Add:

Fourteen percent (14%)

interest from 15 April

1978 to 14 April 1981 46 P 8,376,610.80

Fourteen percent (14%)

interest from 21 April

1983 to 20 April 1986 47 P 11,894,787.00

Total Deficiency Income Tax

Due and Payable P 40,215,709.00

===========

WHEREFORE, for all the foregoing, the Decision of the Court of Appeals is hereby MODIFIED and Picop is hereby
ORDERED to pay the CIR the aggregate amount of P43,794,252.51 itemized as follows:
 (1) Thirty-five percent (35%)

transaction tax P 3,578,543.51

(2) Total Deficiency Income

Tax Due 40,215,709.00

Aggregate Amount Due and Payable P 43,794,252.51

============

No pronouncement as to costs.

SO ORDERED.

G.R. No. 175356 December 3, 2013

MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT, INC., Petitioners,

vs.
SECRETARY OF THE DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT and THE SECRETARY OF THE
DEPARTMENT OF FINANCE, Respondents.

DECISION

DEL CASTILLO, J.:

When a party challeges the constitutionality of a law, the burden of proof rests upon him.

Before us is a Petition for Prohibition2 under Rule 65 of the Rules of Court filed by petitioners Manila Memorial Park, Inc.
and La Funeraria Paz-Sucat, Inc., domestic corporations engaged in the business of providing funeral and burial services,
against public respondents Secretaries of the Department of Social Welfare and Development (DSWD) and the Department
of Finance (DOF).

Petitioners assail the constitutionality of Section 4 of Republic Act (RA) No. 7432,3 as amended by RA 9257,4 and the
implementing rules and regulations issued by the DSWD and DOF insofar as these allow business establishments to claim
the 20% discount given to senior citizens as a tax deduction.

Factual Antecedents

On April 23, 1992, RA 7432 was passed into law, granting senior citizens the following privileges:

SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:

a) the grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services,
hotels and similar lodging establishment[s], restaurants and recreation centers and purchase of medicine anywhere
in the country: Provided, That private establishments may claim the cost as tax credit;

b) a minimum of twenty percent (20%) discount on admission fees charged by theaters, cinema houses and concert
halls, circuses, carnivals and other similar places of culture, leisure, and amusement;
 c) exemption from the payment of individual income taxes: Provided, That their annual taxable income does not
exceed the property level as determined by the National Economic and Development Authority (NEDA) for that
year;

d) exemption from training fees for socioeconomic programs undertaken by the OSCA as part of its work;

e) free medical and dental services in government establishment[s] anywhere in the country, subject to guidelines
to be issued by the Department of Health, the Government Service Insurance System and the Social Security
System;

f) to the extent practicable and feasible, the continuance of the same benefits and privileges given by the
Government Service Insurance System (GSIS), Social Security System (SSS) and PAG-IBIG, as the case may be,
as are enjoyed by those in actual service.

On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to implement RA 7432. Sections 2(i) and 4 of RR
No. 02-94 provide:

Sec. 2. DEFINITIONS. For purposes of these regulations: i. Tax Credit refers to the amount representing the 20%
discount granted to a qualified senior citizen by all establishments relative to their utilization of transportation services, hotels
and similar lodging establishments, restaurants, drugstores, recreation centers, theaters, cinema houses, concert halls,
circuses, carnivals and other similar places of culture, leisure and amusement, which discount shall be deducted by the said
establishments from their gross income for income tax purposes and from their gross sales for value-added tax or other
percentage tax purposes. x x x x Sec. 4. RECORDING/BOOKKEEPING REQUIREMENTS FOR PRIVATE
ESTABLISHMENTS. Private establishments, i.e., transport services, hotels and similar lodging establishments,
restaurants, recreation centers, drugstores, theaters, cinema houses, concert halls, circuses, carnivals and other similar
places of culture[,] leisure and amusement, giving 20% discounts to qualified senior citizens are required to keep separate
and accurate record[s] of sales made to senior citizens, which shall include the name, identification number, gross
sales/receipts, discounts, dates of transactions and invoice number for every transaction. The amount of 20% discount shall
be deducted from the gross income for income tax purposes and from gross sales of the business enterprise concerned for
purposes of the VAT and other percentage taxes.

In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,5 the Court declared Sections 2(i) and 4 of RR No.
02-94 as erroneous because these contravene RA 7432,6 thus:

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant. In turn, the
Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its availment. To deny such credit,
despite the plain mandate of the law and the regulations carrying out that mandate, is indefensible. First, the definition given
by petitioner is erroneous. It refers to tax credit as the amount representing the 20 percent discount that "shall be deducted
by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax
or other percentage tax purposes." In ordinary business language, the tax credit represents the amount of such discount.
However, the manner by which the discount shall be credited against taxes has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an "abatement or reduction made from the gross amount or value of anything." To be
more precise, it is in business parlance "a deduction or lowering of an amount of money;" or "a reduction from the full amount
or value of something, especially a price." In business there are many kinds of discount, the most common of which is that
affecting the income statement or financial report upon which the income tax is based.

xxxx

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible from gross
income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In effect, the tax credit
benefit under RA 7432 is related to a sales discount. This contrived definition is improper, considering that the latter has to
be deducted from gross sales in order to compute the gross income in the income statement and cannot be deducted again,
even for purposes of computing the income tax. When the law says that the cost of the discount may be claimed as a tax
credit, it means that the amount when claimed shall be treated as a reduction from any tax liability, plain and simple.
The option to avail of the tax credit benefit depends upon the existence of a tax liability, but to limit the benefit to a sales
discount which is not even identical to the discount privilege that is granted by law does not define it at all and serves
no useful purpose. The definition must, therefore, be stricken down.

Laws Not Amended by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a regulation that "operates to create a rule out of harmony
with the statute is a mere nullity;" it cannot prevail. It is a cardinal rule that courts "will and should respect the
contemporaneous construction placed upon a statute by the executive officers whose duty it is to enforce it x x x." In the
scheme of judicial tax administration, the need for certainty and predictability in the implementation of tax laws is crucial.
Our tax authorities fill in the details that "Congress may not have the opportunity or competence to provide." The regulations
these authorities issue are relied upon by taxpayers, who are certain that these will be followed by the courts. Courts,
however, will not uphold these authorities interpretations when clearly absurd, erroneous or improper. In the present case,
the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA
7432 provides. Their interpretation has muddled x x x the intent of Congress in granting a mere discount privilege, not a
sales discount. The administrative agency issuing these regulations may not enlarge, alter or restrict the provisions of the
law it administers; it cannot engraft additional requirements not contemplated by the legislature.

In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law." Conversely, a regulation or any
portion thereof not adopted pursuant to law is no law and has neither the force nor the effect of law.7

On February 26, 2004, RA 92578 amended certain provisions of RA 7432, to wit:

SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:

(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels and
similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all establishments for the
exclusive use or enjoyment of senior citizens, including funeral and burial services for the death of senior citizens;

xxxx

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the net cost of the
goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income
for the same taxable year that the discount is granted. Provided, further, That the total amount of the claimed tax deduction
net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to
proper documentation and to the provisions of the National Internal Revenue Code, as amended.

To implement the tax provisions of RA 9257, the Secretary of Finance issued RR No. 4-2006, the pertinent provision of
which provides:

SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS DEDUCTION FROM GROSS INCOME.

Establishments enumerated in subparagraph (6) hereunder granting sales discounts to senior citizens on the sale of goods
and/or services specified thereunder are entitled to deduct the said discount from gross income subject to the following
conditions:

(1) Only that portion of the gross sales EXCLUSIVELY USED, CONSUMED OR ENJOYED BY THE SENIOR
CITIZEN shall be eligible for the deductible sales discount.

(2) The gross selling price and the sales discount MUST BE SEPARATELY INDICATED IN THE OFFICIAL
RECEIPT OR SALES INVOICE issued by the establishment for the sale of goods or services to the senior citizen.

(3) Only the actual amount of the discount granted or a sales discount not exceeding 20% of the gross selling price
can be deducted from the gross income, net of value added tax, if applicable, for income tax purposes, and from
gross sales or gross receipts of the business enterprise concerned, for VAT or other percentage tax purposes.

(4) The discount can only be allowed as deduction from gross income for the same taxable year that the discount
is granted.

(5) The business establishment giving sales discounts to qualified senior citizens is required to keep separate and
accurate record[s] of sales, which shall include the name of the senior citizen, TIN, OSCA ID, gross sales/receipts,
sales discount granted, [date] of [transaction] and invoice number for every sale transaction to senior citizen.

(6) Only the following business establishments which granted sales discount to senior citizens on their sale of goods
and/or services may claim the said discount granted as deduction from gross income, namely:
xxxx

(i) Funeral parlors and similar establishments The beneficiary or any person who shall shoulder the funeral and burial
expenses of the deceased senior citizen shall claim the discount, such as casket, embalmment, cremation cost and other
related services for the senior citizen upon payment and presentation of [his] death certificate.

The DSWD likewise issued its own Rules and Regulations Implementing RA 9257, to wit:

RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS

Article 8. Tax Deduction of Establishments. The establishment may claim the discounts granted under Rule V, Section 4
Discounts for Establishments, Section 9, Medical and Dental Services in Private Facilities and Sections 10 and 11 Air,
Sea and Land Transportation as tax deduction based on the net cost of the goods sold or services rendered.

Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the
discount is granted; Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable,
shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the
provisions of the National Internal Revenue Code, as amended; Provided, finally, that the implementation of the tax
deduction shall be subject to the Revenue Regulations to be issued by the Bureau of Internal Revenue (BIR) and approved
by the Department of Finance (DOF).

Feeling aggrieved by the tax deduction scheme, petitioners filed the present recourse, praying that Section 4 of RA 7432,
as amended by RA 9257, and the implementing rules and regulations issued by the DSWD and the DOF be declared
unconstitutional insofar as these allow business establishments to claim the 20% discount given to senior citizens as a tax
deduction; that the DSWD and the DOF be prohibited from enforcing the same; and that the tax credit treatment of the 20%
discount under the former Section 4 (a) of RA 7432 be reinstated.

Issues

Petitioners raise the following issues:

A.

WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.

B.

WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS IMPLEMENTING RULES AND REGULATIONS,
INSOFAR AS THEY PROVIDE THAT THE TWENTY PERCENT (20%) DISCOUNT TO SENIOR CITIZENS MAY BE
CLAIMED AS A TAX DEDUCTION BY THE PRIVATE ESTABLISHMENTS, ARE INVALID AND UNCONSTITUTIONAL.9

Petitioners Arguments

Petitioners emphasize that they are not questioning the 20% discount granted to senior citizens but are only assailing the
constitutionality of the tax deduction scheme prescribed under RA 9257 and the implementing rules and regulations issued
by the DSWD and the DOF.10

Petitioners posit that the tax deduction scheme contravenes Article III, Section 9 of the Constitution, which provides that:
"[p]rivate property shall not be taken for public use without just compensation." 11

In support of their position, petitioners cite Central Luzon Drug Corporation, 12 where it was ruled that the 20% discount
privilege constitutes taking of private property for public use which requires the payment of just compensation, 13 and Carlos
Superdrug Corporation v. Department of Social Welfare and Development,14 where it was acknowledged that the tax
deduction scheme does not meet the definition of just compensation.15

Petitioners likewise seek a reversal of the ruling in Carlos Superdrug Corporation 16 that the tax deduction scheme adopted
by the government is justified by police power.17
They assert that "[a]lthough both police power and the power of eminent domain have the general welfare for their object,
there are still traditional distinctions between the two" 18 and that "eminent domain cannot be made less supreme than police
power."19

Petitioners further claim that the legislature, in amending RA 7432, relied on an erroneous contemporaneous construction
that prior payment of taxes is required for tax credit.20

Petitioners also contend that the tax deduction scheme violates Article XV, Section 4 21 and Article XIII, Section 1122of the
Constitution because it shifts the States constitutional mandate or duty of improving the welfare of the elderly to the private
sector.23

Under the tax deduction scheme, the private sector shoulders 65% of the discount because only 35%24 of it is actually
returned by the government.25

Consequently, the implementation of the tax deduction scheme prescribed under Section 4 of RA 9257 affects the
businesses of petitioners.26

Thus, there exists an actual case or controversy of transcendental importance which deserves judicious disposition on the
merits by the highest court of the land. 27

Respondents Arguments

Respondents, on the other hand, question the filing of the instant Petition directly with the Supreme Court as this disregards
the hierarchy of courts.28

They likewise assert that there is no justiciable controversy as petitioners failed to prove that the tax deduction treatment is
not a "fair and full equivalent of the loss sustained" by them. 29

As to the constitutionality of RA 9257 and its implementing rules and regulations, respondents contend that petitioners failed
to overturn its presumption of constitutionality. 30

More important, respondents maintain that the tax deduction scheme is a legitimate exercise of the States police power. 31

Our Ruling

The Petition lacks merit.

There exists an actual case or controversy.

We shall first resolve the procedural issue. When the constitutionality of a law is put in issue, judicial review may be availed
of only if the following requisites concur: "(1) the existence of an actual and appropriate case; (2) the existence of personal
and substantial interest on the part of the party raising the [question of constitutionality]; (3) recourse to judicial review is
made at the earliest opportunity; and (4) the [question of constitutionality] is the lis mota of the case." 32

In this case, petitioners are challenging the constitutionality of the tax deduction scheme provided in RA 9257 and the
implementing rules and regulations issued by the DSWD and the DOF. Respondents, however, oppose the Petition on the
ground that there is no actual case or controversy. We do not agree with respondents. An actual case or controversy exists
when there is "a conflict of legal rights" or "an assertion of opposite legal claims susceptible of judicial resolution." 33

The Petition must therefore show that "the governmental act being challenged has a direct adverse effect on the individual
challenging it."34

In this case, the tax deduction scheme challenged by petitioners has a direct adverse effect on them. Thus, it cannot be
denied that there exists an actual case or controversy.

