Administrative Iossuance by Bir

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G.R. No. 119761 August 29, 1996

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

HON. COURT OF APPEALS, HON. COURT OF TAX APPEALS and FORTUNE TOBACCO CORPORATION,respondents.

VITUG, J.:p

The Commissioner of Internal Revenue ("CIR") disputes the decision, dated 31 March 1995, of respondent Court of

Appeals1

affirming the 10th August 1994 decision and the 11th October 1994 resolution of the Court of Tax

Appeals2

("CTA") in C.T.A. Case No. 5015, entitled "Fortune Tobacco Corporation vs. Liwayway Vinzons-Chato in

her capacity as Commissioner of Internal Revenue."

The facts, by and large, are not in dispute.

Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the manufacture of different brands of cigarettes.

On various dates, the Philippine Patent Office issued to the corporation separate certificates of trademark

registration over "Champion," "Hope," and "More" cigarettes. In a letter, dated 06 January 1987, of then

Commissioner of Internal Revenue Bienvenido A. Tan, Jr., to Deputy Minister Ramon Diaz of the Presidential

Commission on Good Government, "the initial position of the Commission was to classify 'Champion,' 'Hope,' and

'More' as foreign brands since they were listed in the World Tobacco Directory as belonging to foreign companies.

However, Fortune Tobacco changed the names of 'Hope' to 'Hope Luxury'and 'More' to 'Premium More,' thereby

removing the said brands from the foreign brand category. Proof was also submitted to the Bureau (of Internal

Revenue ['BIR']) that 'Champion' was an original Fortune Tobacco Corporation register and therefore a local

brand."3Ad Valorem taxes were imposed on these brands,

4at the following rates:

BRANDAD VALOREM TAX RATE

E.O. 22 and E.O. 273 RA 6956

06-23-86 07-25-87 06-18-9007-01-86 01-01-88 07-05-90

Hope Luxury M. 100's Sec. 142, (c), (2) 40% 45% ; Hope L uxury M. King Sec. 142, (c), (2) 40% 45%

More Premium M. 100's Sec. 142, (c), (2) 40% 45%; More Premium International Sec. 142, (c), (2) 40% 45%

Champion Int'l. M. 100's Sec. 142, (c), (2) 40% 45%; Champion M. 100's Sec. 142, (c), (2) 40% 45%

Champion M. King Sec. 142, (c), last par. 15% 20%; Champion Lights Sec. 142, (c), last par. 15% 20%5

A bill, which later became Republic Act ("RA") No. 7654,6

was enacted, on 10 June 1993, by the

legislature and signed into law, on 14 June 1993, by the President of the Philippines. The new law

became effective on 03 July 1993. It amended Section 142(c)(1) of the National Internal Revenue Code

("NIRC") to read; as follows:

Sec. 142. Cigars and Cigarettes.

xxx xxx xxx

(c) Cigarettes packed by machine. There shall be levied, assessed and collected on cigarettes

packed by machine a tax at the rates prescribed below based on the c onstructivemanufacturer's wholesale price or the actual manufacturer's wholesale price, whichever is

higher:

(1) On locally manufactured cigarettes which are currently classified and taxed at fifty-five

percent (55%) or the exportation of which is not authorized by contract or otherwise, fifty-five

(55%) provided that the minimum tax shall not be less than Five Pesos (P5.00) per pack.

(2) On other locally manufactured cigarettes, forty-five percent (45%) provided that the

minimum tax shall not be less than Three Pesos (P3.00) per pack.

xxx xxx xxx

When the registered manufacturer's wholesale price or the actual manufacturer's who

price whichever is higher of existing brands of cigarettes, including the amounts intend

cover the taxes, of cigarettes packed in twenties does not exceed Four Pesos and eighty

centavos (P4.80) per pack, the rate shall be twenty percent (20%).7(Emphasis supplied

About a month afterthe enactment and two (2) days before the effectivity of RA 7654, Revenue

Memorandum Circular No. 37-93 ("RMC 37-93"), was issued by the BIR the full text of which expr

REPUBLIKA NG PILIPINASKAGAWARAN NG PANANALAPI

KAWANIHAN NG RENTAS INTERNAS

July 1, 1993

REVENUE MEMORANDUM CIRCULAR NO. 37-93

SUBJECT: Reclassification of Cigarettes Subject to Excise Tax

TO: All Internal Revenue Officers and Others Conc erned.

In view of the issues raised on whether "HOPE," "MORE" and "CHAMPION" cigarettes w

are locally manufactured are appropriately considered as locally m anufactured cigarett

bearing a foreign brand, this Office is compelled to review the previous rulings on the m

Section 142 (c)(1) National Internal Revenue Code, as amended by R.A. No. 6956, provi

On locally manufactured cigarettes bearing a foreign brand, fifty-fivpercent (55%) Provided, That this rate shall apply regardless of whe

not the right to use or title to the foreign brand was sold or transfer

its owner to the local manufacturer. Whenever it has to be determi

whether or not a cigarette bears a foreign brand, the listing of bran

manufactured in foreign countries appearing in the current World T

Directory shall govern.

Under the foregoing, the test for imposition of the 55% ad valorem tax on cigarettes is t

locally manufactured cigarettes bear a foreign brand regardless of whether or not the r

use or title to the foreign brand was sold or transferred by its owner to the local manuf

The brand must be originally owned by a foreign manufacturer or producer. If ownersh

cigarette brand is, however, not definitely determinable, ". . . the listing of brands

manufactured in foreign countries appearing in the current World Tobacco Directory sh

govern. . . ."

"HOPE" is listed in the World Tobacco Directory as being manufactured by (a) Japan TobJapan and (b) Fortune Tobacco, Philippines. "MORE" is listed in the said directory as bei

manufactured by: (a) Fills de Julia Reig, Andorra; (b) Rothmans, Australia; (c) RJR-Macdo

Canada; (d) Rettig-Strenberg, Finland; (e) Karellas, Greece; (f) R.J. Reynolds, Malaysia; (g

Rothmans, New Zealand; (h) Fortune Tobacco, P hilippines; (i) R.J. Reynolds, Puerto Rico

Reynolds, Spain; (k) Tabacalera, Spain; (l) R.J. Reynolds, Switzerland; and (m) R.J. Reyno

USA. "Champion" is registered in the said directory as being manufactured by (a)


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Commonwealth Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d) Fortune Tobacco,

Philippines; (e) Haggar, Sudan; and (f) Tabac Reunies, Switzerland.

Since there is no showing who among the above-listed manufacturers of the cigarettes bearing

the said brands are the real o wner/s thereof, then it follows that the same s hall be considered

foreign brand for purposes of determining the ad valorem tax pursuant to Section 142 of the

National Internal Revenue Code. As held in BIR Ruling No. 410-88, dated August 24, 1988, "in

cases where it cannot be established or there is dearth of evidence as to whether a brand is

foreign or not, resort to the World Tobacco Directory should be made."

In view of the foregoing, the aforesaid brands of cigarettes, viz: "HOPE," "MORE" and

"CHAMPION" being manufactured by Fortune Tobacc o Corporation are hereby considered

locally manufactured cigarettes bearing a foreign b rand subject to the 55% ad valorem tax oncigarettes.

