G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue was made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for reconsideration," 9being "tantamount to an outright denial thereof and makes the said request deemed rejected." 10 But there is a special circumstance in the case at bar that prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion.13 In fact, as the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue received as agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals. 16

There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after examining the evidence, that no distribution of dividends was involved. 18

The petitioner claims that these payments are fictitious because most of the payees are members of the same family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed

to be informal. This arrangement was understandable, however, in view of the close relationship among the persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with the following provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as deductions —

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical application may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholdings of the officers of employees, it would seem likely that the salaries are not paid wholly for services rendered, but the excessive payments are a distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED  in toto, without costs.

SO ORDERED.

G.R. No. L-31364 March 30, 1979

MISAEL P. VERA, as Commissioner of Internal Revenue, and JAIME ARANETA, as Regional Director, Revenue Region No. 14, Bureau of Internal Revenue, petitioners,

vs.

HON. JOSE F. FERNANDEZ, Judge of the Court of First Instance of Negros Occidental, Branch V, and FRANCIS A. TONGOY, Administrator of the Estate of the late LUIS D. TONGOY respondents.

DE CASTRO, J.:

Appeal from two orders of the Court of First Instance of Negros Occidental, Branch V in Special Proceedings No. 7794, entitled: "Intestate Estate of Luis D. Tongoy," the first dated July 29, 1969 dismissing the Motion for Allowance of Claim and for an Order of Payment of Taxes by the Government of the Republic of the Philippines against the Estate of the late Luis D. Tongoy, for deficiency income taxes for the years 1963 and 1964 of the decedent in the total amount of P3,254.80, inclusive 5% surcharge, 1% monthly interest and compromise penalties, and the second, dated October 7, 1969, denying the Motion for reconsideration of the Order of dismissal.

The Motion for allowance of claim and for payment of taxes dated May 28, 1969 was filed on June 3, 1969 in the abovementioned special proceedings, (par. 3, Annex A, Petition, pp. 1920, Rollo). The claim represents the indebtedness to the Government of the late Luis D. Tongoy for deficiency income taxes in the total sum of P3,254.80 as above stated, covered by Assessment Notices Nos. 11-50-29-1-11061-21-63 and 11-50-291-1 10875-64, to which motion was attached Proof of Claim (Annex B, Petition, pp. 21-22, Rollo). The Administrator opposed the motion solely on the ground that the claim was barred under Section 5, Rule 86 of the Rules of Court (par. 4, Opposition to Motion for Allowance of Claim, pp. 23-24, Rollo). Finding the opposition well-founded, the respondent Judge, Jose F. Fernandez, dismissed the motion for allowance of claim filed by herein petitioner, Regional Director of the Bureau of Internal Revenue, in an order dated July 29, 1969 (Annex D, Petition, p. 26, Rollo). On September 18, 1969, a motion for reconsideration was filed, of the order of July 29, 1969, but was denied in an Order dated October 7, 1969.

Hence, this appeal on certiorari, petitioner assigning the following errors:

1. The lower court erred in holding that the claim for taxes by the government against the estate of Luis D. Tongoy was filed beyond the period provided in Section 2, Rule 86 of the Rules of Court.

2. The lower court erred in holding that the claim for taxes of the government was already barred under Section 5, Rule 86 of the Rules of Court.

which raise the sole issue of whether or not the statute of non-claims Section 5, Rule 86 of the New Rule of Court, bars claim of the government for unpaid taxes, still within the period of limitation prescribed in Section 331 and 332 of the National Internal Revenue Code.

Section 5, Rule 86, as invoked by the respondent Administrator in hid Oppositions to the Motion for Allowance of Claim, etc. of the petitioners reads as follows:

All claims for money against the decedent, arising from contracts, express or implied, whether the same be due, not due, or contingent, all claims for funeral expenses and expenses for the last sickness of the decedent, and judgment for money against the decedent, must be filed within the time limited in they notice; otherwise they are barred forever, except that they may be set forth as counter claims in any action that the executor or administrator may bring against the claimants. Where the executor or administrator commence an action, or prosecutes an action already commenced by the deceased in his lifetime, the debtor may set forth may answer the claims he has against the decedents, instead of presenting them independently to the court has herein provided, and mutual claims may be set off against each other in such action; and in final judgment is rendered in favored of the decedent, the amount to determined shall be considered the true balance against the estate, as though the claim has been presented directly before the court in the administration proceedings. Claims not yet due, or contingent may be approved at their present value.

A perusal of the aforequoted provisions shows that it makes no mention of claims for monetary obligation of the decedent created by law, such as taxes which is entirely of different character from the claims expressly enumerated therein, such as: "all claims for money against the decedent arising from contract, express or implied, whether the same be due, not due or contingent, all claim for funeral expenses and expenses for the last sickness of the decedent and judgment for money against the decedent." Under the familiar rule of statutory construction of expressio unius est exclusio alterius, the mention of one thing implies the exclusion of another thing not mentioned. Thus, if a statute enumerates the things upon which it is to operate, everything else must necessarily, and by implication be excluded from its operation and effect (Crawford, Statutory Construction, pp. 334-335).

In the case of Commissioner of Internal Revenue vs. Ilagan Electric & Ice Plant, et al., G.R. No. L-23081, December 30, 1969, it was held that the assessment, collection and recovery of taxes, as well as the matter of prescription thereof are governed by the provisions of the National Internal revenue Code, particularly Sections 331 and 332 thereof, and not by other provisions of law. (See also Lim Tio, Dy Heng and Dee Jue vs. Court of Tax Appeals & Collector of Internal Revenue, G.R. No. L-10681, March 29, 1958). Even without being specifically mentioned, the provisions of Section 2 of Rule 86 of the Rules of Court may reasonably be presumed to have been also in the mind of the Court as not affecting the aforecited Section of the National Internal Revenue Code.

In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was even more pointedly held that "taxes assessed against the estate of a deceased person ... need not be submitted to the committee on claims in the ordinary course of administration. In the exercise of its control over the administrator, the court may direct the payment of such taxes upon motion showing that the taxes have been assessed against the

estate." The abolition of the Committee on Claims does not alter the basic ruling laid down giving exception to the claim for taxes from being filed as the other claims mentioned in the Rule should be filed before the Court. Claims for taxes may be collected even after the distribution of the decedent's estate among his heirs who shall be liable therefor in proportion of their share in the inheritance. (Government of the Philippines vs. Pamintuan, 55 Phil. 13).

The reason for the more liberal treatment of claims for taxes against a decedent's estate in the form of exception from the application of the statute of non-claims, is not hard to find. Taxes are the lifeblood of the Government and their prompt and certain availability are imperious need. (Commissioner of Internal Revenue vs. Pineda, G. R. No. L-22734, September 15, 1967, 21 SCRA 105). Upon taxation depends the Government ability to serve the people for whose benefit taxes are collected. To safeguard such interest, neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people, in the same manner as private persons may be made to suffer individually on account of his own negligence, the presumption being that they take good care of their personal affairs. This should not hold true to government officials with respect to matters not of their own personal concern. This is the philosophy behind the government's exception, as a general rule, from the operation of the principle of estoppel. (Republic vs. Caballero, L-27437, September 30, 1977, 79 SCRA 177; Manila Lodge No. 761, Benevolent and Protective Order of the Elks Inc. vs. Court of Appeals, L-41001, September 30, 1976, 73 SCRA 162; Sy vs. Central Bank of the Philippines, L-41480, April 30,1976, 70 SCRA 571; Balmaceda vs. Corominas & Co., Inc., 66 SCRA 553; Auyong Hian vs. Court of Tax Appeals, 59 SCRA 110; Republic vs. Philippine Rabbit Bus Lines, Inc., 66 SCRA 553; Republic vs. Philippine Long Distance Telephone Company, L-18841, January 27, 1969, 26 SCRA 620; Zamora vs. Court of Tax Appeals, L-23272, November 26, 1970, 36 SCRA 77; E. Rodriguez, Inc. vs. Collector of Internal Revenue, L- 23041, July 31, 1969, 28 SCRA 119.) As already shown, taxes may be collected even after the distribution of the estate of the decedent among his heirs (Government of the Philippines vs. Pamintuan, supra; Pineda vs. CFI of Tayabas, supra Clara Diluangco Palanca vs. Commissioner of Internal Revenue, G. R. No. L-16661, January 31, 1962).

Furthermore, as held in Commissioner of Internal Revenue vs. Pineda, supra, citing the last paragraph of Section 315 of the Tax Code payment of income tax shall be a lien in favor of the Government of the Philippines from the time the assessment was made by the Commissioner of Internal Revenue until paid with interests, penalties, etc. By virtue of such lien, this court held that the property of the estate already in the hands of an heir or transferee may be subject to the payment of the tax due the estate. A fortiori before the inheritance has passed to the heirs, the unpaid taxes due the decedent may be collected, even without its having been presented under Section 2 of Rule 86 of the Rules of Court. It may truly be said that until the property of the estate of the decedent has vested in the heirs, the decedent, represented by his estate, continues as if he were still alive, subject to the payment of such taxes as would be collectible from the estate even after his death. Thus in the case above cited, the income taxes sought to be collected were due from the estate, for the three years 1946, 1947 and 1948 following his death in May, 1945.

Even assuming arguendo that claims for taxes have to be filed within the time prescribed in Section 2, Rule 86 of the Rules of Court, the claim in question may be

filed even after the expiration of the time originally fixed therein, as may be gleaned from the italicized portion of the Rule herein cited which reads:

Section 2. Time within which claims shall be filed. - In the notice provided in the preceding section, the court shall state the time for the filing of claims against the estate, which shall not be more than twelve (12) nor less than six (6) months after the date of the first publication of the notice. However, at any time before an order of distribution is entered, on application of a creditor who has failed to file his claim within the time previously limited the court may, for cause shown and on such terms as are equitable, allow such claim to be flied within a time not exceeding one (1) month. (Emphasis supplied)

In the instant case, petitioners filed an application (Motion for Allowance of Claim and for an Order of Payment of Taxes) which, though filed after the expiration of the time previously limited but before an order of the distribution is entered, should have been granted by the respondent court, in the absence of any valid ground, as none was shown, justifying denial of the motion, specially considering that it was for allowance Of claim for taxes due from the estate, which in effect represents a claim of the people at large, the only reason given for the denial that the claim was filed out of the previously limited period, sustaining thereby private respondents' contention, erroneously as has been demonstrated.

WHEREFORE, the order appealed from is reverse. Since the Tax Commissioner's assessment in the total amount of P3,254.80 with 5 % surcharge and 1 % monthly interest as provided in the Tax Code is a final one and the respondent estate's sole defense of prescription has been herein overruled, the Motion for Allowance of Claim is herein granted and respondent estate is ordered to pay and discharge the same, subject only to the limitation of the interest collectible thereon as provided by the Tax Code. No pronouncement as to costs.

SO ORDERED.

G.R. No. L-24607           January 29, 1968

TOMAS TRIA TIRONA, petitioner-appellee, vs.THE CITY TREASURER OF MANILA and/or CITY OF MANILA, respondents-appellants.

Tirona and Tirona for petitioner-appellee. Olimpio R. Navarro for respondents-appellants.

BENGZON, J.P., J.:

Tomas Tria Tirona is the legitimate original holder of a P6,777.92-USAFFE Backpay Certificate No. A-23426 (1684) issued by the Republic of the Philippines on May 30, 1955 under Republic Act 304, as amended. Tirona paid therewith his real estate taxes on his land in Sampaloc, Manila for the years 1957 to 1959.

On December 19, 1958, Mayor Arsenio Lacson prohibited the acceptance of backpay certificates in payment of taxes or obligations due to the City of Manila. The matter was indorsed first to the National Treasurer, then to the Department of Finance, particularly the Undersecretary, and both opined 1 that the acceptance of the backpay certificates in payment of taxes is mandatory under Section 2 of Republic Act 304, as amended. Inspite of these opinions, acceptance was refused Tirona when he tried to pay the City of Manila his real estate taxes for 1960-1963 through his backpay certificate.

On July 30, 1963, Tirona sought to compel the City Treasurer and/or City Mayor of Manila to accept his backpay certificate in payment of real estate taxes from 1960-1963 (later amended to cover taxes for 1964) thru an action filed before the Court of First Instance of Manila.

After hearing and presentation of evidence, the Court of First Instance, on January 25, 1965, rendered a decision ordering the respondents to accept the backpay

certificate on the ground that Section 2 of Republic Act 306, as amended, expressly gives the holder of a backpay certificate the right to give the certificate in payment of his taxes and other indebtedness, which right must be imposed on the Government, its branches, and instrumentalities.

Respondents appealed directly to Us, alleging that receptance of the certificates is discretionary on the part of the City and that its compulsory acceptance would constitute an impairment of the obligation of contracts. 2

Section 2 of R.A. 304, as amended by Republic Acts 800 and 897, provides:

Sec. 2. The Treasurer of the Philippines shall, upon application of all persons specified in section one hereof and within one year from the approval of this amendatory Act, and under such rules and regulations as may be promulgated by the Secretary of Finance, acknowledge and file requests for the recognition of the right to the salaries or wages as provided in section one hereof, and notice of such acknowledgment shall be issued to the applicant which shall state the, total amount of such salaries or wages due the applicant, and certify that it shall be redeemed by the Government of the Philippines within ten years from the date of their issuance without interest: Provided, That upon regulations as may be approved by the Secretary of Finance a certificate of indebtedness may be issued by the Treasurer of the Philippines covering the whole or part of the total salaries or wages the right to which has been duly acknowledged and recognized, provided that the face value of such certificate of indebtedness shall not exceed the amount that the applicant may need for the payment of (1) obligations subsisting at the time of the approval of this amendatory Act for which the applicant may directly be liable to the Government or to any of its branches or instrumentalities, or the corporations owned or controlled by the Government, or to any citizen of the Philippines, or to any association or corporation organized under the laws of the Philippines, who may be willing to accept the same for such settlement; (2) his taxes; (3) government hospital bills of the applicant; (4) lands purchased or leased or to be purchased or leased by him from the public domain; and (5) any amount received by the applicant as gratuity or pension which he has refund to the Government or to any of its branches or instrumentalities; Provided, further, That such settlement shall be effected by indorsement on the instrument: . . .

Appellants cite the case of De Borja v. Gella 3 where We held that the Cities of Pasay and Manila were not bound to accept payment of real estate taxes through backpay certificates because first, the obligations were not subsisting at the time Republic Act 304 took effect on June 18, 1948, considering that the tax obligation in question accrued after 1948; secondly, because Section 2 of Republic Act 304, as amended, allows such payment only if the tax is owed by the original certificate holder himself, and lastly, that compensation cannot be had under Article 1278 of the Civil Code because the requisites for compensation were not present.

Although the Gella case was decided when Republic Act 800 amended Republic Act 304 on June 21, 1952, there was no substantial difference in development upon the effectivity of the latest amendment — Republic Act 897 — on June 20, 1953. Republic Act 304 effective June 18, 1948, originally provided for registration of claims of all officers and employees of the Government of the Commonwealth of the Philippines, its branches and instrumentalities and the corporations owned or controlled by the Government and those of free local civil governments, provincial or municipal, duly organized for purposes of resistance against the enemy, to salaries and wages during the enemy or Japanese occupation. Republic Act 800 amended Republic Act 304 to include elective officials who held over in their positions, as

recipients of the benefits of Republic Act 304, also authorizing the issuance and use of certificates of indebtedness for purchase of public lands and authorized the limited negotiability of the certificates. The latest amendment, Republic Act 897, extended the benefits to the members of the Philippine Army and recognized guerrilla forces and officers of the Philippine Scouts allowed certificates to be used in the purchase of public lands and government properties and payment of the obligations subsisting at the time of approval of Republic Act 897. Except for these there is no substantial change in the wording of the provisions.

Lately, this Court speaking through Mr. Justice J.B.L. Reyes in Tirona v. Cudiamat,4 required the acceptance of the certificates in payment of real estate taxes, reversing the rule enunciated in the Gella case with regard to the non-applicability of real estate taxes on the ground that the debts were not subsisting at the time of the approval of the Act. Quoting Section 2 of Republic Act 304, as amended by Republic Act 897, this Court held in said Tironacase that while the applicability of the backpay certificates to the payment of the holder's obligation to the Government or any of its branches or instrumentalities, is limited to those subsisting at the time of the approval of the Act the statute also declares the applicability of such certificates to the payment by the holder of "his taxes" — without any specific limitation. Had the Legislature intended also to limit the payment of taxes, it would have so expressed as it did with regard to obligations.

It is also claimed that the respondents are not bound to accept the backpay certificates, arguing that according to Section 2 of the Act, as amended, certificates may be paid for "obligations subsisting at the approval of this act for which the applicant may be directly liable to the Government or to any of its branches or instrumentalities or the corporations owned or controlled by the Government or to any citizen of the Philippines or to any association or corporation organized under the laws of the Philippines who may be willing to accept the same for such settlement." Contrary to their allegations of discretion in acceptance, it has already been settled that the phrase "who may be willing to accept the same for settlement" in Section 2 refers only to "any citizen of the Philippines or any association or corporation organized under the laws of the Philippines", and not to the Government government or any of its agencies. 5

Furthermore, Section 2 of Republic Act 304, as amended, states that the backpay certificates shall be redeemed by the Government of the Philippines. "Government of the Philippines" refers to that governmental entity through which the functions of the government are exercised as an attribute of sovereignty, and in this are included those arms through which political authority is made effective whether they be provincial, municipal or other form of local government.  6 Thus, the phrase includes even the City of Manila.

Respondents fear disadvantageous effects of compulsory acceptance of the certificates on its treasury. As stated in the Tirona case, whatever unfavorable effects the acceptance of the certificates may have on the City's finances, the effects must be deemed to have been intended by the Legislature, which, after all, has full control over Cities and Municipalities in these matters.

That the compulsory acceptance by the City of Manila of the backpay certificates would be an impairment of obligations of contracts is not tenable because the City of Manila cannot be classified as falling under the phrase "any citizen, association, or corporation" which are not Government entities or owned or controlled by the Government. 7

WHEREFORE, the decision appealed from is hereby affirmed. No costs. So ordered.

G.R. No. 159796               July 17, 2007

ROMEO P. GEROCHI, KATULONG NG BAYAN (KB) and ENVIRONMENTALIST CONSUMERS NETWORK, INC. (ECN), Petitioners, vs.DEPARTMENT OF ENERGY (DOE), ENERGY REGULATORY COMMISSION (ERC), NATIONAL POWER CORPORATION (NPC), POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT GROUP (PSALM Corp.), STRATEGIC POWER UTILITIES GROUP (SPUG), and PANAY ELECTRIC COMPANY INC. (PECO),Respondents.

D E C I S I O N

NACHURA, J.:

Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and Environmentalist Consumers Network, Inc. (ECN) (petitioners), come before this Court in this original action praying that Section 34 of Republic Act (RA) 9136, otherwise known as the "Electric Power Industry Reform Act of 2001" (EPIRA), imposing the Universal Charge,1and Rule 18 of the Rules and Regulations (IRR)2 which seeks to implement the said imposition, be declared unconstitutional. Petitioners also pray that the Universal Charge imposed upon the consumers be refunded and that a preliminary

injunction and/or temporary restraining order (TRO) be issued directing the respondents to refrain from implementing, charging, and collecting the said charge.3 The assailed provision of law reads:

SECTION 34. Universal Charge. — Within one (1) year from the effectivity of this Act, a universal charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users for the following purposes:

(a) Payment for the stranded debts4 in excess of the amount assumed by the National Government and stranded contract costs of NPC5 and as well as qualified stranded contract costs of distribution utilities resulting from the restructuring of the industry;

(b) Missionary electrification;6

(c) The equalization of the taxes and royalties applied to indigenous or renewable sources of energy vis-à-vis imported energy fuels;

(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour (P0.0025/kWh), which shall accrue to an environmental fund to be used solely for watershed rehabilitation and management. Said fund shall be managed by NPC under existing arrangements; and

(e) A charge to account for all forms of cross-subsidies for a period not exceeding three (3) years.

The universal charge shall be a non-bypassable charge which shall be passed on and collected from all end-users on a monthly basis by the distribution utilities. Collections by the distribution utilities and the TRANSCO in any given month shall be remitted to the PSALM Corp. on or before the fifteenth (15th) of the succeeding month, net of any amount due to the distribution utility. Any end-user or self-generating entity not connected to a distribution utility shall remit its corresponding universal charge directly to the TRANSCO. The PSALM Corp., as administrator of the fund, shall create a Special Trust Fund which shall be disbursed only for the purposes specified herein in an open and transparent manner. All amount collected for the universal charge shall be distributed to the respective beneficiaries within a reasonable period to be provided by the ERC.

The Facts

Congress enacted the EPIRA on June 8, 2001; on June 26, 2001, it took effect.7

On April 5, 2002, respondent National Power Corporation-Strategic Power Utilities Group8 (NPC-SPUG) filed with respondent Energy Regulatory Commission (ERC) a petition for the availment from the Universal Charge of its share for Missionary Electrification, docketed as ERC Case No. 2002-165.9

On May 7, 2002, NPC filed another petition with ERC, docketed as ERC Case No. 2002-194, praying that the proposed share from the Universal Charge for the Environmental charge of P0.0025 per kilowatt-hour (/kWh), or a total of P119,488,847.59, be approved for withdrawal from the Special Trust Fund (STF) managed by respondent Power Sector Assets and

Liabilities Management Group (PSALM)10 for the rehabilitation and management of watershed areas.11

On December 20, 2002, the ERC issued an Order12 in ERC Case No. 2002-165 provisionally approving the computed amount of P0.0168/kWh as the share of the NPC-SPUG from the Universal Charge for Missionary Electrification and authorizing the National Transmission Corporation (TRANSCO) and Distribution Utilities to collect the same from its end-users on a monthly basis.

On June 26, 2003, the ERC rendered its Decision13 (for ERC Case No. 2002-165) modifying its Order of December 20, 2002, thus:

WHEREFORE, the foregoing premises considered, the provisional authority granted to petitioner National Power Corporation-Strategic Power Utilities Group (NPC-SPUG) in the Order dated December 20, 2002 is hereby modified to the effect that an additional amount of P0.0205 per kilowatt-hour should be added to the P0.0168 per kilowatt-hour provisionally authorized by the Commission in the said Order. Accordingly, a total amount ofP0.0373 per kilowatt-hour is hereby APPROVED for withdrawal from the Special Trust Fund managed by PSALM as its share from the Universal Charge for Missionary Electrification (UC-ME) effective on the following billing cycles:

(a) June 26-July 25, 2003 for National Transmission Corporation (TRANSCO); and

(b) July 2003 for Distribution Utilities (Dus).

Relative thereto, TRANSCO and Dus are directed to collect the UC-ME in the amount of P0.0373 per kilowatt-hour and remit the same to PSALM on or before the 15th day of the succeeding month.

In the meantime, NPC-SPUG is directed to submit, not later than April 30, 2004, a detailed report to include Audited Financial Statements and physical status (percentage of completion) of the projects using the prescribed format.1avvphi1

Let copies of this Order be furnished petitioner NPC-SPUG and all distribution utilities (Dus).

SO ORDERED.

On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration asking the ERC, among others,14 to set aside the above-mentioned Decision, which the ERC granted in its Order dated October 7, 2003, disposing:

WHEREFORE, the foregoing premises considered, the "Motion for Reconsideration" filed by petitioner National Power Corporation-Small Power Utilities Group (NPC-SPUG) is hereby GRANTED. Accordingly, the Decision dated June 26, 2003 is hereby modified accordingly.

Relative thereto, NPC-SPUG is directed to submit a quarterly report on the following:

1. Projects for CY 2002 undertaken;

2. Location

3. Actual amount utilized to complete the project;

4. Period of completion;

5. Start of Operation; and

6. Explanation of the reallocation of UC-ME funds, if any.

SO ORDERED.15

Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-194, authorizing the NPC to draw up toP70,000,000.00 from PSALM for its 2003 Watershed Rehabilitation Budget subject to the availability of funds for the Environmental Fund component of the Universal Charge.16

On the basis of the said ERC decisions, respondent Panay Electric Company, Inc. (PECO) charged petitioner Romeo P. Gerochi and all other end-users with the Universal Charge as reflected in their respective electric bills starting from the month of July 2003.17

Hence, this original action.

Petitioners submit that the assailed provision of law and its IRR which sought to implement the same are unconstitutional on the following grounds:

1) The universal charge provided for under Sec. 34 of the EPIRA and sought to be implemented under Sec. 2, Rule 18 of the IRR of the said law is a tax which is to be collected from all electric end-users and self-generating entities. The power to tax is strictly a legislative function and as such, the delegation of said power to any executive or administrative agency like the ERC is unconstitutional, giving the same unlimited authority. The assailed provision clearly provides that the Universal Charge is to be determined, fixed and approved by the ERC, hence leaving to the latter complete discretionary legislative authority.

2) The ERC is also empowered to approve and determine where the funds collected should be used.

3) The imposition of the Universal Charge on all end-users is oppressive and confiscatory and amounts to taxation without representation as the consumers were not given a chance to be heard and represented.18

Petitioners contend that the Universal Charge has the characteristics of a tax and is collected to fund the operations of the NPC. They argue that the cases19 invoked by the respondents clearly show the regulatory purpose of the charges imposed therein, which is not so in the case at bench. In said cases, the respective funds20 were created in order to balance and stabilize the prices of oil and sugar, and to act as buffer to counteract the changes and adjustments in prices, peso devaluation, and other variables which cannot be adequately and timely monitored by the legislature. Thus, there was a need to delegate powers to administrative bodies.21 Petitioners posit that the Universal Charge is imposed not for a similar purpose.

On the other hand, respondent PSALM through the Office of the Government Corporate Counsel (OGCC) contends that unlike a tax which is imposed to provide income for public purposes, such as support of the government, administration of the law, or payment of public expenses, the assailed Universal Charge is levied for a specific regulatory purpose, which is to ensure the viability of the country's electric power industry. Thus, it is exacted by the State in the exercise of its inherent police power. On this premise, PSALM submits that there is no undue delegation of legislative power to the ERC since the latter merely exercises a limited authority or discretion as to the execution and implementation of the provisions of the EPIRA.22

Respondents Department of Energy (DOE), ERC, and NPC, through the Office of the Solicitor General (OSG), share the same view that the Universal Charge is not a tax because it is levied for a specific regulatory purpose, which is to ensure the viability of the country's electric power industry, and is, therefore, an exaction in the exercise of the State's police power. Respondents further contend that said Universal Charge does not possess the essential characteristics of a tax, that its imposition would redound to the benefit of the electric power industry and not to the public, and that its rate is uniformly levied on electricity end-users, unlike a tax which is imposed based on the individual taxpayer's ability to pay. Moreover, respondents deny that there is undue delegation of legislative power to the ERC since the EPIRA sets forth sufficient determinable standards which would guide the ERC in the exercise of the powers granted to it. Lastly, respondents argue that the imposition of the Universal Charge is not oppressive and confiscatory since it is an exercise of the police power of the State and it complies with the requirements of due process.23

On its part, respondent PECO argues that it is duty-bound to collect and remit the amount pertaining to the Missionary Electrification and Environmental Fund components of the Universal Charge, pursuant to Sec. 34 of the EPIRA and the Decisions in ERC Case Nos. 2002-194 and 2002-165. Otherwise, PECO could be held liable under Sec. 4624 of the EPIRA, which imposes fines and penalties for any violation of its provisions or its IRR.25

The Issues

The ultimate issues in the case at bar are:

1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax; and

2) Whether or not there is undue delegation of legislative power to tax on the part of the ERC.26

Before we discuss the issues, the Court shall first deal with an obvious procedural lapse.

Petitioners filed before us an original action particularly denominated as a Complaint assailing the constitutionality of Sec. 34 of the EPIRA imposing the Universal Charge and Rule 18 of the EPIRA's IRR. No doubt, petitioners have  locus standi. They impugn the constitutionality of Sec. 34 of the EPIRA because they sustained a direct injury as a result of the imposition of the Universal Charge as reflected in their electric bills.

However, petitioners violated the doctrine of hierarchy of courts when they filed this "Complaint" directly with us. Furthermore, the Complaint is bereft of any allegation of grave abuse of discretion on the part of the ERC or any of the public respondents, in order for the Court to consider it as a petition for certiorari or prohibition.

Article VIII, Section 5(1) and (2) of the 1987 Constitution27 categorically provides that:

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

1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.

2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the rules of court may provide, final judgments and orders of lower courts in:

(a) All cases in which the constitutionality or validity of any treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question.

But this Court's jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, and habeas corpus, while concurrent with that of the regional trial courts and the Court of Appeals, does not give litigants unrestrained freedom of choice of forum from which to seek such relief.28 It has long been established that this Court will not entertain direct resort to it unless the redress desired cannot be obtained in the appropriate courts, or where exceptional and compelling circumstances justify availment of a remedy within and call for the exercise of our primary jurisdiction.29 This circumstance alone warrants the outright dismissal of the present action.

This procedural infirmity notwithstanding, we opt to resolve the constitutional issue raised herein. We are aware that if the constitutionality of Sec. 34 of the EPIRA is not resolved now, the issue will certainly resurface in the near future, resulting in a repeat of this litigation, and probably involving the same parties. In the public interest and to avoid unnecessary delay, this Court renders its ruling now.

The instant complaint is bereft of merit.

The First Issue

To resolve the first issue, it is necessary to distinguish the State’s power of taxation from the police power.

The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency that is to pay it.30 It is based on the principle that taxes are the lifeblood of the government, and their prompt and certain availability is an imperious need.31 Thus, the theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.32

On the other hand, police power is the power of the state to promote public welfare by restraining and regulating the use of liberty and property.33 It is the most pervasive, the least limitable, and the most demanding of the three fundamental powers of the State. The justification is found in the Latin maxims salus populi est suprema lex (the welfare of the people is the supreme law) and sic utere tuo ut alienum non laedas (so use your property as not to injure the property of others). As an inherent attribute of sovereignty which virtually extends to all public needs, police power grants a wide panoply of instruments through which the State, as parens patriae, gives effect to a host of its regulatory powers.34 We have held that the power to "regulate" means the power to protect, foster, promote, preserve, and control, with due regard for the interests, first and foremost, of the public, then of the utility and of its patrons.35

The conservative and pivotal distinction between these two powers rests in the purpose for which the charge is made. If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation

is the primary purpose, the fact that revenue is incidentally raised does not make the imposition a tax.36

In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police power, particularly its regulatory dimension, is invoked. Such can be deduced from Sec. 34 which enumerates the purposes for which the Universal Charge is imposed37 and which can be amply discerned as regulatory in character. The EPIRA resonates such regulatory purposes, thus:

SECTION 2. Declaration of Policy. — It is hereby declared the policy of the State:

(a) To ensure and accelerate the total electrification of the country;

(b) To ensure the quality, reliability, security and affordability of the supply of electric power;

(c) To ensure transparent and reasonable prices of electricity in a regime of free and fair competition and full public accountability to achieve greater operational and economic efficiency and enhance the competitiveness of Philippine products in the global market;

(d) To enhance the inflow of private capital and broaden the ownership base of the power generation, transmission and distribution sectors;

(e) To ensure fair and non-discriminatory treatment of public and private sector entities in the process of restructuring the electric power industry;

(f) To protect the public interest as it is affected by the rates and services of electric utilities and other providers of electric power;

(g) To assure socially and environmentally compatible energy sources and infrastructure;

(h) To promote the utilization of indigenous and new and renewable energy resources in power generation in order to reduce dependence on imported energy;

(i) To provide for an orderly and transparent privatization of the assets and liabilities of the National Power Corporation (NPC);

(j) To establish a strong and purely independent regulatory body and system to ensure consumer protection and enhance the competitive operation of the electricity market; and

(k) To encourage the efficient use of energy and other modalities of demand side management.

From the aforementioned purposes, it can be gleaned that the assailed Universal Charge is not a tax, but an exaction in the exercise of the State's police power. Public welfare is surely promoted.

Moreover, it is a well-established doctrine that the taxing power may be used as an implement of police power.38In Valmonte v. Energy Regulatory Board, et al.39 and in Gaston v. Republic Planters Bank,40 this Court held that the Oil Price Stabilization Fund (OPSF) and the Sugar Stabilization Fund (SSF) were exactions made in the exercise of the police power. The doctrine was reiterated in Osmeña v. Orbos41 with respect to the OPSF. Thus, we disagree with petitioners that the instant case is different from the aforementioned cases. With the Universal Charge, a Special Trust

Fund (STF) is also created under the administration of PSALM.42 The STF has some notable characteristics similar to the OPSF and the SSF, viz.:

1) In the implementation of stranded cost recovery, the ERC shall conduct a review to determine whether there is under-recovery or over recovery and adjust (true-up) the level of the stranded cost recovery charge. In case of an over-recovery, the ERC shall ensure that any excess amount shall be remitted to the STF. A separate account shall be created for these amounts which shall be held in trust for any future claims of distribution utilities for stranded cost recovery. At the end of the stranded cost recovery period, any remaining amount in this account shall be used to reduce the electricity rates to the end-users.43

2) With respect to the assailed Universal Charge, if the total amount collected for the same is greater than the actual availments against it, the PSALM shall retain the balance within the STF to pay for periods where a shortfall occurs.44

3) Upon expiration of the term of PSALM, the administration of the STF shall be transferred to the DOF or any of the DOF attached agencies as designated by the DOF Secretary.45

The OSG is in point when it asseverates:

Evidently, the establishment and maintenance of the Special Trust Fund, under the last paragraph of Section 34, R.A. No. 9136, is well within the pervasive and non-waivable power and responsibility of the government to secure the physical and economic survival and well-being of the community, that comprehensive sovereign authority we designate as the police power of the State.46

This feature of the Universal Charge further boosts the position that the same is an exaction imposed primarily in pursuit of the State's police objectives. The STF reasonably serves and assures the attainment and perpetuity of the purposes for which the Universal Charge is imposed, i.e., to ensure the viability of the country's electric power industry.

The Second Issue

The principle of separation of powers ordains that each of the three branches of government has exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere. A logical corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim potestas delegata non delegari potest (what has been delegated cannot be delegated). This is based on the ethical principle that such delegated power constitutes not only a right but a duty to be performed by the delegate through the instrumentality of his own judgment and not through the intervening mind of another. 47

In the face of the increasing complexity of modern life, delegation of legislative power to various specialized administrative agencies is allowed as an exception to this principle.48 Given the volume and variety of interactions in today's society, it is doubtful if the legislature can promulgate laws that will deal adequately with and respond promptly to the minutiae of everyday life. Hence, the need to delegate to administrative bodies - the principal agencies tasked to execute laws in their specialized fields - the authority to promulgate rules and regulations to implement a given statute and effectuate its policies. All that is required for the valid exercise of this power of subordinate legislation is that the regulation be germane to the objects

and purposes of the law and that the regulation be not in contradiction to, but in conformity with, the standards prescribed by the law. These requirements are denominated as the completeness test and the sufficient standard test.

Under the first test, the law must be complete in all its terms and conditions when it leaves the legislature such that when it reaches the delegate, the only thing he will have to do is to enforce it. The second test mandates adequate guidelines or limitations in the law to determine the boundaries of the delegate's authority and prevent the delegation from running riot.49

The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34 thereof, is complete in all its essential terms and conditions, and that it contains sufficient standards.

Although Sec. 34 of the EPIRA merely provides that "within one (1) year from the effectivity thereof, a Universal Charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users," and therefore, does not state the specific amount to be paid as Universal Charge, the amount nevertheless is made certain by the legislative parameters provided in the law itself. For one, Sec. 43(b)(ii) of the EPIRA provides:

SECTION 43. Functions of the ERC. — The ERC shall promote competition, encourage market development, ensure customer choice and penalize abuse of market power in the restructured electricity industry. In appropriate cases, the ERC is authorized to issue cease and desist order after due notice and hearing. Towards this end, it shall be responsible for the following key functions in the restructured industry:

x x x x

(b) Within six (6) months from the effectivity of this Act, promulgate and enforce, in accordance with law, a National Grid Code and a Distribution Code which shall include, but not limited to the following:

x x x x

(ii) Financial capability standards for the generating companies, the TRANSCO, distribution utilities and suppliers: Provided, That in the formulation of the financial capability standards, the nature and function of the entity shall be considered: Provided, further, That such standards are set to ensure that the electric power industry participants meet the minimum financial standards to protect the public interest. Determine, fix, and approve, after due notice and public hearings the universal charge, to be imposed on all electricity end-users pursuant to Section 34 hereof;

Moreover, contrary to the petitioners’ contention, the ERC does not enjoy a wide latitude of discretion in the determination of the Universal Charge. Sec. 51(d) and (e) of the EPIRA50 clearly provides:

SECTION 51. Powers. — The PSALM Corp. shall, in the performance of its functions and for the attainment of its objective, have the following powers:

x x x x

(d) To calculate the amount of the stranded debts and stranded contract costs of NPC which shall form the basis for ERC in the determination of the universal charge;

(e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales and other property contributed to it, including the proceeds from the universal charge.

Thus, the law is complete and passes the first test for valid delegation of legislative power.

As to the second test, this Court had, in the past, accepted as sufficient standards the following: "interest of law and order;"51 "adequate and efficient instruction;"52 "public interest;"53 "justice and equity;"54 "public convenience and welfare;"55 "simplicity, economy and efficiency;"56 "standardization and regulation of medical education;"57and "fair and equitable employment practices."58 Provisions of the EPIRA such as, among others, "to ensure the total electrification of the country and the quality, reliability, security and affordability of the supply of electric power"59 and "watershed rehabilitation and management"60 meet the requirements for valid delegation, as they provide the limitations on the ERC’s power to formulate the IRR. These are sufficient standards.

It may be noted that this is not the first time that the ERC's conferred powers were challenged. In Freedom from Debt Coalition v. Energy Regulatory Commission,61 the Court had occasion to say:

In determining the extent of powers possessed by the ERC, the provisions of the EPIRA must not be read in separate parts. Rather, the law must be read in its entirety, because a statute is passed as a whole, and is animated by one general purpose and intent. Its meaning cannot to be extracted from any single part thereof but from a general consideration of the statute as a whole. Considering the intent of Congress in enacting the EPIRA and reading the statute in its entirety, it is plain to see that the law has expanded the jurisdiction of the regulatory body, the ERC in this case, to enable the latter to implement the reforms sought to be accomplished by the EPIRA. When the legislators decided to broaden the jurisdiction of the ERC, they did not intend to abolish or reduce the powers already conferred upon ERC's predecessors. To sustain the view that the ERC possesses only the powers and functions listed under Section 43 of the EPIRA is to frustrate the objectives of the law.

In his Concurring and Dissenting Opinion62 in the same case, then Associate Justice, now Chief Justice, Reynato S. Puno described the immensity of police power in relation to the delegation of powers to the ERC and its regulatory functions over electric power as a vital public utility, to wit:

Over the years, however, the range of police power was no longer limited to the preservation of public health, safety and morals, which used to be the primary social interests in earlier times. Police power now requires the State to "assume an affirmative duty to eliminate the excesses and injustices that are the concomitants of an unrestrained industrial economy." Police power is now exerted "to further the public welfare — a concept as vast as the good of society itself." Hence, "police power is but another name for the governmental authority to further the welfare of society that is the basic end of all government." When police power is delegated to administrative bodies with regulatory functions, its exercise should be given a wide latitude. Police power takes on an even broader dimension in developing countries such as ours, where the State must take a more active role in balancing the many conflicting interests in society. The Questioned Order was issued by the ERC, acting as an agent of the State in the exercise of police power. We should have exceptionally good grounds to curtail its exercise. This approach is more compelling

in the field of rate-regulation of electric power rates. Electric power generation and distribution is a traditional instrument of economic growth that affects not only a few but the entire nation. It is an important factor in encouraging investment and promoting business. The engines of progress may come to a screeching halt if the delivery of electric power is impaired. Billions of pesos would be lost as a result of power outages or unreliable electric power services. The State thru the ERC should be able to exercise its police power with great flexibility, when the need arises.

This was reiterated in National Association of Electricity Consumers for Reforms v. Energy Regulatory Commission63 where the Court held that the ERC, as regulator, should have sufficient power to respond in real time to changes wrought by multifarious factors affecting public utilities.

From the foregoing disquisitions, we therefore hold that there is no undue delegation of legislative power to the ERC.