The validity of the 20% senior citizen discount and tax deduction scheme under RA 9257, as an exercise of police
power of the State, has already been settled in Carlos Superdrug Corporation.
Petitioners posit that the resolution of this case lies in the determination of whether the legally mandated 20% senior citizen
discount is an exercise of police power or eminent domain. If it is police power, no just compensation is warranted. But if it
is eminent domain, the tax deduction scheme is unconstitutional because it is not a peso for peso reimbursement of the
20% discount given to senior citizens. Thus, it constitutes taking of private property without payment of just compensation.
At the outset, we note that this question has been settled in Carlos Superdrug Corporation. 35

In that case, we ruled:

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property.
Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital because 1)
drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby
drugstores will be justly compensated for the discount. Examining petitioners arguments, it is apparent that what petitioners
are ultimately questioning is the validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent
(20%) discount that they extend to senior citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does
not fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because the discount is treated
as a deduction, a tax-deductible expense that is subtracted from the gross income and results in a lower taxable income.
Stated otherwise, it is an amount that is allowed by law to reduce the income prior to the application of the tax rate to
compute the amount of tax which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for
peso basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as a deduction
reduces the net income of the private establishments concerned. The discounts given would have entered the coffers and
formed part of the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent reduction in their
total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. This constitutes
compensable taking for which petitioners would ordinarily become entitled to a just compensation. Just compensation is
defined as the full and fair equivalent of the property taken from its owner by the expropriator. The measure is not the takers
gain but the owners loss. The word just is used to intensify the meaning of the word compensation, and to convey the idea
that the equivalent to be rendered for the property to be taken shall be real, substantial, full and ample. A tax deduction
does not offer full reimbursement of the senior citizen discount. As such, it would not meet the definition of just
compensation. Having said that, this raises the question of whether the State, in promoting the health and welfare of a
special group of citizens, can impose upon private establishments the burden of partly subsidizing a government program.
The Court believes so. The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to
nation-building, and to grant benefits and privileges to them for their improvement and well-being as the State considers
them an integral part of our society. The priority given to senior citizens finds its basis in the Constitution as set forth in the
law itself.1wphi1 Thus, the Act provides: SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:

SECTION 1. Declaration of Policies and Objectives. Pursuant to Article XV, Section 4 of the Constitution, it is the duty of
the family to take care of its elderly members while the State may design programs of social security for them. In addition
to this, Section 10 in the Declaration of Principles and State Policies provides: "The State shall provide social justice in all
phases of national development." Further, Article XIII, Section 11, provides: "The State shall adopt an integrated and
comprehensive approach to health development which shall endeavor to make essential goods, health and other social
services available to all the people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly,
disabled, women and children." Consonant with these constitutional principles the following are the declared policies of this
Act:

xxx xxx xxx

(f) To recognize the important role of the private sector in the improvement of the welfare of senior citizens and to actively
seek their partnership.

To implement the above policy, the law grants a twenty percent discount to senior citizens for medical and dental services,
and diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses, carnivals, and other similar
places of culture, leisure and amusement; fares for domestic land, air and sea travel; utilization of services in hotels and
similar lodging establishments, restaurants and recreation centers; and purchases of medicines for the exclusive use or
enjoyment of senior citizens. As a form of reimbursement, the law provides that business establishments extending the
twenty percent discount to senior citizens may claim the discount as a tax deduction. The law is a legitimate exercise of
police power which, similar to the power of eminent domain, has general welfare for its object. Police power is not capable
of an exact definition, but has been purposely veiled in general terms to underscore its comprehensiveness to meet all
exigencies and provide enough room for an efficient and flexible response to conditions and circumstances, thus assuring
the greatest benefits. Accordingly, it has been described as "the most essential, insistent and the least limitable of powers,
extending as it does to all the great public needs." It is "[t]he power vested in the legislature by the constitution to make,
ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or
without, not repugnant to the constitution, as they shall judge to be for the good and welfare of the commonwealth, and of
the subjects of the same." For this reason, when the conditions so demand as determined by the legislature, property rights
must bow to the primacy of police power because property rights, though sheltered by due process, must yield to general
welfare. Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of
petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the absence
of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis for its nullification in
view of the presumption of validity which every law has in its favor. Given these, it is incorrect for petitioners to insist that
the grant of the senior citizen discount is unduly oppressive to their business, because petitioners have not taken time to
calculate correctly and come up with a financial report, so that they have not been able to show properly whether or not the
tax deduction scheme really works greatly to their disadvantage. In treating the discount as a tax deduction, petitioners
insist that they will incur losses because, referring to the DOF Opinion, for every 1.00 senior citizen discount that petitioners
would give, P0.68 will be shouldered by them as only P0.32 will be refunded by the government by way of a tax deduction.
To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance drug Norvasc as an example.
According to the latter, it acquires Norvasc from the distributors at 37.57 per tablet, and retails it at 39.60 (or at a margin
of 5%). If it grants a 20% discount to senior citizens or an amount equivalent to 7.92, then it would have to sell Norvasc at
31.68 which translates to a loss from capital of 5.89 per tablet. Even if the government will allow a tax deduction, only
2.53 per tablet will be refunded and not the full amount of the discount which is 7.92. In short, only 32% of the 20%
discount will be reimbursed to the drugstores. Petitioners computation is flawed. For purposes of reimbursement, the law
states that the cost of the discount shall be deducted from gross income, the amount of income derived from all sources
before deducting allowable expenses, which will result in net income. Here, petitioners tried to show a loss on a per
transaction basis, which should not be the case. An income statement, showing an accounting of petitioners' sales,
expenses, and net profit (or loss) for a given period could have accurately reflected the effect of the discount on their income.
Absent any financial statement, petitioners cannot substantiate their claim that they will be operating at a loss should they
give the discount. In addition, the computation was erroneously based on the assumption that their customers consisted
wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the discount.

Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of their medicines given the
cutthroat nature of the players in the industry. It is a business decision on the part of petitioners to peg the mark-up at 5%.
Selling the medicines below acquisition cost, as alleged by petitioners, is merely a result of this decision. Inasmuch as
pricing is a property right, petitioners cannot reproach the law for being oppressive, simply because they cannot afford to
raise their prices for fear of losing their customers to competition. The Court is not oblivious of the retail side of the
pharmaceutical industry and the competitive pricing component of the business. While the Constitution protects property
rights, petitioners must accept the realities of business and the State, in the exercise of police power, can intervene in the
operations of a business which may result in an impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the precept for the
protection of property, various laws and jurisprudence, particularly on agrarian reform and the regulation of contracts and
public utilities, continuously serve as x x x reminder[s] that the right to property can be relinquished upon the command of
the State for the promotion of public good. Undeniably, the success of the senior citizens program rests largely on the
support imparted by petitioners and the other private establishments concerned. This being the case, the means employed
in invoking the active participation of the private sector, in order to achieve the purpose or objective of the law, is reasonably
and directly related. Without sufficient proof that Section 4 (a) of R.A. No. 9257 is arbitrary, and that the continued
implementation of the same would be unconscionably detrimental to petitioners, the Court will refrain from quashing a
legislative act.36 (Bold in the original; underline supplied)

We, thus, found that the 20% discount as well as the tax deduction scheme is a valid exercise of the police power of the
State.

No compelling reason has been proffered to overturn, modify or abandon the ruling in Carlos Superdrug
Corporation.

Petitioners argue that we have previously ruled in Central Luzon Drug Corporation 37 that the 20% discount is an exercise
of the power of eminent domain, thus, requiring the payment of just compensation. They urge us to re-examine our ruling
in Carlos Superdrug Corporation38 which allegedly reversed the ruling in Central Luzon Drug Corporation. 39

They also point out that Carlos Superdrug Corporation 40 recognized that the tax deduction scheme under the assailed law
does not provide for sufficient just compensation. We agree with petitioners observation that there are statements in Central
Luzon Drug Corporation41 describing the 20% discount as an exercise of the power of eminent domain, viz.:

[T]he privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments
concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation
for private property taken by the State for public use. The concept of public use is no longer confined to the traditional notion
of use by the public, but held synonymous with public interest, public benefit, public welfare, and public convenience. The
discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these
citizens belong. The discounts given would have entered the coffers and formed part of the gross sales of the private
establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy
corresponding to the taking of private property for public use or benefit. As a result of the 20 percent discount imposed by
RA 7432, respondent becomes entitled to a just compensation. This term refers not only to the issuance of a tax credit
certificate indicating the correct amount of the discounts given, but also to the promptness in its release. Equivalent to the
payment of property taken by the State, such issuance when not done within a reasonable time from the grant of the
discounts cannot be considered as just compensation. In effect, respondent is made to suffer the consequences of being
immediately deprived of its revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs
to cope with the reduction in its revenues. Besides, the taxation power can also be used as an implement for the exercise
of the power of eminent domain. Tax measures are but "enforced contributions exacted on pain of penal sanctions" and
"clearly imposed for a public purpose." In recent years, the power to tax has indeed become a most effective tool to realize
social justice, public welfare, and the equitable distribution of wealth. While it is a declared commitment under Section 1 of
RA 7432, social justice "cannot be invoked to trample on the rights of property owners who under our Constitution and laws
are also entitled to protection. The social justice consecrated in our [C]onstitution [is] not intended to take away rights from
a person and give them to another who is not entitled thereto." For this reason, a just compensation for income that is taken
away from respondent becomes necessary. It is in the tax credit that our legislators find support to realize social justice,
and no administrative body can alter that fact. To put it differently, a private establishment that merely breaks even
without the discounts yet will surely start to incur losses because of such discounts. The same effect is expected if its
mark-up is less than 20 percent, and if all its sales come from retail purchases by senior citizens. Aside from the observation
we have already raised earlier, it will also be grossly unfair to an establishment if the discounts will be treated merely as
deductions from either its gross income or its gross sales.1wphi1 Operating at a loss through no fault of its own, it will
realize that the tax credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be put
in a better position if they avail themselves of tax credits denied those that are losing, because no taxes are due from the
latter.42 (Italics in the original; emphasis supplied)

The above was partly incorporated in our ruling in Carlos Superdrug Corporation 43 when we stated preliminarily that

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property.
Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital because 1)
drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby
drugstores will be justly compensated for the discount. Examining petitioners arguments, it is apparent that what petitioners
are ultimately questioning is the validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent
(20%) discount that they extend to senior citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does
not fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because the discount is treated
as a deduction, a tax-deductible expense that is subtracted from the gross income and results in a lower taxable income.
Stated otherwise, it is an amount that is allowed by law to reduce the income prior to the application of the tax rate to
compute the amount of tax which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for
peso basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as a deduction
reduces the net income of the private establishments concerned. The discounts given would have entered the coffers and
formed part of the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent reduction in their
total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. This constitutes
compensable taking for which petitioners would ordinarily become entitled to a just compensation. Just compensation is
defined as the full and fair equivalent of the property taken from its owner by the expropriator. The measure is not the takers
gain but the owners loss. The word just is used to intensify the meaning of the word compensation, and to convey the idea
that the equivalent to be rendered for the property to be taken shall be real, substantial, full and ample. A tax deduction
does not offer full reimbursement of the senior citizen discount. As such, it would not meet the definition of just
compensation. Having said that, this raises the question of whether the State, in promoting the health and welfare of a
special group of citizens, can impose upon private establishments the burden of partly subsidizing a government program.
The Court believes so.44

This, notwithstanding, we went on to rule in Carlos Superdrug Corporation 45 that the 20% discount and tax deduction
scheme is a valid exercise of the police power of the State. The present case, thus, affords an opportunity for us to clarify
the above-quoted statements in Central Luzon Drug Corporation46 and Carlos Superdrug Corporation.47

First, we note that the above-quoted disquisition on eminent domain in Central Luzon Drug Corporation48 is obiter dicta and,
thus, not binding precedent. As stated earlier, in Central Luzon Drug Corporation,49 we ruled that the BIR acted ultra
vires when it effectively treated the 20% discount as a tax deduction, under Sections 2.i and 4 of RR No. 2-94, despite the
clear wording of the previous law that the same should be treated as a tax credit. We were, therefore, not confronted in that
case with the issue as to whether the 20% discount is an exercise of police power or eminent domain. Second, although we
adverted to Central Luzon Drug Corporation50 in our ruling in Carlos Superdrug Corporation,51 this referred only to
preliminary matters. A fair reading of Carlos Superdrug Corporation52would show that we categorically ruled therein that the
20% discount is a valid exercise of police power. Thus, even if the current law, through its tax deduction scheme (which
abandoned the tax credit scheme under the previous law), does not provide for a peso for peso reimbursement of the 20%
discount given by private establishments, no constitutional infirmity obtains because, being a valid exercise of police power,
payment of just compensation is not warranted. We have carefully reviewed the basis of our ruling in Carlos Superdrug
Corporation53 and we find no cogent reason to overturn, modify or abandon it. We also note that petitioners arguments are
a mere reiteration of those raised and resolved in Carlos Superdrug Corporation.54 Thus, we sustain Carlos Superdrug
Corporation.55

Nonetheless, we deem it proper, in what follows, to amplify our explanation in Carlos Superdrug Corporation 56 as to why
the 20% discount is a valid exercise of police power and why it may not, under the specific circumstances of this case, be
considered as an exercise of the power of eminent domain contrary to the obiter in Central Luzon Drug Corporation. 57

Police power versus eminent domain.

