1. G.R. No.
L-23645 October 29, 1968 for delivery in this country or abroad, shall be
BENJAMIN P. GOMEZ, petitioner-appellee,
vs.
ENRICO PALOMAR, in his capacity as Postmaster
General, HON. BRIGIDO R. VALENCIA, in his capacity
as Secretary of Public Works and Communications, and
DOMINGO GOPEZ, in his capacity as Acting Postmaster
of San Fernando, Pampanga, respondent-appellants.
Lorenzo P. Navarro and Narvaro Belar S. Navarro for
petitioner-appellee.
Office of the Solicitor General Arturo A. Alafriz, Assistant
Solicitor General Frine C. Zaballero and Solicitor Dominador
L. Quiroz for respondents-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act
1635,1 as amended by Republic Act 2631,2 which provides as
follows:
To help raise funds for the Philippine Tuberculosis
Society, the Director of Posts shall order for the
period from August nineteen to September thirty
every year the printing and issue of semi-postal
stamps of different denominations with face value
showing the regular postage charge plus the
additional amount of five centavos for the said
purpose, and during the said period, no mail matter
shall be accepted in the mails unless it bears such
semi-postal stamps: Provided, That no such
additional charge of five centavos shall be imposed
on newspapers. The additional proceeds realized
from the sale of the semi-postal stamps shall
constitute a special fund and be deposited with the
National Treasury to be expended by the Philippine
Tuberculosis Society in carrying out its noble work to
prevent and eradicate tuberculosis.
The respondent Postmaster General, in implementation of the
law, thereafter issued four (4) administrative orders numbered
3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28, 1958),
and 10 (July 15, 1960). All these administrative orders were
issued with the approval of the respondent Secretary of Public
Works and Communications.
The pertinent portions of Adm. Order 3 read as follows:
Such semi-postal stamps could not be made available
during the period from August 19 to September 30,
1957, for lack of time. However, two denominations
of such stamps, one at "5 + 5" centavos and another
at "10 + 5" centavos, will soon be released for use by
the public on their mails to be posted during the same
period starting with the year 1958.
xxx xxx xxx
During the period from August 19 to September 30
each year starting in 1958, no mail matter of
whatever class, and whether domestic or foreign,
posted at any Philippine Post Office and addressed
accepted for mailing unless it bears at least one such
semi-postal stamp showing the additional value of
five centavos intended for the Philippine
Tuberculosis Society.
In the case of second-class mails and mails prepaid
by means of mail permits or impressions of postage
meters, each piece of such mail shall bear at least one
such semi-postal stamp if posted during the period
above stated starting with the year 1958, in addition
to being charged the usual postage prescribed by
existing regulations. In the case of business reply
envelopes and cards mailed during said period, such
stamp should be collected from the addressees at the
time of delivery. Mails entitled to franking privilege
like those from the office of the President, members
of Congress, and other offices to which such
privilege has been granted, shall each also bear one
such semi-postal stamp if posted during the said
period.
Mails posted during the said period starting in 1958,
which are found in street or post-office mail boxes
without the required semi-postal stamp, shall be
returned to the sender, if known, with a notation
calling for the affixing of such stamp. If the sender is
unknown, the mail matter shall be treated as
nonmailable and forwarded to the Dead Letter Office
for proper disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3,
reads as follows:
In the case of the following categories of mail matter
and mails entitled to franking privilege which are not
exempted from the payment of the five centavos
intended for the Philippine Tuberculosis Society,
such extra charge may be collected in cash, for which
official receipt (General Form No. 13, A) shall be
issued, instead of affixing the semi-postal stamp in
the manner hereinafter indicated:
1. Second-class mail. Aside from the postage at
the second-class rate, the extra charge of five
centavos for the Philippine Tuberculosis Society shall
be collected on each separately-addressed piece of
second-class mail matter, and the total sum thus
collected shall be entered in the same official receipt
to be issued for the postage at the second-class rate.
In making such entry, the total number of pieces of
second-class mail posted shall be stated, thus: "Total
charge for TB Fund on 100 pieces . .. P5.00." The
extra charge shall be entered separate from the
postage in both of the official receipt and the Record
of Collections.
2. First-class and third-class mail permits. Mails
to be posted without postage affixed under permits
issued by this Bureau shall each be charged the usual
1
 postage, in addition to the five-centavo extra charge
intended for said society. The total extra charge thus
received shall be entered in the same official receipt
to be issued for the postage collected, as in
subparagraph 1.
3. Metered mail. For each piece of mail matter
impressed by postage meter under metered mail
permit issued by this Bureau, the extra charge of five
centavos for said society shall be collected in cash
and an official receipt issued for the total sum thus
received, in the manner indicated in subparagraph 1.
4. Business reply cards and envelopes. Upon
delivery of business reply cards and envelopes to
holders of business reply permits, the five-centavo
charge intended for said society shall be collected in
cash on each reply card or envelope delivered, in
addition to the required postage which may also be
paid in cash. An official receipt shall be issued for the
total postage and total extra charge received, in the
manner shown in subparagraph 1.
5. Mails entitled to franking privilege.
Government agencies, officials, and other persons
entitled to the franking privilege under existing laws
may pay in cash such extra charge intended for said
society, instead of affixing the semi-postal stamps to
their mails, provided that such mails are presented at
the post-office window, where the five-centavo extra
charge for said society shall be collected on each
piece of such mail matter. In such case, an official
receipt shall be issued for the total sum thus
collected, in the manner stated in subparagraph 1.
Mail under permits, metered mails and franked mails
not presented at the post-office window shall be
affixed with the necessary semi-postal stamps. If
found in mail boxes without such stamps, they shall
be treated in the same way as herein provided for
other mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts
"Government and its Agencies and Instrumentalities
Performing Governmental Functions." Adm. Order 10,
amending Adm. Order 3, as amended, exempts "copies of
periodical publications received for mailing under any class of
mail matter, including newspapers and magazines admitted as
second-class mail."
The FACTS. On September l5, 1963 the petitioner Benjamin
P. Gomez mailed a letter at the post office in San Fernando,
Pampanga. Because this letter, addressed to a certain Agustin
Aquino of 1014 Dagohoy Street, Singalong, Manila did not
bear the special anti-TB stamp required by the statute, it was
returned to the petitioner.
In view of this development, the petitioner brough suit for
declaratory relief in the Court of First Instance of Pampanga,
to test the constitutionality of the statute, as well as the
implementing administrative orders issued, contending that it
violates the equal protection clause of the Constitution as well
as the rule of uniformity and equality of taxation. The lower
court declared the statute and the orders unconstitutional;
hence this appeal by the respondent postal authorities.
For the reasons set out in this opinion, the judgment appealed
from must be reversed.
I.
Before reaching the merits, we deem it necessary to dispose of
the respondents' contention that declaratory relief is unavailing
because this suit was filed after the petitioner had committed a
breach of the statute. While conceding that the mailing by the
petitioner of a letter without the additional anti-TB stamp was
a violation of Republic Act 1635, as amended, the trial court
nevertheless refused to dismiss the action on the ground that
under section 6 of Rule 64 of the Rules of Court, "If before the
final termination of the case a breach or violation of ... a
statute ... should take place, the action may thereupon be
converted into an ordinary action."
The prime specification of an action for declaratory relief is
that it must be brought "before breach or violation" of the
statute has been committed. Rule 64, section 1 so provides.
Section 6 of the same rule, which allows the court to treat an
action for declaratory relief as an ordinary action, applies only
if the breach or violation occurs after the filing of the action
but before the termination thereof.3
Hence, if, as the trial court itself admitted, there had been a
breach of the statute before the firing of this action, then
indeed the remedy of declaratory relief cannot be availed of,
much less can the suit be converted into an ordinary action.
Nor is there merit in the petitioner's argument that the mailing
of the letter in question did not constitute a breach of the
statute because the statute appears to be addressed only to
postal authorities. The statute, it is true, in terms provides that
"no mail matter shall be accepted in the mails unless it bears
such semi-postal stamps." It does not follow, however, that
only postal authorities can be guilty of violating it by
accepting mails without the payment of the anti-TB stamp. It
is obvious that they can be guilty of violating the statute only
if there are people who use the mails without paying for the
additional anti-TB stamp. Just as in bribery the mere offer
constitutes a breach of the law, so in the matter of the anti-TB
stamp the mere attempt to use the mails without the stamp
constitutes a violation of the statute. It is not required that the
mail be accepted by postal authorities. That requirement is
relevant only for the purpose of fixing the liability of postal
officials.
Nevertheless, we are of the view that the petitioner's choice of
remedy is correct because this suit was filed not only with
respect to the letter which he mailed on September 15, 1963,
but also with regard to any other mail that he might send in the
future. Thus, in his complaint, the petitioner prayed that due
course be given to "other mails without the semi-postal stamps
which he may deliver for mailing ... if any, during the period
2
covered by Republic Act 1635, as amended, as well as other
mails hereafter to be sent by or to other mailers which bear the
required postage, without collection of additional charge of
five centavos prescribed by the same Republic Act." As one
whose mail was returned, the petitioner is certainly interested
in a ruling on the validity of the statute requiring the use of
additional stamps.
II.
We now consider the constitutional objections raised against
the statute and the implementing orders.
1. It is said that the statute is violative of the equal protection
clause of the Constitution. More specifically the claim is made
that it constitutes mail users into a class for the purpose of the
tax while leaving untaxed the rest of the population and that
even among postal patrons the statute discriminatorily grants
exemption to newspapers while Administrative Order 9 of the
respondent Postmaster General grants a similar exemption to
offices performing governmental functions. .
The five centavo charge levied by Republic Act 1635, as
amended, is in the nature of an excise tax, laid upon the
exercise of a privilege, namely, the privilege of using the
mails. As such the objections levelled against it must be
viewed in the light of applicable principles of taxation.
To begin with, it is settled that the legislature has the inherent
power to select the subjects of taxation and to grant
exemptions.4 This power has aptly been described as "of wide
range and flexibility."5 Indeed, it is said that in the field of
taxation, more than in other areas, the legislature possesses the
greatest freedom in classification.6 The reason for this is that
traditionally, classification has been a device for fitting tax
programs to local needs and usages in order to achieve an
equitable distribution of the tax burden.7
That legislative classifications must be reasonable is of course
undenied. But what the petitioner asserts is that statutory
classification of mail users must bear some reasonable
relationship to the end sought to be attained, and that absent
such relationship the selection of mail users is constitutionally
impermissible. This is altogether a different proposition. As
explained in Commonwealth v. Life Assurance Co.:8
While the principle that there must be a reasonable
relationship between classification made by the
legislation and its purpose is undoubtedly true in
some contexts, it has no application to a measure
whose sole purpose is to raise revenue ... So long as
the classification imposed is based upon some
standard capable of reasonable comprehension, be
that standard based upon ability to produce revenue
or some other legitimate distinction, equal protection
of the law has been afforded. See Allied Stores of
Ohio, Inc. v. Bowers, supra, 358 U.S. at 527, 79 S.
Ct. at 441; Brown Forman Co. v. Commonwealth of
Kentucky, 2d U.S. 56, 573, 80 S. Ct. 578, 580 (1910).
We are not wont to invalidate legislation on equal protection
grounds except by the clearest demonstration that it sanctions
invidious discrimination, which is all that the Constitution
forbids. The remedy for unwise legislation must be sought in
the legislature. Now, the classification of mail users is not
without any reason. It is based on ability to pay, let alone the
enjoyment of a privilege, and on administrative convinience.
In the allocation of the tax burden, Congress must have
concluded that the contribution to the anti-TB fund can be
assured by those whose who can afford the use of the mails.
The classification is likewise based on considerations of
administrative convenience. For it is now a settled principle of
law that "consideration of practical administrative
convenience and cost in the administration of tax laws afford
adequate ground for imposing a tax on a well recognized and
defined class."9 In the case of the anti-TB stamps,
undoubtedly, the single most important and influential
consideration that led the legislature to select mail users as
subjects of the tax is the relative ease and convenienceof
collecting the tax through the post offices. The small amount
of five centavos does not justify the great expense and
inconvenience of collecting through the regular means of
collection. On the other hand, by placing the duty of collection
on postal authorities the tax was made almost self-enforcing,
with as little cost and as little inconvenience as possible.
And then of course it is not accurate to say that the statute
constituted mail users into a class. Mail users were already a
class by themselves even before the enactment of the statue
and all that the legislature did was merely to select their class.
Legislation is essentially empiric and Republic Act 1635, as
amended, no more than reflects a distinction that exists in fact.
As Mr. Justice Frankfurter said, "to recognize differences that
exist in fact is living law; to disregard [them] and concentrate
on some abstract identities is lifeless logic."10
Granted the power to select the subject of taxation, the State's
power to grant exemption must likewise be conceded as a
necessary corollary. Tax exemptions are too common in the
law; they have never been thought of as raising issues under
the equal protection clause.
It is thus erroneous for the trial court to hold that because
certain mail users are exempted from the levy the law and
administrative officials have sanctioned an invidious
discrimination offensive to the Constitution. The application
of the lower courts theory would require all mail users to be
taxed, a conclusion that is hardly tenable in the light of
differences in status of mail users. The Constitution does not
require this kind of equality.
As the United States Supreme Court has said, the legislature
may withhold the burden of the tax in order to foster what it
conceives to be a beneficent enterprise.11 This is the case of
newspapers which, under the amendment introduced by
Republic Act 2631, are exempt from the payment of the
additional stamp.
3
As for the Government and its instrumentalities, their
exemption rests on the State's sovereign immunity from
taxation. The State cannot be taxed without its consent and
such consent, being in derogation of its sovereignty, is to be
strictly construed.12 Administrative Order 9 of the respondent
Postmaster General, which lists the various offices and
instrumentalities of the Government exempt from the payment
of the anti-TB stamp, is but a restatement of this well-known
principle of constitutional law.
The trial court likewise held the law invalid on the ground that
it singles out tuberculosis to the exclusion of other diseases
which, it is said, are equally a menace to public health. But it
is never a requirement of equal protection that all evils of the
same genus be eradicated or none at all.13 As this Court has
had occasion to say, "if the law presumably hits the evil where
it is most felt, it is not to be overthrown because there are
other instances to which it might have been applied."14
2. The petitioner further argues that the tax in question is
invalid, first, because it is not levied for a public purpose as no
special benefits accrue to mail users as taxpayers, and second,
because it violates the rule of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if
by public purpose the petitioner means benefit to a taxpayer as
a return for what he pays, then it is sufficient answer to say
that the only benefit to which the taxpayer is constitutionally
entitled is that derived from his enjoyment of the privileges of
living in an organized society, established and safeguarded by
the devotion of taxes to public purposes. Any other view
would preclude the levying of taxes except as they are used to
compensate for the burden on those who pay them and would
involve the abandonment of the most fundamental principle of
government that it exists primarily to provide for the
common good.15
Nor is the rule of uniformity and equality of taxation infringed
by the imposition of a flat rate rather than a graduated tax. A
tax need not be measured by the weight of the mail or the
extent of the service rendered. We have said that
considerations of administrative convenience and cost afford
an adequate ground for classification. The same considerations
may induce the legislature to impose a flat tax which in effect
is a charge for the transaction, operating equally on all persons
within the class regardless of the amount involved. 16 As Mr.
Justice Holmes said in sustaining the validity of a stamp act
which imposed a flat rate of two cents on every $100 face
value of stock transferred:
One of the stocks was worth $30.75 a share of the
face value of $100, the other $172. The inequality of
the tax, so far as actual values are concerned, is
manifest. But, here again equality in this sense has to
yield to practical considerations and usage. There
must be a fixed and indisputable mode of
ascertaining a stamp tax. In another sense, moreover,
there is equality. When the taxes on two sales are
equal, the same number of shares is sold in each case;
that is to say, the same privilege is used to the same
extent. Valuation is not the only thing to be
considered. As was pointed out by the court of
appeals, the familiar stamp tax of 2 cents on checks,
irrespective of income or earning capacity, and many
others, illustrate the necessity and practice of
sometimes substituting count for weight ...17
According to the trial court, the money raised from the sales of
the anti-TB stamps is spent for the benefit of the Philippine
Tuberculosis Society, a private organization, without
appropriation by law. But as the Solicitor General points out,
the Society is not really the beneficiary but only the agency
through which the State acts in carrying out what is essentially
a public function. The money is treated as a special fund and
as such need not be appropriated by law.18
3. Finally, the claim is made that the statute is so broadly
drawn that to execute it the respondents had to issue
administrative orders far beyond their powers. Indeed, this is
one of the grounds on which the lower court invalidated
Republic Act 1631, as amended, namely, that it constitutes an
undue delegation of legislative power.
Administrative Order 3, as amended by Administrative Orders
7 and 10, provides that for certain classes of mail matters
(such as mail permits, metered mails, business reply cards,
etc.), the five-centavo charge may be paid in cash instead of
the purchase of the anti-TB stamp. It further states that mails
deposited during the period August 19 to September 30 of
each year in mail boxes without the stamp should be returned
to the sender, if known, otherwise they should be treated as
nonmailable.
It is true that the law does not expressly authorize the
collection of five centavos except through the sale of anti-TB
stamps, but such authority may be implied in so far as it may
be necessary to prevent a failure of the undertaking. The
authority given to the Postmaster General to raise funds
through the mails must be liberally construed, consistent with
the principle that where the end is required the appropriate
means are given.19
The anti-TB stamp is a distinctive stamp which shows on its
face not only the amount of the additional charge but also that
of the regular postage. In the case of business reply cards, for
instance, it is obvious that to require mailers to affix the anti-
TB stamp on their cards would be to make them pay much
more because the cards likewise bear the amount of the
regular postage.
It is likewise true that the statute does not provide for the
disposition of mails which do not bear the anti-TB stamp, but
a declaration therein that "no mail matter shall be accepted in
the mails unless it bears such semi-postal stamp" is a
declaration that such mail matter is nonmailable within the
meaning of section 1952 of the Administrative Code.
Administrative Order 7 of the Postmaster General is but a
restatement of the law for the guidance of postal officials and
employees. As for Administrative Order 9, we have already
said that in listing the offices and entities of the Government
4
exempt from the payment of the stamp, the respondent
Postmaster General merely observed an established principle,
namely, that the Government is exempt from taxation.
ACCORDINGLY, the judgment a quo is reversed, and the
complaint is dismissed, without pronouncement as to costs.
2. G.R. No. L-16315 May 30, 1964
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
HAWAIIAN-PHILIPPINE COMPANY, respondent.
Office of the Solicitor General for petitioner.
Hilado and Hilado for respondent.
DIZON, J.:
This is a petition filed by the Commissioner of Internal
Revenue for the review of the decision of the Court of Tax
Appeals in C.T.A. Case No. 598 ordering him to refund to
respondent Hawaiian-Philippine Company the amount of
P8,411.99 representing fixed and percentage taxes assessed
against it and which the latter had deposited with the City
Treasurer of Silay, Occidental Negros.
The undisputed facts of this ease, as found by the Court of Tax
Appeals, are as follows:
The petitioner, a corporation duly organized in
accordance with law, is operating a sugar central in
the City of Silay, Occidental Negros. It produces
centrifugal sugar from sugarcane supplied by
planters. The processed sugar is divided between the
planters and the petitioner in the proportion stipulated
in the milling contracts, and thereafter is deposited in
the warehouses of the latter. (Pp. 4-5, t.s.n.) For the
sugar deposited by the planters, the petitioner issues
the corresponding warehouse receipts of "quedans".
It does not collect storage charges on the sugar
deposited in its warehouse during the first 90 days
period counted from the time it is extracted from the
sugarcane. Upon the lapse of the first ninety days and
up to the beginning of the next milling season, it
collects a fee of P0.30 per picul a month. Henceforth,
if the sugar is not yet withdrawn, a penalty of P0.25
per picul or fraction thereof a month is imposed.
(Exhibits "B-1", "C-1", "D-1", "B-2", "C-2", p. 10,
t.s.n.)
The storage of sugar is carried in the books of the
company under Account No. 5000, denominated
"Manufacturing Cost Ledger Control"; the storage
fees under Account No. 521620; the expense
accounts of the factory under Account No. 5200; and
the so-called "Sugar Bodega Operations" under
Account No. 5216, under which is a Sub-Account
No. 20, captioned, "Credits". (Pp. 16-17, t.s.n.,
Exhibit "F".) The collections from storage after the
lapse of the first 90 days period are entered in the
company's books as debit to CASH, and credit to
Expense Account No. 2516-20 (p. 18, t.s.n.).
The credit for storage charges decreased the
deductible expense resulting in the corresponding
increase of the taxable income of the petitioner. This
is reflected by the entries enclosed in parenthesis in
Exhibit "G", under the heading "Storage Charges".
(P. 18, t.s.n.) The alleged reason for this accounting
operation is that, inasmuch as the "Sugar Bodega
Operations" is considered as an expense account,
entries under it are "debits". Similarly, since "Storage
Charges" constitute "credit", the corresponding
figures (see Exhibit "C") are enclosed in parenthesis
as they decrease the expenses of maintaining the
sugar warehouses.
Upon investigation conducted by the Bureau, it was
found that during the years 1949 to 1957, the
petitioner realized from collected storage fees a total
gross receipts of P212,853.00, on the basis of which
the respondent determined the petitioner's liability for
fixed and percentage taxes, 25% surcharge, and
administrative penalty in the aggregate amount of
P8,411.99 (Exhibit "5", p. 11, BIR rec.)
On October 20, 1958, the petitioner deposited the
amount of P8,411.99 with the Office of the City
Treasurer of Silay. (Exhibits "I" and "I-1", pp. 59-60,
CTA rec.) Later, it filed its petition for review before
this Court (Exhibit "K", p. 25, CTA rec.)
After due hearing the Court of Tax Appeals rendered the
appealed decision.
The only issue to be resolved in the case at bar is whether or
not, upon the facts stated above, petitioner is a warehouseman
liable for the payment of the fixed and percentage taxes
prescribed in Sections 182 and 191 of the National Internal
Revenue Code which read as follows:
SEC. 182. FIXED TAXES (a) ON BUSINESS (1)
PERSONS SUBJECT TO PERCENTAGE TAX.
Unless otherwise provided every person engaging in
a business on which the percentage tax is imposed
shall pay a fixed annual tax of twenty pesos. ... .
SEC. 191. PERCENTAGE TAX ON ROAD,
BUILDING, IRRIGATION, ARTESIAN WELL,
WATERWORKS, AND OTHER CONSTRUCTION
WORK CONTRACTORS, PROPRIETORS OR
OPERATORS OF DOCKYARD, AND OTHERS. ...
warehousemen; plumbers, smiths; house or sign
painters; lithographers, publishers, except those
engaged in the publication or printing and publication
of any newspaper, magazine, review or bulletin
which appear at regular intervals with fixed prices for
subscription and sale, and which is not devoted
principally to the publication of advertisements;
printers and bookbinders, business agents and other
5
 independent contractors, shall pay a tax equivalent to
THREE PERCENTUM of their gross receipts. ... .
Respondent disclaims liability under the provisions quoted
above, alleging that it is not engaged the business of storing its
planters' sugar for profit; that the maintenance of its
warehouses is merely incidental to its business of
manufacturing sugar and in compliance with its obligation to
its planters. We find this to be without merit.
It is clear from the facts of the case that, after manufacturing
the sugar of its planters, respondent stores it in its warehouses
and issues the corresponding "quedans" to the planters who
own the sugar; that while the sugar is stored free during the
first ninety days from the date the it "quedans" are issued, the
undisputed fact is that, upon the expiration of said period,
respondent charger, and collects storage fees; that for the
period beginning 1949 to 1957, respondent's total gross
receipts from this particular enterprise amounted to
P212,853.00.
A warehouseman has been defined as one who receives and
stores goods of another for compensation (44 Words and
Phrases, p. 635). For one to be considered engaged in the
warehousing business, therefore, it is sufficient that he
receives goods owned by another for storage, and collects fees
in connection with the same. In fact, Section 2 of the General
Bonded Warehouse Act, as amended, defines a warehouseman
as "a person engaged in the business of receiving commodity
for storage."
That respondent stores its planters' sugar free of charge for the
first ninety days does not exempt it from liability under the
legal provisions under consideration. Were such fact sufficient
for that purpose, the law imposing the tax would be rendered
ineffectual. 1wph1.t effective 01 January 1993, providing, in part, as follows:
Neither is the fact that respondent's warehousing business is
carried in addition to, or in relation with, the operation of its
sugar central sufficient to exempt it from payment of the tax
prescribed in the legal provisions quoted heretofore Under
Section 178 of the National Internal Revenue Code, the tax on
business is payable for every separate or distinct establishment
or place where business subject to the tax is conducted, and
one line of business or occupation does not become exempt by
being conducted with some other business or occupation for
which such tax has been paid.
Lastly, respondent's contention that the imposition of the tax
under consideration would amount to double taxation is
likewise without merit. As is clear from the facts, respondent's
warehousing business, although carried on in relation to the
operation of its sugar central, is a distinct and separate
business taxable under a different provision of the Tax Code.
There can be no double taxation where the State merely
imposes a tax on every separate and distinct business in which
a party is engaged. Moreover, in Manufacturers Life insurance
Co. vs. Meer, G.R. No. L-2910, June 29, 1951; City of Manila
vs. Inter-Island Gas service, G.R. L-8799, August 31, 1956,
We have ruled that there is no prohibition against double or
multiple taxation in this jurisdiction.
WHEREFORE, the decision appealed from is reversed and set
aside, with costs.
3. [G.R. No. 131359. May 5, 1999]
MANILA ELECTRIC COMPANY, petitioner
vs. PROVINCE OF LAGUNA and BENITO R.
BALAZO, in his capacity as Provincial Treasurer
of Laguna, respondents.
DECISION
VITUG, J.:
On various dates, certain municipalities of the Province
of Laguna including, Bian, Sta Rosa, San Pedro, Luisiana,
Calauan and Cabuyao, by virtue of existing laws then in
effect, issued resolutions through their respective municipal
councils granting franchise in favor of petitioner Manila
Electric Company (MERALCO) for the supply of electric
light, heat and power within their concerned areas. On 19
January 1983, MERALCO was likewise granted a franchise
by the National Electrification Administration to operate an
electric light and power service in the Municipality of
Calamba, Laguna.
On 12 September 1991, Republic Act No. 7160,
otherwise known as the Local Government Code of 1991, was
enacted to take effect on 01 January 1992 enjoining local
government units to create their own sources of revenue and to
levy taxes, fees and charges, subject to the limitations
expressed therein, consistent with the basic policy of local
autonomy. Pursuant to the provisions of the Code, respondent
province enacted Laguna Provincial Ordinance No. 01-92,
Sec. 2.09. Franchise Tax. There is hereby imposed a tax on
businesses enjoying a franchise, at a rate of fifty percent
(50%) of one percent (1%) of the gross annual receipts, which
shall include both cash sales and sales on account realized
during the preceding calendar year within this province,
including the territorial limits on any city located in the
province[1]
On the basis of the above ordinance, respondent
Provincial Treasurer sent a demand letter to MERALCO for
the corresponding tax payment. Petitioner MERALCO paid
the tax, which then amounted to P19,520,628.42, under
protest. A formal claim for refund was thereafter sent by
MERALCO to the Provincial Treasurer of Laguna claiming
that the franchise tax it had paid and continued to pay to the
National Government pursuant to P.D. 551 already included
the franchise tax imposed by the Provincial Tax
Ordinance. MERALCO contended that the imposition of a
franchise tax under Section 2.09 of Laguna Provincial
Ordinance No. 01-92, insofar as it concerned MERALCO,
contravened the provisions of Section 1 of P.D. 551 which
read:
6
Any provision of law or local ordinance to the contrary
notwithstanding, the franchise tax payable by all grantees of
franchises to generate, distribute and sell electric current for
light, heat and power shall be two per cent (2%) of their gross
receipts received from the sale of electric current and from
transactions incident to the generation, distribution and sale of
electric current.
Such franchise tax shall be payable to the Commissioner of
Internal Revenue or his duly authorized representative on or
before the twentieth day of the month following the end of
each calendar quarter or month, as may be provided in the
respective franchise or pertinent municipal regulation and
shall, any provision of the Local Tax Code or any other law to
the contrary notwithstanding, be in lieu of all taxes and
assessments of whatever nature imposed by any national or
local authority on earnings, receipts, income and privilege of
generation, distribution and sale of electric current.
On 28 August 1995, the claim for refund of petitioner
was denied in a letter signed by Governor Jose D. Lina. In
denying the claim, respondents relied on a more recent
law, i.e., Republic Act No. 7160 or the Local Government
Code of 1991, than the old decree invoked by petitioner.
On 14 February 1996, petitioner MERALCO filed with
the Regional Trial Court of Sta Cruz, Laguna, a complaint for
refund, with a prayer for the issuance of a writ of preliminary
injunction and/or temporary restraining order, against the
Province of Laguna and also Benito R. Balazo in his capacity
as the Provincial Treasurer of Laguna. Aside from the amount
of P19,520,628.42 for which petitioner MERALCO had
priority made a formal request for refund, petitioner thereafter
likewise made additional payments under protest on various
dates totaling P27,669,566.91.
The trial court, in its assailed decision of 30 September
1997, dismissed the complaint and concluded:
WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING
CONSIDERATIONS, JUDGMENT is hereby rendered in
favor of the defendants and against the plaintiff, by:
1. Ordering the dismissal of the Complaint; and
2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as
valid, binding, reasonable and enforceable.[2]
In the instant petition, MERALCO assails the above
ruling and brings up the following issues; viz:
1. Whether the imposition of a franchise tax under Section
2.09 of Laguna Provincial Ordinance No. 01-92, insofar as
petitioner is concerned, is violative of the non-impairment
clause of the Constitution and Section 1 of Presidential Decree
No. 551.
2. Whether Republic Act. No. 7160, otherwise known as the
Local Government Code of 1991, has repealed, amended or
modified Presidential Decree No. 551.
3. Whether the doctrine of exhaustion of administrative
remedies is applicable in this case.[3]
The petition lacks merit.
Prefatorily, it might be well to recall that local
governments do not have the inherent power to tax[4] except
to the extent that such power might be delegated to them
either by the basic law or by statute.Presently, under Article X
of the 1987 Constitution, a general delegation of that power
has been given in favor of local government units. Thus:
Sec. 3. The Congress shall enact a local government code
which shall provide for a more responsive and accountable
local government structure instituted through a system of
decentralization with effective mechanisms of recall,
initiative, and referendum, allocate among the different local
government units their powers, responsibilities, and resources,
and provide for the qualifications, election, appointment and
removal, term, salaries, powers and functions, and duties of
local officials, and all other matters relating to the
organization and operation of the local units.
xxxxxxxxx
Sec. 5. Each local government shall have the power to create
its own sources of revenues and to levy taxes, fees, and
charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees and charges shall accrue
exclusively to the local governments.
The 1987 Constitution has a counterpart provision in the 1973
Constitution which did come out with a similar delegation of
revenue making powers to local governments.[5]
Under the regime of the 1935 Constitution no similar
delegation of tax powers was provided, and local government
units instead derived their tax powers under a limited statutory
authority. Whereas, then, the delegation of tax powers granted
at that time by statute to local governments was confined and
defined (outside of which the power was deemed withheld),
the present constitutional rule (starting with the 1973
Constitution), however, would broadly confer such tax powers
subject only to specific exceptions that the law might
prescribe.
Under the now prevailing Constitution, where there is
neither a grant nor a prohibition by statute, the tax power
must be deemed to exist although Congress may provide
statutory limitations and guidelines. The basic rationale for
the current rule is to safeguard the viability and self-
sufficiency of local government units by directly granting
them general and broad tax powers. Nevertheless, the
fundamental law did not intend the delegation to be absolute
and unconditional; the constitutional objective obviously is to
ensure that, while the local government units are being
strengthened and made more autonomous,[6] the legislature
must still see to it that (a) the taxpayer will not be over-
burdened or saddled with multiple and unreasonable
impositions; (b) each local government unit will have its fair
7
share of available resources; (c) the resources of the national
government will not be unduly disturbed; and (d) local
taxation will be fair, uniform, and just.
The Local Government Code of 1991 has incorporated
and adopted, by and large the provisions of the now repealed
Local Tax Code, which had been in effect since 01 July 1973,
promulgated into law by Presidential Decree No.
231[7] pursuant to the then provisions of Section 2, Article XI,
of the 1973 Constitution. The 1991 Code explicitly authorizes
provincial governments, notwithstanding any exemption
granted by any law or other special law, x x x (to) impose a
tax on businesses enjoying a franchise. Section 137 thereof
provides:
Sec. 137. Franchise Tax Notwithstanding any exemption
granted by any law or other special law, the province may
impose a tax on businesses enjoying a franchise, at a rate not
exceeding fifty percent (50%) of one percent (1%) of the gross
annual receipts for the preceding calendar year based on the
incoming receipt, or realized, within its territorial
jurisdiction. In the case of a newly started business, the tax
shall not exceed one-twentieth (1/20) of one percent (1%) of
the capital investment. In the succeeding calendar year,
regardless of when the business started to operate, the tax shall
be based on the gross receipts for the preceding calendar year,
or any fraction thereof, as provided herein. (Underscoring
supplied for emphasis)
Indicative of the legislative intent to carry out the
Constitutional mandate of vesting broad tax powers to local
government units, the Local Government Code has effectively
withdrawn under Section 193 thereof, tax exemptions or
incentives theretofore enjoyed by certain entities. This law
states:
Section 193 Withdrawal of Tax Exemption Privileges Unless
otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn
upon the effectivity of this Code. (Underscoring supplied for
emphasis)
The Code, in addition, contains a general repealing
clause in its Section 534; thus:
Section 534. Repealing Clause. x x x.
(f) All general and special laws, acts, city charters, decrees,
executive orders, proclamations and administrative
regulations, or part or parts thereof which are inconsistent with
any of the provisions of this Code are hereby repealed or
modified accordingly. (Underscoring supplied for emphasis)[8]
To exemplify, in Mactan Cebu International Airport
Authority vs. Marcos,[9] the Court upheld the withdrawal of the
real estate tax exemption previously enjoyed by Mactan Cebu
International Airport Authority. The Court ratiocinated:
x x x These policy considerations are consistent with the State
policy to ensure autonomy to local governments and the
objective of the LGC that they enjoy genuine and meaningful
local autonomy to enable them to attain their fullest
development as self-reliant communities and make them
effective partners in the attainment of national goals. The
power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities of local
government units for the delivery of basic service essential to
the promotion of the general welfare and the enhancement of
peace, progress, and prosperity of the people. It may also be
relevant to recall that the original reasons for the withdrawal
of tax exemption privileges granted to government-owned and
controlled corporations and all other units of government were
that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated
enterprises, and there was a need for these entities to share in
the requirements of development, fiscal or otherwise, by
paying the taxes and other charges due from them.[10]
Petitioner in its complaint before the Regional Trial
Court cited the ruling of this Court in Province of Misamis
Oriental vs. Cagayan Electric Power and Light Company,
Inc.;[11] thus:
In an earlier case, the phrase shall be in lieu of all taxes and at
any time levied, established by, or collected by any authority
found in the franchise of the Visayan Electric Company was
held to exempt the company from payment of the 5% tax on
corporate franchise provided in Section 259 of the Internal
Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No.
4] 1385)
Similarly, we ruled that the provision: shall be in lieu of all
taxes of every name and nature in the franchise of the Manila
Railroad (Subsection 12, Section 1, Act No. 1510) exempts
the Manila Railroad from payment of internal revenue tax for
its importations of coal and oil under Act No. 2432 and the
Amendatory Acts of the Philippine Legislature (Manila
Railroad vs. Rafferty, 40 Phil. 224).
The same phrase found in the franchise of the Philippine
Railway Co. (Sec. 13, Act No. 1497) justified the exemption
of the Philippine Railway Company from payment of the tax
on its corporate franchise under Section 259 of the Internal
Revenue Code, as amended by R.A. No. 39 (Philippine
Railway Co vs. Collector of Internal Revenue, 91 Phil. 35).
Those magic words, shall be in lieu of all taxes also excused
the Cotabato Light and Ice Plant Company from the payment
of the tax imposed by Ordinance No. 7 of the City of Cotabato
(Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA
231).
So was the exemption upheld in favor of the Carcar Electric
and Ice Plant Company when it was required to pay the
corporate franchise tax under Section 259 of the Internal
Revenue Code as amended by R.A. No. 39 (Carcar Electric &
Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4]
8
1068). This Court pointed out that such exemption is part of
the inducement for the acceptance of the franchise and the
rendition of public service by the grantee.[12]
In the recent case of the City Government of San Pablo,
etc., et al. vs. Hon. Bienvenido V. Reyes, et al.,[13] the Court
has held that the phrase in lieu of all taxes have to give way to
the peremptory language of the Local Government Code
specifically providing for the withdrawal of such exemptions,
privileges, and that upon the effectivity of the Local
Government Code all exemptions except only as provided
therein can no longer be invoked by MERALCO to disclaim
liability for the local tax. In fine, the Court has viewed its
previous rulings as laying stress more on the legislative
intent of the amendatory law whether the tax exemption
privilege is to be withdrawn or not rather than on whether
the law can withdraw, without violating the Constitution,
the tax exemption or not.
While the Court has, not too infrequently, referred to tax
exemptions contained in special franchises as being in the
nature of contracts and a part of the inducement for carrying
on the franchise, these exemptions, nevertheless, are far from
being strictly contractual in nature. Contractual tax
exemptions, in the real sense of the term and where the
non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in
contracts, such as those contained in government bonds or
debentures, lawfully entered into by them under enabling
laws in which the government, acting in its private
capacity, sheds its cloak of authority and waives its
governmental immunity. Truly, tax exemptions of this kind
may not be revoked without impairing the obligations of
contracts.[14] These contractual tax exemptions, however, are
not to be confused with tax exemptions granted under
franchises. A franchise partakes the nature of a grant which is
beyond the purview of the non-impairment clause of the
Constitution.[15] Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the 1935 and the
1973 Constitutions, is explicit that no franchise for the
operation of a public utility shall be granted except under the
condition that such privilege shall be subject to amendment,
alteration or repeal by Congress as and when the common
good so requires.
WHEREFORE, the instant petition is hereby
DISMISSED. No costs.
SO ORDERED.
4. G.R. No. 144104 June 29, 2004
LUNG CENTER OF THE PHILIPPINES, petitioner,
vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his
capacity as City Assessor of Quezon City, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the
Rules of Court, as amended, of the Decision1 dated July 17,
2000 of the Court of Appeals in CA-G.R. SP No. 57014 which
affirmed the decision of the Central Board of Assessment
Appeals holding that the lot owned by the petitioner and its
hospital building constructed thereon are subject to assessment
for purposes of real property tax.
The Antecedents
The petitioner Lung Center of the Philippines is a non-stock
and non-profit entity established on January 16, 1981 by virtue
of Presidential Decree No. 1823.2 It is the registered owner of
a parcel of land, particularly described as Lot No. RP-3-B-3A-
1-B-1, SWO-04-000495, located at Quezon Avenue corner
Elliptical Road, Central District, Quezon City. The lot has an
area of 121,463 square meters and is covered by Transfer
Certificate of Title (TCT) No. 261320 of the Registry of
Deeds of Quezon City. Erected in the middle of the aforesaid
lot is a hospital known as the Lung Center of the Philippines.
A big space at the ground floor is being leased to private
parties, for canteen and small store spaces, and to medical or
professional practitioners who use the same as their private
clinics for their patients whom they charge for their
professional services. Almost one-half of the entire area on the
left side of the building along Quezon Avenue is vacant and
idle, while a big portion on the right side, at the corner of
Quezon Avenue and Elliptical Road, is being leased for
commercial purposes to a private enterprise known as the
Elliptical Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also
renders medical services to out-patients, both paying and non-
paying. Aside from its income from paying patients, the
petitioner receives annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the
petitioner were assessed for real property taxes in the amount
of P4,554,860 by the City Assessor of Quezon
City.3 Accordingly, Tax Declaration Nos. C-021-01226 (16-
2518) and C-021-01231 (15-2518-A) were issued for the land
and the hospital building, respectively.4 On August 25, 1993,
the petitioner filed a Claim for Exemption5 from real property
taxes with the City Assessor, predicated on its claim that it is a
charitable institution. The petitioners request was denied, and
a petition was, thereafter, filed before the Local Board of
Assessment Appeals of Quezon City (QC-LBAA, for brevity)
for the reversal of the resolution of the City Assessor. The
petitioner alleged that under Section 28, paragraph 3 of the
1987 Constitution, the property is exempt from real property
taxes. It averred that a minimum of 60% of its hospital beds
are exclusively used for charity patients and that the major
thrust of its hospital operation is to serve charity patients. The
petitioner contends that it is a charitable institution and, as
such, is exempt from real property taxes. The QC-LBAA
rendered judgment dismissing the petition and holding the
petitioner liable for real property taxes.6
The QC-LBAAs decision was, likewise, affirmed on appeal
by the Central Board of Assessment Appeals of Quezon City
9
(CBAA, for brevity)7 which ruled that the petitioner was not a
charitable institution and that its real properties were not
actually, directly and exclusively used for charitable purposes;
hence, it was not entitled to real property tax exemption under
the constitution and the law. The petitioner sought relief from
the Court of Appeals, which rendered judgment affirming the
decision of the CBAA.8
Undaunted, the petitioner filed its petition in this Court
contending that:
A. THE COURT A QUO ERRED IN DECLARING
PETITIONER AS NOT ENTITLED TO REALTY
TAX EXEMPTIONS ON THE GROUND THAT
ITS LAND, BUILDING AND IMPROVEMENTS,
SUBJECT OF ASSESSMENT, ARE NOT
ACTUALLY, DIRECTLY AND EXCLUSIVELY
DEVOTED FOR CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS
REAL PROPERTY TAX EXEMPT UNDER ITS
CHARTER, PD 1823, SAID EXEMPTION MAY
NEVERTHELESS BE EXTENDED UPON
PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the
context of Section 28(3), Article VI of the 1987 Constitution.
It asserts that its character as a charitable institution is not
altered by the fact that it admits paying patients and renders
medical services to them, leases portions of the land to private
parties, and rents out portions of the hospital to private
medical practitioners from which it derives income to be used
for operational expenses. The petitioner points out that for the
years 1995 to 1999, 100% of its out-patients were charity
patients and of the hospitals 282-bed capacity, 60% thereof,
or 170 beds, is allotted to charity patients. It asserts that the
fact that it receives subsidies from the government attests to its
character as a charitable institution. It contends that the
"exclusivity" required in the Constitution does not necessarily
mean "solely." Hence, even if a portion of its real estate is
leased out to private individuals from whom it derives income,
it does not lose its character as a charitable institution, and its
exemption from the payment of real estate taxes on its real
property. The petitioner cited our ruling in Herrera v. QC-
BAA9 to bolster its pose. The petitioner further contends that
even if P.D. No. 1823 does not exempt it from the payment of
real estate taxes, it is not precluded from seeking tax
exemption under the 1987 Constitution.
In their comment on the petition, the respondents aver that the
petitioner is not a charitable entity. The petitioners real
property is not exempt from the payment of real estate taxes
under P.D. No. 1823 and even under the 1987 Constitution
because it failed to prove that it is a charitable institution and
that the said property is actually, directly and exclusively used
for charitable purposes. The respondents noted that in a
newspaper report, it appears that graft charges were filed with
the Sandiganbayan against the director of the petitioner, its
administrative officer, and Zenaida Rivera, the proprietress of
the Elliptical Orchids and Garden Center, for entering into a
lease contract over 7,663.13 square meters of the property in
1990 for only P20,000 a month, when the monthly rental
should be P357,000 a month as determined by the
Commission on Audit; and that instead of complying with the
directive of the COA for the cancellation of the contract for
being grossly prejudicial to the government, the petitioner
renewed the same on March 13, 1995 for a monthly rental of
only P24,000. They assert that the petitioner uses the subsidies
granted by the government for charity patients and uses the
rest of its income from the property for the benefit of paying
patients, among other purposes. They aver that the petitioner
failed to adduce substantial evidence that 100% of its out-
patients and 170 beds in the hospital are reserved for indigent
patients. The respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP
do not speak well of its record of service. That before
a patient is admitted for treatment in the Center, first
impression is that it is pay-patient and required to pay
a certain amount as deposit. That even if a patient is
living below the poverty line, he is charged with high
hospital bills. And, without these bills being first
settled, the poor patient cannot be allowed to leave
the hospital or be discharged without first paying the
hospital bills or issue a promissory note guaranteed
and indorsed by an influential agency or person
known only to the Center; that even the remains of
deceased poor patients suffered the same fate.
Moreover, before a patient is admitted for treatment
as free or charity patient, one must undergo a series
of interviews and must submit all the requirements
needed by the Center, usually accompanied by
endorsement by an influential agency or person
known only to the Center. These facts were heard and
admitted by the Petitioner LCP during the hearings
before the Honorable QC-BAA and Honorable
CBAA. These are the reasons of indigent patients,
instead of seeking treatment with the Center, they
prefer to be treated at the Quezon Institute. Can such
practice by the Center be called charitable? 10
The Issues
The issues for resolution are the following: (a) whether the
petitioner is a charitable institution within the context of
Presidential Decree No. 1823 and the 1973 and 1987
Constitutions and Section 234(b) of Republic Act No. 7160;
and (b) whether the real properties of the petitioner are exempt
from real property taxes.
The Courts Ruling
The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable
institution within the context of the 1973 and 1987
Constitutions. To determine whether an enterprise is a
charitable institution/entity or not, the elements which should
be considered include the statute creating the enterprise, its
corporate purposes, its constitution and by-laws, the methods
of administration, the nature of the actual work performed, the
character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties. 11
10
In the legal sense, a charity may be fully defined as a gift, to
be applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds
and hearts under the influence of education or religion, by
assisting them to establish themselves in life or otherwise
lessening the burden of government.12 It may be applied to
almost anything that tend to promote the well-doing and well-
being of social man. It embraces the improvement and
promotion of the happiness of man.13 The word "charitable" is
not restricted to relief of the poor or sick.14 The test of a
charity and a charitable organization are in law the same. The
test whether an enterprise is charitable or not is whether it
exists to carry out a purpose reorganized in law as charitable
or whether it is maintained for gain, profit, or private
advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-
stock corporation which, subject to the provisions of the
decree, is to be administered by the Office of the President of
the Philippines with the Ministry of Health and the Ministry of
Human Settlements. It was organized for the welfare and
benefit of the Filipino people principally to help combat the
high incidence of lung and pulmonary diseases in the
Philippines. The raison detre for the creation of the petitioner
is stated in the decree, viz:
Whereas, for decades, respiratory diseases have been
a priority concern, having been the leading cause of
illness and death in the Philippines, comprising more
than 45% of the total annual deaths from all causes,
thus, exacting a tremendous toll on human resources,
which ailments are likely to increase and degenerate
into serious lung diseases on account of unabated
pollution, industrialization and unchecked cigarette
smoking in the country;lavvph!l.net
Whereas, the more common lung diseases are, to a
great extent, preventable, and curable with early and
adequate medical care, immunization and through
prompt and intensive prevention and health education
programs;
Whereas, there is an urgent need to consolidate and
reinforce existing programs, strategies and efforts at
preventing, treating and rehabilitating people affected
by lung diseases, and to undertake research and
training on the cure and prevention of lung diseases,
through a Lung Center which will house and nurture
the above and related activities and provide tertiary-
level care for more difficult and problematical cases;
Whereas, to achieve this purpose, the Government
intends to provide material and financial support
towards the establishment and maintenance of a Lung
Center for the welfare and benefit of the Filipino
people.15
The purposes for which the petitioner was created are spelled
out in its Articles of Incorporation, thus:
SECOND: That the purposes for which such
corporation is formed are as follows:
1. To construct, establish, equip, maintain,
administer and conduct an integrated
medical institution which shall specialize in
the treatment, care, rehabilitation and/or
relief of lung and allied diseases in line with
the concern of the government to assist and
provide material and financial support in the
establishment and maintenance of a lung
center primarily to benefit the people of the
Philippines and in pursuance of the policy of
the State to secure the well-being of the
people by providing them specialized health
and medical services and by minimizing the
incidence of lung diseases in the country and
elsewhere.
2. To promote the noble undertaking of
scientific research related to the prevention
of lung or pulmonary ailments and the care
of lung patients, including the holding of a
series of relevant congresses, conventions,
seminars and conferences;
3. To stimulate and, whenever possible,
underwrite scientific researches on the
biological, demographic, social, economic,
eugenic and physiological aspects of lung or
pulmonary diseases and their control; and to
collect and publish the findings of such
research for public consumption;
4. To facilitate the dissemination of ideas
and public acceptance of information on
lung consciousness or awareness, and the
development of fact-finding, information
and reporting facilities for and in aid of the
general purposes or objects aforesaid,
especially in human lung requirements,
general health and physical fitness, and
other relevant or related fields;
5. To encourage the training of physicians,
nurses, health officers, social workers and
medical and technical personnel in the
practical and scientific implementation of
services to lung patients;
6. To assist universities and research
institutions in their studies about lung
diseases, to encourage advanced training in
matters of the lung and related fields and to
support educational programs of value to
general health;
7. To encourage the formation of other
organizations on the national, provincial
and/or city and local levels; and to
11
 coordinate their various efforts and activities
for the purpose of achieving a more
effective programmatic approach on the
common problems relative to the objectives
enumerated herein;
8. To seek and obtain assistance in any form
from both international and local
foundations and organizations; and to
administer grants and funds that may be
given to the organization;
9. To extend, whenever possible and
expedient, medical services to the public
and, in general, to promote and protect the
health of the masses of our people, which
has long been recognized as an economic
asset and a social blessing;
10. To help prevent, relieve and alleviate the
lung or pulmonary afflictions and maladies
of the people in any and all walks of life,
including those who are poor and needy, all
without regard to or discrimination, because
of race, creed, color or political belief of the
persons helped; and to enable them to obtain
treatment when such disorders occur;
11. To participate, as circumstances may
warrant, in any activity designed and carried
on to promote the general health of the
community;
12. To acquire and/or borrow funds and to
own all funds or equipment, educational
materials and supplies by purchase,
donation, or otherwise and to dispose of and
distribute the same in such manner, and, on
such basis as the Center shall, from time to
time, deem proper and best, under the
particular circumstances, to serve its general
and non-profit purposes and
objectives;lavvphil.net
13. To buy, purchase, acquire, own, lease,
hold, sell, exchange, transfer and dispose of
properties, whether real or personal, for
purposes herein mentioned; and
14. To do everything necessary, proper,
advisable or convenient for the
accomplishment of any of the powers herein
set forth and to do every other act and thing
incidental thereto or connected therewith.16
Hence, the medical services of the petitioner are to be
rendered to the public in general in any and all walks of life
including those who are poor and the needy without
discrimination. After all, any person, the rich as well as the
poor, may fall sick or be injured or wounded and become a
subject of charity.17
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because
it derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the
persons managing or operating the
institution.18 In Congregational Sunday School, etc. v. Board
of Review,19 the State Supreme Court of Illinois held, thus:
[A]n institution does not lose its charitable
character, and consequent exemption from taxation,
by reason of the fact that those recipients of its
benefits who are able to pay are required to do so,
where no profit is made by the institution and the
amounts so received are applied in furthering its
charitable purposes, and those benefits are refused to
none on account of inability to pay therefor. The
fundamental ground upon which all exemptions in
favor of charitable institutions are based is the benefit
conferred upon the public by them, and a consequent
relief, to some extent, of the burden upon the state to
care for and advance the interests of its citizens.20
As aptly stated by the State Supreme Court of South Dakota
in Lutheran Hospital Association of South Dakota v. Baker:21
[T]he fact that paying patients are taken, the
profits derived from attendance upon these patients
being exclusively devoted to the maintenance of the
charity, seems rather to enhance the usefulness of the
institution to the poor; for it is a matter of common
observation amongst those who have gone about at
all amongst the suffering classes, that the deserving
poor can with difficulty be persuaded to enter an
asylum of any kind confined to the reception of
objects of charity; and that their honest pride is much
less wounded by being placed in an institution in
which paying patients are also received. The fact of
receiving money from some of the patients does not,
we think, at all impair the character of the charity, so
long as the money thus received is devoted altogether
to the charitable object which the institution is
intended to further.22
The money received by the petitioner becomes a part of the
trust fund and must be devoted to public trust purposes and
cannot be diverted to private profit or benefit.23
Under P.D. No. 1823, the petitioner is entitled to receive
donations. The petitioner does not lose its character as a
charitable institution simply because the gift or donation is in
the form of subsidies granted by the government. As held by
the State Supreme Court of Utah in Yorgason v. County Board
of Equalization of Salt Lake County:24
Second, the government subsidy payments are
provided to the project. Thus, those payments are like
a gift or donation of any other kind except they come
12
 from the government. In both Intermountain Health
Careand the present case, the crux is the presence or
absence of material reciprocity. It is entirely
irrelevant to this analysis that the government, rather
than a private benefactor, chose to make up the
deficit resulting from the exchange between St.
Marks Tower and the tenants by making a
contribution to the landlord, just as it would have
been irrelevant in Intermountain Health Care if the
patients income supplements had come from private
individuals rather than the government.
Therefore, the fact that subsidization of part of the
cost of furnishing such housing is by the government
rather than private charitable contributions does not
dictate the denial of a charitable exemption if the
facts otherwise support such an exemption, as they do
here.25
In this case, the petitioner adduced substantial evidence that it
spent its income, including the subsidies from the government
for 1991 and 1992 for its patients and for the operation of the
hospital. It even incurred a net loss in 1991 and 1992 from its
operations.
Even as we find that the petitioner is a charitable institution,
we hold, anent the second issue, that those portions of its real
property that are leased to private entities are not exempt from
real property taxes as these are not actually, directly and
exclusively used for charitable purposes.
The settled rule in this jurisdiction is 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 effect of an
exemption is equivalent to an appropriation. Hence, a claim
for exemption from tax payments must be clearly shown and
based on language in the law too plain to be mistaken. 26 As
held in Salvation Army v. Hoehn:27
An intention on the part of the legislature to grant an
exemption from the taxing power of the state will
never be implied from language which will admit of
any other reasonable construction. Such an intention
must be expressed in clear and unmistakable terms,
or must appear by necessary implication from the
language used, for it is a well settled principle that,
when a special privilege or exemption is claimed
under a statute, charter or act of incorporation, it is to
be construed strictly against the property owner and
in favor of the public. This principle applies with
peculiar force to a claim of exemption from taxation .
28
Section 2 of Presidential Decree No. 1823, relied upon by the
petitioner, specifically provides that the petitioner shall enjoy
the tax exemptions and privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES.
Being a non-profit, non-stock corporation organized
primarily to help combat the high incidence of lung
and pulmonary diseases in the Philippines, all
donations, contributions, endowments and equipment
and supplies to be imported by authorized entities or
persons and by the Board of Trustees of the Lung
Center of the Philippines, Inc., for the actual use and
benefit of the Lung Center, shall be exempt from
income and gift taxes, the same further deductible in
full for the purpose of determining the maximum
deductible amount under Section 30, paragraph (h),
of the National Internal Revenue Code, as amended.
The Lung Center of the Philippines shall be exempt
from the payment of taxes, charges and fees imposed
by the Government or any political subdivision or
instrumentality thereof with respect to equipment
purchases made by, or for the Lung Center.29
It is plain as day that under the decree, the petitioner does not
enjoy any property tax exemption privileges for its real
properties as well as the building constructed thereon. If the
intentions were otherwise, the same should have been among
the enumeration of tax exempt privileges under Section 2:
It is a settled rule of statutory construction that the
express mention of one person, thing, or consequence
implies the exclusion of all others. The rule is
expressed in the familiar maxim, expressio unius est
exclusio alterius.
The rule of expressio unius est exclusio alterius is
formulated in a number of ways. One variation of the
rule is the principle that what is expressed puts an
end to that which is implied. Expressium facit cessare
tacitum. Thus, where a statute, by its terms, is
expressly limited to certain matters, it may not, by
interpretation or construction, be extended to other
matters.
...
The rule of expressio unius est exclusio alterius and
its variations are canons of restrictive interpretation.
They are based on the rules of logic and the natural
workings of the human mind. They are predicated
upon ones own voluntary act and not upon that of
others. They proceed from the premise that the
legislature would not have made specified
enumeration in a statute had the intention been not to
restrict its meaning and confine its terms to those
expressly mentioned.30
The exemption must not be so enlarged by construction since
the reasonable presumption is that the State has granted in
express terms all it intended to grant at all, and that unless the
privilege is limited to the very terms of the statute the favor
would be intended beyond what was meant.31
Section 28(3), Article VI of the 1987 Philippine Constitution
provides, thus:
(3) Charitable institutions, churches and parsonages
or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and
13
 improvements, actually, directly and exclusively used
for religious, charitable or educational purposes shall
be exempt from taxation.32
The tax exemption under this constitutional provision
covers property taxes only.33 As Chief Justice Hilario G.
Davide, Jr., then a member of the 1986 Constitutional
Commission, explained: ". . . what is exempted is not the
institution itself . . .; those exempted from real estate taxes are
lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational
purposes."34
Consequently, the constitutional provision is implemented by
Section 234(b) of Republic Act No. 7160 (otherwise known as
the Local Government Code of 1991) as follows:
SECTION 234. Exemptions from Real Property Tax.
The following are exempted from payment of the
real property tax:
...
(b) Charitable institutions, churches,
parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries
and all lands, buildings, and
improvements actually, directly,
and exclusivelyused for religious, charitable
or educational purposes.35
We note that under the 1935 Constitution, "... all lands,
buildings, and improvements used exclusively for medical services to them, whether paying or non-paying, other
charitable purposes shall be exempt from
taxation."36 However, under the 1973 and the present
Constitutions, for "lands, buildings, and improvements" of the
charitable institution to be considered exempt, the same should
not only be "exclusively" used for charitable purposes; it is
required that such property be used "actually" and "directly"
for such purposes.37
In light of the foregoing substantial changes in the
Constitution, the petitioner cannot rely on our ruling
in Herrera v. Quezon City Board of Assessment
Appeals which was promulgated on September 30, 1961
before the 1973 and 1987 Constitutions took effect. 38 As this
Court held in Province of Abra v. Hernando:39
Under the 1935 Constitution: "Cemeteries,
churches, and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements
used exclusively for religious, charitable, or
educational purposes shall be exempt from taxation."
The present Constitution added "charitable
institutions, mosques, and non-profit cemeteries" and
required that for the exemption of "lands, buildings,
and improvements," they should not only be
"exclusively" but also "actually" and "directly" used
for religious or charitable purposes. The Constitution
is worded differently. The change should not be
ignored. It must be duly taken into consideration.
Reliance on past decisions would have sufficed were
the words "actually" as well as "directly" not added.
There must be proof therefore of
the actual and direct use of the lands, buildings, and
improvements for religious or charitable purposes to
be exempt from taxation.
Under the 1973 and 1987 Constitutions and Rep. Act No.
7160 in order to be entitled to the exemption, the petitioner is
burdened to prove, by clear and unequivocal proof, that (a) it
is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used
for charitable purposes. "Exclusive" is defined as possessed
and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and "exclusively" is defined, "in a
manner to exclude; as enjoying a privilege exclusively." 40 If
real property is used for one or more commercial purposes, it
is not exclusively used for the exempted purposes but is
subject to taxation.41 The words "dominant use" or "principal
use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitutions and the
law.42 Solely is synonymous with exclusively.43
What is meant by actual, direct and exclusive use of the
property for charitable purposes is the direct and immediate
and actual application of the property itself to the purposes for
which the charitable institution is organized. It is not the use
of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.44
The petitioner failed to discharge its burden to prove that the
entirety of its real property is actually, directly and exclusively
used for charitable purposes. While portions of the hospital are
used for the treatment of patients and the dispensation of
portions thereof are being leased to private individuals for
their clinics and a canteen. Further, a portion of the land is
being leased to a private individual for her business enterprise
under the business name "Elliptical Orchids and Garden
Center." Indeed, the petitioners evidence shows that it
collected P1,136,483.45 as rentals in 1991 and P1,679,999.28
for 1992 from the said lessees.
Accordingly, we hold that the portions of the land leased to
private entities as well as those parts of the hospital leased to
private individuals are not exempt from such taxes.45 On the
other hand, the portions of the land occupied by the hospital
and portions of the hospital used for its patients, whether
paying or non-paying, are exempt from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition
is PARTIALLY GRANTED. The respondent Quezon City
Assessor is hereby DIRECTED to determine, after due
hearing, the precise portions of the land and the area thereof
which are leased to private persons, and to compute the real
property taxes due thereon as provided for by law.
SO ORDERED.
5. G.R. No. L-39086 June 15, 1988
ABRA VALLEY COLLEGE, INC., represented by
PEDRO V. BORGONIA, petitioner,
vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance,
Abra; ARMIN M. CARIAGA, Provincial Treasurer,
Abra; GASPAR V. BOSQUE, Municipal Treasurer,
14
Bangued, Abra; HEIRS OF PATERNO
MILLARE, respondents.
PARAS, J.:
This is a petition for review on certiorari of the decision * of
the defunct Court of First Instance of Abra, Branch I, dated
June 14, 1974, rendered in Civil Case No. 656, entitled "Abra
Valley Junior College, Inc., represented by Pedro V. Borgonia,
plaintiff vs. Armin M. Cariaga as Provincial Treasurer of
Abra, Gaspar V. Bosque as Municipal Treasurer of Bangued,
Abra and Paterno Millare, defendants," the decretal portion of
which reads:
IN VIEW OF ALL THE FOREGOING, the
Court hereby declares:
That the distraint seizure and sale by the
Municipal Treasurer of Bangued, Abra, the
Provincial Treasurer of said province against
the lot and building of the Abra Valley
Junior College, Inc., represented by Director
Pedro Borgonia located at Bangued, Abra, is
valid;
That since the school is not exempt from
paying taxes, it should therefore pay all back
taxes in the amount of P5,140.31 and back
taxes and penalties from the promulgation of
this decision;
That the amount deposited by the plaintaff
him the sum of P60,000.00 before the trial,
be confiscated to apply for the payment of
the back taxes and for the redemption of the
property in question, if the amount is less
than P6,000.00, the remainder must be
returned to the Director of Pedro Borgonia,
who represents the plaintiff herein;
That the deposit of the Municipal Treasurer
in the amount of P6,000.00 also before the
trial must be returned to said Municipal
Treasurer of Bangued, Abra;
And finally the case is hereby ordered
dismissed with costs against the plaintiff.
SO ORDERED. (Rollo, pp. 22-23)
Petitioner, an educational corporation and institution of higher
learning duly incorporated with the Securities and Exchange
Commission in 1948, filed a complaint (Annex "1" of Answer
by the respondents Heirs of Paterno Millare; Rollo, pp. 95-97)
on July 10, 1972 in the court a quo to annul and declare void
the "Notice of Seizure' and the "Notice of Sale" of its lot and
building located at Bangued, Abra, for non-payment of real
estate taxes and penalties amounting to P5,140.31. Said
"Notice of Seizure" of the college lot and building covered by
Original Certificate of Title No. Q-83 duly registered in the
name of petitioner, plaintiff below, on July 6, 1972, by
respondents Municipal Treasurer and Provincial Treasurer,
defendants below, was issued for the satisfaction of the said
taxes thereon. The "Notice of Sale" was caused to be served
upon the petitioner by the respondent treasurers on July 8,
1972 for the sale at public auction of said college lot and
building, which sale was held on the same date. Dr. Paterno
Millare, then Municipal Mayor of Bangued, Abra, offered the
highest bid of P6,000.00 which was duly accepted. The
certificate of sale was correspondingly issued to him.
On August 10, 1972, the respondent Paterno Millare (now
deceased) filed through counstel a motion to dismiss the
complaint.
On August 23, 1972, the respondent Provincial Treasurer and
Municipal Treasurer, through then Provincial Fiscal Loreto C.
Roldan, filed their answer (Annex "2" of Answer by the
respondents Heirs of Patemo Millare; Rollo, pp. 98-100) to the
complaint. This was followed by an amended answer (Annex
"3," ibid, Rollo, pp. 101-103) on August 31, 1972.
On September 1, 1972 the respondent Paterno Millare filed his
answer (Annex "5," ibid; Rollo, pp. 106-108).
On October 12, 1972, with the aforesaid sale of the school
premises at public auction, the respondent Judge, Hon. Juan P.
Aquino of the Court of First Instance of Abra, Branch I,
ordered (Annex "6," ibid; Rollo, pp. 109-110) the respondents
provincial and municipal treasurers to deliver to the Clerk of
Court the proceeds of the auction sale. Hence, on December
14, 1972, petitioner, through Director Borgonia, deposited
with the trial court the sum of P6,000.00 evidenced by PNB
Check No. 904369.
On April 12, 1973, the parties entered into a stipulation of
facts adopted and embodied by the trial court in its questioned
decision. Said Stipulations reads:
STIPULATION OF FACTS
COME NOW the parties, assisted by
counsels, and to this Honorable Court
respectfully enter into the following agreed
stipulation of facts:
1. That the personal circumstances of the
parties as stated in paragraph 1 of the
complaint is admitted; but the particular
person of Mr. Armin M. Cariaga is to be
substituted, however, by anyone who is
actually holding the position of Provincial
Treasurer of the Province of Abra;
2. That the plaintiff Abra Valley Junior
College, Inc. is the owner of the lot and
buildings thereon located in Bangued, Abra
under Original Certificate of Title No. 0-83;
3. That the defendant Gaspar V. Bosque, as
Municipal treasurer of Bangued, Abra
caused to be served upon the Abra Valley
Junior College, Inc. a Notice of Seizure on
the property of said school under Original
Certificate of Title No. 0-83 for the
15
 satisfaction of real property taxes thereon,
amounting to P5,140.31; the Notice of
Seizure being the one attached to the
complaint as Exhibit A;
4. That on June 8, 1972 the above properties
of the Abra Valley Junior College, Inc. was
sold at public auction for the satisfaction of
the unpaid real property taxes thereon and
the same was sold to defendant Paterno
Millare who offered the highest bid of
P6,000.00 and a Certificate of Sale in his
favor was issued by the defendant Municipal
Treasurer.
5. That all other matters not particularly and
specially covered by this stipulation of facts
will be the subject of evidence by the
parties.
WHEREFORE, it is respectfully prayed of
the Honorable Court to consider and admit
this stipulation of facts on the point agreed
upon by the parties.
Bangued, Abra, April 12, 1973.18)
Aside from the Stipulation of Facts, the trial court among
others, found the following: (a) that the school is recognized
by the government and is offering Primary, High School and
College Courses, and has a school population of more than
one thousand students all in all; (b) that it is located right in
the heart of the town of Bangued, a few meters from the plaza
and about 120 meters from the Court of First Instance
building; (c) that the elementary pupils are housed in a two-
storey building across the street; (d) that the high school and
college students are housed in the main building; (e) that the
Director with his family is in the second floor of the main
building; and (f) that the annual gross income of the school
reaches more than one hundred thousand pesos.
From all the foregoing, the only issue left for the Court to
determine and as agreed by the parties, is whether or not the
lot and building in question are used exclusively for
educational purposes. (Rollo, p. 20)
The succeeding Provincial Fiscal, Hon. Jose A. Solomon and
his Assistant, Hon. Eustaquio Z. Montero, filed a
Memorandum for the Government on March 25, 1974, and a
Supplemental Memorandum on May 7, 1974, wherein they
opined "that based on the evidence, the laws applicable, court
decisions and jurisprudence, the school building and school lot
used for educational purposes of the Abra Valley College,
Inc., are exempted from the payment of taxes." (Annexes "B,"
"B-1" of Petition; Rollo, pp. 24-49; 44 and 49).
Nonetheless, the trial court disagreed because of the use of the
second floor by the Director of petitioner school for residential
purposes. He thus ruled for the government and rendered the
assailed decision.
After having been granted by the trial court ten (10) days from
August 6, 1974 within which to perfect its appeal (Per Order
dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57)
petitioner instead availed of the instant petition for review
on certiorari with prayer for preliminary injunction before this
Court, which petition was filed on August 17, 1974 (Rollo,
p.2).
In the resolution dated August 16, 1974, this Court resolved to
give DUE COURSE to the petition (Rollo, p. 58).
Respondents were required to answer said petition (Rollo, p.
74).
Petitioner raised the following assignments of error:
I
THE COURT A QUO ERRED IN SUSTAINING AS VALID
THE SEIZURE AND SALE OF THE COLLEGE LOT AND
BUILDING USED FOR EDUCATIONAL PURPOSES OF
THE PETITIONER.
II
THE COURT A QUO ERRED IN DECLARING THAT THE
COLLEGE LOT AND BUILDING OF THE PETITIONER
ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL
PURPOSES MERELY BECAUSE THE COLLEGE
PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE
BUILDING.
III
THE COURT A QUO ERRED IN DECLARING THAT THE
COLLEGE LOT AND BUILDING OF THE PETITIONER
ARE NOT EXEMPT FROM PROPERTY TAXES AND IN
ORDERING PETITIONER TO PAY P5,140.31 AS REALTY
TAXES.
IV
THE COURT A QUO ERRED IN ORDERING THE
CONFISCATION OF THE P6,000.00 DEPOSIT MADE IN
THE COURT BY PETITIONER AS PAYMENT OF THE
P5,140.31 REALTY TAXES. (See Brief for the Petitioner, pp.
1-2)
The main issue in this case is the proper interpretation of the
phrase "used exclusively for educational purposes."
Petitioner contends that the primary use of the lot and building
for educational purposes, and not the incidental use thereof,
determines and exemption from property taxes under Section
22 (3), Article VI of the 1935 Constitution. Hence, the seizure
and sale of subject college lot and building, which are contrary
thereto as well as to the provision of Commonwealth Act No.
470, otherwise known as the Assessment Law, are without
legal basis and therefore void.
On the other hand, private respondents maintain that the
college lot and building in question which were subjected to
seizure and sale to answer for the unpaid tax are used: (1) for
the educational purposes of the college; (2) as the permanent
residence of the President and Director thereof, Mr. Pedro V.
Borgonia, and his family including the in-laws and
16
grandchildren; and (3) for commercial purposes because the
ground floor of the college building is being used and rented
by a commercial establishment, the Northern Marketing
Corporation (See photograph attached as Annex "8"
(Comment; Rollo, p. 90]).
Due to its time frame, the constitutional provision which finds
application in the case at bar is Section 22, paragraph 3,
Article VI, of the then 1935 Philippine Constitution, which
expressly grants exemption from realty taxes for "Cemeteries,
churches and parsonages or convents appurtenant thereto, and
all lands, buildings, and improvements used exclusively for
religious, charitable or educational purposes ...
Relative thereto, Section 54, paragraph c, Commonwealth Act
No. 470 as amended by Republic Act No. 409, otherwise
known as the Assessment Law, provides:
The following are exempted from real
property tax under the Assessment Law:
xxx xxx xxx
(c) churches and parsonages or convents
appurtenant thereto, and all lands, buildings,
and improvements used exclusively for
religious, charitable, scientific or
educational purposes.
xxx xxx xxx
In this regard petitioner argues that the primary use of the
school lot and building is the basic and controlling guide,
norm and standard to determine tax exemption, and not the
mere incidental use thereof.
As early as 1916 in YMCA of Manila vs. Collector of lnternal
Revenue, 33 Phil. 217 [1916], this Court ruled that while it
may be true that the YMCA keeps a lodging and a boarding
house and maintains a restaurant for its members, still these do
not constitute business in the ordinary acceptance of the word,
but an institution used exclusively for religious, charitable and
educational purposes, and as such, it is entitled to be exempted
from taxation.
In the case of Bishop of Nueva Segovia v. Provincial Board of
Ilocos Norte, 51 Phil. 352 [1972], this Court included in the
exemption a vegetable garden in an adjacent lot and another
lot formerly used as a cemetery. It was clarified that the term
"used exclusively" considers incidental use also. Thus, the
exemption from payment of land tax in favor of the convent
includes, not only the land actually occupied by the building
but also the adjacent garden devoted to the incidental use of
the parish priest. The lot which is not used for commercial
purposes but serves solely as a sort of lodging place, also
qualifies for exemption because this constitutes incidental use
in religious functions.
The phrase "exclusively used for educational purposes" was
further clarified by this Court in the cases of Herrera vs.
Quezon City Board of assessment Appeals, 3 SCRA 186
[1961] and Commissioner of Internal Revenue vs. Bishop of
the Missionary District, 14 SCRA 991 [1965], thus
Moreover, the exemption in favor of
property used exclusively for charitable or
educational purposes is 'not limited to
property actually indispensable' therefor
(Cooley on Taxation, Vol. 2, p. 1430), but
extends to facilities which are incidental to
and reasonably necessary for the
accomplishment of said purposes, such as in
the case of hospitals, "a school for training
nurses, a nurses' home, property use to
provide housing facilities for interns,
resident doctors, superintendents, and other
members of the hospital staff, and
recreational facilities for student nurses,
interns, and residents' (84 CJS 6621), such
as "Athletic fields" including "a firm used
for the inmates of the institution. (Cooley on
Taxation, Vol. 2, p. 1430).
The test of exemption from taxation is the use of the property
for purposes mentioned in the Constitution (Apostolic Prefect
v. City Treasurer of Baguio, 71 Phil, 547 [1941]).
It must be stressed however, that while this Court allows a
more liberal and non-restrictive interpretation of the phrase
"exclusively used for educational purposes" as provided for in
Article VI, Section 22, paragraph 3 of the 1935 Philippine
Constitution, reasonable emphasis has always been made that
exemption extends to facilities which are incidental to and
reasonably necessary for the accomplishment of the main
purposes. Otherwise stated, the use of the school building or
lot for commercial purposes is neither contemplated by law,
nor by jurisprudence. Thus, while the use of the second floor
of the main building in the case at bar for residential purposes
of the Director and his family, may find justification under the
concept of incidental use, which is complimentary to the main
or primary purposeeducational, the lease of the first floor
thereof to the Northern Marketing Corporation cannot by any
stretch of the imagination be considered incidental to the
purpose of education.
It will be noted however that the aforementioned lease appears
to have been raised for the first time in this Court. That the
matter was not taken up in the to court is really apparent in the
decision of respondent Judge. No mention thereof was made
in the stipulation of facts, not even in the description of the
school building by the trial judge, both embodied in the
decision nor as one of the issues to resolve in order to
determine whether or not said properly may be exempted from
payment of real estate taxes (Rollo, pp. 17-23). On the other
hand, it is noteworthy that such fact was not disputed even
after it was raised in this Court.
Indeed, it is axiomatic that facts not raised in the lower court
cannot be taken up for the first time on appeal. Nonetheless, as
an exception to the rule, this Court has held that although a
factual issue is not squarely raised below, still in the interest of
17
substantial justice, this Court is not prevented from
considering a pivotal factual matter. "The Supreme Court is
clothed with ample authority to review palpable errors not
assigned as such if it finds that their consideration is necessary
in arriving at a just decision." (Perez vs. Court of Appeals, 127
SCRA 645 [1984]).
Under the 1935 Constitution, the trial court correctly arrived at
the conclusion that the school building as well as the lot where
it is built, should be taxed, not because the second floor of the
same is being used by the Director and his family for
residential purposes, but because the first floor thereof is being
used for commercial purposes. However, since only a portion
is used for purposes of commerce, it is only fair that half of
the assessed tax be returned to the school involved.
PREMISES CONSIDERED, the decision of the Court of First
Instance of Abra, Branch I, is hereby AFFIRMED subject to
the modification that half of the assessed tax be returned to the
petitioner.
SO ORDERED.
6. G.R. No. L-15270 September 30, 1961
JOSE V. HERRERA and ESTER OCHANGCO
HERRERA, petitioners,
vs.
THE QUEZON CITY BOARD OF ASSESSMENT
APPEALS, respondent.
Angel A. Sison for petitioners.
Jaime Agloro for respondent.
CONCEPCION, J.:
Appeal, by petitioners Jose V. Herrera and Ester Ochangco
Herrera, from a decision of the Court of Tax Appeals
affirming that of the Board of Assessment Appeals of Quezon
City, which held that certain properties of said petitioners are
subject to assessment for purposes of real estate tax.
The facts and the issue are set forth in the aforementioned
decision of the Court of Tax Appeals, from which we quote:
On July 24, 1952, the Director of the Bureau of
Hospitals authorized the petitioners to establish and
operate the "St. Catherine's Hospital", located at 58
D. Tuazon, Sta. Mesa Heights, Quezon City (Exhibit
"F-1", p. 7, BIR rec.). On or about January 3, 1953,
the petitioners sent a letter to the Quezon City
Assessor requesting exemption from payment of real
estate tax on the lot, building and other improvements
comprising the hospital stating that the same was
established for charitable and humanitarian purposes
and not for commercial gain (Exhibit "F-2", pp. 8-9,
BIR rec.). After an inspection of the premises in
question and after a careful study of the case, the
exemption from real property taxes was granted
effective the years 1953, 1954 and 1955.
Subsequently, however, in a letter dated August 10,
1955 (Exhibit "E", p. 65, CTA rec.) the Quezon City
Assessor notified the petitioners that the aforesaid
properties were re-classified from exempt to
"taxable" and thus assessed for real property taxes
effective 1956, enclosing therewith copies of Tax
Declarations Nos. 19321 to 19322 covering the said
properties. The petitioners appealed the assessment to
the Quezon City Board of Assessment Appeals,
which, in a decision dated March 31, 1956 and
received by the former on May 17, 1956, affirmed the
decision of the City Assessor. A motion for
reconsideration thereof was denied on March 8, 1957.
From this decision, the petitioners instituted the
instant appeal.1awphl.nt
The building involved in this case is principally used
as a hospital. It is mainly a surgical and orthopedic
hospital with emphasis on obstetrical cases, the latter
constituting 90% of the total number of cases
registered therein. The hospital has thirty-two (32)
beds, of which twenty (20) are for charity-patients
and twelve (12) for pay-patients. From the evidence
presented by petitioners, it is made to appear that
there are two kinds of charity patients (a) those
who come for consultation only ("out-charity
patients"); and (b) those who remain in the hospital
for treatment ("lying-in-patients"). The out-charity
patients are given free consultation and prescription,
although sometimes they are furnished with free
medicines which are not costly like aspirin,
sulfatiazole, etc. The charity lying-in-patients are
given free medical service and medicine although the
food served to the pay-patients is very much better
than that given to the former. Although no condition
is imposed by the hospital on the admission of charity
lying-in-patients, they however, usually give
donations to the hospital. On the other hand, the pay-
patients are required to pay for hospital services
ranging from the minimum charge of P5.00 to the
maximum of P40.00 for each day of stay in the
hospital. The income realized from pay-patients is
spent for the improvement of the charity wards. The
hospital personnel is composed of three nurses, two
graduate midwives, a resident physician receiving a
salary of P170.00 a month and the petitioner, Dr.
Ester Ochangco Herrera, as directress. As such
directress, the latter does not receive any salary.
Petitioners also operate within the premises of the
hospital the "St. Catherine's School of Midwifery"
which was granted government recognition by the
Secretary of Education on February 1, 1955 (Exhibit
"F-3", p. 10, BIR rec.) This school has an enrollment
of about two hundred students. The students are
charged a matriculation fee of P300.00 for 1- years,
plus P50.00 a month for board and lodging, which
includes transportation to the St. Mary's Hospital.
The students practice in the St. Catherine's Hospital,
as well as in the St. Mary's Hospital, which is also
18
 owned by the petitioners. A separate set of the said properties are used exclusively for charitable or
accounting books is maintained by the school for educational purposes. (Petitioners' brief, pp. 24-29).
midwifery distinct from that kept by the hospital. The
petitioners alleged that the accounts of the school are The Court of Tax Appeals decided the issue in the negative,
not included in Exhibits "A", "A-1", "A-2", "B", "B- upon the ground that the St. Catherine's Hospital "has a pay
1", "B-2", "C", "C-1" and "C-2" which relate to the ward for ... pay-patients, who are charged for the use of the
hospital only. However, the petitioners have refused private rooms, operating room, laboratory room, delivery
to submit a separate statement of accounts of the room, etc., like other hospitals operated for profit" and that
school. A brief tabulation indicating the amount of "petitioners and their family occupy a portion of the building
income of the hospital for the years 1954, 1955 and for their residence." With respect to petitioners' claim for
1956, and its operational expenses, is as follows: exemption based upon the operation of the school of
midwifery, the Court conceded that "the proposition might be
1954 proper if the property used for the school of midwifery were
separate and distinct from the hospital." It added, however,
Income Expenses Deficit
that, "in the instant case, the portions of the building used for
classrooms of the school of midwifery have not been shown to
P 5,280.04 P1,303.80
be exclusively for school purposes"; that said portions "rather
Charity Ward P10,803.26 ... have a dual use, i.e., for classroom and for hospital use, the
P14,779.50
Pay Ward latter not being a purpose that renders the property tax
P16,083.30 exempt;" that part of the building and lot in question "is used
(Exhibits "A", "A-1" and "A-2") as a hospital, part as residence of the petitioners, part as
garage, part as dormitory and part as school"; and that "the
portion dedicated to educational and charitable purposes can
1955 not be identified from those destined to other uses; and the
building is itself an indivisible unit of property."
Income Expenses Deficit
P 6,859.32 It should be noted, however, that, according to the very
Charity Ward 14,038.92 statement of facts made in the decision appealed from, of the
P17,433.30 P3,464.94
thirty-two (32) beds in the hospital, twenty (20) are for
Pay Ward
P20,898.24 charity-patients; that "the income realized from pay-patients is
spent for improvement of the charity wards;" and that
(Exhibits "B", "B-1" and "B-2") "petitioners, Dr. Ester Ochangco Herrera, as directress" of said
hospital, "does not receive any salary," although its resident
physician gets a monthly salary of P170.00. It is well settled,
1956
in this connection, that the admission of pay-patients does not
Income Expenses detract from the charitable character of a hospital, if all its
Deficit
funds are devoted "exclusively to the maintenance of the
P 5,559.89 P 341.53
institution" as a "public charity" (84 C.J.S., 617; see, also, 51
Charity Ward 16,249.04 Am. Jur. 607; Cooley on Taxation, Vol. 2, p. 1562; 144
P21,467.40
Pay Ward A.L.R., 1489-1492). "In other words, where rendering charity
P21,809.93 is its primary object, and the funds derived from payments
made by patients able to pay are devoted to the benevolent
(Exhibits "C", "C-1" and "C-2")
purposes of the institution, the mere fact that a profit has been
Aside from the St. Catherine and St. Mary hospitals, the made will not deprive the hospital of its benevolent character"
petitioners declared that they also own lands and coconut (Prairie Du Chien Sanitarium Co. vs. City of Prairie Du Chien,
plantations in Quezon Province, and other real estate in the 242 Wis. 262, 7 NW [2d] 832, 144 A.L.R. 1480).
City of Manila consisting of apartments for rent. The
petitioner, Jose V. Herrera, is an architect, actively engaged in Thus, we have held that the U.S.T. Hospital was not
the practice of his profession, with office at Tuason Building, established for profit-making purposes, although it had 140
Escolta, Manila. He was formerly Chairman, Board of paying beds maintained only to partly finance the expenses of
Examiners for Architects and Chairman, Board of Architects the free wards, containing 203 beds for charity patients
connected with the United Nations. He was also connected (U.S.T. Hospital Employees Association vs. Sto. Tomas
with the Allied Technologists which constructed the Veterans University Hospital, L-6988, May 24, 1954), that St. Paul's
Hospital in Quezon City. Hospital of Iloilo, a corporation organized for "charitable
educational and religious purposes" can not be considered as
The only issue raised, is whether or not the lot, building and engaged in business merely because its pharmacy department
other improvements occupied by the St. Catherine Hospital are charges paying patients the cost of their medicine, plus 10%
exempt from the real property tax. The resolution of this thereof, to partly offset the cost of medicines supplied free of
question boils down to the corollary issue as to whether or not charge to charity patients (Collector of Internal Revenue vs.
St. Paul's Hospital of Iloilo, L-12127, May 25, 1959), and that
19
the amendment of the original articles of incorporation of the
University of Visayas to convert it from a non-stock to a stock
corporation and the increase of its assets from P9,000 to
P50,000, distributed among the members of the original non-
stock corporation in terms of shares of stock, as well as the
subsequent move of its board of trustees to double the stock
dividends of the corporation, in view of a gain of P200,000.00
in property, besides good-will, which was not carried out, does
not justify the inference that the corporation has become one
for business and profit, none of its profits having inured to the
benefit of any stockholder or individual (Collector of Internal
Revenue vs. University of Visayas, L-13554, February 28,
1961).
Moreover, the exemption in favor of property used exclusively
for charitable or educational purposes is "not limited to
property actually indispensable" therefor (Cooley on Taxation,
Vol. 2, p. 1430), but extends to facilities which are "incidental
to and reasonably necessary for" the accomplishment of said
purposes, such as, in the case of hospitals, "a school for
training nurses, a nurses' home, property use to provide
housing facilities for interns, resident doctors, superintendents,
and other members of the hospital staff, and recreational
facilities for student nurses, interns and residents" (84 C.J.S.,
621), such as "athletic fields," including "a farm used for the
inmates of the institution" (Cooley on Taxation, Vol. 2, p.
1430).
Within the purview of the Constitutional exemption from
taxation, the St. Catherine's Hospital is, therefore, a charitable
institution, and the fact that it admits pay-patients does not bar
it from claiming that it is devoted exclusively to benevolent
purposes, it being admitted that the income derived from pay-
patients is devoted to the improvement of the charity wards,
which represent almost two-thirds (2/3) of the bed capacity of
the hospital, aside from "out-charity patients" who come only
for consultation.
Again, the existence of "St. Catherine's School of Midwifery",
with an enrollment of about 200 students, who practice partly
in St. Catherine's Hospital and partly in St. Mary's Hospital,
which, likewise, belongs to petitioners herein, does not, and
cannot, affect the exemption to which St. Catherine's Hospital
is entitled under our fundamental law. On the contrary, it
furnishes another ground for exemption. Seemingly, the Court
of Tax Appeals was impressed by the fact that the size of said
enrollment and the matriculation fee charged from the students
of midwifery, aside from the amount they paid for board and
lodging, including transportation to St. Mary's Hospital,
warrants the belief that petitioners derive a substantial profit
from the operation of the school aforementioned. Such factor
is, however, immaterial to the issue in the case at bar, for "all
lands, building and improvements used exclusively for
religious, charitable or educational purposes shall be exempt
from taxation," pursuant to the Constitution, regardless of
whether or not material profits are derived from the operation
of the institutions in question. In other words, Congress may,
if it deems fit to do so, impose taxes upon such "profits", but
said "lands, buildings and improvements" are beyond its
taxing power.
Similarly, the garage in the building above referred to
which was obviously essential to the operation of the school of
midwifery, for the students therein enrolled practiced, not only
in St. Catherine's Hospital, but, also, in St. Mary's Hospital,
and were entitled to transportation thereto for Mrs. Herrera
received no compensation as directress of St. Catherine's
Hospital were incidental to the operation of the latter and of
said school, and, accordingly, did not affect the charitable
character of said hospital and the educational nature of said
school.
WHEREFORE, the decision of the Court of Tax Appeals, as
well as that of the Assessment Board of Appeals of Quezon
City, are hereby reversed and set aside, and another one
entered declaring that the lot, building and improvements
constituting the St. Catherine's Hospital are exempt from
taxation under the provisions of the Constitution, without
special pronouncement as to costs. It is so ordered.
G.R. No. L-19707 August 17, 1967
7. PHILIPPINE ACETYLENE CO., INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and
COURT OF TAX APPEALS, respondents.
Ponce Enrile, Siguion Reyna, Montecillo and Belo, for
petitioner.
Office of the Solicitor General for respondents.
CASTRO, J.:
The petitioner is a corporation engaged in the manufacture and
sale of oxygen and acetylene gases. During the period from
June 2, 1953 to June 30, 1958, it made various sales of its
products to the National Power Corporation, an agency of the
Philippine Government, and to the Voice of America an
agency of the United States Government. The sales to the NPC
amounted to P145,866.70, while those to the VOA amounted
to P1,683, on account of which the respondent Commission of
Internal Revenue assessed against, and demanded from, the
petitioner the payment of P12,910.60 as deficiency sales tax
and surcharge, pursuant to the following-provisions of the
National Internal Revenue Code:
Sec. 186. Percentage tax on sales of other articles.
There shall be levied, assessed and collected once
only on every original sale, barter, exchange, and
similar transaction either for nominal or valuable
considerations, intended to transfer ownership of, or
title to, the articles not enumerated in sections one
hundred and eighty-four and one hundred and eighty-
five a tax equivalent to seven per centum of the gross
selling price or gross value in money of the articles
so sold, bartered exchanged, or transferred, such tax
to be paid by the manufacturer or producer: . . . .
Sec. 183. Payment of percentage taxes.(a) In
general.It shall be the duty of every person
20
 conducting business on which a percentage tax is
imposed under this Title, to make a true and complete
return of the amount of his, her, or its gross monthly
sales, receipts or earnings, or gross value of output
actually removed from the factory or mill warehouse
and within twenty days after the end of each month,
pay the tax due thereon: Provided, That any person
retiring from a business subject to the percentage tax
shall notify the nearest internal revenue officer
thereof, file his return or declaration and pay the tax
due thereon within twenty days after closing his
business.
If the percentage tax on any business is not paid
within the time specified above, the amount of the tax
shall be increased by twenty-five per centum, the
increment to be a part of the tax.
The petitioner denied liability for the payment of the tax on
the ground that both the NPC and the VOA are exempt from
taxation. It asked for a reconsideration of the assessment and,
failing to secure one, appealed to the Court of Tax Appeals.
The court ruled that the tax on the sale of articles or goods in
section 186 of the Code is a tax on the manufacturer and not
on the buyer with the result that the "petitioner Philippine
Acetylene Company, the manufacturer or producer of oxygen
and acetylene gases sold to the National Power Corporation,
cannot claim exemption from the payment of sales tax simply
because its buyer the National Power Corporation is
exempt from the payment of all taxes." With respect to the
sales made to the VOA, the court held that goods purchased
by the American Government or its agencies from
manufacturers or producers are exempt from the payment of
the sales tax under the agreement between the Government of
the Philippines and that of the United States, provided the
purchases are supported by certificates of exemption, and
since purchases amounting to only P558, out of a total of
P1,683, were not covered by certificates of exemption, only
the sales in the sum of P558 were subject to the payment of
tax. Accordingly, the assessment was revised and the
petitioner's liability was reduced from P12,910.60, as assessed
by the respondent commission, to P12,812.16. 1
The petitioner appealed to this Court. Its position is that it is
not liable for the payment of tax on the sales it made to the
NPC and the VOA because both entities are exempt from
taxation.
I sales of gasoline made to the Federal Government. Said the
The NPC enjoys tax exemption by virtue of an act2 of
Congress which provides as follows:
Sec. 2. To facilitate the payment of its indebtedness,
the National Power Corporation shall be exempt from
all taxes, except real property tax, and from all duties,
fees, imposts, charges, and restrictions of the
Republic of the Philippines, its provinces, cities and
municipalities.
It is contended that the immunity thus given to the NPC would
be impaired by the imposition of a tax on sales made to it
because while the tax is paid by the manufacturer or producer,
the tax is ultimately shifted by the latter to the former. The
petitioner invokes in support of its position a 1954 opinion of
the Secretary of Justice which ruled that the NPC is exempt
from the payment of all taxes "whether direct or indirect."
We begin with an analysis of the nature of the percentage
(sales) tax imposed by section 186 of the Code. Is it a tax on
the producer or on the purchaser? Statutes of the type under
consideration, which impose a tax on sales, have been
described as "act[s] with schizophrenic symptoms,"3 as they
apparently have two faces one that of a vendor tax, the
other, a vendee tax. Fortunately for us the provisions of the
Code throw some light on the problem. The Code states that
the sales tax "shall be paid by the manufacturer or
producer,"4 who must "make a true and complete return of the
amount of his, her or its gross monthly sales, receipts or
earnings or gross value of output actually removed from the
factory or mill warehouse and within twenty days after the end
of each month, pay the tax due thereon."5
But it is argued that a sales tax is ultimately passed on to the
purchaser, and that, so far as the purchaser is an entity like the
NPC which is exempt from the payment of "all taxes, except
real property tax," the tax cannot be collected from sales.
Many years ago, Mr. Justice Oliver Wendell Holmes
expressed dissatisfaction with the use of the phrase "pass the
tax on." Writing the opinion of the U.S. Supreme Court
in Lash's Products v. United States,6 he said: "The phrase
'passed the tax on' is inaccurate, as obviously the tax is laid
and remains on the manufacturer and on him alone. The
purchaser does not really pay the tax. He pays or may pay the
seller more for the goods because of the seller's obligation, but
that is all. . . . The price is the sum total paid for the goods.
The amount added because of the tax is paid to get the goods
and for nothing else. Therefore it is part of the price . . .".
It may indeed be that the incidence of the tax ultimately settles
on the purchaser, but it is not for that reason alone that one
may validly argue that it is a tax on the purchaser. The
exemption granted to the NPC may be likened to the immunity
of the Federal Government from state taxation and vice
versa in the federal system of government of the United
States. In the early case of Panhandle Oil Co. v.
Mississippi7 the doctrine of intergovernment mental tax
immunity was held as prohibiting the imposition of a tax on
Supreme court of the United States:
A charge at the prescribed. rate is made on account of
every gallon acquired by the United States. It is
immaterial that the seller and not the purchaser is
required to report and make payment to the state.
Sale and purchase constitute a transaction by which
the tax is measured and on which the burden rests. . .
21
 . The necessary operation of these enactments when
so construed is directly to retard, impede and burden
the exertion by the United States, of its constitutional
powers to operate the fleet and hospital. . . . To use
the number of gallons sold the United States as a
measure of the privilege tax is in substance and legal
effect to tax the sale. . . . And that is to tax the United
States to exact tribute on its transactions and apply
the same to the support of the state.1wph1.t
Justice Holmes did not agree. In a powerful dissent joined by
Justices Brandeis and Stone, he said:
If the plaintiff in error had paid the tax and added it
to the price the government would have nothing to
say. It could take the gasoline or leave it but it could
not require the seller to abate his charge even if it had
been arbitrarily increased in the hope of getting more
from the government than could be got from the
public at large. . . . It does not appear that the
government would have refused to pay a price that
included the tax if demanded, but if the government
had refused it would not have exonerated the seller. .
..
. . . I am not aware that the President, the Members of
the Congress, the Judiciary or to come nearer to the
case at hand, the Coast Guard or the officials of the
Veterans' Hospital [to which the sales were made],
because they are instrumentalities of government and
cannot function naked and unfed, hitherto have been
held entitled to have their bills for food and clothing
cut down so far as their butchers and tailors have
been taxed on their sales; and I had not supposed that
the butchers and tailors could omit from their tax
returns all receipts from the large class of customers
to which I have referred. The question of interference
with Government, I repeat, is one of reasonableness
and degree and it seems to me that the interference in
this case is too remote.
But time was not long in coming to confirm the soundness of
Holmes' position. Soon it became obvious that to test the
constitutionality of a statute by determining the party on which
the legal incidence of the tax fell was an unsatisfactory way of
doing things. The fall of the bastion was signalled by Chief
Justice Hughes' statement in James v. Dravo Constructing
Co.8 that "These cases [referring to Panhandle and Indian
Motorcycle Co. v. United States, 283 U.S. 570 (1931)] have
been distinguished and must be deemed to be limited to their
particular facts."
In 1941, Alabama v. King & Boozer9 held that the
constitutional immunity of the United States from state
taxation was not infringed by the imposition of a state sales
tax with which the seller was chargeable but which he was
required to collect from the buyer, in respect of materials
purchased by a contractor with the United States on a cost-
plus basis for use in carrying out its contract, despite the fact
that the economic burden of the tax was borne by the United
States.
The asserted right of the one to be free of taxation by
the other does not spell immunity from paying the
added costs, attributable to the taxation of those who
furnish supplies to the Government and who have
been granted no tax immunity. So far as a different
view has prevailed, see Panhandle Oil Co. v.
Mississippi and Graves v. Texas Co., supra, we think
it no longer tenable.
Further inroads into the doctrine of Panhandle were made in
1943 when the U.S. Supreme Court held that immunity from
state regulation in the performance of governmental functions
by Federal officers and agencies did not extend to those who
merely contracted to furnish supplies or render services to the
government even though as a result of an increase in the price
of such supplies or services attributable to the state regulation,
its ultimate effect may be to impose an additional economic
burden on the Government.10
But if a complete turnabout from the rule announced
in Panhandle was yet to be made, it was so made in 1952
in Esso Standard Oil v. Evans11 which held that a contractor
is not exempt from the payment of a state privilege tax on the
business of storing gasoline simply because the Federal
Government with which it has a contract for the storage of
gasoline is immune from state taxation.
This tax was imposed because Esso stored gasoline.
It is not . . . based on the worth of the government
property. Instead, the amount collected is graduated
in accordance with the exercise of Esso's privilege to
engage in such operations; so it is not "on" the federal
property. . . . Federal ownership of the fuel will not
immunize such a private contractor from the tax on
storage. It may generally, as it did here, burden the
United States financially. But since James vs. Dravo
Contracting Co., 302 U.S. 134, 151, 82 L. ed. 155,
167, 58 S. Ct. 208, 114 ALR 318, this has been no
fatal flaw. . . . 12
We have determined the current status of the doctrine of
intergovernmental tax immunity in the United States, by
showing the drift of the decisions following announcement of
the original rule, to point up the that fact that even in those
cases where exemption from tax was sought on the ground of
state immunity, the attempt has not met with success.
As Thomas Reed Powell noted in 1945 in reviewing the
development of the doctrine:
Since the Dravo case settled that it does not matter
that the economic burden of the gross receipts tax
may be shifted to the Government, it could hardly
matter that the shift comes about by explicit
agreement covering taxes rather than by being
absorbed in a higher contract price by bidders for a
contract. The situation differed from that in
the Panhandle and similar cases in that they involved
but two parties whereas here the transaction was
22
 tripartite. These cases are condemned in so far as
they rested on the economic ground of the ultimate
incidence of the burden being on the Government,
but this condemnation still leaves open the question
whether either the state or the United States when
acting in governmental matters may be made legally
liable to the other for a tax imposed on it as vendee.
The carefully chosen language of the Chief Justice
keeps these cases from foreclosing the issue. . . . Yet
at the time it would have been a rash man who would
find in this a dictum that a sales tax clearly on the
Government as purchaser is invalid or a dictum that
Congress may immunize its contractors.13
If a claim of exemption from sales tax based on state
immunity cannot command assent, much less can a claim
resting on statutory grant.
It may indeed be that the economic burden of the tax finally
falls on the purchaser; when it does the tax becomes a part of
the price which the purchaser must pay. It does not matter that
an additional amount is billed as tax to the purchaser. The
method of listing the price and the tax separately and defining
taxable gross receipts as the amount received less the amount
of the tax added, merely avoids payment by the seller of a tax
on the amount of the tax. The effect is still the same, namely,
that the purchaser does not pay the tax. He pays or may pay
the seller more for the goods because of the seller's obligation,
but that is all and the amount added because of the tax is paid
to get the goods and for nothing else.14
But the tax burden may not even be shifted to the purchaser at
all. A decision to absorb the burden of the tax is largely a
matter of economics.15 Then it can no longer be contended that
a sales tax is a tax on the purchaser.
We therefore hold that the tax imposed by section 186 of the
National Internal Revenue Code is a tax on the manufacturer
or producer and not a tax on the purchaser except probably in
a very remote and inconsequential sense. Accordingly its levy
on the sales made to tax-exempt entities like the NPC is
permissible.
II
This conclusion should dispose of the same issue with respect
to sales made to the VOA, except that a claim is here made
that the exemption of such sales from taxation rests on
stronger grounds. Even the Court of Tax Appeals appears to
share this view as is evident from the following portion of its
decision:
With regard to petitioner's sales to the Voice of
America, it appears that the petitioner and the
respondent are in agreement that the Voice of
America is an agency of the United States
Government and as such, all goods purchased locally
by it directly from manufacturers or producers are
exempt from the payment of the sales tax under the
provisions of the agreement between the Government
of the Philippines and the Government of the United
States, (See Commonwealth Act No. 733) provided
such purchases are supported by serially numbered
Certificates of Tax Exemption issued by the vendee-
agency, as required by General Circular No. V-41,
dated October 16, 1947. . . .
The circular referred to reads:
Goods purchased locally by U.S. civilian agencies
directly from manufacturers, producers or importers
shall be exempt from the sales tax.
It was issued purportedly to implement the Agreement
between the Republic of the Philippines and the United States
of America Concerning Military Bases,16 but we find nothing
in the language of the Agreement to warrant the general
exemption granted by that circular.
The pertinent provisions of the Agreement read:
ARTICLE V. Exemption from Customs and Other
Duties
No import, excise, consumption or other tax, duty or
impost shall be charged on material, equipment,
supplies or goods, including food stores and clothing,
for exclusive use in the construction, maintenance,
operation or defense of the bases, consigned to, or
destined for, the United States authorities and
certified by them to be for such purposes.
ARTICLE XVIII.Sales and Services Within the
Bases
1. It is mutually agreed that the United States Shall
have the right to establish on bases, free of all
licenses; fees; sales, excise or other taxes, or imposts;
Government agencies, including concessions, such as
sales commissaries and post exchanges, messes and
social clubs, for the exclusive use of the United
States military forces and authorized civilian
personnel and their families. The merchandise or
services sold or dispensed by such agencies shall be
free of all taxes, duties and inspection by the
Philippine authorities. . . .
Thus only sales made "for exclusive use in the construction,
maintenance, operation or defense of the bases," in a word,
only sales to the quartermaster, are exempt under article V
from taxation. Sales of goods to any other party even if it be
an agency of the United States, such as the VOA, or even to
the quartermaster but for a different purpose, are not free from
the payment of the tax.
On the other hand, article XVIII exempts from the payment of
the tax sales made within the base by (not sales to)
commissaries and the like in recognition of the principle that a
sales tax is a tax on the seller and not on the purchaser.
It is a familiar learning in the American law of taxation that
tax exemption must be strictly construed and that the
23
exemption will not be held to be conferred unless the terms
under which it is granted clearly and distinctly show that such
was the intention of the parties.17 Hence, in so far as the
circular of the Bureau of Internal Revenue would give the tax
exemptions in the Agreement an expansive construction it is
void.
We hold, therefore, that sales to the VOA are subject to the
payment of percentage taxes under section 186 of the Code.
The petitioner is thus liable for P12,910.60, computed as
follows:
Sales to NPC P145,866.70
Sales to VOA P 1,683.00
Total sales subject to tax P147,549.70
7% sales tax due thereon P 10,328.48
Add: 25% surcharge P 2,582.12
Total amount due and collectible P 12,910.60
Accordingly, the decision a quo is modified by ordering the
petitioner to pay to the respondent Commission the amount of
P12,910.60 as sales tax and surcharge, with costs against the
petitioner.
G.R. No. L-14878 December 26, 1963
SURIGAO CONSOLIDATED MINING CO.,
INC., petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE and COURT
OF APPEALS, respondents.
Leido, Angeles and Valladolid for petitioner.
Office of the Solicitor General for respondents.
REGALA, J.:
This is a petition to review the decision of the Court of Tax
Appeals in Manila Civil Case No. 4770 dismissing for lack of
merit the action of the Surigao Consolidated Mining Company
for the refund of the total amount of P17,051.14 allegedly
representing overpayment of ad valorem tax for the fourth
quarter of 1941.
The record shows that before the outbreak of World War II,
the Surigao Consolidated Mining Company (called SURIGAO
CONSOLIDATED, for short), a domestic corporation which
then had its principal office in the City of Iloilo, was operating
its mining concessions in Mainit, Surigao. Pursuant to section
246 of the Internal Revenue Code, which prescribes the time
and manner of payment of royalties or ad valorem taxes, it
filed a bond and had been regularly filing its returns for
minerals removed from its mines during each calendar quarter
and paying ad valorem tax thereon within 20 days after the
close of every quarter. In each case, computation of the ad
valorem tax was based on the market value of the minerals set
forth in the returns, subject to adjustment upon the receipt of
the smelter showing the actual market value of the minerals to
the United States.
Due to the interruption, of the communications outbreak of the
war, the principal office of Surigao Consolidated lost contact
with its mines and never received the production reports for
the fourth quarter of 1941. In order to avoid incurring any tax
penalty, said company, on January 19, 1942, deposited a check
amount of P27,000.00 payable to and "indorsed in favor of the
City Treasurer (of Iloilo) in payment of the ad valorem taxes
(approximate adjustment to be made when circumstances
allow it) for the fourth quarter of 1941."
After the termination of the war, Commonwealth Act No. 722
was enacted, which provided for the filing of returns for
minerals removed during the last quarter of 1941 up to
December 31, 1945 and the payment of ad valorem tax on said
minerals to February 28, 1946.
Availing of the provisions of the aforementioned Act, the
Surigao Consolidated, on December 28, 1945, ad valoremtax
returns for the fourth quarter declaring as its tax liability the
amount of P43,486.54. Applying the amount of P27,000.00
previously deposited with the City Treasurer of Iloilo, the
returns indicated an unpaid balance of P16,486.54 as the " tax
subject to revision."
However, on February 26, 1946, the Surigao Consolidated
filed an amended ad valorem tax returns under which
amendment it declared a reduced ad valorem tax in the
amount of P37,189.00. And crediting itself with the amount of
P27,000.00 previously deposited with the City Treasurer of
Iloilo, it paid the remaining balance of P10,189.00.
On September 24, 1946, the Surigao Consolidated again filed
a statement of adjustment allegedly containing figures and
data of the complete smelter returns for minerals shipped to
the United States. In the accompanying letter, a request was
made, this time not only for the reduction of tax, but for the
refund of the amount of P18,107.87. On October 19, 1946,
another statement of adjustment was filed reducing the claim
for refund to P17,158.01. Finally, on March 15, 1947, a third
statement of adjustment was submitted further reducing the
claim for refund to the amount of P 17,051.14.
As the Collector of Internal Revenue denied the request for the
refund of the said P17,051.14 on the ground that the money
already paid as ad valorem tax was legally due to the
Government, the Surigao Consolidated instituted with the
Court of First Instance of Manila civil action for its recovery.
However, upon the enactment of Republic Act No. 1125
creating the Court of Tax Appeals, the case was remanded to
the latter court for proper disposition.
After hearing, the Court of Tax Appeals, on July 16, 1958,
finding that the amount sought to be refunded been lawfully
collected, rendered its decision denying the claim for refund.
The Surigao Consolidated in due time filed a motion for new
24
trial on the ground that the decision was "not justified by the
overwhelming weight of evidence" and that it was contrary to
law. The tax court, however, denied the motion. Hence, this
petition for review.lawphil.net
The question to be resolved is whether or not Surigao
Consolidated, petitioner herein, is entitled to the refund of ad
valorem tax in the total amount of P17,051.14, itemized as
follows:
1. Ad valorem tax on minerals removed from the mines P1,191.46
but allegedly lost in transit on account of war
2. Ad valorem tax on minerals extracted from the mines 15,609.73
but allegedly looted during the Japanese occupation
3. Alleged overpayment of ad valorem tax on minerals 249.95to hold that the benefits of said provision does not extend to it.
shipped to the United States
P17,051.14
The first, item in petitioner's claim for refund in the amount of
P1,191.46 represents the amount of ad valorem tax paid on
minerals removed from the mines but alleged to have been lost
in transit on account of the war. The refund is sought under
section 1 (d) of Republic Act No. 81, which provides as
follows:
SECTION 1. Any provision of existing law to the
contrary notwithstanding:
xxx xxx xxx
(d) All unpaid royalties, ad valorem or specific taxes
on all minerals mined from mining claims or
concessions existing and in force on January first,
nineteen hundred and forty-two, and which minerals
were lost by reason of the war or circumstances
arising therefrom, are hereby condoned: Provided,
That if said minerals had been or shall be recovered
by the miner or producer, such royalties, ad
valorem or specific taxes on the same shall be
immediately due and demandable.
Petitioner argues that since the law condones the taxes due
from taxpayers who failed to pay their taxes, it would be
unfair to deny this benefit to those taxpayers who had been
prompt in paying theirs. The argument merits careful
consideration. At first it would seem to be sound and logical.
But the aforequoted section clearly refers to the condonation
of unpaid taxes only. The condonation of a tax liability is
equivalent and is in the nature of a tax exemption. Being so, it
should be sustained only when expressed in explicit terms, and
it can not be extended beyond the plain meaning of those
terms. It is the universal rule that he who claims an exemption
from his share of the common burden of taxation must justify
his claim by showing that the Legislature intended to exempt
him by words too plain to be mistaken. (Statutory
Construction by Francisco, citing Government of P. I. v.
Monte de Piedad, 25 Phil. 42.)
The application of a statute creating an exemption for
taxation to taxes already assessed depends upon
whether it is retrospective in its operation. Such a
statute has no retrospective operation, unless by the
terms thereof it clearly appears to be the intention of
the legislature that the exemption shall relate back to
taxes which have already become fixed, as a statute
which releases a person or corporation from a burden
common to the whole community should be strictly
(Louisville Water Co. v. Hamilton, 81 Ky. 517, ...
cited 6 American and English Ann. Cases, p. 4
38).
Petitioner having failed to point to Us any portion of the law
that explicitly provides for a refund of those taxpayers who
had paid their taxes on the items and under circumstances
mentioned in the abovequoted provision, We are constrained
Even assuming arguendo that the provisions of Republic Act
No. 81 authorizes the refund of taxes already paid by
petitioner, the latter would not still be entitled to the refund
sought for under the first item. It is to be noted that petitioner's
evidence of the alleged loss in transit as observed by the Court
of Tax Appeals, merely of testimony of witnesses who did not
have personal knowledge of the circumstances which gave rise
to the loss. Such evidence cannot, of course be considered
sufficient to establish that the minerals were in fact lost. Judge
Luciano of the Court of Tax Appeals during the trial, would be
to create a dangerous precendent.
Under the second item, petitioner seeks to recover the amount
of P15,609.73 representing the ad valorem tax paid on
minerals extracted from its mines but alleged to have been
looted during the enemy occupation. In connection with the
alleged looting of the minerals, the Tax Court has this to say:
We are again confronted with the case where plaintiff
has, to our mind, failed to present adequate evidence
to prove such loss. The evidence, if at all, is merely
limited to the general and uncorroborated statements
of plaintiff's officers that the same were lost in the
mines. These testimonies cannot be taken on their full
face value, especially because they had no direct
supervision over the handling of such minerals at the
time of the alleged loss. Much less had these officers
have personal knowledge of the loss. Under the
circumstances, we can not make the finding that the
minerals were in fact lost.
Going over the record, We find no reason to disturb the above
findings of the Court of Tax Appeals, there being no showing
that they are not substantiated by the evidence. With this
observation, it would be useless ceremony to delve into the
issue of whether ad valorem tax should be or should not be
paid on minerals extracted from the mines but not removed
therefrom.
One more item in petitioner's claim is the alleged overpayment
of ad valorem tax in the amount of P249.95 on the minerals
shipped to the United States. It is that an ad valorem tax in the
amount of P20,387.81 was originally paid on the minerals
25
shipped to the United States with a gross value of
P410,299.49; that the smelter returns from the United States
show that the actual market value of the minerals shipped to
the States was P416,895.28; and that after deducting all
allowable deductions amounting in all to P1,828,34, the true
and correct amount of ad valoremtax on said minerals was
P20,137.86. Petitioner, therefore, claims difference between
the amount of P20,387.81 and P20,137.86 is an overpayment.
It is not disputed that, as indicated above, the amount of ad
valorem tax on the minerals shipped to the United States is
subject to adjustment upon the receipt of the smelter returns
showing their actual market value Petitioner contends that the
statements of adjustment alleged to contain the figures and
data set forth in the smelter returns are adequate evidence of
the actual market value of the minerals shipped to the United
States.
The best evidence of the actual market value minerals shipped
to the United States are the smelter returns themselves. These
returns are admittedly petitioner's possession, but for unknown
reasons, petitioner failed to produce them during the trial. As
there is no credible and satisfactory explanation for the non-
production of said returns, there arises the presumption that if
produced they would be adverse to petitioner. Under the
circumstances, the Court of Tax Appeals cannot be said to
have committed error, much less abused its discretion, in
refusing to give any probative value statements of adjustment.
It is a settled doctrine that in a suit for the recovery of the
payment of taxes or any portion thereof as having been
illegally or erroneously collected, the burden is upon the
taxpayer to establish the facts which show the illegality of the
tax or that the determination thereof is erroneous. In this case,
petitioner failed to show that the amount of taxes sought to be
refunded have been erroneously collected.
Conformably to the above, We are of the opinion that the
Court of Tax Appeals did not commit any error in denying
petitioner's claim.
WHEREFORE, the decision appealed from is hereby
affirmed. Costs against petitioner.
DIGITAL TELECOMMUNICATIONS G.R. No. 156040
PHILIPPINES, INC.,
Petitioner, Present:
UNO, C.
J.,
QUISUMBING,
YNARES-SANTIAGO,
CARPIO,
AUSTRI
A-MARTINEZ,
- versus - CORONA,
CARPIO MORALES,
AZCUNA,
TINGA,
CHICO-
NAZARIO,
VELASCO, JR.,
NACHURA,
CITY GOVERNMENT OF REYES,
BATANGAS represented by LEONARDO-DE CASTRO, and
HON. ANGELITO DONDON BRION, JJ.
A. DIMACUHA, Batangas City Mayor,
MR. BENJAMIN S. PARGAS,
Batangas City Treasurer, and
ATTY. TEODULFO A. DEQUITO, Promulgated:
Batangas City Legal Officer,
Respondents. December 11, 2008
x------------------------------------------------
-----x
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari[1] assailing the
Regional Trial Courts Order[2] dated 2 May 2002 in Civil Case
No. 5343 as well as the 19 November 2002 Order denying the
Motion for Reconsideration. In the assailed orders, Branch 8
of the Regional Trial Court (RTC) of Batangas City (RTC-
Branch 8) reversed the 28 March 2001 Order [3] issued by
Branch 3 of RTC-Batangas City (RTC-Branch 3). RTC-
Branch 8 declared that under its legislative franchise, Digital
Telecommunications Philippines, Inc. (petitioner) is not
exempt from paying real property tax assessed by
the Batangas City Government (respondent).
The Facts
On 17 February 1994, Republic Act No. 7678 (RA
7678)[4] granted petitioner a 25-year franchise to install,
operate and maintain telecommunications systems throughout
the Philippines. Section 5 of RA 7678 reads:
Sec. 5. Tax Provisions. - The grantee shall
be liable to pay the same taxes on its real
estate, buildings, and personal
property exclusive of this franchise as
other persons or corporations are now or
hereafter may be required by law to pay.
In addition thereto, the grantee shall pay to
the Bureau of Internal Revenue each year,
P within thirty (30) days after the audit and
approval of the accounts, a franchise tax as
may be prescribed by law of all gross
receipts of the telephone or other
telecommunications businesses transacted
under this franchise by the
grantee; Provided, That the grantee shall
continue to be liable for income taxes
payable under Title II of the National
Internal Revenue Code pursuant to Section 2
of Executive Order No. 72 unless the latter
enactment is amended or repealed, in which
case the amendment or repeal shall be
applicable thereto.
26