Petitioners failed to pursue in their Memorandum the contention in the Complaint that the imposition of the Universal Charge on all end-users is oppressive and confiscatory, and amounts to taxation without representation. Hence, such contention is deemed waived or abandoned per Resolution64 of August 3, 2004.65Moreover, the determination of whether or not a tax is excessive, oppressive or confiscatory is an issue which essentially involves questions of fact, and thus, this Court is precluded from reviewing the same.66

As a penultimate statement, it may be well to recall what this Court said of EPIRA:

One of the landmark pieces of legislation enacted by Congress in recent years is the EPIRA. It established a new policy, legal structure and regulatory framework for the electric power industry. The new thrust is to tap private capital for the expansion and improvement of the industry as the large government debt and the highly capital-intensive character of the industry itself have long been acknowledged as the critical constraints to the program. To attract private investment, largely foreign, the jaded structure of the industry had to be addressed. While the generation and transmission sectors were centralized and monopolistic, the distribution side was fragmented with over 130 utilities, mostly small and uneconomic. The pervasive flaws have caused a low utilization of existing generation capacity; extremely high and uncompetitive power rates; poor quality of service to consumers; dismal to forgettable performance of the government power sector; high system losses; and an inability to develop a clear strategy for overcoming these shortcomings.

Thus, the EPIRA provides a framework for the restructuring of the industry, including the privatization of the assets of the National Power Corporation (NPC), the transition to a competitive structure, and the delineation of the roles of various government agencies and the private entities. The law ordains the division of the industry into four (4) distinct sectors, namely: generation, transmission, distribution and supply.

Corollarily, the NPC generating plants have to privatized and its transmission business spun off and privatized thereafter.67

Finally, every law has in its favor the presumption of constitutionality, and to justify its nullification, there must be a clear and unequivocal breach of the Constitution and not one that is doubtful, speculative, or argumentative.68Indubitably, petitioners failed to overcome this presumption in favor of the EPIRA. We find no clear violation

of the Constitution which would warrant a pronouncement that Sec. 34 of the EPIRA and Rule 18 of its IRR are unconstitutional and void.

WHEREFORE, the instant case is hereby DISMISSED for lack of merit.

SO ORDERED.

G.R. No. 166006               March 14, 2008

PLANTERS PRODUCTS, INC., Petitioner, vs.FERTIPHIL CORPORATION, Respondent.

D E C I S I O N

REYES, R.T., J.:

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

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

The Facts

Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine laws.3 They are both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals.

On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which provided, among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all grades of fertilizers in the Philippines.4 The LOI provides:

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

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

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

Fertiphil filed a complaint for collection and damages8 against FPA and PPI with the RTC in Makati. It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process of law.9 Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation, which used the proceeds to maintain its monopoly of the fertilizer industry.

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

RTC Disposition

On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff and against the defendant Planters Product, Inc., ordering the latter to pay the former:

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

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

3) the cost of suit.

SO ORDERED.11

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

It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 is purportedly in the exercise of the power of taxation. It is a settled principle

that the power of taxation by the state is plenary. Comprehensive and supreme, the principal check upon its abuse resting in the responsibility of the members of the legislature to their constituents. However, there are two kinds of limitations on the power of taxation: the inherent limitations and the constitutional limitations.

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

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

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

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

PPI moved for reconsideration but its motion was denied.13 PPI then filed a notice of appeal with the RTC but it failed to pay the requisite appeal docket fee. In a separate but related proceeding, this Court14 allowed the appeal of PPI and remanded the case to the CA for proper disposition.

CA Decision

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

IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject to the MODIFICATION that the award of attorney’s fees is hereby DELETED.15

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The capital recovery component shall continue to be charged and collected until payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost accruing from the date hereof on the amounts which may be outstanding from time to time of the Unpaid Capital and/or the Subsidy Receivables and (d) the capital increases contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the ‘carrying cost’ shall be at such rate as will represent the full and reasonable cost to Planters of servicing its

debts, taking into account both its peso and foreign currency-denominated obligations." (Records, pp. 42-43)

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

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

Issues

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

I

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

II

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

III

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

IV

THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION IN THE INSTANT CASE.20 (Underscoring supplied)

Our Ruling

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

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

PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because it does not have a "personal and substantial interest in the case

or will sustain direct injury as a result of its enforcement."21 It asserts that Fertiphil did not suffer any damage from the CRC imposition because "incidence of the levy fell on the ultimate consumer or the farmers themselves, not on the seller fertilizer company."22

We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice has been adequately discussed by this Court in a catena of cases. Succinctly put, the doctrine requires a litigant to have a material interest in the outcome of a case. In private suits, locus standi requires a litigant to be a "real party in interest," which is defined as "the party who stands to be benefited or injured by the judgment in the suit or the party entitled to the avails of the suit."23

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

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

Recognizing that a strict application of the "direct injury" test may hamper public interest, this Court relaxed the requirement in cases of "transcendental importance" or with "far reaching implications." Being a mere procedural technicality, it has also been held that locus standi may be waived in the public interest.27

Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has locus standi to file it. Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It was required, and it did pay, theP10 levy imposed for every bag of fertilizer sold on the domestic market. It may be true that Fertiphil has passed some or all of the levy to the ultimate consumer, but that does not disqualify it from attacking the constitutionality of the LOI or from seeking a refund. As seller, it bore the ultimate burden of paying the levy. It faced the possibility of severe sanctions for failure to pay the levy. The fact of payment is sufficient injury to Fertiphil.

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

Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently adopted by this Court on locus standi must apply. The issues raised by Fertiphil are of paramount public importance. It involves not only the constitutionality of a tax law but, more importantly, the use of taxes for public

purpose. Former President Marcos issued LOI No. 1465 with the intention of rehabilitating an ailing private company. This is clear from the text of the LOI. PPI is expressly named in the LOI as the direct beneficiary of the levy. Worse, the levy was made dependent and conditional upon PPI becoming financially viable. The LOI provided that "the capital contribution shall be collected until adequate capital is raised to make PPI viable."

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

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

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

Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It claims that the constitutionality of LOI No. 1465 is the very lis mota of the case because the trial court cannot determine its claim without resolving the issue.30

It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidential decree or an executive order. This is clear from Section 5, Article VIII of the 1987 Constitution, which provides:

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

x x x x

(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide,final judgments and orders of lower courts in:

(a) All cases in which the constitutionality or validity of any treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question. (Underscoring supplied)

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

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

In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,33 this Court reiterated:

There is no denying that regular courts have jurisdiction over cases involving the validity or constitutionality of a rule or regulation issued by administrative agencies.

Such jurisdiction, however, is not limited to the Court of Appeals or to this Court alone for even the regional trial courts can take cognizance of actions assailing a specific rule or set of rules promulgated by administrative bodies. Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts.34

Judicial review of official acts on the ground of unconstitutionality may be sought or availed of through any of the actions cognizable by courts of justice, not necessarily in a suit for declaratory relief. Such review may be had in criminal actions, as in People v. Ferrer35 involving the constitutionality of the now defunct Anti-Subversion law, or in ordinary actions, as in Krivenko v. Register of Deeds36 involving the constitutionality of laws prohibiting aliens from acquiring public lands. The constitutional issue, however, (a) must be properly raised and presented in the case, and (b) its resolution is necessary to a determination of the case, i.e., the issue of constitutionality must be the very lis mota presented.37

Contrary to PPI’s claim, the constitutionality of LOI No. 1465 was properly and adequately raised in the complaint for collection filed with the RTC. The pertinent portions of the complaint allege:

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

x x x x

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

x x x x

(e) It was a glaring example of crony capitalism, a forced program through which the PPI, having been presumptuously masqueraded as "the" fertilizer industry itself, was the sole and anointed beneficiary;

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

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

which triggers the refund. The issue of constitutionality is the very lis mota of the complaint with the RTC.

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

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

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

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

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

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

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

It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the Land Transportation and Traffic Code that the legislative intent and purpose behind the law requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction and maintenance of highways and to a much lesser degree, pay for the operating expenses of the administering agency. x x x Fees may be properly regarded as taxes even though they also serve as an instrument of regulation.

Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration fees. The same provision appears as Section 59(b) in the Land Transportation Code. It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle as a "tax or fee." x x x Simply put, if the

exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees" such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle registration fee and chauffeurs’ license fee. Such fees are to go into the expenditures of the Land Transportation Commission as provided for in the last proviso of Sec. 61.44 (Underscoring supplied)

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

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

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

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

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

The purpose of a law is evident from its text or inferable from other secondary sources. Here, We agree with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public purpose.

First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The purpose is explicit from Clause 3 of the law, thus:

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

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

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

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

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

Republic of the PhilippinesOffice of the Prime MinisterManila

LETTER OF UNDERTAKING

May 18, 1985

TO: THE BANKING AND FINANCIAL INSTITUTIONSLISTED IN ANNEX A HERETO WHICH ARECREDITORS (COLLECTIVELY, THE "CREDITORS")OF PLANTERS PRODUCTS, INC. ("PLANTERS")

Gentlemen:

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

of all its obligations, and a separate petition filed by Manufacturers Hanover Trust Company, Manila Offshore Branch for the appointment of a rehabilitation receiver for Planters.

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

x x x x

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

x x x x

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

REPUBLIC OF THE PHILIPPINES

By:

(signed)CESAR E. A. VIRATAPrime Minister and Minister of Finance51

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

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

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

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

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

It is upon applying this established tests that We sustain the trial court’s holding LOI 1465 unconstitutional.1awphil To be sure, ensuring the continued supply and distribution of fertilizer in the country is an undertaking imbued with public interest. However, the method by which LOI 1465 sought to achieve this is by no means a measure that will promote the public welfare. The government’s commitment to support the successful rehabilitation and continued viability of PPI, a private corporation, is an unmistakable attempt to mask the subject statute’s impartiality. There is no way to treat the self-interest of a favored entity, like PPI, as identical with the general interest of the country’s farmers or even the Filipino people in general. Well to stress, substantive due process exacts fairness and equal protection disallows distinction where none is needed. When a statute’s public purpose is spoiled by private interest, the use of police power becomes a travesty which must be struck down for being an arbitrary exercise of government power. To rule in favor of appellant would contravene the general principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private individuals. (Underscoring supplied)

The general rule is that an unconstitutional law is void; the doctrine of operative fact is inapplicable.

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

We cannot agree. It is settled that no question, issue or argument will be entertained on appeal, unless it has been raised in the court a quo. 53 PPI did not raise the applicability of the doctrine of operative fact with the RTC and the CA. It cannot belatedly raise the issue with Us in order to extricate itself from the dire effects of an unconstitutional law.

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

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

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

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

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

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

WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28, 2003 is AFFIRMED.

SO ORDERED.

G.R. No. L-7859        December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme Ledesma, plaintiff-appellant, vs.J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.

Ernesto J. Gonzaga for appellant.Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee.

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.

Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the threat to our industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-McDuffe Act, and the "eventual loss of its preferential position in the United States market"; wherefore, the national policy

was expressed "to obtain a readjustment of the benefits derived from the sugar industry by the component elements thereof" and "to stabilize the sugar industry so as to prepare it for the eventuality of the loss of its preferential position in the United States market and the imposition of the export taxes."

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while section 3 levies on owners or persons in control of lands devoted to the cultivation of sugar cane and ceded to others for a consideration, on lease or otherwise —

a tax equivalent to the difference between the money value of the rental or consideration collected and the amount representing 12 per centum of the assessed value of such land.

According to section 6 of the law —

SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine Treasury, to be known as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid out only for any or all of the following purposes or to attain any or all of the following objectives, as may be provided by law.

First, to place the sugar industry in a position to maintain itself, despite the gradual loss of the preferntial position of the Philippine sugar in the United States market, and ultimately to insure its continued existence notwithstanding the loss of that market and the consequent necessity of meeting competition in the free markets of the world;

Second, to readjust the benefits derived from the sugar industry by all of the component elements thereof — the mill, the landowner, the planter of the sugar cane, and the laborers in the factory and in the field — so that all might continue profitably to engage therein;lawphi1.net

Third, to limit the production of sugar to areas more economically suited to the production thereof; and

Fourth, to afford labor employed in the industry a living wage and to improve their living and working conditions: Provided, That the President of the Philippines may, until the adjourment of the next regular session of the National Assembly, make the necessary disbursements from the fund herein created (1) for the establishment and operation of sugar experiment station or stations and the undertaking of researchers (a) to increase the recoveries of the centrifugal sugar factories with the view of reducing manufacturing costs, (b) to produce and propagate higher yielding varieties of sugar cane more adaptable to different district conditions in the Philippines, (c) to lower the costs of raising sugar cane, (d) to improve the buying quality of denatured alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing the other by-products of the industry, (f) to determine what crop or crops are suitable for rotation and for the utilization of excess cane lands, and (g) on other problems the solution of which would help rehabilitate and stabilize the industry, and (2) for the improvement of living and working conditions in sugar mills and sugar plantations, authorizing him to organize the necessary agency or agencies to take charge of the expenditure and allocation of said funds to carry out the purpose hereinbefore enumerated, and, likewise, authorizing the disbursement from the fund herein created of the necessary amount or amounts needed for

salaries, wages, travelling expenses, equipment, and other sundry expenses of said agency or agencies.

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional and void, being levied for the aid and support of the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax may be constitutioally levied. The action having been dismissed by the Court of First Instance, the plaintifs appealed the case directly to this Court (Judiciary Act, section 17).

The basic defect in the plaintiff's position is his assumption that the tax provided for in Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. In other words, the act is primarily an exercise of the police power.

This Court can take judicial notice of the fact that sugar production is one of the great industries of our nation, sugar occupying a leading position among its export products; that it gives employment to thousands of laborers in fields and factories; that it is a great source of the state's wealth, is one of the important sources of foreign exchange needed by our government, and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion, protection and advancement, therefore redounds greatly to the general welfare. Hence it was competent for the legislature to find that the general welfare demanded that the sugar industry should be stabilized in turn; and in the wide field of its police power, the lawmaking body could provide that the distribution of benefits therefrom be readjusted among its components to enable it to resist the added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552, 139 So. 121).

As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida —

The protection of a large industry constituting one of the great sources of the state's wealth and therefore directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to such an extent by public interests as to be within the police power of the sovereign. (128 Sp. 857).

Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public concern, it follows that the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed fully play, subject only to the test of reasonableness; and it is not contended that the means provided in section 6 of the law (above quoted) bear no relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579).

That the tax to be levied should burden the sugar producers themselves can hardly be a ground of complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that "inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251).

From the point of view we have taken it appears of no moment that the funds raised under the Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected. It may be that other industries are also in need of similar protection; that the legislature is not required by the Constitution to adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "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;" and that "the legislative authority, exerted within its proper field, need not embrace all the evils within its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).

Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax money to experimental stations to seek increase of efficiency in sugar production, utilization of by-products and solution of allied problems, as well as to the improvements of living and working conditions in sugar mills or plantations, without any part of such money being channeled directly to private persons, constitutes expenditure of tax money for private purposes, (compare Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).

The decision appealed from is affirmed, with costs against appellant. So ordered.

G.R. No. 175356               December 3, 2013

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

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

D E C I S I O N

DEL CASTILLO, J.:

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

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

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

Factual Antecedents

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

SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following:

a) the grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services, hotels and similar lodging establishment[s], restaurants and recreation centers and purchase of medicine anywhere in the country: Provided, That private establishments may claim the cost as tax credit;

b) a minimum of twenty percent (20%) discount on admission fees charged by theaters, cinema houses and concert halls, circuses, carnivals and other similar places of culture, leisure, and amusement;

c) exemption from the payment of individual income taxes: Provided, That their annual taxable income does not exceed the property level as determined by the National Economic and Development Authority (NEDA) for that year;

d) exemption from training fees for socioeconomic programs undertaken by the OSCA as part of its work;

e) free medical and dental services in government establishment[s] anywhere in the country, subject to guidelines to be issued by the Department of Health, the Government Service Insurance System and the Social Security System;

f) to the extent practicable and feasible, the continuance of the same benefits and privileges given by the Government Service Insurance System (GSIS), Social Security System (SSS) and PAG-IBIG, as the case may be, as are enjoyed by those in actual service.

On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to implement RA 7432. Sections 2(i) and 4 of RR No. 02-94 provide:

Sec. 2. DEFINITIONS. – For purposes of these regulations: i. Tax Credit – refers to the amount representing the 20% discount granted to a qualified senior citizen by all establishments relative to their utilization of transportation services, hotels and similar lodging establishments, restaurants, drugstores, recreation centers, theaters, cinema houses, concert halls, circuses, carnivals and other similar places of culture, leisure and amusement, which discount shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax purposes. x x x x Sec. 4. RECORDING/BOOKKEEPING REQUIREMENTS FOR PRIVATE ESTABLISHMENTS. – Private establishments, i.e., transport services, hotels and similar lodging establishments, restaurants, recreation centers, drugstores, theaters, cinema houses, concert halls, circuses, carnivals and other similar places of culture[,] leisure and amusement, giving 20% discounts to qualified senior citizens are required to keep separate and accurate record[s] of sales made to senior citizens, which shall include the name, identification number, gross sales/receipts, discounts, dates of transactions and invoice number for every transaction. The amount of 20% discount shall be deducted from the gross income for income tax purposes and from gross sales of the business enterprise concerned for purposes of the VAT and other percentage taxes.

In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,5 the Court declared Sections 2(i) and 4 of RR No. 02-94 as erroneous because these contravene RA 7432,6 thus:

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant. In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its availment. To deny such credit, despite the plain mandate of the law and the regulations carrying out that mandate, is indefensible. First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the 20 percent discount that "shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax purposes." In ordinary business language, the tax credit represents the amount of such discount. However, the manner by which the discount shall be credited against taxes has not been clarified by the revenue regulations. By ordinary acceptation, a discount is an "abatement or reduction made from the gross amount or value of anything." To be more precise, it is in business parlance "a deduction or lowering of an amount of money;" or "a reduction from the full amount or value of something, especially a price." In business there are many kinds of discount, the most common of which is that affecting the income statement or financial report upon which the income tax is based.

x x x x

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible from gross income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is improper, considering that the latter has to be deducted from gross sales in order to compute the gross income in the income statement and cannot be deducted again, even for purposes of computing the income tax. When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount — when claimed — shall be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax credit benefit depends upon the existence of a tax liability, but to

limit the benefit to a sales discount — which is not even identical to the discount privilege that is granted by law — does not define it at all and serves no useful purpose. The definition must, therefore, be stricken down.

Laws Not Amended by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a regulation that "operates to create a rule out of harmony with the statute is a mere nullity;" it cannot prevail. It is a cardinal rule that courts "will and should respect the contemporaneous construction placed upon a statute by the executive officers whose duty it is to enforce it x x x." In the scheme of judicial tax administration, the need for certainty and predictability in the implementation of tax laws is crucial. Our tax authorities fill in the details that "Congress may not have the opportunity or competence to provide." The regulations these authorities issue are relied upon by taxpayers, who are certain that these will be followed by the courts. Courts, however, will not uphold these authorities’ interpretations when clearly absurd, erroneous or improper. In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled x x x the intent of Congress in granting a mere discount privilege, not a sales discount. The administrative agency issuing these regulations may not enlarge, alter or restrict the provisions of the law it administers; it cannot engraft additional requirements not contemplated by the legislature.

In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law." Conversely, a regulation or any portion thereof not adopted pursuant to law is no law and has neither the force nor the effect of law.7

On February 26, 2004, RA 92578 amended certain provisions of RA 7432, to wit:

SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following:

(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for the death of senior citizens;

x x x x

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended.

To implement the tax provisions of RA 9257, the Secretary of Finance issued RR No. 4-2006, the pertinent provision of which provides:

SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS DEDUCTION FROM GROSS INCOME. – Establishments enumerated in subparagraph (6) hereunder granting sales discounts to senior citizens on the sale of goods and/or services

specified thereunder are entitled to deduct the said discount from gross income subject to the following conditions:

(1) Only that portion of the gross sales EXCLUSIVELY USED, CONSUMED OR ENJOYED BY THE SENIOR CITIZEN shall be eligible for the deductible sales discount.

(2) The gross selling price and the sales discount MUST BE SEPARATELY INDICATED IN THE OFFICIAL RECEIPT OR SALES INVOICE issued by the establishment for the sale of goods or services to the senior citizen.

(3) Only the actual amount of the discount granted or a sales discount not exceeding 20% of the gross selling price can be deducted from the gross income, net of value added tax, if applicable, for income tax purposes, and from gross sales or gross receipts of the business enterprise concerned, for VAT or other percentage tax purposes.

(4) The discount can only be allowed as deduction from gross income for the same taxable year that the discount is granted.

(5) The business establishment giving sales discounts to qualified senior citizens is required to keep separate and accurate record[s] of sales, which shall include the name of the senior citizen, TIN, OSCA ID, gross sales/receipts, sales discount granted, [date] of [transaction] and invoice number for every sale transaction to senior citizen.

(6) Only the following business establishments which granted sales discount to senior citizens on their sale of goods and/or services may claim the said discount granted as deduction from gross income, namely:

x x x x

(i) Funeral parlors and similar establishments – The beneficiary or any person who shall shoulder the funeral and burial expenses of the deceased senior citizen shall claim the discount, such as casket, embalmment, cremation cost and other related services for the senior citizen upon payment and presentation of [his] death certificate.

The DSWD likewise issued its own Rules and Regulations Implementing RA 9257, to wit:

RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS

Article 8. Tax Deduction of Establishments. – The establishment may claim the discounts granted under Rule V, Section 4 – Discounts for Establishments, Section 9, Medical and Dental Services in Private Facilities and Sections 10 and 11 – Air, Sea and Land Transportation as tax deduction based on the net cost of the goods sold or services rendered.

Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted; Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended; Provided, finally, that the implementation of the tax deduction shall be subject to the Revenue Regulations to be issued by the Bureau of Internal Revenue (BIR) and approved by the Department of Finance (DOF).

Feeling aggrieved by the tax deduction scheme, petitioners filed the present recourse, praying that Section 4 of RA 7432, as amended by RA 9257, and the implementing rules and regulations issued by the DSWD and the DOF be declared unconstitutional insofar as these allow business establishments to claim the 20% discount given to senior citizens as a tax deduction; that the DSWD and the DOF be prohibited from enforcing the same; and that the tax credit treatment of the 20% discount under the former Section 4 (a) of RA 7432 be reinstated.

Issues

Petitioners raise the following issues:

A.

WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.

B.

WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS IMPLEMENTING RULES AND REGULATIONS, INSOFAR AS THEY PROVIDE THAT THE TWENTY PERCENT (20%) DISCOUNT TO SENIOR CITIZENS MAY BE CLAIMED AS A TAX DEDUCTION BY THE PRIVATE ESTABLISHMENTS, ARE INVALID AND UNCONSTITUTIONAL.9

Petitioners’ Arguments

Petitioners emphasize that they are not questioning the 20% discount granted to senior citizens but are only assailing the constitutionality of the tax deduction scheme prescribed under RA 9257 and the implementing rules and regulations issued by the DSWD and the DOF.10

Petitioners posit that the tax deduction scheme contravenes Article III, Section 9 of the Constitution, which provides that: "[p]rivate property shall not be taken for public use without just compensation."11

In support of their position, petitioners cite Central Luzon Drug Corporation,12 where it was ruled that the 20% discount privilege constitutes taking of private property for public use which requires the payment of just compensation,13 and Carlos Superdrug Corporation v. Department of Social Welfare and Development,14 where it was acknowledged that the tax deduction scheme does not meet the definition of just compensation.15

Petitioners likewise seek a reversal of the ruling in Carlos Superdrug Corporation16 that the tax deduction scheme adopted by the government is justified by police power.17

They assert that "[a]lthough both police power and the power of eminent domain have the general welfare for their object, there are still traditional distinctions between the two"18 and that "eminent domain cannot be made less supreme than police power."19

Petitioners further claim that the legislature, in amending RA 7432, relied on an erroneous contemporaneous construction that prior payment of taxes is required for tax credit.20

Petitioners also contend that the tax deduction scheme violates Article XV, Section 421 and Article XIII, Section 1122 of the Constitution because it shifts the State’s

constitutional mandate or duty of improving the welfare of the elderly to the private sector.23

Under the tax deduction scheme, the private sector shoulders 65% of the discount because only 35%24 of it is actually returned by the government.25

Consequently, the implementation of the tax deduction scheme prescribed under Section 4 of RA 9257 affects the businesses of petitioners.26

Thus, there exists an actual case or controversy of transcendental importance which deserves judicious disposition on the merits by the highest court of the land.27

Respondents’ Arguments

Respondents, on the other hand, question the filing of the instant Petition directly with the Supreme Court as this disregards the hierarchy of courts.28

They likewise assert that there is no justiciable controversy as petitioners failed to prove that the tax deduction treatment is not a "fair and full equivalent of the loss sustained" by them.29

As to the constitutionality of RA 9257 and its implementing rules and regulations, respondents contend that petitioners failed to overturn its presumption of constitutionality.30

More important, respondents maintain that the tax deduction scheme is a legitimate exercise of the State’s police power.31

Our Ruling

The Petition lacks merit.

There exists an actual case or controversy.

We shall first resolve the procedural issue. When the constitutionality of a law is put in issue, judicial review may be availed of only if the following requisites concur: "(1) the existence of an actual and appropriate case; (2) the existence of personal and substantial interest on the part of the party raising the [question of constitutionality]; (3) recourse to judicial review is made at the earliest opportunity; and (4) the [question of constitutionality] is the lis mota of the case."32

In this case, petitioners are challenging the constitutionality of the tax deduction scheme provided in RA 9257 and the implementing rules and regulations issued by the DSWD and the DOF. Respondents, however, oppose the Petition on the ground that there is no actual case or controversy. We do not agree with respondents. An actual case or controversy exists when there is "a conflict of legal rights" or "an assertion of opposite legal claims susceptible of judicial resolution."33

The Petition must therefore show that "the governmental act being challenged has a direct adverse effect on the individual challenging it."34

In this case, the tax deduction scheme challenged by petitioners has a direct adverse effect on them. Thus, it cannot be denied that there exists an actual case or controversy.

The validity of the 20% senior citizen discount and tax deduction scheme under RA 9257, as an exercise of police power of the State, has already been settled in Carlos Superdrug Corporation.

Petitioners posit that the resolution of this case lies in the determination of whether the legally mandated 20% senior citizen discount is an exercise of police power or eminent domain. If it is police power, no just compensation is warranted. But if it is eminent domain, the tax deduction scheme is unconstitutional because it is not a peso for peso reimbursement of the 20% discount given to senior citizens. Thus, it constitutes taking of private property without payment of just compensation. At the outset, we note that this question has been settled in Carlos Superdrug Corporation.35

In that case, we ruled:

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby drugstores will be justly compensated for the discount. Examining petitioners’ arguments, it is apparent that what petitioners are ultimately questioning is the validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend to senior citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross income and results in a lower taxable income. Stated otherwise, it is an amount that is allowed by law to reduce the income prior to the application of the tax rate to compute the amount of tax which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as a deduction reduces the net income of the private establishments concerned. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. This constitutes compensable taking for which petitioners would ordinarily become entitled to a just compensation. Just compensation is defined as the full and fair equivalent of the property taken from its owner by the expropriator. The measure is not the taker’s gain but the owner’s loss. The word just is used to intensify the meaning of the word compensation, and to convey the idea that the equivalent to be rendered for the property to be taken shall be real, substantial, full and ample. A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the definition of just compensation. Having said that, this raises the question of whether the State, in promoting the health and welfare of a special group of citizens, can impose upon private establishments the burden of partly subsidizing a government program. The Court believes so. The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-building, and to grant benefits and privileges to them for their improvement and well-being as the State considers them an integral part of our society. The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. Thus, the Act provides: SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:

SECTION 1. Declaration of Policies and Objectives. — Pursuant to Article XV, Section 4 of the Constitution, it is the duty of the family to take care of its elderly members while the State may design programs of social security for them. In addition to this, Section 10 in the Declaration of Principles and State Policies provides: "The State shall provide social justice in all phases of national development." Further, Article XIII, Section 11, provides: "The State shall adopt an integrated and comprehensive approach to health development which shall endeavor to make essential goods, health and other social services available to all the people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly, disabled, women and children." Consonant with these constitutional principles the following are the declared policies of this Act:

… … …

(f) To recognize the important role of the private sector in the improvement of the welfare of senior citizens and to actively seek their partnership.

To implement the above policy, the law grants a twenty percent discount to senior citizens for medical and dental services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses, carnivals, and other similar places of culture, leisure and amusement; fares for domestic land, air and sea travel; utilization of services in hotels and similar lodging establishments, restaurants and recreation centers; and purchases of medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that business establishments extending the twenty percent discount to senior citizens may claim the discount as a tax deduction. The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare for its object. Police power is not capable of an exact definition, but has been purposely veiled in general terms to underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible response to conditions and circumstances, thus assuring the greatest benefits. Accordingly, it has been described as "the most essential, insistent and the least limitable of powers, extending as it does to all the great public needs." It is "[t]he power vested in the legislature by the constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant to the constitution, as they shall judge to be for the good and welfare of the commonwealth, and of the subjects of the same." For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the primacy of police power because property rights, though sheltered by due process, must yield to general welfare. Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis for its nullification in view of the presumption of validity which every law has in its favor. Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly oppressive to their business, because petitioners have not taken time to calculate correctly and come up with a financial report, so that they have not been able to show properly whether or not the tax deduction scheme really works greatly to their disadvantage. In treating the discount as a tax deduction, petitioners insist that they will incur losses because, referring to the DOF Opinion, for every P1.00 senior citizen discount that petitioners would give, P0.68 will be shouldered by them as only P0.32 will be refunded by the government by way of a tax deduction. To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive

maintenance drug Norvasc as an example. According to the latter, it acquires Norvasc from the distributors at P37.57 per tablet, and retails it at P39.60 (or at a margin of 5%). If it grants a 20% discount to senior citizens or an amount equivalent to P7.92, then it would have to sell Norvasc at P31.68 which translates to a loss from capital of P5.89 per tablet. Even if the government will allow a tax deduction, only P2.53 per tablet will be refunded and not the full amount of the discount which is P7.92. In short, only 32% of the 20% discount will be reimbursed to the drugstores. Petitioners’ computation is flawed. For purposes of reimbursement, the law states that the cost of the discount shall be deducted from gross income, the amount of income derived from all sources before deducting allowable expenses, which will result in net income. Here, petitioners tried to show a loss on a per transaction basis, which should not be the case. An income statement, showing an accounting of petitioners' sales, expenses, and net profit (or loss) for a given period could have accurately reflected the effect of the discount on their income. Absent any financial statement, petitioners cannot substantiate their claim that they will be operating at a loss should they give the discount. In addition, the computation was erroneously based on the assumption that their customers consisted wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the discount.

Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of their medicines given the cutthroat nature of the players in the industry. It is a business decision on the part of petitioners to peg the mark-up at 5%. Selling the medicines below acquisition cost, as alleged by petitioners, is merely a result of this decision. Inasmuch as pricing is a property right, petitioners cannot reproach the law for being oppressive, simply because they cannot afford to raise their prices for fear of losing their customers to competition. The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of the business. While the Constitution protects property rights, petitioners must accept the realities of business and the State, in the exercise of police power, can intervene in the operations of a business which may result in an impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the precept for the protection of property, various laws and jurisprudence, particularly on agrarian reform and the regulation of contracts and public utilities, continuously serve as x x x reminder[s] that the right to property can be relinquished upon the command of the State for the promotion of public good. Undeniably, the success of the senior citizens program rests largely on the support imparted by petitioners and the other private establishments concerned. This being the case, the means employed in invoking the active participation of the private sector, in order to achieve the purpose or objective of the law, is reasonably and directly related. Without sufficient proof that Section 4 (a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the same would be unconscionably detrimental to petitioners, the Court will refrain from quashing a legislative act.36 (Bold in the original; underline supplied)

We, thus, found that the 20% discount as well as the tax deduction scheme is a valid exercise of the police power of the State.

No compelling reason has been proffered to overturn, modify or abandon the ruling in Carlos Superdrug Corporation.

Petitioners argue that we have previously ruled in Central Luzon Drug Corporation37 that the 20% discount is an exercise of the power of eminent domain,

thus, requiring the payment of just compensation. They urge us to re-examine our ruling in Carlos Superdrug Corporation38 which allegedly reversed the ruling in Central Luzon Drug Corporation.39

They also point out that Carlos Superdrug Corporation40 recognized that the tax deduction scheme under the assailed law does not provide for sufficient just compensation. We agree with petitioners’ observation that there are statements in Central Luzon Drug Corporation41 describing the 20% discount as an exercise of the power of eminent domain, viz.:

[T]he privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for public use. The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous with public interest, public benefit, public welfare, and public convenience. The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but also to the promptness in its release. Equivalent to the payment of property taken by the State, such issuance — when not done within a reasonable time from the grant of the discounts — cannot be considered as just compensation. In effect, respondent is made to suffer the consequences of being immediately deprived of its revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the reduction in its revenues. Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain. Tax measures are but "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for a public purpose." In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. While it is a declared commitment under Section 1 of RA 7432, social justice "cannot be invoked to trample on the rights of property owners who under our Constitution and laws are also entitled to protection. The social justice consecrated in our [C]onstitution [is] not intended to take away rights from a person and give them to another who is not entitled thereto." For this reason, a just compensation for income that is taken away from respondent becomes necessary. It is in the tax credit that our legislators find support to realize social justice, and no administrative body can alter that fact. To put it differently, a private establishment that merely breaks even — without the discounts yet — will surely start to incur losses because of such discounts. The same effect is expected if its mark-up is less than 20 percent, and if all its sales come from retail purchases by senior citizens. Aside from the observation we have already raised earlier, it will also be grossly unfair to an establishment if the discounts will be treated merely as deductions from either its gross income or its gross sales. Operating at a loss through no fault of its own, it will realize that the tax credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be put in a better position if they avail themselves of tax credits denied those that are losing, because no taxes are due from the latter.42 (Italics in the original; emphasis supplied)

The above was partly incorporated in our ruling in Carlos Superdrug Corporation43 when we stated preliminarily that—

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby drugstores will be justly compensated for the discount. Examining petitioners’ arguments, it is apparent that what petitioners are ultimately questioning is the validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend to senior citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross income and results in a lower taxable income. Stated otherwise, it is an amount that is allowed by law to reduce the income prior to the application of the tax rate to compute the amount of tax which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as a deduction reduces the net income of the private establishments concerned. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. This constitutes compensable taking for which petitioners would ordinarily become entitled to a just compensation. Just compensation is defined as the full and fair equivalent of the property taken from its owner by the expropriator. The measure is not the taker’s gain but the owner’s loss. The word just is used to intensify the meaning of the word compensation, and to convey the idea that the equivalent to be rendered for the property to be taken shall be real, substantial, full and ample. A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the definition of just compensation. Having said that, this raises the question of whether the State, in promoting the health and welfare of a special group of citizens, can impose upon private establishments the burden of partly subsidizing a government program. The Court believes so.44

This, notwithstanding, we went on to rule in Carlos Superdrug Corporation45 that the 20% discount and tax deduction scheme is a valid exercise of the police power of the State. The present case, thus, affords an opportunity for us to clarify the above-quoted statements in Central Luzon Drug Corporation46 and Carlos Superdrug Corporation.47

First, we note that the above-quoted disquisition on eminent domain in Central Luzon Drug Corporation48 is obiter dicta and, thus, not binding precedent. As stated earlier, in Central Luzon Drug Corporation,49 we ruled that the BIR acted ultra vires when it effectively treated the 20% discount as a tax deduction, under Sections 2.i and 4 of RR No. 2-94, despite the clear wording of the previous law that the same should be treated as a tax credit. We were, therefore, not confronted in that case with the issue as to whether the 20% discount is an exercise of police power or eminent domain. Second, although we adverted to Central Luzon Drug Corporation50 in our ruling in Carlos Superdrug Corporation,51 this referred only to preliminary matters. A fair reading of Carlos Superdrug Corporation52 would show that we categorically ruled therein that the 20% discount is a valid exercise of police power. Thus, even if the current law, through its tax deduction scheme (which

abandoned the tax credit scheme under the previous law), does not provide for a peso for peso reimbursement of the 20% discount given by private establishments, no constitutional infirmity obtains because, being a valid exercise of police power, payment of just compensation is not warranted. We have carefully reviewed the basis of our ruling in Carlos Superdrug Corporation53 and we find no cogent reason to overturn, modify or abandon it. We also note that petitioners’ arguments are a mere reiteration of those raised and resolved in Carlos Superdrug Corporation.54 Thus, we sustain Carlos Superdrug Corporation.55

Nonetheless, we deem it proper, in what follows, to amplify our explanation in Carlos Superdrug Corporation56 as to why the 20% discount is a valid exercise of police power and why it may not, under the specific circumstances of this case, be considered as an exercise of the power of eminent domain contrary to the obiter in Central Luzon Drug Corporation.57

Police power versus eminent domain.

Police power is the inherent power of the State to regulate or to restrain the use of liberty and property for public welfare.58

The only limitation is that the restriction imposed should be reasonable, not oppressive.59

In other words, to be a valid exercise of police power, it must have a lawful subject or objective and a lawful method of accomplishing the goal.60

Under the police power of the State, "property rights of individuals may be subjected to restraints and burdens in order to fulfill the objectives of the government."61

The State "may interfere with personal liberty, property, lawful businesses and occupations to promote the general welfare [as long as] the interference [is] reasonable and not arbitrary."62

Eminent domain, on the other hand, is the inherent power of the State to take or appropriate private property for public use.63

The Constitution, however, requires that private property shall not be taken without due process of law and the payment of just compensation.64

Traditional distinctions exist between police power and eminent domain. In the exercise of police power, a property right is impaired by regulation,65 or the use of property is merely prohibited, regulated or restricted66 to promote public welfare. In such cases, there is no compensable taking, hence, payment of just compensation is not required. Examples of these regulations are property condemned for being noxious or intended for noxious purposes (e.g., a building on the verge of collapse to be demolished for public safety, or obscene materials to be destroyed in the interest of public morals)67 as well as zoning ordinances prohibiting the use of property for purposes injurious to the health, morals or safety of the community (e.g., dividing a city’s territory into residential and industrial areas).68

It has, thus, been observed that, in the exercise of police power (as distinguished from eminent domain), although the regulation affects the right of ownership, none of the bundle of rights which constitute ownership is appropriated for use by or for the benefit of the public.69

On the other hand, in the exercise of the power of eminent domain, property interests are appropriated and applied to some public purpose which necessitates the payment of just compensation therefor. Normally, the title to and possession of the property are transferred to the expropriating authority. Examples include the acquisition of lands for the construction of public highways as well as agricultural lands acquired by the government under the agrarian reform law for redistribution to qualified farmer beneficiaries. However, it is a settled rule that the acquisition of title or total destruction of the property is not essential for "taking" under the power of eminent domain to be present.70

Examples of these include establishment of easements such as where the land owner is perpetually deprived of his proprietary rights because of the hazards posed by electric transmission lines constructed above his property71 or the compelled interconnection of the telephone system between the government and a private company.72

In these cases, although the private property owner is not divested of ownership or possession, payment of just compensation is warranted because of the burden placed on the property for the use or benefit of the public.

The 20% senior citizen discount is an exercise of police power.