Police power is the inherent power of the State to regulate or to restrain the use of liberty and property for public welfare.58

The only limitation is that the restriction imposed should be reasonable, not oppressive. 59

In other words, to be a valid exercise of police power, it must have a lawful subject or objective and a lawful method of
accomplishing the goal.60

Under the police power of the State, "property rights of individuals may be subjected to restraints and burdens in order to
fulfill the objectives of the government."61

The State "may interfere with personal liberty, property, lawful businesses and occupations to promote the general welfare
[as long as] the interference [is] reasonable and not arbitrary."62

Eminent domain, on the other hand, is the inherent power of the State to take or appropriate private property for public
use.63

The Constitution, however, requires that private property shall not be taken without due process of law and the payment of
just compensation.64

Traditional distinctions exist between police power and eminent domain. In the exercise of police power, a property right is
impaired by regulation,65 or the use of property is merely prohibited, regulated or restricted66 to promote public welfare. In
such cases, there is no compensable taking, hence, payment of just compensation is not required. Examples of these
regulations are property condemned for being noxious or intended for noxious purposes (e.g., a building on the verge of
collapse to be demolished for public safety, or obscene materials to be destroyed in the interest of public morals)67 as well
as zoning ordinances prohibiting the use of property for purposes injurious to the health, morals or safety of the community
(e.g., dividing a citys territory into residential and industrial areas). 68

It has, thus, been observed that, in the exercise of police power (as distinguished from eminent domain), although the
regulation affects the right of ownership, none of the bundle of rights which constitute ownership is appropriated for use by
or for the benefit of the public.69

On the other hand, in the exercise of the power of eminent domain, property interests are appropriated and applied to some
public purpose which necessitates the payment of just compensation therefor. Normally, the title to and possession of the
property are transferred to the expropriating authority. Examples include the acquisition of lands for the construction of
public highways as well as agricultural lands acquired by the government under the agrarian reform law for redistribution to
qualified farmer beneficiaries. However, it is a settled rule that the acquisition of title or total destruction of the property is
not essential for "taking" under the power of eminent domain to be present. 70

Examples of these include establishment of easements such as where the land owner is perpetually deprived of his
proprietary rights because of the hazards posed by electric transmission lines constructed above his property71 or the
compelled interconnection of the telephone system between the government and a private company. 72
In these cases, although the private property owner is not divested of ownership or possession, payment of just
compensation is warranted because of the burden placed on the property for the use or benefit of the public.

The 20% senior citizen discount is an exercise of police power.

It may not always be easy to determine whether a challenged governmental act is an exercise of police power or eminent
domain. The very nature of police power as elastic and responsive to various social conditions 73 as well as the evolving
meaning and scope of public use74 and just compensation75 in eminent domain evinces that these are not static concepts.
Because of the exigencies of rapidly changing times, Congress may be compelled to adopt or experiment with different
measures to promote the general welfare which may not fall squarely within the traditionally recognized categories of police
power and eminent domain. The judicious approach, therefore, is to look at the nature and effects of the challenged
governmental act and decide, on the basis thereof, whether the act is the exercise of police power or eminent domain. Thus,
we now look at the nature and effects of the 20% discount to determine if it constitutes an exercise of police power or
eminent domain. The 20% discount is intended to improve the welfare of senior citizens who, at their age, are less likely to
be gainfully employed, more prone to illnesses and other disabilities, and, thus, in need of subsidy in purchasing basic
commodities. It may not be amiss to mention also that the discount serves to honor senior citizens who presumably spent
the productive years of their lives on contributing to the development and progress of the nation. This distinct cultural Filipino
practice of honoring the elderly is an integral part of this law. As to its nature and effects, the 20% discount is a regulation
affecting the ability of private establishments to price their products and services relative to a special class of individuals,
senior citizens, for which the Constitution affords preferential concern. 76

In turn, this affects the amount of profits or income/gross sales that a private establishment can derive from senior citizens.
In other words, the subject regulation affects the pricing, and, hence, the profitability of a private establishment. However, it
does not purport to appropriate or burden specific properties, used in the operation or conduct of the business of private
establishments, for the use or benefit of the public, or senior citizens for that matter, but merely regulates the pricing of
goods and services relative to, and the amount of profits or income/gross sales that such private establishments may derive
from, senior citizens. The subject regulation may be said to be similar to, but with substantial distinctions from, price control
or rate of return on investment control laws which are traditionally regarded as police power measures.77

These laws generally regulate public utilities or industries/enterprises imbued with public interest in order to protect
consumers from exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate of return on
investment of these corporations considering that they have a monopoly over the goods or services that they provide to the
general public. The subject regulation differs therefrom in that (1) the discount does not prevent the establishments from
adjusting the level of prices of their goods and services, and (2) the discount does not apply to all customers of a given
establishment but only to the class of senior citizens. Nonetheless, to the degree material to the resolution of this case, the
20% discount may be properly viewed as belonging to the category of price regulatory measures which affect the profitability
of establishments subjected thereto. On its face, therefore, the subject regulation is a police power measure. The obiter in
Central Luzon Drug Corporation,78 however, describes the 20% discount as an exercise of the power of eminent domain
and the tax credit, under the previous law, equivalent to the amount of discount given as the just compensation therefor.
The reason is that (1) the discount would have formed part of the gross sales of the establishment were it not for the law
prescribing the 20% discount, and (2) the permanent reduction in total revenues is a forced subsidy corresponding to the
taking of private property for public use or benefit. The flaw in this reasoning is in its premise. It presupposes that the subject
regulation, which impacts the pricing and, hence, the profitability of a private establishment, automatically amounts to a
deprivation of property without due process of law. If this were so, then all price and rate of return on investment control
laws would have to be invalidated because they impact, at some level, the regulated establishments profits or income/gross
sales, yet there is no provision for payment of just compensation. It would also mean that overnment cannot set price or
rate of return on investment limits, which reduce the profits or income/gross sales of private establishments, if no just
compensation is paid even if the measure is not confiscatory. The obiter is, thus, at odds with the settled octrine that the
State can employ police power measures to regulate the pricing of goods and services, and, hence, the profitability of
business establishments in order to pursue legitimate State objectives for the common good, provided that the regulation
does not go too far as to amount to "taking."79

In City of Manila v. Laguio, Jr.,80 we recognized that x x x a taking also could be found if government regulation of the use
of property went "too far." When regulation reaches a certain magnitude, in most if not in all cases there must be an exercise
of eminent domain and compensation to support the act. While property may be regulated to a certain extent, if regulation
goes too far it will be recognized as a taking. No formula or rule can be devised to answer the questions of what is too far
and when regulation becomes a taking. In Mahon, Justice Holmes recognized that it was "a question of degree and therefore
cannot be disposed of by general propositions." On many other occasions as well, the U.S. Supreme Court has said that
the issue of when regulation constitutes a taking is a matter of considering the facts in each case. The Court asks whether
justice and fairness require that the economic loss caused by public action must be compensated by the government and
thus borne by the public as a whole, or whether the loss should remain concentrated on those few persons subject to the
public action.81

The impact or effect of a regulation, such as the one under consideration, must, thus, be determined on a case-to-case
basis. Whether that line between permissible regulation under police power and "taking" under eminent domain has been
crossed must, under the specific circumstances of this case, be subject to proof and the one assailing the constitutionality
of the regulation carries the heavy burden of proving that the measure is unreasonable, oppressive or confiscatory. The
time-honored rule is that the burden of proving the unconstitutionality of a law rests upon the one assailing it and "the burden
becomes heavier when police power is at issue."82

The 20% senior citizen discount has not been shown to be unreasonable, oppressive or confiscatory.

In Alalayan v. National Power Corporation, 83 petitioners, who were franchise holders of electric plants, challenged the
validity of a law limiting their allowable net profits to no more than 12% per annum of their investments plus two-month
operating expenses. In rejecting their plea, we ruled that, in an earlier case, it was found that 12% is a reasonable rate of
return and that petitioners failed to prove that the aforesaid rate is confiscatory in view of the presumption of
constitutionality.84

We adopted a similar line of reasoning in Carlos Superdrug Corporation85 when we ruled that petitioners therein failed to
prove that the 20% discount is arbitrary, oppressive or confiscatory. We noted that no evidence, such as a financial report,
to establish the impact of the 20% discount on the overall profitability of petitioners was presented in order to show that they
would be operating at a loss due to the subject regulation or that the continued implementation of the law would be
unconscionably detrimental to the business operations of petitioners. In the case at bar, petitioners proceeded with a
hypothetical computation of the alleged loss that they will suffer similar to what the petitioners in Carlos Superdrug
Corporation86 did. Petitioners went directly to this Court without first establishing the factual bases of their claims. Hence,
the present recourse must, likewise, fail. Because all laws enjoy the presumption of constitutionality, courts will uphold a
laws validity if any set of facts may be conceived to sustain it. 87

On its face, we find that there are at least two conceivable bases to sustain the subject regulations validity absent clear and
convincing proof that it is unreasonable, oppressive or confiscatory. Congress may have legitimately concluded that
business establishments have the capacity to absorb a decrease in profits or income/gross sales due to the 20% discount
without substantially affecting the reasonable rate of return on their investments considering (1) not all customers of a
business establishment are senior citizens and (2) the level of its profit margins on goods and services offered to the general
public. Concurrently, Congress may have, likewise, legitimately concluded that the establishments, which will be required
to extend the 20% discount, have the capacity to revise their pricing strategy so that whatever reduction in profits or
income/gross sales that they may sustain because of sales to senior citizens, can be recouped through higher mark-ups or
from other products not subject of discounts. As a result, the discounts resulting from sales to senior citizens will not be
confiscatory or unduly oppressive. In sum, we sustain our ruling in Carlos Superdrug Corporation 88 that the 20% senior
citizen discount and tax deduction scheme are valid exercises of police power of the State absent a clear showing that it is
arbitrary, oppressive or confiscatory.

Conclusion

In closing, we note that petitioners hypothesize, consistent with our previous ratiocinations, that the discount will force
establishments to raise their prices in order to compensate for its impact on overall profits or income/gross sales. The
general public, or those not belonging to the senior citizen class, are, thus, made to effectively shoulder the subsidy for
senior citizens. This, in petitioners view, is unfair.

As already mentioned, Congress may be reasonably assumed to have foreseen this eventuality. But, more importantly, this
goes into the wisdom, efficacy and expediency of the subject law which is not proper for judicial review. In a way, this law
pursues its social equity objective in a non-traditional manner unlike past and existing direct subsidy programs of the
government for the poor and marginalized sectors of our society. Verily, Congress must be given sufficient leeway in
formulating welfare legislations given the enormous challenges that the government faces relative to, among others,
resource adequacy and administrative capability in implementing social reform measures which aim to protect and uphold
the interests of those most vulnerable in our society. In the process, the individual, who enjoys the rights, benefits and
privileges of living in a democratic polity, must bear his share in supporting measures intended for the common good. This
is only fair. In fine, without the requisite showing of a clear and unequivocal breach of the Constitution, the validity of the
assailed law must be sustained.

Refutation of the Dissent

The main points of Justice Carpios Dissent may be summarized as follows: (1) the discussion on eminent domain in Central
Luzon Drug Corporation89 is not obiter dicta ; (2) allowable taking, in police power, is limited to property that is destroyed or
placed outside the commerce of man for public welfare; (3) the amount of mandatory discount is private property within the
ambit of Article III, Section 990 of the Constitution; and (4) the permanent reduction in a private establishments total revenue,
arising from the mandatory discount, is a taking of private property for public use or benefit, hence, an exercise of the power
of eminent domain requiring the payment of just compensation. I We maintain that the discussion on eminent domain in
Central Luzon Drug Corporation91 is obiter dicta. As previously discussed, in Central Luzon Drug Corporation, 92 the BIR,
pursuant to Sections 2.i and 4 of RR No. 2-94, treated the senior citizen discount in the previous law, RA 7432, as a tax
deduction instead of a tax credit despite the clear provision in that law which stated

SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:

a) The grant of twenty percent (20%) discount from all establishments relative to utilization of transportation
services, hotels and similar lodging establishment, restaurants and recreation centers and purchase of medicines
anywhere in the country: Provided, That private establishments may claim the cost as tax credit; (Emphasis
supplied)

Thus, the Court ruled that the subject revenue regulation violated the law, viz:

The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax deduction from
the gross income or gross sale of the establishment concerned. A tax credit is used by a private establishment only after
the tax has been computed; a tax deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all
covered entities. Thus, the provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the
rule that administrative regulations cannot amend or revoke the law.93

As can be readily seen, the discussion on eminent domain was not necessary in order to arrive at this conclusion. All that
was needed was to point out that the revenue regulation contravened the law which it sought to implement. And, precisely,
this was done in Central Luzon Drug Corporation94 by comparing the wording of the previous law vis--vis the revenue
regulation; employing the rules of statutory construction; and applying the settled principle that a regulation cannot amend
the law it seeks to implement. A close reading of Central Luzon Drug Corporation95 would show that the Court went on to
state that the tax credit "can be deemed" as just compensation only to explain why the previous law provides for a tax credit
instead of a tax deduction. The Court surmised that the tax credit was a form of just compensation given to the
establishments covered by the 20% discount. However, the reason why the previous law provided for a tax credit and not
a tax deduction was not necessary to resolve the issue as to whether the revenue regulation contravenes the law. Hence,
the discussion on eminent domain is obiter dicta.

A court, in resolving cases before it, may look into the possible purposes or reasons that impelled the enactment of a
particular statute or legal provision. However, statements made relative thereto are not always necessary in resolving the
actual controversies presented before it. This was the case in Central Luzon Drug Corporation 96resulting in that unfortunate
statement that the tax credit "can be deemed" as just compensation. This, in turn, led to the erroneous conclusion, by
deductive reasoning, that the 20% discount is an exercise of the power of eminent domain. The Dissent essentially adopts
this theory and reasoning which, as will be shown below, is contrary to settled principles in police power and eminent domain
analysis. II The Dissent discusses at length the doctrine on "taking" in police power which occurs when private property is
destroyed or placed outside the commerce of man. Indeed, there is a whole class of police power measures which justify
the destruction of private property in order to preserve public health, morals, safety or welfare. As earlier mentioned, these
would include a building on the verge of collapse or confiscated obscene materials as well as those mentioned by the
Dissent with regard to property used in violating a criminal statute or one which constitutes a nuisance. In such cases, no
compensation is required. However, it is equally true that there is another class of police power measures which do not
involve the destruction of private property but merely regulate its use. The minimum wage law, zoning ordinances, price
control laws, laws regulating the operation of motels and hotels, laws limiting the working hours to eight, and the like would
fall under this category. The examples cited by the Dissent, likewise, fall under this category: Article 157 of the Labor Code,
Sections 19 and 18 of the Social Security Law, and Section 7 of the Pag-IBIG Fund Law. These laws merely regulate or, to
use the term of the Dissent, burden the conduct of the affairs of business establishments. In such cases, payment of just
compensation is not required because they fall within the sphere of permissible police power measures. The senior citizen
discount law falls under this latter category. III The Dissent proceeds from the theory that the permanent reduction of profits
or income/gross sales, due to the 20% discount, is a "taking" of private property for public purpose without payment of just
compensation. At the outset, it must be emphasized that petitioners never presented any evidence to establish that they
were forced to suffer enormous losses or operate at a loss due to the effects of the assailed law. They came directly to this
Court and provided a hypothetical computation of the loss they would allegedly suffer due to the operation of the assailed
law. The central premise of the Dissents argument that the 20% discount results in a permanent reduction in profits or
income/gross sales, or forces a business establishment to operate at a loss is, thus, wholly unsupported by competent
evidence. To be sure, the Court can invalidate a law which, on its face, is arbitrary, oppressive or confiscatory. 97

But this is not the case here.