Any ruling inconsistent herewith is revoked or modified accordingly.

(SGD) LIWAYWAY VINZONS-CHATO

Commissioner

On 02 July 1993, at about 17:50 hours, BIR Deputy Commissioner Victor A. Deoferio, Jr., sent via telefaxa

copy of RMC 37-93 to Fortune Tobacco but it was addressed to no one in particular. On 15 July 1993,

Fortune Tobacco received, by ordinary mail, a certified xerox copy of RMC 37-93.

In a letter, dated 19 July 1993, addressed to the appellate division of the BIR, Fortune Tobacco requested

for a review, reconsideration and recall of RMC 37-93. The request was denied on 29 July 1993. The

following day, or on 30 July 1993, the CIR assessed Fortune Tobacco for ad valorem tax deficiency

amounting to P9,598,334.00.

On 03 August 1993, Fortune Tobacco filed a petition for review with the CTA.

8

On 10 August 1994, the CTA upheld the position of Fortune Tobacco and adjudged:

WHEREFORE, Revenue Memorandum Circular No. 37-93 reclassifying the brands of

cigarettes, viz: "HOPE," "MORE" and "CHAMPION" being manufactured by Fortune Tobacco

Corporation as locally manufactured cigarettes bearing a foreign brand subject to the 55% ad

valorem tax on cigarettes is found to be defective, invalid and unenforceable, such that when

R.A. No. 7654 took effect on July 3, 1993, the brands in question were not CURRENTLY

CLASSIFIED AND TAXED at 55% pursuant to Section 1142(c)(1) of the Tax Code, as amended by

R.A. No. 7654 and w ere therefore still classified as other loc ally manufactured cigarettes and

taxed at 45% or 20% as the case may be.

Accordingly, the deficiency ad valorem tax assessment issued on petitioner Fortune Tobacco

Corporation in the amount of P9,598,334.00, exclusive of surcharge and interest, is hereby

canceled for lack of legal basis.

Respondent Commissioner of Internal Revenue is hereby enjoined from collecting thedeficiency tax assessment made and issued on petitioner in relation to the implementation of

RMC No. 37-93.

SO ORDERED.9

In its resolution, dated 11 October 1994, the CTA dismissed for lack of merit the motion for

reconsideration.

The CIR forthwith filed a petition for review with the Court of Appeals, questioning the CTA's 10th

1994 decision and 11th October 1994 resolution. On 31 March 1993, the appellate court's Specia

Thirteenth Division affirmed in all respects the assailed decision and resolution.

In the instant petition, the Solicitor General argues: T hat

I. RMC 37-93 IS A RULING OR OPINION OF THE COMMISSIONER OF INTERNAL REVENUE INTERPRE

THE PROVISIONS OF THE TAX CODE.

II. BEING AN INTERPRETATIVE RULING OR OPINION, THE PUBLICATION OF RMC 37-93, FILING OF C

THEREOF WITH THE UP LAW CENTER AND PRIOR HEARING ARE NOT NECESSARY TO ITS VALIDITY,

EFFECTIVITY AND ENFORCEABILITY.

III. PRIVATE RESPONDENT IS DEEMED TO HAVE BEEN NOTIFIED OR RMC 37-93 ON JULY 2, 1993.

IV. RMC 37-93 IS NOT DISCRIMINATORY SINCE IT APPLIES TO ALL LOCALLY MANUFACTURED CIGA

SIMILARLY SITUATED AS "HOPE," "MORE" AND "CHAMPION" CIGARETTES.

V. PETITIONER WAS NOT LEGALLY PROSCRIBED FROM RECLASSIFYING "HOPE," "MORE" AND

"CHAMPION" CIGARETTES BEFORE THE EFFECTIVITY OF R.A. NO. 7654.

VI. SINCE RMC 37-93 IS AN INTERPRETATIVE RULE, THE INQUIRY IS NOT INTO ITS VALIDITY, EFFECT

OR ENFORCEABILITY BUT INTO ITS CORRECTNESS OR PROPRIETY; RMC 37-93 IS CORRECT.10

In fine, petitioner opines that RMC 37- 93 is merely an interpretative ruling of the BIR which can th

become effective without any prior need for notice and hearing, nor publication, and that its issu

not discriminatory since it would apply u nder similar circumstances to all locally manufactured

cigarettes.

The Court must sustain both the appellate court and the tax court.

Petitioner stresses on the wide and ample authority of the BIR in the issuance of rulings for the ef

implementation of the provisions of the National Internal Revenue Code. Let it be made clear tha

authority of the Commissioner is not here doubted. Like any other government agency, however,

may not disregard legal requirements or applicable principles in the exercise of its quasi-legislativ

powers.

Let us first distinguish between two kinds of administrative issuances a legislative rule and

aninterpretative rule.

In Misamis Oriental Association of Coco Traders, Inc ., vs. Department of Finance Secretary,11

the

expressed:

. . . a legislative rule is in the nature of subordinate legislation, designed to implement a

legislation by providing the details thereof . In the same way that laws must have the be

public hearing, it is generally required that before a legislative rule is adopted there mu

hearing. In this connection, the Administrative Code of 1987 provides:

Public Participation. If not otherwise required by law, an agency shall, as far as pract

publish or circulate notices of proposed rules and afford interested parties the opportu

submit their views prior to the adoption of any rule.

(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates sh

have been published in a newspaper of g eneral circulation at least two (2) weeks befor

first hearing thereon.


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(3) In case of opposition, the rules on contested cases shall be observed.

In addition such rule must be published. On the other hand, interpretative rules are designed to

provide guidelines to the law which the administrative agency is in charge of enforcing.12

It should be understandable that when an administrative rule is merely interpretative in nature, its

applicability needs nothing further than its bare issuance f or it gives no real consequence more than

what the law itself has already p rescribed. When, upon the other hand, the administrative rule goes

beyond merely providing for the means that c an facilitate or render least cumbersome the

implementation of the law but substantially adds to or increases the burden of those governed, it

behooves the agency to accord at least to those directly affected a c hance to be heard, and thereafter to

be duly informed, before that new issuance is given the force and effect of law.

A reading of RMC 37-93, particularly considering the circumstances under which it has been issued,

convinces us that the circular cannot be viewed simply as a corrective measure (revoking in the process

the previous holdings of past Commissioners) or merely as construing Section 142(c)(1) of the NIRC, as

amended, but has, in fact and most importantly, been made in order to place "Hope Luxury," "Premium

More" and "Champion" within the classification of locally manufactured cigarettes bearing foreign

brands and to thereby have them covered by RA 7654. Specifically, the new law would have its

amendatory provisions applied to locally manufactured cigarettes which at the time of its effectivitywere

not so classified as bearing foreign brands. Prior to the issuance of the questioned circular, "Hope

Luxury," "Premium More," and "Champion" cigarettes were in the category of locally manufactured

cigarettes notbearing foreign brand subject to 45% ad valorem tax. Hence, without RMC 37-93, the

enactment of RA 7654, would have had no new tax rate consequence o n private respondent's products.