The grantee shall file the return with and pay
the tax due thereon to the Commissioner of
Internal Revenue or his duly authorized
representative in accordance with the
National Internal Revenue Code and the
return shall be subject to audit by the Bureau
of Internal Revenue. (Boldfacing and
underscoring supplied)
Sometime in 1997, respondent issued a building permit for the
installation of petitioners telecommunications facilities
in Batangas City. After the installation of the facilities,
petitioner applied with the Mayors office of Batangas City for
a permit to operate. Because of a discrepancy in the actual
investment costs used in computing the prescribed fees for the
clearances and permits, petitioner was not able to secure a
Mayors Permit for the year 1998. Petitioner was also advised
to settle its unpaid realty taxes. However, petitioner claimed
exemption from the payment of realty tax, citing the first
sentence of Section 5 of RA 7678, the Letter-Opinion of the
Bureau of Local Government Finance (BLGF) dated 8 April
1997,[5] and the letter of the Office of the President dated 12
March 1996.[6]
In 1999, respondent refused to issue a Mayors Permit to
petitioner without payment of its realty taxes.
On 22 June 1999, petitioner paid P68,890.39 under protest as
fees for the permit to operate, but respondent refused to accept
the payment unless petitioner also paid the realty taxes.[7]
On 2 July 1999, respondent threatened to close down
petitioners operations. Hence, on 3 July 1999, petitioner
instituted a complaint for prohibition and mandamus with
prayer for a temporary restraining order or writ of preliminary
injunction. This case was raffled to RTC-Branch 3. On the
same date, respondent served a Cease and Desist Order on
petitioner.[8]
On 20 January 2000, during the pendency of the complaint,
petitioner paid its realty taxes of P2,043,265 under
protest.[9] Petitioner resumed its business, rendering the other
issues raised in petitioners complaint moot. Consequently, the
only issue left for resolution is whether petitioner is exempt
from the realty tax under Section 5 of RA 7678.
The Ruling of RTC-Branch 3
On 28 March 2001, RTC-Branch 3 issued the following
Order:
WHEREFORE, premises considered, the
Court hereby declares that the real estate,
buildings and personal property of plaintiff
Digital Telecommunications Philippines,
Inc. which are used in the operation of its
franchise are exempt from payment of real
property taxes, but those not so used should
be held liable thereto.[10]
RTC-Branch 3 reasoned that the phrase exclusive of this
franchise in the first sentence of Section 5 of RA 7678 limits
the real properties that are subject to realty tax only to those
which are not used in petitioners telecommunications
business. In short, petitioners real properties used in its
telecommunications business are not subject to realty tax.[11]
On 1 May 2001, respondent moved for reconsideration.
Before acting on the motion, the Presiding Judge of RTC-
Branch 3 voluntarily inhibited himself because the newly-
elected mayor of Batangas City was his kumpadre.[12] The case
was re-raffled to RTC-Branch 8.
The Ruling of RTC-Branch 8
On 2 May 2002, RTC-Branch 8 issued an Order which reads:
WHEREFORE, the defendants Motion for
Reconsideration is hereby granted. The
Order of this Court dated March 21, 2001 is
hereby set aside and, in lieu thereof,
judgment is hereby rendered in favor of the
defendants and against the plaintiff:
- DISMISSING
the Amended Complaint;
- DECLARING that the plaintiff
Digital Telecommunications
Philippines, Inc., under its legislative
franchise RA No. 7678, is not exempted
from the payment of real property tax
being collected by the defendant City
of Batangas and, accordingly,
- ORDERING said plaintiff to pay the
City of Batangas real estate taxes in the
amount of Ph4,620,683.33 which was
due as of January, 2000, as well as those
due thereafter, plus corresponding
interest and penalties.[13]
On 29 May 2002, petitioner moved for reconsideration. On 19
November 2002, RTC-Branch 8 denied petitioners motion for
reconsideration.
Hence, this petition.
The Issue
The sole issue for resolution is whether, under the first
sentence of Section 5 of RA 7678, petitioners real properties
used in its telecommunications business are exempt from the
realty tax.
Petitioners Contentions
Petitioner contends that its exemption from realty tax is based
on the first sentence of Section 5 of RA 7678. Petitioner
27
claims that the evident purpose of the phrase exclusive of this
franchise is to limit the real properties that are subject to
realty tax only to properties that are not used in petitioners
telecommunications business.[14] Petitioner asserts that the
phrase exclusive of this franchise must not be construed as a
useless surplusage. Petitioner points out that its exemption
from realty tax was affirmed in two separate opinions, one
rendered by the Office of the President on 12 March 1996 and
the other by the BLGF on 8 April 1997 and reaffirmed on 4
January 1999.[15] The BLGF declared that the real properties
of Digitel, which are used in the operation of its franchise are
x x x found to be exempt from the payment of real property
taxes beginning 1 January 1993. However, all other properties
of that company not used in connection with the operation of
its franchise shall remain taxable.[16]
Petitioner further argues that under the Local Government
Code, the realty tax is imposed on all lands, buildings,
machineries and other improvements attached to real property.
A franchise is an incorporeal being, a special privilege granted
by the legislature. Hence, to read the first sentence of Section
5 of RA 7678 to mean that the franchisee shall pay taxes on its
real properties used in its telecommunications business would
render the phrase exclusive of this franchise meaningless.
Petitioner admits that the franchise granted under RA 7678 is
a personal property, but the franchise is not the personal
property referred to in the first sentence of Section 5.
Petitioner asserts that the phrase real estate, buildings, and
personal property in the first sentence of Section 5 refers
solely to real properties and does not include personal
properties. Petitioner explains thus:
For PTEs (public telecommunication
entities), these personal properties include
the switches which were installed in the
exchange buildings as well as the outside
and inside plant equipment.Initially, these
telecommunications materials and equipment
were personal property in character. But,
having been installed and made operational
by being attached to the exchange building,
they are now converted into immovables or
real property. That being the case, the
phrase real estate, buildings and personal
property actually refer[s] to properties
that are liable for real estate tax. And,
Congress having made the qualification with
the phrase exclusive of this franchise, only
such real properties that are not used in
furtherance of the franchise are subject to
real property tax.[17] (Emphasis supplied)
Respondents Contentions
Respondent contends that the phrase exclusive of this
franchise does not mean that petitioner is exempt from the
realty tax on its real properties used in its telecommunications
business. The first sentence of Section 5 of RA 7678 makes
petitioner liable to pay the same taxes for its real estate,
buildings, and personal property exclusive of this franchise as
other persons or corporations are or hereafter may be required
by law to pay. This shows the clear intent of Congress to tax
petitioners real and personal properties.[18]Respondent asserts
that the phrase exclusive of this franchise is a qualification of
the broad declaration on the franchisees liability for taxes
which is the main thrust of the first sentence of Section
5. Respondent points out that petitioner is paying taxes and
fees on all its motor vehicles, which are personal properties,
without distinction.[19] Respondent also points out that
petitioner admits that the first sentence of Section 5 of RA
7678 is ambiguous with respect to the phrase exclusive of this
franchise,[20] thus petitioner resorted to the rules on statutory
construction.[21]
Respondent adds that the legislative franchises granted to
other telecommunications companies contain the same phrase
exclusive of this franchise. This shows the intent of Congress
to make franchisees liable for the realty tax rather than exempt
them even if the real properties are used in their
telecommunications business.[22]
The Office of the Solicitor General (OSG), appearing for
respondent, contends that the first sentence of Section 5
provides for petitioners general liability to pay taxes and does
not provide for petitioners exemption from realty
tax. The OSG invokes the doctrine of last antecedent which is
an aid in statutory construction. The OSG argues that under
this doctrine, the qualifying word or phrase only restricts the
word or phrase to which the qualifying word or phrase is
immediately associated and not the word or phrase which is
distantly or remotely located. In the first sentence of Section 5,
the phrase exclusive of this franchise restricts only the words
personal property which immediately precede the phrase
exclusive of this franchise. This means that the franchise, an
intangible personal property, should be excluded from the
personal properties that are subject to taxes under the first
sentence of Section 5. The OSG adds that the use of the
comma to separate real estate, buildings from personal
property exerts a dominant influence in the application of the
doctrine of last antecedent. Further, the OSG reiterates that
laws granting exemption from tax are to be
construed strictissimi juris against the taxpayer and liberally in
favor of the taxing power.
The Ruling of the Court
The petition has no merit.
Section 5 of RA 7678 imposes taxes
and does not exempt from realty tax
The issue in this case involves the interpretation of the
phrase exclusive of this franchise in the first sentence of
Section 5 of RA 7678.
Section 5 of RA 7678 states:
28