It may not always be easy to determine whether a challenged governmental act is an exercise of police power or eminent domain. The very nature of police power as elastic and responsive to various social conditions73 as well as the evolving meaning and scope of public use74 and just compensation75 in eminent domain evinces that these are not static concepts. Because of the exigencies of rapidly changing times, Congress may be compelled to adopt or experiment with different measures to promote the general welfare which may not fall squarely within the traditionally recognized categories of police power and eminent domain. The judicious approach, therefore, is to look at the nature and effects of the challenged governmental act and decide, on the basis thereof, whether the act is the exercise of police power or eminent domain. Thus, we now look at the nature and effects of the 20% discount to determine if it constitutes an exercise of police power or eminent domain. The 20% discount is intended to improve the welfare of senior citizens who, at their age, are less likely to be gainfully employed, more prone to illnesses and other disabilities, and, thus, in need of subsidy in purchasing basic commodities. It may not be amiss to mention also that the discount serves to honor senior citizens who presumably spent the productive years of their lives on contributing to the development and progress of the nation. This distinct cultural Filipino practice of honoring the elderly is an integral part of this law. As to its nature and effects, the 20% discount is a regulation affecting the ability of private establishments to price their products and services relative to a special class of individuals, senior citizens, for which the Constitution affords preferential concern.76

In turn, this affects the amount of profits or income/gross sales that a private establishment can derive from senior citizens. In other words, the subject regulation affects the pricing, and, hence, the profitability of a private establishment. However, it does not purport to appropriate or burden specific properties, used in the operation or conduct of the business of private establishments, for the use or benefit of the public, or senior citizens for that matter, but merely regulates the pricing of goods and services relative to, and the amount of profits or income/gross sales that such private establishments may derive from, senior citizens. The subject regulation may be said to be similar to, but with substantial distinctions from, price control or

rate of return on investment control laws which are traditionally regarded as police power measures.77

These laws generally regulate public utilities or industries/enterprises imbued with public interest in order to protect consumers from exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate of return on investment of these corporations considering that they have a monopoly over the goods or services that they provide to the general public. The subject regulation differs therefrom in that (1) the discount does not prevent the establishments from adjusting the level of prices of their goods and services, and (2) the discount does not apply to all customers of a given establishment but only to the class of senior citizens. Nonetheless, to the degree material to the resolution of this case, the 20% discount may be properly viewed as belonging to the category of price regulatory measures which affect the profitability of establishments subjected thereto. On its face, therefore, the subject regulation is a police power measure. The obiter in Central Luzon Drug Corporation,78 however, describes the 20% discount as an exercise of the power of eminent domain and the tax credit, under the previous law, equivalent to the amount of discount given as the just compensation therefor. The reason is that (1) the discount would have formed part of the gross sales of the establishment were it not for the law prescribing the 20% discount, and (2) the permanent reduction in total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. The flaw in this reasoning is in its premise. It presupposes that the subject regulation, which impacts the pricing and, hence, the profitability of a private establishment, automatically amounts to a deprivation of property without due process of law. If this were so, then all price and rate of return on investment control laws would have to be invalidated because they impact, at some level, the regulated establishment’s profits or income/gross sales, yet there is no provision for payment of just compensation. It would also mean that overnment cannot set price or rate of return on investment limits, which reduce the profits or income/gross sales of private establishments, if no just compensation is paid even if the measure is not confiscatory. The obiter is, thus, at odds with the settled octrine that the State can employ police power measures to regulate the pricing of goods and services, and, hence, the profitability of business establishments in order to pursue legitimate State objectives for the common good, provided that the regulation does not go too far as to amount to "taking."79

In City of Manila v. Laguio, Jr.,80 we recognized that— x x x a taking also could be found if government regulation of the use of property went "too far." When regulation reaches a certain magnitude, in most if not in all cases there must be an exercise of eminent domain and compensation to support the act. While property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking. No formula or rule can be devised to answer the questions of what is too far and when regulation becomes a taking. In Mahon, Justice Holmes recognized that it was "a question of degree and therefore cannot be disposed of by general propositions." On many other occasions as well, the U.S. Supreme Court has said that the issue of when regulation constitutes a taking is a matter of considering the facts in each case. The Court asks whether justice and fairness require that the economic loss caused by public action must be compensated by the government and thus borne by the public as a whole, or whether the loss should remain concentrated on those few persons subject to the public action.81

The impact or effect of a regulation, such as the one under consideration, must, thus, be determined on a case-to-case basis. Whether that line between permissible regulation under police power and "taking" under eminent domain has been crossed

must, under the specific circumstances of this case, be subject to proof and the one assailing the constitutionality of the regulation carries the heavy burden of proving that the measure is unreasonable, oppressive or confiscatory. The time-honored rule is that the burden of proving the unconstitutionality of a law rests upon the one assailing it and "the burden becomes heavier when police power is at issue."82

The 20% senior citizen discount has not been shown to be unreasonable, oppressive or confiscatory.

In Alalayan v. National Power Corporation,83 petitioners, who were franchise holders of electric plants, challenged the validity of a law limiting their allowable net profits to no more than 12% per annum of their investments plus two-month operating expenses. In rejecting their plea, we ruled that, in an earlier case, it was found that 12% is a reasonable rate of return and that petitioners failed to prove that the aforesaid rate is confiscatory in view of the presumption of constitutionality.84

We adopted a similar line of reasoning in Carlos Superdrug Corporation85 when we ruled that petitioners therein failed to prove that the 20% discount is arbitrary, oppressive or confiscatory. We noted that no evidence, such as a financial report, to establish the impact of the 20% discount on the overall profitability of petitioners was presented in order to show that they would be operating at a loss due to the subject regulation or that the continued implementation of the law would be unconscionably detrimental to the business operations of petitioners. In the case at bar, petitioners proceeded with a hypothetical computation of the alleged loss that they will suffer similar to what the petitioners in Carlos Superdrug Corporation86 did. Petitioners went directly to this Court without first establishing the factual bases of their claims. Hence, the present recourse must, likewise, fail. Because all laws enjoy the presumption of constitutionality, courts will uphold a law’s validity if any set of facts may be conceived to sustain it.87

On its face, we find that there are at least two conceivable bases to sustain the subject regulation’s validity absent clear and convincing proof that it is unreasonable, oppressive or confiscatory. Congress may have legitimately concluded that business establishments have the capacity to absorb a decrease in profits or income/gross sales due to the 20% discount without substantially affecting the reasonable rate of return on their investments considering (1) not all customers of a business establishment are senior citizens and (2) the level of its profit margins on goods and services offered to the general public. Concurrently, Congress may have, likewise, legitimately concluded that the establishments, which will be required to extend the 20% discount, have the capacity to revise their pricing strategy so that whatever reduction in profits or income/gross sales that they may sustain because of sales to senior citizens, can be recouped through higher mark-ups or from other products not subject of discounts. As a result, the discounts resulting from sales to senior citizens will not be confiscatory or unduly oppressive. In sum, we sustain our ruling in Carlos Superdrug Corporation88 that the 20% senior citizen discount and tax deduction scheme are valid exercises of police power of the State absent a clear showing that it is arbitrary, oppressive or confiscatory.

Conclusion

In closing, we note that petitioners hypothesize, consistent with our previous ratiocinations, that the discount will force establishments to raise their prices in order to compensate for its impact on overall profits or income/gross sales. The general public, or those not belonging to the senior citizen class, are, thus, made to

effectively shoulder the subsidy for senior citizens. This, in petitioners’ view, is unfair.

As already mentioned, Congress may be reasonably assumed to have foreseen this eventuality. But, more importantly, this goes into the wisdom, efficacy and expediency of the subject law which is not proper for judicial review. In a way, this law pursues its social equity objective in a non-traditional manner unlike past and existing direct subsidy programs of the government for the poor and marginalized sectors of our society. Verily, Congress must be given sufficient leeway in formulating welfare legislations given the enormous challenges that the government faces relative to, among others, resource adequacy and administrative capability in implementing social reform measures which aim to protect and uphold the interests of those most vulnerable in our society. In the process, the individual, who enjoys the rights, benefits and privileges of living in a democratic polity, must bear his share in supporting measures intended for the common good. This is only fair. In fine, without the requisite showing of a clear and unequivocal breach of the Constitution, the validity of the assailed law must be sustained.

Refutation of the Dissent

The main points of Justice Carpio’s Dissent may be summarized as follows: (1) the discussion on eminent domain in Central Luzon Drug Corporation89 is not obiter dicta ; (2) allowable taking, in police power, is limited to property that is destroyed or placed outside the commerce of man for public welfare; (3) the amount of mandatory discount is private property within the ambit of Article III, Section 990 of the Constitution; and (4) the permanent reduction in a private establishment’s total revenue, arising from the mandatory discount, is a taking of private property for public use or benefit, hence, an exercise of the power of eminent domain requiring the payment of just compensation. I We maintain that the discussion on eminent domain in Central Luzon Drug Corporation91 is obiter dicta. As previously discussed, in Central Luzon Drug Corporation,92 the BIR, pursuant to Sections 2.i and 4 of RR No. 2-94, treated the senior citizen discount in the previous law, RA 7432, as a tax deduction instead of a tax credit despite the clear provision in that law which stated –

SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following:

a) The grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services, hotels and similar lodging establishment, restaurants and recreation centers and purchase of medicines anywhere in the country: Provided, That private establishments may claim the cost as tax credit; (Emphasis supplied)

Thus, the Court ruled that the subject revenue regulation violated the law, viz:

The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax deduction from the gross income or gross sale of the establishment concerned. A tax credit is used by a private establishment only after the tax has been computed; a tax deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities. Thus, the provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the rule that administrative regulations cannot amend or revoke the law.93

As can be readily seen, the discussion on eminent domain was not necessary in order to arrive at this conclusion. All that was needed was to point out that the revenue regulation contravened the law which it sought to implement. And, precisely, this was done in Central Luzon Drug Corporation94 by comparing the wording of the previous law vis-à-vis the revenue regulation; employing the rules of statutory construction; and applying the settled principle that a regulation cannot amend the law it seeks to implement. A close reading of Central Luzon Drug Corporation95 would show that the Court went on to state that the tax credit "can be deemed" as just compensation only to explain why the previous law provides for a tax credit instead of a tax deduction. The Court surmised that the tax credit was a form of just compensation given to the establishments covered by the 20% discount. However, the reason why the previous law provided for a tax credit and not a tax deduction was not necessary to resolve the issue as to whether the revenue regulation contravenes the law. Hence, the discussion on eminent domain is obiter dicta.

A court, in resolving cases before it, may look into the possible purposes or reasons that impelled the enactment of a particular statute or legal provision. However, statements made relative thereto are not always necessary in resolving the actual controversies presented before it. This was the case in Central Luzon Drug Corporation96resulting in that unfortunate statement that the tax credit "can be deemed" as just compensation. This, in turn, led to the erroneous conclusion, by deductive reasoning, that the 20% discount is an exercise of the power of eminent domain. The Dissent essentially adopts this theory and reasoning which, as will be shown below, is contrary to settled principles in police power and eminent domain analysis. II The Dissent discusses at length the doctrine on "taking" in police power which occurs when private property is destroyed or placed outside the commerce of man. Indeed, there is a whole class of police power measures which justify the destruction of private property in order to preserve public health, morals, safety or welfare. As earlier mentioned, these would include a building on the verge of collapse or confiscated obscene materials as well as those mentioned by the Dissent with regard to property used in violating a criminal statute or one which constitutes a nuisance. In such cases, no compensation is required. However, it is equally true that there is another class of police power measures which do not involve the destruction of private property but merely regulate its use. The minimum wage law, zoning ordinances, price control laws, laws regulating the operation of motels and hotels, laws limiting the working hours to eight, and the like would fall under this category. The examples cited by the Dissent, likewise, fall under this category: Article 157 of the Labor Code, Sections 19 and 18 of the Social Security Law, and Section 7 of the Pag-IBIG Fund Law. These laws merely regulate or, to use the term of the Dissent, burden the conduct of the affairs of business establishments. In such cases, payment of just compensation is not required because they fall within the sphere of permissible police power measures. The senior citizen discount law falls under this latter category. III The Dissent proceeds from the theory that the permanent reduction of profits or income/gross sales, due to the 20% discount, is a "taking" of private property for public purpose without payment of just compensation. At the outset, it must be emphasized that petitioners never presented any evidence to establish that they were forced to suffer enormous losses or operate at a loss due to the effects of the assailed law. They came directly to this Court and provided a hypothetical computation of the loss they would allegedly suffer due to the operation of the assailed law. The central premise of the Dissent’s argument that the 20% discount results in a permanent reduction in profits or income/gross sales, or forces a business establishment to operate at a loss is, thus,

wholly unsupported by competent evidence. To be sure, the Court can invalidate a law which, on its face, is arbitrary, oppressive or confiscatory.97

But this is not the case here.

In the case at bar, evidence is indispensable before a determination of a constitutional violation can be made because of the following reasons. First, the assailed law, by imposing the senior citizen discount, does not take any of the properties used by a business establishment like, say, the land on which a manufacturing plant is constructed or the equipment being used to produce goods or services. Second, rather than taking specific properties of a business establishment, the senior citizen discount law merely regulates the prices of the goods or services being sold to senior citizens by mandating a 20% discount. Thus, if a product is sold at P10.00 to the general public, then it shall be sold at P8.00 ( i.e., P10.00 less 20%) to senior citizens. Note that the law does not impose at what specific price the product shall be sold, only that a 20% discount shall be given to senior citizens based on the price set by the business establishment. A business establishment is, thus, free to adjust the prices of the goods or services it provides to the general public. Accordingly, it can increase the price of the above product to P20.00 but is required to sell it at P16.00 (i.e. , P20.00 less 20%) to senior citizens. Third, because the law impacts the prices of the goods or services of a particular establishment relative to its sales to senior citizens, its profits or income/gross sales are affected. The extent of the impact would, however, depend on the profit margin of the business establishment on a particular good or service. If a product costs P5.00 to produce and is sold at P10.00, then the profit98 is P5.0099 or a profit margin100 of 50%.101

Under the assailed law, the aforesaid product would have to be sold at P8.00 to senior citizens yet the business would still earn P3.00102 or a 30%103 profit margin. On the other hand, if the product costs P9.00 to produce and is required to be sold at P8.00 to senior citizens, then the business would experience a loss of P1.00.104

But note that since not all customers of a business establishment are senior citizens, the business establishment may continue to earn P1.00 from non-senior citizens which, in turn, can offset any loss arising from sales to senior citizens.

Fourth, when the law imposes the 20% discount in favor of senior citizens, it does not prevent the business establishment from revising its pricing strategy.

By revising its pricing strategy, a business establishment can recoup any reduction of profits or income/gross sales which would otherwise arise from the giving of the 20% discount. To illustrate, suppose A has two customers: X, a senior citizen, and Y, a non-senior citizen. Prior to the law, A sells his products at P10.00 a piece to X and Y resulting in income/gross sales of P20.00 (P10.00 + P10.00). With the passage of the law, A must now sell his product to X at P8.00 (i.e., P10.00 less 20%) so that his income/gross sales would be P18.00 (P8.00 +P10.00) or lower by P2.00. To prevent this from happening, A decides to increase the price of his products toP11.11 per piece. Thus, he sells his product to X at P8.89 (i.e. , P11.11 less 20%) and to Y at P11.11. As a result, his income/gross sales would still be P20.00105 (P8.89 + P11.11). The capacity, then, of business establishments to revise their pricing strategy makes it possible for them not to suffer any reduction in profits or income/gross sales, or, in the alternative, mitigate the reduction of their profits or income/gross sales even after the passage of the law. In other words, business establishments have the capacity to adjust their prices so that they may remain profitable even under the operation of the assailed law.

The Dissent, however, states that – The explanation by the majority that private establishments can always increase their prices to recover the mandatory discount will only encourage private establishments to adjust their prices upwards to the prejudice of customers who do not enjoy the 20% discount. It was likewise suggested that if a company increases its prices, despite the application of the 20% discount, the establishment becomes more profitable than it was before the implementation of R.A. 7432. Such an economic justification is self-defeating, for more consumers will suffer from the price increase than will benefit from the 20% discount. Even then, such ability to increase prices cannot legally validate a violation of the eminent domain clause.106

But, if it is possible that the business establishment, by adjusting its prices, will suffer no reduction in its profits or income/gross sales (or suffer some reduction but continue to operate profitably) despite giving the discount, what would be the basis to strike down the law? If it is possible that the business establishment, by adjusting its prices, will not be unduly burdened, how can there be a finding that the assailed law is an unconstitutional exercise of police power or eminent domain? That there may be a burden placed on business establishments or the consuming public as a result of the operation of the assailed law is not, by itself, a ground to declare it unconstitutional for this goes into the wisdom and expediency of the law.

The cost of most, if not all, regulatory measures of the government on business establishments is ultimately passed on to the consumers but that, by itself, does not justify the wholesale nullification of these measures. It is a basic postulate of our democratic system of government that the Constitution is a social contract whereby the people have surrendered their sovereign powers to the State for the common good.107

All persons may be burdened by regulatory measures intended for the common good or to serve some important governmental interest, such as protecting or improving the welfare of a special class of people for which the Constitution affords preferential concern. Indubitably, the one assailing the law has the heavy burden of proving that the regulation is unreasonable, oppressive or confiscatory, or has gone "too far" as to amount to a "taking." Yet, here, the Dissent would have this Court nullify the law without any proof of such nature.

Further, this Court is not the proper forum to debate the economic theories or realities that impelled Congress to shift from the tax credit to the tax deduction scheme. It is not within our power or competence to judge which scheme is more or less burdensome to business establishments or the consuming public and, thereafter, to choose which scheme the State should use or pursue. The shift from the tax credit to tax deduction scheme is a policy determination by Congress and the Court will respect it for as long as there is no showing, as here, that the subject regulation has transgressed constitutional limitations. Unavoidably, the lack of evidence constrains the Dissent to rely on speculative and hypothetical argumentation when it states that the 20% discount is a significant amount and not a minimal loss (which erroneously assumes that the discount automatically results in a loss when it is possible that the profit margin is greater than 20% and/or the pricing strategy can be revised to prevent or mitigate any reduction in profits or income/gross sales as illustrated above),108 and not all private establishments make a 20% profit margin (which conversely implies that there are those who make more and, thus, would not be greatly affected by this regulation).109

In fine, because of the possible scenarios discussed above, we cannot assume that the 20% discount results in a permanent reduction in profits or income/gross sales,

much less that business establishments are forced to operate at a loss under the assailed law. And, even if we gratuitously assume that the 20% discount results in some degree of reduction in profits or income/gross sales, we cannot assume that such reduction is arbitrary, oppressive or confiscatory. To repeat, there is no actual proof to back up this claim, and it could be that the loss suffered by a business establishment was occasioned through its fault or negligence in not adapting to the effects of the assailed law. The law uniformly applies to all business establishments covered thereunder. There is, therefore, no unjust discrimination as the aforesaid business establishments are faced with the same constraints. The necessity of proof is all the more pertinent in this case because, as similarly observed by Justice Velasco in his Concurring Opinion, the law has been in operation for over nine years now. However, the grim picture painted by petitioners on the unconscionable losses to be indiscriminately suffered by business establishments, which should have led to the closure of numerous business establishments, has not come to pass. Verily, we cannot invalidate the assailed law based on assumptions and conjectures. Without adequate proof, the presumption of constitutionality must prevail. IV At this juncture, we note that the Dissent modified its original arguments by including a new paragraph, to wit:

Section 9, Article III of the 1987 Constitution speaks of private property without any distinction. It does not state that there should be profit before the taking of property is subject to just compensation. The private property referred to for purposes of taking could be inherited, donated, purchased, mortgaged, or as in this case, part of the gross sales of private establishments. They are all private property and any taking should be attended by corresponding payment of just compensation. The 20% discount granted to senior citizens belong to private establishments, whether these establishments make a profit or suffer a loss. In fact, the 20% discount applies to non-profit establishments like country, social, or golf clubs which are open to the public and not only for exclusive membership. The issue of profit or loss to the establishments is immaterial.110

Two things may be said of this argument. First, it contradicts the rest of the arguments of the Dissent. After it states that the issue of profit or loss is immaterial, the Dissent proceeds to argue that the 20% discount is not a minimal loss111 and that the 20% discount forces business establishments to operate at a loss.112

Even the obiter in Central Luzon Drug Corporation,113 which the Dissent essentially adopts and relies on, is premised on the permanent reduction of total revenues and the loss that business establishments will be forced to suffer in arguing that the 20% discount constitutes a "taking" under the power of eminent domain. Thus, when the Dissent now argues that the issue of profit or loss is immaterial, it contradicts itself because it later argues, in order to justify that there is a "taking" under the power of eminent domain in this case, that the 20% discount forces business establishments to suffer a significant loss or to operate at a loss. Second, this argument suffers from the same flaw as the Dissent's original arguments. It is an erroneous characterization of the 20% discount. According to the Dissent, the 20% discount is part of the gross sales and, hence, private property belonging to business establishments. However, as previously discussed, the 20% discount is not private property actually owned and/or used by the business establishment. It should be distinguished from properties like lands or buildings actually used in the operation of a business establishment which, if appropriated for public use, would amount to a "taking" under the power of eminent domain. Instead, the 20% discount is a regulatory measure which impacts the pricing and, hence, the profitability of business establishments. At the time the discount is imposed, no particular property

of the business establishment can be said to be "taken." That is, the State does not acquire or take anything from the business establishment in the way that it takes a piece of private land to build a public road. While the 20% discount may form part of the potential profits or income/gross sales114 of the business establishment, as similarly characterized by Justice Bersamin in his Concurring Opinion, potential profits or income/gross sales are not private property, specifically cash or money, already belonging to the business establishment. They are a mere expectancy because they are potential fruits of the successful conduct of the business. Prior to the sale of goods or services, a business establishment may be subject to State regulations, such as the 20% senior citizen discount, which may impact the level or amount of profits or income/gross sales that can be generated by such establishment. For this reason, the validity of the discount is to be determined based on its overall effects on the operations of the business establishment.

Again, as previously discussed, the 20% discount does not automatically result in a 20% reduction in profits, or, to align it with the term used by the Dissent, the 20% discount does not mean that a 20% reduction in gross sales necessarily results. Because (1) the profit margin of a product is not necessarily less than 20%, (2) not all customers of a business establishment are senior citizens, and (3) the establishment may revise its pricing strategy, such reduction in profits or income/gross sales may be prevented or, in the alternative, mitigated so that the business establishment continues to operate profitably. Thus, even if we gratuitously assume that some degree of reduction in profits or income/gross sales occurs because of the 20% discount, it does not follow that the regulation is unreasonable, oppressive or confiscatory because the business establishment may make the necessary adjustments to continue to operate profitably. No evidence was presented by petitioners to show otherwise. In fact, no evidence was presented by petitioners at all. Justice Leonen, in his Concurring and Dissenting Opinion, characterizes "profits" (or income/gross sales) as an inchoate right. Another way to view it, as stated by Justice Velasco in his Concurring Opinion, is that the business establishment merely has a right to profits. The Constitution adverts to it as the right of an enterprise to a reasonable return on investment.115

Undeniably, this right, like any other right, may be regulated under the police power of the State to achieve important governmental objectives like protecting the interests and improving the welfare of senior citizens. It should be noted though that potential profits or income/gross sales are relevant in police power and eminent domain analyses because they may, in appropriate cases, serve as an indicia when a regulation has gone "too far" as to amount to a "taking" under the power of eminent domain. When the deprivation or reduction of profits or income/gross sales is shown to be unreasonable, oppressive or confiscatory, then the challenged governmental regulation may be nullified for being a "taking" under the power of eminent domain. In such a case, it is not profits or income/gross sales which are actually taken and appropriated for public use. Rather, when the regulation causes an establishment to incur losses in an unreasonable, oppressive or confiscatory manner, what is actually taken is capital and the right of the business establishment to a reasonable return on investment. If the business losses are not halted because of the continued operation of the regulation, this eventually leads to the destruction of the business and the total loss of the capital invested therein. But, again, petitioners in this case failed to prove that the subject regulation is unreasonable, oppressive or confiscatory.

V.

The Dissent further argues that we erroneously used price and rate of return on investment control laws to justify the senior citizen discount law. According to the Dissent, only profits from industries imbued with public interest may be regulated because this is a condition of their franchises. Profits of establishments without franchises cannot be regulated permanently because there is no law regulating their profits. The Dissent concludes that the permanent reduction of total revenues or gross sales of business establishments without franchises is a taking of private property under the power of eminent domain. In making this argument, it is unfortunate that the Dissent quotes only a portion of the ponencia – The subject regulation may be said to be similar to, but with substantial distinctions from, price control or rate of return on investment control laws which are traditionally regarded as police power measures. These laws generally regulate public utilities or industries/enterprises imbued with public interest in order to protect consumers from exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate of return on investment of these corporations considering that they have a monopoly over the goods or services that they provide to the general public. The subject regulation differs therefrom in that (1) the discount does not prevent the establishments from adjusting the level of prices of their goods and services, and (2) the discount does not apply to all customers of a given establishment but only to the class of senior citizens. x x x116

The above paragraph, in full, states –

The subject regulation may be said to be similar to, but with substantial distinctions from, price control or rate of return on investment control laws which are traditionally regarded as police power measures. These laws generally regulate public utilities or industries/enterprises imbued with public interest in order to protect consumers from exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate of return on investment of these corporations considering that they have a monopoly over the goods or services that they provide to the general public. The subject regulation differs therefrom in that (1) the discount does not prevent the establishments from adjusting the level of prices of their goods and services, and (2) the discount does not apply to all customers of a given establishment but only to the class of senior citizens.

Nonetheless, to the degree material to the resolution of this case, the 20% discount may be properly viewed as belonging to the category of price regulatory measures which affects the profitability of establishments subjected thereto. (Emphasis supplied)

The point of this paragraph is to simply show that the State has, in the past, regulated prices and profits of business establishments. In other words, this type of regulatory measures is traditionally recognized as police power measures so that the senior citizen discount may be considered as a police power measure as well. What is more, the substantial distinctions between price and rate of return on investment control laws vis-à-vis the senior citizen discount law provide greater reason to uphold the validity of the senior citizen discount law. As previously discussed, the ability to adjust prices allows the establishment subject to the senior citizen discount to prevent or mitigate any reduction of profits or income/gross sales arising from the giving of the discount. In contrast, establishments subject to price and rate of return on investment control laws cannot adjust prices accordingly. Certainly, there is no intention to say that price and rate of return on investment control laws are the justification for the senior citizen discount law. Not at all. The justification for the senior citizen discount law is the plenary powers of Congress.

The legislative power to regulate business establishments is broad and covers a wide array of areas and subjects. It is well within Congress’ legislative powers to regulate the profits or income/gross sales of industries and enterprises, even those without franchises. For what are franchises but mere legislative enactments? There is nothing in the Constitution that prohibits Congress from regulating the profits or income/gross sales of industries and enterprises without franchises. On the contrary, the social justice provisions of the Constitution enjoin the State to regulate the "acquisition, ownership, use, and disposition" of property and its increments.117

This may cover the regulation of profits or income/gross sales of all businesses, without qualification, to attain the objective of diffusing wealth in order to protect and enhance the right of all the people to human dignity.118

Thus, under the social justice policy of the Constitution, business establishments may be compelled to contribute to uplifting the plight of vulnerable or marginalized groups in our society provided that the regulation is not arbitrary, oppressive or confiscatory, or is not in breach of some specific constitutional limitation. When the Dissent, therefore, states that the "profits of private establishments which are non-franchisees cannot be regulated permanently, and there is no such law regulating their profits permanently,"119 it is assuming what it ought to prove. First, there are laws which, in effect, permanently regulate profits or income/gross sales of establishments without franchises, and RA 9257 is one such law. And, second, Congress can regulate such profits or income/gross sales because, as previously noted, there is nothing in the Constitution to prevent it from doing so. Here, again, it must be emphasized that petitioners failed to present any proof to show that the effects of the assailed law on their operations has been unreasonable, oppressive or confiscatory. The permanent regulation of profits or income/gross sales of business establishments, even those without franchises, is not as uncommon as the Dissent depicts it to be. For instance, the minimum wage law allows the State to set the minimum wage of employees in a given region or geographical area. Because of the added labor costs arising from the minimum wage, a permanent reduction of profits or income/gross sales would result, assuming that the employer does not increase the prices of his goods or services. To illustrate, suppose it costs a company P5.00 to produce a product and it sells the same at P10.00 with a 50% profit margin. Later, the State increases the minimum wage. As a result, the company incurs greater labor costs so that it now costs P7.00 to produce the same product. The profit per product of the company would be reduced to P3.00 with a profit margin of 30%. The net effect would be the same as in the earlier example of granting a 20% senior citizen discount. As can be seen, the minimum wage law could, likewise, lead to a permanent reduction of profits. Does this mean that the minimum wage law should, likewise, be declared unconstitutional on the mere plea that it results in a permanent reduction of profits? Taking it a step further, suppose the company decides to increase the price of its product in order to offset the effects of the increase in labor cost; does this mean that the minimum wage law, following the reasoning of the Dissent, is unconstitutional because the consuming public is effectively made to subsidize the wage of a group of laborers, i.e., minimum wage earners? The same reasoning can be adopted relative to the examples cited by the Dissent which, according to it, are valid police power regulations. Article 157 of the Labor Code, Sections 19 and 18 of the Social Security Law, and Section 7 of the Pag-IBIG Fund Law would effectively increase the labor cost of a business establishment. This would, in turn, be integrated as part of the cost of its goods or services. Again, if the establishment does not increase its prices, the net effect would be a permanent reduction in its profits or income/gross sales. Following the reasoning of the Dissent that "any form of permanent taking of private property (including profits

or income/gross sales)120 is an exercise of eminent domain that requires the State to pay just compensation,"121 then these statutory provisions would, likewise, have to be declared unconstitutional. It does not matter that these benefits are deemed part of the employees’ legislated wages because the net effect is the same, that is, it leads to higher labor costs and a permanent reduction in the profits or income/gross sales of the business establishments.122

The point then is this – most, if not all, regulatory measures imposed by the State on business establishments impact, at some level, the latter’s prices and/or profits or income/gross sales.123

If the Court were to sustain the Dissent’s theory, then a wholesale nullification of such measures would inevitably result. The police power of the State and the social justice provisions of the Constitution would, thus, be rendered nugatory. There is nothing sacrosanct about profits or income/gross sales. This, we made clear in Carlos Superdrug Corporation:124

Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis for its nullification in view of the presumption of validity which every law has in its favor.

x x x x

The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of the business. While the Constitution protects property rights petitioners must the realities of business and the State, in the exercise of police power, can intervene in the operations of a business which may result in an impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the percept for the protection of property, various laws and jurisprudence, particularly on agrarian reform and the regulation of contracts and public utilities, continously serve as a reminder for the promotion of public good.

Undeniably, the success of the senior citizens program rests largely on the support imparted by petitioners and the other private establishments concerned. This being the case, the means employed in invoking the active participation of the private sector, in order to achieve the purpose or objective of the law, is reasonably and directly related. Without sufficient proof that Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the same would be unconscionably detrimental to petitioners, the Court will refrain form quashing a legislative act.125

In conclusion, we maintain that the correct rule in determining whether the subject regulatory measure has amounted to a "taking" under the power of eminent domain is the one laid down in Alalayan v. National Power Corporation126 and followed in Carlos Superdurg Corporation127 consistent with long standing principles in police power and eminent domain analysis. Thus, the deprivation or reduction of profits or income. Gross sales must be clearly shown to be unreasonable, oppressive or confiscatory. Under the specific circumstances of this case, such determination can only be made upon the presentation of competent proof which petitioners failed to do. A law, which has been in operation for many years and promotes the welfare of

a group accorded special concern by the Constitution, cannot and should not be summarily invalidated on a mere allegation that it reduces the profits or income/gross sales of business establishments.

WHEREFORE, the Petition is hereby DISMISSED for lack of merit.

SO ORDERED.

G.R. No. 166429 December 19, 2005

REPUBLIC OF THE PHILIPPINES, Represented by Executive Secretary Eduardo R. Ermita, the DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS (DOTC), and the MANILA INTERNATIONAL AIRPORT AUTHORITY (MIAA), Petitioners, vs.HON. HENRICK F. GINGOYON, In his capacity as Presiding Judge of the Regional Trial Court, Branch 117, Pasay City and PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC., Respondents.

D E C I S I O N

TINGA, J.:

The Ninoy Aquino International Airport Passenger Terminal III (NAIA 3) was conceived, designed and constructed to serve as the country’s show window to the world. Regrettably, it has spawned controversies. Regrettably too, despite the apparent completion of the terminal complex way back it has not yet been operated. This has caused immeasurable economic damage to the country, not to mention its deplorable discredit in the international community.

In the first case that reached this Court, Agan v. PIATCO,1 the contracts which the Government had with the contractor were voided for being contrary to law and public policy. The second case now before the Court involves the matter of just compensation due the contractor for the terminal complex it built. We decide the case on the basis of fairness, the same norm that pervades both the Court’s 2004 Resolution in the first case and the latest expropriation law.

The present controversy has its roots with the promulgation of the Court’s decision in Agan v. PIATCO,2promulgated in 2003 (2003 Decision). This decision nullified the "Concession Agreement for the Build-Operate-and-Transfer Arrangement of the Ninoy Aquino International Airport Passenger Terminal III" entered into between the Philippine Government (Government) and the Philippine International Air Terminals Co., Inc. (PIATCO), as well as the amendments and supplements thereto. The agreement had authorized PIATCO to build a new international airport terminal (NAIA 3), as well as a franchise to operate and maintain the said terminal during the concession period of 25 years. The contracts were nullified, among others, that Paircargo Consortium, predecessor of PIATCO, did not possess the requisite financial capacity when it was awarded the NAIA 3 contract and that the agreement was contrary to public policy.3

At the time of the promulgation of the 2003 Decision, the NAIA 3 facilities had already been built by PIATCO and were nearing completion.4 However, the ponencia was silent as to the legal status of the NAIA 3 facilities following the nullification of the contracts, as well as whatever rights of PIATCO for reimbursement for its expenses in the construction of the facilities. Still, in his Separate Opinion, Justice Panganiban, joined by Justice Callejo, declared as follows:

Should government pay at all for reasonable expenses incurred in the construction of the Terminal? Indeed it should, otherwise it will be unjustly enriching itself at the expense of Piatco and, in particular, its funders, contractors and investors — both local and foreign. After all, there is no question that the State needs and will make use of Terminal III, it being part and parcel of the critical infrastructure and transportation-related programs of government.5

PIATCO and several respondents-intervenors filed their respective motions for the reconsideration of the 2003 Decision. These motions were denied by the Court in its Resolution dated 21 January 2004 (2004 Resolution).6However, the Court this time squarely addressed the issue of the rights of PIATCO to refund, compensation or reimbursement for its expenses in the construction of the NAIA 3 facilities. The holding of the Court on this crucial point follows:

This Court, however, is not unmindful of the reality that the structures comprising the NAIA IPT III facility are almost complete and that funds have been spent by PIATCO in their construction. For the government to take over the said facility, it has to compensate respondent PIATCO as builder of the said structures. The compensation must be just and in accordance with law and equity for the government can not unjustly enrich itself at the expense of PIATCO and its investors.7

After the promulgation of the rulings in Agan, the NAIA 3 facilities have remained in the possession of PIATCO, despite the avowed intent of the Government to put the airport terminal into immediate operation. The Government and PIATCO conducted several rounds of negotiation regarding the NAIA 3 facilities.8 It also appears that arbitral proceedings were commenced before the International Chamber of Commerce International Court of Arbitration and the International Centre for the Settlement of Investment Disputes,9 although the Government has raised jurisdictional questions before those two bodies.10

Then, on 21 December 2004, the Government11 filed a Complaint for expropriation with the Pasay City Regional Trial Court (RTC), together with an Application for Special Raffle seeking the immediate holding of a special raffle. The Government sought upon the filing of the complaint the issuance of a writ of possession authorizing it to take immediate possession and control over the NAIA 3 facilities.

The Government also declared that it had deposited the amount of P3,002,125,000.0012 (3 Billion)13 in Cash with the Land Bank of the Philippines, representing the NAIA 3 terminal’s assessed value for taxation purposes.14

The case15 was raffled to Branch 117 of the Pasay City RTC, presided by respondent judge Hon. Henrick F. Gingoyon (Hon. Gingoyon). On the same day that the Complaint was filed, the RTC issued an Order16 directing the issuance of a writ of possession to the Government, authorizing it to "take or enter upon the possession"

of the NAIA 3 facilities. Citing the case of City of Manila v. Serrano,17 the RTC noted that it had the ministerial duty to issue the writ of possession upon the filing of a complaint for expropriation sufficient in form and substance, and upon deposit made by the government of the amount equivalent to the assessed value of the property subject to expropriation. The RTC found these requisites present, particularly noting that "[t]he case record shows that [the Government has] deposited the assessed value of the [NAIA 3 facilities] in the Land Bank of the Philippines, an authorized depositary, as shown by the certification attached to their complaint." Also on the same day, the RTC issued a Writ of Possession. According to PIATCO, the Government was able to take possession over the NAIA 3 facilities immediately after the Writ of Possession was issued.18

However, on 4 January 2005, the RTC issued another Order designed to supplement its 21 December 2004Order and the Writ of Possession. In the 4 January 2005 Order, now assailed in the present petition, the RTC noted that its earlier issuance of its writ of possession was pursuant to Section 2, Rule 67 of the 1997 Rules of Civil Procedure. However, it was observed that Republic Act No. 8974 (Rep. Act No. 8974), otherwise known as "An Act to Facilitate the Acquisition of Right-of-Way, Site or Location for National Government Infrastructure Projects and For Other Purposes" and its Implementing Rules and Regulations (Implementing Rules) had amended Rule 67 in many respects.

There are at least two crucial differences between the respective procedures under Rep. Act No. 8974 and Rule 67. Under the statute, the Government is required to make immediate payment to the property owner upon the filing of the complaint to be entitled to a writ of possession, whereas in Rule 67, the Government is required only to make an initial deposit with an authorized government depositary. Moreover, Rule 67 prescribes that the initial deposit be equivalent to the assessed value of the property for purposes of taxation, unlike Rep. Act No. 8974 which provides, as the relevant standard for initial compensation, the market value of the property as stated in the tax declaration or the current relevant zonal valuation of the Bureau of Internal Revenue (BIR), whichever is higher, and the value of the improvements and/or structures using the replacement cost method.

Accordingly, on the basis of Sections 4 and 7 of Rep. Act No. 8974 and Section 10 of the Implementing Rules, the RTC made key qualifications to its earlier issuances. First, it directed the Land Bank of the Philippines, Baclaran Branch (LBP-Baclaran), to immediately release the amount of US$62,343,175.77 to PIATCO, an amount which the RTC characterized as that which the Government "specifically made available for the purpose of this expropriation;" and such amount to be deducted from the amount of just compensation due PIATCO as eventually determined by the RTC. Second, the Government was directed to submit to the RTC a Certificate of Availability of Funds signed by authorized officials to cover the payment of just compensation. Third, the Government was directed "to maintain, preserve and safeguard" the NAIA 3 facilities or "perform such as acts or activities in preparation for their direct operation" of the airport terminal, pending expropriation proceedings and full payment of just compensation. However, the Government was prohibited "from performing acts of ownership like awarding concessions or leasing any part of [NAIA 3] to other parties."19

The very next day after the issuance of the assailed 4 January 2005 Order, the Government filed an Urgent Motion for Reconsideration, which was set for hearing on 10 January 2005. On 7 January 2005, the RTC issued another Order, the second now assailed before this Court, which appointed three (3) Commissioners to

ascertain the amount of just compensation for the NAIA 3 Complex. That same day, the Government filed a Motion for Inhibition of Hon. Gingoyon.

The RTC heard the Urgent Motion for Reconsideration and Motion for Inhibition on 10 January 2005. On the same day, it denied these motions in an Omnibus Order dated 10 January 2005. This is the third Order now assailed before this Court. Nonetheless, while the Omnibus Order affirmed the earlier dispositions in the 4 January 2005 Order, it excepted from affirmance "the superfluous part of the Order prohibiting the plaintiffs from awarding concessions or leasing any part of [NAIA 3] to other parties."20

Thus, the present Petition for Certiorari and Prohibition under Rule 65 was filed on 13 January 2005. The petition prayed for the nullification of the RTC orders dated 4 January 2005, 7 January 2005, and 10 January 2005, and for the inhibition of Hon. Gingoyon from taking further action on the expropriation case. A concurrent prayer for the issuance of a temporary restraining order and preliminary injunction was granted by this Court in a Resolutiondated 14 January 2005.21

The Government, in imputing grave abuse of discretion to the acts of Hon. Gingoyon, raises five general arguments, to wit:

(i) that Rule 67, not Rep. Act No. 8974, governs the present expropriation proceedings;

(ii) that Hon. Gingoyon erred when he ordered the immediate release of the amount of US$62.3 Million to PIATCO considering that the assessed value as alleged in the complaint was only P3 Billion;

(iii) that the RTC could not have prohibited the Government from enjoining the performance of acts of ownership;

(iv) that the appointment of the three commissioners was erroneous; and

(v) that Hon. Gingoyon should be compelled to inhibit himself from the expropriation case.22

Before we delve into the merits of the issues raised by the Government, it is essential to consider the crucial holding of the Court in its 2004 Resolution in Agan, which we repeat below:

This Court, however, is not unmindful of the reality that the structures comprising the NAIA IPT III facility are almost complete and that funds have been spent by PIATCO in their construction. For the government to take over the said facility, it has to compensate respondent PIATCO as builder of the said structures. The compensation must be just and in accordance with law and equity for the government can not unjustly enrich itself at the expense of PIATCO and its investors.23

This pronouncement contains the fundamental premises which permeate this decision of the Court. Indeed, Agan, final and executory as it is, stands as governing law in this case, and any disposition of the present petition must conform to the conditions laid down by the Court in its 2004 Resolution.