Evidently, in order to place "Hope Luxury," "Premium More," and "Champion" cigarettes within the

scope of the amendatory law and subject them to an increased tax rate, the now disputed RMC 37-93

had to be issued. In so doing, the BIR not simply intrepreted the law; verily, it legislated under its quasi-

legislativeauthority. The due observance of the requirements of notice, of hearing, and of publication

should not have been then ignored.

Indeed, the BIR itself, in its RMC 10-86, has observed and provided:

RMC NO. 10-86

Effectivity of Internal Revenue Rules and Regulations

It has been observed that one of the problem areas bearing on co mpliance with Internal

Revenue Tax rules and regulations is lack or insufficiency of due notice to the tax paying public.

Unless there is due notice, due compliance therewith may not be reasonably expected. And

most importantly, their strict enforcement could possibly suffer fr om legal infirmity in the light

of the constitutional provision on "due process of law" and the essence of the Civil Code

provision concerning effectivity of laws, whereby due notice is a basic requirement (Sec. 1, Art.

IV, Constitution; Art. 2, New Civil Code).

In order that there shall be a just enforcement of rules and reg ulations, in conformity with the

basic element of due process, the f ollowing procedures are hereby prescribed for the drafting,issuance and implementation of the said Revenue Tax Issuances:

(1) This Circular shall apply only to (a) Revenue Regulations; (b) Revenue

Audit Memorandum Orders; and (c) Revenue Memorandum Circulars and

Revenue Memorandum Orders bearing on internal revenue tax rules and

regulations.

(2) Except when the law otherwise expressly provides, the aforesaid

internal revenue tax issuances shall not begin to be operative until a

due notice thereof may be fairly presumed.

Due notice of the said issuances may be fairly presumed only after t

following procedures have been taken;

xxx xxx xxx

(5) Strict compliance with the foregoing procedures is

enjoined.13

Nothing on record could tell us that it was either impossible or impracticable for the BIR to obser

comply with the above requirements before giving effect to its questioned circular.

Not insignificantly, RMC 37-93 might have likewise infringed on uniformity of taxation.

Article VI, Section 28, paragraph 1, of the 1987 Constitution mandates taxation to be uniform and

equitable. Uniformity requires that all subjects or objects of taxation, similarly situated, are to be

alike or put on equal footing both in privileges and liabilities.14

Thus, all taxable articles or kinds o

property of the same class must be taxed at the same rate15

and the tax must operate with the s

force and effect in every place where the subject may be found.

Apparently, RMC 37-93 would only apply to "Hope Luxury," "Premium More" and "Champion" cig

and, unless petitioner would be willing to concede to the submission of private respondent that t

circular should, as in f act my esteemed colleague Mr. Justice Bellosillo so expresses in his separat

opinion, be considered adjudicatory in nature and thus violative of due process following theAng

Tibay16

doctrine, the measure suffers from lack of uniformity of taxation. In its decision, the CTA

keenly noted that other cigarettes bearing foreign brands have not been similarly included within

scope of the circular, such as 1. Locally manufactured by ALHAMBRA INDUSTRIES, INC.

(a) "PALM TREE" is listed as manufactured by office of Monopoly, Ko

(Exhibit "R")

2. Locally manufactured by LA SUERTE CIGAR and CIGARETTE COMPANY

(a) "GOLDEN KEY" is listed being manufactured by United Tobacco,

(Exhibit "S")

(b) "CANNON" is listed as being manufactured by Alpha Tobacco,

Bangladesh (Exhibit "T")

3. Locally manufactured by LA PERLA INDUSTRIES, INC.

(a) "WHITE HORSE" is listed as being manufactured by Rothman's, M

(Exhibit "U")

(b) "RIGHT" is listed as being manufactured by SVENSKA, Tobaks, Sw

(Exhibit "V-1")

4. Locally manufactured by MIGHTY CORPORATION

(a) "WHITE HORSE" is listed as being manufactured by Rothman's, M

(Exhibit "U-1")


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5. Locally manufactured by STERLING TOBACCO CORPORATION

(a) "UNION" is listed as being manufactured by Sumatra Tobacco, Indonesia

and Brown and Williamson, USA (Exhibit "U-3")

(b) "WINNER" is listed as being manufactured by Alpha Tobacco,

Bangladesh; Nangyang, Hongkong; Joo Lan, M alaysia; Pakistan Tobacco Co.,

Pakistan; Premier Tobacco, Pakistan and Haggar, Sudan (Exhibit "U-4").17

The court quoted at length from the transcript of the hearing conducted on 10 August 1993 by the

Committee on Ways and Means of the House of Representatives; viz:

THE CHAIRMAN. So you have specific information on Fortune Tobacco alone. You don't have

specific information on other tobacco manufacturers. Now, there are other brands which aresimilarly situated. They are locally manufactured bearing foreign brands. And may I enumerate

to you all these brands, which are also listed in the World Tobacco Directory . . . Why were

these brand not reclassified at 55 if your want to give a level playing filed to foreign

manufacturers?

MS. CHATO. Mr. Chairman, in fact, we have already prepared a Revenue Memorandum Circular

that was supposed to come after RMC No . 37-93 which have really named specifically the list of

locally manufactured cigarettes bearing a foreign brand for excise tax purposes and includes all

these brands that you mentioned at 55 percent except that at that time, when we had to come

up with this, we were forced to study the brands of Hope, More and Champion because we

were given documents that would indicate the that these brands were actually being claimed

or patented in other countries because we went by Revenue Memorandum Circular 1488 and

we wanted to give some rationality to how it came about but we couldn't find the rationale

there. And we really found based on our own interpretation that the only test that is given by

that existing law would be registration in the World Tobacco Directory. So we came out with

this proposed revenue memorandum circular which we f orwarded to the Secretary of Finance

except that at that point in time, we went by the Republic Act 7654 in Section 1 which

amended Section 142, C-1, it said, that on locally manufactured cigarettes which are c urrently

classified and taxed at 55 percent. So we were saying that when this law took effect in July 3

and if we are going to come up with this revenue circular thereafter, then I think our action

would really be subject to question but we feel that . . . Memorandum Circular Number 37-93

would really cover even similarly situated brands. And in fact, it was really because of the

study, the short time that we were given to study the matter that we could not include all the

rest of the other brands that would have been really classified as foreign brand if we went by

the law itself. I am sure that by the reading of the law, you would without that ruling by

Commissioner Tan they would really have been included in the definition or in the classification

of foregoing brands. These brands that you referred to or just read to us and in fact just for

your information, we really came out with a proposed revenue memorandum circular for those

brands. (Emphasis supplied)

(Exhibit "FF-2-C," pp. V-5 TO V-6, VI-1 to VI-3).

xxx xxx xxx

MS. CHATO. . . . But I do agree with you now that it cannot and in fact that is why I felt that we

. . . I wanted to come up with a more extensive coverage and precisely why I asked that revenue

memorandum circular that would cover all those similarly situated would be prepared but

because of the lack of time and I came out with a study of RA 7654, it would not have been

possible to really come up with the reclassification or the proper classification of all bran

are listed there. . .(emphasis supplied) (Exhibit "FF-2d," page IX-1)

xxx xxx xxx

HON. DIAZ. But did you not consider that there are similarly situated?