Sec. 5. Tax Provisions. - The grantee shall
be liable to pay the same taxes on its real
estate, buildings, and personal
property exclusive of this franchise as
other persons or corporations are now or
hereafter may be required by law to pay.
In addition thereto, the grantee shall pay to
the Bureau of Internal Revenue each year,
within thirty (30) days after the audit and
approval of the accounts, a franchise tax as
may be prescribed by law of all gross
receipts of the telephone or other
telecommunications businesses transacted
under this franchise by the
grantee; Provided, That the grantee shall
continue to be liable for income taxes
payable under Title II of the National
Internal Revenue Code pursuant to Section 2
of Executive Order No. 72 unless the latter
enactment is amended or repealed, in which
case the amendment or repeal shall be
applicable thereto.
The grantee shall file the return with and pay
the tax due thereon to the Commissioner of
Internal Revenue or his duly authorized
representative in accordance with the
National Internal Revenue Code and the
return shall be subject to audit by the Bureau
of Internal Revenue. (Boldfacing and
underscoring supplied)
The first sentence of Section 5 of RA 7678 is the same
provision found in almost all legislative franchises in the
telecommunications industry dating back to 1905.[23] It is also
the same provision that appears in the legislative franchises of
other telecommunications companies like Philippine Long
Distance Telephone Company,[24] Smart Information
Technologies, Inc., and Globe Telecom.[26] Since 1905, no
[25]
telecommunications company has claimed exemption from
realty tax based on the phrase exclusive of this franchise, until
petitioner filed the present case on 3 July 1999.[27]
The first sentence of Section 5 clearly states that the
legislative franchisee shall be liable to pay the following taxes:
(1) the same taxes on its real estate, buildings, and personal
property exclusive of this franchise as other persons or
corporations are now or hereafter may be required by law to
pay; (2) franchise tax as may be prescribed by law of all gross
receipts of the telephone or other telecommunications
businesses transacted under this franchise;[28] and (3) income
taxes payable under Title II of the National Internal Revenue
Code.
The crux of the controversy lies in the interpretation of the
phrase exclusive of this franchise in the first sentence of
Section 5. Petitioner interprets the phrase to mean that its real
properties that are used in its telecommunications business
shall not be subject to realty tax. Respondent interprets the
same phrase to mean that the term personal property shall not
include petitioners franchise, which is an intangible personal
property.
We rule that the phrase exclusive of this franchise simply
means that petitioners franchise shall not be subject to the
taxes imposed in the first sentence of Section 5. The first
sentence lists the properties that are subject to taxes, and the
list excludes the franchise. Thus, the first sentence provides:
The grantee shall be liable to pay the same
taxes on its real estate, buildings, and
personal property exclusive of this
franchise as other persons or corporations
are now or hereafter may be required by law
to pay. (Emphasis supplied)
A plain reading shows that the phrase exclusive of this
franchise is meant to exclude the legislative franchise from the
properties subject to taxes under the first sentence. In effect,
petitioners franchise, which is a personal property, is not
subject to the taxes imposed on properties under the first
sentence of Section 5.
However, petitioners gross receipts from its franchise
are subject to the franchise tax under the second sentence of
Section 5. Thus, the second sentence provides:
In addition thereto, the grantee shall pay to
the Bureau of Internal Revenue each year,
within thirty (30) days after the audit and
approval of the accounts, a franchise tax as
may be prescribed by law of all gross
receipts of the telephone or other
telecommunications businesses transacted
under this franchise by the grantee;
x x x (Emphasis supplied)
In short, petitioners franchise is excluded from the properties
taxable under the first sentence of Section 5 but the gross
receipts from its franchise are expressly taxable under the
second sentence of the same Section.
The first sentence of Section 5 imposes on the franchisee
the same taxes that non-franchisees are subject to with respect
to real and personal properties. The clear intent is to put the
franchisees and non-franchisees in parity in the taxation of
their real and personal properties. Since non-franchisees have
obviously no franchises, the franchise must be excluded from
the list of properties subject to tax to maintain the parity
between the franchisees and non-franchisees. However, the
franchisee is taxable separately from its franchise. Thus, the
second sentence of Section 5 imposes the franchise tax on
gross receipts, which under Republic Act No. 7716 has been
replaced by the 10% Valued Added Tax effective 1 January
1996.[29]
29
Section 5 can be divided into three parts. First is the first
sentence which imposes taxes on real and personal properties,
excluding one property, that is, the franchise. This puts in
parity the franchisees and non-franchisees in the taxation of
real and personal properties. Second is the second sentence
which imposes the franchise tax, which is applicable solely to
the franchisee. And third is the proviso in the second sentence
that imposes the income tax on the franchisee, the same
income tax payable by non-franchisees.
Petitioner claims that the first sentence refers only to real
properties, and that the phrase exclusive of this franchise
exempts petitioner from realty tax on its real properties used in
its telecommunications business. This claim has no basis in
the language of the law as written in the first sentence of
Section 5. First, the first sentence expressly refers to taxes on
real estate and on personal property. Clearly, the first sentence
does not refer only to taxes on real properties, but also to taxes
on personal properties. The trial court correctly observed that
petitioner pays taxes on its motor vehicles,[30] which are
personal properties, that are used in its telecommunications
business.[31] There is also the documentary stamp tax on
transactions involving real and personal properties, which
petitioner and other taxpayers are liable for.[32]
A franchise granted by Congress to operate a private radio
station for the franchisees communications in deep-sea fishing
shows that the first sentence of Section 5 of RA 7678 does not
refer to real properties alone. Section 6 of Republic Act No.
3218 (RA 3218), entitled An Act Granting
Batas Riego De Dios A Franchise To Construct, Maintain And
Operate Private Radio Stations For Radio Communications In
Its Deep-Sea Fishing Industry, provides:
SECTION 6. The grantee shall be liable (1)
to pay the same taxes on its real
estate, building, fishing boats and
personal property, exclusive of this
franchise as other persons or corporations
are now, or hereafter may be required by
law to pay, and shall further be liable (2) to
pay all other taxes that may be imposed by
the National Internal Revenue Code by
reason of this franchise.(Emphasis supplied)
The inclusion of fishing boats, personal properties that can
never be attached to a land or building so as to make them real
properties, demonstrates that Section 6 of RA 3218, like the
first sentence of Section 5 of RA 7678, not only applies to real
properties but also to personal properties.
Second, there is no language in the first sentence of Section 5
expressly or even impliedly exempting petitioner from
the realty tax. The phrases exemption from real estate tax,
free from real estate tax or not subject to real estate tax do not
appear in the first sentence. No matter how one reads the first
sentence, there is no grant of exemption, express or implied,
from realty tax. In fact, the first sentence expressly imposes
taxes on both real and personal properties, excluding only the
intangible personal property that is the franchise.
A tax exemption cannot arise from vague inference. The first
sentence of Section 5 does not grant any express or even
implied exemption from realty tax. On the contrary, the first
sentence categorically states that the franchisee is subject to
the same taxes currently imposed, and those taxes that may be
subsequently imposed, on other persons or corporations,
taxpayers that admittedly are all subject to realty tax. The first
sentence does not limit the imposition of the same taxes to
realty tax only but even to those taxes that may in the future be
imposed on other taxpayers, which future taxes shall also be
imposed on petitioner. Thus, the first sentence of Section 5
imposes on petitioner not only realty tax but also other taxes.
The phrase personal property exclusive of this franchise
merely means that personal property does not include the
franchise even if the franchise is an intangible personal
property. Stated differently, the first sentence of Section 5
provides that petitioner shall pay tax on its real properties as
well as on its personal properties but the franchise, which is an
intangible personal property, shall not be deemed personal
property.
The historical usage of the phrase exclusive of this franchise
in franchise laws enacted by Congress indubitably shows that
the phrase is not a grant of tax exemption, but an exclusion of
one type of personal property subject to taxes, and the
excluded personal property is the franchise. Thus, the
franchises of telecommunications companies in Republic Act
Nos.
4137,[33] 5692,[34] 5739,[35] 5785,[36] 5790,[37] 5791,[38] 5795,[39]
5810,[40] 5847,[41] 5848,[42] 5856,[43] 5857,[44] 5913,[45] 5914,[46]
5929,[47]5937,[48] 5958,[49] 5959,[50] 5974,[51] 5993,[52] 5994,[53]
6002,[54] 6006,[55] 6007,[56] 6013,[57] 6024,[58] 6097,[59] 6510,[60]
6536,[61] and 6530[62] contain the following common tax
provision:
The grantee shall be liable to pay the same
taxes, unless exempted therefrom, on its
business, real estate, buildings, and personal
property, exclusive of this franchise, as
other persons or corporations are now or
hereafter may be required by law to
pay. (Emphasis supplied)
The phrase unless exempted therefrom in the common
provision clearly clarifies that the phrase exclusive of this
franchise does not grant any tax exemption. To claim tax
exemption, there must be an express exemption from tax in
another provision of law. On the other hand, the deletion of
the phrase unless exempted therefrom from the common
provision does not give rise to any tax exemption.
Bayantel and Digitel Cases
In City Government of Quezon City
v. Bayan Telecommunications, Inc.,[63] this Courts Second
Division held that all realties which are actually, directly and
exclusively used in the operation of its franchise are exempted
30
from any property tax. The Second Division added
that Bayantels franchise being national in character, the
exemption granted applies to all its real and personal
properties found anywhere within the Philippines. The Second
Division reasoned in this wise:
The legislative intent expressed in the
phrase exclusive of this franchise cannot be
construed other than distinguishing between
two (2) sets of properties, be they real or
personal, owned by the franchisee, namely,
(a) those actually, directly and exclusively
used in its radio or telecommunications
business, and (b) those properties which are
not so used. It is worthy to note that the
properties subject of the present controversy
are only those which are admittedly falling
under the first category.
To the mind of the Court, Section 14 of Rep.
Act No. 3259 effectively works to grant or
delegate to local governments of Congress
inherent power to tax the franchisees
properties belonging to the second group of
properties indicated above, that is, all
properties which, exclusive of this franchise,
are not actually and directly used in the
pursuit of its franchise. As may be recalled,
the taxing power of local governments under
both the 1935 and the 1973 Constitutions
solely depended upon an enabling law.
Absent such enabling law, local government
units were without authority to impose and
collect taxes on real properties within their
respective territorial jurisdictions. While
Section 14 of Rep. Act No. 3259 may be
validly viewed as an implied delegation of
power to tax, the delegation under that
provision, as couched, is limited to
impositions over properties of the franchisee
which are not actually, directly and
exclusively used in the pursuit of its
franchise. Necessarily, other properties
of Bayantel directly used in the pursuit of its
business are beyond the pale of the
delegated taxing power of local
governments. In a very real sense, therefore,
real properties of Bayantel, save those
exclusive of its franchise, are subject to
realty taxes. Ultimately, therefore, the
inevitable result was that all realties
which are actually, directly and
exclusively used in the operation of its
franchise are exempted from any
property tax. (Emphasis supplied)
In Digital Telecommunications Philippines, Inc. (Digitel)
v. Province of Pangasinan,[64] this Courts Third Division ruled
that Digitels real properties located within the territorial
jurisdiction of Pangasinan that are actually, directly and
exclusively used in its franchise are exempt from realty tax
under the first sentence of Section 5 of RA 7678. The Third
Division explained thus:
The more pertinent issue to consider is
whether or not, by passing Republic Act No.
7678, Congress intended to exempt
petitioner DIGITELs real properties
actually, directly and exclusively used by the
grantee in its franchise.
The fact that Republic Act No. 7678 was a
later piece of legislation can be taken to
mean that Congress, knowing fully well that
the Local Government Code had already
withdrawn exemptions from real property
taxes, chose to restore such immunity even
to a limited degree. Accordingly:
The Court views this
subsequent piece of
legislation as an express
and real intention on the
part of Congress to once
again remove from
the LGCs delegated taxing
power, all of the
franchisees
x x x properties that are
actually, directly and
exclusively used in the
pursuit of its franchise.
In view of the unequivocal intent of
Congress to exempt from real property tax
those real properties actually, directly and
exclusively used by petitioner DIGITEL in
the pursuit of its franchise, respondent
Province of Pangasinan can only levy real
property tax on the remaining real properties
of the grantee located within its territorial
jurisdiction not part of the above-stated
classification. Said exemption, however,
merely applies from the time of
the effectivity of
petitioner DIGITELs legislative franchise
and not a moment sooner.
Nowhere in the language of the first sentence of Section 5 of
RA 7678 does it expressly or even impliedly provide that
petitioners real properties that are actually, directly and
exclusively used in its telecommunications business are
exempt from payment of realty tax. On the contrary, the first
sentence of Section 5 specifically states that the petitioner, as
the franchisee, shall pay the same taxes on its real estate,
buildings, and personal property exclusive of this franchise as
other persons or corporations are now or hereafter may be
required by law to pay.
31
The heading of Section 5 is Tax Provisions, not Tax
Exemptions. To reiterate, the phrase exemption from real
estate tax or other words conveying exemption from realty tax
do not appear in the first sentence of Section 5. The phrase
exclusive of this franchise in the first sentence of Section
5 merely qualifies the phrase personal property to exclude
petitioners legislative franchise, which is an intangible
personal property. Petitioners franchise is subject to tax in the
second sentence of Section 5 which imposes the franchise
tax. Thus, there is no grant of tax exemption in the first
sentence of Section 5.
The interpretation of the phrase exclusive of this franchise in
the Bayantel and Digitel cases goes against the basic principle
in construing tax exemptions. In PLDT v. City
of Davao,[65] the Court held that tax exemptions should be
granted only by clear and unequivocal provision of law on the
basis of language too plain to be mistaken. They cannot be
extended by mere implication or inference.
Tax exemptions must be clear and unequivocal. A taxpayer
claiming a tax exemption must point to a specific provision of
law conferring on the taxpayer, in clear and plain terms,
exemption from a common burden. Any doubt whether a tax
exemption exists is resolved against the taxpayer.[66]
RCPI case
In Radio Communications of the Philippines, Inc. (RCPI) v.
Provincial Assessor of South Cotabato,[67] the Courts First
Division held that RCPIs radio relay station tower, radio
station building, and machinery shed are real properties and
are subject to real property tax. The Court added that:
RCPI cannot also invoke the equality of
treatment clause under Section 23 of
Republic Act No. 7925. The franchises of
Smart, Islacom, TeleTech, Bell, Major
Telecoms, Island Country,
and IslaTel,[68] all expressly declare that
the franchisee shall pay the real estate tax,
using words similar to Section 14 of RA
2036, as amended. The provisions of these
subsequent telecommunication franchises
imposing the real estate tax on franchisees
only confirm that RCPI is subject to the real
estate tax. Otherwise, RCPI will stick out
like a sore thumb, being the only
telecommunications company exempt from
the real estate tax, in mockery of the spirit of
equality of treatment that RCPI is invoking,
not to mention the violation of the
constitutional rule on uniformity of taxation.
It is an elementary rule in taxation that
exemptions are strictly construed against the
taxpayer and liberally in favor of the taxing
authority. It is the taxpayers duty to justify
the exemption by words too plain to be
mistaken and too categorical to be
misinterpreted. (Emphasis supplied)
In RCPI, the Court emphasized that
telecommunications companies which were granted
legislative franchise are liable to realty tax. The intent to grant
realty tax exemption cannot be discerned from Republic Act
No. 4054[69] and neither from the legislative franchises of
other telecommunications companies. Tax exemptions
granted to one or more, but not to all, telecommunications
companies similarly situated will violate the constitutional
rule on uniformity of taxation.[70]
The intent of Congress is to make
legislative franchisees liable to tax
In PLDT v. City of Davao,[71] it was observed that after the
imposition of VAT on telecommunications companies,
Congress refused to grant any tax exemption to
telecommunications companies that sought new franchises
from Congress, except the exemption from specific
tax.[72] More importantly, the uniform tax provision in these
new franchises expressly states that the franchisee shall pay
not only all taxes, except specific tax, under the National
Internal Revenue Code, but also all taxes under other
applicable laws,[73] one of which is the Local Government
Code which imposes the realty tax.[74]
In fact, Section 12 of Republic Act No. 9180 (RA
9180),[75] the legislative franchise of Digitel Mobile, a 100%-
owned subsidiary of petitioner, states that the franchisee, its
successors or assigns shall be subject to the payment of all
taxes, duties, fees or charges and other impositions under the
National Internal Revenue Code of 1997, as amended, and
other applicable laws.[76] Section 12 of RA 9180 provides:
SECTION 12. Tax Provisions. The grantee,
its successors or assigns, shall be subject
to the payment of all taxes, duties, fees or
charges and other impositions under the
National Internal Revenue Code of 1997,
as amended, and other applicable laws:
Provided, That nothing herein shall be
construed as repealing any specific tax
exemptions, incentives, or privileges granted
under any relevant law: Provided, further,
That all rights, privileges, benefits and
exemptions accorded to existing and future
telecommunications franchises shall
likewise be extended to the grantee.
The grantee shall file the return with the city
or province where its facility is located and
pay the income tax due thereon to the
Commissioner of Internal Revenue or his
duly authorized representatives in
accordance with the National Internal
Revenue Code and the return shall be
subject to audit by the Bureau of Internal
Revenue. (Emphasis supplied)
32
Thus, Digitel Mobile is subject to tax on its real estate and
personal properties, whether or not used in its
telecommunications business.
In Compagnie Financiere Sucres et Denrees v. Commissioner
of Internal Revenue,[77] the Court ruled that the governing
principle is that tax exemptions are to be construed
in strictissimi juris against the taxpayer and liberally in favor
of the taxing authority he who claims an exemption must be
able to justify his claim by the clearest grant of statute. A
person claiming an exemption has the burden of justifying the
exemption by words too plain to be mistaken and too
categorical to be misinterpreted. Tax exemptions are never
presumed and the burden lies with the taxpayer to clearly
establish his right to exemption.[78]
BLGF Opinions
On 25 October 2004, the BLGF issued Memorandum Circular
No. 15-2004.[79] This circular reversed the BLGFs Letter-
Opinion dated 8 April 1997 recognizing realty tax exemption
under the phrase exclusive of this franchise. This later circular
states that the real properties owned by Globe and Smart
Telecommunications and all other telecommunications
companies similarly situated are subject to the realty tax. The
BLGF has reversed its opinion on the realty tax exemption of
telecommunications companies. Hence, petitioners claim of
tax exemption based on BLGFs opinion does not hold
water. Besides, the BLGF has no authority to rule on claims
for exemption from the realty tax.[80]
WHEREFORE, we DENY the petition. We AFFIRM the 2
May 2002 and 19 November 2002 Orders of the Regional
Trial Court, Branch 8, Batangas City, in Civil Case No. 5343.
SO ORDERED.
G.R. No. 115349 April 18, 1997
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX
APPEALS and ATENEO DE MANILA
UNIVERSITY, respondents.
PANGANIBAN, J.:
In conducting researches and studies of social organizations
and cultural values thru its Institute of Philippine Culture, is
the Ateneo de Manila University performing the work of an
independent contractor and thus taxable within the purview of
then Section 205 of the National Internal Revenue Code
levying a three percent contractor's tax? This question is
answer by the Court in the negative as it resolves this petition
assailing the Decision 1 of the Respondent Court of
Appeals 2 in CA-G.R. SP No. 31790 promulgated on April 27,
1994 affirming that of the Court of Tax Appeals. 3
The Antecedent Facts
The antecedents as found by the Court of Appeals are
reproduced hereinbelow, the same being largely undisputed by
the parties.
Private respondent is a non-stock, non-profit
educational institution with auxiliary units
and branches all over the Philippines. One
such auxiliary unit is the Institute of
Philippine Culture (IPC), which has no legal
personality separate and distinct from that of
private respondent. The IPC is a Philippine
unit engaged in social science studies of
Philippine society and culture. Occasionally,
it accepts sponsorships for its research
activities from international organizations,
private foundations and government
agencies.
On July 8, 1983, private respondent received
from petitioner Commissioner of Internal
Revenue a demand letter dated June 3, 1983,
assessing private respondent the sum of
P174,043.97 for alleged deficiency
contractor's tax, and an assessment dated
June 27, 1983 in the sum of P1,141,837 for
alleged deficiency income tax, both for the
fiscal year ended March 31, 1978. Denying
said tax liabilities, private respondent sent
petitioner a letter-protest and subsequently
filed with the latter a memorandum
contesting the validity of the assessments
.
On March 17, 1988, petitioner rendered a
letter-decision canceling the assessment for
deficiency income tax but modifying the
assessment for deficiency contractor's tax by
increasing the amount due to P193,475.55.
Unsatisfied, private respondent requested for
a reconsideration or reinvestigation of the
modified assessment. At the same time, it
filed in the respondent court a petition for
review of the said letter-decision of the
petitioner. While the petition was pending
before the respondent court, petitioner
issued a final decision dated August 3, 1988
reducing the assessment for deficiency
contractor's tax from P193,475.55 to
P46,516.41, exclusive of surcharge and
interest.
On July 12, 1993, the respondent court
rendered the questioned decision which
dispositively reads:
WHEREFORE, in view of
the foregoing,
respondent's decision is
SET ASIDE. The
deficiency contractor's tax
assessment in the amount
of P46,516.41 exclusive of
33
 surcharge and interest for occupation tax under
the fiscal year ended Section 12 of the Local
March 31, 1978 is hereby Tax Code) whose activity
CANCELED. No consists essentially of the
pronouncement as to cost. sale of all kinds of
SO ORDERED. services for a fee
Not in accord with said decision, petitioner has come regardless of whether or
to this Court via the present petition for review not the performance of the
raising the following issues: service calls for the
exercise or use of the
1) WHETHER OR NOT physical or mental
PRIVATE faculties of such
RESPONDENT FALLS contractors or their
UNDER THE PURVIEW employees.
OF INDEPENDENT
CONTRACTOR xxx xxx xxx
PURSUANT TO Petitioner contends that the respondent court
SECTION 205 OF THE erred in holding that private respondent is
TAX CODE; and not an "independent contractor" within the
purview of Section 205 of the Tax Code. To
2) WHETHER OR NOT petitioner, the term "independent
PRIVATE contractor", as defined by the Code,
RESPONDENT IS encompasses all kinds of services rendered
SUBJECT TO 3% for a fee and that the only exceptions are the
CONTRACTOR'S TAX following:
UNDER SECTION 205
OF THE TAX CODE. a. Persons, association and corporations
under contract for embroidery and apparel
The pertinent portions of Section 205 of the National Internal for export and gross receipts of or from
Revenue Code, as amended, provide: pioneer industry registered with the Board of
Investment under R.A. No. 5186;
Sec. 205. Contractor, proprietors or
operators of dockyards, and others. A b. Individuals occupation tax under Section
contractor's tax of three per centum of the 12 of the Local Tax Code (under the old
gross receipts is hereby imposed on the Section 182 [b] of the Tax Code); and
following:
xxx xxx xxx c. Regional or area headquarters established
in the Philippines by multinational
(16) Business agents and corporations, including their alien
other independent executives, and which headquarters do not
contractors except earn or derive income from the Philippines
persons, associations and and which act as supervisory,
corporations under communication and coordinating centers for
contract for embroidery their affiliates, subsidiaries or branches in
and apparel for export, as the Asia Pacific Region (Section 205 of the
well as their agents and Tax Code).
contractors and except
gross receipts of or from a Petitioner thus submits that since private
pioneer industry registered respondent falls under the definition of an
with the Board of "independent contractor" and is not among
Investments under the aforementioned exceptions, private
Republic Act No. 5186: respondent is therefore subject to the 3%
xxx xxx xxx contractor's tax imposed under the same
Code. 4
The term "independent
contractors" include The Court of Appeals disagreed with the Petitioner
persons (juridical or Commissioner of Internal Revenue and affirmed the assailed
natural) not enumerated decision of the Court of Tax Appeals. Unfazed, petitioner now
above (but not including asks us to reverse the CA through this petition for review.
individuals subject to the
34
 The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls
under the purview of independent contractor
pursuant to Section 205 of the Tax Code.
2) Whether or not private respondent is
subject to 3% contractor's tax under Section
205 of the Tax Code. 5
In fine, these may be reduced to a single issue: Is Ateneo de
Manila University, through its auxiliary unit or branch the
Institute of Philippine Culture performing the work of an
independent contractor and, thus, subject to the three percent
contractor's tax levied by then Section 205 of the National
Internal Revenue Code?
The Court's Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue
Code germane to the case before us read:
Sec. 205. Contractors, proprietors or
operators of dockyards, and others. A
contractor's tax of threeper centum of the
gross receipts is hereby imposed on the
following:
xxx xxx xxx
(16) Business agents and other independent
contractors, except persons, associations and
corporations under contract for embroidery
and apparel for export, as well as their
agents and contractors, and except gross
receipts of or from a pioneer industry
registered with the Board of Investments
under the provisions of Republic Act No.
5186;
xxx xxx xxx
The term "independent contractors" include
persons (juridical or natural) not enumerated
above (but not including individuals subject
to the occupation tax under Section 12 of the
Local Tax Code) whose activity consists
essentially of the sale of all kinds of services
for a fee regardless of whether or not the
performance of the service calls for the
exercise or use of the physical or mental
faculties of such contractors or their
employees.
The term "independent contractor" shall not
include regional or area headquarters
established in the Philippines by
multinational corporations, including their
alien executives, and which headquarters do
not earn or derive income from the
Philippines and which act as supervisory,
communications and coordinating centers
for their affiliates, subsidiaries or branches
in the Asia-Pacific Region.
The term "gross receipts" means all amounts
received by the prime or principal contractor
as the total contract price, undiminished by
amount paid to the subcontractor, shall be
excluded from the taxable gross receipts of
the subcontractor.
Petitioner Commissioner of Internal Revenue contends that
Private Respondent Ateneo de Manila University "falls within
the definition" of an independent contractor and "is not one of
those mentioned as excepted"; hence, it is properly a subject
of the three percent contractor's tax levied by the foregoing
provision of law. 6 Petitioner states that the "term 'independent
contractor' is not specifically defined so as to delimit the scope
thereof, so much so that any person who . . . renders physical
and mental service for a fee, is now indubitably considered an
independent contractor liable to 3% contractor's
tax." 7 According to petitioner, Ateneo has the burden of proof
to show its exemption from the coverage of the law.
We disagree. Petitioner Commissioner of Internal Revenue
erred in applying the principles of tax exemption without first
applying the well-settled doctrine of strict interpretation in the
imposition of taxes. It is obviously both illogical and
impractical to determine who are exempted without first
determining who are covered by the aforesaid provision. The
Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens
on the populace, before asking Ateneo to prove its exemption
therefrom. The Court takes this occasion to reiterate the
hornbook doctrine in the interpretation of tax laws that "(a)
statute will not be construed as imposing a tax unless it does
so clearly, expressly, and unambiguously . . . (A) tax cannot be
imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the
letter in construing statutes applies with peculiar strictness to
tax lawsand the provisions of a taxing act are not to
be extended by implication." 8 Parenthetically, in answering
the question of who is subject to tax statutes, it is basic that "in
case of doubt, such statutes are to be construed most strongly
against the government and in favor of the subjects or citizens
because burdens are not to be imposed nor presumed to be
imposed beyond what statutes expressly and clearly import." 9
To fall under its coverage, Section 205 of the National Internal
Revenue Code requires that the independent contractor be
engaged in the business of selling its services. Hence, to
impose the three percent contractor's tax on Ateneo's Institute
of Philippine Culture, it should be sufficiently proven that the
private respondent is indeed selling its services for a fee in
pursuit of an independent business. And it is only after private
respondent has been found clearly to be subject to the
provisions of Sec. 205 that the question of exemption
therefrom would arise. Only after such coverage is shown
does the rule of construction that tax exemptions are to be
35
strictly construed against the taxpayer come into play,
contrary to petitioner's position. This is the main line of
reasoning of the Court of Tax Appeals in its decision, 10 which
was affirmed by the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Service of its Institute of Philippine
Culture
After reviewing the records of this case, we find no evidence
that Ateneo's Institute of Philippine Culture ever sold its
services for a fee to anyone or was ever engaged in a business
apart from and independently of the academic purposes of the
university.
Stressing that "it is not the Ateneo de Manila University per
se which is being taxed," Petitioner Commissioner of Internal
Revenue contends that "the tax is due on its activity of
conducting researches for a fee. The tax is due on the gross
receipts made in favor of IPC pursuant to the contracts the
latter entered to conduct researches for the benefit primarily
of its clients. The tax is imposed on the exercise of a taxable
activity. . . . [T]he sale of services of private respondent is
made under a contract and the various contracts entered into
between private respondent and its clients are almost of the
same terms, showing, among others, the compensation and
terms of payment." 11(Emphasis supplied.)
In theory, the Commissioner of Internal Revenue may be
correct. However, the records do not show that Ateneo's IPC
in fact contracted to sell its research services for a fee. Clearly
then, as found by the Court of Appeals and the Court of Tax
Appeals, petitioner's theory is inapplicable to the established
factual milieu obtaining in the instant case.
In the first place, the petitioner has presented no evidence to
prove its bare contention that, indeed, contracts for sale of
services were ever entered into by the private respondent. As
appropriately pointed out by the latter:
An examination of the Commissioner's
Written Formal Offer of Evidence in the
Court of Tax Appeals shows that only the
following documentary evidence was
presented:
Exhibit 1 BIR letter of authority no. 331844
2Exami
ner's
Field
Audit
Report
3 engaged in business.
Adjustm
ents to
Sales/Re
ceipts
4 Letter-
decision
of BIR
Commis
sioner
Bienven
ido A.
Tan Jr.
None of the foregoing evidence even comes
close to purport to be contracts between
private respondent and third parties. 12
Moreover, the Court of Tax Appeals accurately and correctly
declared that the " funds received by the Ateneo de Manila
University are technically not a fee. They may however fall as
gifts or donations which are tax-exempt" as shown by private
respondent's compliance with the requirement of Section 123
of the National Internal Revenue Code providing for the
exemption of such gifts to an educational institution. 13
Respondent Court of Appeals elucidated on the ruling of the
Court of Tax Appeals:
To our mind, private respondent hardly fits
into the definition of an "independent
contractor".
For one, the established facts show that IPC,
as a unit of the private respondent, is not
engaged in business. Undisputedly, private
respondent is mandated by law to undertake
research activities to maintain its university
status. In fact, the research activities being
carried out by the IPC is focused not on
business or profit but on social sciences
studies of Philippine society and
culture. Since it can only finance a limited
number of IPC's research projects, private
respondent occasionally accepts
sponsorship for unfunded IPC research
projects from international organizations,
private foundations and governmental
agencies. However, such sponsorships are
subject to private respondent's terms and
conditions, among which are, that the
research is confined to topics consistent with
the private respondent's academic
agenda; that no proprietary or commercial
purpose research is done; and that private
respondent retains not only the absolute
right to publish but also the ownership of
the results of the research conducted by the
IPC. Quite clearly, the aforementioned
terms and conditions belie the allegation
that private respondent is a contractor or is
For another, it bears stressing that private
respondent is a non-stock, non-profit
educational corporation. The fact that it
accepted sponsorship for IPC's unfunded
projects is merely incidental. For, the main
function of the IPC is to undertake research
projects under the academic agenda of the
36
 private respondent. Moreover the records do
not show that in accepting sponsorship of
research work, IPC realized profits from
such work. On the contrary, the evidence
shows that for about 30 years, IPC had
continuously operated at a loss, which
means that sponsored funds are less than
actual expenses for its research projects.
That IPC has been operating at a loss loudly
bespeaks of the fact that education and not
profit is the motive for undertaking the
research projects.
Then, too, granting arguendo that IPC made
profits from the sponsored research projects,
the fact still remains that there is no proof
that part of such earnings or profits was ever
distributed as dividends to any stockholder,
as in fact none was so distributed because
they accrued to the benefit of the private
respondent which is a non-profit educational
institution. 14
Therefore, it is clear that the funds received by Ateneo's
Institute of Philippine Culture are not given in the concept of a
fee or price in exchange for the performance of a service or
delivery of an object. Rather, the amounts are in the nature of
an endowment or donation given by IPC's benefactors solely
for the purpose of sponsoring or funding the research with no
strings attached. As found by the two courts below, such
sponsorships are subject to IPC's terms and conditions. No
proprietary or commercial research is done, and IPC retains
the ownership of the results of the research, including the
absolute right to publish the same. The copyrights over the
results of the research are owned by
Ateneo and, consequently, no portion thereof may be
reproduced without its permission. 15 The amounts given to
IPC, therefore, may not be deemed, it bears stressing as fees or
gross receipts that can be subjected to the three percent
contractor's tax.
It is also well to stress that the questioned transactions of
Ateneo's Institute of Philippine Culture cannot be deemed
either as a contract of sale or a contract of a piece of work.
"By the contract of sale, one of the contracting parties
obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain
in money or its equivalent." 16 By its very nature, a contract of
sale requires a transfer of ownership. Thus, Article 1458 of the
Civil Code "expressly makes the obligation to transfer
ownership as an essential element of the contract of sale,
following modern codes, such as the German and the Swiss.
Even in the absence of this express requirement, however,
most writers, including Sanchez Roman, Gayoso, Valverde,
Ruggiero, Colin and Capitant, have considered such transfer
of ownership as the primary purpose of sale. Perez and Alguer
follow the same view, stating that the delivery of the thing
does not mean a mere physical transfer, but is a means of
transmitting ownership. Transfer of title or an agreement to
transfer it for a price paid or promised to be paid is the essence
of sale." 17 In the case of a contract for a piece of work, "the
contractor binds himself to execute a piece of work for the
employer, in consideration of a certain price or compensation.
. . . If the contractor agrees to produce the work from materials
furnished by him, he shall deliver the thing produced to the
employer and transfer dominion over the thing, . .
." 18 Ineludably, whether the contract be one of sale or one for
a piece of work, a transfer of ownership is involved and a
party necessarily walks away with an object. 19 In the case at
bench, it is clear from the evidence on record that there was no
sale either of objects or services because, as adverted to
earlier, there was no transfer of ownership over the research
data obtained or the results of research projects undertaken by
the Institute of Philippine Culture
.
Furthermore, it is clear that the research activity of the
Institute of Philippine Culture is done in pursuance of
maintaining Ateneo's university status and not in the course of
an independent business of selling such research with profit in
mind. This is clear from a reading of the regulations governing
universities:
31. In addition to the legal requisites an
institution must meet, among others, the
following requirements before an
application for university status shall be
considered:
xxx xxx xxx
(e) The institution must undertake research
and operate with a competent qualified staff
at least three graduate departments in
accordance with the rules and standards for
graduate education. One of the departments
shall be science and technology. The
competence of the staff shall be judged by
their effective teaching, scholarly
publications and research activities
published in its school journal as well as
their leadership activities in the profession.
(f) The institution must show evidence of
adequate and stable financial resources and
support, a reasonable portion of which
should be devoted to institutional
development and research. (emphasis
supplied)
xxx xxx xxx
32. University status may be withdrawn,
after due notice and hearing, for failure to
maintain satisfactorily the standards and
requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine
Culture that is being taxed and not the Ateneo is patently
erroneous because the former is not an independent juridical
entity that is separate and distinct form the latter.
37
 Factual Findings and Conclusions of the Court of long despite its accumulation of significant losses, we can
Tax Appeals Affirmed by the Court of Appeals only agree with both the Court of Tax Appeals and the Court
Generally Conclusive of Appeals that "education and not profit is [IPC's] motive for
undertaking the research
In addition, we reiterate that the "Court of Tax Appeals is a projects." 25
highly specialized body specifically created for the purpose of WHEREFORE, premises considered, the petition is DENIED
reviewing tax cases. Through its expertise, it is undeniably and the assailed Decision of the Court of Appeals is hereby
competent to determine the issue of whether" 21 Ateneo de AFFIRMED in full.
Manila University may be deemed a subject of the three SO ORDERED.
percent contractor's tax "through the evidence presented
before it." Consequently, "as a matter of principle, this Court G.R. No. 115455 August 25, 1994
will not set aside the conclusion reached by . . . the Court of ARTURO M. TOLENTINO, petitioner,
Tax Appeals which is, by the very nature of its function, vs.
dedicated exclusively to the study and consideration of tax THE SECRETARY OF FINANCE and THE
problems and has necessarily developed an expertise on the COMMISSIONER OF INTERNAL
subject unless there has been an abuse or improvident exercise REVENUE, respondents.
of authority . . ." 22 This point becomes more evident in the G.R. No. 115525 August 25, 1994
case before us where the findings and conclusions of both the JUAN T. DAVID, petitioner,
Court of Tax Appeals and the Court of Appeals appear vs.
untainted by any abuse of authority, much less grave abuse of TEOFISTO T. GUINGONA, JR., as Executive Secretary;
discretion. Thus, we find the decision of the latter affirming ROBERTO DE OCAMPO, as Secretary of Finance;
that of the former free from any palpable error. LIWAYWAY VINZONS-CHATO, as Commissioner of
Internal Revenue; and their AUTHORIZED AGENTS OR
Public Service, Not Profit, is the Motive REPRESENTATIVES, respondents.
The records show that the Institute of Philippine Culture G.R. No. 115543 August 25, 1994
conducted its research activities at a huge deficit of RAUL S. ROCO and the INTEGRATED BAR OF THE
P1,624,014.00 as shown in its statements of fund and PHILIPPINES, petitioners,
disbursements for the period 1972 to 1985. 23 In fact, it was vs.
Ateneo de Manila University itself that had funded the THE SECRETARY OF THE DEPARTMENT OF
research projects of the institute, and it was only when Ateneo FINANCE; THE COMMISSIONERS OF THE BUREAU
could no longer produce the needed funds that the institute OF INTERNAL REVENUE AND BUREAU OF
sought funding from outside. The testimony of Ateneo's CUSTOMS, respondents.
Director for Accounting Services, Ms. Leonor Wijangco, G.R. No. 115544 August 25, 1994
provides significant insight on the academic and nonprofit PHILIPPINE PRESS INSTITUTE, INC.; EGP
nature of the institute's research activities done in furtherance PUBLISHING CO., INC.; PUBLISHING
of the university's purposes, as follows: CORPORATION; PHILIPPINE JOURNALISTS, INC.;
JOSE L. PAVIA; and OFELIA L.
Q Now it was testified to earlier by Miss DIMALANTA, petitioners,
Thelma Padero (Office Manager of the vs.
Institute of Philippine Culture) that as far as HON. LIWAYWAY V. CHATO, in her capacity as
grants from sponsored research it is possible Commissioner of Internal Revenue; HON. TEOFISTO T.
that the grant sometimes is less than the GUINGONA, JR., in his capacity as Executive Secretary;
actual cost. Will you please tell us in this and HON. ROBERTO B. DE OCAMPO, in his capacity as
case when the actual cost is a lot less than Secretary of Finance, respondents.
the grant who shoulders the additional cost? G.R. No. 115754 August 25, 1994
A The University. CHAMBER OF REAL ESTATE AND BUILDERS
Q Now, why is this done by the University? ASSOCIATIONS, INC., (CREBA), petitioner,
A Because of our faculty development vs.
program as a university, because a THE COMMISSIONER OF INTERNAL
university has to have its own research REVENUE, respondent.
institute. 24 G.R. No. 115781 August 25, 1994
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO
So, why is it that Ateneo continues to operate and conduct A. RIGOS, ERME CAMBA, EMILIO C. CAPULONG,
researches through its Institute of Philippine Culture when it JR., JOSE T. APOLO, EPHRAIM TENDERO,
undisputedly loses not an insignificant amount in the process? FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE
The plain and simple answer is that private respondent is not a TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO,
contractor selling its services for a fee but an academic RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN
institution conducting these researches pursuant to its S. DOROMAL, MOVEMENT OF ATTORNEYS FOR
commitments to education and, ultimately, to public service. BROTHERHOOD, INTEGRITY AND NATIONALISM,
For the institute to have tenaciously continued operating for so INC. ("MABINI"), FREEDOM FROM DEBT
38
COALITION, INC., PHILIPPINE BIBLE SOCIETY, These are various suits for certiorari and prohibition,
INC., and WIGBERTO TAADA, petitioners, challenging the constitutionality of Republic Act No. 7716 on
vs. various grounds summarized in the resolution of July 6, 1994
THE EXECUTIVE SECRETARY, THE SECRETARY of this Court, as follows:
OF FINANCE, THE COMMISSIONER OF INTERNAL I. Procedural Issues:
REVENUE and THE COMMISSIONER OF A. Does Republic Act No. 7716 violate Art.
CUSTOMS, respondents. VI, 24 of the Constitution?
G.R. No. 115852 August 25, 1994 B. Does it violate Art. VI, 26(2) of the
PHILIPPINE AIRLINES, INC., petitioner, Constitution?
vs. C. What is the extent of the power of the
THE SECRETARY OF FINANCE, and Bicameral Conference Committee?
COMMISSIONER OF INTERNAL II. Substantive Issues:
REVENUE, respondents.
G.R. No. 115873 August 25, 1994 A. Does the law violate the following
COOPERATIVE UNION OF THE provisions in the Bill of Rights (Art. III)?
PHILIPPINES, petitioners, 1. 1
vs. 2. 4
HON. LIWAYWAY V. CHATO, in her capacity as the 3. 5
Commissioner of Internal Revenue, HON. TEOFISTO T. 4. 10
GUINGONA, JR., in his capacity as Executive Secretary,
and HON. ROBERTO B. DE OCAMPO, in his capacity as B. Does the law violate the following other
Secretary of Finance, respondents. provisions of the Constitution?
G.R. No. 115931 August 25, 1994 1. Art. VI, 28(1)
PHILIPPINE EDUCATIONAL PUBLISHERS 2. Art. VI, 28(3)
ASSOCIATION, INC., and ASSOCIATION OF
PHILIPPINE BOOK-SELLERS, petitioners, These questions will be dealt in the order they are stated
vs. above. As will presently be explained not all of these
HON. ROBERTO B. DE OCAMPO, as the Secretary of questions are judicially cognizable, because not all provisions
Finance; HON. LIWAYWAY V. CHATO, as the of the Constitution are self executing and, therefore, judicially
Commissioner of Internal Revenue and HON. enforceable. The other departments of the government are
GUILLERMO PARAYNO, JR., in his capacity as the equally charged with the enforcement of the Constitution,
Commissioner of Customs, respondents. especially the provisions relating to them.
Arturo M. Tolentino for and in his behalf.
Donna Celeste D. Feliciano and Juan T. David for petitioners I. PROCEDURAL ISSUES
in G.R. No. 115525.
Roco, Bunag, Kapunan, Migallos and Jardeleza for petitioner The contention of petitioners is that in enacting Republic Act
R.S. Roco. No. 7716, or the Expanded Value-Added Tax Law, Congress
Villaranza and Cruz for petitioners in G.R. No. 115544. violated the Constitution because, although H. No. 11197 had
Carlos A. Raneses and Manuel M. Serrano for petitioner in originated in the House of Representatives, it was not passed
G.R. No. 115754. by the Senate but was simply consolidated with the Senate
Salonga, Hernandez & Allado for Freedon From Debts version (S. No. 1630) in the Conference Committee to produce
Coalition, Inc. & Phil. Bible Society. the bill which the President signed into law. The following
Estelito P. Mendoza for petitioner in G.R. No. 115852. provisions of the Constitution are cited in support of the
Panganiban, Benitez, Parlade, Africa & Barinaga Law Offices proposition that because Republic Act No. 7716 was passed in
for petitioners in G.R. No. 115873. this manner, it did not originate in the House of
R.B. Rodriguez & Associates for petitioners in G.R. No. Representatives and it has not thereby become a law:
115931.
Reve A.V. Saguisag for MABINI. Art. VI, 24: All appropriation, revenue or
tariff bills, bills authorizing increase of the
MENDOZA, J.: public debt, bills of local application, and
The value-added tax (VAT) is levied on the sale, barter or private bills shall originate exclusively in the
exchange of goods and properties as well as on the sale or House of Representatives, but the Senate
exchange of services. It is equivalent to 10% of the gross may propose or concur with amendments.
selling price or gross value in money of goods or properties
sold, bartered or exchanged or of the gross receipts from the Id., 26(2): No bill passed by either House
sale or exchange of services. Republic Act No. 7716 seeks to shall become a law unless it has passed three
widen the tax base of the existing VAT system and enhance its readings on separate days, and printed
administration by amending the National Internal Revenue copies thereof in its final form have been
Code. distributed to its Members three days before
its passage, except when the President
39
 certifies to the necessity of its immediate
enactment to meet a public calamity or
emergency. Upon the last reading of a bill,
no amendment thereto shall be allowed, and
the vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in
the Journal.
It appears that on various dates between July 22, 1992 and
August 31, 1993, several bills 1 were introduced in the House
of Representatives seeking to amend certain provisions of the
National Internal Revenue Code relative to the value-added
tax or VAT. These bills were referred to the House Ways and
Means Committee which recommended for approval a
substitute measure, H. No. 11197, entitled
AN ACT RESTRUCTURING THE
VALUE-ADDED TAX (VAT) SYSTEM
TO WIDEN ITS TAX BASE AND
ENHANCE ITS ADMINISTRATION,
AMENDING FOR THESE PURPOSES
SECTIONS 99, 100, 102, 103, 104, 105,
106, 107, 108 AND 110 OF TITLE IV, 112,
115 AND 116 OF TITLE V, AND 236, 237
AND 238 OF TITLE IX, AND
REPEALING SECTIONS 113 AND 114
OF TITLE V, ALL OF THE NATIONAL
INTERNAL REVENUE CODE, AS
AMENDED
The bill (H. No. 11197) was considered on second reading
starting November 6, 1993 and, on November 17, 1993, it was
approved by the House of Representatives after third and final
reading.
It was sent to the Senate on November 23, 1993 and later
referred by that body to its Committee on Ways and Means.
On February 7, 1994, the Senate Committee submitted its
report recommending approval of S. No. 1630, entitled
AN ACT RESTRUCTURING THE
VALUE-ADDED TAX (VAT) SYSTEM
TO WIDEN ITS TAX BASE AND
ENHANCE ITS ADMINISTRATION,
AMENDING FOR THESE PURPOSES
SECTIONS 99, 100, 102, 103, 104, 105,
107, 108, AND 110 OF TITLE IV, 112 OF
TITLE V, AND 236, 237, AND 238 OF
TITLE IX, AND REPEALING SECTIONS
113, 114 and 116 OF TITLE V, ALL OF
THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, AND FOR
OTHER PURPOSES
It was stated that the bill was being submitted "in substitution
of Senate Bill No. 1129, taking into consideration P.S. Res.
No. 734 and H.B. No. 11197."
On February 8, 1994, the Senate began consideration of the
bill (S. No. 1630). It finished debates on the bill and approved
it on second reading on March 24, 1994. On the same day, it
approved the bill on third reading by the affirmative votes of
13 of its members, with one abstention.
H. No. 11197 and its Senate version (S. No. 1630) were then
referred to a conference committee which, after meeting four
times (April 13, 19, 21 and 25, 1994), recommended that
"House Bill No. 11197, in consolidation with Senate Bill No.
1630, be approved in accordance with the attached copy of the
bill as reconciled and approved by the conferees."
The Conference Committee bill, entitled "AN ACT
RESTRUCTURING THE VALUE-ADDED TAX (VAT)
SYSTEM, WIDENING ITS TAX BASE AND ENHANCING
ITS ADMINISTRATION AND FOR THESE PURPOSES
AMENDING AND REPEALING THE RELEVANT
PROVISIONS OF THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, AND FOR OTHER PURPOSES,"
was thereafter approved by the House of Representatives on
April 27, 1994 and by the Senate on May 2, 1994. The
enrolled bill was then presented to the President of the
Philippines who, on May 5, 1994, signed it. It became
Republic Act No. 7716. On May 12, 1994, Republic Act No.
7716 was published in two newspapers of general circulation
and, on May 28, 1994, it took effect, although its
implementation was suspended until June 30, 1994 to allow
time for the registration of business entities. It would have
been enforced on July 1, 1994 but its enforcement was stopped
because the Court, by the vote of 11 to 4 of its members,
granted a temporary restraining order on June 30, 1994.
First. Petitioners' contention is that Republic Act No. 7716 did
not "originate exclusively" in the House of Representatives as
required by Art. VI, 24 of the Constitution, because it is in
fact the result of the consolidation of two distinct bills, H. No.
11197 and S. No. 1630. In this connection, petitioners point
out that although Art. VI, SS 24 was adopted from the
American Federal Constitution, 2 it is notable in two respects:
the verb "shall originate" is qualified in the Philippine
Constitution by the word "exclusively" and the phrase "as on
other bills" in the American version is omitted. This means,
according to them, that to be considered as having originated
in the House, Republic Act No. 7716 must retain the essence
of H. No. 11197.
This argument will not bear analysis. To begin with, it is not
the law but the revenue bill which is required by the
Constitution to "originate exclusively" in the House of
Representatives. It is important to emphasize this, because a
bill originating in the House may undergo such extensive
changes in the Senate that the result may be a rewriting of the
whole. The possibility of a third version by the conference
committee will be discussed later. At this point, what is
important to note is that, as a result of the Senate action, a
distinct bill may be produced. To insist that a revenue statute
and not only the bill which initiated the legislative process
culminating in the enactment of the law must substantially
be the same as the House bill would be to deny the Senate's
power not only to "concur with amendments" but also to
40
"propose amendments." It would be to violate the coequality
of legislative power of the two houses of Congress and in fact
make the House superior to the Senate.
The contention that the constitutional design is to limit the
Senate's power in respect of revenue bills in order to
compensate for the grant to the Senate of the treaty-ratifying
power 3 and thereby equalize its powers and those of the
House overlooks the fact that the powers being compared are
different. We are dealing here with the legislative power
which under the Constitution is vested not in any particular
chamber but in the Congress of the Philippines, consisting of
"a Senate and a House of Representatives." 4 The exercise of
the treaty-ratifying power is not the exercise of legislative
power. It is the exercise of a check on the executive power.
There is, therefore, no justification for comparing the
legislative powers of the House and of the Senate on the basis
of the possession of such nonlegislative power by the Senate.
The possession of a similar power by the U.S. Senate 5 has
never been thought of as giving it more legislative powers
than the House of Representatives.
In the United States, the validity of a provision ( 37)
imposing an ad valorem tax based on the weight of vessels,
which the U.S. Senate had inserted in the Tariff Act of 1909,
was upheld against the claim that the provision was a revenue
bill which originated in the Senate in contravention of Art. I,
7 of the U.S. Constitution. 6 Nor is the power to amend limited
to adding a provision or two in a revenue bill emanating from
the House. The U.S. Senate has gone so far as changing the
whole of bills following the enacting clause and substituting
its own versions. In 1883, for example, it struck out everything
after the enacting clause of a tariff bill and wrote in its place
its own measure, and the House subsequently accepted the
amendment. The U.S. Senate likewise added 847 amendments
to what later became the Payne-Aldrich Tariff Act of 1909; it
dictated the schedules of the Tariff Act of 1921; it rewrote an
extensive tax revision bill in the same year and recast most of
the tariff bill of 1922. 7 Given, then, the power of the Senate to
propose amendments, the Senate can propose its own version
even with respect to bills which are required by the
Constitution to originate in the House.
It is insisted, however, that S. No. 1630 was passed not in
substitution of H. No. 11197 but of another Senate bill (S. No.
1129) earlier filed and that what the Senate did was merely to
"take [H. No. 11197] into consideration" in enacting S. No.
1630. There is really no difference between the Senate
preserving H. No. 11197 up to the enacting clause and then
writing its own version following the enacting clause (which,
it would seem, petitioners admit is an amendment by
substitution), and, on the other hand, separately presenting a
bill of its own on the same subject matter. In either case the
result are two bills on the same subject.
Indeed, what the Constitution simply means is that the
initiative for filing revenue, tariff, or tax bills, bills authorizing
an increase of the public debt, private bills and bills of local
application must come from the House of Representatives on
the theory that, elected as they are from the districts, the
members of the House can be expected to be more sensitive to
the local needs and problems. On the other hand, the senators,
who are elected at large, are expected to approach the same
problems from the national perspective. Both views are
thereby made to bear on the enactment of such laws.
Nor does the Constitution prohibit the filing in the Senate of a
substitute bill in anticipation of its receipt of the bill from the
House, so long as action by the Senate as a body is withheld
pending receipt of the House bill. The Court cannot, therefore,
understand the alarm expressed over the fact that on March 1,
1993, eight months before the House passed H. No. 11197, S.
No. 1129 had been filed in the Senate. After all it does not
appear that the Senate ever considered it. It was only after the
Senate had received H. No. 11197 on November 23, 1993 that
the process of legislation in respect of it began with the
referral to the Senate Committee on Ways and Means of H.
No. 11197 and the submission by the Committee on February
7, 1994 of S. No. 1630. For that matter, if the question were
simply the priority in the time of filing of bills, the fact is that
it was in the House that a bill (H. No. 253) to amend the VAT
law was first filed on July 22, 1992. Several other bills had
been filed in the House before S. No. 1129 was filed in the
Senate, and H. No. 11197 was only a substitute of those earlier
bills.
Second. Enough has been said to show that it was within the
power of the Senate to propose S. No. 1630. We now pass to
the next argument of petitioners that S. No. 1630 did not pass
three readings on separate days as required by the
Constitution 8 because the second and third readings were
done on the same day, March 24, 1994. But this was because
on February 24, 1994 9 and again on March 22, 1994, 10 the
President had certified S. No. 1630 as urgent. The presidential
certification dispensed with the requirement not only of
printing but also that of reading the bill on separate days. The
phrase "except when the President certifies to the necessity of
its immediate enactment, etc." in Art. VI, 26(2) qualifies the
two stated conditions before a bill can become a law: (i) the
bill has passed three readings on separate days and (ii) it has
been printed in its final form and distributed three days before
it is finally approved.
In other words, the "unless" clause must be read in relation to
the "except" clause, because the two are really coordinate
clauses of the same sentence. To construe the "except" clause
as simply dispensing with the second requirement in the
"unless" clause (i.e., printing and distribution three days
before final approval) would not only violate the rules of
grammar. It would also negate the very premise of the
"except" clause: the necessity of securing the immediate
enactment of a bill which is certified in order to meet a public
calamity or emergency. For if it is only the printing that is
dispensed with by presidential certification, the time saved
would be so negligible as to be of any use in insuring
immediate enactment. It may well be doubted whether doing
away with the necessity of printing and distributing copies of
the bill three days before the third reading would insure
speedy enactment of a law in the face of an emergency
requiring the calling of a special election for President and
41
Vice-President. Under the Constitution such a law is required
to be made within seven days of the convening of Congress in
emergency session. 11
That upon the certification of a bill by the President the
requirement of three readings on separate days and of printing
and distribution can be dispensed with is supported by the
weight of legislative practice. For example, the bill defining
the certiorari jurisdiction of this Court which, in consolidation
with the Senate version, became Republic Act No. 5440, was
passed on second and third readings in the House of
Representatives on the same day (May 14, 1968) after the bill
had been certified by the President as urgent. 12
There is, therefore, no merit in the contention that presidential
certification dispenses only with the requirement for the
printing of the bill and its distribution three days before its
passage but not with the requirement of three readings on
separate days, also.
It is nonetheless urged that the certification of the bill in this
case was invalid because there was no emergency, the
condition stated in the certification of a "growing budget
deficit" not being an unusual condition in this country.
It is noteworthy that no member of the Senate saw fit to
controvert the reality of the factual basis of the certification.
To the contrary, by passing S. No. 1630 on second and third
readings on March 24, 1994, the Senate accepted the
President's certification. Should such certification be now
reviewed by this Court, especially when no evidence has been
shown that, because S. No. 1630 was taken up on second and
third readings on the same day, the members of the Senate
were deprived of the time needed for the study of a vital piece
of legislation?
The sufficiency of the factual basis of the suspension of the
writ of habeas corpus or declaration of martial law under Art.
VII, 18, or the existence of a national emergency justifying
the delegation of extraordinary powers to the President under
Art. VI, 23(2), is subject to judicial review because basic
rights of individuals may be at hazard. But the factual basis of
presidential certification of bills, which involves doing away
with procedural requirements designed to insure that bills are
duly considered by members of Congress, certainly should
elicit a different standard of review.
Petitioners also invite attention to the fact that the President
certified S. No. 1630 and not H. No. 11197. That is because S.
No. 1630 was what the Senate was considering. When the
matter was before the House, the President likewise certified
H. No. 9210 the pending in the House.
Third. Finally it is contended that the bill which became
Republic Act No. 7716 is the bill which the Conference
Committee prepared by consolidating H. No. 11197 and S.
No. 1630. It is claimed that the Conference Committee report
included provisions not found in either the House bill or the
Senate bill and that these provisions were "surreptitiously"
inserted by the Conference Committee. Much is made of the
fact that in the last two days of its session on April 21 and 25,
1994 the Committee met behind closed doors. We are not told,
however, whether the provisions were not the result of the
give and take that often mark the proceedings of conference
committees.
Nor is there anything unusual or extraordinary about the fact
that the Conference Committee met in executive sessions.
Often the only way to reach agreement on conflicting
provisions is to meet behind closed doors, with only the
conferees present. Otherwise, no compromise is likely to be
made. The Court is not about to take the suggestion of a cabal
or sinister motive attributed to the conferees on the basis
solely of their "secret meetings" on April 21 and 25, 1994, nor
read anything into the incomplete remarks of the members,
marked in the transcript of stenographic notes by ellipses. The
incomplete sentences are probably due to the stenographer's
own limitations or to the incoherence that sometimes
characterize conversations. William Safire noted some such
lapses in recorded talks even by recent past Presidents of the
United States.
In any event, in the United States conference committees had
been customarily held in executive sessions with only the
conferees and their staffs in attendance. 13 Only in November
1975 was a new rule adopted requiring open sessions. Even
then a majority of either chamber's conferees may vote in
public to close the meetings. 14
As to the possibility of an entirely new bill emerging out of a
Conference Committee, it has been explained:
Under congressional rules of procedure,
conference committees are not expected to
make any material change in the measure at
issue, either by deleting provisions to which
both houses have already agreed or by
inserting new provisions. But this is a
difficult provision to enforce. Note the
problem when one house amends a proposal
originating in either house by striking out
everything following the enacting clause and
substituting provisions which make it an
entirely new bill. The versions are now
altogether different, permitting a conference
committee to draft essentially a new bill. . .
. 15
The result is a third version, which is considered an
"amendment in the nature of a substitute," the only
requirement for which being that the third version be germane
to the subject of the House and Senate bills. 16
Indeed, this Court recently held that it is within the power of a
conference committee to include in its report an entirely new
provision that is not found either in the House bill or in the
Senate bill. 17 If the committee can propose an amendment
consisting of one or two provisions, there is no reason why it
cannot propose several provisions, collectively considered as
an "amendment in the nature of a substitute," so long as such
amendment is germane to the subject of the bills before the
42
committee. After all, its report was not final but needed the
approval of both houses of Congress to become valid as an act
of the legislative department. The charge that in this case the
Conference Committee acted as a third legislative chamber is
thus without any basis. 18
Nonetheless, it is argued that under the respective Rules of the
Senate and the House of Representatives a conference
committee can only act on the differing provisions of a Senate
bill and a House bill, and that contrary to these Rules the
Conference Committee inserted provisions not found in the
bills submitted to it. The following provisions are cited in
support of this contention:
Rules of the Senate
Rule XII:
26. In the event that the Senate does not
agree with the House of Representatives on
the provision of any bill or joint
resolution, the differences shall be settled by
a conference committee of both
Houses which shall meet within ten days
after their composition.
The President shall designate the members
of the conference committee in accordance
with subparagraph (c), Section 3 of Rule III.
Each Conference Committee Report shall
contain a detailed and sufficiently explicit
statement of the changes in or amendments
to the subject measure, and shall be signed
by the conferees.
The consideration of such report shall not be
in order unless the report has been filed with
the Secretary of the Senate and copies
thereof have been distributed to the
Members.
(Emphasis added)
Rules of the House of Representatives
Rule XIV:
85. Conference Committee Reports. In
the event that the House does not agree with
the Senate on the amendments to any bill or
joint resolution, the differences may be
settled by conference committees of both
Chambers.
The consideration of conference committee
reports shall always be in order, except
when the journal is being read, while the roll
is being called or the House is dividing on
any question. Each of the pages of such
reports shall be signed by the
conferees. Each report shall contain a
detailed, sufficiently explicit statement of the
changes in or amendments to the subject
measure.
The consideration of such report shall not be
in order unless copies thereof are distributed
to the Members: Provided, That in the last
fifteen days of each session period it shall be
deemed sufficient that three copies of the
report, signed as above provided, are
deposited in the office of the Secretary
General.
(Emphasis added)
To be sure, nothing in the Rules limits a conference committee
to a consideration of conflicting provisions. But Rule XLIV,
112 of the Rules of the Senate is cited to the effect that "If
there is no Rule applicable to a specific case the precedents of
the Legislative Department of the Philippines shall be resorted
to, and as a supplement of these, the Rules contained in
Jefferson's Manual." The following is then quoted from the
Jefferson's Manual:
The managers of a conference must confine
themselves to the differences committed to
them. . . and may not include subjects not
within disagreements, even though germane
to a question in issue.
Note that, according to Rule XLIX, 112, in case there is no
specific rule applicable, resort must be to the legislative
practice. The Jefferson's Manual is resorted to only as
supplement. It is common place in Congress that conference
committee reports include new matters which, though
germane, have not been committed to the committee. This
practice was admitted by Senator Raul S. Roco, petitioner in
G.R. No. 115543, during the oral argument in these cases.
Whatever, then, may be provided in the Jefferson's Manual
must be considered to have been modified by the legislative
practice. If a change is desired in the practice it must be sought
in Congress since this question is not covered by any
constitutional provision but is only an internal rule of each
house. Thus, Art. VI, 16(3) of the Constitution provides that
"Each House may determine the rules of its proceedings. . . ."
This observation applies to the other contention that the Rules
of the two chambers were likewise disregarded in the
preparation of the Conference Committee Report because the
Report did not contain a "detailed and sufficiently explicit
statement of changes in, or amendments to, the subject
measure." The Report used brackets and capital letters to
indicate the changes. This is a standard practice in bill-
drafting. We cannot say that in using these marks and symbols
the Committee violated the Rules of the Senate and the House.
Moreover, this Court is not the proper forum for the
enforcement of these internal Rules. To the contrary, as we
have already ruled, "parliamentary rules are merely procedural
and with their observance the courts have no concern." 19 Our
concern is with the procedural requirements of the
Constitution for the enactment of laws. As far as these
requirements are concerned, we are satisfied that they have
been faithfully observed in these cases.
43
Nor is there any reason for requiring that the Committee's
Report in these cases must have undergone three readings in
each of the two houses. If that be the case, there would be no
end to negotiation since each house may seek modifications of
the compromise bill. The nature of the bill, therefore, requires
that it be acted upon by each house on a "take it or leave it"
basis, with the only alternative that if it is not approved by
both houses, another conference committee must be appointed.
But then again the result would still be a compromise measure
that may not be wholly satisfying to both houses.
Art. VI, 26(2) must, therefore, be construed as referring only
to bills introduced for the first time in either house of
Congress, not to the conference committee report. For if the
purpose of requiring three readings is to give members of
Congress time to study bills, it cannot be gainsaid that H. No.
11197 was passed in the House after three readings; that in the
Senate it was considered on first reading and then referred to a
committee of that body; that although the Senate committee
did not report out the House bill, it submitted a version (S. No.
1630) which it had prepared by "taking into consideration" the
House bill; that for its part the Conference Committee
consolidated the two bills and prepared a compromise version;
that the Conference Committee Report was thereafter
approved by the House and the Senate, presumably after
appropriate study by their members. We cannot say that, as a
matter of fact, the members of Congress were not fully
informed of the provisions of the bill. The allegation that the
Conference Committee usurped the legislative power of
Congress is, in our view, without warrant in fact and in law.
Fourth. Whatever doubts there may be as to the formal
validity of Republic Act No. 7716 must be resolved in its
favor. Our cases 20 manifest firm adherence to the rule that an
enrolled copy of a bill is conclusive not only of its provisions
but also of its due enactment. Not even claims that a proposed
constitutional amendment was invalid because the requisite
votes for its approval had not been obtained 21 or that certain
provisions of a statute had been "smuggled" in the printing of
the bill 22 have moved or persuaded us to look behind the
proceedings of a coequal branch of the government. There is
no reason now to depart from this rule.
No claim is here made that the "enrolled bill" rule is absolute.
In fact in one case 23 we "went behind" an enrolled bill and
consulted the Journal to determine whether certain provisions
of a statute had been approved by the Senate in view of the
fact that the President of the Senate himself, who had signed
the enrolled bill, admitted a mistake and withdrew his
signature, so that in effect there was no longer an enrolled bill
to consider.
But where allegations that the constitutional procedures for the
passage of bills have not been observed have no more basis
than another allegation that the Conference Committee
"surreptitiously" inserted provisions into a bill which it had
prepared, we should decline the invitation to go behind the
enrolled copy of the bill. To disregard the "enrolled bill" rule
in such cases would be to disregard the respect due the other
two departments of our government.
Fifth. An additional attack on the formal validity of Republic
Act No. 7716 is made by the Philippine Airlines, Inc.,
petitioner in G.R. No. 11582, namely, that it violates Art. VI,
26(1) which provides that "Every bill passed by Congress
shall embrace only one subject which shall be expressed in the
title thereof." It is contended that neither H. No. 11197 nor S.
No. 1630 provided for removal of exemption of PAL
transactions from the payment of the VAT and that this was
made only in the Conference Committee bill which became
Republic Act No. 7716 without reflecting this fact in its title.
The title of Republic Act No. 7716 is:
AN ACT RESTRUCTURING THE
VALUE- ADDED TAX (VAT) SYSTEM,
WIDENING ITS TAX BASE AND
ENHANCING ITS ADMINISTRATION,
AND FOR THESE PURPOSES
AMENDING AND REPEALING THE
RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, AND FOR
OTHER PURPOSES.
Among the provisions of the NIRC amended is 103, which
originally read:
103. Exempt transactions. The
following shall be exempt from the value-
added tax:
....
(q) Transactions which are exempt under
special laws or international agreements to
which the Philippines is a signatory. Among
the transactions exempted from the VAT
were those of PAL because it was exempted
under its franchise (P.D. No. 1590) from the
payment of all "other taxes . . . now or in the
near future," in consideration of the payment
by it either of the corporate income tax or a
franchise tax of 2%.
As a result of its amendment by Republic Act No. 7716, 103
of the NIRC now provides:
103. Exempt transactions. The
following shall be exempt from the value-
added tax:
....
(q) Transactions which are exempt under
special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491,
1590. . . .
The effect of the amendment is to remove the exemption
granted to PAL, as far as the VAT is concerned.
The question is whether this amendment of 103 of the NIRC
is fairly embraced in the title of Republic Act No. 7716,
although no mention is made therein of P.D. No. 1590 as
among those which the statute amends. We think it is, since
the title states that the purpose of the statute is to expand the
44
VAT system, and one way of doing this is to widen its base by
withdrawing some of the exemptions granted before. To insist
that P.D. No. 1590 be mentioned in the title of the law, in
addition to 103 of the NIRC, in which it is specifically
referred to, would be to insist that the title of a bill should be a
complete index of its content.
The constitutional requirement that every bill passed by
Congress shall embrace only one subject which shall be
expressed in its title is intended to prevent surprise upon the
members of Congress and to inform the people of pending
legislation so that, if they wish to, they can be heard regarding
it. If, in the case at bar, petitioner did not know before that its
exemption had been withdrawn, it is not because of any defect
in the title but perhaps for the same reason other statutes,
although published, pass unnoticed until some event somehow
calls attention to their existence. Indeed, the title of Republic
Act No. 7716 is not any more general than the title of PAL's
own franchise under P.D. No. 1590, and yet no mention is
made of its tax exemption. The title of P.D. No. 1590 is:
AN ACT GRANTING A NEW
FRANCHISE TO PHILIPPINE AIRLINES,
INC. TO ESTABLISH, OPERATE, AND
MAINTAIN AIR-TRANSPORT
SERVICES IN THE PHILIPPINES AND
BETWEEN THE PHILIPPINES AND
OTHER COUNTRIES.
The trend in our cases is to construe the constitutional
requirement in such a manner that courts do not unduly
interfere with the enactment of necessary legislation and to
consider it sufficient if the title expresses the general subject
of the statute and all its provisions are germane to the general
subject thus expressed. 24
It is further contended that amendment of petitioner's franchise
may only be made by special law, in view of 24 of P.D. No.
1590 which provides:
This franchise, as amended, or any section
or provision hereof may only be modified,
amended, or repealed expressly by a special
law or decree that shall specifically modify,
amend, or repeal this franchise or any
section or provision thereof.
This provision is evidently intended to prevent the amendment
of the franchise by mere implication resulting from the
enactment of a later inconsistent statute, in consideration of
the fact that a franchise is a contract which can be altered only
by consent of the parties. Thus in Manila Railroad Co. v.
Rafferty, 25 it was held that an Act of the U.S. Congress, which
provided for the payment of tax on certain goods and articles
imported into the Philippines, did not amend the franchise of
plaintiff, which exempted it from all taxes except those
mentioned in its franchise. It was held that a special law
cannot be amended by a general law.
In contrast, in the case at bar, Republic Act No. 7716
expressly amends PAL's franchise (P.D. No. 1590) by
specifically excepting from the grant of exemptions from the
VAT PAL's exemption under P.D. No. 1590. This is within
the power of Congress to do under Art. XII, 11 of the
Constitution, which provides that the grant of a franchise for
the operation of a public utility is subject to amendment,
alteration or repeal by Congress when the common good so
requires.
II. SUBSTANTIVE ISSUES
A.
Claims
of Press
Freedo
m,
Freedo
m of
Thought
and
Religiou
s
Freedo
m
The Philippine Press Institute (PPI), petitioner in G.R. No.
115544, is a nonprofit organization of newspaper publishers
established for the improvement of journalism in the
Philippines. On the other hand, petitioner in G.R. No. 115781,
the Philippine Bible Society (PBS), is a nonprofit organization
engaged in the printing and distribution of bibles and other
religious articles. Both petitioners claim violations of their
rights under 4 and 5 of the Bill of Rights as a result of the
enactment of the VAT Law.
The PPI questions the law insofar as it has withdrawn the
exemption previously granted to the press under 103 (f) of
the NIRC. Although the exemption was subsequently restored
by administrative regulation with respect to the circulation
income of newspapers, the PPI presses its claim because of the
possibility that the exemption may still be removed by mere
revocation of the regulation of the Secretary of Finance. On
the other hand, the PBS goes so far as to question the
Secretary's power to grant exemption for two reasons: (1) The
Secretary of Finance has no power to grant tax exemption
because this is vested in Congress and requires for its exercise
the vote of a majority of all its members 26 and (2) the
Secretary's duty is to execute the law.
103 of the NIRC contains a list of transactions exempted
from VAT. Among the transactions previously granted
exemption were:
(f) Printing, publication, importation or sale
of books and any newspaper, magazine,
review, or bulletin which appears at regular
intervals with fixed prices for subscription
and sale and which is devoted principally to
the publication of advertisements.
45
Republic Act No. 7716 amended 103 by deleting (f) with
the result that print media became subject to the VAT with
respect to all aspects of their operations. Later, however, based
on a memorandum of the Secretary of Justice, respondent
Secretary of Finance issued Revenue Regulations No. 11-94,
dated June 27, 1994, exempting the "circulation income of
print media pursuant to 4 Article III of the 1987 Philippine
Constitution guaranteeing against abridgment of freedom of
the press, among others." The exemption of "circulation
income" has left income from advertisements still subject to
the VAT.
It is unnecessary to pass upon the contention that the
exemption granted is beyond the authority of the Secretary of
Finance to give, in view of PPI's contention that even with the
exemption of the circulation revenue of print media there is
still an unconstitutional abridgment of press freedom because
of the imposition of the VAT on the gross receipts of
newspapers from advertisements and on their acquisition of
paper, ink and services for publication. Even on the
assumption that no exemption has effectively been granted to
print media transactions, we find no violation of press freedom
in these cases.
To be sure, we are not dealing here with a statute that on its
face operates in the area of press freedom. The PPI's claim is
simply that, as applied to newspapers, the law abridges press
freedom. Even with due recognition of its high estate and its
importance in a democratic society, however, the press is not
immune from general regulation by the State. It has been held:
The publisher of a newspaper has no
immunity from the application of general
laws. He has no special privilege to invade
the rights and liberties of others. He must
answer for libel. He may be punished for
contempt of court. . . . Like others, he must
pay equitable and nondiscriminatory taxes
on his business. . . . 27
The PPI does not dispute this point, either.
What it contends is that by withdrawing the exemption
previously granted to print media transactions involving
printing, publication, importation or sale of newspapers,
Republic Act No. 7716 has singled out the press for
discriminatory treatment and that within the class of mass
media the law discriminates against print media by giving
broadcast media favored treatment. We have carefully
examined this argument, but we are unable to find a
differential treatment of the press by the law, much less any
censorial motivation for its enactment. If the press is now
required to pay a value-added tax on its transactions, it is not
because it is being singled out, much less targeted, for special
treatment but only because of the removal of the exemption
previously granted to it by law. The withdrawal of exemption
is all that is involved in these cases. Other transactions,
likewise previously granted exemption, have been delisted as
part of the scheme to expand the base and the scope of the
VAT system. The law would perhaps be open to the charge of
discriminatory treatment if the only privilege withdrawn had
been that granted to the press. But that is not the case.
The situation in the case at bar is indeed a far cry from those
cited by the PPI in support of its claim that Republic Act No.
7716 subjects the press to discriminatory taxation. In the cases
cited, the discriminatory purpose was clear either from the
background of the law or from its operation. For example,
in Grosjean v. American Press Co., 28 the law imposed a
license tax equivalent to 2% of the gross receipts derived from
advertisements only on newspapers which had a circulation of
more than 20,000 copies per week. Because the tax was not
based on the volume of advertisement alone but was measured
by the extent of its circulation as well, the law applied only to
the thirteen large newspapers in Louisiana, leaving untaxed
four papers with circulation of only slightly less than 20,000
copies a week and 120 weekly newspapers which were in
serious competition with the thirteen newspapers in question.
It was well known that the thirteen newspapers had been
critical of Senator Huey Long, and the Long-dominated
legislature of Louisiana respondent by taxing what Long
described as the "lying newspapers" by imposing on them "a
tax on lying." The effect of the tax was to curtail both their
revenue and their circulation. As the U.S. Supreme Court
noted, the tax was "a deliberate and calculated device in the
guise of a tax to limit the circulation of information to which
the public is entitled in virtue of the constitutional
guaranties." 29 The case is a classic illustration of the warning
that the power to tax is the power to destroy.
In the other case 30 invoked by the PPI, the press was also
found to have been singled out because everything was
exempt from the "use tax" on ink and paper, except the press.
Minnesota imposed a tax on the sales of goods in that state. To
protect the sales tax, it enacted a complementary tax on the
privilege of "using, storing or consuming in that state tangible
personal property" by eliminating the residents' incentive to
get goods from outside states where the sales tax might be
lower. The Minnesota Star Tribune was exempted from both
taxes from 1967 to 1971. In 1971, however, the state
legislature amended the tax scheme by imposing the "use tax"
on the cost of paper and ink used for publication. The law was
held to have singled out the press because (1) there was no
reason for imposing the "use tax" since the press was exempt
from the sales tax and (2) the "use tax" was laid on an
"intermediate transaction rather than the ultimate retail sale."
Minnesota had a heavy burden of justifying the differential
treatment and it failed to do so. In addition, the U.S. Supreme
Court found the law to be discriminatory because the
legislature, by again amending the law so as to exempt the
first $100,000 of paper and ink used, further narrowed the
coverage of the tax so that "only a handful of publishers pay
any tax at all and even fewer pay any significant amount of
tax." 31 The discriminatory purpose was thus very clear.
More recently, in Arkansas Writers' Project, Inc. v.
Ragland, 32 it was held that a law which taxed general interest
magazines but not newspapers and religious, professional,
trade and sports journals was discriminatory because while the
tax did not single out the press as a whole, it targeted a small
46
group within the press. What is more, by differentiating on the
basis of contents (i.e., between general interest and special
interests such as religion or sports) the law became "entirely
incompatible with the First Amendment's guarantee of
freedom of the press."
These cases come down to this: that unless justified, the
differential treatment of the press creates risks of suppression
of expression. In contrast, in the cases at bar, the statute
applies to a wide range of goods and services. The argument
that, by imposing the VAT only on print media whose gross
sales exceeds P480,000 but not more than P750,000, the law
discriminates 33 is without merit since it has not been shown
that as a result the class subject to tax has been unreasonably
narrowed. The fact is that this limitation does not apply to the
press along but to all sales. Nor is impermissible motive
shown by the fact that print media and broadcast media are
treated differently. The press is taxed on its transactions
involving printing and publication, which are different from
the transactions of broadcast media. There is thus a reasonable
basis for the classification.
The cases canvassed, it must be stressed, eschew any
suggestion that "owners of newspapers are immune from any
forms of ordinary taxation." The license tax in
the Grosjean case was declared invalid because it was "one
single in kind, with a long history of hostile misuse against the
freedom of the
press." 34 On the other hand, Minneapolis Star acknowledged
that "The First Amendment does not prohibit all regulation of
the press [and that] the States and the Federal Government can
subject newspapers to generally applicable economic
regulations without creating constitutional problems." 35
What has been said above also disposes of the allegations of
the PBS that the removal of the exemption of printing,
publication or importation of books and religious articles, as
well as their printing and publication, likewise violates
freedom of thought and of conscience. For as the U.S.
Supreme Court unanimously held in Jimmy Swaggart
Ministries v. Board of Equalization, 36 the Free Exercise of
Religion Clause does not prohibit imposing a generally
applicable sales and use tax on the sale of religious materials
by a religious organization.
This brings us to the question whether the registration
provision of the law, 37 although of general applicability,
nonetheless is invalid when applied to the press because it lays
a prior restraint on its essential freedom. The case of American
Bible Society v. City of Manila 38 is cited by both the PBS and
the PPI in support of their contention that the law imposes
censorship. There, this Court held that an ordinance of the
City of Manila, which imposed a license fee on those engaged
in the business of general merchandise, could not be applied to
the appellant's sale of bibles and other religious literature. This
Court relied on Murdock v. Pennsylvania, 39 in which it was
held that, as a license fee is fixed in amount and unrelated to
the receipts of the taxpayer, the license fee, when applied to a
religious sect, was actually being imposed as a condition for
the exercise of the sect's right under the Constitution. For that
reason, it was held, the license fee "restrains in advance those
constitutional liberties of press and religion and inevitably
tends to suppress their exercise." 40
But, in this case, the fee in 107, although a fixed amount
(P1,000), is not imposed for the exercise of a privilege but
only for the purpose of defraying part of the cost of
registration. The registration requirement is a central feature of
the VAT system. It is designed to provide a record of tax
credits because any person who is subject to the payment of
the VAT pays an input tax, even as he collects an output tax
on sales made or services rendered. The registration fee is thus
a mere administrative fee, one not imposed on the exercise of
a privilege, much less a constitutional right.
For the foregoing reasons, we find the attack on Republic Act
No. 7716 on the ground that it offends the free speech, press
and freedom of religion guarantees of the Constitution to be
without merit. For the same reasons, we find the claim of the
Philippine Educational Publishers Association (PEPA) in G.R.
No. 115931 that the increase in the price of books and other
educational materials as a result of the VAT would violate the
constitutional mandate to the government to give priority to
education, science and technology (Art. II, 17) to be
untenable.
B.
Claims
of
Regressi
vity,
Denial
of Due
Process,
Equal
Protecti
on, and
Impairm
ent
of
Contract
s
There is basis for passing upon claims that on its face the
statute violates the guarantees of freedom of speech, press and
religion. The possible "chilling effect" which it may have on
the essential freedom of the mind and conscience and the need
to assure that the channels of communication are open and
operating importunately demand the exercise of this Court's
power of review.
There is, however, no justification for passing upon the claims
that the law also violates the rule that taxation must be
progressive and that it denies petitioners' right to due process
and that equal protection of the laws. The reason for this
different treatment has been cogently stated by an eminent
authority on constitutional law thus: "[W]hen freedom of the
mind is imperiled by law, it is freedom that commands a
momentum of respect; when property is imperiled it is the
lawmakers' judgment that commands respect. This dual
47
standard may not precisely reverse the presumption of
constitutionality in civil liberties cases, but obviously it does
set up a hierarchy of values within the due process clause." 41
Indeed, the absence of threat of immediate harm makes the
need for judicial intervention less evident and underscores the
essential nature of petitioners' attack on the law on the grounds
of regressivity, denial of due process and equal protection and
impairment of contracts as a mere academic discussion of the
merits of the law. For the fact is that there have even been no
notices of assessments issued to petitioners and no
determinations at the administrative levels of their claims so as
to illuminate the actual operation of the law and enable us to
reach sound judgment regarding so fundamental questions as
those raised in these suits.
Thus, the broad argument against the VAT is that it is
regressive and that it violates the requirement that "The rule of
taxation shall be uniform and equitable [and] Congress shall
evolve a progressive system of taxation." 42 Petitioners in G.R.
No. 115781 quote from a paper, entitled "VAT Policy Issues:
Structure, Regressivity, Inflation and Exports" by Alan A. Tait
of the International Monetary Fund, that "VAT payment by
low-income households will be a higher proportion of their
incomes (and expenditures) than payments by higher-income
households. That is, the VAT will be regressive." Petitioners
contend that as a result of the uniform 10% VAT, the tax on
consumption goods of those who are in the higher-income
bracket, which before were taxed at a rate higher than 10%,
has been reduced, while basic commodities, which before
were taxed at rates ranging from 3% to 5%, are now taxed at a
higher rate.
Just as vigorously as it is asserted that the law is regressive,
the opposite claim is pressed by respondents that in fact it
distributes the tax burden to as many goods and services as
possible particularly to those which are within the reach of
higher-income groups, even as the law exempts basic goods
and services. It is thus equitable. The goods and properties
subject to the VAT are those used or consumed by higher-
income groups. These include real properties held primarily
for sale to customers or held for lease in the ordinary course of
business, the right or privilege to use industrial, commercial or
scientific equipment, hotels, restaurants and similar places,
tourist buses, and the like. On the other hand, small business
establishments, with annual gross sales of less than P500,000,
are exempted. This, according to respondents, removes from
the coverage of the law some 30,000 business establishments.
On the other hand, an occasional paper 43 of the Center for
Research and Communication cities a NEDA study that the
VAT has minimal impact on inflation and income distribution
and that while additional expenditure for the lowest income
class is only P301 or 1.49% a year, that for a family earning
P500,000 a year or more is P8,340 or 2.2%.
Lacking empirical data on which to base any conclusion
regarding these arguments, any discussion whether the VAT is
regressive in the sense that it will hit the "poor" and middle-
income group in society harder than it will the "rich," as the
Cooperative Union of the Philippines (CUP) claims in G.R.
No. 115873, is largely an academic exercise. On the other
hand, the CUP's contention that Congress' withdrawal of
exemption of producers cooperatives, marketing cooperatives,
and service cooperatives, while maintaining that granted to
electric cooperatives, not only goes against the constitutional
policy to promote cooperatives as instruments of social justice
(Art. XII, 15) but also denies such cooperatives the equal
protection of the law is actually a policy argument. The
legislature is not required to adhere to a policy of "all or none"
in choosing the subject of taxation. 44
Nor is the contention of the Chamber of Real Estate and
Builders Association (CREBA), petitioner in G.R. 115754,
that the VAT will reduce the mark up of its members by as
much as 85% to 90% any more concrete. It is a mere
allegation. On the other hand, the claim of the Philippine Press
Institute, petitioner in G.R. No. 115544, that the VAT will
drive some of its members out of circulation because their
profits from advertisements will not be enough to pay for their
tax liability, while purporting to be based on the financial
statements of the newspapers in question, still falls short of the
establishment of facts by evidence so necessary for
adjudicating the question whether the tax is oppressive and
confiscatory.
Indeed, regressivity is not a negative standard for courts to
enforce. What Congress is required by the Constitution to do
is to "evolve a progressive system of taxation." This is a
directive to Congress, just like the directive to it to give
priority to the enactment of laws for the enhancement of
human dignity and the reduction of social, economic and
political inequalities (Art. XIII, 1), or for the promotion of
the right to "quality education" (Art. XIV, 1). These
provisions are put in the Constitution as moral incentives to
legislation, not as judicially enforceable rights.
At all events, our 1988 decision in Kapatiran 45 should have
laid to rest the questions now raised against the VAT. There
similar arguments made against the original VAT Law
(Executive Order No. 273) were held to be hypothetical, with
no more basis than newspaper articles which this Court found
to be "hearsay and [without] evidentiary value." As Republic
Act No. 7716 merely expands the base of the VAT system and
its coverage as provided in the original VAT Law, further
debate on the desirability and wisdom of the law should have
shifted to Congress.
Only slightly less abstract but nonetheless hypothetical is the
contention of CREBA that the imposition of the VAT on the
sales and leases of real estate by virtue of contracts entered
into prior to the effectivity of the law would violate the
constitutional provision that "No law impairing the obligation
of contracts shall be passed." It is enough to say that the
parties to a contract cannot, through the exercise of prophetic
discernment, fetter the exercise of the taxing power of the
State. For not only are existing laws read into contracts in
order to fix obligations as between parties, but the reservation
of essential attributes of sovereign power is also read into
contracts as a basic postulate of the legal order. The policy of
protecting contracts against impairment presupposes the
48
maintenance of a government which retains adequate authority
to secure the peace and good order of society. 46
In truth, the Contract Clause has never been thought as a
limitation on the exercise of the State's power of taxation save
only where a tax exemption has been granted for a valid
consideration. 47 Such is not the case of PAL in G.R. No.
115852, and we do not understand it to make this claim.
Rather, its position, as discussed above, is that the removal of
its tax exemption cannot be made by a general, but only by a
specific, law.
The substantive issues raised in some of the cases are
presented in abstract, hypothetical form because of the lack of
a concrete record. We accept that this Court does not only
adjudicate private cases; that public actions by "non-
Hohfeldian" 48 or ideological plaintiffs are now cognizable
provided they meet the standing requirement of the
Constitution; that under Art. VIII, 1, 2 the Court has a
"special function" of vindicating constitutional rights.
Nonetheless the feeling cannot be escaped that we do not have
before us in these cases a fully developed factual record that
alone can impart to our adjudication the impact of
actuality 49 to insure that decision-making is informed and
well grounded. Needless to say, we do not have power to
render advisory opinions or even jurisdiction over petitions for
declaratory judgment. In effect we are being asked to do what
the Conference Committee is precisely accused of having
done in these cases to sit as a third legislative chamber to
review legislation.
We are told, however, that the power of judicial review is not
so much power as it is duty imposed on this Court by the
Constitution and that we would be remiss in the performance
of that duty if we decline to look behind the barriers set by the
principle of separation of powers. Art. VIII, 1, 2 is cited in
support of this view:
Judicial power includes the duty of the
courts of justice to settle actual controversies
involving rights which are legally
demandable and enforceable, and to
determine whether or not there has been a
grave abuse of discretion amounting to lack
or excess of jurisdiction on the part of any
branch or instrumentality of the
Government.
To view the judicial power of review as a duty is nothing new.
Chief Justice Marshall said so in 1803, to justify the assertion
of this power in Marbury v. Madison:
It is emphatically the province and duty of
the judicial department to say what the law
is. Those who apply the rule to particular
cases must of necessity expound and
interpret that rule. If two laws conflict with
each other, the courts must decide on the
operation of each. 50
Justice Laurel echoed this justification in 1936 in Angara v.
Electoral Commission:
And when the judiciary mediates to allocate
constitutional boundaries, it does not assert
any superiority over the other departments;
it does not in reality nullify or invalidate an
act of the legislature, but only asserts the
solemn and sacred obligation assigned to it
by the Constitution to determine conflicting
claims of authority under the Constitution
and to establish for the parties in an actual
controversy the rights which that instrument
secures and guarantees to them. 51
This conception of the judicial power has been affirmed in
several
cases 52 of this Court following Angara.
It does not add anything, therefore, to invoke this "duty" to
justify this Court's intervention in what is essentially a case
that at best is not ripe for adjudication. That duty must still be
performed in the context of a concrete case or controversy, as
Art. VIII, 5(2) clearly defines our jurisdiction in terms of
"cases," and nothing but "cases." That the other departments
of the government may have committed a grave abuse of
discretion is not an independent ground for exercising our
power. Disregard of the essential limits imposed by the case
and controversy requirement can in the long run only result in
undermining our authority as a court of law. For, as judges,
what we are called upon to render is judgment according to
law, not according to what may appear to be the opinion of the
day.
_______________________________
In the preceeding pages we have endeavored to discuss, within
limits, the validity of Republic Act No. 7716 in its formal and
substantive aspects as this has been raised in the various cases
before us. To sum up, we hold:
(1) That the procedural requirements of the Constitution have
been complied with by Congress in the enactment of the
statute;
(2) That judicial inquiry whether the formal requirements for
the enactment of statutes beyond those prescribed by the
Constitution have been observed is precluded by the
principle of separation of powers;
(3) That the law does not abridge freedom of speech,
expression or the press, nor interfere with the free exercise of
religion, nor deny to any of the parties the right to an
education; and
(4) That, in view of the absence of a factual foundation of
record, claims that the law is regressive, oppressive and
confiscatory and that it violates vested rights protected under
the Contract Clause are prematurely raised and do not justify
the grant of prospective relief by writ of prohibition.
WHEREFORE, the petitions in these cases are DISMISSED.
Bidin, Quiason, and Kapunan, JJ., concur.
49