In the case at bar, evidence is indispensable before a determination of a constitutional violation can be made because of
the following reasons. First, the assailed law, by imposing the senior citizen discount, does not take any of the properties
used by a business establishment like, say, the land on which a manufacturing plant is constructed or the equipment being
used to produce goods or services. Second, rather than taking specific properties of a business establishment, the senior
citizen discount law merely regulates the prices of the goods or services being sold to senior citizens by mandating a 20%
discount. Thus, if a product is sold at 10.00 to the general public, then it shall be sold at 8.00 ( i.e., 10.00 less 20%) to
senior citizens. Note that the law does not impose at what specific price the product shall be sold, only that a 20% discount
shall be given to senior citizens based on the price set by the business establishment. A business establishment is, thus,
free to adjust the prices of the goods or services it provides to the general public. Accordingly, it can increase the price of
the above product to 20.00 but is required to sell it at 16.00 (i.e. , 20.00 less 20%) to senior citizens. Third, because
the law impacts the prices of the goods or services of a particular establishment relative to its sales to senior citizens, its
profits or income/gross sales are affected. The extent of the impact would, however, depend on the profit margin of the
business establishment on a particular good or service. If a product costs 5.00 to produce and is sold at 10.00, then the
profit98 is 5.0099 or a profit margin100 of 50%.101

Under the assailed law, the aforesaid product would have to be sold at 8.00 to senior citizens yet the business would still
earn 3.00102 or a 30%103 profit margin. On the other hand, if the product costs 9.00 to produce and is required to be sold
at 8.00 to senior citizens, then the business would experience a loss of 1.00.104

But note that since not all customers of a business establishment are senior citizens, the business establishment may
continue to earn 1.00 from non-senior citizens which, in turn, can offset any loss arising from sales to senior citizens.

Fourth, when the law imposes the 20% discount in favor of senior citizens, it does not prevent the business establishment
from revising its pricing strategy.

By revising its pricing strategy, a business establishment can recoup any reduction of profits or income/gross sales which
would otherwise arise from the giving of the 20% discount. To illustrate, suppose A has two customers: X, a senior citizen,
and Y, a non-senior citizen. Prior to the law, A sells his products at 10.00 a piece to X and Y resulting in income/gross
sales of 20.00 (10.00 + 10.00). With the passage of the law, A must now sell his product to X at 8.00 (i.e., 10.00 less
20%) so that his income/gross sales would be 18.00 (8.00 + 10.00) or lower by 2.00. To prevent this from happening,
A decides to increase the price of his products to 11.11 per piece. Thus, he sells his product to X at 8.89 (i.e. , 11.11
less 20%) and to Y at 11.11. As a result, his income/gross sales would still be 20.00105 (8.89 + 11.11). The capacity,
then, of business establishments to revise their pricing strategy makes it possible for them not to suffer any reduction in
profits or income/gross sales, or, in the alternative, mitigate the reduction of their profits or income/gross sales even after
the passage of the law. In other words, business establishments have the capacity to adjust their prices so that they may
remain profitable even under the operation of the assailed law.

The Dissent, however, states that The explanation by the majority that private establishments can always increase their
prices to recover the mandatory discount will only encourage private establishments to adjust their prices upwards to the
prejudice of customers who do not enjoy the 20% discount. It was likewise suggested that if a company increases its prices,
despite the application of the 20% discount, the establishment becomes more profitable than it was before the
implementation of R.A. 7432. Such an economic justification is self-defeating, for more consumers will suffer from the price
increase than will benefit from the 20% discount. Even then, such ability to increase prices cannot legally validate a violation
of the eminent domain clause.106

But, if it is possible that the business establishment, by adjusting its prices, will suffer no reduction in its profits or
income/gross sales (or suffer some reduction but continue to operate profitably) despite giving the discount, what would be
the basis to strike down the law? If it is possible that the business establishment, by adjusting its prices, will not be unduly
burdened, how can there be a finding that the assailed law is an unconstitutional exercise of police power or eminent
domain? That there may be a burden placed on business establishments or the consuming public as a result of the operation
of the assailed law is not, by itself, a ground to declare it unconstitutional for this goes into the wisdom and expediency of
the law.

The cost of most, if not all, regulatory measures of the government on business establishments is ultimately passed on to
the consumers but that, by itself, does not justify the wholesale nullification of these measures. It is a basic postulate of our
democratic system of government that the Constitution is a social contract whereby the people have surrendered their
sovereign powers to the State for the common good.107

All persons may be burdened by regulatory measures intended for the common good or to serve some important
governmental interest, such as protecting or improving the welfare of a special class of people for which the Constitution
affords preferential concern. Indubitably, the one assailing the law has the heavy burden of proving that the regulation is
unreasonable, oppressive or confiscatory, or has gone "too far" as to amount to a "taking." Yet, here, the Dissent would
have this Court nullify the law without any proof of such nature.

Further, this Court is not the proper forum to debate the economic theories or realities that impelled Congress to shift from
the tax credit to the tax deduction scheme. It is not within our power or competence to judge which scheme is more or less
burdensome to business establishments or the consuming public and, thereafter, to choose which scheme the State should
use or pursue. The shift from the tax credit to tax deduction scheme is a policy determination by Congress and the Court
will respect it for as long as there is no showing, as here, that the subject regulation has transgressed constitutional
limitations. Unavoidably, the lack of evidence constrains the Dissent to rely on speculative and hypothetical argumentation
when it states that the 20% discount is a significant amount and not a minimal loss (which erroneously assumes that the
discount automatically results in a loss when it is possible that the profit margin is greater than 20% and/or the pricing
strategy can be revised to prevent or mitigate any reduction in profits or income/gross sales as illustrated above),108 and not
all private establishments make a 20% profit margin (which conversely implies that there are those who make more and,
thus, would not be greatly affected by this regulation).109

In fine, because of the possible scenarios discussed above, we cannot assume that the 20% discount results in a permanent
reduction in profits or income/gross sales, much less that business establishments are forced to operate at a loss under the
assailed law. And, even if we gratuitously assume that the 20% discount results in some degree of reduction in profits or
income/gross sales, we cannot assume that such reduction is arbitrary, oppressive or confiscatory. To repeat, there is no
actual proof to back up this claim, and it could be that the loss suffered by a business establishment was occasioned through
its fault or negligence in not adapting to the effects of the assailed law. The law uniformly applies to all business
establishments covered thereunder. There is, therefore, no unjust discrimination as the aforesaid business establishments
are faced with the same constraints. The necessity of proof is all the more pertinent in this case because, as similarly
observed by Justice Velasco in his Concurring Opinion, the law has been in operation for over nine years now. However,
the grim picture painted by petitioners on the unconscionable losses to be indiscriminately suffered by business
establishments, which should have led to the closure of numerous business establishments, has not come to pass. Verily,
we cannot invalidate the assailed law based on assumptions and conjectures. Without adequate proof, the presumption of
constitutionality must prevail. IV At this juncture, we note that the Dissent modified its original arguments by including a new
paragraph, to wit:

Section 9, Article III of the 1987 Constitution speaks of private property without any distinction. It does not state that there
should be profit before the taking of property is subject to just compensation. The private property referred to for purposes
of taking could be inherited, donated, purchased, mortgaged, or as in this case, part of the gross sales of private
establishments. They are all private property and any taking should be attended by corresponding payment of just
compensation. The 20% discount granted to senior citizens belong to private establishments, whether these establishments
make a profit or suffer a loss. In fact, the 20% discount applies to non-profit establishments like country, social, or golf clubs
which are open to the public and not only for exclusive membership. The issue of profit or loss to the establishments is
immaterial.110

Two things may be said of this argument. First, it contradicts the rest of the arguments of the Dissent. After it states that the
issue of profit or loss is immaterial, the Dissent proceeds to argue that the 20% discount is not a minimal loss 111 and that
the 20% discount forces business establishments to operate at a loss. 112

Even the obiter in Central Luzon Drug Corporation, 113 which the Dissent essentially adopts and relies on, is premised on
the permanent reduction of total revenues and the loss that business establishments will be forced to suffer in arguing that
the 20% discount constitutes a "taking" under the power of eminent domain. Thus, when the Dissent now argues that the
issue of profit or loss is immaterial, it contradicts itself because it later argues, in order to justify that there is a "taking" under
the power of eminent domain in this case, that the 20% discount forces business establishments to suffer a significant loss
or to operate at a loss. Second, this argument suffers from the same flaw as the Dissent's original arguments. It is an
erroneous characterization of the 20% discount. According to the Dissent, the 20% discount is part of the gross sales and,
hence, private property belonging to business establishments. However, as previously discussed, the 20% discount is not
private property actually owned and/or used by the business establishment. It should be distinguished from properties like
lands or buildings actually used in the operation of a business establishment which, if appropriated for public use, would
amount to a "taking" under the power of eminent domain. Instead, the 20% discount is a regulatory measure which impacts
the pricing and, hence, the profitability of business establishments. At the time the discount is imposed, no particular property
of the business establishment can be said to be "taken." That is, the State does not acquire or take anything from the
business establishment in the way that it takes a piece of private land to build a public road. While the 20% discount may
form part of the potential profits or income/gross sales114 of the business establishment, as similarly characterized by Justice
Bersamin in his Concurring Opinion, potential profits or income/gross sales are not private property, specifically cash or
money, already belonging to the business establishment. They are a mere expectancy because they are potential fruits of
the successful conduct of the business. Prior to the sale of goods or services, a business establishment may be subject to
State regulations, such as the 20% senior citizen discount, which may impact the level or amount of profits or income/gross
sales that can be generated by such establishment. For this reason, the validity of the discount is to be determined based
on its overall effects on the operations of the business establishment.

Again, as previously discussed, the 20% discount does not automatically result in a 20% reduction in profits, or, to align it
with the term used by the Dissent, the 20% discount does not mean that a 20% reduction in gross sales necessarily results.
Because (1) the profit margin of a product is not necessarily less than 20%, (2) not all customers of a business establishment
are senior citizens, and (3) the establishment may revise its pricing strategy, such reduction in profits or income/gross sales
may be prevented or, in the alternative, mitigated so that the business establishment continues to operate profitably. Thus,
even if we gratuitously assume that some degree of reduction in profits or income/gross sales occurs because of the 20%
discount, it does not follow that the regulation is unreasonable, oppressive or confiscatory because the business
establishment may make the necessary adjustments to continue to operate profitably. No evidence was presented by
petitioners to show otherwise. In fact, no evidence was presented by petitioners at all. Justice Leonen, in his Concurring
and Dissenting Opinion, characterizes "profits" (or income/gross sales) as an inchoate right. Another way to view it, as
stated by Justice Velasco in his Concurring Opinion, is that the business establishment merely has a right to profits. The
Constitution adverts to it as the right of an enterprise to a reasonable return on investment.115

Undeniably, this right, like any other right, may be regulated under the police power of the State to achieve important
governmental objectives like protecting the interests and improving the welfare of senior citizens. It should be noted though
that potential profits or income/gross sales are relevant in police power and eminent domain analyses because they may,
in appropriate cases, serve as an indicia when a regulation has gone "too far" as to amount to a "taking" under the power
of eminent domain. When the deprivation or reduction of profits or income/gross sales is shown to be unreasonable,
oppressive or confiscatory, then the challenged governmental regulation may be nullified for being a "taking" under the
power of eminent domain. In such a case, it is not profits or income/gross sales which are actually taken and appropriated
for public use. Rather, when the regulation causes an establishment to incur losses in an unreasonable, oppressive or
confiscatory manner, what is actually taken is capital and the right of the business establishment to a reasonable return on
investment. If the business losses are not halted because of the continued operation of the regulation, this eventually leads
to the destruction of the business and the total loss of the capital invested therein. But, again, petitioners in this case failed
to prove that the subject regulation is unreasonable, oppressive or confiscatory.

V.