MS. CHATO. That is precisely why, Sir, after we have come up with this Revenue Memo

Circular No. 37-93, the other brands came about the would have also clarified RMC 37-9

was saying really because of the fact that I was just recently appointed and the lack of t

period that was allotted to us to come up with the right ac tions on the matter, we were

caught by the July 3 deadline. But in fact, We have already prepared a revenue memora

circular clarifying with the other. . . does not yet, would have been a list of locally

manufactured cigarettes bearing a foreign brand for excise tax purposes which would in

all the other brands that were mentioned by the Honorable Chairman . (Emphasis suppli

(Exhibit "FF-2-d," par. IX-4).18

All taken, the Court is convinced that the hastily promulgated RMC 37-93 has fallen short of a valid and effe

administrative issuance.

WHEREFORE, the decision of the Court of Appeals, sustaining that of the Court of Tax Appeals, is AFFIRMED

costs.

SO ORDERED.


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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 Resolution1of the Court of Appeals dated September 22, 1993 affirming the

Decision2

and a Resolution3

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 fromproperty 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 a

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

five centavo difference was noted.

On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitio

a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-

reglementary period provided for by law. The petitioner's claim for refund in 1986 amounting to P234,077.

likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in t

succeeding year.

On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the same was dencourse for lack of merit.

6

Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of A

However on September 22, 1993, the Court of Appeals affirmed in toto the CTA's resolution dated July 20, 1

Hence this petition now before us.

The issues raised by the petitioner are:

I. Whether taxpayer PBCom which relied in good faith on the formal assurances of BIR in RMC

85 and did not immediately file with the CTA a petition for review asking for the refund/tax credit

1985-86 excess quarterly income tax payments can be prejudiced by the subsequent BIR rejec

applied retroactivity, of its assurances in RMC No. 7-85 that the prescriptive period fo r the refund

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 PBCo

claim for the refund of P234,077.69 income tax overpaid in 1986 on the mere speculation, withou

that there were taxes due in 1987 and that PBCom availed of tax-crediting that y ear. 8

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax r

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 ov


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income taxes are not covered by the two -year prescriptive period under the tax Code and that taxpayers may claim

refund or tax credits for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of

the Civil Code. The pertinent portions of the circular reads:

REVENUE MEMORANDUM CIRCULAR NO. 7-85

SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF

EXCESS CORPORATE INCOME TAX RESULTING FROM

THE FILING OF THE FINAL ADJUSTMENT RETURN.

TO: All Internal Revenue Officers and Others Concerned.

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

xxx xxx xxx

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

xxx xxx xxx

It has been observed, however, that because of the excess tax payments, corporations file claims for

recovery of overpaid income tax with the Court of Tax Appeals within the two-year period from the date of

payment, in accordance with sections 292 and 295 of the National Internal Revenue Code. It is obvious that

the filing of the case in court is to preserve the judicial right of the corporation to claim the refund or tax

credit.

It should he noted, however, that this is not a case of erroneously or illegally paid tax under the provisions

of Sections 292 and 295 of the Tax Code.

In the above provision of the Regulations the c orporation 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 haspromulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in

processing said returns. Under these procedures, the returns are merely pre-audited which consist mainly

of checking mathematical accuracy of the figures of the return. After which, the refund or tax credit is

granted, and, this procedure was adopted to fac ilitate immediate action on cases like this.

In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to

preserve the right to claim refund or tax credit the two year period. As already stated, actions hereon by

the Bureau are immediate after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer

may recover from the Bureau of Internal Revenue excess income tax paid under the provisions of Section

86 of the Tax Code within 10 years from the date of payment considering that it is an obligation created by

law (Article 1144 of the Civil Code).9

(Emphasis supplied.)

Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it

would result to injustice to taxpayers. Citing ABS CBN Broadcasting Corporation vs. Court of Tax

Appeals10

petitioner claims that rulings or circ ulars promulgated by the Commissioner of Internal Revenue have no

retroactive effect if it would be prejudicial to taxpayers, In ABS-CBN c ase, the Court held that the government is

precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom

or where there has been a misrepresentation to the taxpayer.

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

Sec. 246 Non-retroactivity of rulingsAny revocation, modification or reversal of any of the

rules and regulations promulgated in accordance with the preceding section or any of the

rulings or circulars promulgated by the Commissioner shall not be given retroactive app

if the revocation, modification or reversal will be prejudicial to the taxpayers except in t

following cases:

a). where the taxpayer deliberately misstates or omits material facts f rom his return or

document required of him by the Bureau of Internal Revenue;

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

different from the facts on which the ruling is based;

c). where the taxpayer acted in bad faith.

Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two- year prescri

period for filing tax cases in court concerning income tax payments of Corporations is reckoned from the dafiling the Final Adjusted Income Tax Return, which is generally done on April 15 following the close of the ca

year. As precedents, respondent Commissioner cited cases which adhered to this principle, to wit ACCRA

Investments Corp. vs. Court of Appeals, et al.,11

and Commissioner of Internal Revenuevs. TMX Sales, Inc., e

al..12

Respondent Commissioner also states that since the Final Adjusted Income Tax Return of the petition

the taxable year 1985 was supposed to be filed on April 15, 1986, the latter had only until April 15, 1988 to

relief from the court. Further, respondent Commissioner stresses that w hen the petitioner filed the case be

the CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such failure is fatal to

petitioner's cause of action.

After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to th

petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards

two-year prescriptive period set by law.

Basic is the principle that "taxes ar e the lifeblood of the nation." T he primary purpose is to generate funds f

State to finance the needs of the citizenry and to advance the common weal.13

Due process of law under t

Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upotaxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmos

importance that the modes adopted to enforce the collection of taxes levied should be summary and interf

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

or hampered by incidental matters.

Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for th

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 co

the recovery of any national internal revenue tax hereafter allege d to have been erroneously or illegally assesse

collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have bee

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 be

under protest or duress.

In any case, no such suit or proceedings shall begun after the expiration of two years fro

date of payment of the tax or penalty regardless of any supervening cause that may aris

payment;Provided however, That the Commissioner may, even without a wr itten claim

therefor, refund or credit any tax, where on the face of the return upon which payment

made, such payment appears clearly to have been erroneously paid. (Emphasis supplie


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TAX TREATIES

G.R. No. 127105 June 25, 1999


vs.

S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.

GONZAGA-REYES, J.:

This is a petition for review on certiorariunder Rule 45 of the Rules of Court seeking to set aside the decision of the

Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the decision of the Court of Tax

Appeals in CTA Case No. 5136.

The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:

[Respondent], a domestic corporation organized and operating under the P hilippine laws, entered into a

license agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign

corporation based in the U.S.A. pursuant to which the [respondent] was granted the r ight to use the

trademark, patents and technology owned by the latter including the rig ht to manufacture, package and

distribute the products covered by the Agreement and secure assistance in management, marketing and

production from SC Johnson and Son, U. S. A.

The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents,

Trade Marks and Technology Transfer under Certificate of Registration No. 8064 (Exh. "A").