No. 1129.
G.R. No. L-21183 September 27, 1968
VICTORIAS MILLING CO., INC., plaintiff-appellant,
vs.
THE MUNICIPALITY OF VICTORIAS, PROVINCE OF
NEGROS OCCIDENTAL, defendant-appellant.
Hilado & Hilado for plaintiff-appellant.
The Provincial Fiscal of Negros Occidental for defendant-
appellant.
SANCHEZ, J.:
This case calls into question the validity of Ordinance No. 1,
series of 1956, of the Municipality of Victorias, Negros
Occidental.
The disputed ordinance was approved by the municipal
Council of Victorias on September 22, 1956 by way of an
amendment to two municipal ordinances separately imposing
license taxes on operators of sugar centrals 1 and sugar
refineries. 2 The changes were: with respect to sugar centrals,
by increasing the rates of license taxes; and as to sugar
refineries, by increasing the rates of license taxes as well as
the range of graduated schedule of annual output capacity.
Ordinance No. 1 3 is labeled "An Ordinance Amending
Ordinance No. 25, Series of 1953 and Ordinance No. 18,
Series of 1947 on Sugar Central by Increasing the Rates on
Sugar Refinery Mill by Increasing the Range of Graduated
Schedule on Capacity Annual Output Respectively". It was, as
the ordinance itself states, enacted pursuant to the taxing
power conferred by Commonwealth Act 472. By Section 1 of
the Ordinance: "Any person, corporation or other forms of
companies, operating sugar central or engage[d] in the
manufacture of centrifugal sugar shall be required to pay the
following annual municipal license tax, payable quarterly, to
wit: . . ." Section 1 referred to prescribes a wide range of
schedule. It starts with a sugar central with mill having an
annual output capacity of not less than 50,000 piculs of
centrifugal sugar, in which case an annual municipal license
tax of P1,000.00 is provided. Depending upon the annual
output capacity the schedule of taxes continues with P2,000.00
progressively upward in twelve other grades until an output
capacity of 1,500,001 piculs or more shall have been reached.
For this, the annual tax is P40,000.00. The tax on sugar
refineries is likewise calibrated with similar rates. It also starts
with P1,000.00 for a refinery with mill having an annual
output capacity of not less than 25,000 bags of 100 lbs. of
refined sugar. Then, it continues with the second bracket of
from 25,001 bags to 75,000 bags of 100 lbs. Here, the
municipal license tax is P1,500.00. Then follow the other rates
in the graduated scale with the ceiling placed at a capacity of
1,750,001 bags or more. The annual municipal license tax for
the last mentioned output capacity is P40,000.00.
elating to sugar centrals and Section 2(m) covering sugar
refineries with specific reference to the maximum annual
license tax, viz:
Section No. 1 Any person, corporation or other
forms of Companies, operating Sugar Central or
engage[d] in the manufacture of centrifugal sugar
shall be required to pay the following annual
municipal license tax, payable quarterly, to wit:
xxx xxx xxx
(m) Sugar Central with mill having a capacity of
producing an annual output of from 1,500,001 piculs
or more shall be required to pay an annual municipal
license tax of P40,000.00.
Section No. 2 Any person, corporation or other
forms of Companies shall be required to pay an
annual municipal license tax for the operation of
Sugar Refinery Mill at the following rates:
xxx xxx xxx
(m) Sugar Refinery with mill having a capacity of
producing an annual output of from 1,750,001 bags
of 100 lbs. or more shall be required to pay an annual
municipal license tax of P40,000.00.
For, the production of plaintiff Victorias Milling Co., Inc. in
both its sugar central and its sugar refinery located in the
Municipality of Victorias comes within these items in the
schedule.
Plaintiff filed suit below 4 to ask for judgment declaring
Ordinance No. 1, series of 1956, null and void; ordering the
refund of all license taxes paid and to be paid under protest;
directing the officials of Victorias and the Province of Negros
Occidental to observe, during the pendency of the action, the
provisions of section 357 of the Revised Manual of
Instructions to Treasurers of Provinces, Cities and
Municipalities, 1954 edition, 5 regarding the treatment of
license taxes paid under protest by virtue of a disputed
ordinance; and other reliefs. 6
The reasons put forth by plaintiff are that: (a) the ordinance
exceeds the amounts fixed in Provincial Circular 12-A issued
by the Finance Department on February 27, 1940; (b) it is
discriminatory since it singles out plaintiff which is the only
operator of a sugar central and a sugar refinery within the
jurisdiction of defendant municipality; (c) it constitutes double
taxation; and (d) the national government has preempted the
field of taxation with respect to sugar centrals or refineries.
Upon the complaint as supplemented and amended, and the
answer thereto, and following hearing on the merits, the trial
court rendered its judgment. After declaring that "[t]here is no
doubt that" the ordinance in question refers to license taxes or
fees," and that "[i]t is settled that a license tax should be
limited to the cost of licensing, regulating and
surveillance," 7 the trial court ruled that said license taxes in
dispute are unreasonable, 8 and held that: "If the defendant has
the power to tax the plaintiff for purposes of revenue, it may
do so by proper municipal legislation, but not in the guise of a
license tax." 9 The court added: "The Court is not, however,
prepared to order the refund of all the license taxes paid by the
50
plaintiff under protest and amounting, up to the second quarter
of 1960, to P280,000.00, considering that the plaintiff appears
to have agreed to the payment of the license taxes at the rates
fixed prior to Ordinance No. 1, series of 1956; that the
defendant had evidently not complied with the provisions of
Section 357 of the Revised Manual of Instructions to
Treasurers of Provinces, Cities and Municipalities, 1954
Edition, as the plaintiff herein seeks an order enjoining the
defendant and its appropriate officials to carry out said
provisions; that the financial position of the defendant would
surely be disrupted if ordered to refund, while the plaintiff
may perhaps easily forego or forget what it had already parted
with". 10 It disposes of the suit in the following manner:
WHEREFORE, judgment is rendered (a) declaring
that Ordinance No. 1, series of 1956, of the
municipality of Victorias, Negros Occidental, is
invalid; (b) ordering all officials of the defendant to
observe the provisions of Section 357 of the Revised
Manual of Instructions to Treasurers of Provinces,
Cities and Municipalities, 1954 Edition, with
particular reference to any license taxes paid by the
plaintiff under said Ordinance No. 1, series of 1956,
after notice of this decision; and (c) ordering the
defendant to refund to the plaintiff any and all such
license taxes paid under protest after notice of this
decision. 11
Both plaintiff and defendant appealed direct to this Court.
Plaintiff questions that portion of the decision denying the
refund of the license taxes paid under protest in the amount of
P280,000 covering the period from the first quarter of 1957 to
the second quarter of 1960; and balked at the court's order
limiting refund to "any and all such license taxes paid under
protest after notice of this decision." Defendant, upon the
other hand, challenges the correctness of the court's decision
invalidating Ordinance No. 1, series of 1956.
The questions raised in the appeals will be discussed in their
proper sequence.
1. We first grapple with the threshold question: Was
Ordinance No. 1, series of 1956, passed by defendant's
municipal council as a regulatory enactment or as a revenue
measure?
The trial court says, and plaintiff seconds, that the amounts set
forth in the ordinance in question did exceed the cost of
licensing, regulating and surveillance, and that defendant
cannot impose a tax for revenue in the guise of a police
or a regulatory measure. Our finding, however, is the other
way.
The ordinance itself recites that its source of taxing power
emanates from Commonwealth Act 472, Section 1 of which
reads:
Section 1. A municipal council or municipal district
council shall have authority to impose municipal
license taxes upon persons engaged in any occupation
or business, or exercising privileges in the
municipality or municipal district, by requiring them
to secure licenses at rates fixed by the municipal
council, or municipal district council, and to collect
fees and charges for services rendered by the
municipality or municipal district and shall otherwise
have power to levy for public local purposes, and for
school purposes, including teachers' salaries, just and
uniform taxes other than percentage taxes and taxes
on specified articles.
Under the statute just quoted and pertinent jurisprudence, a
municipality is authorized to impose three kinds of licenses:
(1) license for regulation of useful occupations or enterprises;
(2) license for restriction or regulation of non-useful
occupations or enterprises; and (3) license for revenue. 12 The
first two easily fall within the broad police power granted
under the general welfare clause. 13 The third class, however,
is for revenue purposes. It is not a license fee, properly
speaking, and yet it is generally so termed. It rests on the
taxing power. That taxing power must be expressly conferred
by statute upon the municipality. 14 It is so granted under
Commonwealth Act 472.
To be recalled at this point is that Ordinance No. 1, series of
1956, is but an amendment of Ordinance No. 18, series of
1947, in reference to refineries, and Ordinance No. 25, series
of 1953, covering sugar centrals. Ordinance No. 18 imposes
"municipal taxes on persons, firms or
corporations operating refinery mills in this
municipality." 15Ordinance No. 25 speaks of municipal taxes
"relative to the output of the sugar centrals." 16
What are these taxes for? Resolution No. 60 of the municipal
council of Victorias, 17 adopted also on September 22, 1956 in
conjunction with Ordinance No. 1, series of 1956, furnishes a
ready answer. It reads in part:
WHEREAS, the Municipal Treasurer informed the
Municipal Council of the revenue of the Municipality
and the heavy obligations which confront it because
of the implementation of Minimum Wage Law on the
salaries and wages it pays to its municipal employees
and laborers thus greatly draining the Municipal
Treasury;
WHEREAS, this local administration is committed to
the plan of ameliorating the deplorable situation
existing in the barrios, sitios and rural areas by giving
them essential and necessary facilities calculated to
improve conditions thereat thru improvements of
roads and feeder roads;
WHEREAS, one of the causes of the municipality's
financial difficulty is low rates of municipal taxes
imposed by some of the ordinances enacted by the
local legislative body;
WHEREAS, [in] . . . the ordinances known as
Ordinance No. 25, Series of 1953, dealing on
51
 the operation of Sugar Central, and Ordinance No.
18, Series of 1947, which exclusively deals with
the operation of Sugar Refinery Mill, the rates so
given are rates suggested and determined by the
Provincial Circular No. 12-A, dated February 27,
1940 issued by the Department of Finance as regards
to Sugar Centrals;
WHEREAS, the Municipal Council has come to the
conclusion that the rates provided for in such
ordinances are no longer adequate if made in keeping
with the present high cost of living;
WHEREAS, the Municipal Council has also taken
cognizance of the fact that the price of sugar per picul
today is more than twice its pre-war average price; . .
. . 18
Given the purposes just mentioned, we find no warrant in
logic to give our assent to the view that the ordinance in
question is solely for regulatory purpose. Plain is the meaning
conveyed. The ordinance is for raising money. To say
otherwise is to misread the purpose of the
ordinance.1awphl.nt
We should not hang so heavy a meaning on the use of the term
"municipal license tax". This does not necessarily connote the
idea that the tax is imposed as the lower court would want
it to mean a revenue measure in the guise of a license tax.
For really, this runs counter to the declared purpose to make
money.
Besides, the term "license tax" has not acquired a fixed
meaning. It is often "used indiscriminately to designate
impositions exacted for the exercise of various privileges." 19 It
does not refer solely to a license for regulation. In many
instances, it refers to "revenue-raising exactions on privileges
or activities." 20 On the other hand, license feesare commonly
called taxes. But, legally speaking, the latter are "for the
purpose of raising revenues," in contrast to the former which
are imposed "in the exercise of police power for purposes of
regulation." 21
We accordingly say that the designation given by the
municipal authorities does not decide whether the imposition
is properly a license tax or a license fee. The determining
factors are the purpose and effect of the imposition as may be
apparent from the provisions of the ordinance. 22 Thus,
"[w]hen no police inspection, supervision, or regulation is
provided, nor any standard set for the applicant 23 to establish,
or that he agrees to attain or maintain, but any and all persons
engaged in the business designated, without qualification or
hindrance, may come, and a license on payment of the
stipulated sum will issue, to do business, subject to no
prescribed rule of conduct and under no guardian eye, but
according to the unrestrained judgment or fancy of the
applicant and licensee, the presumption is strong that the
power of taxation, and not the police power, is being
exercised." 24
Precisely because of these considerations the present
imposition must be treated as a levy for revenue purposes. A
quick glance at the big amount of maximum annual tax set
forth in the ordinance, P40,000.00 for sugar centrals, and
P40,000.00 for sugar refineries, will readily convince one that
the tax is really a revenue tax. And then, we read in the
ordinance nothing which would as much as indicate that the
tax imposed is merely for police inspection, supervision or
regulation.
Our view that the tax imposed by the ordinance is for revenue
purposes finds support in judicial pronouncements which have
gained foothold in this jurisdiction. In Standard Vacuum vs.
Antigua, 25 this Court had occasion to pass upon a similar
ordinance. In categorical terms, we there stated: "We are
satisfied that the graduated license tax imposed by the
ordinance in question is an occupation tax, imposed not under
the police or regulatory power of the municipality but by
virtue of its taxing power for purposes of revenue, and is in
accordance with the last part of Section 1 of Commonwealth
Act No. 472. It is, therefore, valid." 26
The present case is not to be analogized with Panaligan vs.
City of Tacloban cited in the decision below. 27 For there, the
inspection fee sought to be collected upon every head of
specified animals to be transported out of the City of Tacloban
(P2.00 per hog, P10.00 per cow and 20.00 per carabao) was
in reality an export tax specifically withheld from municipal
taxing power under Section 2287 of the Revised
Administrative Code.
So also do we say that the cases of Pacific Commercial Co. vs.
Romualdez, 28 Lacson vs. City of Bacolod, 29 and Santos vs.
Municipal Government of Caloocan, 30 used by plaintiff as
references, are entirely inopposite. In Pacific Commercial, the
tax involved on frozen meat was nullified because tax
measures on cold stores were not then within the legislative
grant to the City of Manila. In Lacson, the City of Bacolod
taxed every admission ticket sold in the moviehouses. And
justification for this imposition was moored to the general
welfare clause of the city charter. This Court held the
ordinance ultra vires for the reason that the authority to tax
cannot be derived from the general welfare clause. In Santos,
the taxes in controversy were internal organs fees, meat
inspection fees and corral fees, separate from the slaughter or
slaughterhouse fees. In annulling the taxes there questioned,
this Court declared: "[W]hen the Council ordained the
payment of internal organs fees, meat inspection fees and
corral fees, aside from the slaughter or slaughterhouse fees, it
overstepped the limits of its statutory grant [Sec. 1, C.A. 655].
Only one fee was allowed by that law to be charged and that
was slaughter or slaughterhouse fees."
In the cases cited then, the tax ordinances did not find plain
and clear statutory prop. Such infirmity is not present here.
We, accordingly, rule that Ordinance No. 1, series of 1956, of
the Municipality of Victorias, was promulgated not in the
exercise of the municipality's regulatory power but as a
revenue measure a tax on occupation or business. The
52
authority to impose such tax is backed by the express grant of
power in Section 1 of Commonwealth Act 472.
2. Not that the disputed ordinance lacks the imprimatur of the
Secretary of Finance required in paragraph 2, Section 4, of
Commonwealth Act 472. This legal provision necessitates
such approval "[w]henever the rate of fixed municipal license
taxes on businesses not excepted in this Act or otherwise
covered by the preceding paragraph and subject to the fixed
annual tax imposed in section one hundred eighty-two of the
National Internal Revenue Law, is in excess of fifty pesos per
annum; . . . ."
The ordinance here challenged was recommended by the
Provincial Board of Negros Occidental in its resolution (No.
1864) of October 26, 1956. 31 And, the Undersecretary of
Finance in his letter to the municipal council of Victorias on
December 18, 1956 approved said ordinance. But considering
that it is amendatory in nature, that approval was coupled with
the mandate that the ordinance "should take effect at the
beginning of the ensuing calendar year [1957] pursuant to
Section 2309 of the Revised Administrative Code." 32
3. Plaintiff argues that the municipality is bereft of authority to
enact the ordinance in question because the national
government "had preempted it from entering the field of
taxation of sugar centrals and sugar refineries." 33 Plaintiff
seeks refuge in Section 189 of the National Internal Revenue
Code which subjects proprietors or operators of sugar centrals
or sugar refineries to percentage tax.
The implausibility of this position is at once apparent. We are
not dealing here with percentage tax. Rather, we are concerned
with a tax specifically for operators of sugar centrals and sugar
refineries. The rates imposed are based on the maximum
annual output capacity. Which is not a percentage. Because it
is not a share. Nor is it a tax based on the amount of the
proceeds realized out of the sale of sugar, centrifugal or
refined. 34
What can be said at most is that the national government has
preempted the field of percentage taxation. Section 1 of
Commonwealth Act 472, while granting municipalities power
to levy taxes, expressly removes from them the power to exact
"percentage taxes".
It is correct to say that preemption in the matter of taxation
simply refers to an instance where the national government
elects to tax a particular area, impliedly withholding from the
local government the delegated power to tax the same field.
This doctrine primarily rests upon the intention of
Congress. 35 Conversely, should Congress allow municipal
corporations to cover fields of taxation it already occupies,
then the doctrine of preemption will not apply.
In the case at bar, Section 4(1) of Commonwealth Act 472
clearly and specifically allows municipal councils to tax
persons engaged in "the same businesses or occupation" on
which "fixed internal revenue privilege taxes" are "regularly
imposed by the National Government." With certain
exceptions specified in Section 3 of the same statute. Our case
does not fall within the exceptions. It would therefore be futile
to argue that Congress exclusively reserved to the national
government the right to impose the disputed taxes.
We rule that there is no preemption.
4. Petitioner advances the theory that the ordinance is
excessive.
An ordinance carries with it the presumption of validity. The
question of reasonableness though is open to judicial inquiry.
Much should be left thus to the discretion of municipal
authorities. Courts will go slow in writing off an ordinance as
unreasonable unless the amount is so excessive as to be
prohibitive, arbitrary, unreasonable, oppressive, or
confiscatory. 36 A rule which has gained acceptance is that
factors relevant to such an inquiry are the municipal
conditions as a whole and the nature of the business made
subject to imposition. 37
Plaintiff has however not sufficiently proven that, taking these
factors together, the license taxes are unreasonable. The
presumption of validity subsists. For, plaintiff has limited
itself to insisting that the amounts levied exceed the cost of
regulation and that the municipality has adequate funds for the
alleged purposes as evidenced by the municipality's cash
surplus for the fiscal year ending 1956.
The cost of regulation cannot be taken as a gauge, if the
municipality really intended to enact a revenue ordinance. For,
"if the charge exceeds the expense of issuance of a license and
costs of regulation, it is a tax." 38 And if it is, and it is validly
imposed, as in this case, "the rule that license fees for
regulation must bear a reasonable relation to the expense of
the regulation has no application." 39
And then, a cash surplus alone cannot stop a municipality
from enacting a revenue ordinance increasing license taxes in
anticipation of municipal needs. Discretion to determine the
amount of revenue required for the needs of the municipality
is lodged with the municipal authorities. Again, judicial
intervention steps in only when there is a flagrant, oppressive
and excessive abuse of power by said municipal authorities. 40
Not that defendant municipality was without reason. On
February 27, 1940, the Secretary of Finance, later President,
Manuel A. Roxas, issued Provincial Circular 12-A. In that
circular, the then Finance Secretary stated that his
"Department has reached the conclusion that a tax on the basis
of one centavo for every picul of annual output capacity of
sugar centrals ... would be just and reasonable." At that time,
the price of sugar was around P6.00 per picul. Sixteen years
later 1956 when Ordinance No. 1 was approved, the
market quotation for export sugar ranged from P12.00 to
P15.00 per picul. 41 And yet, since then the rate per output
capacity of a sugar central in Ordinance No. 1 was merely
from one centavo to two centavos. There is a statement in the
municipality's brief 42that thereafter the price of sugar had
never gone below P16.00 per picul; instead it had gone up.
The reasonableness of the ordinance may not be disputed. It is
not confiscatory.
53