The Dissent further argues that we erroneously used price and rate of return on investment control laws to justify the senior
citizen discount law. According to the Dissent, only profits from industries imbued with public interest may be regulated
because this is a condition of their franchises. Profits of establishments without franchises cannot be regulated permanently
because there is no law regulating their profits. The Dissent concludes that the permanent reduction of total revenues or
gross sales of business establishments without franchises is a taking of private property under the power of eminent domain.
In making this argument, it is unfortunate that the Dissent quotes only a portion of the ponencia The subject regulation
may be said to be similar to, but with substantial distinctions from, price control or rate of return on investment control laws
which are traditionally regarded as police power measures. These laws generally regulate public utilities or
industries/enterprises imbued with public interest in order to protect consumers from exorbitant or unreasonable pricing as
well as temper corporate greed by controlling the rate of return on investment of these corporations considering that they
have a monopoly over the goods or services that they provide to the general public. The subject regulation differs therefrom
in that (1) the discount does not prevent the establishments from adjusting the level of prices of their goods and services,
and (2) the discount does not apply to all customers of a given establishment but only to the class of senior citizens. x x x 116

The above paragraph, in full, states

The subject regulation may be said to be similar to, but with substantial distinctions from, price control or rate of return on
investment control laws which are traditionally regarded as police power measures. These laws generally regulate public
utilities or industries/enterprises imbued with public interest in order to protect consumers from exorbitant or unreasonable
pricing as well as temper corporate greed by controlling the rate of return on investment of these corporations considering
that they have a monopoly over the goods or services that they provide to the general public. The subject regulation differs
therefrom in that (1) the discount does not prevent the establishments from adjusting the level of prices of their goods and
services, and (2) the discount does not apply to all customers of a given establishment but only to the class of senior citizens.
Nonetheless, to the degree material to the resolution of this case, the 20% discount may be properly viewed as belonging
to the category of price regulatory measures which affects the profitability of establishments subjected thereto. (Emphasis
supplied)

The point of this paragraph is to simply show that the State has, in the past, regulated prices and profits of business
establishments. In other words, this type of regulatory measures is traditionally recognized as police power measures so
that the senior citizen discount may be considered as a police power measure as well. What is more, the substantial
distinctions between price and rate of return on investment control laws vis--vis the senior citizen discount law provide
greater reason to uphold the validity of the senior citizen discount law. As previously discussed, the ability to adjust prices
allows the establishment subject to the senior citizen discount to prevent or mitigate any reduction of profits or income/gross
sales arising from the giving of the discount. In contrast, establishments subject to price and rate of return on investment
control laws cannot adjust prices accordingly. Certainly, there is no intention to say that price and rate of return on investment
control laws are the justification for the senior citizen discount law. Not at all. The justification for the senior citizen discount
law is the plenary powers of Congress. The legislative power to regulate business establishments is broad and covers a
wide array of areas and subjects. It is well within Congress legislative powers to regulate the profits or income/gross sales
of industries and enterprises, even those without franchises. For what are franchises but mere legislative enactments?
There is nothing in the Constitution that prohibits Congress from regulating the profits or income/gross sales of industries
and enterprises without franchises. On the contrary, the social justice provisions of the Constitution enjoin the State to
regulate the "acquisition, ownership, use, and disposition" of property and its increments. 117

This may cover the regulation of profits or income/gross sales of all businesses, without qualification, to attain the objective
of diffusing wealth in order to protect and enhance the right of all the people to human dignity. 118

Thus, under the social justice policy of the Constitution, business establishments may be compelled to contribute to uplifting
the plight of vulnerable or marginalized groups in our society provided that the regulation is not arbitrary, oppressive or
confiscatory, or is not in breach of some specific constitutional limitation. When the Dissent, therefore, states that the "profits
of private establishments which are non-franchisees cannot be regulated permanently, and there is no such law regulating
their profits permanently,"119 it is assuming what it ought to prove. First, there are laws which, in effect, permanently regulate
profits or income/gross sales of establishments without franchises, and RA 9257 is one such law. And, second, Congress
can regulate such profits or income/gross sales because, as previously noted, there is nothing in the Constitution to prevent
it from doing so. Here, again, it must be emphasized that petitioners failed to present any proof to show that the effects of
the assailed law on their operations has been unreasonable, oppressive or confiscatory. The permanent regulation of profits
or income/gross sales of business establishments, even those without franchises, is not as uncommon as the Dissent
depicts it to be. For instance, the minimum wage law allows the State to set the minimum wage of employees in a given
region or geographical area. Because of the added labor costs arising from the minimum wage, a permanent reduction of
profits or income/gross sales would result, assuming that the employer does not increase the prices of his goods or services.
To illustrate, suppose it costs a company 5.00 to produce a product and it sells the same at 10.00 with a 50% profit
margin. Later, the State increases the minimum wage. As a result, the company incurs greater labor costs so that it now
costs 7.00 to produce the same product. The profit per product of the company would be reduced to 3.00 with a profit
margin of 30%. The net effect would be the same as in the earlier example of granting a 20% senior citizen discount. As
can be seen, the minimum wage law could, likewise, lead to a permanent reduction of profits. Does this mean that the
minimum wage law should, likewise, be declared unconstitutional on the mere plea that it results in a permanent reduction
of profits? Taking it a step further, suppose the company decides to increase the price of its product in order to offset the
effects of the increase in labor cost; does this mean that the minimum wage law, following the reasoning of the Dissent, is
unconstitutional because the consuming public is effectively made to subsidize the wage of a group of laborers, i.e.,
minimum wage earners? The same reasoning can be adopted relative to the examples cited by the Dissent which, according
to it, are valid police power regulations. Article 157 of the Labor Code, Sections 19 and 18 of the Social Security Law, and
Section 7 of the Pag-IBIG Fund Law would effectively increase the labor cost of a business establishment.1wphi1 This
would, in turn, be integrated as part of the cost of its goods or services. Again, if the establishment does not increase its
prices, the net effect would be a permanent reduction in its profits or income/gross sales. Following the reasoning of the
Dissent that "any form of permanent taking of private property (including profits or income/gross sales) 120 is an exercise of
eminent domain that requires the State to pay just compensation," 121 then these statutory provisions would, likewise, have
to be declared unconstitutional. It does not matter that these benefits are deemed part of the employees legislated wages
because the net effect is the same, that is, it leads to higher labor costs and a permanent reduction in the profits or
income/gross sales of the business establishments.122

The point then is this most, if not all, regulatory measures imposed by the State on business establishments impact, at
some level, the latters prices and/or profits or income/gross sales. 123
If the Court were to sustain the Dissents theory, then a wholesale nullification of such measures would inevitably result.
The police power of the State and the social justice provisions of the Constitution would, thus, be rendered nugatory. There
is nothing sacrosanct about profits or income/gross sales. This, we made clear in Carlos Superdrug Corporation:124

Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of petitioners
that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the absence of
evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis for its nullification in
view of the presumption of validity which every law has in its favor.

xxxx

The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of the
business. While the Constitution protects property rights petitioners must the realities of business and the State, in the
exercise of police power, can intervene in the operations of a business which may result in an impairment of property rights
in the process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the percept for the
protection of property, various laws and jurisprudence, particularly on agrarian reform and the regulation of contracts and
public utilities, continously serve as a reminder for the promotion of public good.

Undeniably, the success of the senior citizens program rests largely on the support imparted by petitioners and the other
private establishments concerned. This being the case, the means employed in invoking the active participation of the
private sector, in order to achieve the purpose or objective of the law, is reasonably and directly related. Without sufficient
proof that Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the same would be
unconscionably detrimental to petitioners, the Court will refrain form quashing a legislative act. 125

In conclusion, we maintain that the correct rule in determining whether the subject regulatory measure has amounted to a
"taking" under the power of eminent domain is the one laid down in Alalayan v. National Power Corporation126 and followed
in Carlos Superdurg Corporation127 consistent with long standing principles in police power and eminent domain analysis.
Thus, the deprivation or reduction of profits or income. Gross sales must be clearly shown to be unreasonable, oppressive
or confiscatory. Under the specific circumstances of this case, such determination can only be made upon the presentation
of competent proof which petitioners failed to do. A law, which has been in operation for many years and promotes the
welfare of a group accorded special concern by the Constitution, cannot and should not be summarily invalidated on a mere
allegation that it reduces the profits or income/gross sales of business establishments.

WHEREFORE, the Petition is hereby DISMISSED for lack of merit.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

G.R. No. 183905 April 16, 2009

GOVERNMENT SERVICE, INSURANCE SYSTEM, Petitioner,

vs.
THE HON. COURT OF APPEALS, (8TH DIVISION), ANTHONY V. ROSETE, MANUEL M. LOPEZ, FELIPE B. ALFONSO,
JESUS F. FRANCISCO, CHRISTIAN S. MONSOD, ELPIDIO L. IBAEZ, and FRANCIS GILES PUNO, Respondents.

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

G.R. No. 184275 April 16, 2009

SECURITIES AND EXCHANGE COMMISSION, COMMISSIONER JESUS ENRIQUE G. MARTINEZ IN HIS CAPACITY
AS OFFICER-IN-CHARGE OF THE SECURITIES AND EXCHANGE COMMISSION and HUBERT G. GUEVARA IN HIS
CAPACITY AS DIRECTOR OF THE COMPLIANCE AND ENFORCEMENT DEPT. OF SECURITIES Petitioners,
vs.
ANTHONY V. ROSETE, MANUEL M. LOPEZ, FELIPE B. ALFONSO, JESUS F. FRANCISCO, CHRISTIAN S. MONSOD,
ELPIDIO L. IBAEZ, and FRANCIS GILES Respondents.

DECISION

TINGA, J.:

These are the undisputed facts.

The annual stockholders meeting (annual meeting) of the Manila Electric Company (Meralco) was scheduled on 27 May
2008.1 In connection with the annual meeting, proxies 2 were required to be submitted on or before 17 May 2008, and the
proxy validation was slated for five days later, or 22 May. 3

In view of the resignation of Camilo Quiason,4 the position of corporate secretary of Meralco became vacant. 5 On 15 May
2008, the board of directors of Meralco designated Jose Vitug 6 to act as corporate secretary for the annual
meeting.7 However, when the proxy validation began on 22 May, the proceedings were presided over by respondent
Anthony Rosete (Rosete), assistant corporate secretary and in-house chief legal counsel of Meralco.8 Private respondents
nonetheless argue that Rosete was the acting corporate secretary of Meralco. 9 Petitioner Government Service Insurance
System (GSIS), a major shareholder in Meralco, was distressed over the proxy validation proceedings, and the resulting
certification of proxies in favor of the Meralco management.10

On 23 May 2008, GSIS filed a complaint with the Regional Trial Court (RTC) of Pasay City, docketed as R-PSY-08-05777-
C4 seeking the declaration of certain proxies as invalid.11 Three days

later, on 26 May, GSIS filed a Notice with the RTC manifesting the dismissal of the complaint. 12 On the same day, GSIS
filed an Urgent Petition13 with the Securities and Exchange Commission (SEC) seeking to restrain Rosete from "recognizing,
counting and tabulating, directly or indirectly, notionally or actually or in whatever way, form, manner or means, or otherwise
honoring the shares covered by" the proxies in favor of respondents Manuel Lopez, 14 Felipe Alfonso,15 Jesus
Francisco,16 Oscar Lopez, Christian Monsod, 17 Elpidio Ibaez,18 Francisco Giles-Puno19 "or any officer representing
MERALCO Management," and to annul and declare invalid said proxies. 20 GSIS also prayed for the issuance of a Cease
and Desist Order (CDO) to restrain the use of said proxies during the annual meeting scheduled for the following day. 21 A
CDO22 to that effect signed by SEC Commissioner Jesus Martinez was issued on 26 May 2008, the same day the complaint
was filed. During the annual meeting held on the following day, Rosete announced that the meeting would push through,
expressing the opinion that the CDO is null and void.23

On 28 May 2008, the SEC issued a Show Cause Order (SCO) 24 against private respondents, ordering them to appear
before the Commission on 30 May 2008 and explain why they should not be cited in contempt. On 29 May 2008,
respondents filed a petition for certiorari with prohibition 25 with the Court of Appeals, praying that the CDO and the SCO be
annulled. The petition was docketed as CA-G.R. SP No. 103692.

Many developments involving the Court of Appeals handling of CA-G.R. SP No. 103692 and the conduct of several of its
individual justices are recounted in our Resolution dated 9 September 2008 in A.M. No. 08-8-11-CA (Re: Letter Of Presiding
Justice Conrado M. Vasquez, Jr. On CA-G.R. SP No. 103692).26 On 23 July 2008, the Court of Appeals Eighth Division
promulgated a decision in the case with the following dispositive portion:

WHEREFORE, premises considered, the May 26, 2008 complaint filed by GSIS in the SEC is hereby DISMISSED due to
SECs lack of jurisdiction, due to forum shopping by respondent GSIS, and due to splitting of causes of action by respondent
GSIS. Consequently, the SECs undated cease and desist order and the SECs May 28, 2008 show cause order are hereby
DECLARED VOID AB INITIO and without legal effect and their implementation are hereby permanently restrained.

The May 26, 2008 complaint filed by GSIS in the SEC is hereby barred from being considered, out of equitable
considerations, as an election contest in the RTC, because the prescriptive period of 15 days from the May 27, 2008 Meralco
election to file an election contest in the RTC had already run its course, pursuant to Sec. 3, Rule 6 of the interim Rules of
Procedure Governing Intra-Corporate Controversies under R.A. No. 8799, due to deliberate act of GSIS in filing a complaint
in the SEC instead of the RTC.

Let seventeen (17) copies of this decision be officially TRANSMITTED to the Office of the Chief Justice and three (3) copies
to the Office of the Court Administrator:
 (1) for sanction by the Supreme Court against the "GSIS LAW OFFICE" for unauthorized practice of law,

(2) for sanction and discipline by the Supreme Court of GSIS lawyers led by Atty. Estrella Elamparo-Tayag, Atty.
Marcial C. Pimentel, Atty. Enrique L. Tandan III, and other GSIS lawyers for violation of Sec. 27 of Rule 138 of the
Revised Rules of Court, pursuant to Santayana v. Alampay, A.C. No. 5878, March 21, 2005 454 SCRA 1, and
pursuant to Land Bank of the Philippines v. Raymunda Martinez, G.R. No. 169008, August 14, 2007:

(a) for violating express provisions of law and defying public policy in deliberately displacing the Office of
the Government Corporate Counsel (OGCC) from its duty as the exclusive lawyer of GSIS, a government
owned and controlled corporation (GOCC), by admittedly filing and defending cases as well as appearing
as counsel for GSIS, without authority to do so, the authority belonging exclusively to the OGCC;

(b) for violating the lawyers oath for failing in their duty to act as faithful officers of the court by engaging in
forum shopping;

(c) for violating express provisions of law most especially those on jurisdiction which are mandatory; and

(d) for violating Sec. 3, Rule 2 of the 1997 Rules of Civil Procedure by deliberately splitting causes of action
in order to file multiple complaints: (i) in the RTC of Pasay City and (ii) in the SEC, in order to ensure a
favorable order.27

The promulgation of the said decision provoked a searing controversy, as detailed in our Resolution in A.M. No. 08-8-11-
CA. Nonetheless, the appellate courts decision spawned three different actions docketed with their own case numbers
before this Court. One of them, G.R. No. 183933, was initiated by a Motion for Extension of Time to File Petition for Review
filed by the Office of the Solicitor General (OSG) in behalf of the SEC, Commissioner Martinez in his capacity as officer-in-
charge of the SEC, and Hubert Guevarra in his capacity as Director of the Compliance and Enforcement Department of the
SEC.28 However, the OSG did not follow through with the filing of the petition for review adverted to; thus, on 19 January
2009, the Court resolved to declare G.R. No. 183933 closed and terminated. 29

The two remaining cases before us are docketed as G.R. No. 183905 and 184275. G.R. No. 183905 pertains to a petition
for certiorari and prohibition filed by GSIS, against the Court of Appeals, and respondents Rosete, Lopez, Alfonso,
Francisco, Monsod, Ibaez and Puno, all of whom serve in different corporate capacities with Meralco or First Philippines
Holdings Corporation, a major stockholder of Meralco and an affiliate of the Lopez Group of Companies. This petition seeks
of the Court to declare the 23 July 2008 decision of the Court of Appeals null and void, affirm the SECs jurisdiction over the
petition filed before it by GSIS, and pronounce that the CDO and the SCO orders are valid. This petition was filed in behalf
of GSIS by the "GSIS Law Office;" it was signed by the Chief Legal Counsel and Assistant Legal Counsel of GSIS, and
three self-identified "Attorney[s]," presumably holding lawyer positions in GSIS. 30

The OSG also filed the other petition, docketed as G.R. No. 184275. It identifies as its petitioners the SEC, Commissioner
Martinez in his capacity as OIC of the SEC, and Hubert Guevarra in his capacity as Director of the Compliance and
Enforcement Department of the SEC the same petitioners in the aborted petition for review initially docketed as G.R. No.
183933. Unlike what was adverted to in the motion for extension filed by the same petitioners in G.R. No. 183933, the
petition in G.R. No. 184275 is one for certiorari under Rule 65 as indicated on page 3 thereof,31 and not a petition for review.
Interestingly, save for the first page which leaves the docket number blank, all 86 pages of this petition for certiorari carry a
header wrongly identifying the pleading as the non-existent petition for review under G.R. No. 183933. This petition seeks
the "reversal" of the assailed decision of the Court of Appeals, the recognition of the jurisdiction of the SEC over the petition
of GSIS, and the affirmation of the CDO and SCO.