The 2004 Resolution Which Is

Law of This Case Generally

Permits Expropriation

The pronouncement in the 2004 Resolution is especially significant to this case in two aspects, namely: (i) that PIATCO must receive payment of just compensation determined in accordance with law and equity; and (ii) that the government is barred from taking over NAIA 3 until such just compensation is paid. The parties cannot be allowed to evade the directives laid down by this Court through any mode of judicial action, such as the complaint for eminent domain.

It cannot be denied though that the Court in the 2004 Resolution prescribed mandatory guidelines which the Government must observe before it could acquire the NAIA 3 facilities. Thus, the actions of respondent judge under review, as well as the arguments of the parties must, to merit affirmation, pass the threshold test of whether such propositions are in accord with the 2004 Resolution.

The Government does not contest the efficacy of this pronouncement in the 2004 Resolution,24 thus its application

to the case at bar is not a matter of controversy. Of course, questions such as what is the standard of "just compensation" and which particular laws and equitable principles are applicable, remain in dispute and shall be resolved forthwith.

The Government has chosen to resort to expropriation, a remedy available under the law, which has the added benefit of an integrated process for the determination of just compensation and the payment thereof to PIATCO. We appreciate that the case at bar is a highly unusual case, whereby the Government seeks to expropriate a building complex constructed on land which the State already owns.25 There is an inherent illogic in the resort to eminent domain on property already owned by the State. At first blush, since the State already owns the property on which NAIA 3 stands, the proper remedy should be akin to an action for ejectment.

However, the reason for the resort by the Government to expropriation proceedings is understandable in this case. The 2004 Resolution, in requiring the payment of just compensation prior to the takeover by the Government of

NAIA 3, effectively precluded it from acquiring possession or ownership of the NAIA 3 through the unilateral exercise of its rights as the owner of the ground on which the facilities stood. Thus, as things stood after the 2004 Resolution, the right of the Government to take over the NAIA 3 terminal was preconditioned by lawful order on the payment of just compensation to PIATCO as builder of the structures.

The determination of just compensation could very well be agreed upon by the parties without judicial intervention, and it appears that steps towards that direction had been engaged in. Still, ultimately, the Government resorted to its inherent power of eminent domain through expropriation proceedings. Is eminent domain appropriate in the first place, with due regard not only to the law on expropriation but also to the Court’s 2004 Resolution in Agan?

The right of eminent domain extends to personal and real property, and the NAIA 3 structures, adhered as they are to the soil, are considered as real property.26 The public purpose for the expropriation is also beyond dispute. It should also be noted that Section 1 of Rule 67 (on Expropriation) recognizes the possibility that the property sought to be expropriated may be titled in the name of the

Republic of the Philippines, although occupied by private individuals, and in such case an averment to that effect should be made in the complaint. The instant expropriation complaint did aver that the NAIA 3 complex "stands on a parcel of land owned by the Bases Conversion Development Authority, another agency of [the Republic of the Philippines]."27

Admittedly, eminent domain is not the sole judicial recourse by which the Government may have acquired the NAIA 3 facilities while satisfying the requisites in the 2004 Resolution. Eminent domain though may be the most effective, as well as the speediest means by which such goals may be accomplished. Not only does it enable immediate possession after satisfaction of the requisites under the law, it also has a built-in procedure through which just compensation may be ascertained. Thus, there should be no question as to the propriety of eminent domain proceedings in this case.

Still, in applying the laws and rules on expropriation in the case at bar, we are impelled to apply or construe these rules in accordance with the Court’s prescriptions in the 2004 Resolution to achieve the end effect that the Government may validly take over the NAIA 3 facilities. Insofar as this case is concerned, the 2004 Resolution is effective not only as a legal precedent, but as the source of rights and prescriptions that must be guaranteed, if not enforced, in the resolution of this petition. Otherwise, the integrity and efficacy of the rulings of this Court will be severely diminished.

It is from these premises that we resolve the first question, whether Rule 67 of the Rules of Court or Rep. Act No. 8974 governs the expropriation proceedings in this case.

Application of Rule 67 Violates

the 2004 Agan Resolution

The Government insists that Rule 67 of the Rules of Court governs the expropriation proceedings in this case to the exclusion of all other laws. On the other hand, PIATCO claims that it is Rep. Act No. 8974 which does apply. Earlier, we had adverted to the basic differences between the statute and the procedural rule. Further elaboration is in order.

Rule 67 outlines the procedure under which eminent domain may be exercised by the Government. Yet by no means does it serve at present as the solitary guideline through which the State may expropriate private property. For example, Section 19 of the Local Government Code governs as to the exercise by local government units of the power of eminent domain through an enabling ordinance. And then there is Rep. Act No. 8974, which covers expropriation proceedings intended for national government infrastructure projects.

Rep. Act No. 8974, which provides for a procedure eminently more favorable to the property owner than Rule 67, inescapably applies in instances when the national government expropriates property "for national government infrastructure projects."28 Thus, if expropriation is engaged in by the national government for purposes other than national infrastructure projects, the assessed value standard and the deposit mode prescribed in Rule 67 continues to apply.

Under both Rule 67 and Rep. Act No. 8974, the Government commences expropriation proceedings through the filing of a complaint. Unlike in the case of

local governments which necessitate an authorizing ordinance before expropriation may be accomplished, there is no need under Rule 67 or Rep. Act No. 8974 for legislative authorization before the Government may proceed with a particular exercise of eminent domain. The most crucial difference between Rule 67 and Rep. Act No. 8974 concerns the particular essential step the Government has to undertake to be entitled to a writ of possession.

The first paragraph of Section 2 of Rule 67 provides:

SEC. 2. Entry of plaintiff upon depositing value with authorized government depository. — Upon the filing of the complaint or at any time thereafter and after due notice to the defendant, the plaintiff shall have the right to take or enter upon the possession of the real property involved if he deposits with the authorized government depositary an amount equivalent to the assessed value of the property for purposes of taxation to be held by such bank subject to the orders of the court. Such deposit shall be in money, unless in lieu thereof the court authorizes the deposit of a certificate of deposit of a government bank of the Republic of the Philippines payable on demand to the authorized government depositary.

In contrast, Section 4 of Rep. Act No. 8974 relevantly states:

SEC. 4. Guidelines for Expropriation Proceedings.— Whenever it is necessary to acquire real property for the right-of-way, site or location for any national government infrastructure project through expropriation, the appropriate proceedings before the proper court under the following guidelines:

a) Upon the filing of the complaint, and after due notice to the defendant, the implementing agency shall immediately pay the owner of the property the amount equivalent to the sum of (1) one hundred percent (100%) of the value of the property based on the current relevant zonal valuation of the Bureau of Internal Revenue (BIR); and (2) the value of the improvements and/or structures as determined under Section 7 hereof;

. . .

c) In case the completion of a government infrastructure project is of utmost urgency and importance, and there is no existing valuation of the area concerned, the implementing agency shall immediately pay the owner of the property its proffered value taking into consideration the standards prescribed in Section 5 hereof.

Upon completion with the guidelines abovementioned, the court shall immediately issue to the implementing agency an order to take possession of the property and start the implementation of the project.

Before the court can issue a Writ of Possession, the implementing agency shall present to the court a certificate of availability of funds from the proper official concerned.

. . .

As can be gleaned from the above-quoted texts, Rule 67 merely requires the Government to deposit with an authorized government depositary the assessed value of the property for expropriation for it to be entitled to a writ of possession. On the other hand, Rep. Act No. 8974 requires that the Government make a direct

payment to the property owner before the writ may issue. Moreover, such payment is based on the zonal valuation of the BIR in the case of land, the value of the improvements or structures under the replacement cost method,29 or if no such valuation is available and in cases of utmost urgency, the proffered value of the property to be seized.

It is quite apparent why the Government would prefer to apply Rule 67 in lieu of Rep. Act No. 8974. Under Rule 67, it would not be obliged to immediately pay any amount to PIATCO before it can obtain the writ of possession since all it need do is deposit the amount equivalent to the assessed value with an authorized government depositary. Hence, it devotes considerable effort to point out that Rep. Act No. 8974 does not apply in this case, notwithstanding the undeniable reality that NAIA 3 is a national government project. Yet, these efforts fail, especially considering the controlling effect of the 2004 Resolution in Agan on the adjudication of this case.

It is the finding of this Court that the staging of expropriation proceedings in this case with the exclusive use of Rule 67 would allow for the Government to take over the NAIA 3 facilities in a fashion that directly rebukes our 2004 Resolution in Agan. This Court cannot sanction deviation from its own final and executory orders.

Section 2 of Rule 67 provides that the State "shall have the right to take or enter upon the possession of the real property involved if [the plaintiff] deposits with the authorized government depositary an amount equivalent to the assessed value of the property for purposes of taxation to be held by such bank subject to the orders of the court."30 It is thus apparent that under the provision, all the Government need do to obtain a writ of possession is to deposit the amount equivalent to the assessed value with an authorized government depositary.

Would the deposit under Section 2 of Rule 67 satisfy the requirement laid down in the 2004 Resolution that "[f]or the government to take over the said facility, it has to compensate respondent PIATCO as builder of the said structures"? Evidently not.

If Section 2 of Rule 67 were to apply, PIATCO would be enjoined from receiving a single centavo as just compensation before the Government takes over the NAIA 3 facility by virtue of a writ of possession. Such an injunction squarely contradicts the letter and intent of the 2004 Resolution. Hence, the position of the Government sanctions its own disregard or violation the prescription laid down by this Court that there must first be just compensation paid to PIATCO before the Government may take over the NAIA 3 facilities.

Thus, at the very least, Rule 67 cannot apply in this case without violating the 2004 Resolution. Even assuming that Rep. Act No. 8974 does not govern in this case, it does not necessarily follow that Rule 67 should then apply. After all, adherence to the letter of Section 2, Rule 67 would in turn violate the Court’s requirement in the 2004 Resolution that there must first be payment of just compensation to PIATCO before the Government may take over the property.

It is the plain intent of Rep. Act No. 8974 to supersede the system of deposit under Rule 67 with the scheme of "immediate payment" in cases involving national government infrastructure projects. The following portion of the Senate deliberations, cited by PIATCO in its Memorandum, is worth quoting to cogitate on the purpose behind the plain meaning of the law:

THE CHAIRMAN (SEN. CAYETANO). "x x x Because the Senate believes that, you know, we have to pay the landowners immediately not by treasury bills but by cash.

Since we are depriving them, you know, upon payment, ‘no, of possession, we might as well pay them as much, ‘no, hindi lang 50 percent.

x x x

THE CHAIRMAN (REP. VERGARA). Accepted.

x x x

THE CHAIRMAN (SEN. CAYETANO). Oo. Because this is really in favor of the landowners, e.

THE CHAIRMAN (REP. VERGARA). That’s why we need to really secure the availability of funds.

x x x

THE CHAIRMAN (SEN. CAYETANO). No, no. It’s the same. It says here: iyong first paragraph, diba? Iyong zonal – talagang magbabayad muna. In other words, you know, there must be a payment kaagad. (TSN, Bicameral Conference on the Disagreeing Provisions of House Bill 1422 and Senate Bill 2117, August 29, 2000, pp. 14-20)

x x x

THE CHAIRMAN (SEN. CAYETANO). Okay, okay, ‘no. Unang-una, it is not deposit, ‘no. It’s payment."

REP. BATERINA. It’s payment, ho, payment." (Id., p. 63)31

It likewise bears noting that the appropriate standard of just compensation is a substantive matter. It is well within the province of the legislature to fix the standard, which it did through the enactment of Rep. Act No. 8974. Specifically, this prescribes the new standards in determining the amount of just compensation in expropriation cases relating to national government infrastructure projects, as well as the manner of payment thereof. At the same time, Section 14 of the Implementing Rules recognizes the continued applicability of Rule 67 on procedural aspects when it provides "all matters regarding defenses and objections to the complaint, issues on uncertain ownership and conflicting claims, effects of appeal on the rights of the parties, and such other incidents affecting the complaint shall be resolved under the provisions on expropriation of Rule 67 of the Rules of Court."32

Given that the 2004 Resolution militates against the continued use of the norm under Section 2, Rule 67, is it then possible to apply Rep. Act No. 8974? We find that it is, and moreover, its application in this case complements rather than contravenes the prescriptions laid down in the 2004 Resolution.

Rep. Act No. 8974 Fits

to the Situation at Bar

and Complements the

2004 Agan Resolution

Rep. Act No. 8974 is entitled "An Act To Facilitate The Acquisition Of Right-Of-Way, Site Or Location For National Government Infrastructure Projects And For Other Purposes." Obviously, the law is intended to cover expropriation proceedings intended for national government infrastructure projects. Section 2 of Rep. Act No. 8974 explains what are considered as "national government projects."

Sec. 2. National Government Projects. – The term "national government projects" shall refer to all national government infrastructure, engineering works and service contracts, including projects undertaken by government-owned and controlled corporations, all projects covered by Republic Act No. 6957, as amended by Republic Act No. 7718, otherwise known as the Build-Operate-and-Transfer Law, and other related and necessary activities, such as site acquisition, supply and/or installation of equipment and materials, implementation, construction, completion, operation, maintenance, improvement, repair and rehabilitation, regardless of the source of funding.

As acknowledged in the 2003 Decision, the development of NAIA 3 was made pursuant to a build-operate-and-transfer arrangement pursuant to Republic Act No. 6957, as amended,33 which pertains to infrastructure or development projects normally financed by the public sector but which are now wholly or partly implemented by the private sector.34 Under the build-operate-and-transfer scheme, it is the project proponent which undertakes the construction, including the financing, of a given infrastructure facility.35 In Tatad v. Garcia,36 the Court acknowledged that the operator of the EDSA Light Rail Transit project under a BOT scheme was the owner of the facilities such as "the rail tracks, rolling stocks like the coaches, rail stations, terminals and the power plant."37

There can be no doubt that PIATCO has ownership rights over the facilities which it had financed and constructed. The 2004 Resolution squarely recognized that right when it mandated the payment of just compensation to PIATCO prior to the takeover by the Government of NAIA 3. The fact that the Government resorted to eminent domain proceedings in the first place is a concession on its part of PIATCO’s ownership. Indeed, if no such right is recognized, then there should be no impediment for the Government to seize control of NAIA 3 through ordinary ejectment proceedings.

Since the rights of PIATCO over the NAIA 3 facilities are established, the nature of these facilities should now be determined. Under Section 415(1) of the Civil Code, these facilities are ineluctably immovable or real property, as they constitute buildings, roads and constructions of all kinds adhered to the soil.38 Certainly, the NAIA 3 facilities are of such nature that they cannot just be packed up and transported by PIATCO like a traveling circus caravan.

Thus, the property subject of expropriation, the NAIA 3 facilities, are real property owned by PIATCO. This point is critical, considering the Government’s insistence that the NAIA 3 facilities cannot be deemed as the "right-of-way", "site" or "location" of a national government infrastructure project, within the coverage of Rep. Act No. 8974.

There is no doubt that the NAIA 3 is not, under any sensible contemplation, a "right-of-way." Yet we cannot agree with the Government’s insistence that neither could NAIA 3 be a "site" or "location". The petition quotes the definitions provided in Black’s Law Dictionary of "location’" as the specific place or position of a person or

thing and ‘site’ as pertaining to a place or location or a piece of property set aside for specific use.’"39 Yet even Black’s Law Dictionary provides that "[t]he term [site] does not of itself necessarily mean a place or tract of land fixed by definite boundaries."40 One would assume that the Government, to back up its contention, would be able to point to a clear-cut rule that a "site" or "location" exclusively refers to soil, grass, pebbles and weeds. There is none.

Indeed, we cannot accept the Government’s proposition that the only properties that may be expropriated under Rep. Act No. 8974 are parcels of land. Rep. Act No. 8974 contemplates within its coverage such real property constituting land, buildings, roads and constructions of all kinds adhered to the soil. Section 1 of Rep. Act No. 8974, which sets the declaration of the law’s policy, refers to "real property acquired for national government infrastructure projects are promptly paid just compensation."41 Section 4 is quite explicit in stating that the scope of the law relates to the acquisition of "real property," which under civil law includes buildings, roads and constructions adhered to the soil.

It is moreover apparent that the law and its implementing rules commonly provide for a rule for the valuation of improvements and/or structures thereupon separate from that of the land on which such are constructed. Section 2 of Rep. Act No. 8974 itself recognizes that the improvements or structures on the land may very well be the subject of expropriation proceedings. Section 4(a), in relation to Section 7 of the law provides for the guidelines for the valuation of the improvements or structures to be expropriated. Indeed, nothing in the law would prohibit the application of Section 7, which provides for the valuation method of the improvements and or structures in the instances wherein it is necessary for the Government to expropriate only the improvements or structures, as in this case.

The law classifies the NAIA 3 facilities as real properties just like the soil to which they are adhered. Any sub-classifications of real property and divergent treatment based thereupon for purposes of expropriation must be based on substantial distinctions, otherwise the equal protection clause of the Constitution is violated. There may be perhaps a molecular distinction between soil and the inorganic improvements adhered thereto, yet there are no purposive distinctions that would justify a variant treatment for purposes of expropriation. Both the land itself and the improvements thereupon are susceptible to private ownership independent of each other, capable of pecuniary estimation, and if taken from the owner, considered as a deprivation of property. The owner of improvements seized through expropriation suffers the same degree of loss as the owner of land seized through similar means. Equal protection demands that all persons or things similarly situated should be treated alike, both as to rights conferred and responsibilities imposed. For purposes of expropriation, parcels of land are similarly situated as the buildings or improvements constructed thereon, and a disparate treatment between those two classes of real property infringes the equal protection clause.

Even as the provisions of Rep. Act No. 8974 call for that law’s application in this case, the threshold test must still be met whether its implementation would conform to the dictates of the Court in the 2004 Resolution. Unlike in the case of Rule 67, the application of Rep. Act No. 8974 will not contravene the 2004 Resolution, which requires the payment of just compensation before any takeover of the NAIA 3 facilities by the Government. The 2004 Resolution does not particularize the extent such payment must be effected before the takeover, but it unquestionably requires at least some degree of payment to the private property owner before a writ of possession may issue. The utilization of Rep. Act No. 8974 guarantees compliance

with this bare minimum requirement, as it assures the private property owner the payment of, at the very least, the proffered value of the property to be seized. Such payment of the proffered value to the owner, followed by the issuance of the writ of possession in favor of the Government, is precisely the schematic under Rep. Act No. 8974, one which facially complies with the prescription laid down in the 2004 Resolution.

Clearly then, we see no error on the part of the RTC when it ruled that Rep. Act No. 8974 governs the instant expropriation proceedings.

The Proper Amount to be Paid

under Rep. Act No. 8974

Then, there is the matter of the proper amount which should be paid to PIATCO by the Government before the writ of possession may issue, consonant to Rep. Act No. 8974.

At this juncture, we must address the observation made by the Office of the Solicitor General in behalf of the Government that there could be no "BIR zonal valuations" on the NAIA 3 facility, as provided in Rep. Act No. 8974, since zonal valuations are only for parcels of land, not for airport terminals. The Court agrees with this point, yet does not see it as an impediment for the application of Rep. Act No. 8974.

It must be clarified that PIATCO cannot be reimbursed or justly compensated for the value of the parcel of land on which NAIA 3 stands. PIATCO is not the owner of the land on which the NAIA 3 facility is constructed, and it should not be entitled to just compensation that is inclusive of the value of the land itself. It would be highly disingenuous to compensate PIATCO for the value of land it does not own. Its entitlement to just compensation should be limited to the value of the improvements and/or structures themselves. Thus, the determination of just compensation cannot include the BIR zonal valuation under Section 4 of Rep. Act No. 8974.

Under Rep. Act No. 8974, the Government is required to "immediately pay" the owner of the property the amount equivalent to the sum of (1) one hundred percent (100%) of the value of the property based on the current relevant zonal valuation of the [BIR]; and (2) the value of the improvements and/or structures as determined under Section 7. As stated above, the BIR zonal valuation cannot apply in this case, thus the amount subject to immediate payment should be limited to "the value of the improvements and/or structures as determined under Section 7," with Section 7 referring to the "implementing rules and regulations for the equitable valuation of the improvements and/or structures on the land." Under the present implementing rules in place, the valuation of the improvements/structures are to be based using "the replacement cost method."42 However, the replacement cost is only one of the factors to be considered in determining the just compensation.

In addition to Rep. Act No. 8974, the 2004 Resolution in Agan also mandated that the payment of just compensation should be in accordance with equity as well. Thus, in ascertaining the ultimate amount of just compensation, the duty of the trial court is to ensure that such amount conforms not only to the law, such as Rep. Act No. 8974, but to principles of equity as well.

Admittedly, there is no way, at least for the present, to immediately ascertain the value of the improvements and structures since such valuation is a matter for

factual determination.43 Yet Rep. Act No. 8974 permits an expedited means by which the Government can immediately take possession of the property without having to await precise determination of the valuation. Section 4(c) of Rep. Act No. 8974 states that "in case the completion of a government infrastructure project is of utmost urgency and importance, and there is no existing valuation of the area concerned, the implementing agency shall immediately pay the owner of the property its proferred value, taking into consideration the standards prescribed in Section 5 [of the law]."44 The "proffered value" may strike as a highly subjective standard based solely on the intuition of the government, but Rep. Act No. 8974 does provide relevant standards by which "proffered value" should be based, 45 as well as the certainty

of judicial determination of the propriety of the proffered value.46

In filing the complaint for expropriation, the Government alleged to have deposited the amount of P3 Billion earmarked for expropriation, representing the assessed value of the property. The making of the deposit, including the determination of the amount of the deposit, was undertaken under the erroneous notion that Rule 67, and not Rep. Act No. 8974, is the applicable law. Still, as regards the amount, the Court sees no impediment to recognize this sum of P3 Billion as the proffered value under Section 4(b) of Rep. Act No. 8974. After all, in the initial determination of the proffered value, the Government is not strictly required to adhere to any predetermined standards, although its proffered value may later be subjected to judicial review using the standards enumerated under Section 5 of Rep. Act No. 8974.

How should we appreciate the questioned order of Hon. Gingoyon, which pegged the amount to be immediately paid to PIATCO at around $62.3 Million? The Order dated 4 January 2005, which mandated such amount, proves problematic in that regard. While the initial sum of P3 Billion may have been based on the assessed value, a standard which should not however apply in this case, the RTC cites without qualification Section 4(a) of Rep. Act No. 8974 as the basis for the amount of $62.3 Million, thus leaving the impression that the BIR zonal valuation may form part of the basis for just compensation, which should not be the case. Moreover, respondent judge made no attempt to apply the enumerated guidelines for determination of just compensation under Section 5 of Rep. Act No. 8974, as required for judicial review of the proffered value.

The Court notes that in the 10 January 2005 Omnibus Order, the RTC noted that the concessions agreement entered into between the Government and PIATCO stated that the actual cost of building NAIA 3 was "not less than" US$350 Million.47 The RTC then proceeded to observe that while Rep. Act No. 8974 required the immediate payment to PIATCO the amount equivalent to 100% of the value of NAIA 3, the amount deposited by the Government constituted only 18% of this value. At this point, no binding import should be given to this observation that the actual cost of building NAIA 3 was "not less than" US$350 Million, as the final conclusions on the amount of just compensation can come only after due ascertainment in accordance with the standards set under Rep. Act No. 8974, not the declarations of the parties. At the same time, the expressed linkage between the BIR zonal valuation and the amount of just compensation in this case, is revelatory of erroneous thought on the part of the RTC.

We have already pointed out the irrelevance of the BIR zonal valuation as an appropriate basis for valuation in this case, PIATCO not being the owner of the land

on which the NAIA 3 facilities stand. The subject order is flawed insofar as it fails to qualify that such standard is inappropriate.

It does appear that the amount of US$62.3 Million was based on the certification issued by the LBP-Baclaran that the Republic of the Philippines maintained a total balance in that branch amounting to such amount. Yet the actual representation of the $62.3 Million is not clear. The Land Bank Certification expressing such amount does state that it was issued upon request of the Manila International Airport Authority "purportedly as guaranty deposit for the expropriation complaint."48 The Government claims in its Memorandum that the entire amount was made available as a guaranty fund for the final and executory judgment of the trial court, and not merely for the issuance of the writ of possession.49 One could readily conclude that the entire amount of US$62.3 Million was intended by the Government to answer for whatever guaranties may be required for the purpose of the expropriation complaint.

Still, such intention the Government may have had as to the entire US$62.3 Million is only inferentially established. In ascertaining the proffered value adduced by the Government, the amount of P3 Billion as the amount deposited characterized in the complaint as "to be held by [Land Bank] subject to the [RTC’s] orders,"50should be deemed as controlling. There is no clear evidence that the Government intended to offer US$62.3 Million as the initial payment of just compensation, the wording of the Land Bank Certification notwithstanding, and credence should be given to the consistent position of the Government on that aspect.

In any event, for the RTC to be able to justify the payment of US$62.3 Million to PIATCO and not P3 Billion Pesos, he would have to establish that the higher amount represents the valuation of the structures/improvements, and not the BIR zonal valuation on the land wherein NAIA 3 is built. The Order dated 5 January 2005 fails to establish such integral fact, and in the absence of contravening proof, the proffered value of P3 Billion, as presented by the Government, should prevail.

Strikingly, the Government submits that assuming that Rep. Act No. 8974 is applicable, the deposited amount ofP3 Billion should be considered as the proffered value, since the amount was based on comparative values made by the City Assessor.51 Accordingly, it should be deemed as having faithfully complied with the requirements of the statute.52 While the Court agrees that P3 Billion should be considered as the correct proffered value, still we cannot deem the Government as having faithfully complied with Rep. Act No. 8974. For the law plainly requires direct payment to the property owner, and not a mere deposit with the authorized government depositary. Without such direct payment, no writ of possession may be obtained.

Writ of Possession May Not

Be Implemented Until Actual

Receipt by PIATCO of Proferred

Value

The Court thus finds another error on the part of the RTC. The RTC authorized the issuance of the writ of possession to the Government notwithstanding the fact that no payment of any amount had yet been made to PIATCO, despite the clear command of Rep. Act No. 8974 that there must first be payment before the writ of

possession can issue. While the RTC did direct the LBP-Baclaran to immediately release the amount of US$62 Million to PIATCO, it should have likewise suspended the writ of possession, nay, withdrawn it altogether, until the Government shall have actually paid PIATCO. This is the inevitable consequence of the clear command of Rep. Act No. 8974 that requires immediate payment of the initially determined amount of just compensation should be effected. Otherwise, the overpowering intention of Rep. Act No. 8974 of ensuring payment first before transfer of repossession would be eviscerated.

Rep. Act No. 8974 represents a significant change from previous expropriation laws such as Rule 67, or even Section 19 of the Local Government Code. Rule 67 and the Local Government Code merely provided that the Government deposit the initial amounts53 antecedent to acquiring possession of the property with, respectively, an authorized

Government depositary54 or the proper court.55 In both cases, the private owner does not receive compensation prior to the deprivation of property. On the other hand, Rep. Act No. 8974 mandates immediate payment of the initial just compensation prior to the issuance of the writ of possession in favor of the Government.

Rep. Act No. 8974 is plainly clear in imposing the requirement of immediate prepayment, and no amount of statutory deconstruction can evade such requisite. It enshrines a new approach towards eminent domain that reconciles the inherent unease attending expropriation proceedings with a position of fundamental equity. While expropriation proceedings have always demanded just compensation in exchange for private property, the previous deposit requirement impeded immediate compensation to the private owner, especially in cases wherein the determination

of the final amount of compensation would prove highly disputed. Under the new modality prescribed by Rep. Act No. 8974, the private owner sees immediate monetary recompense with the same degree of speed as the taking of his/her property.

While eminent domain lies as one of the inherent powers of the State, there is no requirement that it undertake a prolonged procedure, or that the payment of the private owner be protracted as far as practicable. In fact, the expedited procedure of payment, as highlighted under Rep. Act No. 8974, is inherently more fair, especially to the layperson who would be hard-pressed to fully comprehend the social value of expropriation in the first place. Immediate payment placates to some degree whatever ill-will that arises from expropriation, as well as satisfies the demand of basic fairness.

The Court has the duty to implement Rep. Act No. 8974 and to direct compliance with the requirement of immediate payment in this case. Accordingly, the Writ of Possession dated 21 December 2004 should be held in abeyance, pending proof of actual payment by the Government to PIATCO of the proffered value of the NAIA 3 facilities, which totals P3,002,125,000.00.

Rights of the Government

upon Issuance of the Writ

of Possession

Once the Government pays PIATCO the amount of the proffered value of P3 Billion, it will be entitled to the Writ of Possession. However, the Government questions the qualification imposed by the RTC in its 4 January 2005Order consisting of the prohibition on the Government from performing acts of ownership such as awarding concessions or leasing any part of NAIA 3 to other parties. To be certain, the RTC, in its 10 January 2005Omnibus Order, expressly stated that it was not affirming "the superfluous part of the Order [of 4 January 2005] prohibiting the plaintiffs from awarding concessions or leasing any part of NAIA [3] to other parties."56 Still, such statement was predicated on the notion that since the Government was not yet the owner of NAIA 3 until final payment of just compensation, it was obviously incapacitated to perform such acts of ownership.

In deciding this question, the 2004 Resolution in Agan cannot be ignored, particularly the declaration that "[f]or the government to take over the said facility, it has to compensate respondent PIATCO as builder of the said structures." The obvious import of this holding is that unless PIATCO is paid just compensation, the Government is barred from "taking over," a phrase which in the strictest sense could encompass even a bar of physical possession of NAIA 3, much less operation of the facilities.

There are critical reasons for the Court to view the 2004 Resolution less stringently, and thus allow the operation by the Government of NAIA 3 upon the effectivity of the Writ of Possession. For one, the national prestige is diminished every day that passes with the NAIA 3 remaining mothballed. For another, the continued non-use of the facilities contributes to its physical deterioration, if it has not already. And still for another, the economic benefits to the Government and the country at large are beyond dispute once the NAIA 3 is put in operation.

Rep. Act No. 8974 provides the appropriate answer for the standard that governs the extent of the acts the Government may be authorized to perform upon the issuance of the writ of possession. Section 4 states that "the court shall immediately issue to the implementing agency an order to take possession of the property and start the implementation of the project." We hold that accordingly, once the Writ of Possession is effective, the Government itself is authorized to perform the acts that are essential to the operation of the NAIA 3 as an international airport terminal upon the effectivity of the Writ of Possession. These would include the repair, reconditioning and improvement of the complex, maintenance of the existing facilities and equipment, installation of new facilities and equipment, provision of services and facilities pertaining to the facilitation of air traffic and transport, and other services that are integral to a modern-day international airport.

The Government’s position is more expansive than that adopted by the Court. It argues that with the writ of possession, it is enabled to perform acts de jure on the expropriated property. It cites Republic v. Tagle,57 as well as the statement therein that "the expropriation of real property does not include mere physical entry or occupation of land," and from them concludes that "its mere physical entry and occupation of the property fall short of the taking of title, which includes all the rights that may be exercised by an owner over the subject property."

This conclusion is indeed lifted directly from statements in Tagle,58 but not from the ratio decidendi of that case.Tagle concerned whether a writ of possession in favor of the Government was still necessary in light of the fact that it was already in actual possession of the property. In ruling that the Government was entitled to the writ of possession, the Court in Tagle explains that such writ vested not only physical possession, but also the legal right to possess the property. Continues the

Court, such legal right to possess was particularly important in the case, as there was a pending suit against the Republic for unlawful detainer, and the writ of possession would serve to safeguard the Government from eviction.59

At the same time, Tagle conforms to the obvious, that there is no transfer of ownership as of yet by virtue of the writ of possession. Tagle may concede that the Government is entitled to exercise more than just the right of possession by virtue of the writ of possession, yet it cannot be construed to grant the Government the entire panoply of rights that are available to the owner. Certainly, neither Tagle nor any other case or law, lends support to the Government’s proposition that it acquires beneficial or equitable ownership of the expropriated property merely through the writ of possession.

Indeed, this Court has been vigilant in defense of the rights of the property owner who has been validly deprived of possession, yet retains legal title over the expropriated property pending payment of just compensation. We reiterated the various doctrines of such import in our recent holding in Republic v. Lim:60

The recognized rule is that title to the property expropriated shall pass from the owner to the expropriator onlyupon full payment of the just compensation. Jurisprudence on this settled principle is consistent both here and in other democratic jurisdictions. In Association of Small Landowners in the Philippines, Inc. et al., vs. Secretary of Agrarian Reform[61], thus:

"Title to property which is the subject of condemnation proceedings does not vest the condemnor until the judgment fixing just compensation is entered and paid, but the condemnor’s title relates back to the date on which the petition under the Eminent Domain Act, or the commissioner’s report under the Local Improvement Act, is filed.

x x x Although the right to appropriate and use land taken for a canal is complete at the time of entry, title to the property taken remains in the owner until payment is actually made. (Emphasis supplied.)

In Kennedy v. Indianapolis, the US Supreme Court cited several cases holding that title to property does not pass to the condemnor until just compensation had actually been made. In fact, the decisions appear to be uniform to this effect. As early as 1838, in Rubottom v. McLure, it was held that ‘actual payment to the owner of the condemned property was a condition precedent to the investment of the title to the property in the State’ albeit ‘not to the appropriation of it to public use.’ In Rexford v. Knight, the Court of Appeals of New York said that the construction upon the statutes was that the fee did not vest in the State until the payment of the compensation although the authority to enter upon and appropriate the land was complete prior to the payment. Kennedy further said that ‘both on principle and authority the rule is . . . that the right to enter on and use the property is complete, as soon as the property is actually appropriated under the authority of law for a public use, but that the title does not pass from the owner without his consent, until just compensation has been made to him."

Our own Supreme Court has held in Visayan Refining Co. v. Camus and Paredes, that:

‘If the laws which we have exhibited or cited in the preceding discussion are attentively examined it will be apparent that the method of

expropriation adopted in this jurisdiction is such as to afford absolute reassurance that no piece of land can be finally and irrevocably taken from an unwilling owner until compensation is paid....’"(Emphasis supplied.)

Clearly, without full payment of just compensation, there can be no transfer of title from the landowner to the expropriator. Otherwise stated, the Republic’s acquisition of ownership is conditioned upon the full payment of just compensation within a reasonable time.

Significantly, in Municipality of Biñan v. Garcia[62] this Court ruled that the expropriation of lands consists of two stages, to wit:

"x x x The first is concerned with the determination of the authority of the plaintiff to exercise the power of eminent domain and the propriety of its exercise in the context of the facts involved in the suit. It ends with an order, if not of dismissal of the action, "of condemnation declaring that the plaintiff has a lawful right to take the property sought to be condemned, for the public use or purpose described in the complaint, upon the payment of just compensation to be determined as of the date of the filing of the complaint" x x x.

The second phase of the eminent domain action is concerned with the determination by the court of "the just compensation for the property sought to be taken." This is done by the court with the assistance of not more than three (3) commissioners. x x x.

It is only upon the completion of these two stages that expropriation is said to have been completed. In Republic v. Salem Investment Corporation[63]  , we ruled that, "the process is not completed until payment of just compensation." Thus, here, the failure of the Republic to pay respondent and his predecessors-in-interest for a period of 57 years rendered the expropriation process incomplete.

Lim serves fair warning to the Government and its agencies who consistently refuse to pay just compensation due to the private property owner whose property had been

expropriated. At the same time, Lim emphasizes the fragility of the rights of the Government as possessor pending the final payment of just compensation, without diminishing the potency of such rights. Indeed, the public policy, enshrined foremost in the Constitution, mandates that the Government must pay for the private property it expropriates. Consequently, the proper judicial attitude is to guarantee compliance with this primordial right to just compensation.

Final Determination of Just

Compensation Within 60 Days

The issuance of the writ of possession does not write finis to the expropriation proceedings. As earlier pointed out, expropriation is not completed until payment to the property owner of just compensation. The proffered value stands as merely a provisional determination of the amount of just compensation, the payment of which is sufficient to transfer possession of the property to the Government. However, to effectuate the transfer of ownership, it is necessary for the Government to pay the property owner the final just compensation.

In Lim, the Court went as far as to countenance, given the exceptional circumstances of that case, the reversion of the validly expropriated property to

private ownership due to the failure of the Government to pay just compensation in that case.64 It was noted in that case that the Government deliberately refused to pay just compensation. The Court went on to rule that "in cases where the government failed to pay just compensation within five (5) years from the finality of the judgment in the expropriation proceedings, the owners concerned shall have the right to recover possession of their property."65

Rep. Act No. 8974 mandates a speedy method by which the final determination of just compensation may be had. Section 4 provides:

In the event that the owner of the property contests the implementing agency’s proffered value, the court shall determine the just compensation to be paid the owner within sixty (60) days from the date of filing of the expropriation case. When the decision of the court becomes final and executory, the implementing agency shall pay the owner the difference between the amount already paid and the just compensation as determined by the court.

We hold that this provision should apply in this case. The sixty (60)-day period prescribed in Rep. Act No. 8974 gives teeth to the law’s avowed policy "to ensure that owners of real property acquired for national government infrastructure projects are promptly paid just compensation."66 In this case, there already has been irreversible delay in the prompt payment of PIATCO of just compensation, and it is no longer possible for the RTC to determine the just compensation due PIATCO within sixty (60) days from the filing of the complaint last 21 December 2004, as contemplated by the law. Still, it is feasible to effectuate the spirit of the law by requiring the trial court to make such determination within sixty (60) days from finality of this decision, in accordance with the guidelines laid down in Rep. Act No. 8974 and its Implementing Rules.

Of course, once the amount of just compensation has been finally determined, the Government is obliged to pay PIATCO the said amount. As shown in Lim and other like-minded cases, the Government’s refusal to make such payment is indubitably actionable in court.

Appointment of Commissioners

The next argument for consideration is the claim of the Government that the RTC erred in appointing the three commissioners in its 7 January 2005 Order without prior consultation with either the Government or PIATCO, or without affording the Government the opportunity to object to the appointment of these commissioners. We can dispose of this argument without complication.

It must be noted that Rep. Act No. 8974 is silent on the appointment of commissioners tasked with the ascertainment of just compensation.67 This protocol though is sanctioned under Rule 67. We rule that the appointment of commissioners under Rule 67 may be resorted to, even in expropriation proceedings under Rep. Act No. 8974, since the application of the provisions of Rule 67 in that regard do not conflict with the statute. As earlier stated, Section 14 of the Implementing Rules does allow such other incidents affecting the complaint to be resolved under the provisions on expropriation of Rule 67 of the Rules of Court. Even without Rule 67, reference during trial to a commissioner of the examination of an issue of fact is sanctioned under Rule 32 of the Rules of Court.

But while the appointment of commissioners under the aegis of Rule 67 may be sanctioned in expropriation proceedings under Rep. Act No. 8974, the standards to

be observed for the determination of just compensation are provided not in Rule 67 but in the statute. In particular, the governing standards for the determination of just compensation for the NAIA 3 facilities are found in Section 10 of the Implementing Rules for Rep. Act No. 8974, which provides for the replacement cost method in the valuation of improvements and structures.68

Nothing in Rule 67 or Rep. Act No. 8974 requires that the RTC consult with the parties in the expropriation case on who should be appointed as commissioners. Neither does the Court feel that such a requirement should be imposed in this case. We did rule in Municipality of Talisay v. Ramirez69 that "there is nothing to prevent [the trial court] from seeking the recommendations of the parties on [the] matter [of appointment of commissioners], the better to ensure their fair representation."70 At the same time, such solicitation of recommendations is not obligatory on the part of the court, hence we cannot impute error on the part of the RTC in its exercise of solitary discretion in the appointment of the commissioners.