There was misapprehension in the decision below in its
statement that the increase of rates for refineries was 2,000%.
We should not overlook the fact that the original maximum
rate covering refineries in Ordinance No. 18, series of 1947,
was P2,000.00; but that was only for a refinery with an output
capacity of 90,000 or more sacks. Under Section 2(c) of
Ordinance No. 1, series of 1956, where the refineries have an
output capacity of from 75,001 bags to 100,000 bags, the tax
remains at P2,000.00. From here on, the ordinance provides
for ten more scales for the graduation of the tax depending
upon the output capacity (P3,000.00, P4,000.00, P5,000.00,
P10,000.00, P15,000.00, P20,000.00, P25,000.00, P30,000.00,
P35,000.00 and P40,000.00). But it is only where a refinery
has an output capacity of 1,750,001 or more bags that the
present ordinance imposes a tax of P40,000.00. The
happenstance that plaintiff's refinery is in the last bracket
calling upon it to pay P40,000.00 per annum does not make
the ordinance in question unreasonable.
Neither may we tag the ordinance with excessiveness if we
consider the capital invested by plaintiff in both its sugar
central and sugar refinery and its annual income from both.
Plaintiff's capital investment in the sugar central and sugar
refinery is more or less P26,000,000.00. 43 And here are its
annual net income: for the year 1956 P3,852,910; for the
year 1957 P3,854,520; for the year 1958 P7,230,493; for
the year 1959 P5,951,187; and for the year 1960
P7,809,250. 44 If these figures mean anything at all, they show
that the ordinance in question is neither confiscatory nor
unjust and unreasonable.
5. Upon the averment that in the Municipality of Victorias
plaintiff is the only operator of a sugar central and sugar
refinery, plaintiff now presses its argument that Ordinance No.
1, series of 1956, is discriminatory. The ordinance does not
single out Victorias as the only object of the ordinance. Said
ordinance is made to apply to any sugar central or sugar
refinery which may happen to operate in the municipality. So
it is, that the fact that plaintiff is actually the sole operator of a
sugar central and a sugar refinery does not make the ordinance
discriminatory. Argument along the same lines was rejected
in Shell Co. of P.I., Ltd. vs. Vao, 45 this Court holding that the
circumstance "that there is no other person in the locality who
exercises" the occupation designated as installation manager
"does not make the ordinance discriminatory and hostile,
inasmuch as it is and will be applicable to any person or firm
who exercises such calling or occupation." And in Ormoc
Sugar Company, Inc. vs. Municipal Board of Ormoc
City, 46 declaratory relief was sought to test the validity of a
municipal ordinance which provides a city tax of twenty
centavos per picul of centrifugal sugar and one per centum on
the gross sale of its derivatives and by-products "produced by
the Ormoc Sugar Company, Incorporated, or by any other
sugar mill in Ormoc City." Mr. Justice Enrique Fernando,
delivering the opinion of this Court, declared that the
ordinance did not suffer "from a constitutional or statutory
infirmity." And yet, in Ormoc, it is to be observed that Section
1 of the ordinance spelled out Ormoc Sugar Company,
Incorporated specifically by name. Not even the name of
plaintiff herein was ever mentioned in the ordinance now
disputed.
No discrimination exists.
6. As infirm is plaintiff's stand that its business is not confined
to the Municipality of Victorias. It suffices that plantiff
engages in a business or occupation subject to an exaction by
the municipality within the territorial boundaries of that
municipality. Plaintiff's sugar central and sugar refinery are
located within the Municipality of Victorias. In this central
and refinery, plaintiff manufactures centrifugal sugar and
refined sugar, respectively.
But plaintiff insists that plaintiff's sugar milling and refining
operations are not wholly performed within the territorial
limits of Victorias. According to plaintiff, transportation of
canes from plantation to the mill site, operation and
maintenance of telephone system, inspection of crop progress
and other related activities, are conducted not only in
defendant's municipality but also in the municipalities of
Cadiz, Manapla, Sagay and Saravia as well. 47 We fail to see
the relevance of these facts. Because, if we follow plaintiff's
ratiocination, neither Victorias nor any of the municipalities
just adverted to would be able to impose the tax. One thing
certain, of course, is that the tax is imposed upon the business
of operating a sugar central and a sugar refinery. And
the situs of that business is precisely the Municipality of
Victorias.
7. Plaintiff finally impleads double taxation. Its reason is that
in computing the amount of taxes to be paid by the sugar
refinery the cost of the raw sugar coming from the sugar
central is not deducted; ergo, plaintiff is taxed twice on the
raw sugar.
Double taxation has been otherwise described as "direct
duplicate taxation." 48 For double taxation to exist, "the same
property must be taxed twice, when it should be taxed but
once." 49 Double taxation has also been "defined as taxing the
same person twice by the same jurisdiction for the same
thing." 50 As stated in Manila Motor Company, Inc. vs. Ciudad
de Manila, 51 there is double taxation "cuando la misma
propiedad se sujeta a dos impuestos por la misma entidad o
Gobierno, para el mismo fin y durante el mismo periodo de
tiempo."
With the foregoing precepts in mind, we find no difficulty in
saying that plaintiff's argument on double taxation does not
inspire assent. First. The two taxes cover two different
objects. Section 1 of the ordinance taxes a person operating
sugar centrals or engaged in the manufacture of centrifugal
sugar. While under Section 2, those taxed are the operators of
sugar refinery mills. One occupation or business is different
from the other. Second. The disputed taxes are imposed on
occupation or business. Both taxes are not on sugar. The
amount thereof depends on the annual output capacity of the
mills concerned, regardless of the actual sugar milled.
Plaintiff's argument perhaps could make out a point if the
54
object of taxation here were the sugar it produces, not the
business of producing it.
There is no double taxation.
For the reasons given
The judgment under review is hereby reversed; and
Judgment is hereby rendered: (a) declaring valid and
subsisting Ordinance No. 1, series of 1956, of the
Municipality of Victorias, Province of Negros Occidental; and
(b) dismissing plaintiff's complaint as supplemented and
amended. Costs against plaintiff. So ordered.
G.R. No. L-24813 April 28, 1969
DR. HERMENEGILDO SERAFICA, plaintiff-appellant,
vs.
THE TREASURER OF ORMOC CITY, THE
MUNICIPAL BOARD OF ORMOC CITY, HON.
ESTEBAN C. CONEJOS, as Mayor of Ormoc City and
ORMOC CITY, defendants-appellees.
Cleto P. Evangelista for plaintiff-appellant.
The City Fiscal of Ormoc City for defendant-appellees.
CONCEPCION, C.J.:
Direct appeal from a decision of the Court of First Instance of
Leyte dismissing plaintiff's complaint, without pronouncement
as to costs.
Plaintiff, Dr. Hermenegildo Serafica, seeks a declaration of
nullity of Ordinance No. 13, Series of 1964, of Ormoc City,
imposing a "tax of five pesos (P5.00) for every one thousand
(1,000) board feet of lumber sold at Ormoc City by any
person, partnership, firm, association, corporation, or entities",
pursuant to which the Treasurer of said City levied on and
collected from said plaintiff, as owner of the Serafica Sawmill,
the aggregate sum of P1,837.84, as tax on 367,568 board feet
of lumber sold, in said City, during the third quarter of 1964.
After appropriate proceedings, the lower court rendered
judgment upholding the validity of said ordinance and denying
the relief prayed for by Dr. Serafica. Hence, this appeal by the
latter.
The contested ordinance reads:
ORDINANCE NO. 13
AN ORDINANCE IMPOSING A TAX OF FIVE
PESOS (P5.00) FOR EVERY ONE THOUSAND
BOARD FEET OF LUMBER SOLD AT ORMOC
CITY AND FOR OTHER PURPOSES.
BE IT ORDAINED, by authority of the Municipal
Board of Ormoc City, Philippines, pursuant to the
provisions of Republic Act 179, as amended by RA
429, otherwise known as the Charter of Ormoc City,
That:
SECTION 1. City tax. There shall be paid to the
City Treasurer a city tax of five pesos (P5.00) for
every one thousand (1,000) board feet of lumber sold
at Ormoc City by any person, partnership, firm,
association, corporation or entity.
SECTION 2. Time and manner of payment and
penalty for delinquency. The city tax herein
prescribed shall be payable without penalty within
twenty (20) days after the close of every quarter for
which the tax is due. Failure to pay the tax within the
prescribed time shall render the taxpayer subject to a
surcharge of fifty percentum (50%) for the first
offense and one hundred percentum (100%) for
subsequent failures to pay within the prescribed
period.
SECTION 3. Payment to be rendered by taxpayer.
The taxpayer is hereby obliged to include the tax due
in every invoice issued for the sale of lumber which
tax shall be submitted for payment to the City
Treasurer within twenty (20) days after the close of
every quarter.
SECTION 4. Inspection of taxpayer's books and
records. For the purpose of enforcing the
provisions of this Ordinance, the City Treasurer or
any of his deputies specifically authorized in writing
for the purpose, shall have authority to examine the
books and records of any person, partnership, firm,
association, corporation or entity subject to the tax
herein imposed, PROVIDED, HOWEVER, That
such examination shall be made only during regular
business hours, unless the person, partnership, firm,
association, corporation or entity concerned shall
consent otherwise.
SEC. 5. Penalty for violation. Any violation of the
provisions of the Ordinance shall be punishable by a
fine of not more than five hundred (P500.00) pesos
and an imprisonment of not more than three (3)
months.
SEC. 6. Construction of this Ordinance. If any
part or section of this Ordinance shall be declared
unconstitutional or ultra vires, such part or section
shall not invalidate any other provision hereof.
SEC. 7. Effectivity. This Ordinance shall take
effect immediately upon approval. ENACTED, June
17, 1964.lawphi1.nt
RESOLVED, FURTHER, to authorize the City
Treasurer to copies of this Ordinance for issuance to
all concerned;
RESOLVED, FINALLY, to furnish a copy of this
resolution-ordinance each to the City Treasurer, the
City Auditor, the City Fiscal, the City Judge, and all
concerned;
CARRIED. Six affirmative votes registered by
Councilors Tugonon, Alfaro, Kierulf, Abas,
55
 Besabella, and Du; one abstention registered by
Councilor Aviles.
xxx xxx xxx
Plaintiff assails this ordinance as null and void upon the
grounds that: (1) the Charter of Ormoc City (Republic Acts
Nos. 179 and 429) authorizes the same to "regulate", but not to
"tax" lumber yards; (2) the ordinance in question imposes, in
effect, double taxation, because the business of lumberyard is
already regulated under said Charter and the sale of lumber is
"a mere incident to the business of lumber yard"; (3) the tax
imposed is "unfair, unjust, arbitrary, unreasonable, oppressive
and contrary to the principles of taxation"; and (4) "the public
was not heard and given a chance to air its views" thereon.
With respect to the first ground, We have held in Ormoc
Sugar Co. v. Municipal Board of Ormoc City, 1 that the taxing
power of the City of Ormoc, under section 2 of the Local
Autonomy Act 2 is "broad" and "sufficiently plenary to cover
everything, excepting those mentioned therein". 3 It should be
noted that in said case of Ormoc Sugar Co., We upheld the
validity of a sales tax.
As regards the second ground, suffice it to say that regulation
and taxation are two different things, the first being an
exercise of police power, whereas the latter is not, apart from
the fact that double taxation is not prohibited in the
Philippines. 4
The third objection is premised upon the fact that the tax in
question is imposed regardless of the class of lumber sold,
although there are several categories thereof, commanding
different prices. Plaintiff has not proven, however, or even
alleged the prices corresponding to each category, so that, like
the lower court, We have no means to ascertain the accuracy
of the conclusion drawn by him, and must, accordingly, rely
upon the presumption that the City Council had merely
complied with its duty and that the ordinance is valid, unless
and until the contrary has been duly established. 5
The last objection is based upon Provincial Circular No. 24 of
the Department of Finance, dated March 31,
1960, suggesting that, "in the enactment of tax ordinances ..
under the Local Autonomy Act ... where practicable, public
hearings be held wherein the views of the public ... may be
heard." This is, however, a mere suggestion, compliance with
which is not obligatory, so that failure to act in accordance
therewith can not and does not affect the validity of the tax
ordinance.
Indeed, since local governments are subject, not to the control,
but merely to the general supervision of the President, it is to
say the least, doubtful that the latter could have made
compliance with said circular obligatory. 6
We have not overlooked the fact that, pursuant to Sec. 2 of
Republic Act No. 2264 as amended "no city, municipality or
municipal district may levy or impose ...
xxx xxx xxx
(e) Taxes on forest products or forest concessions."
Although lumber is a forest product, this imitation has no
application to the case at bar, the tax in question being
imposed, not upon lumber, but upon its sale. Said tax is not
levied upon the lumber in plaintiff's sawmill and does not
become due until after the lumber has been sold. Hence, the
case at bar is distinguishable from Golden Ribbon Lumber
Co., Inc. v. City of Butuan 7 in that the ordinance involved
therein provided that "every person, association or corporation
operating a lumber mill and/or lumber yard within the territory
of the City of Butuan shall pay to the City a tax of two-fifths
(P.004) centavo for every board foot of lumber sawn,
manufactured and/or produced." In short, the tax in that case
was imposed upon the "lumber" a forest product, not
subject to local taxation whether sold or not.
Similarly, Santos Lumber Co. v. City of Cebu 8 and Jose S.
Johnston & Sons v. Ramon Regondola 9 cited by the plaintiff,
refer to situations arising before the enactment of Republic
Act No. 2264, 10 and, hence, are inapplicable to the present
case.
Neither have We overlooked the proviso in Sec. 2 of said Act
prohibiting the imposition of "any percentage tax on sales or
other taxes in any form based thereon," for this injunction is
directed exclusively to "municipalities and municipal
districts," and does not apply to cities.
WHEREFORE, the decision appealed from should be, as it is
hereby affirmed, with costs against plaintiff herein. It is so
ordered.
G.R. No. L- 41383 August 15, 1988
PHILIPPINE AIRLINES, INC., plaintiff-appellant,
vs.
ROMEO F. EDU in his capacity as Land Transportation
Commissioner, and UBALDO CARBONELL, in his
capacity as National Treasurer, defendants-appellants.
Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-
appellant.
GUTIERREZ, JR., J.:
What is the nature of motor vehicle registration fees? Are they
taxes or regulatory fees?
This question has been brought before this Court in the past.
The parties are, in effect, asking for a re-examination of the
latest decision on this issue.
This appeal was certified to us as one involving a pure
question of law by the Court of Appeals in a case where the
then Court of First Instance of Rizal dismissed the portion-
about complaint for refund of registration fees paid under
protest.
The disputed registration fees were imposed by the appellee,
Commissioner Romeo F. Elevate pursuant to Section 8,
Republic Act No. 4136, otherwise known as the Land
Transportation and Traffic Code.
56
The Philippine Airlines (PAL) is a corporation organized and
existing under the laws of the Philippines and engaged in the
air transportation business under a legislative franchise, Act
No. 42739, as amended by Republic Act Nos. 25). and 269.1
Under its franchise, PAL is exempt from the payment of taxes.
The pertinent provision of the franchise provides as follows:
Section 13. In consideration of the franchise
and rights hereby granted, the grantee shall
pay to the National Government during the
life of this franchise a tax of two per cent of
the gross revenue or gross earning derived
by the grantee from its operations under this
franchise. Such tax shall be due and payable
quarterly and shall be in lieu of all taxes of
any kind, nature or description, levied,
established or collected by any municipal,
provincial or national automobiles,
Provided, that if, after the audit of the
accounts of the grantee by the
Commissioner of Internal Revenue, a
deficiency tax is shown to be due, the
deficiency tax shall be payable within the
ten days from the receipt of the assessment.
The grantee shall pay the tax on its real
property in conformity with existing law.
On the strength of an opinion of the Secretary of Justice (Op.
No. 307, series of 1956) PAL has, since 1956, not been paying
motor vehicle registration fees.
Sometime in 1971, however, appellee Commissioner Romeo
F. Elevate issued a regulation requiring all tax exempt entities,
among them PAL to pay motor vehicle registration fees.
Despite PAL's protestations, the appellee refused to register
the appellant's motor vehicles unless the amounts imposed
under Republic Act 4136 were paid. The appellant thus paid,
under protest, the amount of P19,529.75 as registration fees of
its motor vehicles.
After paying under protest, PAL through counsel, wrote a
letter dated May 19,1971, to Commissioner Edu demanding a
refund of the amounts paid, invoking the ruling in Calalang v.
Lorenzo (97 Phil. 212 [1951]) where it was held that motor
vehicle registration fees are in reality taxes from the payment
of which PAL is exempt by virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action
on the decision in Republic v. Philippine Rabbit Bus Lines,
Inc., (32 SCRA 211, March 30, 1970) to the effect that motor
vehicle registration fees are regulatory exceptional. and not
revenue measures and, therefore, do not come within the
exemption granted to PAL? under its franchise. Hence, PAL
filed the complaint against Land Transportation Commissioner
Romeo F. Edu and National Treasurer Ubaldo Carbonell with
the Court of First Instance of Rizal, Branch 18 where it was
docketed as Civil Case No. Q-15862.
Appellee Romeo F. Elevate in his capacity as LTC
Commissioner, and LOI Carbonell in his capacity as National
Treasurer, filed a motion to dismiss alleging that the complaint
states no cause of action. In support of the motion to dismiss,
defendants repatriation the ruling in Republic v. Philippine
Rabbit Bus Lines, Inc., (supra) that registration fees of motor
vehicles are not taxes, but regulatory fees imposed as an
incident of the exercise of the police power of the state. They
contended that while Act 4271 exempts PAL from the
payment of any tax except two per cent on its gross revenue or
earnings, it does not exempt the plaintiff from paying
regulatory fees, such as motor vehicle registration fees. The
resolution of the motion to dismiss was deferred by the Court
until after trial on the merits.
On April 24, 1973, the trial court rendered a decision
dismissing the appellant's complaint "moved by the later
ruling laid down by the Supreme Court in the case or Republic
v. Philippine Rabbit Bus Lines, Inc., (supra)." From this
judgment, PAL appealed to the Court of Appeals which
certified the case to us.
Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit
Bus Lines, Inc. (supra) cited by PAL and Commissioner
Romeo F. Edu respectively, discuss the main points of
contention in the case at bar.
Resolving the issue in the Philippine Rabbit case, this Court
held:
"The registration fee which defendant-
appellee had to pay was imposed by Section
8 of the Revised Motor Vehicle Law
(Republic Act No. 587 [1950]). Its heading
speaks of "registration fees." The term is
repeated four times in the body thereof.
Equally so, mention is made of the "fee for
registration." (Ibid., Subsection G) A
subsection starts with a categorical
statement "No fees shall be charged."
(lbid.,Subsection H) The conclusion is
difficult to resist therefore that the Motor
Vehicle Act requires the payment not of a
tax but of a registration fee under the police
power. Hence the incipient, of the section
relied upon by defendant-appellee under the
Back Pay Law, It is not held liable for a tax
but for a registration fee. It therefore cannot
make use of a backpay certificate to meet
such an obligation.
Any vestige of any doubt as to the
correctness of the above conclusion should
be dissipated by Republic Act No. 5448.
([1968]. Section 3 thereof as to the
imposition of additional tax on privately-
owned passenger automobiles, motorcycles
and scooters was amended by Republic Act
No. 5470 which is (sic) approved on May
30, 1969.) A special science fund was
thereby created and its title expressly sets
forth that a tax on privately-owned
passenger automobiles, motorcycles and
57
 scooters was imposed. The rates thereof
were provided for in its Section 3 which
clearly specifies the" Philippine
tax."(Cooley to be paid as distinguished
from the registration fee under the Motor
Vehicle Act. There cannot be any clearer
expression therefore of the legislative will,
even on the assumption that the earlier
legislation could by subdivision the point be
susceptible of the interpretation that a tax
rather than a fee was levied. What is thus
most apparent is that where the legislative
body relies on its authority to tax it
expressly so states, and where it is enacting
a regulatory measure, it is equally exploded
(at p. 22,1969
which the Government is to discharge one of
its principal functionsthe construction and
maintenance of public highways for
everybody's use. They are veritable taxes,
not merely fees.
As a matter of fact, the Revised Motor
Vehicle Law itself now regards those fees as
taxes, for it provides that "no other taxes or
fees than those prescribed in this Act shall
be imposed," thus implying that the charges
therein imposedthough called feesare of
the category of taxes. The provision is
contained in section 70, of subsection (b), of
the law, as amended by section 17 of
Republic Act 587, which reads:

In direct refutation is the ruling in Calalang v. Lorenzo Sec. 70(b) No other taxes
(supra), where the Court, on the other hand, held: or fees than those
prescribed in this Act shall
The charges prescribed by the Revised be imposed for the
Motor Vehicle Law for the registration of registration or operation or
motor vehicles are in section 8 of that law on the ownership of any
called "fees". But the appellation is no motor vehicle, or for the
impediment to their being considered taxes exercise of the profession
if taxes they really are. For not the name but of chauffeur, by any
the object of the charge determines whether municipal corporation, the
it is a tax or a fee. Geveia speaking, taxes provisions of any city
are for revenue, whereas fees are charter to the contrary
exceptional. for purposes of regulation and notwithstanding: Provided
inspection and are for that reason limited in , however, That any
amount to what is necessary to cover the provincial board, city or
cost of the services rendered in that municipal council or
connection. Hence, a charge fixed by statute board, or other competent
for the service to be person,-When by an authority may exact and
officer, where the charge has no relation to collect such reasonable
the value of the services performed and and equitable toll fees for
where the amount collected eventually finds the use of such bridges
its way into the treasury of the branch of the and ferries, within their
government whose officer or officers respective jurisdiction, as
collected the chauffeur, is not a fee but a may be authorized and
tax."(Cooley on Taxation, Vol. 1, 4th ed., p. approved by the Secretary
110.) of Public Works and
Communications, and also
From the data submitted in the court below, for the use of such public
it appears that the expenditures of the Motor roads, as may be
Vehicle Office are but a small portion authorized by the
about 5 per centumof the total collections President of the
from motor vehicle registration fees. And as Philippines upon the
proof that the money collected is not recommendation of the
intended for the expenditures of that office, Secretary of Public Works
the law itself provides that all such money and Communications, but
shall accrue to the funds for the construction in none of these cases,
and maintenance of public roads, streets and shall any toll fee." be
bridges. It is thus obvious that the fees are charged or collected until
not collected for regulatory purposes, that is and unless the approved
to say, as an incident to the enforcement of schedule of tolls shall
regulations governing the operation of motor have been posted levied,
vehicles on public highways, for their in a conspicuous place at
express object is to provide revenue with
58
 such toll station. (at pp.
213-214)
Motor vehicle registration fees were matters originally
governed by the Revised Motor Vehicle Law (Act 3992
[19511) as amended by Commonwealth Act 123 and Republic
Acts Nos. 587 and 1621.
Today, the matter is governed by Rep. Act 4136 [1968]),
otherwise known as the Land Transportation Code, (as
amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382,
843, 896, 110.) and BP Blg. 43, 74 and 398).
Section 73 of Commonwealth Act 123 (which amended Sec.
73 of Act 3992 and remained unsegregated, by Rep. Act Nos.
587 and 1603) states:
Section 73. Disposal of moneys collected.
Twenty per centum of the money collected
under the provisions of this Act shall accrue
to the road and bridge funds of the different
provinces and chartered cities in proportion
to the centum shall during the next previous
year and the remaining eighty per centum
shall be deposited in the Philippine Treasury
to create a special fund for the construction
and maintenance of national and provincial
roads and bridges. as well as the streets and
bridges in the chartered cities to be alloted
by the Secretary of Public Works and
Communications for projects recommended
by the Director of Public Works in the
different provinces and chartered cities. ....
Presently, Sec. 61 of the Land Transportation and Traffic
Code provides:
Sec. 61. Disposal of Mortgage. Collected
Monies collected under the provisions of
this Act shall be deposited in a special trust
account in the National Treasury to
constitute the Highway Special Fund, which
shall be apportioned and expended in
accordance with the provisions of the"
Philippine Highway Act of 1935. "Provided,
however, That the amount necessary to
maintain and equip the Land Transportation
Commission but not to exceed twenty per
cent of the total collection during one year,
shall be set aside for the purpose. (As
amended by RA 64-67, approved August 6,
1971).
It appears clear from the above provisions that the legislative
intent and purpose behind the law requiring owners of vehicles
to pay for their registration is mainly to raise funds for the
construction and maintenance of highways and to a much
lesser degree, pay for the operating expenses of the
administering agency. On the other hand, the Philippine
Rabbit case mentions a presumption arising from the use of
the term "fees," which appears to have been favored by the
legislature to distinguish fees from other taxes such as those
mentioned in Section 13 of Rep. Act 4136 which reads:
Sec. 13. Payment of taxes upon
registration.No original registration of
motor vehicles subject to payment of taxes,
customs s duties or other charges shall be
accepted unless proof of payment of the
taxes due thereon has been presented to the
Commission.
referring to taxes other than those imposed on the registration,
operation or ownership of a motor vehicle (Sec. 59, b, Rep.
Act 4136, as amended).
Fees may be properly regarded as taxes even though they also
serve as an instrument of regulation, As stated by a former
presiding judge of the Court of Tax Appeals and writer on
various aspects of taxpayers
It is possible for an exaction to be both tax
arose. regulation. License fees are changes.
looked to as a source of revenue as well as a
means of regulation (Sonzinky v. U.S., 300
U.S. 506) This is true, for example, of
automobile license fees. Isabela such case,
the fees may properly be regarded as taxes
even though they also serve as an instrument
of regulation. If the purpose is primarily
revenue, or if revenue is at least one of the
real and substantial purposes, then the
exaction is properly called a tax. (1955 CCH
Fed. tax Course, Par. 3101, citing Cooley on
Taxation (2nd Ed.) 592, 593; Calalang v.
Lorenzo. 97 Phil. 213-214) Lutz v. Araneta
98 Phil. 198.) These exactions are
sometimes called regulatory taxes. (See
Secs. 4701, 4711, 4741, 4801, 4811, 4851,
and 4881, U.S. Internal Revenue Code of
1954, which classify taxes on tobacco and
alcohol as regulatory taxes.) (Umali,
Reviewer in Taxation, 1980, pp. 12-13,
citing Cooley on Taxation, 2nd Edition, 591-
593).
Indeed, taxation may be made the implement of the state's
police power (Lutz v. Araneta, 98 Phil. 148).
If the purpose is primarily revenue, or if revenue is, at least,
one of the real and substantial purposes, then the exaction is
properly called a tax (Umali, Id.) Such is the case of motor
vehicle registration fees. The conclusions become inescapable
in view of Section 70(b) of Rep. Act 587 quoted in
the Calalang case. The same provision appears as Section
591-593). in the Land Transportation code. It is patent
therefrom that the legislators had in mind a regulatory tax as
the law refers to the imposition on the registration, operation
or ownership of a motor vehicle as a "tax or fee." Though
nowhere in Rep. Act 4136 does the law specifically state that
59
the imposition is a tax, Section 591-593). speaks of "taxes." or 41-42). to the effect that its franchise tax of
fees ... for the registration or operation or on the ownership of one and one-half percentum (1-1/2%) of all
any motor vehicle, or for the exercise of the profession of gross receipts was provided as "in lieu of
chauffeur ..." making the intent to impose a tax more apparent. any and all taxes of any kind, nature, or
Thus, even Rep. Act 5448 cited by the respondents, speak of description levied, established, or collected
an "additional" tax," where the law could have referred to an by any authority whatsoever, municipal,
original tax and not one in addition to the tax already imposed provincial, or national from which taxes the
on the registration, operation, or ownership of a motor vehicle grantee is hereby expressly exempted." The
under Rep. Act 41383. Simply put, if the exaction under Rep. issue raised to this Court now is the validity
Act 4136 were merely a regulatory fee, the imposition in Rep. of the respondent court's decision which
Act 5448 need not be an "additional" tax. Rep. Act 4136 also ruled that the exemption under Republic Act
speaks of other "fees," such as the special permit fees for No. 41-42). was repealed by Section 24 of
certain types of motor vehicles (Sec. 10) and additional fees Republic Act No. 5448 dated June 27, 1968
for change of registration (Sec. 11). These are not to be which reads:
understood as taxes because such fees are very minimal to be
revenue-raising. Thus, they are not mentioned by Sec. 591- "(d) The provisions of
593). of the Code as taxes like the motor vehicle registration existing special or general
fee and chauffers' license fee. Such fees are to go into the laws to the contrary
expenditures of the Land Transportation Commission as notwithstanding, all
provided for in the last proviso of see. 61, aforequoted. corporate taxpayers not
specifically exempt under
It is quite apparent that vehicle registration fees were Sections 24 (c) (1) of this
originally simple exceptional. intended only for rigidly Code shall pay the rates
purposes in the exercise of the State's police powers. Over the provided in this section.
years, however, as vehicular traffic exploded in number and All corporations, agencies,
motor vehicles became absolute necessities without which or instrumentalities owned
modem life as we know it would stand still, Congress found or controlled by the
the registration of vehicles a very convenient way of raising government, including the
much needed revenues. Without changing the earlier deputy. Government Service
of registration payments as "fees," their nature has become Insurance System and the
that of "taxes." Social Security System
but excluding educational
In view of the foregoing, we rule that motor vehicle institutions, shall pay such
registration fees as at present exacted pursuant to the Land rate of tax upon their
Transportation and Traffic Code are actually taxes intended taxable net income as are
for additional revenues. of government even if one fifth or less imposed by this section
of the amount collected is set aside for the operating expenses upon associations or
of the agency administering the program. corporations engaged in a
similar business or
May the respondent administrative agency be required to industry. "
refund the amounts stated in the complaint of PAL?
An examination of Section 24 of the Tax
The answer is NO. Code as amended shows clearly that the law
intended all corporate taxpayers to
The claim for refund is made for payments given in 1971. It is pay income tax as provided by the statute.
not clear from the records as to what payments were made in There can be no doubt as to the power of
succeeding years. We have ruled that Section 24 of Rep. Act Congress to repeal the earlier exemption it
No. 5448 dated June 27, 1968, repealed all earlier tax granted. Article XIV, Section 8 of the 1935
exemptions Of corporate taxpayers found in legislative Constitution and Article XIV, Section 5 of
franchises similar to that invoked by PAL in this case. the Constitution as amended in 1973
In Radio Communications of the Philippines, Inc. v. Court of expressly provide that no franchise shall be
Tax Appeals, et al. (G.R. No. 615)." July 11, 1985), this Court granted to any individual, firm, or
ruled: corporation except under the condition that
it shall be subject to amendment, alteration,
Under its original franchise, Republic Act or repeal by the legislature when the public
No. 21); enacted in 1957, petitioner Radio interest so requires. There is no question as
Communications of the Philippines, Inc., to the public interest involved. The country
was subject to both the franchise tax and needs increased revenues. The repealing
income tax. In 1964, however, petitioner's clause is clear and unambiguous. There is a
franchise was amended by Republic Act No. listing of entities entitled to tax exemption.
60
 The petitioner is not covered by the
provision. Considering the foregoing, the
Court Resolved to DENY the petition for
lack of merit. The decision of the respondent
court is affirmed.
Any registration fees collected between June 27, 1968 and
April 9, 1979, were correctly imposed because the tax
exemption in the franchise of PAL was repealed during the
period. However, an amended franchise was given to PAL in
1979. Section 13 of Presidential Decree No. 1590, now
provides:
In consideration of the franchise and rights
hereby granted, the grantee shall pay to the
Philippine Government during the lifetime
of this franchise whichever of subsections
(a) and (b) hereunder will result in a lower
taxes.)
(a) The basic corporate
income tax based on the
grantee's annual net
taxable income computed
in accordance with the
provisions of the Internal
Revenue Code; or
(b) A franchise tax of two
per cent (2%) of the gross
revenues. derived by the
grantees from all specific.
without distinction as to
transport or nontransport
corporations; provided
that with respect to
international airtransport
service, only the gross
passengers, mail, and
freight revenues. from its
outgoing flights shall be
subject to this law.
The tax paid by the grantee under either of
the above alternatives shall be in lieu of all
other taxes, duties, royalties, registration,
license and other fees and charges of any
kind, nature or description imposed, levied,
established, assessed, or collected by any
municipal, city, provincial, or national
authority or government, agency, now or in
the future, including but not limited to the
following:
xxx xxx xxx
(5) All taxes, fees and other charges on the
registration, license, acquisition, and transfer
of airtransport equipment, motor vehicles,
and all other personal or real property of the
gravitates (Pres. Decree 1590, 75 OG No.
15, 3259, April 9, 1979).
PAL's current franchise is clear and specific. It has removed
the ambiguity found in the earlier law. PAL is now exempt
from the payment of any tax, fee, or other charge on the
registration and licensing of motor vehicles. Such payments
are already included in the basic tax or franchise tax provided
in Subsections (a) and (b) of Section 13, P.D. 1590, and may
no longer be exacted.
WHEREFORE, the petition is hereby partially GRANTED.
The prayed for refund of registration fees paid in 1971 is
DENIED. The Land Transportation Franchising and
Regulatory Board (LTFRB) is enjoined functions-the
collecting any tax, fee, or other charge on the registration and
licensing of the petitioner's motor vehicles from April 9, 1979
as provided in Presidential Decree No. 1590.
SO ORDERED.
G.R. No. L-19737 August 26, 1968
HENG TONG TEXTILES CO., INC. (before), PHILIP
MANUFACTURING CORPORATION (now), petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and THE
COURT OF TAX APPEALS, respondents.
Caparas and Ilagan and Anatolia F. Reyes for petitioner.
Office of the Solicitor General for respondents.
MAKALINTAL, J.:
In 1952 the then Collector of Internal Revenue assessed
against the petitioner deficiency sales taxes and surcharges for
the year 1949 and the first four months of 1950 in the
aggregate sum of P89,123.58. The assessment was appealed to
the Board of Tax Appeals, whence the case was transferred to
the Court of Tax Appeals upon its organization in 1954, and
there was affirmed in its decision dated February 28, 1952.
The matter was thereafter elevated to this Court for review.
The deficiency taxes in question were assessed on
importations of textiles from abroad. The goods were
withdrawn from Customs by Pan-Asiatic Commercial Co.,
Inc., which paid, in the name of the petitioner, the
corresponding advance sales tax under section 183(b) of the
Internal Revenue Code. The assessment for the deficiency,
however, was made against the petitioner, Heng Tong Textiles
Co., Inc. (now Philip Manufacturing Corporation) on the
ground that it was the real importer of the goods and did not
pay the taxes due on the basis of the gross selling prices
thereof. There is no dispute as to the amount as computed by
the internal revenue examiners and confirmed by the
Collector. The only issues posed in the instant petition for
review are: (1) whether or not the petitioner was the importer
of the goods; and (2) whether or not it was guilty of fraud so
as to warrant the imposition of a penalty of 50% on the
deficiency.
The Court of Tax Appeals based its decision of affirmance,
finding the petitioner the importer of the goods, on a number
of evidentiary circumstances. First, Heng Tong Textiles Co.,
61
Inc. and Pan-Asiatic Commercial were sister corporations.
This is not controverted by the petitioner. Second, the
commercial documents covering the importations (shipping
documents, insurance papers, and records of payment of the
advance sales tax in the Bureau of Customs) were all in the
name of the petitioner. Third, in connection with advance sales
tax aforesaid, Pan-Asiatic Asiatic Commercial wrote the
petitioner the following letter:
In compliance with your request regarding the 5%
Sales Tax that we paid for you for the year 1949 and
the first quarter of 1950 against the goods that you
ordered from various United States suppliers, through
us, we attach hereto a list giving a breakdown of this
5% Sales Tax, together with the corresponding
Official Receipt Numbers and other details relative to
the orders covered by these payments.
Fourth, there is both documentary and testimonial evidence
the latter being declarations of the petitioner's own witnesses
that Pan-Asiatic Commercial acted merely as indentor.
Indeed the original petition for review below contains the
allegation that "during the taxable year 1949, Heng Tong
Textiles Co., Inc. placed through Pan-Asiatic Commercial Co.,
Inc., orders for importations of textiles from the United States
in the sum of P2,190,948.66."
Petitioner excepts to the conclusion of the Court of Tax
Appeals and avers that the importation papers were placed in
the name of the petitioner only for purposes of
accommodation, that is, to introduce the petitioner to textile
suppliers abroad; and that the petitioner was not in a financial
position to make the importations in question, valued at over a
million pesos, since its paid-up capital was only P30,000.00.
These circumstances show nothing but a private arrangement
between the petitioner and Pan-Asiatic Commercial, which in
no way affected the role of the petitioner as the importer as far
as the Government and its right to collect the taxes were
concerned. Pan-Asiatic Commercial might have furnished the
necessary financing for the importations in question, but that
did not militate against the petitioner's being the importer; nor
did the idea of building up its reputation among textile
suppliers abroad render it necessary for the withdrawal of the
goods from customs and the payment of the advance sales tax
to be made in the petitioner's name, these being purely local
operations, or for Pan-Asiatic Commercial to affirm, in the
private communication sent by it to the petitioner, that the
latter was the one that ordered the goods from the United
States.
If anything, we perceive in the entire set-up an arrangement
through which the sales taxes due could be minimized, by
having Pan-Asiatic Commercial, as indorsee of the goods,
withdraw the same from Customs upon payment of the
advance sales tax and then execute a sale thereof to Heng
Tong Textiles at cost, or at a negligible profit. As it turned out,
according to the Court of Tax Appeals, "the goods were made
to appear as having (thus) been sold ... so that no sales tax was
paid by petitioner upon the sales of such goods ... (and)
neither, was any sales tax paid on the supposed sales of said
goods by the Pan-Asiatic Commercial to the petitioner as the
sales were made apparently at cost." This is so because
"during the period in question," the Court of Tax Appeals
added, "the sales tax on sales of imported articles was based
on the gross selling price thereof, the advance sales tax paid
upon removal of the goods from the customhouse being
credited against the tax on the actual gross selling price paid
by the importer. (See Rep. Act No. 253; General Circular No.
V-106, February 19, 1951.)"
In our opinion, however, the arrangement resorted to does not
by itself alone justify the penalty imposed. Section 183 (a),
paragraph 3, of the Internal Revenue Code, as amended by
Republic Act No. 253, speaks of willful neglect to file the
return or willful making of a false or fraudulent return. An
attempt to minimize one's tax does not necessarily constitute
fraud. It is a settled principle that a taxpayer may diminish his
liability by any means which the law permits. "The intention
to minimize taxes, when used in the context of fraud, must be
proved to exist by clear and convincing evidence amounting to
more than mere preponderance, and cannot, be justified by
mere speculation. This is because fraud is never lightly to be
presumed." (Yutivo Sons Hardware Co. vs. CTA, G.R. No. L-
13203, and cases cited). No such evidence is shown by the
record in the case of the herein petitioner. Its actuation is not
incompatible with good faith on its part, that is, with a genuine
belief that by indorsing the goods to Pan-Asiatic Commercial
so that the latter could, as it did, take delivery thereof, Pan-
Asiatic Commercial would in law be considered the importer.
It may even be true, as the petitioner insists, that it was Pan-
Asiatic Commercial that financed the importations but placed
them in the name of the petitioner as a matter of
accommodation, in which case the element of fraud would be
ruled out, although from the legal viewpoint and as far as the
right of the Government to collect the taxes was concerned the
petitioner was the real importer and hence must shoulder the
tax burden.
The decision of the Court of Tax Appeals is modified, by
eliminating therefrom the penalty of 50% on the amount of
deficiency sales taxes imposed, and is affirmed in all other
respects. No pronouncement as to costs.
G.R. No. L-21609 September 29, 1966
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
KER & COMPANY, LTD., defendant-appellant.
Office of the Solicitor General for plaintiff-appellant.
Leido, Andrada, Perez and Associates for defendant-
appellant.
BENGZON, J.P., J.:
Ker & Co., Ltd., a domestic corporation, filed its income tax
returns for the years 1947, 1948, 1949 and 1950 on the
following dates:
Year Date Filed
1947 April 12, 1948
1948 April 30, 1949
1949 May 15, 1950
62
 1950 May 9, 1951
It amended its income tax returns for 1948 and 1949 on May
11, 1949 and June 30, 1950, respectively.
In 1953 the Bureau of Internal Revenue examined and audited
Ker & Co., Ltd.'s returns and books of accounts and
subsequently issued the following assessments for deficiency
income tax:
Year Amount Date Assessed
1947 P42,342.30 July 25, 1953
1948 18,651.87 Feb. 16, 1953
1949 139.67 Feb. 16, 1953
Feb. 16, 1953
1950 12,813.00
due and payable on dates indicated in the accompanying
notices of assessment. The assessments for 1948 and 1950
carried the surcharge of 50% authorized under Section 72 of
the Tax Code for the filing of fraudulent returns.
Upon request of Ker & Co., Ltd., through Atty. Jose Leido, its
counsel, the Bureau of Internal Revenue reduced the
assessments for the year 1947 from P42,342.30 to P27,026.28
and for the year 1950 from P12,813.00 to P8,542.00, imposed
the 50% surcharge for the year 1947 and eliminated the same
surcharge from the assessment for the year 1950. The
assessments for years 1948 and 1949 remained the same.
On March 1, 1956 Ker & Co., Ltd. filed with the Court of Tax
Appeals a petition for review with preliminary injunction. No
preliminary injunction was issued, for said court dismissed the
appeal for having been instituted beyond the 30-day period
provided for in Section 11 of Republic Act 1125. We affirmed
the order of dismissal of L-12396. 1
On March 15, 1962, the Bureau of Internal Revenue
demanded payment of the aforesaid assessments together with
a surcharge of 5% for late payment and interest at the rate of
1% monthly. Ker & Co., Ltd. refused to pay, instead in its
letters dated March 28, 1962 and April 10, 1962 it set up the
defense of prescription of the Commissioner's right to collect
the tax. Subsequently, the Republic of the Philippines filed on
March 27, 1962 a complaint with the Court of First Instance of
Manila seeking collection of the aforesaid deficiency income
tax for the years 1947, 1948, 1949 and 1950. The complaint
did not allege fraud in the filing of any of the income tax
returns for the years involved, nor did it pray for the payment
of the corresponding 50% surcharge, but it prayed for the
payment of 5% surcharge for late payment and interest of 1%
per month without however specifying from what date interest
started to accrue.
Summons was served not on the defendant taxpayer but upon
Messrs. Leido and Associates, its counsel in the proceedings
before the Bureau of Internal Revenue and the Court of Tax
Appeals.
On April 14, 1962 Ker & Co., Ltd. through its counsel, Leido,
Andrada, Perez & Associates, moved for the dismissal of the
complaint on the ground that the court did not acquire
jurisdiction over the person of the defendant and that
plaintiff's cause of action has prescribed. This motion was
denied and defendant filed a motion for reconsideration.
Resolution on said motion, however, was deferred until trial of
the case on the merits.
On May 18, 1962, Ker & Co., Ltd. filed its answer to the
complaint interposing therein the defense set up in its motion
to dismiss of April 14, 1962.
On September 18, 1962 the Republic of the Philippines
amended its complaint, in answer to which Ker & Co., Ltd.
adopted the same answer which it had filed on May 18, 1962.
On January 30, 1963 the Court of First Instance rendered
judgment, the dispositive portion of which states:
WHEREFORE, this Court dismisses the claim for the
collection of deficiency income taxes for 1947, but
orders defendant taxpayer to pay the deficiency
income taxes for 1948, 1949 and 1950, in the
amounts of P18,651.87, P139.67 and P8,542.00,
respectively, plus 5% surcharge thereon on each
amount and interest of 1% a month computed from
March 27, 1962 and until full payment thereof is
made, plus the costs of suit.
On February 20, 1963 the Republic of the Philippines filed a
motion for reconsideration contending that the right of the
Commissioner of Internal Revenue to collect the deficiency
assessment for 1947 has not prescribed by a lapse of merely
five years and three months, because the taxpayer's income tax
return was fraudulent in which case prescription sets in ten
years from October 31, 1951, the date of discovery of the
fraud, pursuant to Section 332 (a) of the Tax Codes and that
the payment of delinquency interest of 1% per month should
commence from the date it fell due as indicated in the
assessment notices instead of on the date the complaint was
filed.
On March 6, 1963 Ker & Co., Ltd. also filed a motion for
reconsideration reiterating its assertion that the Court of First
Instance did not acquire jurisdiction over its person, and
maintaining that since the complaint was filed nine years, one
month and eleven days after the deficiency assessments for
1948, 1949 and 1950 were made and since the filing of its
petition for review in the Court of Tax Appeals did not stop
the running of the period of limitations, the right of the
Commissioner of Internal Revenue to collect the tax in
question has prescribed.
The two motions for reconsideration having been denied, both
parties appealed directly to this Court.
The issues in this case are:
1. Did the Court of First Instance acquire jurisdiction
over the person of defendant Ker & Co., Ltd.?
.
63
 2. Did the right of the Commissioner of Internal
Revenue to assess deficiency income tax for the year
1947 prescribe? .
3. Did the filing of a petition for review by the
taxpayer in the Court of Tax Appeals suspend the
running of the statute of limitations to collect the
deficiency income for the years 1948, 1949 and
1950?
4. When did the delinquency interest on the
deficiency income tax for the years 1948, 1949 and
1950 accrue?
First Issue
Ker & Co., Ltd. maintains that the court a quo did not acquire
jurisdiction over its person inasmuch as summons was not
served upon it but upon Messrs. Leido and Associates who do
not come under any of the class of persons upon whom
summons should be served as enumerated in Section 13, Rule
7 of the Rules of Court, 2 which reads:
SEC. 13. Service upon private domestic corporation
or partnership.If the defendant is a corporation
formed under the laws of the Philippines or a
partnership duly registered, service may be made on
the president, manager, secretary, cashier, agent, or
any of its directors.
Messrs. Leido and Associates acted as counsel for Ker Co.,
Ltd. when this tax case was in its administrative stage. The
same counsel represented Ker & Co., Ltd., when it appealed
said case to the Court of Tax Appeals and later to this Court.
Subsequently, when the Deputy Commissioner of Internal
Revenue, by letter dated March 15, 1962, demanded the
payment of the deficiency income tax in question, it was
Messrs. Leido, Andrada, Perez & Associates who replied in
behalf of Ker & Co., Ltd. in two letters, dated March 28, 1962
and April 10, 1962, both after the complaint in this case was
filed. At least therefore on April 2, 1962 when Messrs. Leido
and Associates received the summons, they were still acting
for and in behalf of Ker & Co., Ltd. in connection with its tax
liability involved in this case. Perforce, they were the
taxpayer's agent when summons was served. Under Section 13
of Rule 7, aforequoted, service upon the agent of a corporation
is sufficient.
We observe that the motion to dismiss filed on April 14, 1962,
aside from disputing the lower court's jurisdiction over
defendant's person, prayed for dismissal of the complaint on
the ground that plaintiff's cause of action has prescribed. By
interposing such second ground in its motion to dismiss, Ker
& Co., Ltd. availed of an affirmative defense on the basis of
which it prayed the court to resolve controversy in its favor.
For the court to validly decide the said plea of defendant Ker
& Co., Ltd., it necessarily had to acquire jurisdiction upon the
latter's person, who, being the proponent of the affirmative
defense, should be deemed to have abandoned its special
appearance and voluntarily submitted itself to the jurisdiction
of the court.3
Voluntary appearance cures defects of summons, if any.4 Such
defect, if any, was further cured when defendant filed its
answer to the complaint.5 A defendant can not be permitted to
speculate upon the judgment of the court by objecting to the
court's jurisdiction over its person if the judgment is adverse to
it, and acceding to jurisdiction over its person if and when the
judgment sustains its defenses.
Second Issue
Ker & Co., Ltd. contends that under Section 331 of the Tax
Code the right of the Commissioner of Internal Revenue to
assess against it a deficiency income tax for the year 1947 has
prescribed because the assessment was issued on July 25,
1953 after a lapse of five years, three months and thirteen days
from the date (April 12, 1948) it filed its income tax return.
On the other hand, the Republic of the Philippines insists that
the taxpayer's income tax return was fraudulent, therefore the
Commissioner of Internal Revenue may assess the tax within
ten years from discovery of the fraud on October 31, 1951
pursuant to Section 322(a) of the Tax Code.
The stand of the Republic of the Philippines hinges on
whether or not taxpayer's income tax return for 1947 was
fraudulent.
The court a quo, confining itself to determining whether or not
the assessment of the tax for 1947 was issued within the five-
year period provided for in Section 331 of the Tax Code, ruled
that the right of the Commissioner of Internal Revenue to
assess the tax has prescribed. Said the lower court:
The Court resolves the second issue in the negative,
because Section 331 of the Revenue Code explicitly
provides, in mandatory terms, that "Internal
Revenue taxes shall be assessed within 5 years after
the return was filed, and no proceedings in
court without assessment, for the collection of such
taxes, shall be begun after expiration of such period.
The attempt by the Commissioner of Internal
Revenue to make an assessment on July 25, 1953, on
the basis of a return filed on April 12, 1948, is an
exercise of authority against the aforequoted explicit
and mandatory limitations of statutory law. Settled in
our system is the rule that acts committed against the
provisions of mandatory or prohibitory laws shall be
void (Art. 5, New Civil Code). . . .
Said court resolved the issue without touching upon
fraudulence of the return. The reason is that the complaint
alleged no fraud, nor did the plaintiff present evidence to
prove fraud.
In reply to the lower court's conclusion, the Republic of the
Philippines maintains in its brief that Ker & Co., Ltd. filed a
false return and since the fraud penalty of 50% surcharge was
imposed in the deficiency income tax assessment, which has
become final and executory, the finding of the Commissioner
of Internal Revenue as to the existence of the fraud has also
become final and need not be proved. This contention suffers
64
from a flaw in that it fails to consider the well-settled principle
that fraud is a question of fact6 which must be alleged and
proved.7 Fraud is a serious charge and, to be sustained, it must
be supported by clear and convincing proof.8 Accordingly,
fraud should have been alleged and proved in the lower court.
On these premises We therefore sustain the ruling of the lower
court upon the point of prescription.
It would be worth mentioning that since the assessment for
deficiency income tax for 1947 has become final and
executory, Ker & Co., Ltd. may not anymore raise defenses
which go into the merits of the assessment, i.e., prescription of
the Commissioner's right to assess the tax. Such was our
ruling in previous cases.9 In this case however, Ker & Co.,
Ltd. raised the defense of prescription in the proceedings
below and the Republic of the Philippines, instead of
questioning the right of the defendant to raise such defense,
litigated on it and submitted the issue for resolution of the
court. By its actuation, the Republic of the Philippines should
be considered to have waived its right to object to the setting
up of such defense.
Third Issue
Ker & Co., Ltd. impresses upon Us that since the Republic of
the Philippines filed the complaint for the collection of the
deficiency income tax for the years 1948, 1949 and 1950 only
on March 27, 1962, or nine years, one month and eleven days
from February 16, 1953, the date the tax was assessed, the
right to collect the same has prescribed pursuant to Section
332 (c) of the Tax Code. The Republic of the Philippines
however contends that the running of the prescriptive period
was interrupted by the filing of the taxpayer's petition for
review in the Court of Tax Appeals on March 1, 1956.
If the period during which the case was pending in the Court
of Tax Appeals and in the Supreme Court were not counted in
reckoning the prescriptive period, less than five years would
have elapsed, hence, the right to collect the tax has not
prescribed.
The taxpayer counters that the filing of the petition for review
in the Court of Tax Appeals could not have stopped the
running of the prescriptive period to collect because said court
did not have jurisdiction over the case, the appeal having been
interposed beyond the 30-day period set forth in Section 11 of
Republic Act 1125. Precisely, it adds, the Tax Court dismissed
the appeal for lack of jurisdiction and said dismissal was
affirmed by the Supreme Court in L-12396 aforementioned.
Under Section 333 of the Tax Code, quoted hereunder:
SEC. 333. Suspension of running of statute.The
running of the statute of limitations provided in
Section 331 or three hundred thirty-two on the
making of assessments and the beginning, of distraint
or levy or a proceeding in court for collection, in
respect of any deficiency, shall be suspended for the
period during which the Collector of Internal
Revenue is prohibited from making the assessment or
beginning distraint or levy or a proceeding in court,
and for sixty days thereafter.
the running of the prescriptive period to collect the tax shall be
suspended for the period during which the Commissioner of
Internal Revenue is prohibited from beginning a distraint and
levy or instituting a proceeding in court, and for sixty days
thereafter.
Did the pendency of the taxpayer's appeal in the Court of Tax
Appeals and in the Supreme Court have the effect of legally
preventing the Commissioner of Internal Revenue from
instituting an action in the Court of First Instance for the
collection of the tax? Our view is that it did.
From March 1, 1956 when Ker & Co., Ltd. filed a petition for
review in the Court of Tax Appeals contesting the legality of
the assessments in question, until the termination of its appeal
in the Supreme Court, the Commissioner of Internal Revenue
was prevented, as recognized in this Court's ruling
in Ledesma, et al. v. Court of Tax Appeals, 10 from filing an
ordinary action in the Court of First Instance to collect the tax.
Besides, to do so would be to violate the judicial policy of
avoiding multiplicity of suits and the rule on lis pendens. 11
It would be interesting to note that when the Commissioner of
Internal Revenue issued the final deficiency assessments on
January 5, 1954, he had already lost, by prescription, the right
to collect the tax (except that for 1950) by the summary
method of warrant of distraint and levy. Ker & Co., Ltd.
immediately thereafter requested suspension of the collection
of the tax without penalty incident to late payment pending the
filing of a memorandum in support of its views. As requested,
no tax was collected. On May 22, 1954 the projected
memorandum was filed, but as of that date the Commissioner's
right to collect by warrant of distraint and levy the deficiency
tax for 1950 had already prescribed. So much so, that on
March 1, 1956 when Ker & Co., Ltd. filed a petition for
review in the Court of Tax Appeals, the Commissioner of
Internal Revenue had but one remedy left to collect the tax,
that is, by judicial action. 12 However, as stated, an
independent ordinary action in the Court of First Instance was
not available to the Commissioner pursuant to Our ruling
in Ledesma, et al. v. Court of Tax Appeals, supra, in view of
the pendency of the taxpayer's petition for review in the Court
of Tax Appeals. Precisely he urgently filed a motion to
dismiss the taxpayer's petition for review with a view to
terminating therein the proceedings in the shortest possible
time in order that he could file a collection case in the Court of
First Instance before his right to do so is cut off by the passage
of time. As moved, the Tax Court dismissed the case and Ker
& Co., Ltd. appealed to the Supreme Court. By the time the
Supreme Court affirmed the order of dismissal of the Court of
Tax Appeals in L-12396 on January 31, 1962 more than five
years had elapsed since the final assessments were made on
January 5, 1954. Thereafter, the Commissioner of Internal
Revenue demanded extra-judicially the payment of the
deficiency tax in question and in reply the taxpayer, by its
letter dated March 28, 1962, advised the Commissioner of
Internal Revenue that the right to collect the tax has prescribed
pursuant to Section 332 (c) of the Tax Code.1awphl.nt
65
Thus, did the taxpayer produce the effect of temporarily
staying the hands of the Commissioner of Internal Revenue
simply through a choice of remedy. And, if We were to sustain
the taxpayer's stand, We would be encouraging taxpayers to
delay the payment of taxes in the hope of ultimately avoiding
the same.
Under the circumstances, the Commissioner of Internal
Revenue was in effect prohibited from collecting the tax in
question. This being so, the provisions of Section 333 of the
Tax Code will apply.
Fourth Issue
The Republic of the Philippines maintains that the
delinquency interest on the deficiency income tax for 1948,
1949 and 1950 accrued and should commence from the date of
the assessments as shown in the assessment notices, pursuant
to Section 51(e) of the Tax Code, instead of from the date the
complaint was filed as determined in the decision appealed
from.
Section 51 (e) of the Tax Code states:
SEC. 51(e). Surcharge and interest in case of
delinquency.To any sum or sums due and unpaid
after the dates prescribed in subsections (b), (c) and
(d) for the payment of the same, there shall be added
the sum of five per centum on the amount of tax
unpaid and interest at the rate of one per centum a
month upon said tax from the time the same became
due, except from the estates of insane, deceased, or
insolvent persons. (emphasis supplied)
Exhibit "F" the letter of assessment shows that the
deficiency income tax for 1948 and 1949 became due on
March 15, 1953 and that for 1950 accrued on February 15,
1954 in accordance with Section 51(d) of the Tax Code. Since
the tax in question remained unpaid, delinquency interest
accrued and became due starting from said due dates. The
decision appealed from should therefore be modified
accordingly.
WHEREFORE, the decision appealed from is affirmed with
the modification that the delinquency interest at the rate of 1%
per month shall be computed from March 15, 1953 for the
deficiency income tax for 1948 and 1949 and from February
15, 1954 for the deficiency income tax for 1950. With costs
against Ker & Co., Ltd. So ordered.
[G.R. Nos. L-9738 & L-9771. May 31, 1957.]
BLAS GUTIERREZ, and MARIA
MORALES, Petitioners, v. HONORABLE COURT OF
TAX APPEALS, and THE COLLECTOR OF INTERNAL
REVENUE, Respondents.
COLLECTOR OF INTERNAL REVENUE, Petitioner, v.
BLAS GUTIERREZ, MARIA MORALES, and COURT
OF TAX APPEALS, Respondents.
Rafael Morales, for Petitioners.
Assistant Solicitor General Ramon L. Avancea and
Solicitor Jose P. Alejandro for Respondents.
SYLLABUS
1. EXPROPRIATION; INCOME FROM SOURCES WITHIN
THE PHILIPPINES, WHERE TAXABLE. The
compensation or income derived from the expropriation of
property located in the Philippines is an income from sources
within the Philippines and subject to the taxing jurisdiction of
the place.
2. ID.; ID.; TRANSFER OF PROPERTY EQUIVALENT TO
SALE; PROCEEDS SUBJECT TO INCOME TAX AS
CAPITAL GAIN. The acquisition by the Government of
private properties through the exercise of the power of
eminent domain, said properties being justly compensated, is
embraced within the meaning of the term "sale" or
"disposition of property," and the proceeds derived therefrom
is subject to income tax as capital gain pursuant to the
provisions of Section 37-(a)-(5) in relation to Section 29-(a) of
the Tax Code.
3. ID.; ID.; ID.; ID.; INCOME NOT INCLUDED IN THE
TAX EXEMPTIONS SPECIFIED IN THE MILITARY
BASES AGREEMENT. The taxpayers maintain that since,
at the request of the U. S. Government, the proceeding to
expropriate the land in question necessary for the expansion of
the Clark Field Air Base was instituted by the Philippine
Government as part of its obligation under the Military Bases
Agreement, the compensation accruing therefrom must
necessarily fall under the exemption provided for by Section
29-(b)-6 of the Tax Code. This stand is untenable because
while the condemnation or expropriation of properties wad
provided for in the Agreement, the exemption from tax of the
compensation to be paid for the expropriation of privately
owned lands located in the Philippines was not given any
attention, and the internal revenue exemptions specifically
taken care of by said agreement applies only to members of
the U. S. Armed Forces serving in the Philippines and U. S.
nationals working in these Islands in connection with the
construction, maintenance, operation and defense of said
66
bases.
4. ID.; TRANSFER OF OWNERSHIP; WHEN TITLE
PASSES TO EXPROPRIATOR. In condemnation
proceedings, title to the land does not pass to the plaintiff until
the indemnity is paid (Calvo v. Zandueta, 49 Phil. 605), and
notwithstanding possession acquired by the expropriator, title
does not actually pass to him until payment of the amount
adjudged by the Court and the registration of the judgment
with the Register of Deeds (See Visayan Refining Company v.
Camus Et. Al., 40 Phil. 550; Metropolitan Water District v. De
los Angeles, 55 Phil. 783).
5. ID.; GAIN OR LOSS FROM SALE, HOW
DETERMINED. The property in question was adjudicated
to the owner by court order on March 23, 1929, and in
accordance with Section 35 (b) of the Tax Code, only the fair
market price or value of the property as of the date of the
acquisition thereof should be considered in determining the
gain or loss sustained by the property owner when the
property was disposed, without taking into account the
purchasing power of the currency used in the transaction. The
value of the property at the time of its acquisition by the
owner was P28,291.78 and the same was compensated with
P94,305.75 when it was expropriated. The resulting difference
is not merely nominal but a capital gain and should be
correspondingly taxed.
6. TAXATION; ASSESSMENT MADE WITHIN THE
PRESCRIPTIVE PERIOD, HOW ENFORCED. When the
assessment for deficiency income tax was made by the
Collector of Internal Revenue within the 3-year prescriptive
period provided for by Section 51-d of the Tax Code, the same
could be collected either by the administrative methods of
distraint and levy or by judicial action.
7. COURT OF TAX APPEALS; REVIEW OF DECISIONS
OF; ONLY QUESTIONS OF LAW MAY BE
CONSIDERED. The question of fraud is a question of fact
which is for the Court of Tax Appeals to determine. It is
already settled in this jurisdiction that in passing upon
petitions to review decisions of the Court of Tax Appeals, only
questions of law may be considered.
DECISION
FELIX, J.:
Maria Morales was the registered owner of an agricultural
land designated as Lot No. 724-C of the cadastral survey of
Mabalacat, Pampanga. The Republic of the Philippines, at the
request of the U.S. Government and pursuant to the terms of
the Military Bases Agreement of March 14, 1947, instituted
condemnation proceedings in the Court of First Instance of
Pampanga, docketed as Civil Case No. 148, for the purpose of
expropriating the lands owned by Maria Morales and others
needed for the expansion of the Clark Field Air Base, which
project is necessary for the mutual protection and defense of
the Philippines and the United States. Blas Gutirrez was also
made a party defendant in said Civil Case No. 148 for being
the husband of the landowner Maria Morales. At the
commencement of the action, the Republic of the Philippines,
therein plaintiff, deposited with the Clerk of the Court of First
Instance of Pampanga the sum of P156,960, which was
provisionally fixed as the value of the lands sought to be
expropriated, in order that it could take immediate possession
of the same.
On January 27, 1949, upon order of the Court, the sum of
P34,580 (PNB Check 721520-Exh. R) was paid by the
Provincial Treasurer of Pampanga to Maria Morales out of the
original deposit of P156,960 made by therein plaintiff. After
due hearing, the Court of First Instance of Pampanga rendered
decision dated November 29, 1949, wherein it fixed as just
compensation P2,500 per hectare for some of the lots and
P3,000 per hectare for the others, which values were based on
the reports of the Commission on Appraisal whose members
were chosen by both parties and by the Court, which took into
consideration the different conditions affecting the value of
the condemned properties in making their findings.
In virtue of said decision, defendant Maria Morales was to
receive the amount of P94,305.75 as compensation for Lot No.
724-C which was one of the expropriated lands. But the Court
disapproved defendants claims for consequential damages
considering them amply compensated by the price awarded to
their said properties. In order to avoid further litigation
expenses and delay inherent to an appeal, the parties entered
into a compromise agreement on January 7, 1950, modifying
in part the decision rendered by the Court in the sense of
fixing the compensation for all the lands, without distinction,
at P2,500 per hectare, which compromise agreement was
approved by the Court on January 9, 1950. This reduction of
the price to P2,500 per hectare did not affect Lot No. 724-C of
defendant Maria Morales. Sometime in 1950, the spouses Blas
Gutirrez and Maria Morales received the sum of P59,785.75
representing the balance remaining in their favor after
deducting the amount of P34,580 already withdrawn from the
compensation due to them.
In a notice of assessment dated January 28, 1953, the
Collector of Internal Revenue demanded of the petitioners the
payment of P8,481 as alleged deficiency income tax for the
year 1950, inclusive of surcharges and penalties. On March 5,
1953, counsel for petitioners sent a letter to the Collector of
Internal Revenue requesting the latter to withdraw and
reconsider said assessment, contending among others, that the
compensation paid to the spouses by the Government for their
property was not "income derived from sale, dealing or
disposition of property" referred to by section 29 of the Tax
Code and therefore not taxable; that even granting that
condemnation of private properties is embraced within the
meaning of the word "sale" or "dealing", the compensation
received by the taxpayers must be considered as income for
1948 and not for 1950 since the amount deposited and paid in
1948 represented more than 25 per cent of the total
compensation awarded by the court; that the assessment was
67
made after the lapse of the 3-year prescriptive period provided
for in section 51-(d) of the Tax Code; that the compensation in
question should be exempted from taxation by reason of the
provision of section 29 (b)-6 of the Tax Code; that the spouses
Blas Gutirrez and Maria Morales did not realize any profit in
said transaction as there were improvements on the land
already made and that the purchasing value of the peso at the
time of the expropriation proceeding had depreciated if
compared to the value of the pre-war peso; and that penalties
should not be imposed on said spouses because granting that
the assessment was correct, the omission of the compensation
awarded therein was due to an honest mistake.
This request was denied by the Collector of Internal Revenue,
in a letter dated April 26, 1954, refuting point by point the
arguments advanced by the taxpayers. The record further
shows that a warrant of distraint and levy was issued by the
Collector of Internal Revenue on the properties of Mr. & Mrs.
Blas Gutirrez found in Mabalacat, Pampanga, and a notice of
tax lien was duly registered with the Register of Deeds of San
Fernando, Pampanga, on the same date. Counsel for the
spouses then requested that the matter be referred to the
Conference Staff of the Bureau of Internal Revenue for proper
hearing, to which the Collector answered in a letter dated
December 24, 1954, stating that the request would be granted
upon compliance by the taxpayers with the requirements of
Department of Finance Order No. 213, i.e., the filing of a
verified petition to that effect and that one-half of the total
assessment should be guaranteed by a bond, provided that the
taxpayers would agree in writing to the suspension of the
running of the period of prescription.
The taxpayers then served notice that the case would be
brought on appeal to the Court of Tax Appeals, which they did
by filing a petition with said Court to review the assessment
made by the Collector of Internal Revenue, docketed as
C.T.A. Case No. 65. In that instance, it was prayed that the
Court render judgment declaring that the taking of petitioners
land by the Government was not a sale or dealing in property;
that the amount paid to petitioners as just compensation for
their property should not be diminished by way of taxation;
that said compensation was by law exempt from taxation and
that the period to collect the income taxes by summary
methods had prescribed; that respondent Collector of Internal
Revenue be enjoined from carrying out further steps to collect
from petitioners by summary methods the said taxes which
they alleged to be erroneously assessed and for such other
remedies which would serve the ends of law and justice.
The Solicitor General, in representation of the respondent
Collector of Internal Revenue, filed an answer on February 11,
1955, admitting some of the allegations of petitioners and
denying some of them, and as special defenses, he advanced
the contention that the Court had no jurisdiction to entertain
the petition; that the profit realized by petitioners from the sale
of the land in question was subject to income tax; that the full
compensation received by petitioners should be included in
the income received in 1950, same having been paid in 1950
by the Government; that under the Bases Agreement only
residents of the United States are exempt from the payment of
income tax in the Philippines in respects to profits derived
under a contract with the U.S. Government in connection with
the construction, maintenance and operation of the bases; that
in the determination of the gain or loss from the sale of
property acquired on or after March 1, 1913, the cost of
acquisition and the selling price shall be taken into account
without qualification as to the purchasing power of the
currency; that the imposition of the 50 per cent surcharge was
in accordance with the Tax Code; that the Collector of Internal
Revenue was empowered to collect petitioners deficiency
income tax; and prayed that the petition for review be
dismissed; petitioners be ordered to pay the amount of P8,481
plus the delinquency penalty of 5 per cent for late payment
and monthly interest at the rate of 1 per cent from April 1,
1953, up to the date of actual payment and for such other relief
that may be deemed just and equitable in the premises.
After due hearing and after the parties had filed their
respective memoranda, the Court of Tax Appeals rendered
decision on August 31, 1955, holding that it had jurisdiction to
hear and determine the case; that the gain derived by the
petitioners from the expropriation of their property constituted
taxable income and as such was capital gain; and that said gain
was taxable in 1950 when it was realized. It was also found by
said Court that the evidence did not warrant the imposition of
the 50 per cent surcharge because the petitioners acted in good
faith and without intent to defraud the Government when they
failed to include in their gross income the proceeds they
received from the expropriated property, and, therefore,
modified the assessment made by respondent, requiring
petitioners to pay only the sum of P5,654. From this decision,
both parties appealed to this Court and in this instance,
petitioners Blas Gutirrez and Maria Morales, as appellants in
G. R. No. L-9738, made the following assignments of
error:chanrob1es virtual 1aw library
1. That the Court of Tax Appeals erred in holding that, for
income tax purposes, income from expropriation should be
deemed as income from sale, any profit derived therefrom is
subject to income tax as capital gain pursuant to the provisions
of Section 37-(a)-(5) in relation to Section 29-(a) of the Tax
Code;
2. That the Court of Tax Appeals erred in not holding that,
under the particular circumstances in which the property of the
appellants was taken by the Philippine Government, the
amount paid to them as just compensation is exempt from
income tax pursuant to Section 29- (b)-(6) of the Tax Code;
3. That the Court of Tax Appeals erred in not holding that the
respondent Collector is definitely barred by the Statute of
Limitations from collecting the deficiency income tax in
question, whether administratively thru summary methods, or
judicially thru the ordinary court procedures;
4. That the Court of Tax Appeals erred is not holding that the
capital gain found by the respondent Collector as have been
derived by the petitioners-appellants from the expropriation of
their property is merely nominal not subject to income tax, and
in not holding that the pronouncement of the court in the
68
expropriation case in this respect is binding upon the
respondent Collector of Internal Revenue; and
5. That the Court of Tax Appeals erred in not pronouncing
upon the pleadings of the parties that the petitioners-appellants
did not derive any capital gain from the expropriation of their
property.
The appeal of the respondent Collector of Internal Revenue
was docketed in this Court as G. R. No. L-9771, and in this
case the Solicitor General ascribed to the lower court the
commission of the following error:chanrob1es virtual 1aw
library
That the Court of Tax Appeals erred in holding that
respondents are not subject to the payment of the 50 per cent
surcharge in spite of the fact that the latters income tax return
for the year 1950 is false and/or fraudulent.
The facts just narrated are not disputed and the controversy
only arose from the assertion by the Collector of Internal
Revenue that petitioners-appellants failed to include from their
gross income, in filing their income tax return for 1950, the
amount of P94,305.75 which they had received as
compensation for their land taken by the Government by
expropriation proceedings. It is the contention of respondent
Collector of Internal Revenue that such transfer of property,
for taxation purposes, is "sale" and that the income derived
therefrom is taxable. The pertinent provisions of the National
Internal Revenue Code applicable to the instant cases are the
following:chanrob1es virtual 1aw library
SEC. 29. GROSS INCOME. (a) General definition.
"Gross income" includes gains, profits, and income derived
from salaries, wages, or compensation for personal service of
whatever kind and in whatever form paid, or from professions,
vocations, trades, businesses, commerce, sales or dealings in
property, whether real or personal, growing out of ownership
or use of or interest in such property; also from interests, rents,
dividends, securities, or the transactions of any business
carried on for gain or profit, or gains, profits, and income
derived from any source whatsoever.
SEC. 37. INCOME FROM SOURCES WITHIN THE
PHILIPPINES.
(a) Gross income from sources within the Philippines. The
following items of gross income shall be treated as gross
income from sources within the Philippines:chanrob1es virtual
1aw library
x x x virtual 1aw library
(5) SALE OF REAL PROPERTY. Gains profits, and
income from the sale of real property located in the
Philippines;
x x x Government
There is no question that the property expropriated being
located in the Philippines, compensation or income derived
therefrom ordinarily has to be considered as income from
sources within the Philippines and subject to the taxing
jurisdiction of the Philippines. However, it is to be
remembered that said property was acquired by the
Government through condemnation proceedings and
appellants stand is, therefore, that same cannot be considered
as sale as said acquisition was by force, there being practically
no meeting of the minds between the parties. Consequently,
the taxpayers contend, this kind of transfer of ownership must
perforce be distinguished from sale, for the purpose of Section
29-(a) of the Tax Code. But the authorities in the United States
on the matter sustain the view expressed by the Collector of
Internal Revenue, for it is held that:jgc:chanrobles.com.ph
"The transfer of property through condemnation proceedings
is a sale or exchange within the meaning of section 117 (a) of
the 1936 Revenue Act and profit from the transaction
constitutes capital gain" (1942. Com. Int. Revenue v.
Kieselbach (CCA 3) 127 F. (24) 359). "The taking of property
by condemnation and the payment of just compensation
therefore is a sale or exchange within the meaning of
section 117 (a) of the Revenue Act of 1936, and profits from
that transaction is capital gain" (David S. Brown v. Comm.,
1942, 42 BTA 139).
The proposition that income from expropriation proceedings is
income from sales or exchange and therefore taxable has been
likewise upheld in the case of Lapham v. U.S. (1949, 40
AFTR 1370) and in Kneipp v. U.S. (1949, 85 F Suppl. 902). It
appears then that the acquisition by the Government of private
properties through the exercise of the power of eminent
domain, said properties being JUSTLY compensated, is
embraced within the meaning of the term "sale" or
"disposition of property", and the proceeds from said
transaction clearly fall within the definition of gross income
laid down by Section 29 of the Tax Code of the Philippines.
Petitioners-appellants also averred that granting that the
compensation thus received is "income", same is exempted
under Section 29-(b)-6 of the Tax Code, which reads as
follows:chanrob1es virtual 1aw library
SEC. 29. GROSS INCOME.
x x x
(b) EXCLUSIONS FROM GROSS INCOME. The
following items shall not be included in gross income and
shall be exempt from taxation under this Title:chanrob1es
x x x
(6) Income exempt under treaty. Income of any kind, to the
extent required by any treaty obligation binding upon the
of the Philippines.
The taxpayers maintain that since, at the request of the U.S.
Government, the proceeding to expropriate the land in
69
question necessary for the expansion of the Clark Field Air
Base was instituted by the Philippine Government as part of
its obligation under the Military Bases Agreement, the
compensation accruing therefrom must necessarily fall under
the exemption provided for by Section 29-(b)-6 of the Tax
Code. We find this stand untenable, for the same Military
Bases Agreement cited by appellants contains the
following:jgc:chanrobles.com.ph
"ARTICLE XXII
"CONDEMNATION OR EXPROPRIATION
"1. Whenever it is necessary to acquire by condemnation or
expropriation proceedings real property belonging to private
persons, association, or corporations located in bases named in
Annex A and Annex B in order to carry out the purposes of in the Philippines was not given any attention, and the internal
this agreement, the Philippines will institute and prosecute
such condemnation proceedings in accordance with the laws
of the Philippines. The United States agrees to reimburse the
Philippines for all the reasonable expanses, damages, and
costs thereby incurred, including the value of the property as
determined by the Court. In addition, subject to mutual
agreements of the two governments, the United States shall
reimburse the Philippines for the reasonable costs of
transportation and removal of any occupants displaced or
ejected by reason of the condemnation or expropriation"
"ARTICLE XII
"INTERNAL REVENUE EXEMPTION
"(1) No member of the United States Armed Forces except
Filipino citizens, serving in the Philippines in connection with
the bases and residing in the Philippines by reason only of
such service, or his dependents, shall be liable to pay income
tax in the Philippines except in respect of income derived from
Philippine sources.
"(2) No national of the United States serving in the Philippines
in connection with the construction, maintenance, operation or
defense of the bases and residing in the Philippines by reason
only of such employment, or his spouse and minor children
and dependent parents of either spouse, shall be liable to pay
income tax in the Philippines except in respect of income
derived from Philippine sources or sources other than the
United States.
"(3) No person referred to in paragraphs 1 and 2 of this said
Article shall be liable to pay the government or local
authorities of the Philippines any poll or residence tax, or any
imports or experts duties, or any other tax on personal
property imported for his own use provided, that private
owned vehicles shall be subject to payment of the following
only: when certified as being used for military purposes by
appropriate United States Authorities, the normal license plate
fee; otherwise, the normal license and registration fees.
"(4) No national of the United States, or corporation organized
under the laws of the United States, shall be liable to pay
income tax in the Philippines in respect of any profits derived
under a contract made in the United States with the
government of the United States in connection with the
construction, maintenance, operation and defense of the bases,
or any tax in the nature of a license in respect of any service of
works for the United States in connection with the
construction, maintenance, operation and defense of the
bases.
x x x
The facts brought about by the aforementioned terms of the
said treaty need no further elucidation. It is unmistakable that
although the condemnation or expropriation of properties was
provided for, the exemption from tax of the compensation to
be paid for the expropriation of privately owned lands located
revenue exemptions specifically taken care of by said
Agreement applies only to members of the U.S. Armed Forces
serving in the Philippines and U.S. nationals working in these
Islands in connection with the construction, maintenance,
operation and defense of said bases.
Anent appellant taxpayers allegation that the respondent
Collector of Internal Revenue was barred from collecting the
deficiency income tax assessment, it having been made
beyond the 3-year period prescribed by section 51-(d) of the
Tax Code, We have this much to say. Although it is true that
by order of the Court of First Instance of Pampanga, the
amount of P34,580 out of the original deposit made by the
Government was withdrawn in favor of appellants on January
27, 1949, the same cannot be considered as income for said
year but for 1950 when the balance of P59,785.75 was
actually received. Before that date (1950), appellant taxpayers
were still the owners of their whole property that was subject
of condemnation proceedings and said amount of P34,580 was
not paid to, but merely deposited in court and withdrawn by
them. Therefore, the payment of the value of Maria Morales
Lot 724-C was actually made by the Republic of the
Philippines in 1950 and it has to be credited as income for
1950 for it was then when title over said property passed to the
Republic of the Philippines. Appellant tax payers cannot say
that the title over the property expropriated already passed to
the Government when the latter was placed in possession
thereof, for in condemnation proceedings, title to the land does
not pass to the plaintiff until the indemnity is paid (Calvo v.
Zandueta, 49 Phil. 605), and notwithstanding possession
acquired by the expropriator, title does not actually pass to
him until payment of the amount adjudged by the Court and
the registration of the judgment with the Register of Deeds
(See Visayan Refining Company v. Camus Et. Al., 40 Phil.
550; Metropolitan Water District v. De los Angeles, 55 Phil.
783). Now, if said amount should have been reported as
income for 1950 in the return that must have been filed on or
before March 1, 1951, the assessment made by the Collector
on January 28, 1953, is still within the 3-year prescriptive
period provided for by Section 51-d and could, therefore, be
collected either by the administrative methods of distraint and
levy or by judicial action (See Collector of Internal Revenue v.
A.P. Reyes Et. Al., 100 Phil., 822; Collector of Internal
70
Revenue v. Zulueta Et. Al., 100 Phil., 872; and Sambrano v.
Court of Tax Appeals Et. Al., supra, p. 1).
As to appellant taxpayers proposition that the profit derived
by them from the expropriation of their property is merely
nominal and not subject to income tax, We find Section 35 of
the Tax Code illuminating. Said section reads as
follows:jgc:chanrobles.com.ph
"SEC. 35. DETERMINATION OF GAIN OR LOSS FROM
THE SALE OR OTHER DISPOSITION OF PROPERTY.
The gain derived or loss sustained from the sale or other
disposition of property, real or personal, or mixed, shall be
determined in accordance with the following
schedule:chanrob1es virtual 1aw library
(a)x x x"
(b) In the case of property acquired on or after March first,
nineteen hundred and thirteen, the cost thereof if such property
was acquired by purchase or the fair market price or value as
of the date of the acquisition if the same was acquired by
gratuitous title.
x x x private respondent National Power Corporation (NPC) is
The records show that the property in question was
adjudicated to Maria Morales by order of the Court of First
Instance of Pampanga on March 23, 1929, and in accordance
with the aforequoted section of the National Internal Revenue
Code, only the fair market price or value of the property as of
the date of the acquisition thereof should be considered in
determining the gain or loss sustained by the property owner
when the property was disposed, without taking into account
the purchasing power of the currency used in the transaction.
The records placed the value of the said property at the time of
its acquisition by appellant Maria Morales was P28,291.73
and it is a fact that same was compensated with P94,305.75
when it was expropriated. The resulting difference is surely a
capital gain and should be correspondingly taxed.
As to the only question raised by appellant Collector of
Internal Revenue in case L-9771, assailing the lower Courts
order exonerating petitioners from the 50 per cent surcharge
imposed on the latter, on the ground that the taxpayers
income tax return for 1950 is false and/or fraudulent, it should
be noted that the Court of Tax Appeals found that the evidence
did not warrant the imposition of said surcharge because the
petitioners therein acted in good faith and without intent to
defraud the Government.
"The question of fraud is a question of fact which frequently
requires a nicely balanced judgment to answer. All the facts
and circumstances surrounding the conduct of the taxpayers
business and all the facts incident to the preparation of the
alleged fraudulent return should be considered." (Mertens,
Federal Income Taxation, Chapter 55).
The question of fraud being a question of fact and the lower
court having made the finding that "the evidence of this case
does not warrant the imposition of the 50 per cent surcharge",
We are constrained to refrain from giving any consideration to
the question raised by the Solicitor General, for it is already
settled in this jurisdiction that in passing upon petitions to
review decisions of the Court of Tax Appeals, We have to
confine ourselves to questions of law.
Wherefore, the decision appealed from by both parties is
hereby affirmed, without pronouncement as to costs. It is so
ordered.
G.R. No. 88291 June 8, 1993
ERNESTO M. MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his capacity as
Executive Secretary, Office of the President, HON.
VICENTE JAYME, ETC., ET AL., respondents.
Angara, Abello, Concepcion & Cruz for respondent Pilipinas
Shell Petroleum Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex.
NOCON, J.:
Just like lightning which does strike the same place twice in
some instances, this matter of indirect tax exemption of the
brought to this Court a second time. Unfazed by the Decision
We promulgated on May 31, 1991 1 petitioner Ernesto Maceda
asks this Court to reconsider said Decision. Lest We be
criticized for denying due process to the petitioner. We have
decided to take a second look at the issues. In the process, a
hearing was held on July 9, 1992 where all parties presented
their respective arguments. Etched in this Court's mind are the
paradoxical claims by both petitioner and private respondents
that their respective positions are for the benefit of the Filipino
people.
I
A Chronological review of the relevant NPC laws, specially
with respect to its tax exemption provisions, at the risk of
being repetitious is, therefore, in order.
On November 3, 1936, Commonwealth Act No. 120 was
enacted creating the National Power Corporation, a public
corporation, mainly to develop hydraulic power from all water
sources in the Philippines. 2 The sum of P250,000.00 was
appropriated out of the funds in the Philippine Treasury for the
purpose of organizing the NPC and conducting its preliminary
work. 3 The main source of funds for the NPC was the
flotation of bonds in the capital markets 4 and these bonds
. . . issued under the authority of this Act
shall be exempt from the payment of all
taxes by the Commonwealth of the
Philippines, or by any authority, branch,
division or political subdivision thereof and
subject to the provisions of the Act of
Congress, approved March 24, 1934,
otherwise known as the Tydings McDuffle
Law, which facts shall be stated upon the
face of said bonds. . . . . 5
On June 24, 1938, C.A. No. 344 was enacted increasing to
P550,000.00 the funds needed for the initial operations of the
71
NPC and reiterating the provision of the flotation of bonds as
soon as the first construction of any hydraulic power project
was to be decided by the NPC Board. 6 The provision on tax
exemption in relation to the issuance of the NPC bonds was
neither amended nor deleted.
On September 30, 1939, C.A. No. 495 was enacted removing
the provision on the payment of the bond's principal and
interest in "gold coins" but adding that payment could be made
in United States dollars. 7 The provision on tax exemption in
relation to the issuance of the NPC bonds was neither
amended nor deleted.
On June 4, 1949, Republic Act No. 357 was enacted
authorizing the President of the Philippines to guarantee,
absolutely and unconditionally, as primary obligor, the
payment of any and all NPC loans. 8 He was also authorized to
contract on behalf of the NPC with the International Bank for
Reconstruction and Development (IBRD) for NPC loans for
the accomplishment of NPC's corporate objectives 9 and for
the reconstruction and development of the economy of the
country. 10 It was expressly stated that:
Any such loan or loans shall be exempt from
taxes, duties, fees, imposts, charges,
contributions and restrictions of the
Republic of the Philippines, its provinces,
cities and municipalities. 11
On the same date, R.A. No. 358 was enacted expressly
authorizing the NPC, for the first time, to incur other types of
indebtedness, aside from indebtedness incurred by flotation of
bonds. 12 As to the pertinent tax exemption provision, the law
stated as follows:
To facilitate payment of its indebtedness, the
National Power Corporation shall be exempt
from all taxes, duties, fees, imposts, charges,
and restrictions of the Republic of the
Philippines, its provinces, cities and
municipalities. 13
On July 10, 1952, R.A. No. 813 was enacted amending R.A.
No. 357 in that, aside from the IBRD, the President of the
Philippines was authorized to negotiate, contract and
guarantee loans with the Export-Import Bank of of Washigton,
D.C., U.S.A., or any other international financial
institution. 14 The tax provision for repayment of these loans,
as stated in R.A. No. 357, was not amended.
On June 2, 1954, R.A. No. 987 was enacted specifically to
withdraw NPC's tax exemption for real estate taxes. As
enacted, the law states as follows:
To facilitate payment of its indebtedness, the
National Power Corporation shall be exempt
from all taxes, except real property tax, and
from all duties, fees, imposts, charges, and
restrictions of the Republic of the
Philippines, its provinces, cities, and
municipalities. 15
On September 8, 1955, R.A. No. 1397 was enacted directing
that the NPC projects to be funded by the increased
indebtedness 16 should bear the National Economic Council's
stamp of approval. The tax exemption provision related to the
payment of this total indebtedness was not amended nor
deleted.
On June 13, 1958, R.A. No. 2055 was enacted increasing the
total amount of foreign loans NPC was authorized to incur to
US$100,000,000.00 from the US$50,000,000.00 ceiling in
R.A. No. 357. 17 The tax provision related to the repayment of
these loans was not amended nor deleted.
On June 13, 1958, R.A. No. 2058 was enacting fixing the
corporate life of NPC to December 31, 2000. 18 All laws or
provisions of laws and executive orders contrary to said R.A.
No. 2058 were expressly repealed. 19
On June 18, 1960, R.A. No 2641 was enacted converting the
NPC from a public corporation into a stock corporation with
an authorized capital stock of P100,000,000.00 divided into
1,000.000 shares having a par value of P100.00 each, with
said capital stock wholly subscribed to by the
Government. 20 No tax exemption was incorporated in said
Act.
On June 17, 1961, R.A. No. 3043 was enacted increasing the
above-mentioned authorized capital stock to P250,000,000.00
with the increase to be wholly subscribed by the
Government. 21 No tax provision was incorporated in said Act.
On June 17, 1967, R.A. No 4897 was enacted. NPC's capital
stock was increased again to P300,000,000.00, the increase to
be wholly subscribed by the Government. No tax provision
was incorporated in said Act. 22
On September 10, 1971, R.A. No. 6395 was enacted revising
the charter of the NPC, C.A. No. 120, as amended. Declared
as primary objectives of the nation were:
Declaration of Policy. Congress hereby
declares that (1) the comprehensive
development, utilization and conservation of
Philippine water resources for all beneficial
uses, including power generation, and (2)
the total electrification of the Philippines
through the development of power from all
sources to meet the needs of industrial
development and dispersal and the needs of
rural electrification are primary objectives of
the nation which shall be pursued
coordinately and supported by all
instrumentalities and agencies of the
government, including the financial
institutions. 23
Section 4 of C.A. No. 120, was renumbered as Section 8, and
divided into sections 8 (a) (Authority to incur Domestic
72
Indebtedness) and Section 8 (b) (Authority to Incur Foreign
Loans).
As to the issuance of bonds by the NPC, Paragraph No. 3 of
Section 8(a), states as follows:
The bonds issued under the authority of this
subsection shall be exempt from the
payment of all taxes by the Republic of the
Philippines, or by any authority, branch,
division or political subdivision thereof
which facts shall be stated upon the face of
said bonds. . . . 24
As to the foreign loans the NPC was authorized to contract,
Paragraph No. 5, Section 8(b), states as follows:
The loans, credits and indebtedness
contracted under this subsection and the
payment of the principal, interest and other
charges thereon, as well as the importation
of machinery, equipment, materials and
supplies by the Corporation, paid from the
proceeds of any loan, credit or
indebtedeness incurred under this Act, shall
also be exempt from all taxes, fees, imposts,
other charges and restrictions, including
import restrictions, by the Republic of the
Philippines, or any of its agencies and
political subdivisions. 25
A new section was added to the charter, now known as
Section 13, R.A. No. 6395, which declares the non-profit
character and tax exemptions of NPC as follows:
The Corporation shall be non-profit and
shall devote all its returns from its capital
investment, as well as excess revenues from
its operation, for expansion. To enable the
Corporation to pay its indebtedness and
obligations and in furtherance and effective
implementation of the policy enunciated in
Section one of this Act, the Corporation is
hereby declared exempt:
(a) From the payment of all taxes, duties,
fees, imposts, charges costs and service fees
in any court or administrative proceedings in
which it may be a party, restrictions and
duties to the Republic of the Philippines, its
provinces, cities, and municipalities and
other government agencies and
instrumentalities;
(b) From all income taxes, franchise taxes
and realty taxes to be paid to the National
Government, its provinces, cities,
municipalities and other government
agencies and instrumentalities;
(c) From all import duties, compensating
taxes and advanced sales tax, and wharfage
fees on import of foreign goods required for
its operations and projects; and
(d) From all taxes, duties, fees, imposts and
all other charges its provinces, cities,
municipalities and other government
agencies and instrumentalities, on all
petroleum products used by the Corporation
in the generation, transmission, utilization,
and sale of electric power. 26
On November 7, 1972, Presidential Decree
No. 40 was issued declaring that the
electrification of the entire country was one
of the primary concerns of the country. And
in connection with this, it was specifically
stated that:
The setting up of transmission line grids and
the construction of associated generation
facilities in Luzon, Mindanao and major
islands of the country, including the
Visayas, shall be the responsibility of the
National Power Corporation (NPC) as the
authorized implementing agency of the
State. 27
xxx xxx xxx
It is the ultimate objective of the State for
the NPC to own and operate as a single
integrated system all generating facilities
supplying electric power to the entire area
embraced by any grid set up by the NPC. 28
On January 22, 1974, P.D. No. 380 was issued giving extra
powers to the NPC to enable it to fulfill its role under
aforesaid P.D. No. 40. Its authorized capital stock was raised
to P2,000,000,000.00, 29 its total domestic indebtedness was
pegged at a maximum of P3,000,000,000.00 at any one
time, 30 and the NPC was authorized to borrow a total of
US$1,000,000,000.00 31 in foreign loans.
The relevant tax exemption provision for these foreign loans
states as follows:
The loans, credits and indebtedness
contracted under this subsection and the
payment of the principal, interest and other
charges thereon, as well as the importation
of machinery, equipment, materials, supplies
and services, by the Corporation, paid from
the proceeds of any loan, credit or
indebtedness incurred under this Act, shall
also be exempt from all direct and indirect
taxes, fees, imposts, other charges and
restrictions, including import restrictions
previously and presently imposed, and to be
imposed by the Republic of the Philippines,
73
 or any of its agencies and political
subdivisions. 32(Emphasis supplied)
Section 13(a) and 13(d) of R.A. No 6395 were amended to
read as follows:
(a) From the payment of all taxes, duties,
fees, imposts, charges and restrictions to the
Republic of the Philippines, its provinces,
cities, municipalities and other government
agencies and instrumentalities including the
taxes, duties, fees, imposts and other charges
provided for under the Tariff and Customs
Code of the Philippines, Republic Act
Numbered Nineteen Hundred Thirty-Seven,
as amended, and as further amended by
Presidential Decree No. 34 dated October
27, 1972, and Presidential Decree No. 69,
dated November 24, 1972, and costs and
service fees in any court or administrative
proceedings in which it may be a party;
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and
all other charges imposed directly or
indirectly by the Republic of the Philippines,
its provinces, cities, municipalities and other
government agencies and instrumentalities,
on all petroleum products used by the
Corporation in the generation, transmission,
utilization and sale of electric
power. 33 (Emphasis supplied)
On February 26, 1970, P.D. No. 395 was issued removing
certain restrictions in the NPC's sale of electricity to its
different customers. 34 No tax exemption provision was
amended, deleted or added.
On July 31, 1975, P.D. No. 758 was issued directing that
P200,000,000.00 would be appropriated annually to cover the
unpaid subscription of the Government in the NPC authorized
capital stock, which amount would be taken from taxes
accruing to the General Funds of the Government, proceeds
from loans, issuance of bonds, treasury bills or notes to be
issued by the Secretary of Finance for this particular
purpose. 35
On May 27, 1976 P.D. No. 938 was issued
(I)n view of the accelerated expansion
programs for generation and transmission
facilities which includes nuclear power
generation, the present capitalization of
National Power Corporation (NPC) and the
ceilings for domestic and foreign
borrowings are deemed insufficient; 36
xxx xxx xxx
(I)n the application of the tax exemption
provisions of the Revised Charter, the non-
profit character of NPC has not been fully
utilized because of restrictive interpretation
of the taxing agencies of the government on
said provisions; 37
xxx xxx xxx
(I)n order to effect the accelerated expansion
program and attain the declared objective of
total electrification of the country, further
amendments of certain sections of Republic
Act No. 6395, as amended by Presidential
Decrees Nos. 380, 395 and 758, have
become imperative; 38
Thus NPC's capital stock was raised to
P8,000,000,000.00, 39 the total domestic indebtedness ceiling
was increased to P12,000,000,000.00, 40 the total foreign loan
ceiling was raised to US$4,000,000,000.00 41 and Section 13
of R.A. No. 6395, was amended to read as follows:
The Corporation shall be non-profit and
shall devote all its returns from its capital
investment as well as excess revenues from
its operation, for expansion. To enable the
Corporation to pay to its indebtedness and
obligations and in furtherance and effective
implementation of the policy enunciated in
Section one of this Act, the Corporation,
including its subsidiaries, is hereby declared
exempt from the payment of all forms of
taxes, duties, fees, imposts as well as costs
and service fees including filing fees, appeal
bonds, supersedeas bonds, in any court or
administrative proceedings. 42
II
On the other hand, the pertinent tax laws involved in this
controversy are P.D. Nos. 882, 1177, 1931 and Executive
Order No. 93 (S'86).
On January 30, 1976, P.D. No. 882 was issued withdrawing
the tax exemption of NPC with regard to imports as follows:
WHEREAS, importations by certain
government agencies, including
government-owned or controlled
corporation, are exempt from the payment of
customs duties and compensating tax; and
WHEREAS, in order to reduce foreign
exchange spending and to protect domestic
industries, it is necessary to restrict and
regulate such tax-free importations.
NOW THEREFORE, I, FERDINAND E.
MARCOS, President of the Philippines, by
virtue of the powers vested in me by the
Constitution, and do hereby decree and
order the following:
Sec. 1. All importations of any government
agency, including government-owned or
controlled corporations which are exempt
74
 from the payment of customs duties and
internal revenue taxes, shall be subject to the
prior approval of an Inter-Agency
Committee which shall insure compliance
with the following conditions:
(a) That no such article of local manufacture
are available in sufficient quantity and
comparable quality at reasonable prices;
(b) That the articles to be imported are
directly and actually needed and will be
used exclusively by the grantee of the
exemption for its operations and projects or
in the conduct of its functions; and
(c) The shipping documents covering the
importation are in the name of the grantee to
whom the goods shall be delivered directly
by customs authorities.
xxx xxx xxx
Sec. 3. The Committee shall have the power
to regulate and control the tax-free
importation of government agencies in
accordance with the conditions set forth in
Section 1 hereof and the regulations to be
promulgated to implement the provisions of
this Decree. Provided, however, That any
government agency or government-owned
or controlled corporation, or any local
manufacturer or business firm adversely
affected by any decision or ruling of the
Inter-Agency Committee may file an appeal
with the Office of the President within ten
days from the date of notice thereof. . . . .
xxx xxx xxx
Sec. 6. . . . . Section 13 of Republic Act No.
6395; . . .. and all similar provisions of all
general and special laws and decrees are
hereby amended accordingly.
xxx xxx xxx
On July 30, 1977, P.D. 1177 was issued as it was
. . . declared the policy of the State to
formulate and implement a National Budget
that is an instrument of national
development, reflective of national
objectives, strategies and plans. The budget
shall be supportive of and consistent with
the socio-economic development plan and
shall be oriented towards the achievement of
explicit objectives and expected results, to
ensure that funds are utilized and operations
are conducted effectively, economically and
efficiently. The national budget shall be
formulated within a context of a
regionalized government structure and of the
totality of revenues and other receipts,
expenditures and borrowings of all levels of
government-owned or controlled
corporations. The budget shall likewise be
prepared within the context of the national
long-term plan and of a long-term budget
program. 43
In line with such policy, the law decreed that
All units of government, including government-owned or
controlled corporations, shall pay income taxes, customs
duties and other taxes and fees are imposed under revenues
laws: provided, that organizations otherwise exempted by law
from the payment of such taxes/duties may ask for a subsidy
from the General Fund in the exact amount of taxes/duties
due: provided, further, that a procedure shall be established by
the Secretary of Finance and the Commissioner of the Budget,
whereby such subsidies shall automatically be considered as
both revenue and expenditure of the General Fund. 44
The law also declared that
[A]ll laws, decrees, executive orders, rules
and regulations or parts thereof which are
inconsistent with the provisions of the
Decree are hereby repealed and/or modified
accordingly. 45
On July 11, 1984, most likely due to the economic morass the
Government found itself in after the Aquino assassination,
P.D. No. 1931 was issued to reiterate that:
WHEREAS, Presidential Decree No. 1177
has already expressly repealed the grant of
tax privileges to any government-owned or
controlled corporation and all other units of
government; 46
and since there was a
. . . need for government-owned or
controlled corporations and all other units of
government enjoying tax privileges to share
in the requirements of development, fiscal or
otherwise, by paying the duties, taxes and
other charges due from them. 47
it was decreed that:
Sec. 1. The provisions of special on general
law to the contrary notwithstanding, all
exemptions from the payment of duties,
taxes, fees, imposts and other charges
heretofore granted in favor of government-
owned or controlled corporations including
their subsidiaries, are hereby withdrawn.
Sec. 2. The President of the Philippines
and/or the Minister of Finance, upon the
recommendation of the Fiscal Incentives
Review Board created under Presidential
Decree No. 776, is hereby empowered to
75
 restore, partially or totally, the exemptions
withdrawn by Section 1 above, any It was thus ordered that:
applicable tax and duty, taking into account, Sec. 1. The Provisions of any general or
among others, any or all of the following: special law to the contrary notwithstanding,
all tax and duty incentives granted to
1) The effect on the relative price levels; government and private entities are hereby
withdrawn, except:
2) The relative contribution of the
corporation to the revenue generation effort; a) those covered by the non-impairment
3) The nature of the activity in which the clause of the Constitution;
corporation is engaged in; or
4) In general the greater national interest to b) those conferred by effective internation
be served. agreement to which the Government of the
Republic of the Philippines is a signatory;
xxx xxx xxx c) those enjoyed by enterprises registered
Sec. 5. The provisions of Presidential with:
Decree No. 1177 as well as all other laws,
decrees, executive orders, administrative (i) the Board of
orders, rules, regulations or parts thereof Investment pursuant to
which are inconsistent with this Decree are Presidential Decree No.
hereby repealed, amended or modified 1789, as amended;
accordingly.
(ii) the Export Processing
On December 17, 1986, E.O. No. 93 (S'86) was issued with a Zone Authority, pursuant
view to correct presidential restoration or grant of tax to Presidential Decree No.
exemption to other government and private entities without 66 as amended;
benefit of review by the Fiscal Incentives Review Board, to
wit: (iii) the Philippine
WHEREAS, Presidential Decree Nos. 1931 Veterans Investment
and 1955 issued on June 11, 1984 and Development Corporation
October 14, 1984, respectively, withdrew Industrial Authority
the tax and duty exemption privileges, pursuant to Presidential
including the preferential tax treatment, of Decree No
government and private entities with certain
exceptions, in order that the requirements of d) those enjoyed by the copper mining
national economic development, in terms of industry pursuant to the provisions of Letter
fiscals and other resources, may be met of Instructions No. 1416;
more adequately; e) those conferred under the four basic codes
xxx xxx xxx namely:

WHEREAS, in addition to those tax and (i) the Tariff and Customs
duty exemption privileges were restored by Code, as amended;
the Fiscal Incentives Review Board (FIRB), (ii) the National Internal
a number of affected entities, government Revenue Code, as
and private, had their tax and duty amended;
exemption privileges restored or granted by (iii) the Local Tax Code,
Presidential action without benefit or review as amended;
by the Fiscal Incentives Review Board (iv) the Real Property Tax
(FIRB); Code, as amended;
f) those approved by the
xxx xxx xxx President upon the
Since it was decided that: recommendation of the
Fiscal Incentives Review
[A]ssistance to government and private Board.
entities may be better provided where
necessary by explicit subsidy and budgetary Sec. 2. The Fiscal Incentives Review Board
support rather than tax and duty exemption created under Presidential Decree No. 776,
privileges if only to improve the fiscal as amended, is hereby authorized to:
monitoring aspects of government
operations.
76
 a) restore tax and/or duty exemptions
withdrawn hereunder in whole or in part;
b) revise the scope and coverage of tax
and/or duty exemption that may be restored;
c) impose conditions for the restoration of
tax and/or duty exemption;
d) prescribe the date of period of effectivity
of the restoration of tax and/or duty
exemption;
e) formulate and submit to the President for
approval, a complete system for the grant of
subsidies to deserving beneficiaries, in lieu
of or in combination with the restoration of
tax and duty exemptions or preferential
treatment in taxation, indicating the source
of funding therefor, eligible beneficiaries
and the terms and conditions for the grant
thereof taking into consideration the
international commitment of the Philippines
and the necessary precautions such that the
grant of subsidies does not become the basis
for countervailing action.
Sec. 3. In the discharge of its authority
hereunder, the Fiscal Incentives Review
Board shall take into account any or all of
the following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to
the revenue generation effort;
c) nature of the activity the beneficiary is
engaged; and
d) in general, the greater national interest to
be served.
xxx xxx xxx
Sec. 5. All laws, orders, issuances, rules and
regulations or parts thereof inconsistent with
this Executive Order are hereby repealed or
modified accordingly.
E.O. No. 93 (S'86) was decreed to be effective 48 upon the
promulgation of the rules and regulations, to be issued by the
Ministry of Finance. 49 Said rules and regulations were
promulgated and published in the Official Gazette
on February 23, 1987. These became effective on the 15th day
after promulgation 50 in the Official Gasetter, 51 which 15th
day was March 10, 1987.
III
Now to some definitions. We refer to the very simplistic
approach that all would-be lawyers, learn in their TAXATION
I course, which fro convenient reference, is as follows:
Classifications or kinds of Taxes:
According to Persons who pay or who bear
the burden:
a. Direct Tax the where the person
supposed to pay the tax really pays
it. WITHOUT transferring the burden to
someone else.
Examples: Individual income tax, corporate
income tax, transfer taxes (estate tax,
donor's tax), residence tax, immigration tax
b. Indirect Tax that where the tax is
imposed upon goods BEFORE reaching the
consumer who ultimately pays for it, not as
a tax, but as a part of the purchase price.
Examples: the internal revenue indirect
taxes (specific tax, percentage taxes, (VAT)
and the tariff and customs indirect taxes
(import duties, special import tax and other
dues) 52
IV
To simply matter, the issues raised by petitioner in his motion
for reconsideration can be reduced to the following:
(1) What kind of tax exemption privileges did NPC have?
(2) For what periods in time were these privileges being
enjoyed?
(3) If there are taxes to be paid, who shall pay for these taxes?
V
Petitioner contends that P.D. No. 938 repealed the indirect tax
exemption of NPC as the phrase "all forms of taxes etc.," in its
section 10, amending Section 13, R.A. No. 6395, as amended
by P.D. No. 380, does not expressly include "indirect taxes."
His point is not well-taken.
A chronological review of the NPC laws will show that it has
been the lawmaker's intention that the NPC was to be
completely tax exempt from all forms of taxes direct and
indirect.
NPC's tax exemptions at first applied to the bonds it was
authorized to float to finance its operations upon its creation
by virtue of C.A. No. 120.
When the NPC was authorized to contract with the IBRD for
foreign financing, any loans obtained were to be completely
tax exempt.
After the NPC was authorized to borrow from other sources of
funds aside issuance of bonds it was again specifically
exempted from all types of taxes "to facilitate payment of its
indebtedness." Even when the ceilings for domestic and
foreign borrowings were periodically increased, the tax
exemption privileges of the NPC were maintained.
NPC's tax exemption from real estate taxes was, however,
specifically withdrawn by Rep. Act No. 987, as above stated.
The exemption was, however, restored by R.A. No. 6395.
Section 13, R.A. No. 6395, was very comprehensive in its
enumeration of the tax exemptions allowed NPC. Its section
13(d) is the starting point of this bone of contention among the
parties. For easy reference, it is reproduced as follows:
77
 [T]he Corporation is hereby declared
exempt:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts and
all other charges imposed by the Republic of
the Philippines, its provinces, cities,
municipalities and other government
agencies and instrumentalities, on all
petroleum products used by the Corporation
in the generation, transmission, utilization,
and sale of electric power.
P.D. No. 380 added phrase "directly or indirectly" to said
Section 13(d), which now reads as follows:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and
all other charges imposed directly or
indirectly by the Republic of the Philippines,
its provinces, cities, municipalities and other
government agencies and instrumentalities,
on all petroleum products used by the
Corporation in the generation, transmission,
utilization and sale of electric power.
(Emphasis supplied)
Then came P.D. No. 938 which amended Sec. 13(a), (b), (c)
and (d) into one very simple paragraph as follows:
The Corporation shall be non-profit and
shall devote all its returns from its capital
investment as well as excess revenues from
its operation, for expansion. To enable the
Corporation to pay its indebtedness and
obligations and in furtherance and effective
implementation of the policy enunciated in
Section one of this Act, the Corporation,
including its subsidiaries, is hereby declared
exempt from the payment of ALL FORMS
OF taxes, duties, fees, imposts as well as
costs and service fees including filing fees,
appeal bonds, supersedeas bonds, in any
court or administrative proceedings.
(Emphasis supplied)
Petitioner reminds Us that:
[I]t must be borne in mind that Presidential
Decree Nos. 380
and 938 were issued by one man, acting as
such the Executive and Legislative. 53
xxx xxx xxx
[S]ince both presidential decrees were made
by the same person, it would have been very
easy for him to retain the same or similar
language used in P.D. No. 380 P.D. No. 938
if his intention were to preserve the indirect
tax exemption of NPC. 54
Actually, P.D. No. 938 attests to the ingenuousness of then
President Marcos no matter what his fault were. It should be
noted that section 13, R.A. No. 6395, provided for tax
exemptions for the following items:
13(a) : court or administrative proceedings;
13(b) : income, franchise, realty taxes;
13(c) : import of foreign goods required for
its operations and projects;
13(d) : petroleum products used in
generation of electric power.
P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the
phrase "ALL FORMS OF TAXES, ETC.,", included 13(a)
under the "as well as" clause and added PNOC subsidiaries as
qualified for tax exemptions.
This is the only conclusion one can arrive at if he has read all
the NPC laws in the order of enactment or issuance as narrated
above in part I hereof. President Marcos must have considered
all the NPC statutes from C.A. No. 120 up to its latest
amendments, P.D. No. 380, P.D. No. 395 and P.D. No. 759,
AND came up 55 with a very simple Section 13, R.A. No.
6395, as amended by P.D. No. 938.
One common theme in all these laws is that the NPC must be
enable to pay its indebtedness 56 which, as of P.D. No. 938,
was P12 Billion in total domestic indebtedness, at any one
time, and U$4 Billion in total foreign loans at any one time.
The NPC must be and has to be exempt from all forms of
taxes if this goal is to be achieved.
By virtue of P.D. No. 938 NPC's capital stock was raised to P8
Billion. It must be remembered that to pay the government
share in its capital stock P.D. No. 758 was issued mandating
that P200 Million would be appropriated annually to cover the
said unpaid subscription of the Government in NPC's
authorized capital stock. And significantly one of the sources
of this annual appropriation of P200 million is TAX MONEY
accruing to the General Fund of the Government. It does not
stand to reason then that former President Marcos would order
P200 Million to be taken partially or totally from tax money to
be used to pay the Government subscription in the NPC, on
one hand, and then order the NPC to pay all its indirect taxes,
on the other.
The above conclusion that then President Marcos lumped up
Sections 13 (b), 13 (c) and (d) into the phrase "All FORMS
OF" is supported by the fact that he did not do the same for the
tax exemption provision for the foreign loans to be incurred.
The tax exemption on foreign loans found in Section 8(b),
R.A. No. 6395, reads as follows:
The loans, credits and indebtedness
contracted under this subsection and the
payment of the principal, interest and other
charges thereon, as well as the importation
of machinery, equipment, materials and
supplies by the Corporation, paid from the
proceeds of any loan, credit or indebtedness
incurred under this Act, shall also be exempt
78
 from all taxes, fees, imposts, other charges
and restrictions, including import
restrictions, by the Republic of the
Philippines, or any of its agencies and
political subdivisions. 57
The same was amended by P.D. No. 380 as follows:
The loans, credits and indebtedness
contracted this subsection and the payment
of the principal, interest and other charges
thereon, as well as the importation of
machinery, equipment, materials, supplies
and services, by the Corporation, paid from
the proceeds of any loan, credit or
indebtedness incurred under this Act, shall
also be exempt from all direct and
indirect taxes, fees, imposts, other charges
and restrictions, including import
restrictions previously and presently
imposed, and to be imposed by the Republic
of the Philippines, or any of its agencies and
political subdivisions. 58(Emphasis supplied)
P.D. No. 938 did not amend the same 59 and so the tax
exemption provision in Section 8 (b), R.A. No. 6395, as
amended by P.D. No. 380, still stands. Since the subject matter
of this particular Section 8 (b) had to do only with loans and
machinery imported, paid for from the proceeds of these
foreign loans, THERE WAS NO OTHER SUBJECT MATTER
TO LUMP IT UP WITH, and so, the tax exemption stood as is
with the express mention of "direct
and indirect" tax exemptions. And this "direct and indirect"
tax exemption privilege extended to "taxes, fees, imposts,
other charges . . . to be imposed" in the future surely, an
indication that the lawmakers wanted the NPC to be exempt
from ALL FORMS of taxes direct and indirect.
It is crystal clear, therefore, that NPC had been granted tax
exemption privileges for both direct and indirect taxes under
P.D. No. 938.
VI
Five (5) years on into the now discredited New Society, the
Government decided to rationalize government receipts and
expenditures by formulating and implementing a National
Budget. 60 The NPC, being a government owned and
controlled corporation had to be shed off its tax exemption
status privileges under P.D. No. 1177. It was, however,
allowed to ask for a subsidy from the General Fund in the
exact amount of taxes/duties due.
Actually, much earlier, P.D. No. 882 had already repealed
NPC's tax-free importation privileges. It allowed, however,
NPC to appeal said repeal with the Office of the President and
to avail of tax-free importation privileges under its Section 1,
subject to the prior approval of an Inter-Agency Committed
created by virtue of said P.D. No. 882. It is presumed that the
NPC, being the special creation of the State, was allowed to
continue its tax-free importations.
This Court notes that petitioner brought to the attention of this
Court, the matter of the abolition of NPC's tax exemption
privileges by P.D. No. 1177 61 only in his Common
Reply/Comment to private Respondents' "Opposition" and
"Comment" to Motion for Reconsideration, four (4) months
AFTER the motion for Reconsideration had been filed. During
oral arguments heard on July 9, 1992, he proceeded to discuss
this tax exemption withdrawal as explained by then Secretary
of Justice Vicente Abad Santos in opinion No. 133 (S
'77). 62 A careful perusal of petitioner's senate Blue Ribbon
Committee Report No. 474, the basis of the petition at bar,
fails to yield any mention of said P.D. No. 1177's effect on
NPC's tax exemption privileges. 63 Applying by
64
analogy Pulido vs. Pablo, the court declares that the matter
of P.D. No. 1177 abolishing NPC's tax exemption privileges
was not seasonably invoked 65 by the petitioner.
Be that as it may, the Court still has to discuss the effect of
P.D. No. 1177 on the NPC tax exemption privileges as this
statute has been reiterated twice in P.D. No. 1931. The express
repeal of tax privileges of any government-owned or
controlled corporation (GOCC). NPC included, was reiterated
in the fourth whereas clause of P.D. No. 1931's preamble. The
subsidy provided for in Section 23, P.D. No. 1177, being
inconsistent with Section 2, P.D. No. 1931, was deemed
repealed as the Fiscal Incentives Revenue Board was tasked
with recommending the partial or total restoration of tax
exemptions withdrawn by Section 1, P.D. No. 1931.
The records before Us do not indicate whether or not NPC
asked for the subsidy contemplated in Section 23, P.D. No.
1177. Considering, however, that under Section 16 of P.D. No.
1177, NPC had to submit to the Office of the President its
request for the P200 million mandated by P.D. No. 758 to be
appropriated annually by the Government to cover its unpaid
subscription to the NPC authorized capital stock and that
under Section 22, of the same P.D. No. NPC had to likewise
submit to the Office of the President its internal operating
budget for review due to capital inputs of the government
(P.D. No. 758) and to the national government's guarantee of
the domestic and foreign indebtedness of the NPC, it is clear
that NPC was covered by P.D. No. 1177.
There is reason to believe that NPC availed of subsidy granted
to exempt GOCC's that suddenly found themselves having to
pay taxes. It will be noted that Section 23, P.D. No. 1177,
mandated that the Secretary of Finance and the Commissioner
of the Budget had to establish the necessary procedure to
accomplish the tax payment/tax subsidy scheme of the
Government. In effect, NPC, did not put any cash to pay any
tax as it got from the General Fund the amounts necessary to
pay different revenue collectors for the taxes it had to pay.
In his memorandum filed July 16, 1992, petitioner submits:
[T]hat with the enactment of P.D. No. 1177
on July 30, 1977, the NPC lost all its duty
and tax exemptions, whether direct or
indirect. And so there was nothing to be
withdrawn or to be restored under P.D. No.
79
 1931, issued on June 11, 1984. This is
evident from sections 1 and 2 of said P.D.
No. 1931, which reads:
"Section 1. The provisions
of special or general law
to the contrary
notwithstanding, all
exemptions from the
payment of duties, taxes,
fees, imports and other
charges heretofore granted
in favor of government-
owned or controlled
corporations including
their subsidiaries are
hereby withdrawn."
Sec. 2. The President of
the Philippines and/or the
Minister of Finance, upon
the recommendation of the
Fiscal Incentives Review
Board created under P.D.
No. 776, is hereby
empowered to restore
partially or totally, the
exemptions withdrawn by
section 1 above. . . .
Hence, P.D. No. 1931 did not have any
effect or did it change NPC's status. Since it
had already lost all its tax exemptions
privilege with the issuance of P.D. No. 1177
seven (7) years earlier or on July 30, 1977,
there were no tax exemptions to be
withdrawn by section 1 which could later be
restored by the Minister of Finance upon the
recommendation of the FIRB under Section
2 of P.D. No. 1931. Consequently, FIRB
resolutions No. 10-85, and 1-86, were all
illegally and validly issued since FIRB acted
beyond their statutory authority by creating
and not merely restoring the tax exempt
status of NPC. The same is true for FIRB
Res. No. 17-87 which restored NPC's tax
exemption under E.O. No. 93 which
likewise abolished all duties and tax
exemptions but allowed the President upon
recommendation of the FIRB to restore
those abolished.
The Court disagrees.
Applying by analogy the weight of authority that:
When a revised and consolidated act re-
enacts in the same or substantially the same
terms the provisions of the act or acts so
revised and consolidated, the revision and
consolidation shall be taken to be a
continuation of the former act or acts,
although the former act or acts may be
expressly repealed by the revised and
consolidated act; and all rights
and liabilities under the former act or acts
are preserved and may be enforced. 66
the Court rules that when P.D. No. 1931 basically reenacted in
its Section 1 the first half of Section 23, P.D. No. 1177, on
withdrawal of tax exemption privileges of all GOCC's said
Section 1, P.D. No. 1931 was deemed to be a continuation of
the first half of Section 23, P.D. No. 1177, although the
second half of Section 23, P.D. No. 177, on the subsidy
scheme for former tax exempt GOCCs had been expressly
repealed by Section 2 with its institution of the FIRB
recommendation of partial/total restoration of tax exemption
privileges.
The NPC tax privileges withdrawn by Section 1. P.D. No.
1931, were, therefore, the same NPC tax exemption privileges
withdrawn by Section 23, P.D. No. 1177. NPC could no
longer obtain a subsidy for the taxes it had to pay. It could,
however, under P.D. No. 1931, ask for a total restoration of its
tax exemption privileges, which, it did, and the same were
granted under FIRB Resolutions Nos. 10-85 67 and 1-86 68 as
approved by the Minister of Finance.
Consequently, contrary to petitioner's submission, FIRB
Resolutions Nos. 10-85 and 1-86 were both legally and validly
issued by the FIRB pursuant to P.D. No. 1931. FIRB did not
created NPC's tax exemption status but merely restored it. 69
Some quarters have expressed the view that P.D. No. 1931
was illegally issued under the now rather infamous
Amendment No. 6 70 as there was no showing that President
Marcos' encroachment on legislative prerogatives was justified
under the then prevailing condition that he could legislate
"only if the Batasang Pambansa 'failed or was unable to act
inadequately on any matter that in his judgment required
immediate action' to meet the 'exigency'. 71
Actually under said Amendment No. 6, then President Marcos
could issue decrees not only when the Interim Batasang
Pambansa failed or was unable to act adequately on any matter
for any reason that in his (Marcos') judgment required
immediate action, but also when there existed a grave
emergency or a threat or thereof. It must be remembered that
said Presidential Decree was issued only around nine (9)
months after the Philippines unilaterally declared a
moratorium on its foreign debt payments 72 as a result of the
economic crisis triggered by loss of confidence in the
government brought about by the Aquino assassination. The
Philippines was then trying to reschedule its debt
payments. 73 One of the big borrowers was the NPC 74 which
had a US$ 2.1 billion white elephant of a Bataan Nuclear
Power Plant on its back. 75 From all indications, it must have
been this grave emergency of a debt rescheduling which
compelled Marcos to issue P.D. No. 1931, under his
Amendment 6 power. 76
The rule, therefore, that under the 1973 Constitution "no law
granting a tax exemption shall be passed without the
concurrence of a majority of all the members of the Batasang
Pambansa" 77 does not apply as said P.D. No. 1931 was not
80
passed by the Interim Batasang Pambansa but by then
President Marcos under His Amendment No. 6 power.
P.D. No. 1931 was, therefore, validly issued by then President
Marcos under his Amendment No. 6 authority.
Under E.O No. 93 (S'86) NPC's tax exemption privileges were
again clipped by, this time, President Aquino. Its section 2
allowed the NPC to apply for the restoration of its tax
exemption privileges. The same was granted under FIRB
Resolution No. 17-87 78 dated June 24, 1987 which restored
NPC's tax exemption privileges effective, starting March 10,
1987, the date of effectivity of E.O. No. 93 (S'86).
FIRB Resolution No. 17-87 was approved by the President on
October 5, 1987. 79 There is no indication, however, from the
records of the case whether or not similar approvals were
given by then President Marcos for FIRB Resolutions Nos.
10-85 and 1- 86. This has led some quarters to believe that a
"travesty of justice" might have occurred when the Minister of
Finance approved his own recommendation as Chairman of
the Fiscal Incentives Review Board as what happened
in Zambales Chromate vs. Court of Appeals 80 when the
Secretary of Agriculture and Natural Resources approved a
decision earlier rendered by him when he was the Director of
Mines, 81 and in Anzaldo vs. Clave 82 where Presidential
Executive Assistant Clave affirmed, on appeal to Malacaang,
his own decision as Chairman of the Civil Service
Commission. 83
Upon deeper analysis, the question arises as to whether one
can talk about "due process" being violated when FIRB
Resolutions Nos. 10-85 and 1-86 were approved by the
Minister of Finance when the same were recommended by
him in his capacity as Chairman of the Fiscal Incentives
Review Board. 84
In Zambales Chromite and Anzaldo, two (2) different parties
were involved: mining groups and scientist-doctors,
respectively. Thus, there was a need for procedural due
process to be followed.
In the case of the tax exemption restoration of NPC, there is
no other comparable entity not even a single public or
private corporation whose rights would be violated if
NPC's tax exemption privileges were to be restored. While
there might have been a MERALCO before Martial Law, it is
of public knowledge that the MERALCO generating plants
were sold to the NPC in line with the State policy that NPC
was to be the State implementing arm for the electrification of
the entire country. Besides, MERALCO was limited to Manila
and its environs. And as of 1984, there was no more
MERALCO as a producer of electricity which could
have objected to the restoration of NPC's tax exemption
privileges.
It should be noted that NPC was not asking to be granted tax
exemption privileges for the first time. It was just asking that
its tax exemption privileges be restored. It is for these reasons
that, at least in NPC's case, the recommendation and approval
of NPC's tax exemption privileges under FIRB Resolution
Nos. 10-85 and 1-86, done by the same person acting in his
dual capacities as Chairman of the Fiscal Incentives Review
Board and Minister of Finance, respectively, do not violate
procedural due process.
While as above-mentioned, FIRB Resolution No. 17-87 was
approved by President Aquino on October 5, 1987, the view
has been expressed that President Aquino, at least with regard
to E.O. 93 (S'86), had no authority to sub-delegate to the
FIRB, which was allegedly not a delegate of the legislature,
the power delegated to her thereunder.
A misconception must be cleared up.
When E.O No. 93 (S'86) was issued, President Aquino was
exercising both Executive and Legislative powers. Thus, there
was no power delegated to her, rather it was she who was
delegating her power. She delegated it to the FIRB, which, for
purposes of E.O No. 93 (S'86), is a delegate of the legislature.
Clearly, she was not sub-delegating her power.
And E.O. No. 93 (S'86), as a delegating law, was complete in
itself it set forth the policy to be carried out 85 and it fixed
the standard to which the delegate had to conform in the
performance of his functions, 86 both qualities having been
enunciated by this Court in Pelaez vs. Auditor General. 87
Thus, after all has been said, it is clear that the NPC had its tax
exemption privileges restored from June 11, 1984 up to the
present.
VII
The next question that projects itself is who pays the tax?
The answer to the question could be gleamed from the manner
by which the Commissaries of the Armed Forces of the
Philippines sell their goods.
By virtue of P.D. No. 83, 88 veterans, members of the Armed
of the Philippines, and their defendants but groceries and other
goods free of all taxes and duties if bought from any AFP
Commissaries.
In practice, the AFP Commissary suppliers probably treat the
unchargeable specific, ad valorem and other taxes on the
goods earmarked for AFP Commissaries as an added cost of
operation and distribute it over the total units of goods sold as
it would any other cost. Thus, even the ordinary supermarket
buyer probably pays for the specific, ad valorem and other
taxes which theses suppliers do not charge the AFP
Commissaries. 89
IN MUCH THE SAME MANNER, it is clear that private
respondents-oil companies have to absorb the taxes they add
to the bunker fuel oil they sell to NPC.
It should be stated at this juncture that, as early as May 14,
1954, the Secretary of Justice renders an opinion, 90wherein he
stated and We quote:
xxx xxx xxx
81
 Republic Act No. 358 exempts the National
Power Corporation from "all taxes, duties,
fees, imposts, charges, and restrictions of the
Republic of the Philippines and its
provinces, cities, and municipalities." This
exemption is broad enough to include all
taxes, whether direct or indirect, which the
National Power Corporation may be
required to pay, such as the specific tax on
petroleum products. That it is indirect or is
of no amount [should be of no moment], for
it is the corporation that ultimately pays
it. The view which refuses to accord the
exemption because the tax is first paid by the
seller disregards realities and gives more
importance to form than to substance.
Equity and law always exalt substance over
from.
xxx xxx xxx
Tax exemptions are undoubtedly to be
construed strictly but not so grudgingly as
knowledge that many impositions taxpayers
have to pay are in the nature of indirect
taxes. To limit the exemption granted the
National Power Corporation to direct taxes
notwithstanding the general and broad
language of the statue will be to thwrat the
legislative intention in giving exemption
from all forms of taxes and impositions
without distinguishing between those that
are direct and those that are not. (Emphasis
supplied)
In view of all the foregoing, the Court rules and declares that
the oil companies which supply bunker fuel oil to NPC have to
pay the taxes imposed upon said bunker fuel oil sold to NPC.
By the very nature of indirect taxation, the economic burden
of such taxation is expected to be passed on through the
channels of commerce to the user or consumer of the goods
sold. Because, however, the NPC has been exempted from
both direct and indirect taxation, the NPC must beheld
exempted from absorbing the economic burden of indirect
taxation. This means, on the one hand, that the oil companies
which wish to sell to NPC absorb all or part of the economic
burden of the taxes previously paid to BIR, which could they
shift to NPC if NPC did not enjoy exemption from indirect
taxes. This means also, on the other hand, that the NPC may
refuse to pay the part of the "normal" purchase price of bunker
fuel oil which represents all or part of the taxes previously
paid by the oil companies to BIR. If NPC nonetheless
purchases such oil from the oil companies because to do so
may be more convenient and ultimately less costly for NPC
than NPC itself importing and hauling and storing the oil from
overseas NPC is entitled to be reimbursed by the BIR for
that part of the buying price of NPC which verifiably
represents the tax already paid by the oil company-vendor to
the BIR.
It should be noted at this point in time that the whole issue of
who WILL pay these indirect taxes HAS BEEN
RENDERED moot and academic by E.O. No. 195 issued on
June 16, 1987 by virtue of which the ad valorem tax rate on
bunker fuel oil was reduced to ZERO (0%) PER CENTUM.
Said E.O. no. 195 reads as follows:
EXECUTIVE ORDER NO. 195
AMENDING PARAGRAPH (b) OF
SECTION 128 OF THE NATIONAL
INTERNAL REVENUE CODE, AS
AMENDED BY REVISING THE EXCISE
TAX RATES OF CERTAIN PETROLEUM
PRODUCTS.
xxx xxx xxx
Sec. 1. Paragraph (b) of Section 128 of the
National Internal Revenue Code, as
amended, is hereby amended to read as
follows:
Par. (b) For products subject to ad
valorem tax only:
PRODUCT AD VALOREM TAX RATE
1. . . .
2. . . .
3. . . .
4. Fuel oil, commercially known as bunker
oil and on similar fuel oils having more or
less the same generating power 0%
xxx xxx xxx
Sec. 3. This Executive Order shall take
effect immediately.
Done in the city of Manila, this 17th day of
June, in the year of Our Lord, nineteen
hundred and eighty-seven. (Emphasis
supplied)
The oil companies can now deliver bunker fuel oil to NPC
without having to worry about who is going to bear the
economic burden of the ad valorem taxes. What this Court
will now dispose of are petitioner's complaints that some
indirect tax money has been illegally refunded by the Bureau
of Internal Revenue to the NPC and that more claims for
refunds by the NPC are being processed for payment by the
BIR.
A case in point is the Tax Credit Memo issued by the Bureau
of Internal Revenue in favor of the NPC last July 7, 1986 for
P58.020.110.79 which were for "erroneously paid specific
and ad valorem taxes during the period from October 31, 1984
to April 27, 1985. 91 Petitioner asks Us to declare this Tax
Credit Memo illegal as the PNC did not have indirect tax
exemptions with the enactment of P.D. No. 938. As We have
already ruled otherwise, the only questions left are whether
NPC Is entitled to a tax refund for the tax component of the
price of the bunker fuel oil purchased from Caltex (Phils.) Inc.
and whether the Bureau of Internal Revenue properly refunded
the amount to NPC.
82
After P.D. No. 1931 was issued on June 11, 1984 withdrawing
the
tax exemptions of all GOCCs NPC included, it was only on
May 8, 1985 when the BIR issues its letter authority to the
NPC authorizing it to withdraw tax-free bunker fuel oil from
the oil companies pursuant to FIRB Resolution No. 10-
85. 92 Since the tax exemption restoration was retroactive to
June 11, 1984 there was a need. therefore, to recover said
amount as Caltex (PhiIs.) Inc. had already paid the BIR the
specific and ad valorem taxes on the bunker oil it sold NPC
during the period above indicated and had billed NPC
correspondingly. 93 It should be noted that the NPC, in its
letter-claim dated September 11, 1985 to the Commissioner of
the Bureau of Internal Revenue DID NOT
CATEGORICALLY AND UNEQUIVOCALLY STATE that
itself paid the P58.020,110.79 as part of the bunker fuel oil
price it purchased from Caltex (Phils) Inc. 94
The law governing recovery of erroneously or illegally,
collected taxes is section 230 of the National Internal Revenue
Code of 1977, as amended which reads as follows:
Sec. 230. Recover of tax erroneously or
illegally collected. No suit or proceeding
shall be maintained in any court for the
recovery of any national internal revenue tax
hereafter alleged to have been erroneously
or illegally assessed or collected, or of any
penalty claimed to have been collected
without authority, or of any sum alleged to
have been excessive or in any Manner
wrongfully collected. until a claim for
refund or credit has been duly filed with the
Commissioner; but such suit or proceeding
may be maintained, whether or not such tax,
penalty, or sum has been paid under protest
or duress.
In any case, no such suit or proceeding shall
be begun after the expiration of two years
from the date of payment of the tax or
penalty regardless of any supervening cause
that may arise after payment; Provided,
however, That the Commissioner may, even
without a written claim therefor, refund or
credit any tax, where on the face of the
return upon which payment was made, such
payment appears clearly, to have been
erroneously paid.
xxx xxx xxx
Inasmuch as NPC filled its claim for P58.020,110.79 on
September 11, 1985, 95 the Commissioner correctly issued the
Tax Credit Memo in view of NPC's indirect tax exemption.
Petitioner, however, asks Us to restrain the Commissioner
from acting favorably on NPC's claim for P410.580,000.00
which represents specific and ad valorem taxes paid by the oil
companies to the BIR from June 11, 1984 to the early part of
1986. 96
A careful examination of petitioner's pleadings and annexes
attached thereto does not reveal when the alleged claim for a
P410,580,000.00 tax refund was filed. It is only stated In
paragraph No. 2 of the Deed of Assignment 97executed by and
between NPC and Caltex (Phils.) Inc., as follows:
That the ASSIGNOR(NPC) has a pending
tax credit claim with the Bureau of Internal
Revenue amounting to P442,887,716.16.
P58.020,110.79 of which is due to
Assignor's oil purchases from the Assignee
(Caltex [Phils.] Inc.)
Actually, as the Court sees it, this is a clear case
of a "Mexican standoff." We cannot restrain the BIR from
refunding said amount because of Our ruling that NPC has
both direct and indirect tax exemption privileges. Neither can
We order the BIR to refund said amount to NPC as there is no
pending petition for review on certiorari of a suit for its
collection before Us. At any rate, at this point in time, NPC
can no longer file any suit to collect said amount EVEN IF lt
has previously filed a claim with the BIR because it is time-
barred under Section 230 of the National Internal Revenue
Code of 1977. as amended, which states:
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)
The date of the Deed of Assignment is June 6. 1986. Even if
We were to assume that payment by NPC for the amount of
P410,580,000.00 had been made on said date. it is clear that
more than two (2) years had already elapsed from said date. At
the same time, We should note that there is no legal obstacle
to the BIR granting, even without a suit by NPC, the tax credit
or refund claimed by NPC, assuming that NPC's claim had
been made seasonably, and assuming the amounts covered had
actually been paid previously by the oil companies to the BIR.
WHEREFORE, in view of all the foregoing, the Motion for
Reconsideration of petitioner is hereby DENIED for lack of
merit and the decision of this Court promulgated on May 31,
1991 is hereby AFFIRMED.
SO ORDERED.
83