For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and Son, USA

royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty

payments which [respondent] paid for the period covering July 1992 to May 1993 in the total amount of

P1,603,443.00 (Exhs. "B" to "L" and submarkings).

On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the BIR a claim for

refund of overpaid withholding tax on royalties arguing that, "the antecedent facts attending [respondent's]

case fall squarely within the same circ umstances under which said MacGeorge and Gillete rulings were issued.

Since the agreement was approved by the Technology T ransfer Board, the preferential tax rate of 10% should

apply to the [respondent]. We therefore submit that royalties paid by the [respondent] to SC Johnson and

Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax

Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]"

(Petition for Review [filed with the Court of Appeals], par. 12). [Respondent's] claim for there fund of

P963,266.00 was computed as follows:

Gross 25% 10%

Month/ Royalty Withholding Withholding

Year Fee Tax Paid Tax Balance

July 1992 559,878 139,970 55,988 83,982

August 567,935 141,984 56,794 85,190

September 595,956 148,989 59,596 89,393

October 634,405 158,601 63,441 95,161

November 620,885 155,221 62,089 93,133

December 383,276 95,819 36,328 57,491

Jan 1993 602,451 170,630 68,245 102,368

February 565,845 141,461 56,585 84,877

March 547,253 136,813 54,725 82,088

April 660,810 165,203 66,081 99,122

May 603,076 150,769 60,308 90,461

P6,421,770 P1,605,443 P642,177 P963,2661

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

The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc. (S.C. Joh

then filed a petition for review before the Court of Tax Appeals (CTA) where the case was docketed as CTA

No. 5136, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 199

On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the

Commissioner of Internal Revenue to issue a tax c redit certificate in the amount of P963,266.00 representi

overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993.2

The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which rend

the decision subject of this appeal on November 7, 1996 finding no merit in the petition and affirming in to

CTA ruling.3

This petition for review was filed by the Commissioner of Internal Revenue raising the following issue:

THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED TO THE

FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP -US TAX TREATY IN RTO THE RP-WEST GERMANY TAX TREATY.

Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the "most fa

nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a r eside

the United States from sources within the Philippines only if the circumstances of the resident of the Unite

are similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching cre

provision as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under t

US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treat

assuming that the phrase "paid under similar c ircumstances" refers to the payment of royalties, and not tax

held by the Court of Appeals, still, the "most favored nation" clause c annot be invoked for the reason that w

tax treaty contemplates circumstances attendant to the payment of a tax, or royalty remittances for that m

these must necessarily refer to circumstances that are tax-r elated. Finally, petitioner argues that since S.C.

Johnson's invocation of the "most favored nation" clause is in the nature of a claim for exemption from the

application of the regular tax rate of 25% for royalties, the provisions of the treaty must be construed strict

against it.

In its Comment, private respondent S.C. Johnson avers that the i nstant petition should be denied (1) becau

contains a defective certification against forum shopping as required under SC Circular No. 28-91, that is, th

certification was not executed by the petitioner herself but by her counsel; and (2) that the "most favored

clause under the RP-US Tax T reaty refers to royalties paid under similar circumstances as those royalties su

tax in other treaties; that the phrase "paid under similar circumstances" does not refer to payment of the t

to the subject matter of the tax, that is, royalties, because the "most favored nation" c lause is intended to a

the taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the c ou


9/22


10/22

1) Tax shall be determined in the case of a resident of the Federal Republic of Germany as follows:

xxx xxx xxx

b) Subject to the provisions of German tax law regarding credit for foreign tax, there shall be

allowed as a credit against German income and corporation tax payable in respect of the

following items of income arising in the Republic of the Philippines, the tax paid under the laws

of the Philippines in accordance with this Agreement on:

xxx xxx xxx

dd) royalties, as defined in paragraph 3 of Article 12;

xxx xxx xxx

c) For the purpose of the credit referred in subparagraph; b) the Philippine tax shall be deemed

to be

xxx xxx xxx

cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according to

paragraph 2 of Article 12, 20 percent of the gross amount of such royalties.

xxx xxx xxx

According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under circumstances

similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20 percent matching credit in

the former convention and private respondent cannot invoke the concessional tax rate on the strength of the most

favored nation clause in the RP-US Tax Treaty. Petitioner's position is explained thus:

Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on income from

sources within the Philippines is allowed as a credit against German income and corporation tax on the same

income. In the case of royalties for which the tax is reduced to 10 or 15 percent according to paragraph 2 of

Article 12 of the RP-West Germany Tax Treaty, the credit shall be 20% of the gross amount of such royalty. To

illustrate, the royalty income of a German resident from sources within the Philippines arising from the use of,

or the right to use, any patent, trade mark, design or model, plan, secret fo rmula or process, is taxed at 10%

of the gross amount of said royalty under certain conditions. The rate of 10% is imposed if credit against the

German income and corporation tax on said royalty is allowed in favor of the German resident. That means

the rate of 10% is granted to the German taxpayer if he is similarly granted a credit against the income and

corporation tax of West Germany. The clear intent of the "matching credit" is to soften the impact of double

taxation by different jurisdictions.

The RP-US Tax Treaty contains no similar "matching credit" as that provided under the RP-West Germany Tax

Treaty. Hence, the tax on royalties under the RP -US Tax Treaty is not paid under similar circumstances as

those obtaining in the RP-West Germany Tax Treaty. Therefore, the "most favored nation" clause in the RP-

West Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP -US Tax Treaty.5

The petition is meritorious.

We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of Appeals, that

the phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP- US Tax Treaty should be interpreted

to refer to payment of royalty, and not to the payment of the tax, f or the reason that the phrase "paid under

similar circumstances" is followed by the phrase "to a resident of a third state". The respondent court held that

"Words are to be understood in the context in which they are used", and since what is paid to a resident of a third

state is not a tax but a royalty "logic instructs" that the treaty provision in question should refer to royalties

same kind paid under similar circumstances.

The above construction is based principally on syntax or sentence structure but fails to take into account th

purpose animating the treaty provisions in point. To begin with, we are not aware of any law or rule pertin

the payment of royalties, and none has been brought to our attention, which provides for the payment of r

under dissimilar circumstances. The tax rates on royalties and the circumstances of payment thereof are th

for all the recipients of such royalties and there is no disparity based on nationality in the circumstances of

payment.6

On the other hand, a c ursory reading of the various tax treaties will show that there is no simila

the provisions on relief from or avoidance of double taxation7

as this is a matter of negotiation between th

contracting parties.8

As will be shown later, this dissimilarity is true particularly in the treaties between the

Philippines and the United States and between the Philippines and West Germany.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for

avoidance of double taxation.9The purpose of these international agreements is to reconcile the national f

legislations of the contracting parties in or der to help the taxpayer avoid simultaneous taxation in two diffe

jurisdictions.10

More precisely, the tax conventions are drafted with a view towards the elimination of

international juridical double taxation, which is defined as the imposition of comparable taxes in two or mo

states on the same taxpayer in respect of the same subject matter and for identical periods.11