What Rule 67 does allow though is for the parties to protest the appointment of any of these commissioners, as provided under Section 5 of the Rule. These objections though must be made filed within ten (10) days from service of the order of appointment of the commissioners.71 In this case, the proper recourse of the Government to challenge the choice of the commissioners is to file an objection with the trial court, conformably with Section 5, Rule 67, and not as it has done, assail the same through a special civil action for certiorari. Considering that the expropriation proceedings in this case were effectively halted seven (7) days after the Order appointing the commissioners,72 it is permissible to allow the parties to file their objections with the RTC within five (5) days from finality of this decision.

Insufficient Ground for Inhibition

of Respondent Judge

The final argument for disposition is the claim of the Government is that Hon. Gingoyon has prejudged the expropriation case against the Government’s cause and, thus, should be required to inhibit himself. This grave charge is predicated on facts which the Government characterizes as "undeniable." In particular, the Government notes that the 4 January 2005 Order was issued motu proprio, without any preceding motion, notice or hearing. Further, such order, which directed the payment of US$62 Million to PIATCO, was attended with error in the computation of just compensation. The Government also notes that the said Order was issued even before summons had been served on PIATCO.

The disqualification of a judge is a deprivation of his/her judicial power73 and should not be allowed on the basis of mere speculations and surmises. It certainly cannot be predicated on the adverse nature of the judge’s rulings towards the movant for inhibition, especially if these rulings are in accord with law. Neither could inhibition be justified merely on the erroneous nature of the rulings of the judge. We emphasized in Webb v. People:74

To prove bias and prejudice on the part of respondent judge, petitioners harp on the alleged adverse and erroneous rulings of respondent judge on their various motions. By themselves, however, they do not sufficiently prove bias and prejudice to disqualify respondent judge. To be disqualifying, the bias and prejudice must be shown to have stemmed from an extrajudicial source and result in an opinion on the merits on some basis other than what the judge learned from his participation in the case. Opinions formed in

the course of judicial proceedings, although erroneous, as long as they are based on the evidence presented and conduct observed by the judge, do not prove personal bias or prejudice on the part of the judge.As a general rule, repeated rulings against a litigant, no matter how erroneous and vigorously and consistently expressed, are not a basis for disqualification of a judge on grounds of bias and prejudice. Extrinsic evidence is required to establish bias, bad faith, malice or corrupt purpose, in addition to the palpable error which may be inferred from the decision or order itself. Although the decision may seem so erroneous as to raise doubts concerning a judge's integrity, absent extrinsic evidence, the decision itself would be insufficient to establish a case against the judge. The only exception to the rule is when the error is so gross and patent as to produce an ineluctable inference of bad faith or malice.75

The Government’s contentions against Hon. Gingoyon are severely undercut by the fact that the 21 December 2004 Order, which the 4 January 2005 Order sought to rectify, was indeed severely flawed as it erroneously applied the provisions of Rule 67 of the Rules of Court, instead of Rep. Act No. 8974, in ascertaining compliance with the requisites for the issuance of the writ of possession. The 4 January

2005 Order, which according to the Government establishes Hon. Gingoyon’s bias, was promulgated precisely to correct the previous error by applying the correct provisions of law. It would not speak well of the Court if it sanctions a judge for wanting or even attempting to correct a previous erroneous order which precisely is the right move to take.

Neither are we convinced that the motu proprio issuance of the 4 January 2005 Order, without the benefit of notice or hearing, sufficiently evinces bias on the part of Hon. Gingoyon. The motu proprio amendment by a court of an erroneous order previously issued may be sanctioned depending on the circumstances, in line with the long-recognized principle that every court has inherent power to do all things reasonably necessary for the administration of justice within the scope of its jurisdiction.76 Section 5(g), Rule 135 of the Rules of Court further recognizes the inherent power of courts "to amend and control its process and orders so as to make them conformable to law and justice,"77 a power which Hon. Gingoyon noted in his 10 January 2005 Omnibus Order.78This inherent power includes the right of the court to reverse itself, especially when in its honest opinion it has committed an error or mistake in judgment, and that to adhere to its decision will cause injustice to a party litigant.79

Certainly, the 4 January 2005 Order was designed to make the RTC’s previous order conformable to law and justice, particularly to apply the correct law of the case. Of course, as earlier established, this effort proved incomplete, as the 4 January 2005 Order did not correctly apply Rep. Act No. 8974 in several respects. Still, at least, the 4 January 2005 Order correctly reformed the most basic premise of the case that Rep. Act No. 8974 governs the expropriation proceedings.

Nonetheless, the Government belittles Hon. Gingoyon’s invocation of Section 5(g), Rule 135 as "patently without merit". Certainly merit can be seen by the fact that the 4 January 2005 Order reoriented the expropriation proceedings towards the correct governing law. Still, the Government claims that the unilateral act of the RTC did not conform to law or justice, as it was not afforded the right to be heard.

The Court would be more charitably disposed towards this argument if not for the fact that the earlier order with the 4 January 2005 Order sought to correct was itself

issued without the benefit of any hearing. In fact, nothing either in Rule 67 or Rep. Act No. 8975 requires the conduct of a hearing prior to the issuance of the writ of possession, which by design is available immediately upon the filing of the complaint provided that the requisites attaching thereto are present. Indeed, this expedited process for the obtention of a writ of possession in expropriation cases comes at the expense of the rights of the property owner to be heard or to be deprived of possession. Considering these predicates, it would be highly awry to demand that an order modifying the earlier issuance of a writ of possession in an expropriation case be barred until the staging of a hearing, when the issuance of the writ of possession itself is not subject to hearing. Perhaps the conduct of a hearing under these circumstances would be prudent. However, hearing is not mandatory, and the failure to conduct one does not establish the manifest bias required for the inhibition of the judge.

The Government likewise faults Hon. Gingoyon for using the amount of US$350 Million as the basis for the 100% deposit under Rep. Act No. 8974. The Court has noted that this statement was predicated on the erroneous belief that the BIR zonal valuation applies as a standard for determination of just compensation in this case. Yet this is manifest not of bias, but merely of error on the part of the judge. Indeed, the Government was not the only victim of the errors of the RTC in the assailed orders. PIATCO itself was injured by the issuance by the RTC of the writ of possession, even though the former had yet to be paid any amount of just compensation. At the same time, the Government was also prejudiced by the erroneous ruling of the RTC that the amount of US$62.3 Million, and notP3 Billion, should be released to PIATCO.

The Court has not been remiss in pointing out the multiple errors committed by the RTC in its assailed orders, to the prejudice of both parties. This attitude of error towards all does not ipso facto negate the charge of bias. Still, great care should be had in requiring the inhibition of judges simply because the magistrate did err. Incompetence may be a ground for administrative sanction, but not for inhibition, which requires lack of objectivity or impartiality to sit on a case.

The Court should necessarily guard against adopting a standard that a judge should be inhibited from hearing the case if one litigant loses trust in the judge. Such loss of trust on the part of the Government may be palpable, yet inhibition cannot be grounded merely on the feelings of the party-litigants. Indeed, every losing litigant in any case can resort to claiming that the judge was biased, and he/she will gain a sympathetic ear from friends, family, and people who do not understand the judicial process. The test in believing such a proposition should not be the vehemence of the litigant’s claim of bias, but the Court’s judicious estimation, as people who know better than to believe any old cry of "wolf!", whether such bias has been irrefutably exhibited.

The Court acknowledges that it had been previously held that "at the very first sign of lack of faith and trust in his actions, whether well-grounded or not, the judge has no other alternative but to inhibit himself from the case."80But this doctrine is qualified by the entrenched rule that "a judge may not be legally prohibited from sitting in a litigation, but when circumstances appear that will induce doubt to his honest actuations and probity in favor of either party, or incite such state of mind, he should conduct a careful self-

examination. He should exercise his discretion in a way that the people's faith in the Courts of Justice is not impaired."81 And a self-assessment by the judge that he/she

is not impaired to hear the case will be respected by the Court absent any evidence to the contrary. As held in Chin v. Court of Appeals:

An allegation of prejudgment, without more, constitutes mere conjecture and is not one of the "just and valid reasons" contemplated in the second paragraph of Rule 137 of the Rules of Court for which a judge may inhibit himself from hearing the case. We have repeatedly held that mere suspicion that a judge is partial to a party is not enough. Bare allegations of partiality and prejudgment will not suffice in the absence of clear and convincing evidence to overcome the presumption that the judge will undertake his noble role to dispense justice according to law and evidence and without fear or favor. There should be adequate evidence to prove the allegations, and there must be showing that the judge had an interest, personal or otherwise, in the prosecution of the case. To be a disqualifying circumstance, the bias and prejudice must be shown to have stemmed from an extrajudicial source and result in an opinion on the merits on some basis other than what the judge learned from his participation in the case.82

The mere vehemence of the Government’s claim of bias does not translate to clear and convincing evidence of impairing bias. There is no sufficient ground to direct the inhibition of Hon. Gingoyon from hearing the expropriation case.

In conclusion, the Court summarizes its rulings as follows:

(1) The 2004 Resolution  in Agan sets the base requirement that has to be observed before the Government may take over the NAIA 3, that there must be payment to PIATCO of just compensation in accordance with law and equity. Any ruling in the present expropriation case must be conformable to the dictates of the Court as pronounced in the Agan cases.

(2) Rep. Act No. 8974 applies in this case, particularly insofar as it requires the immediate payment by the Government of at least the proffered value of the NAIA 3 facilities to PIATCO and provides certain valuation standards or methods for the determination of just compensation.

(3) Applying Rep. Act No. 8974, the implementation of Writ of Possession in favor of the Government over NAIA 3 is held in abeyance until PIATCO is directly paid the amount of P3 Billion, representing the proffered value of NAIA 3 under Section 4(c) of the law.

(4) Applying Rep. Act No. 8974, the Government is authorized to start the implementation of the NAIA 3 Airport terminal project by performing the acts that are essential to the operation of the NAIA 3 as an international airport terminal upon the effectivity of the Writ of Possession, subject to the conditions above-stated. As prescribed by the Court, such authority encompasses "the repair, reconditioning and improvement of the complex, maintenance of the existing facilities and equipment, installation of new facilities and equipment, provision of services and facilities pertaining to the facilitation of air traffic and transport, and other services that are integral to a modern-day international airport."83

(5) The RTC is mandated to complete its determination of the just compensation within sixty (60) days from finality of this Decision. In doing so, the RTC is obliged to comply with "law and equity" as ordained in Again and the standard set under Implementing Rules of Rep. Act No. 8974 which is the "replacement cost method" as the standard of valuation of structures and improvements.

(6) There was no grave abuse of discretion attending the RTC Order appointing the commissioners for the purpose of determining just compensation. The provisions on commissioners under Rule 67 shall apply insofar as they are not inconsistent with Rep. Act No. 8974, its Implementing Rules, or the rulings of the Court in Agan.

(7) The Government shall pay the just compensation fixed in the decision of the trial court to PIATCO immediately upon the finality of the said decision.

(8) There is no basis for the Court to direct the inhibition of Hon. Gingoyon.

All told, the Court finds no grave abuse of discretion on the part of the RTC to warrant the nullification of the questioned orders. Nonetheless, portions of these orders should be modified to conform with law and the pronouncements made by the Court herein.

WHEREFORE, the Petition is GRANTED in PART with respect to the orders dated 4 January 2005 and 10 January 2005 of the lower court. Said orders are AFFIRMED with the following MODIFICATIONS:

1) The implementation of the Writ of Possession dated 21 December 2005 is HELD IN ABEYANCE, pending payment by petitioners to PIATCO of the amount of Three Billion Two Million One Hundred Twenty Five Thousand Pesos (P3,002,125,000.00), representing the proffered value of the NAIA 3 facilities;

2) Petitioners, upon the effectivity of the Writ of Possession, are authorized start the implementation of the Ninoy Aquino International Airport Pasenger Terminal III project by performing the acts that are essential to the operation of the said International Airport Passenger Terminal project;

3) RTC Branch 117 is hereby directed, within sixty (60) days from finality of this Decision, to determine the just compensation to be paid to PIATCO by the Government.

The Order dated 7 January 2005 is AFFIRMED in all respects subject to the qualification that the parties are given ten (10) days from finality of this Decision to file, if they so choose, objections to the appointment of the commissioners decreed therein.

The Temporary Restraining Order dated 14 January 2005 is hereby LIFTED.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 180006               September 28, 2011

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.FORTUNE TOBACCO CORPORATION, Respondent.

D E C I S I O N

BRION, J.:

Before the Court is a petition for review on certiorari filed under Rule 45 of the Rules of Court by petitioner Commissioner of Internal Revenue (CIR), assailing the decision dated July 12, 20071 and the resolution dated October 4, 2007,2 both issued by the Court of Tax Appeals (CTA) en banc in CTA E.B. No. 228.

BACKGROUND FACTS

Under our tax laws, manufacturers of cigarettes are subject to pay excise taxes on their products. Prior to January 1, 1997, the excises taxes on these products were in the form of ad valorem taxes, pursuant to Section 142 of the 1977 National Internal Revenue Code (1977 Tax Code).

Beginning January 1, 1997, Republic Act No. (RA) 82403 took effect and a shift from ad valorem to specific taxes was made. Section 142(c) of the 1977 Tax Code, as amended by RA 8240, reads in part:

Sec. 142. Cigars and cigarettes. — x x x.

(c) Cigarettes packed by machine. — There shall be levied, assessed and collected on cigarettes packed by machine a tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (P10.00) per pack, the tax shall be Twelve pesos (P12.00) per pack;

(2) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and fifty centavos (P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be Eight pesos (P8.00) per pack;

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but does not exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos (P5.00) per pack;

(4) If the net retail price (excluding the excise tax and the [value]-added tax) is below Five pesos (P5.00) per pack, the tax shall be One peso (P1.00) per pack.

x x x x

The specific tax from any brand of cigarettes within the next three (3) years of effectivity of this Act shall not be lower than the tax [which] is due from each brand on October 1, 1996: Provided, however, That in cases where the specific tax rates imposed in paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of more than seventy percent (70%), for a brand of cigarette, the increase shall take effect in two tranches: fifty percent (50%) of the increase shall be

effective in 1997 and one hundred percent (100%) of the increase shall be effective in 1998.

x x x x

The rates of specific tax on cigars and cigarettes under paragraphs (1), (2), (3) and (4) hereof, shall be increased by twelve percent (12%) on January 1, 2000. [emphases ours]

To implement RA 8240 and pursuant to its rule-making powers, the CIR issued Revenue Regulation No. (RR) 1-97 whose Section 3(c) and (d) echoed the above-quoted portion of Section 142 of the 1977 Tax Code, as amended.4

The 1977 Tax Code was later repealed by RA 8424, or the National Internal Revenue Code of 1997 (1997 Tax Code), and Section 142, as amended by RA 8240, was renumbered as Section 145.

This time, to implement the 12% increase in specific taxes mandated under Section 145 of the 1997 Tax Code and again pursuant to its rule-making powers, the CIR issued RR 17-99, which reads:

Section 1. New Rates of Specific Tax. The specific tax rates imposed under the following sections are hereby increased by twelve percent (12%) and the new rates to be levied, assessed, and collected are as follows:

Section

Description of Articles Present Specific Tax Rates (Prior to January 1, 2000)

New Specific Tax Rates (Effective January 1, 2000)

145 CIGARS and CIGARETTES    

  B) Cigarettes Packed by Machine

   

  (1) Net Retail Price (excluding VAT & Excise) exceeds P10.00 per pack

P12.00/pack P13.44/pack

  (2) Net Retail Price (excluding VAT & Excise) is P6.51 up to P10.00 per pack

P8.00/pack P8.96/pack

  (3) Net Retail Price (excluding VAT & Excise) is P5.00 to P6.50 per pack

P5.00/pack P5.60/pack

  (4) Net Retail Price (excluding VAT & Excise) is below P5.00 per pack

P1.00/pack P1.12/pack

Provided, however, that the new specific tax rate for any existing brand of cigars [and] cigarettes packed by machine, distilled spirits, wines and fermented liquors shall not be lower than the excise tax that is actually being paid prior to January 1, 2000. [emphasis ours]

THE FACTS OF THE CASE

Pursuant to these laws, respondent Fortune Tobacco Corporation (Fortune Tobacco) paid in advance excise taxes for the year 2003 in the amount of P11.15 billion, and for the period covering January 1 to May 31, 2004 in the amount of P4.90 billion.5

In June 2004, Fortune Tobacco filed an administrative claim for tax refund with the CIR for erroneously and/or illegally collected taxes in the amount of P491 million.6 Without waiting for the CIR’s action on its claim, Fortune Tobacco filed with the CTA a judicial claim for tax refund.7

In its decision dated May 26, 2006, the CTA First Division ruled in favor of Fortune Tobacco and granted its claim for refund.8 The CTA First Division’s ruling was upheld on appeal by the CTA en banc in its decision dated July 12, 2007.9 The CIR’s motion for reconsideration of the CTA en banc’s decision was denied in a resolution dated October 4, 2007.10

THE ISSUE

Fortune Tobacco’s claim for refund of overpaid excise taxes is based primarily on what it considers as an "unauthorized administrative legislation" on the part of the CIR. Specifically, it assails the proviso in Section 1 of RR 17-99 that requires the payment of the "excise tax actually being paid prior to January 1, 2000" if this amount is higher than the new specific tax rate, i.e., the rates of specific taxes imposed in 1997 for each category of cigarette, plus 12%. It claimed that by including the proviso, the CIR went beyond the language of the law and usurped Congress’ power. As mentioned, the CTA sided with Fortune Tobacco and allowed the latter to claim the refund.

The CIR disagrees with the CTA’s ruling and assails it before this Court through the present petition for review on certiorari. The CIR posits that the inclusion of the proviso in Section 1 of RR 17-99 was made to carry into effect the law’s intent and is well within the scope of his delegated legislative authority.11 He claims that the CTA’s strict interpretation of the law ignored Congress’ intent "to increase the collection of excise taxes by increasing specific tax rates on ‘sin’ products."12 He cites portions of the Senate’s deliberation on House Bill No. 7198 (the precursor of RA 8240) that conveyed the legislative intent to increase the excise taxes being paid.13

The CIR points out that Section 145(c) of the 1997 Tax Code categorically declares that "[t]he excise tax from any brand of cigarettes within the [three-year transition period from January 1, 1997 to December 31, 1999] shall not be lower than the tax, which is due from each brand on October 1, 1996." He posits that there is no plausible reason why the new specific tax rates due beginning January 1, 2000 should not be subject to the same rule as those due during the transition period. To the CIR, the adoption of the "higher tax rule" during the transition period unmistakably shows the intent of Congress not to lessen the excise tax collection. Thus, the CTA should have construed the ambiguity or omission in Section 145(c) in a manner that would uphold the law’s policy and intent.

Fortune Tobacco argues otherwise. To it, Section 145(c) of the 1997 Tax Code read and interpreted as it is written; it imposes a 12% increase on the rates of excise taxes provided under sub-paragraphs (1), (2), (3), and (4) only; it does not say that the tax due during the transition period shall continue to be collected if the amount is higher than the new specific tax rates. It contends that the "higher tax rule" applies only to the three-year transition period to offset the burden caused by the shift from ad valorem to specific taxes.

THE COURT’S RULING

Except for the tax period and the amounts involved,14 the case at bar presents the same issue that the Court already resolved in 2008 in CIR v. Fortune Tobacco Corporation.15 In the 2008 Fortune Tobacco case, the Court upheld the tax refund claims of Fortune Tobacco after finding invalid the proviso in Section 1 of RR 17-99. We ruled:

Section 145 states that during the transition period, i.e., within the next three (3) years from the effectivity of the Tax Code, the excise tax from any brand of cigarettes shall not be lower than the tax due from each brand on 1 October 1996. This qualification, however, is conspicuously absent as regards the 12% increase which is to be applied on cigars and cigarettes packed by machine, among others, effective on 1 January 2000. Clearly and unmistakably, Section 145 mandates a new rate of excise tax for cigarettes packed by machine due to the 12% increase effective on 1 January 2000 without regard to whether the revenue collection starting from this period may turn out to be lower than that collected prior to this date.

By adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than the tax actually paid prior to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes a tax which is the higher amount between the ad valorem tax being paid at the end of the three (3)-year transition period and the specific tax under paragraph C, sub-paragraph (1)-(4), as increased by 12% – a situation not supported by the plain wording of Section 145 of the Tax Code.16

Following the principle of stare decisis,17 our ruling in the present case should no longer come as a surprise. The proviso in Section 1 of RR 17-99 clearly went beyond the terms of the law it was supposed to implement, and therefore entitles Fortune Tobacco to claim a refund of the overpaid excise taxes collected pursuant to this provision.

The amount involved in the present case and the CIR’s firm insistence of its arguments nonetheless compel us to take a second look at the issue, but our findings ultimately lead us to the same conclusion. Indeed, we find more reasons to disagree with the CIR’s construction of the law than those stated in our 2008 Fortune Tobacco ruling, which was largely based on the application of the rules of statutory construction.

Raising government revenue is not the sole objective of RA 8240

That RA 8240 (incorporated as Section 145 of the 1997 Tax Code) was enacted to raise government revenues is a given fact, but this is not the sole and only objective of the law.18 Congressional deliberations show that the shift from ad valorem to specific taxes introduced by the law was also intended to curb the corruption that became endemic to the imposition of ad valorem taxes.19 Since ad valorem taxes

were based on the value of the goods, the prices of the goods were often manipulated to yield lesser taxes. The imposition of specific taxes, which are based on the volume of goods produced, would prevent price manipulation and also cure the unequal tax treatment created by the skewed valuation of similar goods.

Rule of uniformity of taxation violated by the proviso in Section 1, RR 17-99

The Constitution requires that taxation should be uniform and equitable.20 Uniformity in taxation requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities.21 This requirement, however, is unwittingly violated when the proviso in Section 1 of RR 17-99 is applied in certain cases. To illustrate this point, we consider three brands of cigarettes, all classified as lower-priced cigarettes under Section 145(c)(4) of the 1997 Tax Code, since their net retail price is below P5.00 per pack:

Brand22

Net Retail Price per pack

(A)Ad Valorem Tax Due prior to Jan 1997

(B)Specific Tax under Section 145(C)(4)

(C)Specific Tax Due Jan 1997 to Dec 1999

(D)New Specific Tax imposing 12% increase by Jan 2000

(E)New Specific Tax Due by Jan 2000 perRR 17-99

Camel KS

4.71 5.50 1.00/pack 5.50 1.12/pack 5.50

Champion M 100

4.56 3.30 1.00/pack 3.30 1.12/pack 3.30

Union American Blend

4.64 1.09 1.00/pack 1.09 1.12/pack 1.12

Although the brands all belong to the same category, the proviso in Section 1, RR 17-99 authorized the imposition of different (and grossly disproportionate) tax rates (see column [D]). It effectively extended the qualification stated in the third paragraph of Section 145(c) of the 1997 Tax Code that was supposed to apply only during the transition period:

The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from each brand on October 1, 1996[.]

In the process, the CIR also perpetuated the unequal tax treatment of similar goods that was supposed to be cured by the shift from ad valorem to specific taxes.

The omission in the law in fact reveals the legislative intent not to adopt the "higher tax rule"

The CIR claims that the proviso in Section 1 of RR 17-99 was patterned after the third paragraph of Section 145(c) of the 1997 Tax Code. Since the law’s intent was to increase revenue, it found no reason not to apply the same "higher tax rule" to excise taxes due after the transition period despite the absence of a similar text in the wording of Section 145(c). What the CIR misses in his argument is that he applied the rule not only for cigarettes, but also for cigars, distilled spirits, wines and fermented liquors:

Provided, however, that the new specific tax rate for any existing brand of cigars [and] cigarettes packed by machine, distilled spirits, wines and fermented liquors shall not be lower than the excise tax that is actually being paid prior to January 1, 2000.

When the pertinent provisions of the 1997 Tax Code imposing excise taxes on these products are read, however, there is nothing similar to the third paragraph of Section 145(c) that can be found in the provisions imposing excise taxes on distilled spirits (Section 14123 ) and wines (Section 14224 ). In fact, the rule will also not apply to cigars as these products fall under Section 145(a).25

Evidently, the 1997 Tax Code’s provisions on excise taxes have omitted the adoption of certain tax measures. To our mind, these omissions are telling indications of the intent of Congress not to adopt the omitted tax measures; they are not simply unintended lapses in the law’s wording that, as the CIR claims, are nevertheless covered by the spirit of the law. Had the intention of Congress been solely to increase revenue collection, a provision similar to the third paragraph of Section 145(c) would have been incorporated in Sections 141 and 142 of the 1997 Tax Code. This, however, is not the case.

We note that Congress was not unaware that the "higher tax rule" is a proviso that should ideally apply to the increase after the transition period (as the CIR embodied in the proviso in Section 1 of RR 17-99). During the deliberations for the law amending Section 145 of the 1997 Tax Code (RA 9334), Rep. Jesli Lapuz adverted to the "higher tax rule" after December 31, 1999 when he stated:

This bill serves as a catch-up measure as government attempts to collect additional revenues due it since 2001. Modifications are necessary indeed to capture the loss proceeds and prevent further erosion in revenue base. x x x. As it is, it plugs a major loophole in the ambiguity of the law as evidenced by recent disputes resulting in the government being ordered by the courts to refund taxpayers.1âwphi1 This bill clarifies that the excise tax due on the products shall not be lower than the tax due as of the date immediately prior to the effectivity of the act or the excise tax due as of December 31, 1999.26

This remark notwithstanding, the final version of the bill that became RA 9334 contained no provision similar to the proviso in Section 1 of RR 17-99 that imposed the tax due as of December 31, 1999 if this tax is higher than the new specific tax rates. Thus, it appears that despite its awareness of the need to protect the increase of excise taxes to increase government revenue, Congress ultimately decided against adopting the "higher tax rule.

WHEREFORE, in view of the foregoing, the petition is DENIED. The decision dated July 12, 2007 and the resolution dated October 4, 2007 of the Court of Tax Appeals in CTA E.B. No. 228 are AFFIRMED. No pronouncement as to costs.

SO ORDERED.

G.R. No. 193007               July 19, 2011

RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners, vs.THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, Respondents.

D E C I S I O N

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 relief1 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 III’s 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 meaning of "sale of services" that are subject to VAT; that a toll fee is a "user’s 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 government’s 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 State’s 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 reply6 to the government’s 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 Court’s 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 Court’s 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 government’s 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 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 VAT’s 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 latter’s use of the tollway facilities over which the operator enjoys private proprietary rights12 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.

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 11913 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 "user’s 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 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 user’s tax. This means taxing those among the public who actually use a public facility instead of taxing all the public including those who never use the particular public facility. A user’s tax is more equitable – a principle of taxation mandated in the 1987 Constitution."23 (Underscoring supplied)

Petitioners assume that what the Court said above, equating terminal fees to a "user’s tax" must also pertain to tollway fees. But the main issue in the MIAA case was whether or not Parañaque 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 user’s 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 user’s 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 seller’s 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 tax30and 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 "user’s tax." VAT is assessed against the tollway operator’s 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 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 BIR’s 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 circular’s 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 law’s 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.1avvphi1

Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive prerogative of Congress. The Court’s 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 Revenue’s motion for reconsideration of its August 24, 2010 resolution, DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of merit, and SETS ASIDE the Court’s temporary restraining order dated August 13, 2010.

SO ORDERED.

G.R. No. L-23645            October 29, 1968

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 for delivery in this country or abroad, shall be 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 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 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.

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 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.

G.R. No. L-22074             September 6, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner, vs.THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, ET AL., respondents.

R E S O L U T I O N*

BENGZON, J.P., J.:

The Philippine Guaranty Company, Inc. moves for the reconsideration of our decision, promulgated on April 30, 1965, holding it liable for the payment of income tax which it should have withheld and remitted to the Bureau of Internal Revenue in the total sum of P375,345.00.

The grounds raised in the instant motion all spring from movant's view that the Court of Tax Appeals as well as this Court, found it "innocent of the charges of violating, willfully or negligently, subsection (c) of Section 53 and Section 54 of the

National Internal Revenue Code." Hence, it cannot subsequently be held liable for the assessment of P375,345.00 based on said sections.

The premise of movants' reasoning cannot be accepted. The Court of Tax Appeals and this Court did not find that it did not violate Sections 53 (c) and 54 of the Tax Code. On the contrary, movant was found to have violatedSection 53(c) by failing to file the necessary withholding tax return and to pay tax due. Still, finding that movant'sviolation was due to a reasonable cause — namely, reliance on the advice of its auditors and opinion of the Commissioner of Internal Revenue — no surcharge to the tax was imposed. Section 72 of the Tax Code provides:

SEC. 72. Surcharges for failure to render returns and for rendering false and fraudulent returns. — The Commissioner of Internal Revenue shall assess all income taxes. In case of willful neglect to file the return or list within the time prescribed by law or in case a false or fraudulent return or list is willfully made, the Commissioner of Internal Revenue shall add to the tax or to the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, a surcharge of fifty per centum of the amount of such tax or deficiency tax. In case of any failure to make and file a return or list within the time prescribed by law or by the Commissioner or other internal-revenue officer, not due to willful neglect, the Commissioner of Internal Revenue shall add to the tax twenty-five per centum of its amount, except that, when a return is voluntarily and without notice from the Commissioner or other officer filed after such time, and it is shown that the failure to file it was due to a reasonable cause, no such addition shall be made to the tax ... .

It will be noted that the first half of the above-quoted section covers failure to file a return, willingly and/or due to negligence, in which case the surcharge is, 50%. In the second part of the law it covers failure to make and file a return "not due to willful neglect," in which case only 25% surcharge should be added. As a further concession to the taxpayer the above-quoted section provides that if "it is shown that the failure to file it was due to a reasonable cause, no such addition shall be made to the tax."

It would, therefore, be incorrect for movant to state that it was found "innocent of the charges of violating, willfully or negligently, sub-section (c) of Section 53 and Section 54. For, precisely, the mere fact that it was exempted from paying the penalty necessarily implies violation of Section 53(c). Violating Section 53(c) is one thing; imposing the penalty for such violation under Section 72 ** is another. If it is found that the failure to file is due to a reasonable cause, then exemption from surcharge sets in but never exemption from payment of the tax due.

Since movant failed to pay the tax due, in the sum of P375,345.00, this Court ordered it to pay the same. Simply because movant was relieved from paying the surcharge for failure to file the necessary returns, it now wants us to absolve it from paying even the tax. This, we cannot do. The non-imposition of the 25% surcharge does not carry with it remission of the tax.

Movant argues that it could not be expected to withhold the tax, for as early as August 18, 1953 the Board of Tax Appeals held in the case of Franklin Baker  1 that the reinsurance premiums in question were not subject to withholding. On top of that, movant maintains, the Commissioner of Internal Revenue, in reply to the query of its accountants and auditors, issued on September 5, 1953 an opinion subscribing to the ruling in the Franklin Baker case. As already explained in our decision a mistake committed by Government agents is not binding on the Government.

Inasmuch as movant insists on this point in its motion for reconsideration, we shall further elaborate on the same. Section 200 of the Income Tax Regulations expressly grants protection to him only if and when he follows strictly what has been provided therein.

Section 53 (c) makes the withholding agent personally liable for the income tax withheld under Section 54. It states:

SEC. 53(c). Return and payment. — Every person required to deduct and withhold any tax under this section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section.

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

Movant then further contends that as agent of the Government it was released from liability for the tax after it was advised by the Commissioner of Internal Revenue that the reinsurance premiums involved were not subject to withholding. It relies on the provisions of the second paragraph of Section 200 of the Income Tax Regulations which states:

In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly causing a query to be addressed to the Commissioner of Internal Revenue for the determination of whether or not the income paid to an individual is not subject to withholding. In case the Commissioner of Internal Revenue decides that the income paid to an individual is not subject to withholding the withholding agent may thereupon remit the amount of tax withheld.

The section above-quoted relaxes the application of the stringent provisions of Section 53 of the Tax Code. Accordingly, it grants exemption from tax liability, and in so doing, it lays down steps to be taken by the withholding agent, namely: (1) that he withholds the tax due; (2) that he promptly addresses a query to the Commissioner of Internal Revenue for determination whether or not the income paid to an individual is subject to withholding; and (3) that the Commissioner of Internal Revenue decides that such income is not subject to withholding. Strict observance of said steps is required of a withholding agent before he could be released from liability. Generally, the law frowns upon exemption from taxation, hence, an exempting provision should be construed strictis simi juris. 2

It may be illuminating to mention here, however, that the Income Tax Regulations was issued by the Secretary of Finance upon his authority, "to promulgate all needful rules and regulations of the effective enforcement" of the provisions of the Tax Code.3 The mission, therefore, of Section 200, quoted above, is to implement Section 53 of the Tax Code for no other purpose than to enforce its provisions effectively. It should also be noted, that Section 53 provided for no exemption from the duty to withhold except in the cases of tax-free covenant bonds dividends.1awphîl.nèt

The facts in this case do not support a finding that movant complied with Section 200. For, it has not been shown that it withheld the amount of tax due before it inquired from the Bureau of Internal Revenue as to the taxability of the reinsurance premiums involved. As a matter of fact, the Court of Tax Appeals found that "upon advice of its accountants and auditors, ... petitioner did not collect and remit to the Commissioner of Internal Revenue the withholding tax." This finding of fact of the lower court, unchallenged as it is, may not be disturbed.4

The requirement in Section 200 that the withholding agent should first withhold the tax before addressing a query to the Commissioner of Internal Revenue is not without meaning for it is in keeping with the general operation of our tax laws: payment precedes defense. Prior to the creation of the Court of Tax Appeals, the remedy of a taxpayer was to pay an internal revenue tax first and file a claim for refund later.5 This remedy has not been abrogated for the law creating the Court of Tax Appeals merely gives to the taxpayer an additional remedy. With respect to customs duties the consignee or importer concerned is required to pay them under protest, before he is allowed to question the legality of the imposition.6 Likewise, validity of a realty tax cannot be assailed until after the taxpayer has paid the tax under protest.7 The legislature, in adopting such measures in our tax laws, only wanted to be assured that taxes are paid and collected without delay. For taxes are the lifeblood of government. Also, such measures tend to prevent collusion between the taxpayer and the tax collector. By questioning a tax's legality without first paying it, a taxpayer, in collusion with Bureau of Internal Revenue officials, can unduly delay, if not totally evade, the payment of such tax.

Of course, in this case there was absolutely no such collusion. Precisely, the Philippine Guaranty Company, Inc. was absolved from the payment of the 25% surcharge for non-filing of income tax returns inasmuch as the Tax Court as well as this Court believes that its omission was due to a reasonable cause.

WHEREFORE, the motion for reconsideration is denied. So ordered.

G.R. No. 187485               February 12, 2013

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.SAN ROQUE POWER CORPORATION, Respondent.

X----------------------------X

G.R. No. 196113

TAGANITO MINING CORPORATION, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

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

G.R. No. 197156

PHILEX MINING CORPORATION, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

CARPIO, J.:

The Cases

G.R. No. 187485 is a petitiOn for review1 assailing the Decision2 promulgated on 25 March 2009 as well as the Resolution3 promulgated on 24 April 2009 by the Court of Tax Appeals En Banc (CTA EB) in CTA EB No. 408. The CTA EB affirmed the 29 November 2007 Amended Decision4 as well as the 11 July 2008 Resolution5 of the Second Division of the Court of Tax Appeals (CTA Second Division) in CTA Case No. 6647. The CTA Second Division ordered the Commissioner of Internal Revenue (Commissioner) to refund or issue a tax credit for P483,797,599.65 to San Roque Power Corporation (San Roque) for unutilized input value-added tax (VAT) on purchases of capital goods and services for the taxable year 2001.

G.R. No. 196113 is a petition for review6 assailing the Decision7 promulgated on 8 December 2010 as well as the Resolution8 promulgated on 14 March 2011 by the CTA EB in CTA EB No. 624. In its Decision, the CTA EB reversed the 8 January 2010 Decision9 as well as the 7 April 2010 Resolution10of the CTA Second Division and granted the CIR’s petition for review in CTA Case No. 7574. The CTA EB dismissed, for having been prematurely filed, Taganito Mining Corporation’s (Taganito) judicial claim for P8,365,664.38 tax refund or credit.

G.R. No. 197156 is a petition for review11 assailing the Decision12promulgated on 3 December 2010 as well as the Resolution13 promulgated on 17 May 2011 by the CTA EB in CTA EB No. 569. The CTA EB affirmed the 20 July 2009 Decision as well as the 10 November 2009 Resolution of the CTA Second Division in CTA Case No. 7687. The CTA Second Division denied, due to prescription, Philex Mining Corporation’s (Philex) judicial claim for P23,956,732.44 tax refund or credit.

On 3 August 2011, the Second Division of this Court resolved14 to consolidate G.R. No. 197156 with G.R. No. 196113, which were pending in the same Division, and with G.R. No. 187485, which was assigned to the Court En Banc. The Second Division also resolved to refer G.R. Nos. 197156 and 196113 to the Court En Banc, where G.R. No. 187485, the lower-numbered case, was assigned.

G.R. No. 187485CIR v. San Roque Power Corporation

The Facts

The CTA EB’s narration of the pertinent facts is as follows:

[CIR] is the duly appointed Commissioner of Internal Revenue, empowered, among others, to act upon and approve claims for refund or tax credit, with office at the Bureau of Internal Revenue ("BIR") National Office Building, Diliman, Quezon City.

[San Roque] is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal office at Barangay San Roque, San Manuel, Pangasinan. It was incorporated in October 1997 to design, construct, erect, assemble, own, commission and operate power-generating plants and related facilities pursuant to and under contract with the Government of the Republic of the Philippines, or any subdivision, instrumentality or agency thereof, or any governmentowned or controlled corporation, or other entity engaged in the development, supply, or distribution of energy.

As a seller of services, [San Roque] is duly registered with the BIR with TIN/VAT No. 005-017-501. It is likewise registered with the Board of Investments ("BOI") on a preferred pioneer status, to engage in the design, construction, erection, assembly, as well as to own, commission, and operate electric power-generating plants and related activities, for which it was issued Certificate of Registration No. 97-356 on February 11, 1998.

On October 11, 1997, [San Roque] entered into a Power Purchase Agreement ("PPA") with the National Power Corporation ("NPC") to develop hydro-potential of the Lower Agno River and generate additional power and energy for the Luzon Power Grid, by building the San Roque Multi-Purpose Project located in San Manuel, Pangasinan. The PPA provides, among others, that [San Roque] shall be responsible for the design, construction, installation, completion, testing and commissioning of the Power Station and shall operate and maintain the same, subject to NPC instructions. During the cooperation period of twenty-five (25) years commencing from the completion date of the Power Station, NPC will take and pay for all electricity available from the Power Station.

On the construction and development of the San Roque Multi- Purpose Project which comprises of the dam, spillway and power plant, [San Roque] allegedly incurred, excess input VAT in the amount of ₱559,709,337.54 for taxable year 2001 which it declared in its Quarterly VAT Returns filed for the same year. [San Roque] duly filed with the BIR separate claims for refund, in the total amount of ₱559,709,337.54, representing unutilized input taxes as declared in its VAT returns for taxable year 2001.

However, on March 28, 2003, [San Roque] filed amended Quarterly VAT Returns for the year 2001 since it increased its unutilized input VAT to the amount of ₱560,200,283.14. Consequently, [San Roque] filed with the BIR on even date, separate amended claims for refund in the aggregate amount of ₱560,200,283.14.

[CIR’s] inaction on the subject claims led to the filing by [San Roque] of the Petition for Review with the Court [of Tax Appeals] in Division on April 10, 2003.

Trial of the case ensued and on July 20, 2005, the case was submitted for decision.15

The Court of Tax Appeals’ Ruling: Division

The CTA Second Division initially denied San Roque’s claim. In its Decision16 dated 8 March 2006, it cited the following as bases for the denial of San Roque’s claim: lack of recorded zero-rated or effectively zero-rated sales; failure to submit documents specifically identifying the purchased goods/services related to the claimed input VAT which were included in its Property, Plant and Equipment account; and failure to prove that the related construction costs were capitalized in its books of account and subjected to depreciation.