G.R. No. L-19201 June 16, 1965
REV. FR. CASIMIRO LLADOC, petitioner,
vs.
The COMMISSIONER OF INTERNAL REVENUE and
The COURT of TAX APPEALS, respondents.
Hilado and Hilado for petitioner.
Office of the Solicitor General for respondents.
PAREDES, J.:
Sometime in 1957, the M.B. Estate, Inc., of Bacolod City,
donated P10,000.00 in cash to Rev. Fr. Crispin Ruiz, then
parish priest of Victorias, Negros Occidental, and predecessor
of herein petitioner, for the construction of a new Catholic
Church in the locality. The total amount was actually spent for
the purpose intended.
On March 3, 1958, the donor M.B. Estate, Inc., filed the
donor's gift tax return. Under date of April 29, 1960, the
respondent Commissioner of Internal Revenue issued an
assessment for donee's gift tax against the Catholic Parish of
Victorias, Negros Occidental, of which petitioner was the
priest. The tax amounted to P1,370.00 including surcharges,
interests of 1% monthly from May 15, 1958 to June 15, 1960,
and the compromise for the late filing of the return.
Petitioner lodged a protest to the assessment and requested the
withdrawal thereof. The protest and the motion for
reconsideration presented to the Commissioner of Internal
Revenue were denied. The petitioner appealed to the Court of
Tax Appeals on November 2, 1960. In the petition for review,
the Rev. Fr. Casimiro Lladoc claimed, among others, that at
the time of the donation, he was not the parish priest in
Victorias; that there is no legal entity or juridical person
known as the "Catholic Parish Priest of Victorias," and,
therefore, he should not be liable for the donee's gift tax. It
was also asserted that the assessment of the gift tax, even
against the Roman Catholic Church, would not be valid, for
such would be a clear violation of the provisions of the
Constitution.
After hearing, the CTA rendered judgment, the pertinent
portions of which are quoted below:
... . Parish priests of the Roman Catholic Church
under canon laws are similarly situated as its
Archbishops and Bishops with respect to the
properties of the church within their parish. They are
the guardians, superintendents or administrators of
these properties, with the right of succession and may
sue and be sued.
xxx xxx xxx
The petitioner impugns the, fairness of the
assessment with the argument that he should not be
held liable for gift taxes on donation which he did not
receive personally since he was not yet the parish
priest of Victorias in the year 1957 when said
donation was given. It is intimated that if someone
has to pay at all, it should be petitioner's predecessor,
the Rev. Fr. Crispin Ruiz, who received the donation
in behalf of the Catholic parish of Victorias or the
Roman Catholic Church. Following petitioner's line
of thinking, we should be equally unfair to hold that
the assessment now in question should have been
addressed to, and collected from, the Rev. Fr. Crispin
Ruiz to be paid from income derived from his present
parish where ever it may be. It does not seem right to
indirectly burden the present parishioners of Rev. Fr.
Ruiz for donee's gift tax on a donation to which they
were not benefited.
xxx xxx xxx
We saw no legal basis then as we see none now, to
include within the Constitutional exemption, taxes
which partake of the nature of an excise upon the use
made of the properties or upon the exercise of the
privilege of receiving the properties. (Phipps vs.
Commissioner of Internal Revenue, 91 F [2d] 627;
1938, 302 U.S. 742.)
It is a cardinal rule in taxation that exemptions from
payment thereof are highly disfavored by law, and
the party claiming exemption must justify his claim
by a clear, positive, or express grant of such
privilege by law. (Collector vs. Manila Jockey Club,
G.R. No. L-8755, March 23, 1956; 53 O.G. 3762.)
The phrase "exempt from taxation" as employed in
Section 22(3), Article VI of the Constitution of the
Philippines, should not be interpreted to mean
exemption from all kinds of taxes. Statutes
exempting charitable and religious property from
taxation should be construed fairly though strictly
and in such manner as to give effect to the main
intent of the lawmakers. (Roman Catholic Church vs.
Hastrings 5 Phil. 701.)
xxx xxx xxx
WHEREFORE, in view of the foregoing
considerations, the decision of the respondent
Commissioner of Internal Revenue appealed from, is
hereby affirmed except with regard to the imposition
of the compromise penalty in the amount of P20.00
(Collector of Internal Revenue v. U.S.T., G.R. No. L-
11274, Nov. 28, 1958); ..., and the petitioner, the
Rev. Fr. Casimiro Lladoc is hereby ordered to pay to
the respondent the amount of P900.00 as donee's gift
tax, plus the surcharge of five per centum (5%) as ad
valorem penalty under Section 119 (c) of the Tax
Code, and one per centum (1%) monthly interest
from May 15, 1958 to the date of actual payment.
The surcharge of 25% provided in Section 120 for
failure to file a return may not be imposed as the
failure to file a return was not due to willful neglect.(
... ) No costs.
The above judgment is now before us on appeal, petitioner
assigning two (2) errors allegedly committed by the Tax
Court, all of which converge on the singular issue of whether
84
or not petitioner should be liable for the assessed donee's gift
tax on the P10,000.00 donated for the construction of the
Victorias Parish Church.
Section 22 (3), Art. VI of the Constitution of the Philippines,
exempts from taxation cemeteries, churches and parsonages or
convents, appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious purposes. The
exemption is only from the payment of taxes assessed on such
properties enumerated, as property taxes, as contra
distinguished from excise taxes. In the present case, what the
Collector assessed was a donee's gift tax; the assessment was
not on the properties themselves. It did not rest upon general
ownership; it was an excise upon the use made of the
properties, upon the exercise of the privilege of receiving the
properties (Phipps vs. Com. of Int. Rec. 91 F 2d 627).
Manifestly, gift tax is not within the exempting provisions of
the section just mentioned. A gift tax is not a property tax, but
an excise tax imposed on the transfer of property by way of
gift inter vivos, the imposition of which on property used
exclusively for religious purposes, does not constitute an
impairment of the Constitution. As well observed by the
learned respondent Court, the phrase "exempt from taxation,"
as employed in the Constitution (supra) should not be
interpreted to mean exemption from all kinds of taxes. And
there being no clear, positive or express grant of such privilege
by law, in favor of petitioner, the exemption herein must be
denied.
The next issue which readily presents itself, in view of
petitioner's thesis, and Our finding that a tax liability exists, is,
who should be called upon to pay the gift tax? Petitioner
postulates that he should not be liable, because at the time of
the donation he was not the priest of Victorias. We note the
merit of the above claim, and in order to put things in their
proper light, this Court, in its Resolution of March 15, 1965,
ordered the parties to show cause why the Head of the Diocese
to which the parish of Victorias pertains, should not be
substituted in lieu of petitioner Rev. Fr. Casimiro Lladoc it
appearing that the Head of such Diocese is the real party in
interest. The Solicitor General, in representation of the
Commissioner of Internal Revenue, interposed no objection to
such a substitution. Counsel for the petitioner did not also
offer objection thereto.
On April 30, 1965, in a resolution, We ordered the Head of the
Diocese to present whatever legal issues and/or defenses he
might wish to raise, to which resolution counsel for petitioner,
who also appeared as counsel for the Head of the Diocese, the
Roman Catholic Bishop of Bacolod, manifested that it was
submitting itself to the jurisdiction and orders of this Court
and that it was presenting, by reference, the brief of petitioner
Rev. Fr. Casimiro Lladoc as its own and for all purposes.
In view here of and considering that as heretofore stated, the
assessment at bar had been properly made and the imposition
of the tax is not a violation of the constitutional provision
exempting churches, parsonages or convents, etc. (Art VI, sec.
22 [3], Constitution), the Head of the Diocese, to which the
parish Victorias Pertains, is liable for the payment thereof.
The decision appealed from should be, as it is hereby affirmed
insofar as tax liability is concerned; it is modified, in the sense
that petitioner herein is not personally liable for the said gift
tax, and that the Head of the Diocese, herein substitute
petitioner, should pay, as he is presently ordered to pay, the
said gift tax, without special, pronouncement as to costs.
G.R. No. L-17303 August 31, 1962
ANTONIO CO PO, petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE, respondent.
Federico D. Nepomuceno for petitioner.
Office of the Solicitor General for respondent.
BARRERA, J.:
This is a petition to review the decision of the Court of Tax
Appeals in C.T.A. case No. 313, denying petitioner's claim for
refund of the sum of P1,782.72 alleged as illegally collected
advance sales tax on goods purchased by him from the United
States Military Bases in the Philippines at Sangley Point,
Clark Field, and Olongapo from 1954 to 1956.
Petitioner is a merchant doing business under the name and
style of St. Luke's Trading. On several occasions during the
years 1954 to 1956, petitioner purchased through public
auctions various articles from the United States military
authorities in the military bases, removed the goods therefrom
and subsequently sold the same to other third parties. On these
transactions which were treated as importations, the
respondent Collector of Internal Revenue, imposed and
collected the advance sales tax in question, under the
provisions of Section 183 (B) of the National Internal Revenue
Code, in relation to Sections 184, 185 and 186 of the same
Code.
It is the contention of the petitioner that he is not liable for the
payment of said advance sales tax because, it is argued, he is
not an importer, not having engaged in the business of
importation, and that there was no importation by him
inasmuch as the goods "did not come to the country from a
foreign country", Sangley Point, Clark Field, and Olongapo
not being considered as foreign territory. Moreover, the
petitioner claims that the sales to him by the U.S. authorities in
these bases were the original sales mentioned in the law
subject to the tax and, that therefore the subsequent sales by
him were not taxable. And finally the petitioner maintains that
before Republic Act No. 1612 came into effect on August 24,
1956, purchasers of tax-free articles were not considered the
importers thereof, and invoked in support of his contention the
decision of the Supreme Court in the case of Collector of
Internal Revenue, et al. v. Marcelino Viduya, et al., G.R. No.
L-10808, promulgated on February 28, 1958.1wph1.t
The issue herein raised is not new. It has already been settled
contrary to the contention of petitioner, in a series of decisions
of this Court in cases involving similar factual situations,
85
wherein it was held in effect that goods and materials while in
the army bases or installations in the Philippines are, in
contemplation of law, on foreign soil (Saura Import & Export
Co. v. Meer, G.R. No. L-2927, February 26, 1951); that one
who acquires title to surplus equipment found in U.S. Bases or
installations within the Philippines by purchase, and then
brings them out of those bases or depots, is an importer; that
the bringing out of such goods and materials, after acquiring
titles to such goods, is importation in the legal sense (A.
Soriano y Cia v. Collector of Internal Revenue, G.R. No. L-
5896, August 31, 1955); and that the said materials removed
from these bases and depots were, for purposes of the internal
revenue taxes, purchased or received from "outside the
Philippines." (Bisaya Land Transportation Co., Inc. v.
Collector of Internal Revenue, G.R. Nos. L-12100 & L-11812,
May 29, 1959).
It is true that the areas covered by the United State Military
Bases are not foreign territories both in the political and
geographical sense. But because of the special arrangements
regarding their status and the resulting legal relations and
situations obtaining therein by reason of the Military Bases
Agreement with the United States, this Court has ruled, for the
purposes of Section 183 (B) of the National Internal Revenue
Code, in the manner set forth in the cases heretofore adverted
to. The reason is, in synthesis, stated in the case of Go Cheng
Tee v. Meer, 87 Phil. 18, in the following language:
Como ya hemos dicho, el eidreito americans no
estaba obligado a pagar ningun impuesto sobre tales
efectos, porque no hablan sido traidos aqui para fines
de comercio sino como objetos de abastecimiento
military Solamente se convirtieron en mercanclas de
comercio cuando el demandante los obtuvo en
compra para dedicarlos al negocio, y solamente desde
entonces quedaban sujetos a impuesto. La venta
original de que habla el articulo 5 de la Ley No.
5031 es la realizada por el demandante al publico de
Filipinas, y no la venta hecha a 61 por la "Foreign
Liquidation Commission". En esta transaccion, el
demandante compro: no vendio. ... La venta hecha
por el demandante a sus parroquianos es la venta
original, y no la compra hecha por el de la "Foreign
Liquidation Commission. (p. 24)
Hence, under this ruling, the original sale is not the sale made
by the U.S. authorities to the petitioner but the subsequent sale
that the herein petitioner makes to his customers. To hold
otherwise would be to bring about the very situation which the
law intends to avoid, that is, the influx of articles free of tax
into the military bases, and the subsequent indiscriminate and
unchecked distribution and sale thereof to the general public
also free of tax. It is in this spirit that the decisions herein cited
were conceived and formulated. Besides, for the purposes of
our customs and tax laws, the sale by the U.S. authorities to
the petitioner is considered but a continuation of the
importation of the goods to the Philippines. As was held in the
case of Go Cheng Tee v. Meer, supra:
... pero la importacion no termino con la entrega al
demandante por la "Foreign Liquidation
Commission" de dichos efectos sino hasta cuando se
hubiese pagado el impuesto correspondiente. ...
Mientras estaban bajo el control del ejercito y para
uso military los efectos no debian pagar ningun
impuesto al Gobierno Filipino. Pero immediatamente
despues de transferidos al demandante para fines
commerciales desde ese momento nacio el derecho
del gobierno de gravar sobre ellos impuesto
correspondiente, y mientras no lo pague al
demandante no termina la importacion. Por eso el
demandante que negocio con ellos es el importador
bajo los terminos precisos de la ley. (p. 22)
Applying this ruling to the case at bar, the importation
therefore, continues and is not completed until the petitioner
pays the taxes due on the articles. For that long, therefore, in
contemplation of law the petitioner is the importer.
However, it is argued by the petitioner that before the
amendment of Section 183(B) of the National Internal
Revenue Act by Republic Act 1612, incorporating therein the
provision
In the case of tax-free articles brought or imported
into the Philippines by persons, entities or agencies
exempt from tax which are subsequently sold,
transferred, or exchanged in the Philippines to non-
exempt private persons or entities, the purchasers
shall be considered the importers thereof. The tax due
on such articles shall constitute lien on the article
itself superior to all other charges or liens,
irrespective of the possessor thereof. (Sec. 5,
Republic Act No. 1612)
the purchasers of tax-free articles brought into the
Philippines by persons or agencies exempt from tax
were no considered the importers of said tax-free
articles. He then concludes that, having purchased the
tax-free articles before Republic Act No. 1612 took
effect on August 24, 1956, his purchases were not
taxable as he was not then the importer thereof.
This contention is incorrect because the Saura and Soriano
cases (supra) were decided in 1951 and 1955 respectively long
before the enactment of Republic Act 1612. In fact the
amendment merely adopted an existing ruling of the Bureau of
Internal Revenue, which is in line with the decisions of this
Court, that purchasers of articles brought or imported tax-free
into the Philippines, shall be subject to the payment of
advance sales tax. This clearly appears in the explanatory note
to House Bill No. 5809 now Republic Act 1612, which
enumerates the features of the proposed amendments, among
which is the
xxx xxx xxx
4. Incorporation into the provision of Section 183
(B) the existing ruling of the Bureau of Internal
Revenue considering as the importers, purchasers of
86
 articles brought or imported tax-free into the
Philippines, and establishing a lien for the tax on
such articles irrespective of the possessors thereof.
This provision will merely place said purchasers in
the same footing as those purchasing similar articles
from taxable persons, entities, or agencies.
(Congressional Record, House of Representatives,
page 2946, May 17, 1956) (Emphasis supplied).
The case of Collector of Internal Revenue v. Viduya, G.R. No.
L-10808, promulgated on February 28, 1958, invoked by
petitioner is not in point. That case concerns the purchase by
Viduya, who was not a merchant, of an automobile apparently
for his own use, from a member of the staff of the American
Embassy in Manila who brought the car from the United
States also for his personal use here. The issue there involved
relates to the payment by amend users of compensating tax
under Section 190 of the Tax Code. The advance sales tax is
levied upon merchants, importers and manufacturers who
resell, barter and exchange the articles purchased or imported
or who use them in the manufacture or preparation of articles
subject to specific tax or those for consignment abroad. The
end-users do not pay the advance sales tax; merchants,
importers and manufacturers do not pay the compensating tax.
The compensating tax is not an import tax.2 Obviously, a
ruling on the question of the payment of compensating tax, as
the one in the Viduya case, can not have application to a case
involving the payment of advance sales tax, as is the issue in
the present case.
The appealed judgment of the Court of Tax Appeals being in
accordance with law, the same is hereby affirmed with costs
against the appellant. So ordered.
RENATO V. DIAZ and G.R. No. 193007
AURORA MA. F. TIMBOL,
Petitioners, Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
- versus - PERALTA,
.
THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011
x -------------------------------------------------------------------------
--------------- x
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to
value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol
(petitioners) filed this petition for declaratory relief[1] assailing
the validity of the impending imposition of value-added tax
(VAT) by the Bureau of Internal Revenue (BIR) on the
collections of tollway operators.
Petitioners claim that, since the VAT would result in
increased toll fees, they have an interest as regular users of
tollways in stopping the BIR action. Additionally, Diaz claims
that he sponsored the approval of Republic Act 7716 (the 1994
Expanded VAT Law or EVAT Law) and Republic Act 8424
(the 1997 National Internal Revenue Code or the NIRC) at the
House of Representatives. Timbol, on the other hand, claims
that she served as Assistant Secretary of the Department of
Trade and Industry and consultant of the Toll Regulatory
Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the
administration of President Gloria Macapagal-Arroyo to
impose VAT on toll fees. The imposition was deferred,
however, in view of the consistent opposition of Diaz and
other sectors to such move. But, upon President Benigno C.
Aquino IIIs assumption of office in 2010, the BIR revived the
idea and would impose the challenged tax on toll fees
beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when
it enacted the NIRC, intend to include toll fees within the
87
meaning of sale of services that are subject to VAT; that a toll
fee is a users tax, not a sale of services; that to impose VAT on
toll fees would amount to a tax on public service; and that,
since VAT was never factored into the formula for computing
toll fees, its imposition would violate the non-impairment
clause of the constitution.
On August 13, 2010 the Court issued a temporary
restraining order (TRO), enjoining the implementation of the
VAT. The Court required the government, represented by
respondents Cesar V. Purisima, Secretary of the Department
of Finance, and Kim S. Jacinto-Henares, Commissioner of
Internal Revenue, to comment on the petition within 10 days
from notice.[2] Later, the Court issued another resolution
treating the petition as one for prohibition.[3]
On August 23, 2010 the Office of the Solicitor General filed
the governments comment.[4] The government avers that the
NIRC imposes VAT on all kinds of services of franchise
grantees, including tollway operations, except where the law
provides otherwise; that the Court should seek the meaning
and intent of the law from the words used in the statute; and
that the imposition of VAT on tollway operations has been the
subject as early as 2003 of several BIR rulings and circulars. [5]
The government also argues that petitioners have no
right to invoke the non-impairment of contracts clause since
they clearly have no personal interest in existing toll operating
agreements (TOAs) between the government and tollway
operators. At any rate, the non-impairment clause cannot limit
the States sovereign taxing power which is generally read into
contracts.
Finally, the government contends that the non-inclusion of
VAT in the parametric formula for computing toll rates cannot
exempt tollway operators from VAT. In any event, it cannot
be claimed that the rights of tollway operators to a reasonable
rate of return will be impaired by the VAT since this is
imposed on top of the toll rate. Further, the imposition of VAT
on toll fees would have very minimal effect on motorists using
the tollways.
In their reply[6] to the governments comment,
petitioners point out that tollway operators cannot be regarded
as franchise grantees under the NIRC since they do not hold
legislative franchises. Further, the BIR intends to collect the
VAT by rounding off the toll rate and putting any excess
collection in an escrow account. But this would be illegal
since only the Congress can modify VAT rates and authorize
its disbursement. Finally, BIR Revenue Memorandum
Circular 63-2010 (BIR RMC 63-2010), which directs toll
companies to record an accumulated input VAT of zero
balance in their books as of August 16, 2010, contravenes
Section 111 of the NIRC which grants entities that first
become liable to VAT a transitional input tax credit of 2% on
beginning inventory. For this reason, the VAT on toll fees
cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for
declaratory relief as one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have
legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully
expanding VAT coverage by including tollway operators and
tollway operations in the terms franchise grantees and sale of
services under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway
operators a) amounts to a tax on tax and not a tax on services;
b) will impair the tollway operators right to a reasonable
return of investment under their TOAs; and c) is not
administratively feasible and cannot be implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution,
treating the petition as one for prohibition rather than one for
declaratory relief, the characterization that petitioners Diaz
and Timbol gave their action. The government has sought
reconsideration of the Courts resolution,[7] however, arguing
that petitioners allegations clearly made out a case for
declaratory relief, an action over which the Court has no
original jurisdiction. The government adds, moreover, that the
petition does not meet the requirements of Rule 65 for actions
for prohibition since the BIR did not exercise judicial, quasi-
judicial, or ministerial functions when it sought to impose
VAT on toll fees. Besides, petitioners Diaz and Timbol has a
plain, speedy, and adequate remedy in the ordinary course of
law against the BIR action in the form of an appeal to the
Secretary of Finance.
But there are precedents for treating a petition for declaratory
relief as one for prohibition if the case has far-reaching
implications and raises questions that need to be resolved for
the public good.[8] The Court has also held that a petition for
prohibition is a proper remedy to prohibit or nullify acts of
executive officials that amount to usurpation of legislative
authority.[9]
Here, the imposition of VAT on toll fees has far-
reaching implications. Its imposition would impact, not only
on the more than half a million motorists who use the tollways
everyday, but more so on the governments effort to raise
revenue for funding various projects and for reducing
budgetary deficits.
To dismiss the petition and resolve the issues later,
after the challenged VAT has been imposed, could cause more
mischief both to the tax-paying public and the government. A
belated declaration of nullity of the BIR action would make
any attempt to refund to the motorists what they paid an
administrative nightmare with no solution.Consequently, it is
88
not only the right, but the duty of the Court to take cognizance
of and resolve the issues that the petition raises.
Although the petition does not strictly comply with
the requirements of Rule 65, the Court has ample power to
waive such technical requirements when the legal questions to
be resolved are of great importance to the public. The same
may be said of the requirement of locus standi which is a mere
procedural requisite.[10]
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of
the NIRC, as amended. VAT is levied, assessed, and collected,
according to Section 108, on the gross receipts derived from
the sale or exchange of services as well as from the use or
lease of properties. The third paragraph of Section 108 defines
sale or exchange of services as follows:
The phrase sale or exchange of
services means the performance of all
kinds of services in the Philippines for
others for a fee, remuneration or
consideration, including those performed
or rendered by construction and service
contractors; stock, real estate,
commercial, customs and immigration
brokers; lessors of property, whether
personal or real; warehousing services;
lessors or distributors of cinematographic
films; persons engaged in milling,
processing, manufacturing or repacking
goods for others; proprietors, operators
or keepers of hotels, motels, resthouses,
pension houses, inns, resorts; proprietors
or operators of restaurants, refreshment
parlors, cafes and other eating places,
including clubs and caterers; dealers in
securities; lending investors;
transportation contractors on their
transport of goods or cargoes, including
persons who transport goods or cargoes
for hire and other domestic common
carriers by land relative to their transport
of goods or cargoes; common carriers by
air and sea relative to their transport of
passengers, goods or cargoes from one
place in the Philippines to another place
in the Philippines; sales of electricity by
generation companies, transmission, and
distribution companies; services of
franchise grantees of electric utilities,
telephone and telegraph, radio and
television broadcasting and all other
franchise grantees except those under
Section 119 of this Code and non-life
insurance companies (except their crop
insurances), including surety, fidelity,
indemnity and bonding companies; and
similar services regardless of whether or
not the performance thereof calls for the
exercise or use of the physical or mental
faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT
on all kinds of services rendered in the Philippines for a fee,
including those specified in the list. The enumeration of
affected services is not exclusive.[11] By qualifying services
with the words all kinds, Congress has given the term services
an all-encompassing meaning. The listing of specific services
are intended to illustrate how pervasive and broad is the VATs
reach rather than establish concrete limits to its
application. Thus, every activity that can be imagined as a
form of service rendered for a fee should be deemed included
unless some provision of law especially excludes it.
Now, do tollway operators render services for a
fee? Presidential Decree (P.D.) 1112 or the Toll Operation
Decree establishes the legal basis for the services that tollway
operators render. Essentially, tollway operators construct,
maintain, and operate expressways, also called tollways, at the
operators expense. Tollways serve as alternatives to regular
public highways that meander through populated areas and
branch out to local roads. Traffic in the regular public
highways is for this reason slow-moving. In consideration for
constructing tollways at their expense, the operators are
allowed to collect government-approved fees from motorists
using the tollways until such operators could fully recover
their expenses and earn reasonable returns from their
investments.
When a tollway operator takes a toll fee from a motorist, the
fee is in effect for the latters use of the tollway facilities over
which the operator enjoys private proprietary rights[12]that its
contract and the law recognize. In this sense, the tollway
operator is no different from the following service providers
under Section 108 who allow others to use their properties or
facilities for a fee:
1. Lessors of property, whether
personal or real;
2. Warehousing service operators;
3. Lessors or distributors of
cinematographic films;
4. Proprietors, operators or keepers
of hotels, motels, resthouses, pension
houses, inns, resorts;
5. Lending investors (for use of
money);
6. Transportation contractors on
their transport of goods or cargoes,
including persons who transport goods or
cargoes for hire and other domestic common
carriers by land relative to their transport of
goods or cargoes; and
7. Common carriers by air and sea
relative to their transport of passengers,
goods or cargoes from one place in
the Philippines to another place in
the Philippines.
89
 It does not help petitioners cause that Section 108
subjects to VAT all kinds of services rendered for a fee
regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties. This
means that services to be subject to VAT need not fall under
the traditional concept of services, the personal or professional
kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term
all kinds of services, they also come under the specific class
described in Section 108 as all other franchise grantees who
are subject to VAT, except those under Section 119 of this
Code.
Tollway operators are franchise grantees and they do
not belong to exceptions (the low-income radio and/or
television broadcasting companies with gross annual incomes
of less than P10 million and gas and water utilities) that
Section 119[13] spares from the payment of VAT. The word
franchise broadly covers government grants of a special right
to do an act or series of acts of public concern.[14]
Petitioners of course contend that tollway operators
cannot be considered franchise grantees under Section 108
since they do not hold legislative franchises. But nothing in
Section 108 indicates that the franchise grantees it speaks of
are those who hold legislative franchises. Petitioners give no
reason, and the Court cannot surmise any, for making a
distinction between franchises granted by Congress and
franchises granted by some other government agency. The
latter, properly constituted, may grant franchises. Indeed,
franchises conferred or granted by local authorities, as agents
of the state, constitute as much a legislative franchise as
though the grant had been made by Congress itself.[15] The
term franchise has been broadly construed as referring, not
only to authorizations that Congress directly issues in the form
of a special law, but also to those granted by administrative
agencies to which the power to grant franchises has been
delegated by Congress.[16]
Tollway operators are, owing to the nature and object
of their business, franchise grantees. The construction,
operation, and maintenance of toll facilities on public
improvements are activities of public consequence that
necessarily require a special grant of authority from the
state. Indeed, Congress granted special franchise for the
operation of tollways to the Philippine National Construction
Company, the former tollway concessionaire for the North and
South Luzon Expressways. Apart from Congress, tollway
franchises may also be granted by the TRB, pursuant to the
exercise of its delegated powers under P.D. 1112. [17] The
franchise in this case is evidenced by a Toll Operation
Certificate.[18]
Petitioners contend that the public nature of the
services rendered by tollway operators excludes such services
from the term sale of services under Section 108 of the
Code.But, again, nothing in Section 108 supports this
contention. The reverse is true. In specifically including by
way of example electric utilities, telephone, telegraph, and
broadcasting companies in its list of VAT-covered businesses,
Section 108 opens other companies rendering public service
for a fee to the imposition of VAT. Businesses of a public
nature such as public utilities and the collection of tolls or
charges for its use or service is a franchise.[19]
Nor can petitioners cite as binding on the Court
statements made by certain lawmakers in the course of
congressional deliberations of the would-be law. As the Court
said in South African Airways v. Commissioner of Internal
Revenue,[20] statements made by individual members of
Congress in the consideration of a bill do not necessarily
reflect the sense of that body and are, consequently, not
controlling in the interpretation of law. The congressional will
is ultimately determined by the language of the law that the
lawmakers voted on. Consequently, the meaning and intention
of the law must first be sought in the words of the statute
itself, read and considered in their natural, ordinary,
commonly accepted and most obvious significations,
according to good and approved usage and without resorting
to forced or subtle construction.
Two. Petitioners argue that a toll fee is a users tax
and to impose VAT on toll fees is tantamount to taxing a
tax.[21] Actually, petitioners base this argument on the
following discussion in Manila International Airport
Authority (MIAA) v. Court of Appeals:[22]
No one can dispute that
properties of public dominion mentioned
in Article 420 of the Civil Code,
like roads, canals, rivers, torrents, ports
and bridges constructed by the State,are
owned by the State. The term ports
includes seaports and airports.
The MIAA Airport Lands and Buildings
constitute a port constructed by the State.
Under Article 420 of the Civil Code,
the MIAA Airport Lands and Buildings
are properties of public dominion and
thus owned by the State or the Republic
of the Philippines.
x x x The operation by the
government of a tollway does not change
the character of the road as one for public
use. Someone must pay for the
maintenance of the road, either the public
indirectly through the taxes they pay the
government, or only those among the
public who actually use the road through
the toll fees they pay upon using the
road. The tollway system is even a more
efficient and equitable manner of taxing
the public for the maintenance of public
roads.
The charging of fees to the public
does not determine the character of the
property whether it is for public
90
 dominion or not. Article 420 of the Civil
Code defines property of public dominion
as one intended for public use. Even if the
government collects toll fees, the road is
still intended for public use if anyone can
use the road under the same terms and
conditions as the rest of the public. The
charging of fees, the limitation on the
kind of vehicles that can use the road, the
speed restrictions and other conditions
for the use of the road do not affect the
public character of the road.
The terminal fees MIAA charges
to passengers, as well as the landing fees
MIAA charges to airlines, constitute the
bulk of the income that maintains the
operations of MIAA. The collection of
such fees does not change the character of
MIAA as an airport for public use. Such
fees are often termed users tax. This
means taxing those among the public who
actually use a public facility instead of
taxing all the public including those who
never use the particular public facility. A
users tax is more equitable a principle of
taxation mandated in the 1987
Constitution.[23] (Underscoring supplied)
Petitioners assume that what the Court said above,
equating terminal fees to a users tax must also pertain to
tollway fees. But the main issue in the MIAA case was whether
or not Paraaque City could sell airport lands and buildings
under MIAA administration at public auction to satisfy unpaid
real estate taxes. Since local governments have no power to
tax the national government, the Court held that the City could
not proceed with the auction sale. MIAA forms part of the
national government although not integrated in the department
framework.[24] Thus, its airport lands and buildings are
properties of public dominion beyond the commerce of man
under Article 420(1)[25] of the Civil Code and could not be
sold at public auction.
As can be seen, the discussion in the MIAA case on
toll roads and toll fees was made, not to establish a rule that
tollway fees are users tax, but to make the point that airport
lands and buildings are properties of public dominion and that
the collection of terminal fees for their use does not make
them private properties. Tollway fees are not taxes.Indeed,
they are not assessed and collected by the BIR and do not go
to the general coffers of the government.
It would of course be another matter if Congress
enacts a law imposing a users tax, collectible from motorists,
for the construction and maintenance of certain roadways.The
tax in such a case goes directly to the government for the
replenishment of resources it spends for the roadways. This is
not the case here. What the government seeks to tax here are
fees collected from tollways that are constructed, maintained,
and operated by private tollway operators at their own expense
under the build, operate, and transfer scheme that the
government has adopted for expressways.[26] Except for a
fraction given to the government, the toll fees essentially end
up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of
the tollways, are not taxes in any sense. A tax is imposed
under the taxing power of the government principally for the
purpose of raising revenues to fund public
expenditures.[27] Toll fees, on the other hand, are collected by
private tollway operators as reimbursement for the costs and
expenses incurred in the construction, maintenance and
operation of the tollways, as well as to assure them a
reasonable margin of income. Although toll fees are charged
for the use of public facilities, therefore, they are not
government exactions that can be properly treated as a
tax. Taxes may be imposed only by the government under its
sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of
ownership.[28]
Parenthetically, VAT on tollway operations cannot be deemed
a tax on tax due to the nature of VAT as an indirect tax. In
indirect taxation, a distinction is made between the liability for
the tax and burden of the tax. The seller who is liable for the
VAT may shift or pass on the amount of VAT it paid on
goods, properties or services to the buyer. In such a case, what
is transferred is not the sellers liability but merely the burden
of the VAT.[29]
Thus, the seller remains directly and legally liable for
payment of the VAT, but the buyer bears its burden since the
amount of VAT paid by the former is added to the selling
price. Once shifted, the VAT ceases to be a tax[30] and simply
becomes part of the cost that the buyer must pay in order to
purchase the good, property or service.
Consequently, VAT on tollway operations is not
really a tax on the tollway user, but on the tollway operator.
Under Section 105 of the Code, [31] VAT is imposed on any
person who, in the course of trade or business, sells or renders
services for a fee. In other words, the seller of services, who in
this case is the tollway operator, is the person liable for VAT.
The latter merely shifts the burden of VAT to the tollway user
as part of the toll fees.
For this reason, VAT on tollway operations cannot be
a tax on tax even if toll fees were deemed as a users tax. VAT
is assessed against the tollway operators gross receipts and not
necessarily on the toll fees. Although the tollway operator may
shift the VAT burden to the tollway user, it will not make the
latter directly liable for the VAT. The shifted VAT burden
simply becomes part of the toll fees that one has to pay in
order to use the tollways.[32]
Three. Petitioner Timbol has no personality to invoke the
non-impairment of contract clause on behalf of private
investors in the tollway projects. She will neither be
prejudiced by nor be affected by the alleged diminution in
return of investments that may result from the VAT
imposition. She has no interest at all in the profits to be earned
91
under the TOAs. The interest in and right to recover
investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate
of recovery will be adversely affected by imposing VAT on
tollway operations is purely speculative. Equally
presumptuous is her assertion that a stipulation in the TOAs
known as the Material Adverse Grantor Action will be
activated if VAT is thus imposed. The Court cannot rule on
matters that are manifestly conjectural. Neither can it prohibit
the State from exercising its sovereign taxing power based on
uncertain, prophetic grounds.
Four. Finally, petitioners assert that the
substantiation requirements for claiming input VAT make the
VAT on tollway operations impractical and incapable of
implementation. They cite the fact that, in order to claim input
VAT, the name, address and tax identification number of the
tollway user must be indicated in the VAT receipt or
invoice. The manner by which the BIR intends to implement
the VAT by rounding off the toll rate and putting any excess
collection in an escrow account is also illegal, while the
alternative of giving change to thousands of motorists in order
to meet the exact toll rate would be a logistical nightmare.
Thus, according to them, the VAT on tollway operations is not
administratively feasible.[33]
Administrative feasibility is one of the canons of a
sound tax system. It simply means that the tax system should
be capable of being effectively administered and enforced
with the least inconvenience to the taxpayer. Non-observance
of the canon, however, will not render a tax imposition invalid
except to the extent that specific constitutional or statutory
limitations are impaired.[34] Thus, even if the imposition of
VAT on tollway operations may seem burdensome to
implement, it is not necessarily invalid unless some aspect of
it is shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority
will actually implement the VAT on tollway operations. Any
declaration by the Court that the manner of its implementation
is illegal or unconstitutional would be premature. Although the
transcript of the August 12, 2010 Senate hearing provides
some clue as to how the BIR intends to go about it,[35] the facts
pertaining to the matter are not sufficiently established for the
Court to pass judgment on. Besides, any concern about how
the VAT on tollway operations will be enforced must first be
addressed to the BIR on whom the task of implementing tax
laws primarily and exclusively rests. The Court cannot
preempt the BIRs discretion on the matter, absent any clear
violation of law or the Constitution.
For the same reason, the Court cannot prematurely
declare as illegal, BIR RMC 63-2010 which directs toll
companies to record an accumulated input VAT of zero
balance in their books as of August 16, 2010, the date when
the VAT imposition was supposed to take effect. The issuance
allegedly violates Section 111(A)[36] of the Code which grants
first time VAT payers a transitional input VAT of 2% on
beginning inventory.
In this connection, the BIR explained that BIR RMC
63-2010 is actually the product of negotiations with tollway
operators who have been assessed VAT as early as 2005, but
failed to charge VAT-inclusive toll fees which by now can no
longer be collected. The tollway operators agreed to waive the
2% transitional input VAT, in exchange for cancellation of
their past due VAT liabilities. Notably, the right to claim the
2% transitional input VAT belongs to the tollway operators
who have not questioned the circulars validity. They are thus
the ones who have a right to challenge the circular in a direct
and proper action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did
not usurp legislative prerogative or expand the VAT laws
coverage when she sought to impose VAT on tollway
operations. Section 108(A) of the Code clearly states that
services of all other franchise grantees are subject to VAT,
except as may be provided under Section 119 of the
Code.Tollway operators are not among the franchise grantees
subject to franchise tax under the latter provision. Neither are
their services among the VAT-exempt transactions under
Section 109 of the Code.
If the legislative intent was to exempt tollway
operations from VAT, as petitioners so strongly allege, then it
would have been well for the law to clearly say so. Tax
exemptions must be justified by clear statutory grant and
based on language in the law too plain to be mistaken. [37] But
as the law is written, no such exemption obtains for tollway
operators. The Court is thus duty-bound to simply apply the
law as it is found.
Lastly, the grant of tax exemption is a matter of
legislative policy that is within the exclusive prerogative of
Congress. The Courts role is to merely uphold this legislative
policy, as reflected first and foremost in the language of the
tax statute. Thus, any unwarranted burden that may be
perceived to result from enforcing such policy must be
properly referred to Congress. The Court has no discretion on
the matter but simply applies the law.
The VAT on franchise grantees has been in the
statute books since 1994 when R.A. 7716 or the Expanded
Value-Added Tax law was passed. It is only now, however,
that the executive has earnestly pursued the VAT imposition
against tollway operators. The executive exercises exclusive
discretion in matters pertaining to the implementation and
execution of tax laws. Consequently, the executive is more
properly suited to deal with the immediate and practical
consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents
Secretary of Finance and Commissioner of Internal Revenues
motion for reconsideration of its August 24, 2010
resolution, DISMISSES the petitioners Renato V. Diaz and
Aurora Ma. F. Timbols petition for lack of merit, and SETS
92
ASIDE the Courts temporary restraining order dated August
13, 2010.
SO ORDERED.
G.R. No. 124043 October 14, 1998
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and
YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE
PHILIPPINES, INC., respondents.
PANGANIBAN, J.:
Is the income derived from rentals of real property owned by
the Young Men's Christian Association of the Philippines, Inc.
(YMCA) established as "a welfare, educational and
charitable non-profit corporation" subject to income tax
under the National Internal Revenue Code (NIRC) and the
Constitution?
The Case
This is the main question raised before us in this petition for
review on certiorari challenging two Resolutions issued by
the Court of Appeals 1 on September 28, 1995 2 and February
29, 1996 3 in CA-GR SP No. 32007. Both Resolutions
affirmed the Decision of the Court of Tax Appeals (CTA)
allowing the YMCA to claim tax exemption on the latter's
income from the lease of its real property.
The Facts
The facts are undisputed. 4 Private Respondent YMCA is a
non-stock, non-profit institution, which conducts various
programs and activities that are beneficial to the public,
especially the young people, pursuant to its religious,
educational and charitable objectives.
In 1980, private respondent earned, among others, an income
of P676,829.80 from leasing out a portion of its premises to
small shop owners, like restaurants and canteen operators, and
P44,259.00 from parking fees collected from non-members.
On July 2, 1984, the commissioner of internal revenue (CIR)
issued an assessment to private respondent, in the total amount
of P415,615.01 including surcharge and interest, for
deficiency income tax, deficiency expanded withholding taxes
on rentals and professional fees and deficiency withholding
tax on wages. Private respondent formally protested the
assessment and, as a supplement to its basic protest, filed a
letter dated October 8, 1985. In reply, the CIR denied the
claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition
for review at the Court of Tax Appeals (CTA) on March 14,
1989. In due course, the CTA issued this ruling in favor of the
YMCA:
. . . [T]he leasing of [private respondent's]
facilities to small shop owners, to restaurant
and canteen operators and the operation of
the parking lot are reasonably incidental to
and reasonably necessary for the
accomplishment of the objectives of the
[private respondents]. It appears from the
testimonies of the witnesses for the [private
respondent] particularly Mr. James C.
Delote, former accountant of YMCA, that
these facilities were leased to members and
that they have to service the needs of its
members and their guests. The rentals were
minimal as for example, the barbershop was
only charged P300 per month. He also
testified that there was actually no lot
devoted for parking space but the parking
was done at the sides of the building. The
parking was primarily for members with
stickers on the windshields of their cars and
they charged P.50 for non-members. The
rentals and parking fees were just enough to
cover the costs of operation and
maintenance only. The earning[s] from these
rentals and parking charges including those
from lodging and other charges for the use
of the recreational facilities constitute [the]
bulk of its income which [is] channeled to
support its many activities and attainment of
its objectives. As pointed out earlier, the
membership dues are very insufficient to
support its program. We find it reasonably
necessary therefore for [private respondent]
to make [the] most out [of] its existing
facilities to earn some income. It would have
been different if under the circumstances,
[private respondent] will purchase a lot and
convert it to a parking lot to cater to the
needs of the general public for a fee, or
construct a building and lease it out to the
highest bidder or at the market rate for
commercial purposes, or should it invest its
funds in the buy and sell of properties, real
or personal. Under these circumstances, we
could conclude that the activities are already
profit oriented, not incidental and reasonably
necessary to the pursuit of the objectives of
the association and therefore, will fall under
the last paragraph of Section 27 of the Tax
Code and any income derived therefrom
shall be taxable.
Considering our findings that [private
respondent] was not engaged in the business
of operating or contracting [a] parking lot,
we find no legal basis also for the imposition
of [a] deficiency fixed tax and [a]
contractor's tax in the amount[s] of P353.15
and P3,129.73, respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing,
the following assessments are hereby
dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
93
 1980 Deficiency Contractor's Tax
P3,129.23;
1980 Deficiency Income Tax
P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax
P1,798.93;
1980 Deficiency Withholding Tax on Wages
P33,058.82
plus 10% surcharge and 20% interest per
annum from July 2, 1984 until fully paid but
not to exceed three (3) years pursuant to
Section 51(e)(2) & (3) of the National
Internal Revenue Code effective as of
1984. 5
Dissatisfied with the CTA ruling, the CIR elevated the case to
the Court of Appeals (CA). In its Decision of February 16,
1994, the CA 6 initially decided in favor of the CIR and
disposed of the appeal in the following manner:
Following the ruling in the afore-cited cases
of Province of Abra vs. Hernando and Abra
Valley College Inc. vs. Aquino, the ruling of
the respondent Court of Tax Appeals that
"the leasing of petitioner's (herein
respondent's) facilities to small shop owners,
to restaurant and canteen operators and the
operation of the parking lot are reasonably
incidental to and reasonably necessary for
the accomplishment of the objectives of the
petitioners, and the income derived
therefrom are tax exempt, must be reversed.
WHEREFORE, the appealed decision is
hereby REVERSED in so far as it dismissed
the assessment for:
1980 Deficiency Income
Tax P 353.15
1980 Deficiency
Contractor's Tax P In affirming the conclusion of Respondent
3,129.23, &
1980 Deficiency Income
Tax P 372,578.20
but the same is AFFIRMED in all other respect. 7
Aggrieved, the YMCA asked for reconsideration based on the
following grounds:
I First
The findings of facts of the Public
Respondent Court of Tax Appeals being
supported by substantial evidence [are] final
and conclusive.
II
The conclusions of law of [p]ublic
[r]espondent exempting [p]rivate
[r]espondent from the income on rentals of
small shops and parking fees [are] in accord
with the applicable law and jurisprudence. 8
Finding merit in the Motion for Reconsideration filed by the
YMCA, the CA reversed itself and promulgated on September
28, 1995 its first assailed Resolution which, in part, reads:
The Court cannot depart from the CTA's
findings of fact, as they are supported by
evidence beyond what is considered as
substantial.
xxx xxx xxx
The second ground raised is that the
respondent CTA did not err in saying that
the rental from small shops and parking fees
do not result in the loss of the exemption.
Not even the petitioner would hazard the
suggestion that YMCA is designed for
profit. Consequently, the little income from
small shops and parking fees help[s] to keep
its head above the water, so to speak, and
allow it to continue with its laudable work.
The Court, therefore, finds the second
ground of the motion to be meritorious and
in accord with law and jurisprudence.
WHEREFORE, the motion for
reconsideration is GRANTED; the
respondent CTA's decision is
AFFIRMED in toto. 9
The internal revenue commissioner's own Motion for
Reconsideration was denied by Respondent Court in its
second assailed Resolution of February 29, 1996. Hence, this
petition for review under Rule 45 of the Rules of Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the
following errors:
I
In holding that it had departed from the
findings of fact of Respondent Court of Tax
Appeals when it rendered its Decision dated
February 16, 1994; and
II
Court of Tax Appeals that the income of
private respondent from rentals of small
shops and parking fees [is] exempt from
taxation. 11
This Court's Ruling
The petition is meritorious.
Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA
Decision reversed the factual findings of the CTA. On the
other hand, petitioner argues that the CA merely reversed the
"ruling of the CTA that the leasing of private respondent's
facilities to small shop owners, to restaurant and canteen
operators and the operation of parking lots are reasonably
incidental to and reasonably necessary for the accomplishment
of the objectives of the private respondent and that the income
derived therefrom are tax exempt." 12 Petitioner insists that
94
what the appellate court reversed was the legal conclusion, not
the factual finding, of the CTA. 13 The commissioner has a
point.
Indeed, it is a basic rule in taxation that the factual findings of
the CTA, when supported by substantial evidence, will be
disturbed on appeal unless it is shown that the said court
committed gross error in the appreciation of facts. 14 In the
present case, this Court finds that the February 16, 1994
Decision of the CA did not deviate from this rule. The latter
merely applied the law to the facts as found by the CTA and
ruled on the issue raised by the CIR: "Whether or not the
collection or earnings of rental income from the lease of
certain premises and income earned from parking fees shall
fall under the last paragraph of Section 27 of the National
Internal Revenue Code of 1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It merely
resolved the aforementioned issue, as indeed it was expected
to. That it did so in a manner different from that of the CTA
did not necessarily imply a reversal of factual findings.
The distinction between a question of law and a question of
fact is clear-cut. It has been held that "[t]here is a question of
law in a given case when the doubt or difference arises as to
what the law is on a certain state of facts; there is a question of
fact when the doubt or difference arises as to the truth or
falsehood of alleged facts." 16 In the present case, the CA did
not doubt, much less change, the facts narrated by the CTA. It
merely applied the law to the facts. That its interpretation or
conclusion is different from that of the CTA is not irregular or
abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the
YMCA from its real estate subject to tax? At the outset, we set
forth the relevant provision of the NIRC:
Sec. 27. Exemptions from tax on
corporations. The following
organizations shall not be taxed under this
Title in respect to income received by them
as such
xxx xxx xxx
(g) Civic league or organization not
organized for profit but operated exclusively
for the promotion of social welfare;
(h) Club organized and operated exclusively
for pleasure, recreation, and other non-
profitable purposes, no part of the net
income of which inures to the benefit of any
private stockholder or member;
xxx xxx xxx
Notwithstanding the provisions in the
preceding paragraphs, the income of
whatever kind and character of the foregoing
organizations from any of their properties,
real or personal, or from any of their
activities conducted for profit, regardless of
the disposition made of such income, shall
be subject to the tax imposed under this
Code. (as amended by Pres. Decree No.
1457)
Petitioner argues that while the income received by the
organizations enumerated in Section 27 (now Section 26) of
the NIRC is, as a rule, exempted from the payment of tax "in
respect to income received by them as such," the exemption
does not apply to income derived ". . . from any of their
properties, real or personal, or from any of their activities
conducted for profit, regardless of the disposition made of
such income . . . ."
Petitioner adds that "rental income derived by a tax-exempt
organization from the lease of its properties, real or personal,
[is] not, therefore, exempt from income taxation, even if such
income [is] exclusively used for the accomplishment of its
objectives." 17 We agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has
always applied the doctrine of strict in interpretation in
construing tax exemptions. 18 Furthermore, a claim of statutory
exemption from taxation should be manifest. and
unmistakable from the language of the law on which it is
based. Thus, the claimed exemption "must expressly be
granted in a statute stated in a language too clear to be
mistaken." 19
In the instant case, the exemption claimed by the YMCA is
expressly disallowed by the very wording of the last paragraph
of then Section 27 of the NIRC which mandates that the
income of exempt organizations (such as the YMCA) from
any of their properties, real or personal, be subject to the tax
imposed by the same Code. Because the last paragraph of said
section unequivocally subjects to tax the rent income of the
YMCA from its real property, 20the Court is duty-bound to
abide strictly by its literal meaning and to refrain from
resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and
unambiguous, its express terms must be
applied. 21Parenthetically, a consideration of the question of
construction must not even begin, particularly when such
question is on whether to apply a strict construction or a
liberal one on statutes that grant tax exemptions to "religious,
charitable and educational propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues, should
be "subject to the qualification that the income from the
properties must arise from activities 'conducted for profit'
before it may be considered taxable." 23 This argument is
erroneous. As previously stated, a reading of said paragraph
ineludibly shows that the income from any property of exempt
organizations, as well as that arising from any activity it
conducts for profit, is taxable. The phrase "any of their
activities conducted for profit" does not qualify the word
"properties." This makes from the property of the organization
taxable, regardless of how that income is used whether for
profit or for lofty non-profit purposes.
95
Verba legis non est recedendum. Hence, Respondent Court of
Appeals committed reversible error when it allowed, on
reconsideration, the tax exemption claimed by YMCA on
income it derived from renting out its real property, on the
solitary but unconvincing ground that the said income is not
collected for profit but is merely incidental to its operation.
The law does not make a distinction. The rental income is
taxable regardless of whence such income is derived and how
it is used or disposed of. Where the law does not distinguish,
neither should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the fundamental law,
private respondent submits that Article VI, Section 28 of par.
3 of the 1987 Constitution, 24 exempts "charitable institutions"
from the payment not only of property taxes but also of
income tax from any source. 25 In support of its novel theory,
it compares the use of the words "charitable institutions,"
"actually" and "directly" in the 1973 and the 1987
Constitutions, on the one hand; and in Article VI, Section 22,
par. 3 of the 1935 Constitution, on the other hand. 26
Private respondent enunciates three points. First, the present
provision is divisible into two categories: (1) "[c]haritable
institutions, churches and parsonages or convents appurtenant
thereto, mosques and non-profit cemeteries," the incomes of
which are, from whatever source, all tax-exempt; 27 and (2)
"[a]ll lands, buildings and improvements actually and directly
used for religious, charitable or educational purposes," which
are exempt only from property taxes. 28 Second, Lladoc v.
Commissioner of Internal Revenue, 29 which limited the
exemption only to the payment of property taxes, referred to
the provision of the 1935 Constitution and not to its
counterparts in the 1973 and the 1987 Constitutions. 30 Third,
the phrase "actually, directly and exclusively used for
religious, charitable or educational purposes" refers not only
to "all lands, buildings and improvements," but also to the
above-quoted first category which includes charitable
institutions like the private respondent. 31
The Court is not persuaded. The debates, interpellations and
expressions of opinion of the framers of the Constitution
reveal their intent which, in turn, may have guided the people
in ratifying the Charter. 32 Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former
constitutional commissioner, who is now a member of this
Court, stressed during the Concom debates that ". . . what is
exempted is not the institution itself . . .; those exempted from
real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable
or educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority
on the Constitution and also a member of the Concom,
adhered to the same view that the exemption created by said
provision pertained only to property taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs,
stating that "[t]he tax exemption covers property taxes
only." 35 Indeed, the income tax exemption claimed by private
respondent finds no basis in Article VI, Section 26, par. 3 of
the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3
of the Character, 36 claiming that the YMCA "is a non-stock,
non-profit educational institution whose revenues and assets
are used actually, directly and exclusively for educational
purposes so it is exempt from taxes on its properties and
income." 37 We reiterate that private respondent is exempt
from the payment of property tax, but not income tax on the
rentals from its property. The bare allegation alone that it is a
non-stock, non-profit educational institution is insufficient to
justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are
construed strictissimi juris. Hence, for the YMCA to be
granted the exemption it claims under the aforecited provision,
it must prove with substantial evidence that (1) it falls under
the classification non-stock, non-profit educational institution;
and (2) the income it seeks to be exempted from taxation is
used actually, directly, and exclusively for educational
purposes. However, the Court notes that not a scintilla of
evidence was submitted by private respondent to prove that it
met the said requisites.
Is the YMCA an educational institution within the purview of
Article XIV, Section 4, par. 3 of the Constitution? We rule
that it is not. The term "educational institution" or "institution
of learning" has acquired a well-known technical meaning, of
which the members of the Constitutional Commission are
deemed cognizant. 38 Under the Education Act of 1982, such
term refers to schools. 39 The school system is synonymous
with formal education, 40 which "refers to the hierarchically
structured and chronologically graded learnings organized and
provided by the formal school system and for which
certification is required in order for the learner to progress
through the grades or move to the higher levels." 41 The Court
has examined the "Amended Articles of Incorporation" and
"By-Laws" 43 of the YMCA, but found nothing in them that
even hints that it is a school or an educational institution. 44
Furthermore, under the Education Act of 1982, even non-
formal education is understood to be school-based and
"private auspices such as foundations and civic-spirited
organizations" are ruled out. 45 It is settled that the term
"educational institution," when used in laws granting tax
exemptions, refers to a ". . . school seminary, college or
educational establishment . . . ." 46 Therefore, the private
respondent cannot be deemed one of the educational
institutions covered by the constitutional provision under
consideration.
..
. Words used in the Constitution are to be
taken in their ordinary acceptation. While in
its broadest and best sense education
embraces all forms and phases of
instruction, improvement and development
of mind and body, and as well of religious
and moral sentiments, yet in the common
understanding and application it means a
96
 place where systematic instruction in any or
all of the useful branches of learning is
given by methods common to schools and
institutions of learning. That we conceive to
be the true intent and scope of the term
[educational institutions,] as used in the
Constitution. 47
Moreover, without conceding that Private Respondent YMCA
is an educational institution, the Court also notes that the
former did not submit proof of the proportionate amount of the
subject income that was actually, directly and exclusively used
for educational purposes. Article XIII, Section 5 of the YMCA
by-laws, which formed part of the evidence submitted, is
patently insufficient, since the same merely signified that
"[t]he net income derived from the rentals of the commercial
buildings shall be apportioned to the Federation and Member
Associations as the National Board may decide." 48 In sum, we
find no basis for granting the YMCA exemption from income
tax under the constitutional provision invoked.
Cases Cited by Private
Respondent Inapplicable
The cases 49 relied on by private respondent do not support its
cause. YMCA of Manila v. Collector of Internal
Revenue 50and Abra Valley College, Inc. v. Aquino 51 are not
applicable, because the controversy in both cases involved
exemption from the payment of property tax, not income
tax. Hospital de San Juan de Dios, Inc. v. Pasay City 52 is not
in point either, because it involves a claim for exemption from
the payment of regulatory fees, specifically electrical
inspection fees, imposed by an ordinance of Pasay City an
issue not at all related to that involved in a claimed exemption
from the payment of income taxes imposed on property leases.
In Jesus Sacred Heart College v. Com. of Internal
Revenue, 53 the party therein, which claimed an exemption
from the payment of income tax, was an educational
institution which submitted substantial evidence that the
income subject of the controversy had been devoted or used
solely for educational purposes. On the other hand, the private
respondent in the present case has not given any proof that it is
an educational institution, or that part of its rent income is
actually, directly and exclusively used for educational
purposes.
Epilogue
In deliberating on this petition, the Court expresses its
sympathy with private respondent. It appreciates the nobility
of its cause. However, the Court's power and function are
limited merely to applying the law fairly and objectively. It
cannot change the law or bend it to suit its sympathies and
appreciations. Otherwise, it would be overspilling its role and
invading the realm of legislation.
We concede that private respondent deserves the help and the
encouragement of the government. It needs laws that can
facilitate, and not frustrate, its humanitarian tasks. But the
Court regrets that, given its limited constitutional authority, it
cannot rule on the wisdom or propriety of legislation. That
prerogative belongs to the political departments of
government. Indeed, some of the members of the Court may
even believe in the wisdom and prudence of granting more tax
exemptions to private respondent. But such belief, however
well-meaning and sincere, cannot bestow upon the Court the
power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of
the Court of Appeals dated September 28, 1995 and February
29, 1996 are hereby REVERSED and SET ASIDE. The
Decision of the Court of Appeals dated February 16, 1995 is
REINSTATED, insofar as it ruled that the income derived by
petitioner from rentals of its real property is subject to income
tax. No pronouncement as to costs.
SO ORDERED.
G.R. No. 195909 September 26, 2012
COMMISSIONER OF INTERNAL
REVENUE, PETITIONER,
vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
x-----------------------x
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,
vs.
COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT.
DECISION
CARPIO, J.:
The Case
These are consolidated 1 petitions for review on certiorari
under Rule 45 of the Rules of Court assailing the Decision of
19 November 2010 of the Court of Tax Appeals (CTA) En
Banc and its Resolution 2 of 1 March 2011 in CTA Case No.
6746. This Court resolves this case on a pure question of law,
which involves the interpretation of Section 27(B) vis--vis
Section 30(E) and (G) of the National Internal Revenue Code
of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital
organized as a non-stock and non-profit corporation. Under its
articles of incorporation, among its corporate purposes are:
(a) To establish, equip, operate and maintain a non-
stock, non-profit Christian, benevolent, charitable
and scientific hospital which shall give curative,
rehabilitative and spiritual care to the sick, diseased
and disabled persons; provided that purely medical
and surgical services shall be performed by duly
licensed physicians and surgeons who may be freely
and individually contracted by patients;
(b) To provide a career of health science education
and provide medical services to the community
through organized clinics in such specialties as the
facilities and resources of the corporation make
possible;
97
 (c) To carry on educational activities related to the
maintenance and promotion of health as well as
provide facilities for scientific and medical
researches which, in the opinion of the Board of
Trustees, may be justified by the facilities, personnel,
funds, or other requirements that are available;
(d) To cooperate with organized medical societies,
agencies of both government and private sector;
establish rules and regulations consistent with the
highest professional ethics;
xxxx3
On 16 December 2002, the Bureau of Internal Revenue (BIR)
assessed St. Luke's deficiency taxes amounting
to P76,063,116.06 for 1998, comprised of deficiency income
tax, value-added tax, withholding tax on compensation and
expanded withholding tax. The BIR reduced the amount
to P63,935,351.57 during trial in the First Division of the
CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest
with the BIR against the deficiency tax assessments. The BIR
did not act on the protest within the 180-day period under
Section 228 of the NIRC. Thus, St. Luke's appealed to the
CTA.
The BIR argued before the CTA that Section 27(B) of the
NIRC, which imposes a 10% preferential tax rate on the
income of proprietary non-profit hospitals, should be
applicable to St. Luke's. According to the BIR, Section 27(B),
introduced in 1997, "is a new provision intended to amend the
exemption on non-profit hospitals that were previously
categorized as non-stock, non-profit corporations under
Section 26 of the 1997 Tax Code x x x." 5 It is a specific
provision which prevails over the general exemption on
income tax granted under Section 30(E) and (G) for non-stock,
non-profit charitable institutions and civic organizations
promoting social welfare. 6
The BIR claimed that St. Luke's was actually operating for
profit in 1998 because only 13% of its revenues came from
charitable purposes. Moreover, the hospital's board of trustees,
officers and employees directly benefit from its profits and
assets. St. Luke's had total revenues of P1,730,367,965 or
approximately P1.73 billion from patient services in 1998. 7
St. Luke's contended that the BIR should not consider its total
revenues, because its free services to patients
was P218,187,498 or 65.20% of its 1998 operating income
(i.e., total revenues less operating expenses)
of P334,642,615. 8 St. Luke's also claimed that its income does
not inure to the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit
institution for charitable and social welfare purposes under
Section 30(E) and (G) of the NIRC. It argued that the making
of profit per se does not destroy its income tax exemption.
The petition of the BIR before this Court in G.R. No. 195909
reiterates its arguments before the CTA that Section 27(B)
applies to St. Luke's. The petition raises the sole issue of
whether the enactment of Section 27(B) takes proprietary non-
profit hospitals out of the income tax exemption under Section
30 of the NIRC and instead, imposes a preferential rate of
10% on their taxable income. The BIR prays that St. Luke's be
ordered to pay P57,659,981.19 as deficiency income and
expanded withholding tax for 1998 with surcharges and
interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual
matters on the treatment and withholding of a part of its
income, 9 as well as the payment of surcharge and delinquency
interest. There is no ground for this Court to undertake such a
factual review. Under the Constitution 10 and the Rules of
Court, 11 this Court's review power is generally limited to
"cases in which only an error or question of law is
involved." 12 This Court cannot depart from this limitation if a
party fails to invoke a recognized exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed
in toto the CTA First Division Decision dated 23 February
2009 which held:
WHEREFORE, the Amended Petition for Review [by St.
Luke's] is hereby PARTIALLY GRANTED. Accordingly, the
1998 deficiency VAT assessment issued by respondent against
petitioner in the amount of P110,000.00 is hereby
CANCELLED and WITHDRAWN. However, petitioner is
hereby ORDERED to PAY deficiency income tax and
deficiency expanded withholding tax for the taxable year 1998
in the respective amounts of P5,496,963.54 and P778,406.84
or in the sum of P6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty
percent (20%) delinquency interest on the total amount
of P6,275,370.38 counted from October 15, 2003 until full
payment thereof, pursuant to Section 249(C)(3) of the NIRC
of 1997.
SO ORDERED. 13
The deficiency income tax of P5,496,963.54, ordered by the
CTA En Banc to be paid, arose from the failure of St. Luke's
to prove that part of its income in 1998 (declared as "Other
Income-Net") 14 came from charitable activities. The CTA
cancelled the remainder of the P63,113,952.79 deficiency
assessed by the BIR based on the 10% tax rate under Section
27(B) of the NIRC, which the CTA En Banc held was not
applicable to St. Luke's. 15
The CTA ruled that St. Luke's is a non-stock and non-profit
charitable institution covered by Section 30(E) and (G) of the
NIRC. This ruling would exempt all income derived by St.
Luke's from services to its patients, whether paying or non-
paying. The CTA reiterated its earlier decision in St. Luke's
Medical Center, Inc. v. Commissioner of Internal
Revenue, 16 which examined the primary purposes of St.
98
Luke's under its articles of incorporation and various
documents 17 identifying St. Luke's as a charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios,
Inc. v. Pasay City, 18 which states that "a charitable institution
does not lose its charitable character and its consequent
exemption from taxation merely because recipients of its
benefits who are able to pay are required to do so, where funds
derived in this manner are devoted to the charitable purposes
of the institution x x x." 19 The generation of income from
paying patients does not per se destroy the charitable nature of
St. Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v.
Collector of Internal Revenue, 20 which ruled that the old
NIRC (Commonwealth Act No. 466, as
amended) 21 "positively exempts from taxation those
corporations or associations which, otherwise, would be
subject thereto, because of the existence of x x x net
income." 22 The NIRC of 1997 substantially reproduces the
provision on charitable institutions of the old NIRC. Thus, in
rejecting the argument that tax exemption is lost whenever
there is net income, the Court in Jesus Sacred Heart College
declared: "[E]very responsible organization must be run to at
least insure its existence, by operating within the limits of its
own resources, especially its regular income. In other words, it
should always strive, whenever possible, to have a surplus." 23
The CTA held that Section 27(B) of the present NIRC does
not apply to St. Luke's. 24 The CTA explained that to apply the
10% preferential rate, Section 27(B) requires a hospital to be
"non-profit." On the other hand, Congress specifically used the
word "non-stock" to qualify a charitable "corporation or
association" in Section 30(E) of the NIRC. According to the
CTA, this is unique in the present tax code, indicating an
intent to exempt this type of charitable organization from
income tax. Section 27(B) does not require that the hospital be
"non-stock." The CTA stated, "it is clear that non-stock, non-
profit hospitals operated exclusively for charitable purpose are
exempt from income tax on income received by them as such,
applying the provision of Section 30(E) of the NIRC of 1997,
as amended." 25
The Issue
The sole issue is whether St. Luke's is liable for deficiency
income tax in 1998 under Section 27(B) of the NIRC, which
imposes a preferential tax rate of 10% on the income of
proprietary non-profit hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St.
Luke's in G.R. No. 195960 because the petition raises factual
issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he
petition shall raise only questions of law which must be
distinctly set forth." St. Luke's cites Martinez v. Court of
Appeals 26 which permits factual review "when the Court of
Appeals [in this case, the CTA] manifestly overlooked certain
relevant facts not disputed by the parties and which, if
properly considered, would justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant
facts. St. Luke's itself stated that the CTA "disregarded the
testimony of [its] witness, Romeo B. Mary, being allegedly
self-serving, to show the nature of the 'Other Income-Net' x x
x." 28 This is not a case of overlooking or failing to consider
relevant evidence. The CTA obviously considered the
evidence and concluded that it is self-serving. The CTA
declared that it has "gone through the records of this case and
found no other evidence aside from the self-serving affidavit
executed by [the] witnesses [of St. Luke's] x x x." 29
The deficiency tax on "Other Income-Net" stands. Thus, St.
Luke's is liable to pay the 25% surcharge under Section
248(A)(3) of the NIRC. There is "[f]ailure to pay the
deficiency tax within the time prescribed for its payment in the
notice of assessment[.]" 30 St. Luke's is also liable to pay 20%
delinquency interest under Section 249(C)(3) of the
NIRC. 31 As explained by the CTA En Banc, the amount
of P6,275,370.38 in the dispositive portion of the CTA First
Division Decision includes only deficiency interest under
Section 249(A) and (B) of the NIRC and not delinquency
interest. 32
The Main Issue
The issue raised by the BIR is a purely legal one. It involves
the effect of the introduction of Section 27(B) in the NIRC of
1997 vis--vis Section 30(E) and (G) on the income tax
exemption of charitable and social welfare institutions. The
10% income tax rate under Section 27(B) specifically pertains
to proprietary educational institutions and proprietary non-
profit hospitals. The BIR argues that Congress intended to
remove the exemption that non-profit hospitals previously
enjoyed under Section 27(E) of the NIRC of 1977, which is
now substantially reproduced in Section 30(E) of the NIRC of
1997. 33 Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. -
xxxx
(B) Proprietary Educational Institutions and Hospitals. -
Proprietary educational institutions and hospitals which are
non-profit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) hereof:
Provided, That if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the
total gross income derived by such educational institutions or
hospitals from all sources, the tax prescribed in Subsection (A)
hereof shall be imposed on the entire taxable income. For
purposes of this Subsection, the term 'unrelated trade, business
or other activity' means any trade, business or other activity,
the conduct of which is not substantially related to the exercise
or performance by such educational institution or hospital of
its primary purpose or function. A 'proprietary educational
institution' is any private school maintained and administered
by private individuals or groups with an issued permit to
operate from the Department of Education, Culture and Sports
(DECS), or the Commission on Higher Education (CHED), or
the Technical Education and Skills Development Authority
(TESDA), as the case may be, in accordance with existing
laws and regulations. (Emphasis supplied)
99
St. Luke's claims tax exemption under Section 30(E) and (G)
of the NIRC. It contends that it is a charitable institution and
an organization promoting social welfare. The arguments of
St. Luke's focus on the wording of Section 30(E) exempting
from income tax non-stock, non-profit charitable
institutions. 34 St. Luke's asserts that the legislative intent of
introducing Section 27(B) was only to remove the exemption
for "proprietary non-profit" hospitals. 35 The relevant
provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The
following organizations shall not be taxed under this Title in
respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to or
inure to the benefit of any member, organizer, officer or any
specific person;
xxxx
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
xxxx
Notwithstanding the provisions in the preceding paragraphs,
the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of
the disposition made of such income, shall be subject to tax
imposed under this Code. (Emphasis supplied)
The Court partly grants the petition of the BIR but on a
different ground. We hold that Section 27(B) of the NIRC
does not remove the income tax exemption of proprietary non-
profit hospitals under Section 30(E) and (G). Section 27(B) on
one hand, and Section 30(E) and (G) on the other hand, can be
construed together without the removal of such tax exemption.
The effect of the introduction of Section 27(B) is to subject the
taxable income of two specific institutions, namely,
proprietary non-profit educational institutions 36 and
proprietary non-profit hospitals, among the institutions
covered by Section 30, to the 10% preferential rate under
Section 27(B) instead of the ordinary 30% corporate rate
under the last paragraph of Section 30 in relation to Section
27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate
on the income of (1) proprietary non-profit educational
institutions and (2) proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be proprietary
and non-profit. "Proprietary" means private, following the
definition of a "proprietary educational institution" as "any
private school maintained and administered by private
individuals or groups" with a government permit. "Non-profit"
means no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset
devoted to the institution's purposes and all its activities
conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In
Collector of Internal Revenue v. Club Filipino Inc. de
Cebu, 37 this Court considered as non-profit a sports club
organized for recreation and entertainment of its stockholders
and members. The club was primarily funded by membership
fees and dues. If it had profits, they were used for overhead
expenses and improving its golf course. 38 The club was non-
profit because of its purpose and there was no evidence that it
was engaged in a profit-making enterprise. 39
The sports club in Club Filipino Inc. de Cebu may be non-
profit, but it was not charitable. The Court defined "charity" in
Lung Center of the Philippines v. Quezon City 40 as "a gift, to
be applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds
and hearts under the influence of education or religion, by
assisting them to establish themselves in life or [by] otherwise
lessening the burden of government." 41 A non-profit club for
the benefit of its members fails this test. An organization may
be considered as non-profit if it does not distribute any part of
its income to stockholders or members. However, despite its
being a tax exempt institution, any income such institution
earns from activities conducted for profit is taxable, as
expressly provided in the last paragraph of Section 30.
To be a charitable institution, however, an organization must
meet the substantive test of charity in Lung Center. The issue
in Lung Center concerns exemption from real property tax and
not income tax. However, it provides for the test of charity in
our jurisdiction. Charity is essentially a gift to an indefinite
number of persons which lessens the burden of government. In
other words, charitable institutions provide for free goods and
services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to
address public needs, because certain private entities already
assume a part of the burden. This is the rationale for the tax
exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public
works which would have been funded by appropriations from
the Treasury. 42
Charitable institutions, however, are not ipso facto entitled to a
tax exemption. The requirements for a tax exemption are
specified by the law granting it. The power of Congress to tax
implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that "[n]o
law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of
Congress." 43 The requirements for a tax exemption are strictly
construed against the taxpayer 44 because an exemption
restricts the collection of taxes necessary for the existence of
the government.
The Court in Lung Center declared that the Lung Center of the
Philippines is a charitable institution for the purpose of
exemption from real property taxes. This ruling uses the same
100
premise as Hospital de San Juan 45 and Jesus Sacred Heart
College 46 which says that receiving income from paying
patients does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because
it derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the
persons managing or operating the institution. 47
For real property taxes, the incidental generation of income is
permissible because the test of exemption is the use of the
property. The Constitution provides that "[c]haritable
institutions, churches and personages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation." 48 The test of
exemption is not strictly a requirement on the intrinsic nature
or character of the institution. The test requires that the
institution use the property in a certain way, i.e. for a
charitable purpose. Thus, the Court held that the Lung Center
of the Philippines did not lose its charitable character when it
used a portion of its lot for commercial purposes. The effect of
failing to meet the use requirement is simply to remove from
the tax exemption that portion of the property not devoted to
charity.
The Constitution exempts charitable institutions only from real
property taxes. In the NIRC, Congress decided to extend the
exemption to income taxes. However, the way Congress
crafted Section 30(E) of the NIRC is materially different from
Section 28(3), Article VI of the Constitution. Section 30(E) of
the NIRC defines the corporation or association that is exempt
from income tax. On the other hand, Section 28(3), Article VI
of the Constitution does not define a charitable institution, but
requires that the institution "actually, directly and exclusively"
use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable
institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to
or inure to the benefit of any member, organizer,
officer or any specific person.
Thus, both the organization and operations of the charitable
institution must be devoted "exclusively" for charitable
purposes. The organization of the institution refers to its
corporate form, as shown by its articles of incorporation, by-
laws and other constitutive documents. Section 30(E) of the
NIRC specifically requires that the corporation or association
be non-stock, which is defined by the Corporation Code as
"one where no part of its income is distributable as dividends
to its members, trustees, or officers" 49 and that any profit
"obtain[ed] as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose
or purposes for which the corporation was
organized." 50 However, under Lung Center, any profit by a
charitable institution must not only be plowed back "whenever
necessary or proper," but must be "devoted or used altogether
to the charitable object which it is intended to achieve." 51
The operations of the charitable institution generally refer to
its regular activities. Section 30(E) of the NIRC requires that
these operations be exclusive to charity. There is also a
specific requirement that "no part of [the] net income or asset
shall belong to or inure to the benefit of any member,
organizer, officer or any specific person." The use of lands,
buildings and improvements of the institution is but a part of
its operations.
There is no dispute that St. Luke's is organized as a non-stock
and non-profit charitable institution. However, this does not
automatically exempt St. Luke's from paying taxes. This only
refers to the organization of St. Luke's. Even if St. Luke's
meets the test of charity, a charitable institution is not ipso
facto tax exempt. To be exempt from real property taxes,
Section 28(3), Article VI of the Constitution requires that a
charitable institution use the property "actually, directly and
exclusively" for charitable purposes. To be exempt from
income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated
exclusively" for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) of the NIRC requires that
the institution be "operated exclusively" for social welfare.
However, the last paragraph of Section 30 of the NIRC
qualifies the words "organized and operated exclusively" by
providing that:
Notwithstanding the provisions in the preceding paragraphs,
the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of
the disposition made of such income, shall be subject to tax
imposed under this Code. (Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax
exempt charitable institution conducts "any" activity for profit,
such activity is not tax exempt even as its not-for-profit
activities remain tax exempt. This paragraph qualifies the
requirements in Section 30(E) that the "[n]on-stock
corporation or association [must be] organized and operated
exclusively for x x x charitable x x x purposes x x x." It
likewise qualifies the requirement in Section 30(G) that the
civic organization must be "operated exclusively" for the
promotion of social welfare.
Thus, even if the charitable institution must be "organized and
operated exclusively" for charitable purposes, it is
nevertheless allowed to engage in "activities conducted for
profit" without losing its tax exempt status for its not-for-
profit activities. The only consequence is that the "income of
whatever kind and character" of a charitable institution "from
any of its activities conducted for profit, regardless of the
101
disposition made of such income, shall be subject to tax."
Prior to the introduction of Section 27(B), the tax rate on such
income from for-profit activities was the ordinary corporate
rate under Section 27(A). With the introduction of Section
27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of P1,730,367,965 from
services to paying patients. It cannot be disputed that a
hospital which receives approximately P1.73 billion from
paying patients is not an institution "operated exclusively" for
charitable purposes. Clearly, revenues from paying patients
are income received from "activities conducted for
profit." 52 Indeed, St. Luke's admits that it derived profits from
its paying patients. St. Luke's declared P1,730,367,965 as
"Revenues from Services to Patients" in contrast to its "Free
Services" expenditure of P218,187,498. In its Comment in
G.R. No. 195909, St. Luke's showed the following
"calculation" to support its claim that 65.20% of its "income
after expenses was allocated to free or charitable services" in
1998. 53
REVENUES FROM P1,730,367,965.00
SERVICES TO PATIENTS
OPERATING EXPENSES
The Court cannot expand the meaning of the words "operated
exclusively" without violating the NIRC. Services to paying
patients are activities conducted for profit. They cannot be
considered any other way. There is a "purpose to make profit
over and above the cost" of services. 55 The P1.73 billion total
revenues from paying patients is not even incidental to St.
Luke's charity expenditure of P218,187,498 for non-paying
patients.
St. Luke's claims that its charity expenditure of P218,187,498
is 65.20% of its operating income in 1998. However, if a part
of the remaining 34.80% of the operating income is reinvested
in property, equipment or facilities used for services to paying
and non-paying patients, then it cannot be said that the income
is "devoted or used altogether to the charitable object which it
is intended to achieve." 56 The income is plowed back to the
corporation not entirely for charitable purposes, but for profit
as well. In any case, the last paragraph of Section 30 of the
NIRC expressly qualifies that income from activities for profit
is taxable "regardless of the disposition made of such income."
Jesus Sacred Heart College declared that there is no official
legislative record explaining the phrase "any activity
conducted for profit." However, it quoted a deposition of
Senator Mariano Jesus Cuenco, who was a member of the
Committee of Conference for the Senate, which introduced the
phrase "or from any activity conducted for profit."