The apparen

rationale for doing away with double taxation is of encourage the free flow of goods and services and the

movement of capital, technology and persons between countries, conditions deemed vital in creating robu

dynamic economies.12

Foreign investments will only thrive in a fairly predictable and reasonable internatio

investment climate and the protection against double taxation is crucial in creating such a c limate.13

Double taxation usually takes place when a person is resident of a contracting state and derives income fro

owns capital in, the other contracting state and both states impose tax on that income or capital. In order t

eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to t

the state of source or situs and of the state of residence with regard to certain classes of income or capital.

some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other itemincome or capital, both states are given the right to tax, although the amount of tax that may be imposed b

state of source is limited.14

The second method for the elimination of double taxation applies whenever the state of source is given a f

limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon t

of residence to allow relief in order to avoid double taxation. There are two methods of relief the exemp

method and the credit method. In the exemption method, the income or capital which is taxable in the stat

source or situs is exempted in the state of residence, although in some instances it may be taken into ac cou

determining the rate of tax applicable to the taxpayer's remaining income or capital. On the other hand, in

credit method, although the income or capital which is taxed in the state of source is still taxable in the stat

residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference bet

the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the

method focuses upon the tax.15

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the P hilippines will give

part of the tax in the expectation that the tax given up for this particular investment is not taxed by the oth

country.16

Thus the petitioner correctly opined that the phrase "r oyalties paid under similar circumstances

most favored nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are tax-r

In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use pr

or rights, i.e. trademarks, patents and technology, located within the Philippines.17

The United States is the

of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty,


11/22

state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that

may be collected by the state of source.18

Furthermore, the method employed to give relief from d ouble taxation

is the allowance of a tax credit to citizens or residents of the United States (in an appropriate amount based upon

the taxes paid or accrued to the Philippines) against the United States tax, but suc h amount shall not exceed the

limitations provided by United States law for the taxable year.19

Under Article 13 thereof, the P hilippines may

impose one of three rates 25 percent of the gross amount of the royalties; 15 percent when the royalties are

paid by a corporation registered with the Philippine Board of Investments and engaged in pr eferred areas of

activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar

circumstances to a resident of a third state.

Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the concessional

tax rate of 10 percent provided f or in the RP-Germany Tax Treaty should apply only if the taxes imposed upon

royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. Thiswould mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of

the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as

those allowed to their German counterparts under the RP -Germany Tax Treaty.

The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of

the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and corporation tax of 20%

of the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US

Tax Treaty, which is the co unterpart provision with respect to relief for double taxation, does not provide for

similar crediting of 20% of the gross amount of royalties paid. Said Article 23 reads:

Article 23

Relief from double taxation

Double taxation of income shall be avoided in the following manner:

1) In accordance with the provisions and subject to the limitations of the law of the UnitedStates (as it may be amended from time to time without changing the general principle

thereof), the United States shall allow to a citizen or resident of the United States as a credit

against the United States tax the appropriate amount of taxes paid or accrued to the

Philippines and, in the case of a United States corporation owning at least 10 percent of the

voting stock of a Philippine corporation from which it receives dividends in any taxable year,

shall allow credit for the appropriate amount of taxes paid or acc rued to the Philippines by the

Philippine corporation paying such dividends with respect to the profits out of which such

dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or

accrued to the Philippines, but the cr edit shall not exceed the limitations (for the purpose of

limiting the credit to the United States tax on income from sources within the Philippines or on

income from sources outside the United States) provided by United States law for the taxable

year. . . .

The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2) (b) (iii) of the RP-

US Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the light of the fundamental

purpose of such treaty which is to grant an incentive to the fo reign investor by lowering the tax and at the same

time crediting against the domestic tax abroad a figure higher than what was collected in the Philippines.

In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be

achieved and that the general purpose is a more important aid to the meaning of a law than any rule which

grammar may lay down.20

It is the duty of the courts to look to the object to be accomplished, the evils to be

remedied, or the purpose to be subserved, and should give the law a reasonable or liberal construction which will

best effectuate its purpose.21

The Vienna Convention on the Law o f Treaties states that a treaty shall be

interpreted in good faith in accordance w ith the ordinary meaning to be given to the terms of the treaty in

context and in the light of its object and

purpose.22

As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign i nvestors to inve

Philippines a crucial economic goal for developing countries.23

The goal of double taxation conventions w

be thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate

burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of

in this case, by the P hilippines, there should be a concomitant commitment on the part of the state of resid

grant some form of tax relief, whether this be in the form of a tax credit or exemption.24

Otherwise, the ta

could have been collected by the Philippine go vernment will simply be collected by another state, defeatin

object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the staresidence does not grant some form of tax relief to the investor, no benefit would redound to the Philippin

increased investment resulting from a favorable tax regime, should it impose a lower tax rate on the royalt

earnings of the investor, and it w ould be better to impose the regular r ate rather than lose much-needed re

to another country.

At the same time, the intention behind the adoption of the provision on "relief from double taxation" in th

tax treaties in question should be considered in light of the purpose behind the most f avored nation clause

The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorab

that which has been or may be granted to the "most favored" among other countries.25

The most favored

clause is intended to establish the principle of equality of international treatment by providing that the citiz

subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most f

nation.26

The essence of the principle is to allow the taxpayer in one state to avail of more liberal provision

granted in another tax treaty to which the country of residence of such taxpayer is also a party pro vided th

subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the

taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP -West Germany Taxabove-quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The entitlement

10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from th

behind the most grant equality of international treatment since the tax burden laid upon the income of the

investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a co

for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatm

We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of

percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty

private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for th

reason that there is no payment of taxes on royalties under similar circumstances.

It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogat

sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemptio

burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim

clearest grant of organic or statute law.28

Private respondent is claiming for a refund of the alleged overpa

of tax on royalties; however, there is nothing on record to support a claim that the tax on royalties under th

US Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax T

WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the

Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET ASIDE.

SO ORDERED.


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PROSPECTIVITY

G.R. No. 154068 August 3, 2007


vs.

ROSEMARIE ACOSTA, as represented by Virgilio A. Abogado, respondent.

D E C I S I O N

QUISUMBING, J.:

Assailed in this petition for review are the Decision1and Resolution

2dated February 13, 2002 and May 29, 2002,

respectively, of the Court of Appeals in CA-G.R. SP No. 55572 which had reversed the Resolution3dated August 4,

1999 of the Court of Tax Appeals in C.T.A. Case No. 5828 and or dered the latter to resolve respondents petitionfor review.

The facts are as follows:

Respondent is an employee of Intel Manufacturing Phils., Inc. (Intel). For the period January 1, 1996 to December

31, 1996, respondent was assigned in a foreign country. During that period, Intel withheld the taxes due on

respondents compensation income and remitted to the Bureau of Internal Revenue (BIR) the amount

ofP308,084.56.

On March 21, 1997, respondent and her husband filed with the BIR their Joint Individual Income Tax Return for the

year 1996. Later, on June 17, 1997, respondent, through her representative, filed an amended return and a Non-

Resident Citizen Income Tax Return, and paid the BIR P17,693.37 plus interests in the amount of P14,455.76. On

October 8, 1997, she filed another amended return indicating an overpayment of P358,274.63.