The CTA Second Division required San Roque to show that it complied with the following requirements of Section 112(B) of Republic Act No. 8424 (RA 8424) 17 to be entitled to a tax refund or credit of input VAT attributable to capital goods imported or locally purchased: (1) it is a VAT-registered entity; (2) its input taxes claimed were paid on capital goods duly supported by VAT invoices and/or official receipts; (3) it did not offset or apply the claimed input VAT payments on capital goods against any output VAT liability; and (4) its claim for refund was filed within the two-year prescriptive period both in the administrative and judicial levels.

The CTA Second Division found that San Roque complied with the first, third, and fourth requirements, thus:

The fact that [San Roque] is a VAT registered entity is admitted (par. 4, Facts Admitted, Joint Stipulation of Facts, Records, p. 157). It was also established that the instant claim of ₱560,200,823.14 is already net of the ₱11,509.09 output tax declared by [San Roque] in its amended VAT return for the first quarter of 2001. Moreover, the entire amount of ₱560,200,823.14 was deducted by [San Roque] from the total available input tax reflected in its amended VAT returns for the last two quarters of 2001 and first two quarters of 2002 (Exhibits M-6, O-6, OO-1 & QQ-1). This means that the claimed input taxes of ₱560,200,823.14 did not form part of the excess input taxes of ₱83,692,257.83, as of the second quarter of 2002 that was to be carried-over to the succeeding quarters. Further, [San Roque’s] claim for refund/tax credit certificate of excess input VAT was filed within the two-year prescriptive period reckoned from the dates of filing of the corresponding quarterly VAT returns.

For the first, second, third, and fourth quarters of 2001, [San Roque] filed its VAT returns on April 25, 2001, July 25, 2001, October 23, 2001 and January 24, 2002, respectively (Exhibits "H, J, L, and N"). These returns were all subsequently amended on March 28, 2003 (Exhibits "I, K, M, and O"). On the other hand, [San Roque] originally filed its separate claims for refund on July 10, 2001, October 10, 2001, February 21, 2002, and May 9, 2002 for the first, second, third, and fourth quarters of 2001, respectively, (Exhibits "EE, FF, GG, and HH") and subsequently filed amended claims for all quarters on March 28, 2003 (Exhibits "II, JJ, KK, and LL"). Moreover, the Petition for Review was filed on April 10, 2003. Counting from the respective dates when [San Roque] originally filed its VAT returns for the first, second, third and fourth quarters of 2001, the administrative claims for refund (original and amended) and the Petition for Review fall within the two-year prescriptive period.18

San Roque filed a Motion for New Trial and/or Reconsideration on 7 April 2006. In its 29 November 2007 Amended Decision,19 the CTA Second Division found legal basis to partially grant San Roque’s claim. The CTA Second Division ordered the Commissioner to refund or issue a tax credit in favor of San Roque in the amount of ₱483,797,599.65, which represents San Roque’s unutilized input VAT on its purchases of capital goods and services for the taxable year 2001. The CTA based the adjustment in the amount on the findings of the independent certified public

accountant. The following reasons were cited for the disallowed claims: erroneous computation; failure to ascertain whether the related purchases are in the nature of capital goods; and the purchases pertain to capital goods. Moreover, the reduction of claims was based on the following: the difference between San Roque’s claim and that appearing on its books; the official receipts covering the claimed input VAT on purchases of local services are not within the period of the claim; and the amount of VAT cannot be determined from the submitted official receipts and invoices. The CTA Second Division denied San Roque’s claim for refund or tax credit of its unutilized input VAT attributable to its zero-rated or effectively zero-rated sales because San Roque had no record of such sales for the four quarters of 2001.

The dispositive portion of the CTA Second Division’s 29 November 2007 Amended Decision reads:

WHEREFORE, [San Roque’s] "Motion for New Trial and/or Reconsideration" is hereby PARTIALLY GRANTED and this Court’s Decision promulgated on March 8, 2006 in the instant case is hereby MODIFIED.

Accordingly, [the CIR] is hereby ORDERED to REFUND or in the alternative, to ISSUE A TAX CREDIT CERTIFICATE in favor of [San Roque] in the reduced amount of Four Hundred Eighty Three Million Seven Hundred Ninety Seven Thousand Five Hundred Ninety Nine Pesos and Sixty Five Centavos (₱483,797,599.65) representing unutilized input VAT on purchases of capital goods and services for the taxable year 2001.

SO ORDERED.20

The Commissioner filed a Motion for Partial Reconsideration on 20 December 2007. The CTA Second Division issued a Resolution dated 11 July 2008 which denied the CIR’s motion for lack of merit.

The Court of Tax Appeals’ Ruling: En Banc

The Commissioner filed a Petition for Review before the CTA EB praying for the denial of San Roque’s claim for refund or tax credit in its entirety as well as for the setting aside of the 29 November 2007 Amended Decision and the 11 July 2008 Resolution in CTA Case No. 6647.

The CTA EB dismissed the CIR’s petition for review and affirmed the challenged decision and resolution.

The CTA EB cited Commissioner of Internal Revenue v. Toledo Power, Inc.21 and Revenue Memorandum Circular No. 49-03,22 as its bases for ruling that San Roque’s judicial claim was not prematurely filed. The pertinent portions of the Decision state:

More importantly, the Court En Banc has squarely and exhaustively ruled on this issue in this wise:

It is true that Section 112(D) of the abovementioned provision applies to the present case. However, what the petitioner failed to consider is Section 112(A) of the same provision. The respondent is also covered by the two (2) year prescriptive period. We have repeatedly held that the claim for refund with the BIR and the subsequent appeal to the Court of Tax Appeals must be filed within the two-year period.

Accordingly, the Supreme Court held in the case of Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue that the two-year prescriptive period for filing a claim for input tax is reckoned from the date of the filing of the quarterly VAT return and payment of the tax due. If the said period is about to expire but the BIR has not yet acted on the application for refund, the taxpayer may interpose a petition for review with this Court within the two year period.

In the case of Gibbs vs. Collector, the Supreme Court held that if, however, the Collector (now Commissioner) takes time in deciding the claim, and the period of two years is about to end, the suit or proceeding must be started in the Court of Tax Appeals before the end of the two-year period without awaiting the decision of the Collector.

Furthermore, in the case of Commissioner of Customs and Commissioner of Internal Revenue vs. The Honorable Court of Tax Appeals and Planters Products, Inc., the Supreme Court held that the taxpayer need not wait indefinitely for a decision or ruling which may or may not be forthcoming and which he has no legal right to expect. It is disheartening enough to a taxpayer to keep him waiting for an indefinite period of time for a ruling or decision of the Collector (now Commissioner) of Internal Revenue on his claim for refund. It would make matters more exasperating for the taxpayer if we were to close the doors of the courts of justice for such a relief until after the Collector (now Commissioner) of Internal Revenue, would have, at his personal convenience, given his go signal.

This Court ruled in several cases that once the petition is filed, the Court has already acquired jurisdiction over the claims and the Court is not bound to wait indefinitely for no reason for whatever action respondent (herein petitioner) may take. At stake are claims for refund and unlike disputed assessments, no decision of respondent (herein petitioner) is required before one can go to this Court. (Emphasis supplied and citations omitted)

Lastly, it is apparent from the following provisions of Revenue Memorandum Circular No. 49-03 dated August 18, 2003, that [the CIR] knows that claims for VAT refund or tax credit filed with the Court [of Tax Appeals] can proceed simultaneously with the ones filed with the BIR and that taxpayers need not wait for the lapse of the subject 120-day period, to wit:

In response to [the] request of selected taxpayers for adoption of procedures in handling refund cases that are aligned to the statutory requirements that refund cases should be elevated to the Court of Tax Appeals before the lapse of the period prescribed by law, certain provisions of RMC No. 42-2003 are hereby amended and new provisions are added thereto.

In consonance therewith, the following amendments are being introduced to RMC No. 42-2003, to wit:

I.) A-17 of Revenue Memorandum Circular No. 42-2003 is hereby revised to read as follows:

In cases where the taxpayer has filed a "Petition for Review" with the Court of Tax Appeals involving a claim for refund/TCC that is pending at the administrative agency (Bureau of Internal Revenue or OSS-DOF), the administrative agency and the tax court may act on the case separately. While the case is pending in the tax court and at the same time is still

under process by the administrative agency, the litigation lawyer of the BIR, upon receipt of the summons from the tax court, shall request from the head of the investigating/processing office for the docket containing certified true copies of all the documents pertinent to the claim. The docket shall be presented to the court as evidence for the BIR in its defense on the tax credit/refund case filed by the taxpayer. In the meantime, the investigating/processing office of the administrative agency shall continue processing the refund/TCC case until such time that a final decision has been reached by either the CTA or the administrative agency.

If the CTA is able to release its decision ahead of the evaluation of the administrative agency, the latter shall cease from processing the claim. On the other hand, if the administrative agency is able to process the claim of the taxpayer ahead of the CTA and the taxpayer is amenable to the findings thereof, the concerned taxpayer must file a motion to withdraw the claim with the CTA.23 (Emphasis supplied)

G.R. No. 196113Taganito Mining Corporation v. CIR

The Facts

The CTA Second Division’s narration of the pertinent facts is as follows:

Petitioner, Taganito Mining Corporation, is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal office at 4th Floor, Solid Mills Building, De La Rosa St., Lega[s]pi Village, Makati City. It is duly registered with the Securities and Exchange Commission with Certificate of Registration No. 138682 issued on March 4, 1987 with the following primary purpose:

To carry on the business, for itself and for others, of mining lode and/or placer mining, developing, exploiting, extracting, milling, concentrating, converting, smelting, treating, refining, preparing for market, manufacturing, buying, selling, exchanging, shipping, transporting, and otherwise producing and dealing in nickel, chromite, cobalt, gold, silver, copper, lead, zinc, brass, iron, steel, limestone, and all kinds of ores, metals and their by-products and which by-products thereof of every kind and description and by whatsoever process the same can be or may hereafter be produced, and generally and without limit as to amount, to buy, sell, locate, exchange, lease, acquire and deal in lands, mines, and mineral rights and claims and to conduct all business appertaining thereto, to purchase, locate, lease or otherwise acquire, mining claims and rights, timber rights, water rights, concessions and mines, buildings, dwellings, plants machinery, spare parts, tools and other properties whatsoever which this corporation may from time to time find to be to its advantage to mine lands, and to explore, work, exercise, develop or turn to account the same, and to acquire, develop and utilize water rights in such manner as may be authorized or permitted by law; to purchase, hire, make, construct or otherwise, acquire, provide, maintain, equip, alter, erect, improve, repair, manage, work and operate private roads, barges, vessels, aircraft and vehicles, private telegraph and telephone lines, and other communication media, as may be needed by the corporation for its own purpose, and to purchase, import, construct, machine, fabricate, or otherwise acquire, and maintain and operate bridges, piers, wharves, wells, reservoirs, plumes, watercourses, waterworks, aqueducts, shafts, tunnels, furnaces, cook ovens, crushing works, gasworks, electric lights and power plants and compressed air plants, chemical works of all kinds, concentrators, smelters, smelting plants, and refineries, matting plants, warehouses, workshops, factories, dwelling

houses, stores, hotels or other buildings, engines, machinery, spare parts, tools, implements and other works, conveniences and properties of any description in connection with or which may be directly or indirectly conducive to any of the objects of the corporation, and to contribute to, subsidize or otherwise aid or take part in any operations;

and is a VAT-registered entity, with Certificate of Registration (BIR Form No. 2303) No. OCN 8RC0000017494. Likewise, [Taganito] is registered with the Board of Investments (BOI) as an exporter of beneficiated nickel silicate and chromite ores, with BOI Certificate of Registration No. EP-88-306.

Respondent, on the other hand, is the duly appointed Commissioner of Internal Revenue vested with authority to exercise the functions of the said office, including inter alia, the power to decide refunds of internal revenue taxes, fees and other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code (NIRC) or other laws administered by Bureau of Internal Revenue (BIR) under Section 4 of the NIRC. He holds office at the BIR National Office Building, Diliman, Quezon City.

[Taganito] filed all its Monthly VAT Declarations and Quarterly Vat Returns for the period January 1, 2005 to December 31, 2005. For easy reference, a summary of the filing dates of the original and amended Quarterly VAT Returns for taxable year 2005 of [Taganito] is as follows:

Exhibit(s) Quarter Nature ofthe Return

Mode of filing Filing Date

L to L-4 1st Original Electronic April 15, 2005

M to M-3 Amended Electronic July 20, 2005

N to N-4 Amended Electronic October 18, 2006

Q to Q-3 2nd Original Electronic July 20, 2005

R to R-4 Amended Electronic October 18, 2006

U to U-4 3rd Original Electronic October 19, 2005

V to V-4 Amended Electronic October 18, 2006

Y to Y-4 4th Original Electronic January 20, 2006

Z to Z-4 Amended Electronic October 18, 2006

As can be gleaned from its amended Quarterly VAT Returns, [Taganito] reported zero-rated sales amounting to P1,446,854,034.68; input VAT on its domestic purchases and importations of goods (other than capital goods) and services amounting to P2,314,730.43; and input VAT on its domestic purchases and

importations of capital goods amounting to P6,050,933.95, the details of which are summarized as follows:

PeriodCovered

Zero-Rated Sales Input VAT onDomesticPurchases andImportationsof Goods andServices

Input VAT onDomesticPurchases andImportationsof CapitalGoods

Total Input VAT

01/01/05 -03/31/05

P551,179,871.58 P1,491,880.56 P239,803.22 P1,731,683.78

04/01/05 -06/30/05

64,677,530.78 204,364.17 5,811,130.73 6,015,494.90

07/01/05 -09/30/05

480,784,287.30 144,887.67 - 144,887.67

10/01/05 -12/31/05

350,212,345.02 473,598.03 - 473,598.03

TOTAL P1,446,854,034.68

P2,314,730.43

P6,050,933.95

P8,365,664.38

On November 14, 2006, [Taganito] filed with [the CIR], through BIR’s Large Taxpayers Audit and Investigation Division II (LTAID II), a letter dated November 13, 2006 claiming a tax credit/refund of its supposed input VAT amounting to ₱8,365,664.38 for the period covering January 1, 2004 to December 31, 2004. On the same date, [Taganito] likewise filed an Application for Tax Credits/Refunds for the period covering January 1, 2005 to December 31, 2005 for the same amount.

On November 29, 2006, [Taganito] sent again another letter dated November 29, 2004 to [the CIR], to correct the period of the above claim for tax credit/refund in the said amount of ₱8,365,664.38 as actually referring to the period covering January 1, 2005 to December 31, 2005.

As the statutory period within which to file a claim for refund for said input VAT is about to lapse without action on the part of the [CIR], [Taganito] filed the instant Petition for Review on February 17, 2007.

In his Answer filed on March 28, 2007, [the CIR] interposes the following defenses:

4. [Taganito’s] alleged claim for refund is subject to administrative investigation/examination by the Bureau of Internal Revenue (BIR);

5. The amount of ₱8,365,664.38 being claimed by [Taganito] as alleged unutilized input VAT on domestic purchases of goods and services and on importation of capital goods for the period January 1, 2005 to December 31, 2005 is not properly documented;

6. [Taganito] must prove that it has complied with the provisions of Sections 112 (A) and (D) and 229 of the National Internal Revenue Code of 1997 (1997 Tax Code) on the prescriptive period for claiming tax refund/credit;

7. Proof of compliance with the prescribed checklist of requirements to be submitted involving claim for VAT refund pursuant to Revenue Memorandum Order No. 53-98, otherwise there would be no sufficient compliance with the filing of administrative claim for refund, the administrative claim thereof being mere proforma, which is a condition sine qua non prior to the filing of judicial claim in accordance with the provision of Section 229 of the 1997 Tax Code. Further, Section 112 (D) of the Tax Code, as amended, requires the submission of complete documents in support of the application filed with the BIR before the 120-day audit period shall apply, and before the taxpayer could avail of judicial remedies as provided for in the law. Hence, [Taganito’s] failure to submit proof of compliance with the above-stated requirements warrants immediate dismissal of the petition for review.

8. [Taganito] must prove that it has complied with the invoicing requirements mentioned in Sections 110 and 113 of the 1997 Tax Code, as amended, in relation to provisions of Revenue Regulations No. 7-95.

9. In an action for refund/credit, the burden of proof is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to the claim for refund/credit (Asiatic Petroleum Co. vs. Llanes, 49 Phil. 466 cited in Collector of Internal Revenue vs. Manila Jockey Club, Inc., 98 Phil. 670);

10. Claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation (Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95) and as such, they are looked upon with disfavor (Western Minolco Corp. vs. Commissioner of Internal Revenue, 124 SCRA 1211).

SPECIAL AND AFFIRMATIVE DEFENSES

11. The Court of Tax Appeals has no jurisdiction to entertain the instant petition for review for failure on the part of [Taganito] to comply with the provision of Section 112 (D) of the 1997 Tax Code which provides, thus:

Section 112. Refunds or Tax Credits of Input Tax. –

x x x           x x x          x x x

(D) Period within which refund or Tax Credit of Input Taxes shall be Made. –  In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) and (B) hereof.

In cases of full or partial denial for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the

decision denying the claim or after the expiration of the one hundred twenty dayperiod, appeal the decision or the unacted claim with the Court of Tax Appeals. (Emphasis supplied.)

12. As stated, [Taganito] filed the administrative claim for refund with the Bureau of Internal Revenue on November 14, 2006. Subsequently on February 14, 2007, the instant petition was filed. Obviously the 120 days given to the Commissioner to decide on the claim has not yet lapsed when the petition was filed. The petition was prematurely filed, hence it must be dismissed for lack of jurisdiction.

During trial, [Taganito] presented testimonial and documentary evidence primarily aimed at proving its supposed entitlement to the refund in the amount of ₱8,365,664.38, representing input taxes for the period covering January 1, 2005 to December 31, 2005. [The CIR], on the other hand, opted not to present evidence. Thus, in the Resolution promulgated on January 22, 2009, this case was submitted for decision as of such date, considering [Taganito’s] "Memorandum" filed on January 19, 2009 and [the CIR’s] "Memorandum" filed on December 19, 2008.24

The Court of Tax Appeals’ Ruling: Division

The CTA Second Division partially granted Taganito’s claim. In its Decision25 dated 8 January 2010, the CTA Second Division found that Taganito complied with the requirements of Section 112(A) of RA 8424, as amended, to be entitled to a tax refund or credit of input VAT attributable to zero-rated or effectively zero-rated sales.26

The pertinent portions of the CTA Second Division’s Decision read:

Finally, records show that [Taganito’s] administrative claim filed on November 14, 2006, which was amended on November 29, 2006, and the Petition for Review filed with this Court on February 14, 2007 are well within the two-year prescriptive period, reckoned from March 31, 2005, June 30, 2005, September 30, 2005, and December 31, 2005, respectively, the close of each taxable quarter covering the period January 1, 2005 to December 31, 2005.

In fine, [Taganito] sufficiently proved that it is entitled to a tax credit certificate in the amount of ₱8,249,883.33 representing unutilized input VAT for the four taxable quarters of 2005.

WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED.Accordingly, [the CIR] is hereby ORDERED to REFUND to [Taganito] the amount of EIGHT MILLION TWO HUNDRED FORTY NINE THOUSAND EIGHT HUNDRED EIGHTY THREE PESOS AND THIRTY THREE CENTAVOS (P8,249,883.33) representing its unutilized input taxes attributable to zero-rated sales from January 1, 2005 to December 31, 2005.

SO ORDERED.27

The Commissioner filed a Motion for Partial Reconsideration on 29 January 2010. Taganito, in turn, filed a Comment/Opposition on the Motion for Partial Reconsideration on 15 February 2010.

In a Resolution28 dated 7 April 2010, the CTA Second Division denied the CIR’s motion. The CTA Second Division ruled that the legislature did not intend that Section 112 (Refunds or Tax Credits of Input Tax) should be read in isolation from Section 229 (Recovery of Tax Erroneously or Illegally Collected) or vice versa. The

CTA Second Division applied the mandatory statute of limitations in seeking judicial recourse prescribed under Section 229 to claims for refund or tax credit under Section 112.

The Court of Tax Appeals’ Ruling: En Banc

On 29 April 2010, the Commissioner filed a Petition for Review before the CTA EB assailing the 8 January 2010 Decision and the 7 April 2010 Resolution in CTA Case No. 7574 and praying that Taganito’s entire claim for refund be denied.

In its 8 December 2010 Decision,29 the CTA EB granted the CIR’s petition for review and reversed and set aside the challenged decision and resolution.

The CTA EB declared that Section 112(A) and (B) of the 1997 Tax Code both set forth the reckoning of the two-year prescriptive period for filing a claim for tax refund or credit over input VAT to be the close of the taxable quarter when the sales were made. The CTA EB also relied on this Court’s rulings in the cases of Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi)30 and Commisioner of Internal Revenue v. Mirant Pagbilao Corporation (Mirant).31 Both Aichi and Mirant ruled that the two-year prescriptive period to file a refund for input VAT arising from zero-rated sales should be reckoned from the close of the taxable quarter when the sales were made. Aichi further emphasized that the failure to await the decision of the Commissioner or the lapse of 120-day period prescribed in Section 112(D) amounts to a premature filing.

The CTA EB found that Taganito filed its administrative claim on 14 November 2006, which was well within the period prescribed under Section 112(A) and (B) of the 1997 Tax Code. However, the CTA EB found that Taganito’s judicial claim was prematurely filed. Taganito filed its Petition for Review before the CTA Second Division on 14 February 2007. The judicial claim was filed after the lapse of only 92 days from the filing of its administrative claim before the CIR, in violation of the 120-day period prescribed in Section 112(D) of the 1997 Tax Code.

The dispositive portion of the Decision states:

WHEREFORE, the instant Petition for Review is hereby GRANTED. The assailed Decision dated January 8, 2010 and Resolution dated April 7, 2010 of the Special Second Division of this Court are hereby REVERSED and SET ASIDE. Another one is hereby entered DISMISSING the Petition for Review filed in CTA Case No. 7574 for having been prematurely filed.

SO ORDERED.32

In his dissent,33 Associate Justice Lovell R. Bautista insisted that Taganito timely filed its claim before the CTA. Justice Bautista read Section 112(C) of the 1997 Tax Code (Period within which Refund or Tax Credit of Input Taxes shall be Made) in conjunction with Section 229 (Recovery of Tax Erroneously or Illegally Collected). Justice Bautista also relied on this Court’s ruling in Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue (Atlas),34 which stated that refundable or creditable input VAT and illegally or erroneously collected national internal revenue tax are the same, insofar as both are monetary amounts which are currently in the hands of the government but must rightfully be returned to the taxpayer. Justice Bautista concluded:

Being merely permissive, a taxpayer claimant has the option of seeking judicial redress for refund or tax credit of excess or unutilized input tax with this Court,

either within 30 days from receipt of the denial of its claim, or after the lapse of the 120-day period in the event of inaction by the Commissioner, provided that both administrative and judicial remedies must be undertaken within the 2-year period.35

Taganito filed its Motion for Reconsideration on 29 December 2010. The Commissioner filed an Opposition on 26 January 2011. The CTA EB denied for lack of merit Taganito’s motion in a Resolution36 dated 14 March 2011. The CTA EB did not see any justifiable reason to depart from this Court’s rulings in Aichi and Mirant.

G.R. No. 197156Philex Mining Corporation v. CIR

The Facts

The CTA EB’s narration of the pertinent facts is as follows:

[Philex] is a corporation duly organized and existing under the laws of the Republic of the Philippines, which is principally engaged in the mining business, which includes the exploration and operation of mine properties and commercial production and marketing of mine products, with office address at 27 Philex Building, Fairlaine St., Kapitolyo, Pasig City.

[The CIR], on the other hand, is the head of the Bureau of Internal Revenue ("BIR"), the government entity tasked with the duties/functions of assessing and collecting all national internal revenue taxes, fees, and charges, and enforcement of all forfeitures, penalties and fines connected therewith, including the execution of judgments in all cases decided in its favor by [the Court of Tax Appeals] and the ordinary courts, where she can be served with court processes at the BIR Head Office, BIR Road, Quezon City.

On October 21, 2005, [Philex] filed its Original VAT Return for the third quarter of taxable year 2005 and Amended VAT Return for the same quarter on December 1, 2005.

On March 20, 2006, [Philex] filed its claim for refund/tax credit of the amount of ₱23,956,732.44 with the One Stop Shop Center of the Department of Finance. However, due to [the CIR’s] failure to act on such claim, on October 17, 2007, pursuant to Sections 112 and 229 of the NIRC of 1997, as amended, [Philex] filed a Petition for Review, docketed as C.T.A. Case No. 7687.

In [her] Answer, respondent CIR alleged the following special and affirmative defenses:

4. Claims for refund are strictly construed against the taxpayer as the same partake the nature of an exemption;

5. The taxpayer has the burden to show that the taxes were erroneously or illegally paid. Failure on the part of [Philex] to prove the same is fatal to its cause of action;

6. [Philex] should prove its legal basis for claiming for the amount being refunded.37

The Court of Tax Appeals’ Ruling: Division

The CTA Second Division, in its Decision dated 20 July 2009, denied Philex’s claim due to prescription. The CTA Second Division ruled that the two-year prescriptive period specified in Section 112(A) of RA 8424, as amended, applies not only to the

filing of the administrative claim with the BIR, but also to the filing of the judicial claim with the CTA. Since Philex’s claim covered the 3rd quarter of 2005, its administrative claim filed on 20 March 2006 was timely filed, while its judicial claim filed on 17 October 2007 was filed late and therefore barred by prescription.

On 10 November 2009, the CTA Second Division denied Philex’s Motion for Reconsideration.

The Court of Tax Appeals’ Ruling: En Banc

Philex filed a Petition for Review before the CTA EB praying for a reversal of the 20 July 2009 Decision and the 10 November 2009 Resolution of the CTA Second Division in CTA Case No. 7687.

The CTA EB, in its Decision38 dated 3 December 2010, denied Philex’s petition and affirmed the CTA Second Division’s Decision and Resolution.

The pertinent portions of the Decision read:

In this case, while there is no dispute that [Philex’s] administrative claim for refund was filed within the two-year prescriptive period; however, as to its judicial claim for refund/credit, records show that on March 20, 2006, [Philex] applied the administrative claim for refund of unutilized input VAT in the amount of ₱23,956,732.44 with the One Stop Shop Center of the Department of Finance, per Application No. 52490. From March 20, 2006, which is also presumably the date [Philex] submitted supporting documents, together with the aforesaid application for refund, the CIR has 120 days, or until July 18, 2006, within which to decide the claim. Within 30 days from the lapse of the 120-day period, or from July 19, 2006 until August 17, 2006, [Philex] should have elevated its claim for refund to the CTA. However, [Philex] filed its Petition for Review only on October 17, 2007, which is 426 days way beyond the 30- day period prescribed by law.

Evidently, the Petition for Review in CTA Case No. 7687 was filed 426 days late. Thus, the Petition for Review in CTA Case No. 7687 should have been dismissed on the ground that the Petition for Review was filed way beyond the 30-day prescribed period; thus, no jurisdiction was acquired by the CTA in Division; and not due to prescription.

WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED DUE COURSE, and accordingly, DISMISSED. The assailed Decision dated July 20, 2009, dismissing the Petition for Review in CTA Case No. 7687 due to prescription, and Resolution dated November 10, 2009 denying [Philex’s] Motion for Reconsideration are hereby AFFIRMED, with modification that the dismissal is based on the ground that the Petition for Review in CTA Case No. 7687 was filed way beyond the 30-day prescribed period to appeal.

SO ORDERED.39

G.R. No. 187485CIR v. San Roque Power Corporation

The Commissioner raised the following grounds in the Petition for Review:

I. The Court of Tax Appeals En Banc erred in holding that [San Roque’s] claim for refund was not prematurely filed.

II. The Court of Tax Appeals En Banc erred in affirming the amended decision of the Court of Tax Appeals (Second Division) granting [San Roque’s] claim for refund of alleged unutilized input VAT on its purchases of capital goods and services for the taxable year 2001 in the amount of P483,797,599.65. 40

G.R. No. 196113Taganito Mining Corporation v. CIR

Taganito raised the following grounds in its Petition for Review:

I. The Court of Tax Appeals En Banc committed serious error and acted with grave abuse of discretion tantamount to lack or excess of jurisdiction in erroneously applying the Aichi doctrine in violation of [Taganito’s] right to due process.

II. The Court of Tax Appeals committed serious error and acted with grave abuse of discretion amounting to lack or excess of jurisdiction in erroneously interpreting the provisions of Section 112 (D).41

G.R. No. 197156Philex Mining Corporation v. CIR

Philex raised the following grounds in its Petition for Review:

I. The CTA En Banc erred in denying the petition due to alleged prescription. The fact is that the petition was filed with the CTA within the period set by prevailing court rulings at the time it was filed.

II. The CTA En Banc erred in retroactively applying the Aichi ruling in denying the petition in this instant case.42

The Court’s Ruling

For ready reference, the following are the provisions of the Tax Code applicable to the present cases:

Section 105:

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

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

x x x x

Section 110(B):

Sec. 110. Tax Credits. —

(B) Excess Output or Input Tax. — If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the

succeeding quarter or quarters: [Provided, That the input tax inclusive of input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT:]43 Provided, however, That any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.

Section 112:44

Sec. 112. Refunds or Tax Credits of Input Tax. —

(A) Zero-Rated or Effectively Zero-Rated Sales.— Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2) (a)(1), (2) and (B) and Section 108(B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales.

(B) Capital Goods.- A VAT — registered person may apply for the issuance of a tax credit certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or purchase was made.

(C) Cancellation of VAT Registration. — A person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Section 106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made . — In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsection (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may,within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.

(E) Manner of Giving Refund. — Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative without the necessity of being countersigned by the Chairman, Commission on Audit, the provisions of the

Administrative Code of 1987 to the contrary notwithstanding: Provided, that refunds under this paragraph shall be subject to post audit by the Commission on Audit.

Section 229:

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 excessively 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 filed after the expiration of  two (2) 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.

(All emphases supplied)

I. Application of the 120+30 Day Periods

a. G.R. No. 187485 - CIR v. San Roque Power Corporation

On 10 April 2003, a mere 13 days after it filed its amended administrative claim with the Commissioner on 28 March 2003, San Roque filed a Petition for Review with the CTA docketed as CTA Case No. 6647. From this we gather two crucial facts: first, San Roque did not wait for the 120-day period to lapse before filing its judicial claim;second, San Roque filed its judicial claim more than four (4) years before the Atlas45 doctrine, which was promulgated by the Court on 8 June 2007.

Clearly, San Roque failed to comply with the 120-day waiting period, the time expressly given by law to the Commissioner to decide whether to grant or deny San Roque’s application for tax refund or credit. It is indisputable that compliance with the 120-day waiting period is mandatory and jurisdictional. The waiting period, originally fixed at 60 days only, was part of the provisions of the first VAT law, Executive Order No. 273, which took effect on 1 January 1988. The waiting period was extended to 120 days effective 1 January 1998 under RA 8424 or the Tax Reform Act of 1997. Thus, the waiting period has been in our statute books for more than fifteen (15) years before San Roque filed its judicial claim.

Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates the doctrine of exhaustion of administrative remedies and renders the petition premature and thus without a cause of action, with the effect that the CTA does not acquire jurisdiction over the taxpayer’s petition. Philippine jurisprudence is replete with cases upholding and reiterating these doctrinal principles.46

The charter of the CTA expressly provides that its jurisdiction is to review on appeal "decisions of the Commissioner of Internal Revenue in cases involving x x x refunds of internal revenue taxes."47 When a taxpayer prematurely files a judicial claim for tax refund or credit with the CTA without waiting for the decision of the

Commissioner, there is no "decision" of the Commissioner to review and thus the CTA as a court of special jurisdiction has no jurisdiction over the appeal. The charter of the CTA also expressly provides that if the Commissioner fails to decide within "a specific period" required by law, such "inaction shall be deemed a denial"48 of the application for tax refund or credit. It is the Commissioner’s decision, or inaction "deemed a denial," that the taxpayer can take to the CTA for review. Without a decision or an "inaction x x x deemed a denial" of the Commissioner, the CTA has no jurisdiction over a petition for review.49

San Roque’s failure to comply with the 120-day mandatory period renders its petition for review with the CTA void. Article 5 of the Civil Code provides, "Acts executed against provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity." San Roque’s void petition for review cannot be legitimized by the CTA or this Court because Article 5 of the Civil Code states that such void petition cannot be legitimized "except when the law itself authorizes [its] validity." There is no law authorizing the petition’s validity.

It is hornbook doctrine that a person committing a void act contrary to a mandatory provision of law cannot claim or acquire any right from his void act. A right cannot spring in favor of a person from his own void or illegal act. This doctrine is repeated in Article 2254 of the Civil Code, which states, "No vested or acquired right can arise from acts or omissions which are against the law or which infringe upon the rights of others."50 For violating a mandatory provision of law in filing its petition with the CTA, San Roque cannot claim any right arising from such void petition. Thus, San Roque’s petition with the CTA is a mere scrap of paper.

This Court cannot brush aside the grave issue of the mandatory and jurisdictional nature of the 120-day period just because the Commissioner merely asserts that the case was prematurely filed with the CTA and does not question the entitlement of San Roque to the refund. The mere fact that a taxpayer has undisputed excess input VAT, or that the tax was admittedly illegally, erroneously or excessively collected from him, does not entitle him as a matter of right to a tax refund or credit. Strict compliance with the mandatory and jurisdictional conditions prescribed by law to claim such tax refund or credit is essential and necessary for such claim to prosper. Well-settled is the rule that tax refunds or credits, just like tax exemptions, are strictly construed against the taxpayer.51 The burden is on the taxpayer to show that he has strictly complied with the conditions for the grant of the tax refund or credit.

This Court cannot disregard mandatory and jurisdictional conditions mandated by law simply because the Commissioner chose not to contest the numerical correctness of the claim for tax refund or credit of the taxpayer. Non-compliance with mandatory periods, non-observance of prescriptive periods, and non-adherence to exhaustion of administrative remedies bar a taxpayer’s claim for tax refund or credit, whether or not the Commissioner questions the numerical correctness of the claim of the taxpayer. This Court should not establish the precedent that non-compliance with mandatory and jurisdictional conditions can be excused if the claim is otherwise meritorious, particularly in claims for tax refunds or credit. Such precedent will render meaningless compliance with mandatory and jurisdictional requirements, for then every tax refund case will have to be decided on the numerical correctness of the amounts claimed, regardless of non-compliance with mandatory and jurisdictional conditions.

San Roque cannot also claim being misled, misguided or confused by the Atlas doctrine because San Roque filed its petition for review with the

CTA more than four years before Atlas was promulgated. The Atlasdoctrine did not exist at the time San Roque failed to comply with the 120- day period. Thus, San Roque cannot invoke the Atlas doctrine as an excuse for its failure to wait for the 120-day period to lapse. In any event, the Atlasdoctrine merely stated that the two-year prescriptive period should be counted from the date of payment of the output VAT, not from the close of the taxable quarter when the sales involving the input VAT were made. TheAtlas doctrine does not interpret, expressly or impliedly, the 120+3052 day periods.

In fact, Section 106(b) and (e) of the Tax Code of 1977 as amended, which was the law cited by the Court in Atlasas the applicable provision of the law did not yet provide for the 30-day period for the taxpayer to appeal to the CTA from the decision or inaction of the Commissioner.53 Thus, the Atlas doctrine cannot be invoked by anyone to disregard compliance with the 30-day mandatory and jurisdictional period. Also, the difference between the Atlas doctrine on one hand, and the Mirant54 doctrine on the other hand, is a mere 20 days. TheAtlas doctrine counts the two-year prescriptive period from the date of payment of the output VAT, which means within 20 days after the close of the taxable quarter. The output VAT at that time must be paid at the time of filing of the quarterly tax returns, which were to be filed "within 20 days following the end of each quarter."

Thus, in Atlas, the three tax refund claims listed below were deemed timely filed because the administrative claims filed with the Commissioner, and the petitions for review filed with the CTA, were all filed within two years from the date of payment of the output VAT, following Section 229:

Period CoveredDate of Filing Return& Payment of Tax

Date of FilingAdministrative Claim

Date of FilingPetition With CTA

2nd Quarter, 1990Close of Quarter30 June 1990

20 July 1990 21 August 1990 20 July 1992

3rd Quarter, 1990Close of Quarter30 September 1990

18 October 1990 21 November 1990

9 October 1992

4th Quarter, 1990Close of Quarter31 December 1990

20 January 1991 19 February 1991 14 January 1993

Atlas paid the output VAT at the time it filed the quarterly tax returns on the 20th, 18th, and 20th day after the close of the taxable quarter. Had the twoyear prescriptive period been counted from the "close of the taxable quarter" as expressly stated in the law, the tax refund claims of Atlas would have already prescribed. In contrast, the Mirant doctrine counts the two-year prescriptive period from the "close of the taxable quarter when the sales were made" as expressly stated in the law, which means the last day of the taxable quarter. The 20-day

difference55 between the Atlas doctrine and the later Mirant doctrine is not material to San Roque’s claim for tax refund.

Whether the Atlas doctrine or the Mirant doctrine is applied to San Roque is immaterial because what is at issue in the present case is San Roque’s non-compliance with the 120-day mandatory and jurisdictional period, which is counted from the date it filed its administrative claim with the Commissioner. The 120-day period may extend beyond the two-year prescriptive period, as long as the administrative claim is filed within the two-year prescriptive period. However, San Roque’s fatal mistake is that it did not wait for the Commissioner to decide within the 120-day period, a mandatory period whether the Atlas or the Mirant doctrine is applied.

At the time San Roque filed its petition for review with the CTA, the 120+30 day mandatory periods were already in the law. Section 112(C)56 expressly grants the Commissioner 120 days within which to decide the taxpayer’s claim. The law is clear, plain, and unequivocal: "x x x the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents." Following the verba legis doctrine, this law must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA without waiting for the Commissioner’s decision within the 120-day mandatory and jurisdictional period. The CTA will have no jurisdiction because there will be no "decision" or "deemed a denial" decision of the Commissioner for the CTA to review. In San Roque’s case, it filed its petition with the CTA a mere 13 days after it filed its administrative claim with the Commissioner. Indisputably, San Roque knowingly violated the mandatory 120-day period, and it cannot blame anyone but itself.

Section 112(C) also expressly grants the taxpayer a 30-day period to appeal to the CTA the decision or inaction of the Commissioner, thus:

x x x the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals. (Emphasis supplied)

This law is clear, plain, and unequivocal. Following the well-settled verba legis doctrine, this law should be applied exactly as worded since it is clear, plain, and unequivocal. As this law states, the taxpayer may, if he wishes, appeal the decision of the Commissioner to the CTA within 30 days from receipt of the Commissioner’s decision, or if the Commissioner does not act on the taxpayer’s claim within the 120-day period, the taxpayer may appeal to the CTA within 30 days from the expiration of the 120-day period.

b. G.R. No. 196113 - Taganito Mining Corporation v. CIR

Like San Roque, Taganito also filed its petition for review with the CTA without waiting for the 120-day period to lapse. Also, like San Roque, Taganito filed its judicial claim before the promulgation of the Atlas doctrine. Taganito filed a Petition for Review on 14 February 2007 with the CTA. This is almost four months before the adoption of the Atlas doctrine on 8 June 2007. Taganito is similarly situated as San Roque - both cannot claim being misled, misguided, or confused by the Atlas doctrine.

However, Taganito can invoke BIR Ruling No. DA-489-0357 dated 10 December 2003, which expressly ruled that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review." Taganito filed its judicial claim after the issuance of BIR Ruling No. DA-489-03 but before the adoption of the Aichi doctrine. Thus, as will be explained later, Taganito is deemed to have filed its judicial claim with the CTA on time.

c. G.R. No. 197156 – Philex Mining Corporation v. CIR

Philex (1) filed on 21 October 2005 its original VAT Return for the third quarter of taxable year 2005; (2) filed on 20 March 2006 its administrative claim for refund or credit; (3) filed on 17 October 2007 its Petition for Review with the CTA. The close of the third taxable quarter in 2005 is 30 September 2005, which is the reckoning date in computing the two-year prescriptive period under Section 112(A).