Professional care of patients P1,016,608,394.00 P. Cuando ha hablado de la Universidad de Santo Toms que
tiene un hospital, no cree Vd. que es una actividad esencial
Administrative 287,319,334.00 dicho hospital para el funcionamiento del colegio de medicina
Household and Property 91,797,622.00 de dicha universidad?

P1,395,725,350.00 xxxx
R. Si el hospital se limita a recibir enformos pobres, mi
contestacin seria afirmativa; pero considerando que el
INCOME FROM P334,642,615.00 100% hospital tiene cuartos de pago, y a los mismos generalmente
OPERATIONS van enfermos de buena posicin social econmica, lo que se
paga por estos enfermos debe estar sujeto a 'income tax', y es
Free Services -218,187,498.00 -
una de las razones que hemos tenido para insertar las palabras
65.20%
o frase 'or from any activity conducted for profit.' 57
INCOME FROM P116,455,117.00 34.80%
OPERATIONS, Net of FREE The question was whether having a hospital is essential to an
SERVICES educational institution like the College of Medicine of the
University of Santo Tomas. Senator Cuenco answered that if
the hospital has paid rooms generally occupied by people of
OTHER INCOME 17,482,304.00 good economic standing, then it should be subject to income
tax. He said that this was one of the reasons Congress inserted
EXCESS OF REVENUES P133,937,421.00 the phrase "or any activity conducted for profit."
OVER EXPENSES
The question in Jesus Sacred Heart College involves an
educational institution. 58 However, it is applicable to
In Lung Center, this Court declared: charitable institutions because Senator Cuenco's response
shows an intent to focus on the activities of charitable
"[e]xclusive" is defined as possessed and enjoyed to the institutions. Activities for profit should not escape the reach of
exclusion of others; debarred from participation or enjoyment; taxation. Being a non-stock and non-profit corporation does
and "exclusively" is defined, "in a manner to exclude; as not, by this reason alone, completely exempt an institution
enjoying a privilege exclusively." x x x The words "dominant from tax. An institution cannot use its corporate form to
use" or "principal use" cannot be substituted for the words prevent its profitable activities from being taxed.
"used exclusively" without doing violence to the Constitution
and the law. Solely is synonymous with exclusively. 54
102
The Court finds that St. Luke's is a corporation that is not
"operated exclusively" for charitable or social welfare
purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict
interpretation of a provision granting tax exemption, but also
on the clear and plain text of Section 30(E) and (G). Section
30(E) and (G) of the NIRC requires that an institution be
"operated exclusively" for charitable or social welfare
purposes to be completely exempt from income tax. An
institution under Section 30(E) or (G) does not lose its tax
exemption if it earns income from its for-profit activities. Such
income from for-profit activities, under the last paragraph of
Section 30, is merely subject to income tax, previously at the
ordinary corporate rate but now at the preferential 10% rate
pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the
State because an exempt institution is spared from sharing in
the expenses of government and yet benefits from them. Tax
exemptions for charitable institutions should therefore be
limited to institutions beneficial to the public and those which
improve social welfare. A profit-making entity should not be
allowed to exploit this subsidy to the detriment of the
government and other taxpayers.1wphi1
St. Luke's fails to meet the requirements under Section 30(E)
and (G) of the NIRC to be completely tax exempt from all its
income. However, it remains a proprietary non-profit hospital
under Section 27(B) of the NIRC as long as it does not
distribute any of its profits to its members and such profits are
reinvested pursuant to its corporate purposes. St. Luke's, as a
proprietary non-profit hospital, is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998
under Section 27(B) of the NIRC. However, St. Luke's has
good reasons to rely on the letter dated 6 June 1990 by the
BIR, which opined that St. Luke's is "a corporation for purely
charitable and social welfare purposes"59 and thus exempt
from income tax. 60 In Michael J. Lhuillier, Inc. v.
Commissioner of Internal Revenue, 61 the Court said that
"good faith and honest belief that one is not subject to tax on
the basis of previous interpretation of government agencies
tasked to implement the tax law, are sufficient justification to
delete the imposition of surcharges and interest." 62
WHEREFORE, the petition of the Commissioner of Internal
Revenue in G.R. No. 195909 is PARTLY GRANTED. The
Decision of the Court of Tax Appeals En Banc dated 19
November 2010 and its Resolution dated 1 March 2011 in
CTA Case No. 6746 are MODIFIED. St. Luke's Medical
Center, Inc. is ORDERED TO PAY the deficiency income tax
in 1998 based on the 10% preferential income tax rate under
Section 27(B) of the National Internal Revenue Code.
However, it is not liable for surcharges and interest on such
deficiency income tax under Sections 248 and 249 of the
National Internal Revenue Code. All other parts of the
Decision and Resolution of the Court of Tax Appeals are
AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No.
195960 is DENIED for violating Section 1, Rule 45 of the
Rules of Court.
SO ORDERED.
G.R. No. 144104 June 29, 2004
LUNG CENTER OF THE PHILIPPINES, petitioner,
vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his
capacity as City Assessor of Quezon City, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the
Rules of Court, as amended, of the Decision1 dated July 17,
2000 of the Court of Appeals in CA-G.R. SP No. 57014 which
affirmed the decision of the Central Board of Assessment
Appeals holding that the lot owned by the petitioner and its
hospital building constructed thereon are subject to assessment
for purposes of real property tax.
The Antecedents
The petitioner Lung Center of the Philippines is a non-stock
and non-profit entity established on January 16, 1981 by virtue
of Presidential Decree No. 1823.2 It is the registered owner of
a parcel of land, particularly described as Lot No. RP-3-B-3A-
1-B-1, SWO-04-000495, located at Quezon Avenue corner
Elliptical Road, Central District, Quezon City. The lot has an
area of 121,463 square meters and is covered by Transfer
Certificate of Title (TCT) No. 261320 of the Registry of
Deeds of Quezon City. Erected in the middle of the aforesaid
lot is a hospital known as the Lung Center of the Philippines.
A big space at the ground floor is being leased to private
parties, for canteen and small store spaces, and to medical or
professional practitioners who use the same as their private
clinics for their patients whom they charge for their
professional services. Almost one-half of the entire area on the
left side of the building along Quezon Avenue is vacant and
idle, while a big portion on the right side, at the corner of
Quezon Avenue and Elliptical Road, is being leased for
commercial purposes to a private enterprise known as the
Elliptical Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also
renders medical services to out-patients, both paying and non-
paying. Aside from its income from paying patients, the
petitioner receives annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the
petitioner were assessed for real property taxes in the amount
of P4,554,860 by the City Assessor of Quezon
City.3 Accordingly, Tax Declaration Nos. C-021-01226 (16-
2518) and C-021-01231 (15-2518-A) were issued for the land
and the hospital building, respectively.4 On August 25, 1993,
the petitioner filed a Claim for Exemption5 from real property
taxes with the City Assessor, predicated on its claim that it is a
charitable institution. The petitioners request was denied, and
a petition was, thereafter, filed before the Local Board of
Assessment Appeals of Quezon City (QC-LBAA, for brevity)
103
for the reversal of the resolution of the City Assessor. The
petitioner alleged that under Section 28, paragraph 3 of the
1987 Constitution, the property is exempt from real property
taxes. It averred that a minimum of 60% of its hospital beds
are exclusively used for charity patients and that the major
thrust of its hospital operation is to serve charity patients. The
petitioner contends that it is a charitable institution and, as
such, is exempt from real property taxes. The QC-LBAA
rendered judgment dismissing the petition and holding the
petitioner liable for real property taxes.6
The QC-LBAAs decision was, likewise, affirmed on appeal
by the Central Board of Assessment Appeals of Quezon City
(CBAA, for brevity)7 which ruled that the petitioner was not a
charitable institution and that its real properties were not
actually, directly and exclusively used for charitable purposes;
hence, it was not entitled to real property tax exemption under
the constitution and the law. The petitioner sought relief from
the Court of Appeals, which rendered judgment affirming the
decision of the CBAA.8
Undaunted, the petitioner filed its petition in this Court
contending that:
A. THE COURT A QUO ERRED IN DECLARING
PETITIONER AS NOT ENTITLED TO REALTY
TAX EXEMPTIONS ON THE GROUND THAT
ITS LAND, BUILDING AND IMPROVEMENTS,
SUBJECT OF ASSESSMENT, ARE NOT
ACTUALLY, DIRECTLY AND EXCLUSIVELY
DEVOTED FOR CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS
REAL PROPERTY TAX EXEMPT UNDER ITS
CHARTER, PD 1823, SAID EXEMPTION MAY
NEVERTHELESS BE EXTENDED UPON
PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the
context of Section 28(3), Article VI of the 1987 Constitution.
It asserts that its character as a charitable institution is not
altered by the fact that it admits paying patients and renders
medical services to them, leases portions of the land to private
parties, and rents out portions of the hospital to private
medical practitioners from which it derives income to be used
for operational expenses. The petitioner points out that for the
years 1995 to 1999, 100% of its out-patients were charity
patients and of the hospitals 282-bed capacity, 60% thereof,
or 170 beds, is allotted to charity patients. It asserts that the
fact that it receives subsidies from the government attests to its
character as a charitable institution. It contends that the
"exclusivity" required in the Constitution does not necessarily
mean "solely." Hence, even if a portion of its real estate is
leased out to private individuals from whom it derives income,
it does not lose its character as a charitable institution, and its
exemption from the payment of real estate taxes on its real
property. The petitioner cited our ruling in Herrera v. QC-
BAA9 to bolster its pose. The petitioner further contends that
even if P.D. No. 1823 does not exempt it from the payment of
real estate taxes, it is not precluded from seeking tax
exemption under the 1987 Constitution.
In their comment on the petition, the respondents aver that the
petitioner is not a charitable entity. The petitioners real
property is not exempt from the payment of real estate taxes
under P.D. No. 1823 and even under the 1987 Constitution
because it failed to prove that it is a charitable institution and
that the said property is actually, directly and exclusively used
for charitable purposes. The respondents noted that in a
newspaper report, it appears that graft charges were filed with
the Sandiganbayan against the director of the petitioner, its
administrative officer, and Zenaida Rivera, the proprietress of
the Elliptical Orchids and Garden Center, for entering into a
lease contract over 7,663.13 square meters of the property in
1990 for only P20,000 a month, when the monthly rental
should be P357,000 a month as determined by the
Commission on Audit; and that instead of complying with the
directive of the COA for the cancellation of the contract for
being grossly prejudicial to the government, the petitioner
renewed the same on March 13, 1995 for a monthly rental of
only P24,000. They assert that the petitioner uses the subsidies
granted by the government for charity patients and uses the
rest of its income from the property for the benefit of paying
patients, among other purposes. They aver that the petitioner
failed to adduce substantial evidence that 100% of its out-
patients and 170 beds in the hospital are reserved for indigent
patients. The respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP
do not speak well of its record of service. That before
a patient is admitted for treatment in the Center, first
impression is that it is pay-patient and required to pay
a certain amount as deposit. That even if a patient is
living below the poverty line, he is charged with high
hospital bills. And, without these bills being first
settled, the poor patient cannot be allowed to leave
the hospital or be discharged without first paying the
hospital bills or issue a promissory note guaranteed
and indorsed by an influential agency or person
known only to the Center; that even the remains of
deceased poor patients suffered the same fate.
Moreover, before a patient is admitted for treatment
as free or charity patient, one must undergo a series
of interviews and must submit all the requirements
needed by the Center, usually accompanied by
endorsement by an influential agency or person
known only to the Center. These facts were heard and
admitted by the Petitioner LCP during the hearings
before the Honorable QC-BAA and Honorable
CBAA. These are the reasons of indigent patients,
instead of seeking treatment with the Center, they
prefer to be treated at the Quezon Institute. Can
such practice by the Center be called charitable? 10
The Issues
The issues for resolution are the following: (a) whether the
petitioner is a charitable institution within the context of
Presidential Decree No. 1823 and the 1973 and 1987
Constitutions and Section 234(b) of Republic Act No. 7160;
and (b) whether the real properties of the petitioner are exempt
from real property taxes.
104
The Courts Ruling
The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable
institution within the context of the 1973 and 1987
Constitutions. To determine whether an enterprise is a
charitable institution/entity or not, the elements which should
be considered include the statute creating the enterprise, its
corporate purposes, its constitution and by-laws, the methods
of administration, the nature of the actual work performed, the
character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.11
In the legal sense, a charity may be fully defined as a gift, to
be applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds
and hearts under the influence of education or religion, by
assisting them to establish themselves in life or otherwise
lessening the burden of government.12 It may be applied to
almost anything that tend to promote the well-doing and well-
being of social man. It embraces the improvement and
promotion of the happiness of man.13 The word "charitable" is
not restricted to relief of the poor or sick.14 The test of a
charity and a charitable organization are in law the same. The
test whether an enterprise is charitable or not is whether it
exists to carry out a purpose reorganized in law as charitable
or whether it is maintained for gain, profit, or private
advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-
stock corporation which, subject to the provisions of the
decree, is to be administered by the Office of the President of
the Philippines with the Ministry of Health and the Ministry of
Human Settlements. It was organized for the welfare and
benefit of the Filipino people principally to help combat the
high incidence of lung and pulmonary diseases in the
Philippines. The raison detre for the creation of the petitioner
is stated in the decree, viz:
Whereas, for decades, respiratory diseases have been
a priority concern, having been the leading cause of
illness and death in the Philippines, comprising more
than 45% of the total annual deaths from all causes,
thus, exacting a tremendous toll on human resources,
which ailments are likely to increase and degenerate
into serious lung diseases on account of unabated
pollution, industrialization and unchecked cigarette
smoking in the country;lavvph!l.net
Whereas, the more common lung diseases are, to a
great extent, preventable, and curable with early and
adequate medical care, immunization and through
prompt and intensive prevention and health education
programs;
Whereas, there is an urgent need to consolidate and
reinforce existing programs, strategies and efforts at
preventing, treating and rehabilitating people affected
by lung diseases, and to undertake research and
training on the cure and prevention of lung diseases,
through a Lung Center which will house and nurture
the above and related activities and provide tertiary-
level care for more difficult and problematical cases;
Whereas, to achieve this purpose, the Government
intends to provide material and financial support
towards the establishment and maintenance of a Lung
Center for the welfare and benefit of the Filipino
people.15
The purposes for which the petitioner was created are spelled
out in its Articles of Incorporation, thus:
SECOND: That the purposes for which such
corporation is formed are as follows:
1. To construct, establish, equip, maintain,
administer and conduct an integrated
medical institution which shall specialize in
the treatment, care, rehabilitation and/or
relief of lung and allied diseases in line with
the concern of the government to assist and
provide material and financial support in the
establishment and maintenance of a lung
center primarily to benefit the people of the
Philippines and in pursuance of the policy of
the State to secure the well-being of the
people by providing them specialized health
and medical services and by minimizing the
incidence of lung diseases in the country and
elsewhere.
2. To promote the noble undertaking of
scientific research related to the prevention
of lung or pulmonary ailments and the care
of lung patients, including the holding of a
series of relevant congresses, conventions,
seminars and conferences;
3. To stimulate and, whenever possible,
underwrite scientific researches on the
biological, demographic, social, economic,
eugenic and physiological aspects of lung or
pulmonary diseases and their control; and to
collect and publish the findings of such
research for public consumption;
4. To facilitate the dissemination of ideas
and public acceptance of information on
lung consciousness or awareness, and the
development of fact-finding, information
and reporting facilities for and in aid of the
general purposes or objects aforesaid,
especially in human lung requirements,
general health and physical fitness, and
other relevant or related fields;
5. To encourage the training of physicians,
nurses, health officers, social workers and
medical and technical personnel in the
practical and scientific implementation of
services to lung patients;
105
 6. To assist universities and research
institutions in their studies about lung
diseases, to encourage advanced training in
matters of the lung and related fields and to
support educational programs of value to
general health;
7. To encourage the formation of other
organizations on the national, provincial
and/or city and local levels; and to
coordinate their various efforts and activities
for the purpose of achieving a more
effective programmatic approach on the
common problems relative to the objectives
enumerated herein;
8. To seek and obtain assistance in any form
from both international and local
foundations and organizations; and to
administer grants and funds that may be
given to the organization;
9. To extend, whenever possible and
expedient, medical services to the public
and, in general, to promote and protect the
health of the masses of our people, which
has long been recognized as an economic
asset and a social blessing;
10. To help prevent, relieve and alleviate the
lung or pulmonary afflictions and maladies
of the people in any and all walks of life,
including those who are poor and needy, all
without regard to or discrimination, because
of race, creed, color or political belief of the
persons helped; and to enable them to obtain
treatment when such disorders occur;
11. To participate, as circumstances may
warrant, in any activity designed and carried
on to promote the general health of the
community;
12. To acquire and/or borrow funds and to
own all funds or equipment, educational
materials and supplies by purchase,
donation, or otherwise and to dispose of and
distribute the same in such manner, and, on
such basis as the Center shall, from time to
time, deem proper and best, under the
particular circumstances, to serve its general
and non-profit purposes and
objectives;lavvphil.net
13. To buy, purchase, acquire, own, lease,
hold, sell, exchange, transfer and dispose of
properties, whether real or personal, for
purposes herein mentioned; and
14. To do everything necessary, proper,
advisable or convenient for the
accomplishment of any of the powers herein
set forth and to do every other act and thing
incidental thereto or connected therewith.16
Hence, the medical services of the petitioner are to be
rendered to the public in general in any and all walks of life
including those who are poor and the needy without
discrimination. After all, any person, the rich as well as the
poor, may fall sick or be injured or wounded and become a
subject of charity.17
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because
it derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the
persons managing or operating the
institution.18 In Congregational Sunday School, etc. v. Board
of Review,19 the State Supreme Court of Illinois held, thus:
[A]n institution does not lose its charitable
character, and consequent exemption from taxation,
by reason of the fact that those recipients of its
benefits who are able to pay are required to do so,
where no profit is made by the institution and the
amounts so received are applied in furthering its
charitable purposes, and those benefits are refused to
none on account of inability to pay therefor. The
fundamental ground upon which all exemptions in
favor of charitable institutions are based is the benefit
conferred upon the public by them, and a consequent
relief, to some extent, of the burden upon the state to
care for and advance the interests of its citizens.20
As aptly stated by the State Supreme Court of South Dakota
in Lutheran Hospital Association of South Dakota v. Baker:21
[T]he fact that paying patients are taken, the
profits derived from attendance upon these patients
being exclusively devoted to the maintenance of the
charity, seems rather to enhance the usefulness of the
institution to the poor; for it is a matter of common
observation amongst those who have gone about at
all amongst the suffering classes, that the deserving
poor can with difficulty be persuaded to enter an
asylum of any kind confined to the reception of
objects of charity; and that their honest pride is much
less wounded by being placed in an institution in
which paying patients are also received. The fact of
receiving money from some of the patients does not,
we think, at all impair the character of the charity, so
long as the money thus received is devoted altogether
to the charitable object which the institution is
intended to further.22
The money received by the petitioner becomes a part of the
trust fund and must be devoted to public trust purposes and
cannot be diverted to private profit or benefit.23
Under P.D. No. 1823, the petitioner is entitled to receive
donations. The petitioner does not lose its character as a
charitable institution simply because the gift or donation is in
the form of subsidies granted by the government. As held by
the State Supreme Court of Utah in Yorgason v. County Board
of Equalization of Salt Lake County:24
106
 Second, the government subsidy payments are
provided to the project. Thus, those payments are like
a gift or donation of any other kind except they come
from the government. In both Intermountain Health
Careand the present case, the crux is the presence or
absence of material reciprocity. It is entirely
irrelevant to this analysis that the government, rather
than a private benefactor, chose to make up the
deficit resulting from the exchange between St.
Marks Tower and the tenants by making a
contribution to the landlord, just as it would have
been irrelevant in Intermountain Health Care if the
patients income supplements had come from private
individuals rather than the government.
Therefore, the fact that subsidization of part of the
cost of furnishing such housing is by the government
rather than private charitable contributions does not
dictate the denial of a charitable exemption if the
facts otherwise support such an exemption, as they do
here.25
In this case, the petitioner adduced substantial evidence that it
spent its income, including the subsidies from the government
for 1991 and 1992 for its patients and for the operation of the
hospital. It even incurred a net loss in 1991 and 1992 from its
operations.
Even as we find that the petitioner is a charitable institution,
we hold, anent the second issue, that those portions of its real
property that are leased to private entities are not exempt from
real property taxes as these are not actually, directly and
exclusively used for charitable purposes.
The settled rule in this jurisdiction is 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 effect of an
exemption is equivalent to an appropriation. Hence, a claim
for exemption from tax payments must be clearly shown and
based on language in the law too plain to be mistaken. 26 As
held in Salvation Army v. Hoehn:27
An intention on the part of the legislature to grant an
exemption from the taxing power of the state will
never be implied from language which will admit of
any other reasonable construction. Such an intention
must be expressed in clear and unmistakable terms,
or must appear by necessary implication from the
language used, for it is a well settled principle that,
when a special privilege or exemption is claimed
under a statute, charter or act of incorporation, it is to
be construed strictly against the property owner and
in favor of the public. This principle applies with
peculiar force to a claim of exemption from taxation .
28
Section 2 of Presidential Decree No. 1823, relied upon by the
petitioner, specifically provides that the petitioner shall enjoy
the tax exemptions and privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES.
Being a non-profit, non-stock corporation organized
primarily to help combat the high incidence of lung
and pulmonary diseases in the Philippines, all
donations, contributions, endowments and equipment
and supplies to be imported by authorized entities or
persons and by the Board of Trustees of the Lung
Center of the Philippines, Inc., for the actual use and
benefit of the Lung Center, shall be exempt from
income and gift taxes, the same further deductible in
full for the purpose of determining the maximum
deductible amount under Section 30, paragraph (h),
of the National Internal Revenue Code, as amended.
The Lung Center of the Philippines shall be exempt
from the payment of taxes, charges and fees imposed
by the Government or any political subdivision or
instrumentality thereof with respect to equipment
purchases made by, or for the Lung Center.29
It is plain as day that under the decree, the petitioner does not
enjoy any property tax exemption privileges for its real
properties as well as the building constructed thereon. If the
intentions were otherwise, the same should have been among
the enumeration of tax exempt privileges under Section 2:
It is a settled rule of statutory construction that the
express mention of one person, thing, or consequence
implies the exclusion of all others. The rule is
expressed in the familiar maxim, expressio unius est
exclusio alterius.
The rule of expressio unius est exclusio alterius is
formulated in a number of ways. One variation of the
rule is the principle that what is expressed puts an
end to that which is implied. Expressium facit cessare
tacitum. Thus, where a statute, by its terms, is
expressly limited to certain matters, it may not, by
interpretation or construction, be extended to other
matters.
...
The rule of expressio unius est exclusio alterius and
its variations are canons of restrictive interpretation.
They are based on the rules of logic and the natural
workings of the human mind. They are predicated
upon ones own voluntary act and not upon that of
others. They proceed from the premise that the
legislature would not have made specified
enumeration in a statute had the intention been not to
restrict its meaning and confine its terms to those
expressly mentioned.30
The exemption must not be so enlarged by construction since
the reasonable presumption is that the State has granted in
express terms all it intended to grant at all, and that unless the
privilege is limited to the very terms of the statute the favor
would be intended beyond what was meant.31
Section 28(3), Article VI of the 1987 Philippine Constitution
provides, thus:
107
 (3) Charitable institutions, churches and parsonages
or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used
for religious, charitable or educational purposes shall
be exempt from taxation.32
The tax exemption under this constitutional provision
covers property taxes only.33 As Chief Justice Hilario G.
Davide, Jr., then a member of the 1986 Constitutional
Commission, explained: ". . . what is exempted is not the
institution itself . . .; those exempted from real estate taxes are
lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational
purposes."34
Consequently, the constitutional provision is implemented by
Section 234(b) of Republic Act No. 7160 (otherwise known as
the Local Government Code of 1991) as follows:
SECTION 234. Exemptions from Real Property Tax.
The following are exempted from payment of the
real property tax:
...
(b) Charitable institutions, churches,
parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries
and all lands, buildings, and
improvements actually, directly,
and exclusivelyused for religious, charitable
or educational purposes.35
We note that under the 1935 Constitution, "... all lands,
buildings, and improvements used exclusively for
charitable purposes shall be exempt from
taxation."36 However, under the 1973 and the present
Constitutions, for "lands, buildings, and improvements" of the
charitable institution to be considered exempt, the same should
not only be "exclusively" used for charitable purposes; it is
required that such property be used "actually" and "directly"
for such purposes.37
In light of the foregoing substantial changes in the
Constitution, the petitioner cannot rely on our ruling
in Herrera v. Quezon City Board of Assessment
Appeals which was promulgated on September 30, 1961
before the 1973 and 1987 Constitutions took effect. 38 As this
Court held in Province of Abra v. Hernando:39
Under the 1935 Constitution: "Cemeteries,
churches, and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements
used exclusively for religious, charitable, or
educational purposes shall be exempt from taxation."
The present Constitution added "charitable
institutions, mosques, and non-profit cemeteries" and
required that for the exemption of "lands, buildings,
and improvements," they should not only be
"exclusively" but also "actually" and "directly" used
for religious or charitable purposes. The Constitution
is worded differently. The change should not be
ignored. It must be duly taken into consideration.
Reliance on past decisions would have sufficed were
the words "actually" as well as "directly" not added.
There must be proof therefore of
the actual and direct use of the lands, buildings, and
improvements for religious or charitable purposes to
be exempt from taxation.
Under the 1973 and 1987 Constitutions and Rep. Act No.
7160 in order to be entitled to the exemption, the petitioner is
burdened to prove, by clear and unequivocal proof, that (a) it
is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used
for charitable purposes. "Exclusive" is defined as possessed
and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and "exclusively" is defined, "in a
manner to exclude; as enjoying a privilege exclusively." 40 If
real property is used for one or more commercial purposes, it
is not exclusively used for the exempted purposes but is
subject to taxation.41 The words "dominant use" or "principal
use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitutions and the
law.42 Solely is synonymous with exclusively.43
What is meant by actual, direct and exclusive use of the
property for charitable purposes is the direct and immediate
and actual application of the property itself to the purposes for
which the charitable institution is organized. It is not the use
of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.44
The petitioner failed to discharge its burden to prove that the
entirety of its real property is actually, directly and exclusively
used for charitable purposes. While portions of the hospital are
used for the treatment of patients and the dispensation of
medical services to them, whether paying or non-paying, other
portions thereof are being leased to private individuals for
their clinics and a canteen. Further, a portion of the land is
being leased to a private individual for her business enterprise
under the business name "Elliptical Orchids and Garden
Center." Indeed, the petitioners evidence shows that it
collected P1,136,483.45 as rentals in 1991 and P1,679,999.28
for 1992 from the said lessees.
Accordingly, we hold that the portions of the land leased to
private entities as well as those parts of the hospital leased to
private individuals are not exempt from such taxes.45 On the
other hand, the portions of the land occupied by the hospital
and portions of the hospital used for its patients, whether
paying or non-paying, are exempt from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition
is PARTIALLY GRANTED. The respondent Quezon City
Assessor is hereby DIRECTED to determine, after due
hearing, the precise portions of the land and the area thereof
which are leased to private persons, and to compute the real
property taxes due thereon as provided for by law.
SO ORDERED.
108
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.
109
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
SUBJE
CT:
PROCE
SSING
OF
REFUN
D OR
TAX
CREDI
T OF
EXCES
S
CORPO
RATE
INCOM
E TAX
RESUL
TING
FROM
THE
FILING
OF THE
FINAL
ADJUS
TMENT
RETUR
N.
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
110
 mathematical accuracy of the figures of the docume
return. After which, the refund or tax credit nt
is granted, and, this procedure was adopted required
to facilitate immediate action on cases like of him
this. by the
Bureau
In this regard, therefore, there is no need to of
file petitions for review in the Court of Tax Internal
Appeals in order to preserve the right to Revenue
claim refund or tax credit the two year ;
period. As already stated, actions hereon by b).
the Bureau are immediate after only a where
cursory pre-audit of the income tax returns. the facts
Moreover, a taxpayer may recover from the subsequ
Bureau of Internal Revenue excess income ently
tax paid under the provisions of Section 86 gathered
of the Tax Code within 10 years from the by the
date of payment considering that it is an Bureau
obligation created by law (Article 1144 of of
the Civil Code). 9 (Emphasis supplied.) Internal
Revenue
Petitioner argues that the government is barred from asserting are
a position contrary to its declared circular if it would result to materiall
injustice to taxpayers. Citing ABS CBN Broadcasting y
Corporation vs. Court of Tax Appeals 10 petitioner claims that different
rulings or circulars promulgated by the Commissioner of from the
Internal Revenue have no retroactive effect if it would be facts on
prejudicial to taxpayers, In ABS-CBN case, the Court held which
that the government is precluded from adopting a position the
inconsistent with one previously taken where injustice would ruling is
result therefrom or where there has been a misrepresentation based;
to the taxpayer. c).
where
Petitioner contends that Sec. 246 of the National Internal the
Revenue Code explicitly provides for this rules as follows: taxpayer
acted in
Sec. 246 Non-retroactivity of rulings Any bad
revocation, modification or reversal of any faith.
of the rules and regulations promulgated in
accordance with the preceding section or Respondent Commissioner of Internal Revenue, through
any of the rulings or circulars promulgated Solicitor General, argues that the two-year prescriptive period
by the Commissioner shall not be given for filing tax cases in court concerning income tax payments
retroactive application if the revocation, of Corporations is reckoned from the date of filing the Final
modification or reversal will be prejudicial Adjusted Income Tax Return, which is generally done on
to the taxpayers except in the following April 15 following the close of the calendar year. As
cases: precedents, respondent Commissioner cited cases which
a). adhered to this principle, to wit ACCRA Investments Corp. vs.
where Court of Appeals, et al., 11 and Commissioner of Internal
the Revenue vs. TMX Sales, Inc., et al.. 12Respondent
taxpayer Commissioner also states that since the Final Adjusted Income
deliberat Tax Return of the petitioner for the taxable year 1985 was
ely supposed to be filed on April 15, 1986, the latter had only
misstate until April 15, 1988 to seek relief from the court. Further,
s or respondent Commissioner stresses that when the petitioner
omits filed the case before the CTA on November 18, 1988, the
material same was filed beyond the time fixed by law, and such failure
facts is fatal to petitioner's cause of action.
from his
return or After a careful study of the records and applicable
in any jurisprudence on the matter, we find that, contrary to the
111
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
112
 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
113
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.

DIGITAL TELECOMMUNICATIONS, INC. vs. CITY

GOVERNMENT OF BATANGAS- Real Property Tax

FACTS:
Petitioner was granted a 25-year franchise to install
telecommunications systems under a law which states that
The grantee shall be liable to pay the same taxes on its real
estate, buildings, and personal property exclusive of this
franchise x x x. As they were not being issued a Mayors
permit, Petitioner paid the Real Property Tax under protest
arguing that the phrase exclusive of this franchise means
that only the real properties not used in furtherance of its
franchise are subject to Real Property Tax while those real
properties which are used in its telecommunications business
are exempt from Real Property Tax.

ISSUE:
Are Petitioners real properties used in its telecommunications
business exempt from Real Property Tax?

HELD:
NO. Petitioners real properties, whether or not used in its
telecommunications business, are subject to Real Property
Tax. The phrase exclusive of this franchise qualifies the
term personal property. This means that Petitioners
legislative franchise, which is an intangible personal property,
shall not be subject to taxes. This is to put franchise grantees
in parity with non-franchisees as the latter obviously do not
have franchises which may potentially be subject to realty tax.
There is nothing in the first sentence of Section 5 which
expressly or even impliedly exempts Petitioner from Real
Property Tax. Petitioners reliance on the BLGFs opinion
stating that real properties owned by telecommunications
companies are exempt from Real Property Tax is without basis
as the BLGF has no authority to rule on claims for exemption
from Real Property Tax.

114