Claiming that the income taxes withheld and paid by Intel and respondent resulted in an overpayment

ofP340,918.92,4respondent filed on April 15, 1999 a petition for review docketed as C.T.A. Case No. 5828 with the

Court of Tax Appeals (CT A). The Commissioner of Internal Revenue (CIR) moved to dismiss the petition for failure

of respondent to file the mandatory written claim for refund before the CIR.

In its Resolution dated August 4, 1999, the CTA dismissed respondents petition. For one, the CTA ruled that

respondent failed to file a written claim for refund with the CIR, a condition precedent to the filing of a petition for

review before the CTA.5Second, the CTA noted that respondents omission, inadvertently or otherwise, to allege i n

her petition the date of filing the final adjustment return, deprived the court of its jurisdiction over the subject

matter of the case.6The decretal portion of the CTAs resolution states:

WHEREFORE, in view of all the foregoing, Respondents Motion to Dismiss isGRANTED. Accordingly[,]

the Petition for Review is hereby DISMISSED.

SO ORDERED.7

Upon review, the Court of Appeals reversed the CTA and directed the latter to resolve respondents petition for

review. Applying Section 204(c)8of the 1997 National Internal Revenue Code (NIRC), the Court of Appeals ruled

that respondents filing of an amended return indicating an overpayment was sufficient compliance with therequirement of a written claim for refund.9The decretal portion of the Court o f Appeals decision reads:

WHEREFORE, finding the petition to be meritorious, this Court GRANTS it due course and REVERSES the

appealed Resolutions and DIRECTS the Court of Tax Appeal[s] to resolve the petition for review on the

merits.

SO ORDERED.10

Petitioner sought reconsideration, but it was denied. Hence, the i nstant petition raising the following quest

law:

I.

WHETHER OR NOT THE 1997 TAX REFORM ACT CAN BE APPLIED RETROACTIVELY.

II.

WHETHER OR NOT THE CTA HAS JURISDICTION TO TAKE *COGNIZANCE+ OF RESPONDENTS PETITI

REVIEW.11

While the main concern in this controversy is the CTAs jurisdiction, we must first resolve two issues. First,

amended return filed by respondent indicating an overpayment constitute the written claim for refund req

law, thereby vesting the CTA with jurisdiction over this case? Second, can the 1997 NIRC be applied retroac

Petitioner avers that an amended return showing an overpayment does not c onstitute the written claim fo

required under Section 23012

of the 1993 NIRC13

(old Tax Code). He claims that an actual written claim for r

necessary before a suit for its recovery may proceed in any court.

On the other hand, respondent contends that the filing of an amended return indicating an o verpayment

ofP358,274.63 constitutes a written claim for refund pursuant to the clear proviso stated in the last senten

Section 204(c) of the 1997 NIRC (new Tax Code), to wit:

x x x x

Provided, however, That a return filed showing an overpayment shall be considered as a written

for credit or refund.

x x x x

Along the same vein, respondent invokes the liberal application of technicalities in tax refund cases, confor

with our ruling in BPI-Family Savings Bank, Inc. v. Court of Appeals.14We are, however, unable to agree wit

respondents submission on this score.

The applicable law on refund of taxes pertaining to the 1996 compensation income is Section 230 of the old

Code, which was the law then in effect, and not Section 204(c) of the new Tax Code, which was effective st

only on January 1, 1998.

Noteworthy, the requirements under Section 230 for refund claims are as follows:

1. A written claim for refund or tax credit must be filed by t he taxpayer with the Commissioner;

2. The claim for refund must be a categorical demand for reimbursement;

3. The claim for refund or tax credit must be filed, or the suit or proc eeding therefor must be

commenced in court within two (2) years from date of payment of the tax or penalty regardless

supervening cause.15

(Emphasis ours.)

In our view, the law is clear. A claimant must first file a written claim for refund, categorically demanding reof overpaid taxes with the CIR, before resorting to an action in court. This obviously is intended, first, to aff

CIR an opportunity to correct the action of subordinate officers; and second, to notify the government that

taxes have been questioned, and the notice should then be borne in mind in estimating the revenue availab

expenditure.16

Thus, on the first issue, we rule against respondents contention. Entrenched in our jurisprudence is the pri

that tax refunds are in the nature of tax exemptions which are construed strictissimi juris against the taxpa
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liberally in favor of the g overnment. As tax refunds involve a return of revenue from the government, the claimant

must show indubitably the specific provision of law from which her right arises; it cannot be allowed to exist upon

a mere vague implication or inference17

nor can it be extended beyond the ordinary and reasonable intendment of

the language actually usedby the legislature in granting the refund .18

To repeat, strict compliance with the

conditions imposed for the return of revenue collected is a doctrine consistently applied in this jurisdiction.19

Under the circumstances of this c ase, we cannot agree that the amended return filed by respondent constitutes

the written claim for refund required by the old Tax Code, the law prevailing at that time. Neither can we apply the

liberal interpretation of the law based on our pronouncement in the case ofBPI-Family Savings Bank, Inc. v. Court

of Appeals, as the taxpayer therein filed a w ritten claim for refund aside from presenting other evidence to prove

its claim, unlike this case before us.

On the second issue, petitioner argues that the 1997 NIRC cannot be applied retroactively as the instant c ase

involved refund of taxes withheld on a 1996 income. Respondent, however, points out that when the petition was

filed with the CTA on April 15, 1999, the 1997 NIRC was already in effect, hence, Section 204(c) should apply,

despite the fact that the refund being sought pertains to a 1996 inc ome tax. Note that the issue on the

retroactivity of Section 204(c) of the 1997 NIRC arose because the last paragraph of Section 204(c) was not found

in Section 230 of the old Code. After a thorough consideration of this matter, we find that we cannot give

retroactive application to Section 204(c) abovecited. We have to stress that tax laws are prospective in operation,

unless the language of the statute clearly provides otherwise.20

Moreover, it should be emphasized that a party seeking an administrative remedy must not merely initiate the

prescribed administrative procedure to obtain relief, but also pursue it to its appropriate conclusion before seeking

judicial intervention in order to give the administrative agency an opportunity to decide the matter itself correctly

and prevent unnecessary and premature resort to court action.21

This the respondent did not follow through.

Additionally, it could not escape notice that at the time respondent filed her amended return, the 1997 NIRC was

not yet in effect. Hence, respondent had no reason at that time to think that the filing of an amended return would

constitute the written claim for refund required by applicable law.

Furthermore, as the CTA stressed, even the date of filing of the Final Adjustment Return was omitted,

inadvertently or otherwise, by respondent in her petition for review. This omission was fatal to respondents claim,

for it deprived the CTA of its jurisdiction over the subject matter of the case.

Finally, we cannot agree with the Co urt of Appeals finding that the nature of the instant case calls for the

application of remedial laws. Revenue statutes are substantive laws and in no sense must their application be

equated with that of remedial laws. As well said in a prior case, revenue laws are not intended to be liberally

construed.22

Considering that taxes are the lifeblood of the government and in Holmess memorable metaphor,

the price we pay for civilization, tax laws must be faithfully and strictly implemented.