Philex timely filed its administrative claim on 20 March 2006, within the two-year prescriptive period. Even if the two-year prescriptive period is computed from the date of payment of the output VAT under Section 229, Philex still filed its administrative claim on time. Thus, the Atlas doctrine is immaterial in this case. The Commissioner had until 17 July 2006, the last day of the 120-day period, to decide Philex’s claim. Since the Commissioner did not act on Philex’s claim on or before 17 July 2006, Philex had until 17 August 2006, the last day of the 30-day period, to file its judicial claim. The CTA EB held that 17 August 2006 was indeed the last day for Philex to file its judicial claim. However, Philex filed its Petition for Review with the CTA only on 17 October 2007, or four hundred twenty-six (426) days after the last day of filing. In short, Philex was late by one year and 61 days in filing its judicial claim. As the CTA EB correctly found:

Evidently, the Petition for Review in C.T.A. Case No. 7687 was filed 426 days late. Thus, the Petition for Review in C.T.A. Case No. 7687 should have been dismissed on the ground that the Petition for Review was filed way beyond the 30-day prescribed period; thus, no jurisdiction was acquired by the CTA Division; x x x58(Emphasis supplied)

Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing. Philex did not file any petition with the CTA within the 120-day period. Philex did not also file any petition with the CTA within 30 days after the expiration of the 120-day period. Philex filed its judicial claim long after the expiration of the 120-day period, in fact 426 days after the lapse of the 120-day period. In any event, whether governed by jurisprudence before, during, or after the Atlas case, Philex’s judicial claim will have to be rejected because of late filing. Whether the two-year prescriptive period is counted from the date of payment of the output VAT following the Atlas doctrine, or from the close of the taxable quarter when the sales attributable to the input VAT were made following the Mirant and Aichi doctrines, Philex’s judicial claim was indisputably filed late.

The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of the Commissioner on Philex’s claim during the 120-day period is, by express provision of law, "deemed a denial" of Philex’s claim. Philex had 30 days from the expiration of the 120-day period to file its judicial claim with the CTA. Philex’s failure to do so rendered the "deemed a denial" decision of the Commissioner final and inappealable. The right to appeal to the CTA from a decision or "deemed a denial" decision of the Commissioner is merely a statutory privilege, not a constitutional right. The exercise of such statutory privilege requires strict

compliance with the conditions attached by the statute for its exercise.59 Philex failed to comply with the statutory conditions and must thus bear the consequences.

II. Prescriptive Periods under Section 112(A) and (C)

There are three compelling reasons why the 30-day period need not necessarily fall within the two-year prescriptive period, as long as the administrative claim is filed within the two-year prescriptive period.

First, Section 112(A) clearly, plainly, and unequivocally provides that the taxpayer "may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of the creditable input tax due or paid to such sales." In short, the law states that the taxpayer may apply with the Commissioner for a refund or credit "within two (2) years," which means at anytime within two years. Thus, the application for refund or credit may be filed by the taxpayer with the Commissioner on the last day of the two-year prescriptive period and it will still strictly comply with the law. The twoyear prescriptive period is a grace period in favor of the taxpayer and he can avail of the full period before his right to apply for a tax refund or credit is barred by prescription.

Second, Section 112(C) provides that the Commissioner shall decide the application for refund or credit "within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsection (A)." The reference in Section 112(C) of the submission of documents "in support of the application filed in accordance with Subsection A" means that the application in Section 112(A) is the administrative claim that the Commissioner must decide within the 120-day period. In short, the two-year prescriptive period in Section 112(A) refers to the period within which the taxpayer can file an administrative claim for tax refund or credit. Stated otherwise, the two-year prescriptive period does not refer to the filing of the judicial claim with the CTA but to the filing of the administrative claim with the Commissioner. As held in Aichi, the "phrase ‘within two years x x x apply for the issuance of a tax credit or refund’ refers to applications for refund/credit with the CIR and not to appeals made to the CTA."

Third, if the 30-day period, or any part of it, is required to fall within the two-year prescriptive period (equivalent to 730 days60), then the taxpayer must file his administrative claim for refund or credit within the first 610 days of the two-year prescriptive period. Otherwise, the filing of the administrative claim beyond the first 610 days will result in the appeal to the CTA being filed beyond the two-year prescriptive period. Thus, if the taxpayer files his administrative claim on the 611th day, the Commissioner, with his 120-day period, will have until the 731st day to decide the claim. If the Commissioner decides only on the 731st day, or does not decide at all, the taxpayer can no longer file his judicial claim with the CTA because the two-year prescriptive period (equivalent to 730 days) has lapsed. The 30-day period granted by law to the taxpayer to file an appeal before the CTA becomes utterly useless, even if the taxpayer complied with the law by filing his administrative claim within the two-year prescriptive period.

The theory that the 30-day period must fall within the two-year prescriptive period adds a condition that is not found in the law. It results in truncating 120 days from the 730 days that the law grants the taxpayer for filing his administrative claim with the Commissioner. This Court cannot interpret a law to defeat, wholly or even partly, a remedy that the law expressly grants in clear, plain, and unequivocal language.

Section 112(A) and (C) must be interpreted according to its clear, plain, and unequivocal language. The taxpayer can file his administrative claim for refund or credit at anytime within the two-year prescriptive period. If he files his claim on the last day of the two-year prescriptive period, his claim is still filed on time. The Commissioner will have 120 days from such filing to decide the claim. If the Commissioner decides the claim on the 120th day, or does not decide it on that day, the taxpayer still has 30 days to file his judicial claim with the CTA. This is not only the plain meaning but also the only logical interpretation of Section 112(A) and (C).

III. "Excess" Input VAT and "Excessively" Collected Tax

The input VAT is not "excessively" collected as understood under Section 229 because at the time the input VAT is collected the amount paid is correct and proper. The input VAT is a tax liability of, and legally paid by, a VAT-registered seller61 of goods, properties or services used as input by another VAT-registered person in the sale of his own goods, properties, or services. This tax liability is true even if the seller passes on the input VAT to the buyer as part of the purchase price. The second VAT-registered person, who is not legally liable for the input VAT, is the one who applies the input VAT as credit for his own output VAT.62 If the input VAT is in fact "excessively" collected as understood under Section 229, then it is the first VAT-registered person - the taxpayer who is legally liable and who is deemed to have legally paid for the input VAT - who can ask for a tax refund or credit under Section 229 as an ordinary refund or credit outside of the VAT System. In such event, the second VAT-registered taxpayer will have no input VAT to offset against his own output VAT.

In a claim for refund or credit of "excess" input VAT under Section 110(B) and Section 112(A), the input VAT is not "excessively" collected as understood under Section 229. At the time of payment of the input VAT the amount paid is the correct and proper amount. Under the VAT System, there is no claim or issue that the input VAT is "excessively" collected, that is, that the input VAT paid is more than what is legally due. The person legally liable for the input VAT cannot claim that he overpaid the input VAT by the mere existence of an "excess" input VAT. The term "excess" input VAT simply means that the input VAT available as credit exceeds the output VAT, not that the input VAT is excessively collected because it is more than what is legally due. Thus, the taxpayer who legally paid the input VAT cannot claim for refund or credit of the input VAT as "excessively" collected under Section 229.

Under Section 229, the prescriptive period for filing a judicial claim for refund is two years from the date of payment of the tax "erroneously, x x x illegally, x x x excessively or in any manner wrongfully collected." The prescriptive period is reckoned from the date the person liable for the tax pays the tax. Thus, if the input VAT is in fact "excessively" collected, that is, the person liable for the tax actually pays more than what is legally due, the taxpayer must file a judicial claim for refund within two years from his date of payment. Only the person legally liable to pay the tax can file the judicial claim for refund. The person to whom the tax is passed on as part of the purchase price has no personality to file the judicial claim under Section 229.63

Under Section 110(B) and Section 112(A), the prescriptive period for filing a judicial claim for "excess" input VAT is two years from the close of the taxable quarter when the sale was made by the person legally liable to pay theoutput VAT. This prescriptive period has no relation to the date of payment of the "excess" input VAT. The "excess" input VAT may have been paid for more than two years but this does not bar the filing of a judicial claim for "excess" VAT under

Section 112(A), which has a different reckoning period from Section 229. Moreover, the person claiming the refund or credit of the input VAT is not the person who legally paid the input VAT. Such person seeking the VAT refund or credit does not claim that the input VAT was "excessively" collected from him, or that he paid an input VAT that is more than what is legally due. He is not the taxpayer who legally paid the input VAT.

As its name implies, the Value-Added Tax system is a tax on the value added by the taxpayer in the chain of transactions. For simplicity and efficiency in tax collection, the VAT is imposed not just on the value added by the taxpayer, but on the entire selling price of his goods, properties or services. However, the taxpayer is allowed a refund or credit on the VAT previously paid by those who sold him the inputs for his goods, properties, or services. The net effect is that the taxpayer pays the VAT only on the value that he adds to the goods, properties, or services that he actually sells.

Under Section 110(B), a taxpayer can apply his input VAT only against his output VAT. The only exception is when the taxpayer is expressly "zero-rated or effectively zero-rated" under the law, like companies generating power through renewable sources of energy.64 Thus, a non zero-rated VAT-registered taxpayer who has no output VAT because he has no sales cannot claim a tax refund or credit of his unused input VAT under the VAT System. Even if the taxpayer has sales but his input VAT exceeds his output VAT, he cannot seek a tax refund or credit of his "excess" input VAT under the VAT System. He can only carry-over and apply his "excess" input VAT against his future output VAT. If such "excess" input VAT is an "excessively" collected tax, the taxpayer should be able to seek a refund or credit for such "excess" input VAT whether or not he has output VAT. The VAT System does not allow such refund or credit. Such "excess" input VAT is not an "excessively" collected tax under Section 229. The "excess" input VAT is a correctly and properly collected tax. However, such "excess" input VAT can be applied against the output VAT because the VAT is a tax imposed only on the value added by the taxpayer. If the input VAT is in fact "excessively" collected under Section 229, then it is the person legally liable to pay the input VAT, not the person to whom the tax was passed on as part of the purchase price and claiming credit for the input VAT under the VAT System, who can file the judicial claim under Section 229.

Any suggestion that the "excess" input VAT under the VAT System is an "excessively" collected tax under Section 229 may lead taxpayers to file a claim for refund or credit for such "excess" input VAT under Section 229 as an ordinary tax refund or credit outside of the VAT System. Under Section 229, mere payment of a tax beyond what is legally due can be claimed as a refund or credit. There is no requirement under Section 229 for an output VAT or subsequent sale of goods, properties, or services using materials subject to input VAT.

From the plain text of Section 229, it is clear that what can be refunded or credited is a tax that is "erroneously, x x x illegally, x x x excessively or in any manner wrongfully collected." In short, there must be a wrongful payment because what is paid, or part of it, is not legally due. As the Court held in Mirant, Section 229 should "apply only to instances of erroneous payment or illegal collection of internal revenue taxes." Erroneous or wrongful payment includes excessive payment because they all refer to payment of taxes not legally due. Under the VAT System, there is no claim or issue that the "excess" input VAT is "excessively or in any manner wrongfully collected." In fact, if the "excess" input VAT is an "excessively" collected tax under Section 229, then the taxpayer claiming to apply such "excessively" collected input VAT to offset his output VAT may have no legal

basis to make such offsetting. The person legally liable to pay the input VAT can claim a refund or credit for such "excessively" collected tax, and thus there will no longer be any "excess" input VAT. This will upend the present VAT System as we know it.

IV. Effectivity and Scope of the Atlas , Mirant and Aichi Doctrines

The Atlas doctrine, which held that claims for refund or credit of input VAT must comply with the two-year prescriptive period under Section 229, should be effective only from its promulgation on 8 June 2007 until its abandonment on 12 September 2008 in Mirant. The Atlas doctrine was limited to the reckoning of the two-year prescriptive period from the date of payment of the output VAT. Prior to the Atlas doctrine, the two-year prescriptive period for claiming refund or credit of input VAT should be governed by Section 112(A) following theverba legis rule. The Mirant ruling, which abandoned the Atlas doctrine, adopted the verba legis rule, thus applying Section 112(A) in computing the two-year prescriptive period in claiming refund or credit of input VAT.

The Atlas doctrine has no relevance to the 120+30 day periods under Section 112(C) because the application of the 120+30 day periods was not in issue in Atlas. The application of the 120+30 day periods was first raised inAichi, which adopted the verba legis rule in holding that the 120+30 day periods are mandatory and jurisdictional. The language of Section 112(C) is plain, clear, and unambiguous. When Section 112(C) states that "the Commissioner shall grant a refund or issue the tax credit within one hundred twenty (120) days from the date of submission of complete documents," the law clearly gives the Commissioner 120 days within which to decide the taxpayer’s claim. Resort to the courts prior to the expiration of the 120-day period is a patent violation of the doctrine of exhaustion of administrative remedies, a ground for dismissing the judicial suit due to prematurity. Philippine jurisprudence is awash with cases affirming and reiterating the doctrine of exhaustion of administrative remedies.65 Such doctrine is basic and elementary.

When Section 112(C) states that "the taxpayer affected may, within thirty (30) days from receipt of the decision denying the claim or after the expiration of the one hundred twenty-day period, appeal the decision or the unacted claim with the Court of Tax Appeals," the law does not make the 120+30 day periods optional just because the law uses the word "may." The word "may" simply means that the taxpayer may or may not appeal the decision of the Commissioner within 30 days from receipt of the decision, or within 30 days from the expiration of the 120-day period. Certainly, by no stretch of the imagination can the word "may" be construed as making the 120+30 day periods optional, allowing the taxpayer to file a judicial claim one day after filing the administrative claim with the Commissioner.

The old rule66 that the taxpayer may file the judicial claim, without waiting for the Commissioner’s decision if the two-year prescriptive period is about to expire, cannot apply because that rule was adopted before the enactment of the 30-day period. The 30-day period was adopted precisely to do away with the old rule, so that under the VAT System the taxpayer will always have 30 days to file the judicial claim even if the Commissioner acts only on the 120th day, or does not act at all during the 120-day period. With the 30-day period always available to the taxpayer, the taxpayer can no longer file a judicial claim for refund or credit of input VAT without waiting for the Commissioner to decide until the expiration of the 120-day period.

To repeat, a claim for tax refund or credit, like a claim for tax exemption, is construed strictly against the taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT System is compliance with the 120+30 day mandatory and jurisdictional periods. Thus, strict compliance with the 120+30 day periods is necessary for such a claim to prosper, whether before, during, or after the effectivity of the Atlas doctrine, except for the period from the issuance of BIR Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when the Aichi doctrine was adopted, which again reinstated the 120+30 day periods as mandatory and jurisdictional.

V. Revenue Memorandum Circular No. 49-03 (RMC 49-03) dated 15 April 2003

There is nothing in RMC 49-03 that states, expressly or impliedly, that the taxpayer need not wait for the 120-day period to expire before filing a judicial claim with the CTA. RMC 49-03 merely authorizes the BIR to continue processing the administrative claim even after the taxpayer has filed its judicial claim, without saying that the taxpayer can file its judicial claim before the expiration of the 120-day period. RMC 49-03 states: "In cases where the taxpayer has filed a ‘Petition for Review’ with the Court of Tax Appeals involving a claim for refund/TCC that is pending at the administrative agency (either the Bureau of Internal Revenue or the One- Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance), the administrative agency and the court may act on the case separately." Thus, if the taxpayer files its judicial claim before the expiration of the 120-day period, the BIR will nevertheless continue to act on the administrative claim because such premature filing cannot divest the Commissioner of his statutory power and jurisdiction to decide the administrative claim within the 120-day period.

On the other hand, if the taxpayer files its judicial claim after the 120- day period, the Commissioner can still continue to evaluate the administrative claim. There is nothing new in this because even after the expiration of the 120-day period, the Commissioner should still evaluate internally the administrative claim for purposes of opposing the taxpayer’s judicial claim, or even for purposes of determining if the BIR should actually concede to the taxpayer’s judicial claim. The internal administrative evaluation of the taxpayer’s claim must necessarilycontinue to enable the BIR to oppose intelligently the judicial claim or, if the facts and the law warrant otherwise, for the BIR to concede to the judicial claim, resulting in the termination of the judicial proceedings.

What is important, as far as the present cases are concerned, is that the mere filing by a taxpayer of a judicial claim with the CTA before the expiration of the 120-day period cannot operate to divest the Commissioner of his jurisdiction to decide an administrative claim within the 120-day mandatory period,unless the Commissioner has clearly given cause for equitable estoppel to apply as expressly recognized in Section 246 of the Tax Code.67

VI. BIR Ruling No. DA-489-03 dated 10 December 2003

BIR Ruling No. DA-489-03 does provide a valid claim for equitable estoppel under Section 246 of the Tax Code. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review." Prior to this ruling, the BIR held, as shown by its position in the Court of

Appeals,68 that the expiration of the 120-day period is mandatory and jurisdictional before a judicial claim can be filed.

There is no dispute that the 120-day period is mandatory and jurisdictional, and that the CTA does not acquire jurisdiction over a judicial claim that is filed before the expiration of the 120-day period. There are, however, two exceptions to this rule. The first exception is if the Commissioner, through a specific ruling, misleads a particular taxpayer to prematurely file a judicial claim with the CTA. Such specific ruling is applicable only to such particular taxpayer. The second exception is where the Commissioner, through a general interpretative rule  issued under Section 4 of the Tax Code, misleads all taxpayers into filing prematurely judicial claims with the CTA. In these cases, the Commissioner cannot be allowed to later on question the CTA’s assumption of jurisdiction over such claim since equitable estoppel has set in as expressly authorized under Section 246 of the Tax Code.

Section 4 of the Tax Code, a new provision introduced by RA 8424, expressly grants to the Commissioner the power to interpret tax laws, thus:

Sec. 4. Power of the Commissioner To Interpret Tax Laws and To Decide Tax Cases. — The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

Since the Commissioner has exclusive and original jurisdiction to interpret tax laws, taxpayers acting in good faith should not be made to suffer for adhering to general interpretative rules of the Commissioner interpreting tax laws, should such interpretation later turn out to be erroneous and be reversed by the Commissioner or this Court. Indeed, Section 246 of the Tax Code expressly provides that a reversal of a BIR regulation or ruling cannot adversely prejudice a taxpayer who in good faith relied on the BIR regulation or ruling prior to its reversal. Section 246 provides as follows:

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

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

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith. (Emphasis supplied)

Thus, a general interpretative rule issued by the Commissioner may be relied upon by taxpayers from the time the rule is issued up to its reversal by the Commissioner or this Court. Section 246 is not limited to a reversal only by the Commissioner because this Section expressly states, "Any revocation, modification or reversal"

without specifying who made the revocation, modification or reversal. Hence, a reversal by this Court is covered under Section 246.

Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a difficult question of law. The abandonment of the Atlas doctrine by Mirant and Aichi69 is proof that the reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of law. The abandonment of the Atlasdoctrine did not result in Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit they received or could have received under Atlas prior to its abandonment. This Court is applying Mirant and Aichiprospectively. Absent fraud, bad faith or misrepresentation, the reversal by this Court of a general interpretative rule issued by the Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply prospectively. As held by this Court in CIR v. Philippine Health Care Providers, Inc.:70

In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, this Court held that under Section 246 of the 1997 Tax Code, the Commissioner of Internal Revenue is precluded from adopting a position contrary to one previously taken where injustice would result to the taxpayer. Hence, where an assessment for deficiency withholding income taxes was made, three years after a new BIR Circular reversed a previous one upon which the taxpayer had relied upon, such an assessment was prejudicial to the taxpayer. To rule otherwise, opined the Court, would be contrary to the tenets of good faith, equity, and fair play.

This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp.1âwphi1 in the later cases ofCommissioner of Internal Revenue v. Borroughs, Ltd., Commissioner of Internal Revenue v. Mega Gen. Mdsg. Corp., Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.) Inc., and Commissioner of Internal Revenue v. Court of Appeals. The rule is that the BIR rulings have no retroactive effect where a grossly unfair deal would result to the prejudice of the taxpayer, as in this case.

More recently, in Commissioner of Internal Revenue v. Benguet Corporation, wherein the taxpayer was entitled to tax refunds or credits based on the BIR’s own issuances but later was suddenly saddled with deficiency taxes due to its subsequent ruling changing the category of the taxpayer’s transactions for the purpose of paying its VAT, this Court ruled that applying such ruling retroactively would be prejudicial to the taxpayer. (Emphasis supplied)

Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all taxpayers or a specific ruling applicable only to a particular taxpayer.

BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not by a particular taxpayer, but by a government agency tasked with processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance. This government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in its query to the Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the agency was in fact asking the Commissioner what to do in cases like the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period.

Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional

However, BIR Ruling No. DA-489-03 cannot be given retroactive effect for four reasons: first, it is admittedly an erroneous interpretation of the law; second, prior to its issuance, the BIR held that the 120-day period was mandatory and jurisdictional, which is the correct interpretation of the law; third, prior to its issuance, no taxpayer can claim that it was misled by the BIR into filing a judicial claim prematurely; and fourth, a claim for tax refund or credit, like a claim for tax exemption, is strictly construed against the taxpayer.

San Roque, therefore, cannot benefit from BIR Ruling No. DA-489-03 because it filed its judicial claim prematurely on 10 April 2003, before the issuance of BIR Ruling No. DA-489-03 on 10 December 2003. To repeat, San Roque cannot claim that it was misled by the BIR into filing its judicial claim prematurely because BIR Ruling No. DA-489-03 was issued only after San Roque filed its judicial claim. At the time San Roque filed its judicial claim, the law as applied and administered by the BIR was that the Commissioner had 120 days to act on administrative claims. This was in fact the position of the BIR prior to the issuance of BIR Ruling No. DA-489-03. Indeed, San Roque never claimed the benefit of BIR Ruling No. DA-489-03 or RMC 49-03, whether in this Court, the CTA, or before the Commissioner.

Taganito, however, filed its judicial claim with the CTA on 14 February 2007, after the issuance of BIR Ruling No. DA-489-03 on 10 December 2003. Truly, Taganito can claim that in filing its judicial claim prematurely without waiting for the 120-day period to expire, it was misled by BIR Ruling No. DA-489-03. Thus, Taganito can claim the benefit of BIR Ruling No. DA-489-03, which shields the filing of its judicial claim from the vice of prematurity.

Philex’s situation is not a case of premature filing of its judicial claim but of late filing, indeed very  late filing. BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means non-exhaustion of the 120-day period for the Commissioner to act on an administrative claim. Philex cannot claim the benefit of BIR Ruling No. DA-489-03 because Philex did not file its judicial claim prematurely but filed it long after the lapse of the 30-day period following the expiration of the 120-day period. In fact, Philex filed its judicial claim 426 days after the lapse of the 30-day period.

VII. Existing Jurisprudence

There is no basis whatsoever to the claim that in five cases this Court had already made a ruling that the filing dates of the administrative and judicial claims are inconsequential, as long as they are within the two-year prescriptive period. The effect of the claim of the dissenting opinions is that San Roque’s failure to wait for the 120-day mandatory period to lapse is inconsequential, thus allowing San Roque to claim the tax refund or credit. However, the five cases cited by the dissenting opinions do not support even remotely the claim that this Court had already made such a ruling. None of these five cases mention, cite, discuss, rule or even hint that compliance with the 120-day mandatory period is inconsequential as long as the administrative and judicial claims are filed within the two-year prescriptive period.

In CIR v. Toshiba Information Equipment (Phils.), Inc.,71 the issue was whether any output VAT was actually passed on to Toshiba that it could claim as input VAT subject to tax credit or refund. The Commissioner argued that "although Toshiba may be a VAT-registered taxpayer, it is not engaged in a VAT-taxable business." The Commissioner cited Section 4.106-1 of Revenue Regulations No. 75 that "refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT-taxable business." In the words of the Court, "Ultimately, however, the issue still to be resolved herein shall be whether respondent Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods and services, to which this Court answers in the affirmative." Nowhere in this case did the Court discuss, state, or rule that the filing dates of the administrative and judicial claims are inconsequential, as long as they are within the two-year prescriptive period.

In Intel Technology Philippines, Inc. v. CIR,72 the Court stated: "The issues to be resolved in the instant case are (1) whether the absence of the BIR authority to print or the absence of the TIN-V in petitioner’s export sales invoices operates to forfeit its entitlement to a tax refund/credit of its unutilized input VAT attributable to its zero-rated sales; and (2) whether petitioner’s failure to indicate "TIN-V" in its sales invoices automatically invalidates its claim for a tax credit certification." Again, nowhere in this case did the Court discuss, state, or rule that the filing dates of the administrative and judicial claims are inconsequential, as long as they are within the two-year prescriptive period.

In AT&T Communications Services Philippines, Inc. v. CIR,73 the Court stated: "x x x the CTA First Division, conceding that petitioner’s transactions fall under the classification of zero-rated sales, nevertheless denied petitioner’s claim ‘for lack of substantiation,’ x x x." The Court quoted the ruling of the First Division that "valid VAT official receipts, and not mere sale invoices, should have been submitted" by petitioner to substantiate its claim. The Court further stated: "x x x the CTA En Banc, x x x affirmed x x x the CTA First Division," and "petitioner’s motion for reconsideration having been denied x x x, the present petition for review was filed." Clearly, the sole issue in this case is whether petitioner complied with the substantiation requirements in claiming for tax refund or credit. Again, nowhere in this case did the Court discuss, state, or rule that the filing dates of the administrative and judicial claims are inconsequential, as long as they are within the two-year prescriptive period.

In CIR v. Ironcon Builders and Development Corporation,74 the Court put the issue in this manner: "Simply put, the sole issue the petition raises is whether or not the CTA erred in granting respondent Ironcon’s application for refund of its excess creditable VAT withheld." The Commissioner argued that "since the NIRC does not specifically grant taxpayers the option to refund excess creditable VAT withheld, it follows that such refund cannot be allowed." Thus, this case is solely about whether the taxpayer has the right under the NIRC to ask for a cash refund of excess creditable VAT withheld. Again, nowhere in this case did the Court discuss, state, or rule that the filing dates of the administrative and judicial claims are inconsequential, as long as they are within the two-year prescriptive period.

In CIR v. Cebu Toyo Corporation,75 the issue was whether Cebu Toyo was exempt or subject to VAT. Compliance with the 120-day period was never an issue in Cebu Toyo. As the Court explained:

Both the Commissioner of Internal Revenue and the Office of the Solicitor General argue that respondent Cebu Toyo Corporation, as a PEZA-registered enterprise, is

exempt from national and local taxes, including VAT, under Section 24 of Rep. Act No. 7916 and Section 109 of the NIRC. Thus, they contend that respondent Cebu Toyo Corporation is not entitled to any refund or credit on input taxes it previously paid as provided under Section 4.103-1 of Revenue Regulations No. 7-95, notwithstanding its registration as a VAT taxpayer. For petitioner claims that said registration was erroneous and did not confer upon the respondent any right to claim recognition of the input tax credit.

The respondent counters that it availed of the income tax holiday under E.O. No. 226 for four years from August 7, 1995 making it exempt from income tax but not from other taxes such as VAT. Hence, according to respondent, its export sales are not exempt from VAT, contrary to petitioner’s claim, but its export sales is subject to 0% VAT. Moreover, it argues that it was able to establish through a report certified by an independent Certified Public Accountant that the input taxes it incurred from April 1, 1996 to December 31, 1997 were directly attributable to its export sales. Since it did not have any output tax against which said input taxes may be offset, it had the option to file a claim for refund/tax credit of its unutilized input taxes.

Considering the submission of the parties and the evidence on record, we find the petition bereft of merit.

Petitioner’s contention that respondent is not entitled to refund for being exempt from VAT is untenable. This argument turns a blind eye to the fiscal incentives granted to PEZA-registered enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute, the respondent had two options with respect to its tax burden. It could avail of an income tax holiday pursuant to provisions of E.O. No. 226, thus exempt it from income taxes for a number of years but not from other internal revenue taxes such as VAT; or it could avail of the tax exemptions on all taxes, including VAT under P.D. No. 66 and pay only the preferential tax rate of 5% under Rep. Act No. 7916. Both the Court of Appeals and the Court of Tax Appeals found that respondent availed of the income tax holiday for four (4) years starting from August 7, 1995, as clearly reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where respondent specified that it was availing of the tax relief under E.O. No. 226. Hence, respondent is not exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine, it is engaged in taxable rather than exempt transactions. (Emphasis supplied)

Clearly, the issue in Cebu Toyo was whether the taxpayer was exempt from VAT or subject to VAT at 0% tax rate. If subject to 0% VAT rate, the taxpayer could claim a refund or credit of its input VAT. Again, nowhere in this case did the Court discuss, state, or rule that the filing dates of the administrative and judicial claims are inconsequential, as long as they are within the two-year prescriptive period.

While this Court stated in the narration of facts in Cebu Toyo that the taxpayer "did not bother to wait for the Resolution of its (administrative) claim by the CIR" before filing its judicial claim with the CTA, this issue was not raised before the Court. Certainly, this statement of the Court is not a binding precedent that the taxpayer need not wait for the 120-day period to lapse.

Any issue, whether raised or not by the parties, but not passed upon by the Court, does not have any value as precedent. As this Court has explained as early as 1926:

It is contended, however, that the question before us was answered and resolved against the contention of the appellant in the case of Bautista vs. Fajardo (38 Phil. 624). In that case no question was raised nor was it even suggested that said section 216 did not apply to a public officer. That question was not discussed nor referred to by any of the parties interested in that case. It has been frequently decided that the fact that a statute has been accepted as valid, and invoked and applied for many years in cases where its validity was not raised or passed on, does not prevent a court from later passing on its validity, where that question is squarely and properly raised and presented. Where a question passes the Court sub silentio, the case in which the question was so passed is not binding on the Court (McGirr vs. Hamilton and Abreu, 30 Phil. 563), nor should it be considered as a precedent. (U.S. vs. Noriega and Tobias, 31 Phil. 310; Chicote vs. Acasio, 31 Phil. 401; U.S. vs. More, 3 Cranch [U.S.] 159, 172; U.S. vs. Sanges, 144 U.S. 310, 319; Cross vs. Burke, 146 U.S. 82.) For the reasons given in the case of McGirr vs. Hamilton and Abreu, supra, the decision in the case of Bautista vs. Fajardo, supra, can have no binding force in the interpretation of the question presented here.76 (Emphasis supplied)

In Cebu Toyo, the nature of the 120-day period, whether it is mandatory or optional, was not even raised as an issue by any of the parties. The Court never passed upon this issue. Thus, Cebu Toyo does not constitute binding precedent on the nature of the 120-day period.

There is also the claim that there are numerous CTA decisions allegedly supporting the argument that the filing dates of the administrative and judicial claims are inconsequential, as long as they are within the two-year prescriptive period. Suffice it to state that CTA decisions do not constitute precedents, and do not bind this Court or the public. That is why CTA decisions are appealable to this Court, which may affirm, reverse or modify the CTA decisions as the facts and the law may warrant. Only decisions of this Court constitute binding precedents, forming part of the Philippine legal system.77 As held by this Court in The Philippine Veterans Affairs Office v. Segundo:78

x x x Let it be admonished that decisions of the Supreme Court "applying or interpreting the laws or the Constitution . . . form part of the legal system of the Philippines," and, as it were, "laws" by their own right because they interpret what the laws say or mean. Unlike rulings of the lower courts, which bind the parties to specific cases alone, our judgments are universal in their scope and application, and equally mandatory in character. Let it be warned that to defy our decisions is to court contempt. (Emphasis supplied)

The same basic doctrine was reiterated by this Court in De Mesa v. Pepsi Cola Products Phils., Inc.:79

The principle of stare decisis et non quieta movere  is entrenched in Article 8 of the Civil Code, to wit:

ART. 8. Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the legal system of the Philippines.

It enjoins adherence to judicial precedents. It requires our courts to follow a rule already established in a final decision of the Supreme Court. That decision becomes a judicial precedent to be followed in subsequent cases by all courts in the land. The doctrine of stare decisis  is based on the principle that once a

question of law has been examined and decided, it should be deemed settled and closed to further argument. (Emphasis supplied)

VIII. Revenue Regulations No. 7-95 Effective 1 January 1996

Section 4.106-2(c) of Revenue Regulations No. 7-95, by its own express terms, applies only if the taxpayer files the judicial claim "after" the lapse of the 60-day period, a period with which San Roque failed to comply. Under Section 4.106-2(c), the 60-day period is still mandatory and jurisdictional.

Moreover, it is a hornbook principle that a prior administrative regulation can never prevail over a later contrary law, more so in this case where the later law was enacted precisely to amend the prior administrative regulation and the law it implements.

The laws and regulation involved are as follows:

1977 Tax Code, as amended by Republic Act No. 7716 (1994)

Sec. 106. Refunds or tax credits of creditable input tax. —

(a) x x x x

(d) Period within which refund or tax credit of input tax shall be made - In proper cases, the Commissioner shall grant a refund or issue the tax credit for creditable input taxes within sixty (60) days from the date of submission of complete documents in support of the application filed in accordance with subparagraphs (a) and (b) hereof. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from receipt of the decision denying the claim or after the expiration of the sixty-day period, appeal the decision or the unacted claim with the Court of Tax Appeals.

Revenue Regulations No. 7-95 (1996)

Section 4.106-2. Procedures for claiming refunds or tax credits of input tax — (a) x x x

x x x x

(c) Period within which refund or tax credit of input taxes shall be made. — In proper cases, the Commissioner shall grant a tax credit/refund for creditable input taxes within sixty (60) days from the date of submission of complete documents in support of the application filed in accordance with subparagraphs (a) and (b) above.

In case of full or partial denial of the claim for tax credit/refund as decided by the Commissioner of Internal Revenue, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from the receipt of said denial, otherwise the decision will become final. However, if no action on the claim for tax credit/refund has been taken by the Commissioner of Internal Revenue after the sixty (60) day period from the date of submission of the application but before the lapse of the two (2) year period from the date of filing of the VAT return for the taxable quarter, the taxpayer may appeal to the Court of Tax Appeals.

x x x x

1997 Tax Code

Section 112. Refunds or Tax Credits of Input Tax —

(A) x x x

x x x x

(D) Period within which Refund or Tax Credit of Input Taxes shall be made. — In proper cases, the Commissioner shall grant the refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals.

There can be no dispute that under Section 106(d) of the 1977 Tax Code, as amended by RA 7716, the Commissioner has a 60-day period to act on the administrative claim. This 60-day period is mandatory and jurisdictional.

Did Section 4.106-2(c) of Revenue Regulations No. 7-95 change this, so that the 60-day period is no longer mandatory and jurisdictional? The obvious answer is no.

Section 4.106-2(c) itself expressly states that if, "after the sixty (60) day period," the Commissioner fails to act on the administrative claim, the taxpayer may file the judicial claim even "before the lapse of the two (2) year period." Thus, under Section 4.106-2(c) the 60-day period is still mandatory and jurisdictional.

Section 4.106-2(c) did not change Section 106(d) as amended by RA 7716, but merely implemented it, for two reasons. First, Section 4.106-2(c) still expressly requires compliance with the 60-day period. This cannot be disputed.1âwphi1

Second, under the novel amendment introduced by RA 7716, mere inaction by the Commissioner during the 60-day period is deemed a denial of the claim. Thus, Section 4.106-2(c) states that "if no action on the claim for tax refund/credit has been taken by the Commissioner after the sixty (60) day period," the taxpayer "may" already file the judicial claim even long before the lapse of the two-year prescriptive period. Prior to the amendment by RA 7716, the taxpayer had to wait until the two-year prescriptive period was about to expire if the Commissioner did not act on the claim.80 With the amendment by RA 7716, the taxpayer need not wait until the two-year prescriptive period is about to expire before filing the judicial claim because mere inaction by the Commissioner during the 60-day period is deemed a denial of the claim. This is the meaning of the phrase "but before the lapse of the two (2) year period" in Section 4.106-2(c). As Section 4.106- 2(c) reiterates that the judicial claim can be filed only "after the sixty (60) day period," this period remains mandatory and jurisdictional. Clearly, Section 4.106-2(c) did not amend Section 106(d) but merely faithfully implemented it.

Even assuming, for the sake of argument, that Section 4.106-2(c) of Revenue Regulations No. 7-95, an administrative issuance, amended Section 106(d) of the Tax Code to make the period given to the Commissioner non-mandatory, still the 1997 Tax Code, a much later law, reinstated the original intent and provision of Section 106(d) by extending the 60-day period to 120 days and re-adopting the original wordings of Section 106(d). Thus, Section 4.106-2(c), a mere administrative issuance, becomes inconsistent with Section 112(D), a later law. Obviously, the later law prevails over a prior inconsistent administrative issuance.

Section 112(D) of the 1997 Tax Code is clear, unequivocal, and categorical that the Commissioner has 120 days to act on an administrative claim. The taxpayer can file the judicial claim (1) only within thirty days after the Commissioner partially or fully denies the claim within the 120- day period, or (2) only within thirty days from the expiration of the 120- day period  if the Commissioner does not act within the 120-day period.

There can be no dispute that upon effectivity of the 1997 Tax Code on 1 January 1998, or more than five yearsbefore San Roque filed its administrative claim on 28 March 2003, the law has been clear: the 120- day period is mandatory and jurisdictional. San Roque’s claim, having been filed administratively on 28 March 2003, is governed by the 1997 Tax Code, not the 1977 Tax Code. Since San Roque filed its judicial claim before the expiration of the 120-day mandatory and jurisdictional period, San Roque’s claim cannot prosper.

San Roque cannot also invoke Section 4.106-2(c), which expressly provides that the taxpayer can only file the judicial claim "after" the lapse of the 60-day period from the filing of the administrative claim. San Roque filed its judicial claim just 13 days after filing its administrative claim. To recall, San Roque filed its judicial claim on 10 April 2003, a mere 13 days after it filed its administrative claim.

Even if, contrary to all principles of statutory construction as well as plain common sense, we gratuitously apply now Section 4.106-2(c) of Revenue Regulations No. 7-95, still San Roque cannot recover any refund or credit because San Roque did not wait for the 60-day period to lapse, contrary to the express requirement in Section 4.106-2(c). In short, San Roque does not even comply with Section 4.106-2(c). A claim for tax refund or credit is strictly construed against the taxpayer, who must prove that his claim clearly complies with all the conditions for granting the tax refund or credit. San Roque did not comply with the express condition for such statutory grant.

A final word. Taxes are the lifeblood of the nation. The Philippines has been struggling to improve its tax efficiency collection for the longest time with minimal success. Consequently, the Philippines has suffered the economic adversities arising from poor tax collections, forcing the government to continue borrowing to fund the budget deficits. This Court cannot turn a blind eye to this economic malaise by being unduly liberal to taxpayers who do not comply with statutory requirements for tax refunds or credits. The tax refund claims in the present cases are not a pittance. Many other companies stand to gain if this Court were to rule otherwise. The dissenting opinions will turn on its head the well-settled doctrine that tax refunds are strictly construed against the taxpayer.

WHEREFORE, the Court hereby (1) GRANTS the petition of the Commissioner of Internal Revenue in G.R. No. 187485 to DENY the P483,797,599.65 tax refund or credit claim of San Roque Power Corporation; (2) GRANTSthe petition of Taganito Mining Corporation in G.R. No. 196113 for a tax refund or credit of P8,365,664.38;

and (3) DENIES the petition of Philex Mining Corporation in G.R. No. 197156 for a tax refund or credit of P23,956,732.44.

SO ORDERED.

IRST DIVISION

G.R. No. 172509, February 04, 2015

CHINA BANKING CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE,Respondent.

D E C I S I O N

SERENO, C.J.:

This Rule 45 Petition1 requires this Court to address the question of prescription of the government’s right to collect taxes. Petitioner China Banking Corporation (CBC) assails the Decision2 and Resolution3 of the Court of Tax Appeals (CTA) En Banc  in CTA En Banc Case No. 109. The CTA En Banc affirmed the Decision4 in CTA Case No. 6379 of the CTA Second Division, which had also affirmed the validity of Assessment No. FAS-5-82/85-89-000586 and FAS-5-86-89-00587. The Assessment required petitioner CBC to pay the amount of P11,383,165.50, plus increments accruing thereto, as deficiency documentary stamp tax (DST) for the taxable years 1982 to 1986.cralawred

FACTS

Petitioner CBC is a universal bank duly organized and existing under the laws of the Philippines. For the taxable years 1982 to 1986, CBC was engaged in transactions involving sales of foreign exchange to the Central Bank of the Philippines (now Bangko Sentral ng Pilipinas), commonly known as SWAP transactions.5 Petitioner did not file tax returns or pay tax on the SWAP transactions for those taxable years.