II.

Private respondents seek the expunction of the petition filed by the SEC in G.R. No. 184275. We agree that the petitioners
therein, namely: the SEC, Commissioner Marquez and Guevarra, are not real parties-in-interest to the dispute and thus
bereft of capacity to file the petition. By way of simple illustration, to argue otherwise is to say that the trial court judge, the
National Labor Relations Commission, or any quasi-judicial agency has the right to seek the review of an appellate court
decision reversing any of their rulings. That prospect, as any serious student of remedial law knows, is zero.

The Court, through the Resolution of the Third Division dated 2 September 2008, had resolved to treat the petition in G.R.
No. 184275 as a petition for review on certiorari, but withheld giving due course to it. 32 Under Section 1 of Rule 45, which
governs appeals by certiorari, the right to file the appeal is restricted to "a party," meaning that only the real parties-in-
interest who litigated the petition for certiorari before the Court of Appeals are entitled to appeal the same under Rule 45.
The SEC and its two officers may have been designated as respondents in the petition for certiorari filed with the Court of
Appeals, but under Section 5 of Rule 65 they are not entitled to be classified as real parties-in-interest. Under the provision,
the judge, court, quasi-judicial agency, tribunal, corporation, board, officer or person to whom grave abuse of discretion is
imputed (the SEC and its two officers in this case) are denominated only as public respondents. The provision further states
that "public respondents shall not appear in or file an answer or comment to the petition or any pleading therein." 33 Justice
Regalado explains:

[R]ule 65 involves an original special civil action specifically directed against the person, court, agency or party a quo which
had committed not only a mistake of judgment but an error of jurisdiction, hence should be made public respondents in that
action brought to nullify their invalid acts. It shall, however be the duty of the party litigant, whether in an appeal under Rule
45 or in a special civil action in Rule 65, to defend in his behalf and the party whose adjudication is assailed, as he is the
one interested in sustaining the correctness of the disposition or the validity of the proceedings.

xxx The party interested in sustaining the proceedings in the lower court must be joined as a co-respondent and he has the
duty to defend in his own behalf and in behalf of the court which rendered the questioned order. While there is nothing in
the Rules that prohibit the presiding judge of the court involved from filing his own answer and defending his questioned
order, the Supreme Court has reminded judges of the lower courts to refrain from doing so unless ordered by the
Supreme Court.34 The judicial norm or mode of conduct to be observed in trial and appellate courts is now
prescribed in the second paragraph of this section.

xxx

A person not a party to the proceedings in the trial court or in the Court of Appeals cannot maintain an action for
certiorari in the Supreme Court to have the judgment reviewed. 35

Rule 65 does recognize that the SEC and its officers should have been designated as public respondents in the petition for
certiorari filed with the Court of Appeals. Yet their involvement in the instant petition is not as original party-litigants, but as
the quasi-judicial agency and officers exercising the adjudicative functions over the dispute between the two contending
factions within Meralco. From the onset, neither the SEC nor Martinez or Guevarra has been considered as a real party-in-
interest. Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides that every action must be prosecuted or defended
in the name of the real party in interest, that is "the party who stands to be benefited or injured by the judgment in the suit,
or the party entitled to the avails of the suit." It would be facetious to assume that the SEC had any real interest or stake in
the intra-corporate dispute within Meralco.

We find our ruling in Hon. Santiago v. Court of Appeals36 quite apposite to the question at hand. Petitioner therein, a trial
court judge, had presided over an expropriation case. The litigants had arrived at an amicable settlement, but the judge
refused to approve the same, even declaring it invalid. The matter was elevated to the Court of Appeals, which promptly
reversed the trial court and approved the amicable settlement. The judge took the extraordinary step of filing in his own
behalf a petition for review on certiorari with this Court, assailing the decision of the Court of Appeals which had reversed
him. In disallowing the judges petition, the Court explained:

While the issue in the Court of Appeals and that raised by petitioner now is whether the latter abused his discretion in
nullifying the deeds of sale and in proceeding with the expropriation proceeding, that question is eclipsed by the concern of
whether Judge Pedro T. Santiago may file this petition at all.

And the answer must be in the negative, Section 1 of Rule 45 allows a party to appeal by certiorari from a judgment of the
Court of Appeals by filing with this Court a petition for review on certiorari. But petitioner judge was not a party either in the
expropriation proceeding or in the certiorari proceeding in the Court of Appeals. His being named as respondent in the Court
of Appeals was merely to comply with the rule that in original petitions for certiorari, the court or the judge, in his capacity
as such, should be named as party respondent because the question in such a proceeding is the jurisdiction of the court
itself (See Mayol v. Blanco, 61 Phil. 547 [19351, cited in Comments on the Rules of Court, Moran, Vol. II, 1979 ed., p. 471).
"In special proceedings, the judge whose order is under attack is merely a nominal party; wherefore, a judge in his official
capacity, should not be made to appear as a party seeking reversal of a decision that is unfavorable to the action taken by
him. A decent regard for the judicial hierarchy bars a judge from suing against the adverse opinion of a higher court,. . . ."
(Alcasid v. Samson, 102 Phil. 785, 740 [1957])

ACCORDINGLY, this petition is DENIED for lack of legal capacity to sue by the petitioner.37
Justice Isagani Cruz added, in a Concurring Opinion in Santiago: "The judge is not an active combatant in such proceeding
and must leave it to the parties themselves to argue their respective positions and for the appellate court to rule on the
matter without his participation."38

Note that in Santiago, the Court recognized the good faith of the judge, who perceived the amicable settlement "as a
manifestly iniquitous and illegal contract."39 The SEC could have similarly felt in good faith that the assailed Court of Appeals
decision had unduly impaired its prerogatives or caused some degree of hurt to it. Yet assuming that there are rights or
prerogatives peculiar to the SEC itself that the appellate court had countermanded, these can be vindicated in the petition
for certiorari filed by GSIS, whose legal capacity to challenge the Court of Appeals decision is without question. There simply
is no plausible reason for this Court to deviate from a time-honored rule that preserves the purity of our judicial and quasi-
judicial offices to accommodate the SECs distrust and resentment of the appellate courts decision. The expunction of the
petition in G.R. No. 184275 is accordingly in order.

At this point, only one petition remainsthe petition for certiorari filed by GSIS in G.R. No. 183905. Casting off the uncritical
and unimportant aspects, the two main issues for adjudication are as follows: (1) whether the SEC has jurisdiction over the
petition filed by GSIS against private respondents; and (2) whether the CDO and SCO issued by the SEC are valid.

II.

It is our resolute inclination that this case, which raises interesting questions of law, be decided solely on the merits, without
regard to the personalities involved or the well-reported drama preceding the petition. To that end, the Court has taken note
of reports in the media that GSIS and the Lopez group have taken positive steps to divest or significantly reduce their
respective interests in Meralco.40 These are developments that certainly ease the tension surrounding this case, not to
mention reason enough for the two groups to make an internal reassessment of their respective positions and interests in
relation to this case. Still, the key legal questions raised in the petition do not depend at all on the identity of any of the
parties, and would obtain the same denouement even if this case was lodged by unknowns as petitioners against similarly
obscure respondents.

With the objective to resolve the key questions of law raised in the petition, some of the issues raised diminish as peripheral.
For example, petitioners raise arguments tied to the behavior of individual justices of the Court of Appeals, particularly
former Justice Vicente Roxas, in relation to this case as it was pending before the appellate court. The Court takes
cognizance of our Resolution in A.M. No. 08-8-11-CA dated 9 September 2008, which duly recited the various anomalous
or unbecoming acts in relation to this case performed by two of the justices who decided the case in behalf of the Court of
Appealsformer Justice Roxas (the ponente) and Justice Bienvenido L. Reyes (the Chairman of the 8th Division) as well
as three other members of the Court of Appeals. At the same time, the consensus of the Court as it deliberated on A.M. No.
08-8-11-CA was to reserve comment or conclusion on the assailed decision of the Court of Appeals, in recognition of the
reality that however stigmatized the actions and motivations of Justice Roxas are, the decision is still the product of the
Court of Appeals as a collegial judicial body, and not of one or some rogue justices. The penalties levied by the Court on
these appellate court justices, in our estimation, redress the unwholesome acts which they had committed. At the same
time, given the jurisprudential importance of the questions of law raised in the petition, any result reached without squarely
addressing such questions would be unsatisfactory, perhaps derelict even.

III.

We now examine whether the SEC has jurisdiction over the petition filed by GSIS. To recall, SEC has sought to enjoin the
use and annul the validation, of the proxies issued in favor of several of the private respondents, particularly in connection
with the annual meeting.

A.

Jurisdiction is conferred by no other source but law. Both sides have relied upon provisions of Rep. Act No. 8799, otherwise
known as the Securities Regulation Code (SRC), its implementing rules (Amended Implementing Rules or AIRR-SRC), and
other related rules to support their competing contentions that either the SEC or the trial courts has exclusive original
jurisdiction over the dispute.

GSIS primarily anchors its argument on two correlated provisions of the SRC. These are Section 53.1 and Section 20.1,
which we cite:

SEC. 53. Investigations, Injunctions and Prosecution of Offenses . - 53.1. The Commission may, in its discretion, make
such investigations as it deems necessary to determine whether any person has violated or is about to violate any
provision of this Code, any rule, regulation or order thereunder, or any rule of an Exchange, registered securities
association, clearing agency, other self-regulatory organization, and may require or permit any person to file with it a
statement in writing, under oath or otherwise, as the Commission shall determine, as to all facts and circumstances
concerning the matter to be investigated. The Commission may publish information concerning any such violations, and to
investigate any fact, condition, practice or matter which it may deem necessary or proper to aid in the enforcement
of the provisions of this Code, in the prescribing of rules and regulations thereunder, or in securing information to
serve as a basis for recommending further legislation concerning the matters to which this Code relates: xxx
(emphasis supplied)

SEC. 20. Proxy Solicitations. 20.1. Proxies must be issued and proxy solicitation must be made in accordance with rules
and regulations to be issued by the Commission;

The argument, stripped of extravagance, is that since proxy solicitations following Section 20.1 have to be made in
accordance with rules and regulations issued by the SEC, it is the SEC under Section 53.1 that has the jurisdiction to
investigate alleged violations of the rules on proxy solicitations. The GSIS petition invoked AIRR-AIRR-SRC Rule 20,
otherwise known as "The Proxy Rule," which enumerates the requirements as to form of proxy and delivery of information
to security holders. According to GSIS, the information statement Meralco had filed with the SEC in connection with the
annual meeting did not contain any proxy form as required under AIRR-SRC Rule 20.

On the other hand, private respondents argue before us that under Section 5.2 of the SRC, the SECs jurisdiction over all
cases enumerated in Section 5 of Presidential Decree No. 902-A was transferred to the courts of general jurisdiction or the
appropriate regional trial court. The two particular classes of cases in the enumeration under Section 5 of Presidential
Decree No. 902-A which private respondents especially refer to are as follows:

xxx

(2) Controversies arising out of intra-corporate, partnership, or association relations, between and among stockholders,
members, or associates; or association of which they are stockholders, members, or associates, respectively;

3) Controversies in the election or appointment of directors, trustees, officers or managers of corporations, partnerships, or
associations;

xxx

In addition, private respondents cite the Interim Rules on Intra-Corporate Controversies (Interim Rules) promulgated by this
Court in 2001, most pertinently, Section 2 of Rule 6 (on Election Contests), which defines "election contests" as follows:

SEC. 2. Definition. An election contest refers to any controversy or dispute involving title or claim to any elective office in
a stock or nonstock corporation, the validation of proxies, the manner and validity of elections and the qualifications of
candidates, including the proclamation of winners, to the office of director, trustee or other officer directly elected by the
stockholders in a close corporation or by members of a nonstock corporation where the articles of incorporation or bylaws
so provide. (emphasis supplied)

The correct answer is not clear-cut, but there is one. In private respondents favor, the provisions of law they cite pertain
directly and exclusively to the statutory jurisdiction of trial courts acquired by virtue of the transfer of jurisdiction following
the passage of the SRC. In contrast, the SRC provisions relied upon by GSIS do not immediately or directly establish that
bodys jurisdiction over the petition, since it necessitates the linkage of Section 20 to Section 53.1 of the SRC before the
point can bear on us.