WHEREFORE, the petition is GRANTED. Both the assailed Decision and Resolution dated February 1 3, 2002 and

May 29, 2002, respectively, of the Court of Appeals in CA-G.R. SP No. 55572 are REVERSED and SET ASIDE. The

Resolution dated August 4, 1999 of the Court of Tax Appeals in C.T.A. Case No. 5828 is herebyREINSTATED.

No pronouncement as to costs.

SO ORDERED.
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NO ESTOPPEL AGAINST THE GOVERNMENT

G.R. No. 185568 March 21, 2012

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.

PETRON CORPORATION, Respondent.

D E C I S I O N

SERENO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure filed by the

Commissioner of Internal Revenue (CIR) assailing the Decision1dated 03 December 2008 of the Court of Tax

Appeals En Banc (CTA En Banc) in CTA EB No. 311. The assailed Decision reversed and set aside the Decision2dated04 May 2007 of the Court of Tax Appeals Second Division (CTA Second Division) in CTA Case No. 6423, which

ordered respondent Petron Corporation (Petron) to pay deficiency excise taxes for the taxable years 1995 to 1998,

together with surcharges and delinquency interests imposed thereon.

Respondent Petron is a corporation engaged in the production of petroleum products and is a Board of Investment

(BOI) registered enterprise in accordance with the provisions of the Omnibus Investments Code of 1987 (E.O.

226) under Certificate of Registration Nos. 89-1037 and D95-136.3

The Facts

The CTA En Banc in CTA EB Case No. 311 adopted the findings of fact by the CTA Second Division in CTA Case No.

6423. Considering that there are no factual issues in this case, we likewise adopt the findings of fact by the CTA En

Banc, as follows:

As culled from the records and as agreed upon by the parties in their Joint Stipulation of Facts and Issues, these are

the facts of the case.

During the period covering the taxable years 1995 to 1998, petitioner (herein respondent Petron) had been an

assignee of several Tax Credit Certificates ( TCCs) from various BOI-registered entities for which petitioner utilized

in the payment of its excise tax liabilities for the taxable years 1995 to 1998. The transfers and assig nments of the

said TCCs were approved by the Department of Finances One Stop Shop Inter-Agency Tax Credit and Duty

Drawback Center (DOF Center), composed of representatives from the appropriate government agencies, namely,

the Department of Finance (DOF), the Board of Investments (BOI), the Bureau of Customs (BOC) and the Bureau of

Internal Revenue (BIR).

Taking ground on a BOI letter issued on 15 May 1998 which states that hydraulic oil, penetrating oil, diesel fuels

and industrial gases are classified as supplies and considered the suppliers thereof as qualified transferees of tax

credit, petitioner acknowledged and accepted the transfers of the T CCs from the various BOI -registered entities.

Petitioners acceptance and use of the TCCs as payment of its excise tax l iabilities for the taxable years 1995 to

1998, had been continuously approved by the DOF as well as the BIRs Collection Program Division through its

surrender and subsequent issuance by the Assistant Commissioner of the Collection Service of the BIR of the Tax

Debit Memos (TDMs).

On January 30, 2002, respondent [herein petitioner CIR] issued the assailed Assessment against petitioner for

deficiency excise taxes for the taxable years 1995 to 1998, in the total amount of P 739,003,036.32, inclusive of

surcharges and interests, based on the ground that the TCCs utilized by petitioner in its payment of excise taxes

have been cancelled by the DOF for having been fraudulently issued and transferred, pursuant to its EXCOM

Resolution No. 03-05-99. Thus, petitioner, through letters dated August 31, 1999 and September 1, 1999, was

required by the DOF Center to submit copies of its sales invoices and delivery receipts showing the consum

of the sale transaction to certain T CC transferors.

Instead of submitting the documents required by the respondent, on February 27, 2002, petitioner filed its

letter to the Assessment on the grounds, among others, that:

a. The BIR did not comply with the requirements of Revenue Regulations 12-99 in issuing the

"assessment" letter dated January 30, 2002, hence, the assessment made against it is void;

b. The assignment/transfer of the TCCs to petitioner by the TCC holders was submitted to, exami

approved by the concerned government agencies which processed the assignment in accordance

law and revenue regulations;

c. There is no basis for the imposition of the 50% surcharge in the amount of P 159,460,900.00 an

interest penalties in the amount of P 260,620,335.32 against it;

d. Some of the items included in the assessment are already pending litigation and are subject o

case entitled Commissioner of Internal Revenue vs. Petron Corporation, C.A. GR SP No. 55330 (C

No. 5657) and hence, should no longer be included in the assessment; and

e. The assessment and collection of alleged excise tax deficiencies sought to be collected by the B

against petitioner through the January 30, 2002 letter are already barred by prescription under Se

203 of the National Internal Revenue Code.

On 27 March 2002, respondent, through Assistant Commissioner Edwin R. Abella served a Warrant of Distr

and/or Levy on petitioner to enforce payment of the P 739,003,036.32 tax deficiencies.

Respondent allegedly served the Warrant of Distraint and/or Levy against petitioner without first ac ting on

letter-protest. Thus, construing the Warrant of Distraint and/or Levy as the final adverse decision of the BIR

protest of the assessment, petitioner filed the instant petition before this Honorable Court [referring to the

Second Division] on April 2, 2002.

On April 30, 2002, respondent filed his Answer, raising the following as his Special Affirmative Defenses:

6. In a post-audit conducted by the One-Stop Inter-Agency Tax Credit and Duty Drawback Center

of the Department of Finance (DOF), pursuant to the Centers Excom Resolution No. 03-05-99, it

found that TCCs issued to Alliance Thread Co., Inc., Allstar Spinning, Inc., Diamond Knitting Corp.,

Technology Corp., Filstar Textile Industrial Corp., FLB International Fiber Corp., Jantex Philippines

Jibtex Industrial Corp., Master Colour System Corp. and Spintex International, Inc. were fraudulen

obtained and were fraudulently transferred to petitioner. As a result of said findings, the TCCs an

Tax Debit Memos (TDMs) issued by the Center to petitioner against said TCCs were cancelled by t

7. Prior to the cancellation of the aforesaid TCCs and TDMs, petitioner had utilized the same in th

payment of its excise tax liabilities. With such cancellation, the TCCs and TDMs have no value in m

or moneys worth and, therefore, the excise taxes fo r which they were used as payment are now

deemed unpaid;

8. The cancellation by the DOF of the aforesaid TCCs and TDMs has the presumption of regularitywhich respondent may validly rely;

9. Petitioner was informed by the DOF of the post-audit conducted on the TCCs and was given th

opportunity to submit documents showing that the TCCs were transferred to it in payment of pet

products allegedly delivered by it to the T CC transferors upon which the TCC transfers were appro

with the admonition that failure to submit the required doc uments would result in the cancellatio
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the transfers. Petitioner was also informed of the cancellation of the TCCs and TDMs and the reason for

their cancellation;

10. Since petitioner is deemed not to have paid its excise tax liabilities, a pre-assessment notice is not

required under Section 22

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