On the other hand, the distinction between "proxy solicitation" and "proxy validation" cannot be dismissed offhand. The right
of a stockholder to vote by proxy is generally established by the

Corporation Code,41 but it is the SRC which specifically regulates the form and use of proxies, more particularly the
procedure of proxy solicitation, primarily through Section 20.42 AIRR-SRC Rule 20 defines the
terms solicit and solicitation:

The terms solicit and solicitation include:

A. any request for a proxy whether or not accompanied by or included in a form of proxy
 B. any request to execute or not to execute, or to revoke, a proxy; or

C. the furnishing of a form of proxy or other communication to security holders under circumstance reasonably
calculated to result in the procurement, withholding or revocation of a proxy.

It is plain that proxy solicitation is a procedure that antecedes proxy validation. The former involves the securing and
submission of proxies, while the latter concerns the validation of such secured and submitted proxies. GSIS raises the
sensible point that there was no election yet at the time it filed its petition with the SEC, hence no proper election contest or
controversy yet over which the regular courts may have jurisdiction. And the point ties its cause of action to alleged
irregularities in the proxy solicitation procedure, a process that precedes either the validation of proxies or the annual
meeting itself.

Under Section 20.1, the solicitation of proxies must be in accordance with rules and regulations issued by the SEC, such
as AIRR-SRC Rule 4. And by virtue of Section 53.1, the SEC has the discretion "to make such investigations as it deems
necessary to determine whether any person has violated" any rule issued by it, such as AIRR-SRC Rule 4. The investigatory
power of the SEC established by Section 53.1 is central to its regulatory authority, most crucial to the public interest
especially as it may pertain to corporations with publicly traded shares. For that reason, we are not keen on pursuing private
respondents insistence that the GSIS complaint be viewed as rooted in an intra-corporate controversy solely within the
jurisdiction of the trial courts to decide. It is possible that an intra-corporate controversy may animate a disgruntled
shareholder to complain to the SEC a corporations violations of SEC rules and regulations, but that motive alone should
not be sufficient to deprive the SEC of its investigatory and regulatory powers, especially so since such powers are
exercisable on a motu proprio basis.

At the same time, Meralco raises the substantial point that nothing in the SRC empowers the SEC to annul or invalidate
improper proxies issued in contravention of Section 20. It cites that the penalties defined by the SEC itself for violation of
Section 20 or AIRR-SRC Rule 20 are limited to a reprimand/warning for the first offense, and pecuniary fines for succeeding
offenses.43 Indeed, if the SEC does not have the power to invalidate proxies solicited in violation of its promulgated rules,
serious questions may be raised whether it has the power to adjudicate claims of violation in the first place, since the relief
it may extend does not directly redress the cause of action of the complainant seeking the exclusion of the proxies.

There is an interesting point, which neither party raises, and it concerns Section 6(g) of Presidential Decree No. 902-A,
which states:

SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers:

xxx

(g) To pass upon the validity of the issuance and use of proxies and voting trust agreements for absent stockholders or
members;

xxx

As promulgated then, the provision would confer on the SEC the power to adjudicate controversies relating not only to proxy
solicitation, but also to proxy validation. Should the proposition hold true up to the present, the position of GSIS would have
merit, especially since Section 6 of Presidential Decree No. 902-A was not expressly repealed or abrogated by the SRC.44

Yet a closer reading of the provision indicates that such power of the SEC then was incidental or ancillary to the "exercise
of such jurisdiction." Note that Section 6 is immediately preceded by Section 5, which originally conferred on the SEC
"original and exclusive jurisdiction to hear and decide cases" involving "controversies in the election or appointments of
directors, trustees, officers or managers of such corporations, partnerships or associations." The cases referred to in Section
5 were transferred from the jurisdiction of the SEC to the regular courts with the passage of the SRC, specifically Section
5.2. Thus, the SECs power to pass upon the validity of proxies in relation to election controversies has effectively been
withdrawn, tied as it is to its abrogated jurisdictional powers.

Based on the foregoing, it is evident that the linchpin in deciding the question is whether or not the cause of action of GSIS
before the SEC is intimately tied to an election controversy, as defined under Section 5(c) of Presidential Decree No. 902-
A. To answer that, we need to properly ascertain the scope of the power of trial courts to resolve controversies in corporate
elections.
B.

Shares of stock in corporations may be divided into voting shares and non-voting shares, which are generally issued as
"preferred" or "redeemable" shares.45 Voting rights are exercised during regular or special meetings of stockholders; regular
meetings to be held annually on a fixed date, while special meetings may be held at any time necessary or as provided in
the by-laws, upon due notice.46 The Corporation Code provides for a whole range of matters which can be voted upon by
stockholders, including a limited set on which even non-voting stockholders are entitled to vote on.47 On any of these matters
which may be voted upon by stockholders, the proxy device is generally available. 48

Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the jurisdiction of the regular trial courts with
respect to election-related controversies is specifically confined to "controversies in the election or appointment of directors,
trustees, officers or managers of corporations, partnerships, or associations." Evidently, the jurisdiction of the regular courts
over so-called election contests or controversies under Section 5(c) does not extend to every potential subject that may be
voted on by shareholders, but only to the election of directors or trustees, in which stockholders are authorized to participate
under Section 24 of the Corporation Code.49

This qualification allows for a useful distinction that gives due effect to the statutory right of the SEC to regulate proxy
solicitation, and the statutory jurisdiction of regular courts over election contests or controversies. The power of the SEC to
investigate violations of its rules on proxy solicitation is unquestioned when proxies are obtained to vote on matters unrelated
to the cases enumerated under Section 5 of Presidential Decree No. 902-A. However, when proxies are solicited in relation
to the election of corporate directors, the resulting controversy, even if it ostensibly raised the violation of the SEC rules on
proxy solicitation, should be properly seen as an election controversy within the original and exclusive jurisdiction of the trial
courts by virtue of Section 5.2 of the SRC in relation to Section 5(c) of Presidential Decree No. 902-A.

The conferment of original and exclusive jurisdiction on the regular courts over such controversies in the election of
corporate directors must be seen as intended to confine to one body the adjudication of all related claims and controversy
arising from the election of such directors. For that reason, the aforequoted Section 2, Rule 6 of the Interim Rules broadly
defines the term "election contest" as encompassing all plausible incidents arising from the election of corporate directors,
including: (1) any controversy or dispute involving title or claim to any elective office in a stock or nonstock corporation,
(2) the validation of proxies, (3) the manner and validity of elections and (4) the qualifications of candidates, including the
proclamation of winners. If all matters anteceding the holding of such election which affect its manner and conduct, such as
the proxy solicitation process, are deemed within the original and exclusive jurisdiction of the SEC, then the prospect of
overlapping and competing jurisdictions between that body and the regular courts becomes frighteningly real. From the
language of Section 5(c) of Presidential Decree No. 902-A, it is indubitable that controversies as to the qualification of voting
shares, or the validity of votes cast in favor of a candidate for election to the board of directors are properly cognizable and
adjudicable by the regular courts exercising original and exclusive jurisdiction over election cases. Questions relating to the
proper solicitation of proxies used in such election are indisputably related to such issues, yet if the position of GSIS were
to be upheld, they would be resolved by the SEC and not the regular courts, even if they fall within "controversies in the
election" of directors.

The Court recognizes that GSISs position flirts with the abhorrent evil of split jurisdiction, 50 allowing as it does both the SEC
and the regular courts to assert jurisdiction over the same controversies surrounding an election contest. Should the
argument of GSIS be sustained, we would be perpetually confronted with the spectacle of election controversies being
heard and adjudicated by both the SEC and the regular courts, made possible through a mere allegation that the anteceding
proxy solicitation process was errant, but the competing cases filed with one objective in mind to affect the outcome of
the election of the board of directors. There is no definitive statutory provision that expressly mandates so untidy a
framework, and we are disinclined to construe the SRC in such a manner as to pave the way for the splitting of jurisdiction.

Unlike either Section 20.1 or Section 53.1, which merely alludes to the rule-making or investigatory power of the SEC,
Section 5 of Pres. Decree No. 902-A sets forth a definitive rule on jurisdiction, expressly granting as it does "original and
exclusive jurisdiction" first to the SEC, and now to the regular courts. The fact that the jurisdiction of the regular courts under
Section 5(c) is confined to the voting on election of officers, and not on all matters which may be voted upon by stockholders,
elucidates that the power of the SEC to regulate proxies remains extant and could very well be exercised when stockholders
vote on matters other than the election of directors.

That the proxy challenge raised by GSIS relates to the election of the directors of Meralco is undisputed. The controversy
was engendered by the looming annual meeting, during which the stockholders of Meralco were to elect the directors of the
corporation. GSIS very well knew of that fact. On 17 March 2008, the Meralco board of directors adopted a board resolution
stating:
RESOLVED that the board of directors of the Manila Electric Company (MERALCO) delegate, as it hereby delegates to the
Nomination & Governance Committee the authority to approve and adopt appropriate rules on: (1) nomination of
candidates for election to the board of directors; (2) appreciation of ballots during the election of members of the
board of directors; and (3) validation of proxies for regular or special meetings of the stockholders. 51

In addition, the Information Statement/Proxy form filed by First Philippine Holdings Corporation with the SEC pursuant to
Section 20 of the SRC, states:

REASON FOR SOLICITATION OF VOTES

The Solicitor is soliciting proxies from stockholders of the Company for the purpose of electing the directors named
under the subject headed Directors in this Statement as well as to vote the matters in the agenda of the meeting as
provided for in the Information Statement of the Company. All of the nominees are current directors of the Company.52

Under the circumstances, we do not see it feasible for GSIS to posit that its challenge to the solicitation or validation of
proxies bore no relation at all to the scheduled election of the board of directors of Meralco during the annual meeting. GSIS
very well knew that the controversy falls within the contemplation of an election controversy properly within the jurisdiction
of the regular courts. Otherwise, it would have never filed its original petition with the RTC of Pasay. GSIS may have
withdrawn its petition with the RTC on a new assessment made in good faith that the controversy falls within the jurisdiction
of the SEC, yet the reality is that the reassessment is precisely wrong as a matter of law.

IV.

The lack of jurisdiction of the SEC over the subject matter of GSISs petition necessarily invalidates the CDO and SDO
issued by that body. However, especially with respect to the CDO, there is need for this Court to squarely rule on the
question pertaining to its validity, if only for jurisprudential value and for the guidance of the SEC.

To recount the facts surrounding the issuance of the CDO, GSIS filed its petition with the SEC on 26 May 2008. The CDO,
six (6) pages in all with three (3) pages devoted to the tenability of granting the injunctive relief, was issued on the very
same day, 26 May 2008, without notice or hearing. The CDO bore the signature of Commissioner Jesus Martinez, identified
therein as "Officer-in-Charge," and nobody elses.

The provisions of the SRC relevant to the issuance of a CDO are as follows:

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency and shall have the
powers and functions provided by this Code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses
Law, the Financing Company Act and other existing laws. Pursuant thereto the Commission shall have, among others, the
following powers and functions:

xxx

(i) Issue cease and desist orders to prevent fraud or injury to the investing public;

xxx

[SEC.] 53.3. Whenever it shall appear to the Commission that any person has engaged or is about to engage in any act or
practice constituting a violation of any provision of this Code, any rule, regulation or order thereunder, or any rule of an
Exchange, registered securities association, clearing agency or other self-regulatory organization, it may issue an order to
such person to desist from committing such act or practice: Provided, however, That the Commission shall not charge any
person with violation of the rules of an Exchange or other self regulatory organization unless it appears to the Commission
that such Exchange or other self-regulatory organization is unable or unwilling to take action against such person. After
finding that such person has engaged in any such act or practice and that there is a reasonable likelihood of continuing,
further or future violations by such person, the Commission may issue ex-parte a cease and desist order for a maximum
period of ten (10) days, enjoining the violation and compelling compliance with such provision. The Commission may
transmit such evidence as may be available concerning any violation of any provision of this Code, or any rule, regulation
or order thereunder, to the Department of Justice, which may institute the appropriate criminal proceedings under this Code.

SEC. 64. Cease and Desist Order. 64.1. The Commission, after proper investigation or verification, motu proprio, or upon
verified complaint by any aggrieved party, may issue a cease and desist order without the necessity of a prior hearing if in
its judgment the act or practice, unless restrained, will operate as a fraud on investors or is otherwise likely to cause grave
or irreparable injury or prejudice to the investing public.

64.2. Until the Commission issues a cease and desist order, the fact that an investigation has been initiated or that a
complaint has been filed, including the contents of the complaint, shall be confidential. Upon issuance of a cease and desist
order, the Commission shall make public such order and a copy thereof shall be immediately furnished to each person
subject to the order.

64.3. Any person against whom a cease and desist order was issued may, within five (5) days from receipt of the order, file
a formal request for a lifting thereof. Said request shall be set for hearing by the Commission not later than fifteen (15) days
from its filing and the resolution thereof shall be made not later than ten (10) days from the termination of the hearing. If the
Commission fails to resolve the request within the time herein prescribed, the cease and desist order shall automatically be
lifted.

There are three distinct bases for the issuance by the SEC of the CDO. The first, allocated by Section 5(i), is predicated on
a necessity "to prevent fraud or injury to the investing public". No other requisite or detail is tied to this CDO authorized
under Section 5(i).

The second basis, found in Section 53.3, involves a determination by the SEC that "any person has engaged or is about to
engage in any act or practice constituting a violation of any provision of this Code, any rule, regulation or order thereunder,
or any rule of an Exchange, registered securities association, clearing agency or other self-regulatory organization." The
provision additionally requires a finding that "there is a reasonable likelihood of continuing [or engaging in] further or future
violations by such person." The maximum duration of the CDO issued under Section 53.3 is ten (10) days.

The third basis for the issuance of a CDO is Section 64. This CDO is founded on a determination of an act or practice, which
unless restrained, "will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice
to the investing public". Section 64.1 plainly provides three segregate instances upon which the SEC may issue the CDO
under this provision: (1) after proper investigation or verification, (2) motu proprio, or (3) upon verified complaint by any
aggrieved party. While no lifetime is expressly specified for the CDO under Section 64, the respondent to the CDO may file
a formal request for the lifting thereof, which the SEC must hear within fifteen (15) days from filing and decide within ten
(10) days from the hearing.

It appears that the CDO under Section 5(i) is similar to the CDO under Section 64.1. Both require a common finding of a
need to prevent fraud or injury to the investing public. At the same time, no mention is made whether the CDO defined
under Section 5(i) may be issued ex-parte, while the CDO under Section 64.1 requires "grave and irreparable" injury,
language absent in Section 5(i). Notwithstanding the similarities between Section 5(i) and Section 64.1, it remains clear that
the CDO issued under Section 53.3 is a distinct creation from that under Section 64.

The Court of Appeals cited the CDO as having been issued in violation of the constitutional provision on due process, which
requires both prior notice and prior hearing.53 Yet interestingly, the CDO as contemplated in Section 53.3 or in Section 64,
may be issued "ex-parte" (under Section 53.3) or "without necessity of hearing" (under Section 64.1). Nothing in these
provisions impose a requisite hearing before the CDO may be issued thereunder. Nonetheless, there are identifiable
requisite actions on the part of the SEC that must be undertaken before the CDO may be issued either under Section 53.3
or Section 64. In the case of Section 53.3, the SEC must make two findings: (1) that such person has engaged in any such
act or practice, and (2) that there is a reasonable likelihood of continuing, (or engaging in) further or future violations by
such person. In the case of Section 64, the SEC must adjudge that the act, unless restrained, will operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public."

Noticeably, the CDO is not precisely clear whether it was issued on the basis of Section 5.1, Section 53.3 or Section 64 of
the SRC. The CDO actually refers and cites all three provisions, yet it is apparent that a singular CDO could not be founded
on Section 5.1, Section 53.3 and Section 64 collectively. At the very least, the CDO under Section 53.3 and under Section
64 have their respective requisites and terms.

GSIS was similarly cagey in its petition before the SEC, it demurring to state whether it was seeking the CDO under Section
5.1, Section 53.3, or Section 64. Considering that injunctive relief generally avails upon the showing of a clear legal right to
such relief, the inability or unwillingness to lay bare the precise statutory basis for the prayer for injunction is an obvious
impediment to a successful

application. Nonetheless, the error of the SEC in granting the CDO without stating which kind of CDO it was issuing is more
unpardonable, as it is an act that contravenes due process of law.
We have particularly required, in administrative proceedings, that the body or tribunal "in all controversial questions, render
its decision in such a manner that the parties to the proceeding can know the various issues involved, and the reason for
the decision rendered."54 This requirement is vital, as its fulfillment would afford the adverse party the opportunity to
interpose a reasoned and intelligent appeal that is responsive to the grounds cited against it. The CDO extended by the
SEC fails to provide the needed reasonable clarity of the rationale behind its issuance.

The subject CDO first refers to Section 64, citing its provisions, then stating: "[p]rescinding from the aforequoted, there can
be no doubt whatsoever that the Commission is in fact mandated to take up, if expeditiously, any verified complaint praying
for the provisional remedy of a cease and desist order."55 The CDO then discusses the nature of the right of GSIS to obtain
the CDO, as well as "the urgent and paramount necessity to prevent serious damage because the stockholders meeting is
scheduled on May 28, 2008 x x x" Had the CDO stopped there, the unequivocal impression would have been that the order
is based on Section 64.

But the CDO goes on to cite Section 5.1, quoting paragraphs (i) and (n) in full, ratiocinating that under these provisions, the
SEC had "the power to issue cease and desist orders to prevent fraud or injury to the public and such other measures
necessary to carry out the Commissions role as regulator."56 Immediately thence, the CDO cites Section 53.3 as providing
"that whenever it shall appear to the Commission that nay person has engaged or is about to engage in any act or practice
constituting a violation of any provision, any rule, regulation or order thereunder, the Commission may issue ex-parte a
cease and desist order for a maximum period of ten (10) days, enjoining the violation and compelling compliance
therewith."57

The citation in the CDO of Section 5.1, Section 53.3 and Section 64 together may leave the impression that it is grounded
on all three provisions, and that may very well have been the intention of the SEC. Assuming that is so, it is legally
impermissible for the SEC to have utilized both Section 53.3 and Section 64 as basis for the CDO at the same time. The
CDO under Section 53.3 is premised on distinctly different requisites than the CDO under Section 64. Even more crucially,
the lifetime of the CDO under Section 53.3 is confined to a definite span of ten (10) days, which is not the case with the
CDO under Section 64. This CDO under Section 64 may be the object of a formal request for lifting within five (5) days from
its issuance, a remedy not expressly afforded to the CDO under Section 53.3.

Any respondent to a CDO which cites both Section 53.3 and Section 64 would not have an intelligent or adequate basis to
respond to the same. Such respondent would not know whether the CDO would have a determinate lifespan of ten (10)
days, as in Section 53.3, or would necessitate a formal request for lifting within five (5) days, as required under Section
64.1. This lack of clarity is to the obvious prejudice of the respondent, and is in clear defiance of the constitutional right to
due process of law. Indeed, the veritable mlange that the assailed CDO is, with its jumbled mixture of premises and
conclusions, the antithesis of due process.

Had the CDO issued by the SEC expressed the length of its term, perhaps greater clarity would have been offered on what
Section of the SRC it is based. However, the CDO is precisely silent as to its lifetime, thereby precluding much needed
clarification. In view of the statutory differences among the three CDOs under the SRC, it is essential that the SEC, in issuing
such injunctive relief, identify the exact provision of the SRC on which the CDO is founded. Only by doing so could the
adversely affected party be able to properly evaluate whatever his responses under the law.

To make matters worse for the SEC, the fact that the CDO was signed, much less apparently deliberated upon, by only by
one commissioner likewise renders the order fatally infirm.

The SEC is a collegial body composed of a Chairperson and four (4) Commissioners. 58 In order to constitute a quorum to
conduct business, the presence of at least three (3) Commissioners is required.59 In the leading case of GMCR v. Bell,60 we
definitively explained the nature of a collegial body, and how the act of one member of such body, even if the head, could
not be considered as that of the entire body itself. Thus:

We hereby declare that the NTC is a collegial body requiring a majority vote out of the three members of the commission in
order to validly decide a case or any incident therein. Corollarily, the vote alone of the chairman of the commission, as in
this case, the vote of Commissioner Kintanar, absent the required concurring vote coming from the rest of the membership
of the commission to at least arrive at a majority decision, is not sufficient to legally render an NTC order, resolution or
decision.

Simply put, Commissioner Kintanar is not the National Telecommunications Commission. He alone does not speak for and
in behalf of the NTC. The NTC acts through a three-man body, and the three members of the commission each has one
vote to cast in every deliberation concerning a case or any incident therein that is subject to the jurisdiction of the NTC.
When we consider the historical milieu in which the NTC evolved into the quasi-judicial agency it is now under Executive
Order No. 146 which organized the NTC as a three-man commission and expose the illegality of all memorandum circulars
negating the collegial nature of the NTC under Executive Order No. 146, we are left with only one logical conclusion: the
NTC is a collegial body and was a collegial body even during the time when it was acting as a one-man regime.61

We can adopt a virtually word-for-word observation with respect to former Commissioner Martinez and the SEC. Simply
put, Commissioner Martinez is not the SEC. He alone does not speak for and in behalf of the SEC. The SEC acts through
a five-person body, and the five members of the commission each has one vote to cast in every deliberation concerning a
case or any incident therein that is subject to the jurisdiction of the SEC.

GSIS attempts to defend former Commissioner Martinezs action, but its argument is without merit. It cites SEC Order No.
169, Series of 2008, whereby Martinez was designated as "Officer-in-Charge of the Commission for the duration of the
official travel of the Chairperson to Paris, France, to attend the 33rd Annual Conference of the [IOSCO] from May 26-30,
2008."62 As officer-in-charge (OIC), Martinez was "authorized to sign all documents and papers and perform all other acts
and deeds as may be necessary in the day-to-day operation of the Commission".1avvphi1

It is clear that Martinez was designated as OIC because of the official travel of only one member, Chairperson Fe Barin.
Martinez was not commissioned to act as the SEC itself. At most, he was to act in place of Chairperson Barin in the exercise
of her duties as Chairperson of the SEC. Under Section 4.3 of the SRC, the Chairperson is the chief executive officer of the
SEC, and thus empowered to "execute and administer the policies, decisions, orders and resolutions approved by the
Commission," as well as to "have the

general executive direction and supervision of the work and operation of the Commission." 63 It is in relation to the exercise
of these duties of the Chairperson, and not to the functions of the Commission, that Martinez was "authorized to sign all
documents and papers and perform all other acts and deeds as may be necessary in the day-to-day operation of the
Commission."

GSIS likewise cites, as authority for Martinezs unilateral issuance of the CDO, Section 4.6 of the SRC, which states that
the SEC "may, for purposes of efficiency, delegate any of its functions to any department or office of the Commission, an
individual Commissioner or staff member of the Commission except its review or appellate authority and its power to adopt,
alter and supplement any rule or regulation." Reliance on this provision is inappropriate. First, there is no convincing
demonstration that the SEC had delegated to Martinez the authority to issue the CDO. The SEC Order designating Martinez
as OIC only authorized him to exercise the functions of the absent Chairperson, and not of the Commission. If the Order is
read as enabling Martinez to issue the CDO in behalf of the Commission, it would be akin to conceding that the SEC
Chairperson, acting alone, can issue the CDO in behalf of the SEC itself. That again contravenes our holding in GMCR v.
Bell.

In addition, it is clear under Section 4.6 that the ability to delegate functions to a single commissioner does not extend to
the exercise of the review or appellate authority of the SEC. The issuance of the CDO is an act of the SEC itself done in the
exercise of its original jurisdiction to review actual cases or controversies. If it has not been clear to the SEC before, it should
be clear now that its power to issue a CDO can not, under the SRC, be delegated to an individual commissioner.

V.

In the end, even assuming that the events narrated in our Resolution in A.M. No. 08-8-11-CA constitute sufficient basis to
nullify the assailed decision of the Court of Appeals, still it remains clear that the reliefs GSIS seeks of this Court have no
basis in law. Notwithstanding the black mark that stains the appellate courts decision, the first paragraph of its fallo, to the
extent that it dismissed the complaint of GSIS with the SEC for lack of jurisdiction and consequently nullified the CDO and
SDO, defies unbiased scrutiny and deserves affirmation.

A.

In its dispositive portion, the Court of Appeals likewise pronounced that the complaint filed by GSIS with the SEC should be
barred from being considered "as an election contest in the RTC", given that the fifteen (15) day prescriptive period to file
an election contest with the RTC, under Section 3, Rule 6 of the Interim Rules, had already run its course. 64 Yet no such
relief was requested by private respondents in their petition for certiorari filed with the Court of Appeals 65 . Without disputing
the legal predicates surrounding this pronouncement, we note that its tenor, if not the text, unduly suggests an unwholesome
pre-emptive strike. Given our observations in A.M. No. 08-8-11-CA of the "undue interest" exhibited by the author of the
appellate court decision, such declaration is best deleted. Nonetheless, we do trust that any court or tribunal that may be
confronted with that premise adverted to by the Court of Appeals would know how to properly treat the same.
B.

Finally, we turn to the sanction on the lawyers of GSIS imposed by the Court of Appeals.

Nonetheless, we find that as a matter of law the sanctions are unwarranted. The charter of GSIS 66 is unique among
government owned or controlled corporations with original charter in that it allocates a role for its internal legal counsel that
is in conjunction with or complementary to the Office of the Government Corporate Counsel (OGCC), which is the statutory
legal counsel for GOCCs. Section 47 of GSIS charter reads:

SEC. 47. Legal Counsel.The Government Corporate Counsel shall be the legal adviser and consultant of GSIS, but GSIS
may assign to the Office of the Government Corporate Counsel (OGCC) cases for legal action or trial, issues for legal
opinions, preparation and review of contracts/agreements and others, as GSIS may decide or determine from time to time:
Provided, however, That the present legal services group in GSIS shall serve as its in-house legal counsel.

The GSIS may, subject to approval by the proper court, deputize any personnel of the legal service group to act as special
sheriff in the enforcement of writs and processes issued by the court, quasi-judicial agencies or administrative bodies in
cases involving GSIS.67

The designation of the OGCC as the legal counsel for GOCCs is set forth by statute, initially by Rep. Act No. 3838, then
reiterated by the Administrative Code of 1987. 68 Given that the designation is statutory in nature, there is no impediment for
Congress to impose a different role for the OGCC with respect to particular GOCCs it may charter. Congress appears to
have done so with respect to GSIS, designating the OGCC as a "legal adviser and consultant," rather than as counsel to
GSIS. Further, the law clearly vests unto GSIS the discretion, rather than the duty, to assign cases to the OGCC for legal
action, while designating the present legal services group of GSIS as "in-house legal counsel." This situates GSIS differently
from the Land Bank of the Philippines, whose own in-house lawyers have persistently argued before this Court to no avail
on their alleged right

to file petitions before us instead of the OGCC.69 Nothing in the Land Bank charter70 vested it with the discretion to choose
when to assign

cases to the OGCC, notwithstanding the establishment of its own Legal Department. 71

Congress is not bound to retain the OGCC as the primary or exclusive legal counsel of GSIS even if it performs such a role
for other GOCCs. To bind Congress to perform in that manner would be akin to elevating the OGCCs statutory role to
irrepealable status, and it is basic that Congress is barred from passing irrepealable laws.72

C.

We close by acknowledging that the surrounding circumstances behind these petitions are unfortunate, given the events as
narrated in A.M. No. 08-8-11-CA. While due punishment has been meted on the errant magistrates, the corporate world
may very well be reminded that the members of the judiciary are not to be viewed or treated as

mere pawns or puppets in the internecine fights businessmen and their associates wage against other businessmen in the
quest for corporate dominance. In the end, the petitions did afford this Court to clarify consequential points of law, points
rooted in principles which will endure long after the names of the participants in these cases have been forgotten.

WHEREFORE, the petition in G.R. No. 184275 is EXPUNGED for lack of capacity of the petitioner to bring forth the suit.

The petition in G.R. No. 183905 is DISMISSED for lack of merit except that the second and third paragraphs of the fallo of
the assailed decision dated 23 July 2008 of the Court of Appeals, including subparagraphs (1), (2), 2(a), 2(b), 2(c) and 2(d)
under the second paragraph, are hereby DELETED.

No pronouncements as to costs.

SO ORDERED.