On 19 April 1989, petitioner CBC received an assessment from the Bureau of Internal Revenue (BIR) finding CBC liable for deficiency DST on the sales of foreign

bills of exchange to the Central Bank. The deficiency DST was computed as follows:chanroblesvirtuallawlibrary

Deficiency Documentary Stamp Tax                                                                              

Amount

For the years 1982 to 1985 

P 8,280,696.00

For calendar year 1986 P 2,481 ,975.60

Add : Surcharge  P 620,493.90 P 3,102.469.50

    P11 ,383,165.506

On 8 May 1989, petitioner CBC, through its vice-president, sent a letter of protest to the BIR. CBC raised the following defenses: (1) double taxation, as the bank had previously paid the DST on all its transactions involving sales of foreign bills of exchange to the Central Bank; (2) absence of liability,as the liability for the DST in a sale of foreign exchange through telegraphic transfers to the Central Bank falls on the buyer ? in this case, the Central Bank; (3) due process violation, as the bank’s records were never formally examined by the BIR examiners; (4) validity of the assessment, as it did not include the factual basis therefore; (5) exemption, as neither the tax-exempt entity nor the other party was liable for the payment of DST before the effectivity of Presidential Decree Nos. (PD) 1177 and 1931 for the years 1982 to 1986.7 In the protest, the taxpayer requested a reinvestigation so as to substantiate its assertions.8chanRoblesvirtualLawlibrary

On 6 December 2001, more than 12 years after the filing of the protest, the Commissioner of Internal Revenue (CIR) rendered a decision reiterating the deficiency DST assessment and ordered the payment thereof plus increments within 30 days from receipt of the Decision.9chanRoblesvirtualLawlibrary

On 18 January 2002, CBC filed a Petition for Review with the CTA. On 11 March 2002, the CIR filed an Answer with a demand for CBC to pay the assessed DST.10chanRoblesvirtualLawlibrary

On 23 February 2005, and after trial on the merits, the CTA Second Division denied the Petition of CBC. The CTA ruled that a SWAP arrangement should be treated as a telegraphic transfer subject to documentary stamp tax.11chanRoblesvirtualLawlibrary

On 30 March 2005, petitioner CBC filed a Motion for Reconsideration, but it was denied in a Resolution dated 14 July 2005.

On 5 August 2005, petitioner appealed to the CTA En Banc. The appellate tax court, however, dismissed the Petition for Review in a Decision dated 1 December 2005. CBC filed a Motion for Reconsideration on 21 December 2005, but it was denied in a 20 March 2006 Resolution.

The taxpayer now comes to this Court with a Rule 45 Petition, reiterating the

arguments it raised at the CTA level and invoking for the first time the argument of prescription. Petitioner CBC states that the government has three years from 19 April 1989, the date the former received the assessment of the CIR, to collect the tax. Within that time frame, however, neither a warrant of distraint or levy was issued, nor a collection case filed in court.

On 17 October 2006, respondent CIR submitted its Comment in compliance with the Court’s Resolution dated 26 June 2006.12 The Comment did not have any discussion on the question of prescription.

On 21 February 2007, the Court issued a Resolution directing the parties to file their respective Memoranda. Petitioner CBC filed its Memorandum13 on 26 April 2007. The CIR, on the other hand, filed on 17 April 2007 a Manifestation stating that it was adopting the allegations and authorities in its Comment in lieu of the required Memorandum.14chanRoblesvirtualLawlibrary

ISSUE

Given the facts and the arguments raised in this case, the resolution of this case hinges on this issue: whether the right of the BIR to collect the assessed DST from CBC is barred by prescription.15chanRoblesvirtualLawlibrary

RULING OF THE COURT

We grant the Petition on the ground that the right of the BIR to collect the assessed DST is barred by the statute of limitations.

Prescription Has Set In.

To recall, the Bureau of Internal Revenue (BIR) issued the assessment for deficiency DST on 19 April 1989, when the applicable rule was Section 319(c) of the National Internal Revenue Code of 1977, as amended.16  In that provision, the time limit for the government to collect the assessed tax is set at three years, to be reckoned from the date when the BIR mails/releases/sends the assessment notice to the taxpayer. Further, Section 319(c) states that the assessed tax must be collected by distraint or levy and/or court proceeding within the three-year period.

With these rules in mind, we shall now determine whether the claim of the BIR is barred by time.

In this case, the records do not show when the assessment notice was mailed, released or sent to CBC. Nevertheless, the latest possible date that the BIR could have released, mailed or sent the assessment notice was on the same date that CBC received it, 19 April 1989. Assuming therefore that 19 April 1989 is the reckoning date, the BIR had three years to collect the assessed DST. However, the records of this case show that there was neither a warrant of distraint or levy served on CBC's properties nor a collection case filed in court by the BIR within the three-year period.

The attempt of the BIR to collect the tax through its Answer with a demand for CBC to pay the assessed DST in the CTA on 11 March 2002 did not comply with Section 319(c) of the 1977 Tax Code, as amended. The demand was made almost thirteen years from the date from which the prescriptive period is to be reckoned. Thus, the

attempt to collect the tax was made way beyond the three-year prescriptive period.

The BIR’s Answer in the case filed before the CTA could not, by any means, have qualified as a collection case as required by law. Under the rule prevailing at the time the BIR filed its Answer, the regular courts, and not the CTA, had jurisdiction over judicial actions for collection of internal revenue taxes. It was only on 23 April 2004, when Republic Act Number 9282 took effect,17 that the jurisdiction of the CTA was expanded to include, among others, original jurisdiction over collection cases in which the principal amount involved is one million pesos or more.

Consequently, the claim of the CIR for deficiency DST from petitioner is forever lost, as it is now barred by time. This Court has no other option but to dismiss the present case.

The running of the statute of limitations was not suspendedby the request for reinvestigation. 

The fact that the taxpayer in this case may have requested a reinvestigation did not toll the running of the three-year prescriptive period. Section 320 of the 1977 Tax Code states:chanroblesvirtuallawlibrary

Sec. 320. Suspension of running of statute.—The running of the statute of limitations provided in Sections 318 or 319 on the making of assessment 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 Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a re-investigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected:Provided, That if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations will not be suspended; when the warrant of distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines. (Emphasis supplied)

The provision is clear.  A request for reinvestigation alone will not suspend the statute of limitations. Two things must concur: there must be a request for reinvestigation and the CIR must have granted it. BPI v. Commissioner of Internal Revenue18 emphasized this rule by stating:chanroblesvirtuallawlibrary

In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco requested for a thorough reinvestigation of the assessment against him and placed at the disposal of the Collector of Internal Revenue all the [evidence] he had for such purpose; yet, the Collector ignored the request, and the records and documents were not at all examined. Considering the given facts, this Court pronounced that—

x x x. The act of requesting a reinvestigation alone does not suspend the period. The request should first be granted, in order to effect suspension. (Collector v. Suyoc Consolidated, supra; also Republic v. Ablaza, supra). Moreover, the Collector gave appellee until April 1, 1949, within which to submit his evidence,

which the latter did one day before. There were no impediments on the part of the Collector to file the collection case from April 1, 1949 x x x.

In Republic of the Philippines v. Acebedo, this Court similarly found that —

. . . [T]he defendant, after receiving the assessment notice of September 24, 1949, asked for a reinvestigation thereof on October 11, 1949 (Exh. “A”). There is no evidence that this request was considered or acted upon. In fact, on October 23, 1950 the then Collector of Internal Revenue issued a warrant of distraint and levy for the full amount of the assessment (Exh. “D”), but there was follow-up of this warrant. Consequently, the request for reinvestigation did not suspend the running of the period for filing an action for collection. (Emphasis in the original)

The Court went on to declare that the burden of proof that the request for reinvestigation had been actually granted shall be on the CIR. Such grant may be expressed in its communications with the taxpayer or implied from the action of the CIR or his authorized representative in response to the request for reinvestigation.

There is nothing in the records of this case which indicates, expressly or impliedly, that the CIR had granted the request for reinvestigation filed by BPI. What is reflected in the records is the piercing silence and inaction of the CIR on the request for reinvestigation, as he considered BPI's letters of protest to be.

In the present case, there is no showing from the records that the CIR ever granted the request for reinvestigation filed by CBC. That being the case, it cannot be said that the running of the three-year prescriptive period was effectively suspended.

Failure to raise prescription at theadministrative level/lower court as adefense is of no moment. 

When the pleadings or the evidence on recordshow that the claim is barred by prescription, the court must dismiss the claim even if prescription is not raised as a defense.

We note that petitioner has raised the issue of prescription for the first time only before this Court. While we are mindful of the established rule of remedial law that the defense of prescription must be raised at the trial court that has also been applied for tax cases.19  Thus, as a rule, the failure to raise the defense of prescription at the administrative level prevents the taxpayer from raising it at the appeal stage.

This rule, however, is not absolute.

The facts of the present case are substantially identical to those in the 2014 case, Bank of the Philippine Islands (BPI) v. Commissioner of Internal Revenue.20 In that case, petitioner received an assessment notice from the BIR for deficiency DST based on petitioner’s SWAP transactions for the year 1985 on 16 June 1989. On 23 June 1989, BPI, through its counsel, filed a protest requesting the reinvestigation and/or reconsideration of the assessment for lack of legal or factual bases. Almost ten years later, the CIR, in a letter dated 4 August 1998, denied the protest. On 4 January 1999, BPI filed a Petition for Review with the CTA. On 23 February 1999, the

CIR filed an Answer with a demand for BPI to pay the assessed DST. It was only when the case ultimately reached this Court that the issue of prescription was brought up. Nevertheless, the Court ruled that the CIR could no longer collect the assessed tax due to prescription. Basing its ruling on Section 1, Rule 9 of the Rules of Court and on jurisprudence, the Court held as follows:chanroblesvirtuallawlibrary

In a Resolution dated 5 August 2013, the Court, through the Third Division, found that the assailed tax assessment may be invalidated because the statute of limitations on the collection of the alleged deficiency DST had already expired, conformably with Section 1, Rule 9 of the Rules of Court and the Bank of the Philippine Islands v. Commissioner of Internal Revenue decision. However, to afford due process, the Court required both BPI and CIR to submit their respective comments on the issue of prescription.

Only the CIR filed his comment on 9 December 2013. In his Comment, the CIR argues that the issue of prescription cannot be raised for the first time on appeal. The CIR further alleges that even assuming that the issue of prescription can be raised, the protest letter interrupted the prescriptive period to collect the assessed DST, unlike in the Bank of the Philippine Islands case.

x x x x

We deny the right of the BIR to collect the assessed DST on the ground of prescription.

Section 1, Rule 9 of the Rules of Court expressly provides that:ChanRoblesVirtualawlibrary

Section 1. Defenses and objections not pleaded. - Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived. However, when it appears from the pleadings or the evidence on record that the court has no jurisdiction over the subject matter, that there is another action pending between the same parties for the same cause, or that the action is barred by prior judgment or by the statute of limitations, the court shall dismiss the claim.

If the pleadings or the evidence on record show that the claim is barred by prescription, the court is mandated to dismiss the claim even if prescription is not raised as a defense. In Heirs of Valientes v. Ramas, we ruled that the CA maymotu proprio dismiss the case on the ground of prescription despite failure to raise this ground on appeal. The court is imbued with sufficient discretion to review matters, not otherwise assigned as errors on appeal, if it finds that their consideration is necessary in arriving at a complete and just resolution of the case. More so, when the provisions on prescription were enacted to benefit and protect taxpayers from investigation after a reasonable period of time.

Thus, we proceed to determine whether the period to collect the assessed DST for the year 1985 has prescribed.

To determine prescription, what is essential only is that the facts demonstrating the lapse of the prescriptive period were sufficiently and satisfactorily apparent on the record either in the allegations of the plaintiff’s complaint, or otherwise established by the evidence. Under the then applicable Section 319(c) [now, 222(c)] of the National Internal Revenue Code (NIRC) of 1977, as amended, any internal revenue

tax which has been assessed within the period of limitation may be collected by distraint or levy, and/or court proceeding within three years following the assessment of the tax. The assessment of the tax is deemed made and the three-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent by the BIR to the taxpayer.

In the present case, although there was no allegation as to when the assessment notice had been released, mailed or sent to BPI, still, the latest date that the BIR could have released, mailed or sent the assessment notice was on the date BPI received the same on 16 June 1989. Counting the three-year prescriptive period from 16 June 1989, the BIR had until 15 June 1992 to collect the assessed DST. But despite the lapse of 15 June 1992, the evidence established that there was no warrant of distraint or levy served on BPI’s properties, or any judicial proceedings initiated by the BIR.

The earliest attempt of the BIR to collect the tax was when it filed its answer in the CTA on 23 February 1999, which was several years beyond the three-year prescriptive period. However, the BIR’s answer in the CTA was not the collection case contemplated by the law. Before 2004 or the year Republic Act No. 9282 took effect, the judicial action to collect internal revenue taxes fell under the jurisdiction of the regular trial courts, and not the CTA. Evidently, prescription has set in to bar the collection of the assessed DST. (Emphasis supplied)

BPI thus provides an exception to the rule against raising the defense of prescription for the first time on appeal: the exception arises when the pleadings or the evidence on record show that the claim is barred by prescription.

In this case, the fact that the claim of the government is time-barred is a matter of record. As can be seen from the previous discussion on the determination of the prescription of the right of the government to claim deficiency DST, the conclusion that prescription has set in was arrived at using the evidence on record. The date of receipt of the assessment notice was not disputed, and the date of the attempt to collect was determined by merely checking the records as to when the Answer of the CIR containing the demand to pay the tax was filed.

Estoppel or waiver prevents the government from invoking the rule against raising the issue of prescription for the first time on appeal.

In this case, petitioner may have raised the question of prescription only on appeal to this Court. The BIR could have crushed the defense by the mere invocation of the rule against setting up the defense of prescription only at the appeal stage. The government, however, failed to do so.

On the contrary, the BIR was silent despite having the opportunity to invoke the bar against the issue of prescription. It is worthy of note that the Court ordered the BIR to file a Comment. The government, however, did not offer any argument in its Comment about the issue of prescription, even if petitioner raised it in the latter’s Petition. It merely fell silent on the issue. It was given another opportunity to meet the challenge when this Court ordered both parties to file their respective memoranda. The CIR, however, merely filed a Manifestation that it would no longer be filing a Memorandum and, in lieu thereof, it would be merely adopting the

arguments raised in its Comment. Its silence spoke loudly of its intent to waive its right to object to the argument of prescription.

We are mindful of the rule in taxation that estoppel does not prevent the government from collecting taxes; it is not bound by the mistake or negligence of its agents. The rule is based on the political law concept “the king can do no wrong,”21 which likens a state to a king: it does not commit mistakes, and it does not sleep on its rights. The analogy fosters inequality between the taxpayer and the government, with the balance tilting in favor of the latter. This concept finds justification in the theory and reality that government is necessary, and it must therefore collect taxes if it is to survive. Thus, the mistake or negligence of government officials should not bind the state, lest it bring harm to the government and ultimately the people, in whom sovereignty resides.22chanRoblesvirtualLawlibrary

Republic v. Ker & Co. Ltd.23 involved a collection case for a final and executory assessment. The taxpayer nevertheless raised the prescription of the right to assess the tax as a defense before the Court of First Instance. The Republic, instead of objecting to the invocation of prescription as a defense by the taxpayer, litigated on the issue and thereafter submitted it for resolution. The Supreme Court ruled for the taxpayer, treating the actuations of the government as a waiver of the right to invoke the defense of prescription. Ker effectively applied to the government the rule ofestoppel. Indeed, the no-estoppel rule is not absolute.

The same ingredients in Ker - procedural matter and injustice - obtain in this case. The procedural matter consists in the failure to raise the issue of prescription at the trial court/administrative level, and injustice in the fact that the BIR has unduly delayed the assessment and collection of the DST in this case.  The fact is that it took more than 12 years for it to take steps to collect the assessed tax.  The BIR definitely caused untold prejudice to petitioner, keeping the latter in the dark for so long, as to whether it is liable for DST and, if so, for how much.cralawred

CONCLUSION

Inasmuch as the government’s claim for deficiency DST is barred by prescription, it is no longer necessary to dwell on the validity of the assessment.chanrobleslaw

WHEREFORE, the Petition is GRANTED. The Court of Tax Appeals En Banc Decision dated 1 December 2005 and its Resolution dated 20 March 2006 in CTA EB Case No. 109 are herebyREVERSED and SET ASIDE. A new ruling is entered DENYING respondent’s claim for deficiency DST in the amount of P11,383,165.50.

SO ORDERED.cralawlawlibraryG.R. No. 181845               August 4, 2009

THE CITY OF MANILA, LIBERTY M. TOLEDO, in her capacity as THE TREASURER OF MANILA and JOSEPH SANTIAGO, in his capacity as the CHIEF OF THE LICENSE DIVISION OF CITY OF MANILA,petitioners, vs.COCA-COLA BOTTLERS PHILIPPINES, INC., Respondent.

D E C I S I O N

CHICO-NAZARIO, J.:

This case is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Civil Procedure seeking to review and reverse the Decision1 dated 18 January 2008 and Resolution2 dated 18 February 2008 of the Court of Tax Appeals en banc (CTA en banc) in C.T.A. EB No. 307. In its assailed Decision, the CTA en banc dismissed the Petition for Review of herein petitioners City of Manila, Liberty M. Toledo (Toledo), and Joseph Santiago (Santiago); and affirmed the Resolutions dated 24 May 2007,3 8 June 2007,4 and 26 July 2007,5 of the CTA First Division in C.T.A. AC No. 31, which, in turn, dismissed the Petition for Review of petitioners in said case for being filed out of time. In its questioned Resolution, the CTA en banc denied the Motion for Reconsideration of petitioners.

Petitioner City of Manila is a public corporation empowered to collect and assess business taxes, revenue fees, and permit fees, through its officers, petitioners Toledo and Santiago, in their capacities as City Treasurer and Chief of the Licensing Division, respectively. On the other hand, respondent Coca-Cola Bottlers Philippines, Inc. is a corporation engaged in the business of manufacturing and selling beverages, and which maintains a sales office in the City of Manila.

The case stemmed from the following facts:

Prior to 25 February 2000, respondent had been paying the City of Manila local business tax only under Section 14 of Tax Ordinance No. 7794,6 being expressly exempted from the business tax under Section 21 of the same tax ordinance. Pertinent provisions of Tax Ordinance No. 7794 provide:

Section 14. – Tax on Manufacturers, Assemblers and Other Processors. – There is hereby imposed a graduated tax on manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever kind or nature, in accordance with any of the following schedule:

x x x x

over P6,500,000.00 up to

P25,000,000.00 - - - - - - - - - - - - - - - - - - - --

P36,000.00 plus 50% of 1%

in excess of P6,500,000.00

x x x x

Section 21. – Tax on Businesses Subject to the Excise, Value-Added or Percentage Taxes under the NIRC. – On any of the following businesses and articles of commerce subject to excise, value-added or percentage taxes under the National Internal Revenue Code hereinafter referred to as NIRC, as amended, a tax of FIFTY PERCENT (50%) of ONE PERCENT (1%) per annum on the gross sales or receipts of the preceding calendar year is hereby imposed:

(A) On persons who sell goods and services in the course of trade or business; and those who import goods whether for business or otherwise; as provided for in Sections 100 to 103 of the NIRC as administered and determined by the Bureau of Internal Revenue pursuant to the pertinent provisions of the said Code.

x x x x

(D) Excisable goods subject to VAT

(1) Distilled spirits

(2) Wines

x x x x

(8) Coal and coke

(9) Fermented liquor, brewers’ wholesale price, excluding the ad valorem tax

x x x x

PROVIDED, that all registered businesses in the City of Manila that are already paying the aforementioned tax shall be exempted from payment thereof.

Petitioner City of Manila subsequently approved on 25 February 2000, Tax Ordinance No. 7988,7 amending certain sections of Tax Ordinance No. 7794, particularly: (1) Section 14, by increasing the tax rates applicable to certain establishments operating within the territorial jurisdiction of the City of Manila; and (2) Section 21, by deleting the proviso found therein, which stated "that all registered businesses in the City of Manila that are already paying the aforementioned tax shall be exempted from payment thereof." Petitioner City of Manila approved only after a year, on 22 February 2001, another tax ordinance, Tax Ordinance No. 8011, amending Tax Ordinance No. 7988.

Tax Ordinances No. 7988 and No. 8011 were later declared by the Court null and void in Coca-Cola Bottlers Philippines, Inc. v. City of Manila8 (Coca-Cola case) for the following reasons: (1) Tax Ordinance No. 7988 was enacted in contravention of the provisions of the Local Government Code (LGC) of 1991 and its implementing rules and regulations; and (2) Tax Ordinance No. 8011 could not cure the defects of Tax Ordinance No. 7988, which did not legally exist.

However, before the Court could declare Tax Ordinance No. 7988 and Tax Ordinance No. 8011 null and void, petitioner City of Manila assessed respondent on the basis of Section 21 of Tax Ordinance No. 7794, as amended by the aforementioned tax ordinances, for deficiency local business taxes, penalties, and interest, in the total amount of P18,583,932.04, for the third and fourth quarters of the year 2000. Respondent filed a protest with petitioner Toledo on the ground that the said assessment amounted to double taxation, as respondent was taxed twice, i.e., under Sections 14 and 21 of Tax Ordinance No. 7794, as amended by Tax Ordinances No. 7988 and No. 8011. Petitioner Toledo did not respond to the protest of respondent.

Consequently, respondent filed with the Regional Trial Court (RTC) of Manila, Branch 47, an action for the cancellation of the assessment against respondent for business taxes, which was docketed as Civil Case No. 03-107088.

On 14 July 2006, the RTC rendered a Decision9 dismissing Civil Case No. 03-107088. The RTC ruled that the business taxes imposed upon the respondent under Sections 14 and 21 of Tax Ordinance No. 7988, as amended, were not of the same kind or character; therefore, there was no double taxation. The RTC, though, in an Order10 dated 16 November 2006, granted the Motion for Reconsideration of

respondent, decreed the cancellation and withdrawal of the assessment against the latter, and barred petitioners from further imposing/assessing local business taxes against respondent under Section 21 of Tax Ordinance No. 7794, as amended by Tax Ordinance No. 7988 and Tax Ordinance No. 8011. The 16 November 2006 Decision of the RTC was in conformity with the ruling of this Court in the Coca-Cola case, in which Tax Ordinance No. 7988 and Tax Ordinance No. 8011 were declared null and void. The Motion for Reconsideration of petitioners was denied by the RTC in an Order11 dated 4 April 2007. Petitioners received a copy of the 4 April 2007 Order of the RTC, denying their Motion for Reconsideration of the 16 November 2006 Order of the same court, on 20 April 2007.

On 4 May 2007, petitioners filed with the CTA a Motion for Extension of Time to File Petition for Review, praying for a 15-day extension or until 20 May 2007 within which to file their Petition. The Motion for Extension of petitioners was docketed as C.T.A. AC No. 31, raffled to the CTA First Division.

Again, on 18 May 2007, petitioners filed, through registered mail, a Second Motion for Extension of Time to File a Petition for Review, praying for another 10-day extension, or until 30 May 2007, within which to file their Petition.

On 24 May 2007, however, the CTA First Division already issued a Resolution dismissing C.T.A. AC No. 31 for failure of petitioners to timely file their Petition for Review on 20 May 2007.

Unaware of the 24 May 2007 Resolution of the CTA First Division, petitioners filed their Petition for Review therewith on 30 May 2007 via registered mail. On 8 June 2007, the CTA First Division issued another Resolution, reiterating the dismissal of the Petition for Review of petitioners.

Petitioners moved for the reconsideration of the foregoing Resolutions dated 24 May 2007 and 8 June 2007, but their motion was denied by the CTA First Division in a Resolution dated 26 July 2007. The CTA First Division reasoned that the Petition for Review of petitioners was not only filed out of time -- it also failed to comply with the provisions of Section 4, Rule 5; and Sections 2 and 3, Rule 6, of the Revised Rules of the CTA.

Petitioners thereafter filed a Petition for Review before the CTA en banc, docketed as C.T.A. EB No. 307, arguing that the CTA First Division erred in dismissing their Petition for Review in C.T.A. AC No. 31 for being filed out of time, without considering the merits of their Petition.

The CTA en banc rendered its Decision on 18 January 2008, dismissing the Petition for Review of petitioners and affirming the Resolutions dated 24 May 2007, 8 June 2007, and 26 July 2007 of the CTA First Division. The CTA en banc similarly denied the Motion for Reconsideration of petitioners in a Resolution dated 18 February 2008.

Hence, the present Petition, where petitioners raise the following issues:

I. WHETHER OR NOT PETITIONERS SUBSTANTIALLY COMPLIED WITH THE REGLEMENTARY PERIOD TO TIMELY APPEAL THE CASE FOR REVIEW BEFORE THE [CTA DIVISION].

II. WHETHER OR NOT THE RULING OF THIS COURT IN THE EARLIER [COCA-COLA CASE] IS DOCTRINAL AND CONTROLLING IN THE INSTANT CASE.

III. WHETHER OR NOT PETITIONER CITY OF MANILA CAN STILL ASSESS TAXES UNDER [SECTIONS] 14 AND 21 OF [TAX ORDINANCE NO. 7794, AS AMENDED].

IV. WHETHER OR NOT THE ENFORCEMENT OF [SECTION] 21 OF THE [TAX ORDINANCE NO. 7794, AS AMENDED] CONSTITUTES DOUBLE TAXATION.

Petitioners assert that Section 1, Rule 712 of the Revised Rules of the CTA refers to certain provisions of the Rules of Court, such as Rule 42 of the latter, and makes them applicable to the tax court. Petitioners then cannot be faulted in relying on the provisions of Section 1, Rule 4213 of the Rules of Court as regards the period for filing a Petition for Review with the CTA in division. Section 1, Rule 42 of the Rules of Court provides for a 15-day period, reckoned from receipt of the adverse decision of the trial court, within which to file a Petition for Review with the Court of Appeals. The same rule allows an additional 15-day period within which to file such a Petition; and, only for the most compelling reasons, another extension period not to exceed 15 days. Petitioners received on 20 April 2007 a copy of the 4 April 2007 Order of the RTC, denying their Motion for Reconsideration of the 16 November 2006 Order of the same court. On 4 May 2007, believing that they only had 15 days to file a Petition for Review with the CTA in division, petitioners moved for a 15-day extension, or until 20 May 2007, within which to file said Petition. Prior to the lapse of their first extension period, or on 18 May 2007, petitioners again moved for a 10-day extension, or until 30 May 2007, within which to file their Petition for Review. Thus, when petitioners filed their Petition for Review with the CTA First Division on 30 May 2007, the same was filed well within the reglementary period for doing so.

Petitioners argue in the alternative that even assuming that Section 3(a), Rule 8 14 of the Revised Rules of the CTA governs the period for filing a Petition for Review with the CTA in division, still, their Petition for Review was filed within the reglementary period. Petitioners call attention to the fact that prior to the lapse of the 30-day period for filing a Petition for Review under Section 3(a), Rule 8 of the Revised Rules of the CTA, they had already moved for a 10-day extension, or until 30 May 2007, within which to file their Petition. Petitioners claim that there was sufficient justification in equity for the grant of the 10-day extension they requested, as the primordial consideration should be the substantive, and not the procedural, aspect of the case. Moreover, Section 3(a), Rule 8 of the Revised Rules of the CTA, is silent as to whether the 30-day period for filing a Petition for Review with the CTA in division may be extended or not.

Petitioners also contend that the Coca-Cola case is not determinative of the issues in the present case because the issue of nullity of Tax Ordinance No. 7988 and Tax Ordinance No. 8011 is not the lis mota herein. The Coca-Cola case is not doctrinal and cannot be considered as the law of the case.

Petitioners further insist that notwithstanding the declaration of nullity of Tax Ordinance No. 7988 and Tax Ordinance No. 8011, Tax Ordinance No. 7794 remains a valid piece of local legislation. The nullity of Tax Ordinance No. 7988 and Tax Ordinance No. 8011 does not effectively bar petitioners from imposing local business taxes upon respondent under Sections 14 and 21 of Tax Ordinance No. 7794, as they were read prior to their being amended by the foregoing null and void tax ordinances.

Petitioners finally maintain that imposing upon respondent local business taxes under both Sections 14 and 21 of Tax Ordinance No. 7794 does not constitute direct double taxation. Section 143 of the LGC gives municipal, as well as city governments, the power to impose business taxes, to wit:

SECTION 143. Tax on Business. – The municipality may impose taxes on the following businesses:

(a) On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever kind or nature, in accordance with the following schedule:

x x x x

(b) On wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature in accordance with the following schedule:

x x x x

(c) On exporters, and on manufacturers, millers, producers, wholesalers, distributors, dealers or retailers of essential commodities enumerated hereunder at a rate not exceeding one-half (1/2) of the rates prescribed under subsections (a), (b) and (d) of this Section:

x x x x

Provided, however, That barangays shall have the exclusive power to levy taxes, as provided under Section 152 hereof, on gross sales or receipts of the preceding calendar year of Fifty thousand pesos (P50,000.00) or less, in the case of cities, and Thirty thousand pesos (P30,000) or less, in the case of municipalities.

(e) On contractors and other independent contractors, in accordance with the following schedule:

x x x x

(f) On banks and other financial institutions, at a rate not exceeding fifty percent (50%) of one percent (1%) on the gross receipts of the preceding calendar year derived from interest, commissions and discounts from lending activities, income from financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium.

(g) On peddlers engaged in the sale of any merchandise or article of commerce, at a rate not exceeding Fifty pesos (P50.00) per peddler annually.

(h) On any business, not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, That on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year.

Section 14 of Tax Ordinance No. 7794 imposes local business tax on manufacturers, etc. of liquors, distilled spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC. On the other hand, the local business tax under Section 21 of Tax Ordinance No. 7794 is imposed upon persons selling goods and services in the course of trade or business, and those importing goods for business or otherwise, who, pursuant to Section 143(h) of the LGC, are subject to excise tax, value-added tax (VAT), or percentage tax under the National Internal Revenue Code (NIRC). Thus, there can be no double taxation when respondent is being taxed under both Sections 14 and 21 of Tax Ordinance No. 7794, for under the first, it is being

taxed as a manufacturer; while under the second, it is being taxed as a person selling goods in the course of trade or business subject to excise, VAT, or percentage tax.

The Court first addresses the issue raised by petitioners concerning the period within which to file with the CTA a Petition for Review from an adverse decision or ruling of the RTC.

The period to appeal the decision or ruling of the RTC to the CTA via a Petition for Review is specifically governed by Section 11 of Republic Act No. 9282,15 and Section 3(a), Rule 8 of the Revised Rules of the CTA.

Section 11 of Republic Act No. 9282 provides:

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. – Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file an Appeal with the CTA within thirty (30) days after the receipt of such decision or ruling or after the expiration of the period fixed by law for action as referred to in Section 7(a)(2) herein.

Appeal shall be made by filing a petition for review under a procedure analogous to that provided for under Rule 42 of the 1997 Rules of Civil Procedure with the CTA within thirty (30) days from the receipt of the decision or ruling or in the case of inaction as herein provided, from the expiration of the period fixed by law to act thereon. x x x. (Emphasis supplied.)

Section 3(a), Rule 8 of the Revised Rules of the CTA states:

SEC 3. Who may appeal; period to file petition. – (a) A party adversely affected by a decision, ruling or the inaction of the Commissioner of Internal Revenue on disputed assessments or claims for refund of internal revenue taxes, or by a decision or ruling of the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry, the Secretary of Agriculture, or a Regional Trial Court in the exercise of its original jurisdiction may appeal to the Court by petition for review filed within thirty days after receipt of a copy of such decision or ruling, or expiration of the period fixed by law for the Commissioner of Internal Revenue to act on the disputed assessments. x x x. (Emphasis supplied.)

It is crystal clear from the afore-quoted provisions that to appeal an adverse decision or ruling of the RTC to the CTA, the taxpayer must file a Petition for Review with the CTA within 30 days from receipt of said adverse decision or ruling of the RTC.

It is also true that the same provisions are silent as to whether such 30-day period can be extended or not. However, Section 11 of Republic Act No. 9282 does state that the Petition for Review shall be filed with the CTA following the procedure analogous to Rule 42 of the Revised Rules of Civil Procedure. Section 1, Rule 42 16 of the Revised Rules of Civil Procedure provides that the Petition for Review of an adverse judgment or final order of the RTC must be filed with the Court of Appeals within: (1) the original 15-day period from receipt of the judgment or final order to be appealed; (2) an extended period of 15 days from the lapse of the original period; and (3) only for the most compelling reasons, another extended period not to exceed 15 days from the lapse of the first extended period.

Following by analogy Section 1, Rule 42 of the Revised Rules of Civil Procedure, the 30-day original period for filing a Petition for Review with the CTA under Section 11 of Republic Act No. 9282, as implemented by Section 3(a), Rule 8 of the Revised Rules of the CTA, may be extended for a period of 15 days. No further extension shall be allowed thereafter, except only for the most compelling reasons, in which case the extended period shall not exceed 15 days.

Even the CTA en banc, in its Decision dated 18 January 2008, recognizes that the 30-day period within which to file the Petition for Review with the CTA may, indeed, be extended, thus:

Being suppletory to R.A. 9282, the 1997 Rules of Civil Procedure allow an additional period of fifteen (15) days for the movant to file a Petition for Review, upon Motion, and payment of the full amount of the docket fees. A further extension of fifteen (15) days may be granted on compelling reasons in accordance with the provision of Section 1, Rule 42 of the 1997 Rules of Civil Procedure x x x.17

In this case, the CTA First Division did indeed err in finding that petitioners failed to file their Petition for Review in C.T.A. AC No. 31 within the reglementary period.

From 20 April 2007, the date petitioners received a copy of the 4 April 2007 Order of the RTC, denying their Motion for Reconsideration of the 16 November 2006 Order, petitioners had 30 days, or until 20 May 2007, within which to file their Petition for Review with the CTA. Hence, the Motion for Extension filed by petitioners on 4 May 2007 – grounded on their belief that the reglementary period for filing their Petition for Review with the CTA was to expire on 5 May 2007, thus, compelling them to seek an extension of 15 days, or until 20 May 2007, to file said Petition – was unnecessary and superfluous. Even without said Motion for Extension, petitioners could file their Petition for Review until 20 May 2007, as it was still within the 30-day reglementary period provided for under Section 11 of Republic Act No. 9282; and implemented by Section 3(a), Rule 8 of the Revised Rules of the CTA.

The Motion for Extension filed by the petitioners on 18 May 2007, prior to the lapse of the 30-day reglementary period on 20 May 2007, in which they prayed for another extended period of 10 days, or until 30 May 2007, to file their Petition for Review was, in reality, only the first Motion for Extension of petitioners. The CTA First Division should have granted the same, as it was sanctioned by the rules of procedure. In fact, petitioners were only praying for a 10-day extension, five days less than the 15-day extended period allowed by the rules. Thus, when petitioners filed via registered mail their Petition for Review in C.T.A. AC No. 31 on 30 May 2007, they were able to comply with the reglementary period for filing such a petition.

Nevertheless, there were other reasons for which the CTA First Division dismissed the Petition for Review of petitioners in C.T.A. AC No. 31; i.e., petitioners failed to conform to Section 4 of Rule 5, and Section 2 of Rule 6 of the Revised Rules of the CTA. The Court sustains the CTA First Division in this regard.

Section 4, Rule 5 of the Revised Rules of the CTA requires that:

SEC. 4. Number of copies. – The parties shall file eleven signed copies of every paper for cases before the Court en banc and six signed copies for cases before a Division of the Court in addition to the signed original copy, except as otherwise directed by the Court. Papers to be filed in more than one case shall include one additional copy for each additional case. (Emphasis supplied.)

Section 2, Rule 6 of the Revised Rules of the CTA further necessitates that:

SEC. 2. Petition for review; contents. – The petition for review shall contain allegations showing the jurisdiction of the Court, a concise statement of the complete facts and a summary statement of the issues involved in the case, as well as the reasons relied upon for the review of the challenged decision. The petition shall be verified and must contain a certification against forum shopping as provided in Section 3, Rule 46 of the Rules of Court. A clearly legible duplicate original or certified true copy of the decision appealed from shall be attached to the petition. (Emphasis supplied.)

The aforesaid provisions should be read in conjunction with Section 1, Rule 7 of the Revised Rules of the CTA, which provides:

SECTION 1. Applicability of the Rules of Court on procedure in the Court of Appeals, exception. – The procedure in the Court en banc or in Divisions in original or in appealed cases shall be the same as those in petitions for review and appeals before the Court of Appeals pursuant to the applicable provisions of Rules 42, 43, 44, and 46 of the Rules of Court, except as otherwise provided for in these Rules. (Emphasis supplied.)

As found by the CTA First Division and affirmed by the CTA en banc, the Petition for Review filed by petitioners via registered mail on 30 May 2007 consisted only of one copy and all the attachments thereto, including the Decision dated 14 July 2006; and that the assailed Orders dated 16 November 2006 and 4 April 2007 of the RTC in Civil Case No. 03-107088 were mere machine copies. Evidently, petitioners did not comply at all with the requirements set forth under Section 4, Rule 5; or with Section 2, Rule 6 of the Revised Rules of the CTA. Although the Revised Rules of the CTA do not provide for the consequence of such non-compliance, Section 3, Rule 42 of the Rules of Court may be applied suppletorily, as allowed by Section 1, Rule 7 of the Revised Rules of the CTA. Section 3, Rule 42 of the Rules of Court reads:

SEC. 3. Effect of failure to comply with requirements. – The failure of the petitioner to comply with any of the foregoing requirements regarding the payment of the docket and other lawful fees, the deposit for costs, proof of service of the petition, and the contents of and the documents which should accompany the petition shall be sufficient ground for the dismissal thereof. (Emphasis supplied.)

True, petitioners subsequently submitted certified copies of the Decision dated 14 July 2006 and assailed Orders dated 16 November 2006 and 4 April 2007 of the RTC in Civil Case No. 03-107088, but a closer examination of the stamp on said documents reveals that they were prepared and certified only on 14 August 2007, about two months and a half after the filing of the Petition for Review by petitioners.

Petitioners never offered an explanation for their non-compliance with Section 4 of Rule 5, and Section 2 of Rule 6 of the Revised Rules of the CTA. Hence, although the Court had, in previous instances, relaxed the application of rules of procedure, it cannot do so in this case for lack of any justification.

Even assuming arguendo that the Petition for Review of petitioners in C.T.A. AC No. 31 should have been given due course by the CTA First Division, it is still dismissible for lack of merit.

Contrary to the assertions of petitioners, the Coca-Cola case is indeed applicable to the instant case. The pivotal issue raised therein was whether Tax Ordinance No.

7988 and Tax Ordinance No. 8011 were null and void, which this Court resolved in the affirmative. Tax Ordinance No. 7988 was declared by the Secretary of the Department of Justice (DOJ) as null and void and without legal effect due to the failure of herein petitioner City of Manila to satisfy the requirement under the law that said ordinance be published for three consecutive days. Petitioner City of Manila never appealed said declaration of the DOJ Secretary; thus, it attained finality after the lapse of the period for appeal of the same. The passage of Tax Ordinance No. 8011, amending Tax Ordinance No. 7988, did not cure the defects of the latter, which, in any way, did not legally exist.

By virtue of the Coca-Cola case, Tax Ordinance No. 7988 and Tax Ordinance No. 8011 are null and void and without any legal effect. Therefore, respondent cannot be taxed and assessed under the amendatory laws--Tax Ordinance No. 7988 and Tax Ordinance No. 8011.

Petitioners insist that even with the declaration of nullity of Tax Ordinance No. 7988 and Tax Ordinance No. 8011, respondent could still be made liable for local business taxes under both Sections 14 and 21 of Tax Ordinance No. 7944 as they were originally read, without the amendment by the null and void tax ordinances.

Emphasis must be given to the fact that prior to the passage of Tax Ordinance No. 7988 and Tax Ordinance No. 8011 by petitioner City of Manila, petitioners subjected and assessed respondent only for the local business tax under Section 14 of Tax Ordinance No. 7794, but never under Section 21 of the same. This was due to the clear and unambiguous proviso in Section 21 of Tax Ordinance No. 7794, which stated that "all registered business in the City of Manila that are already paying the aforementioned tax shall be exempted from payment thereof." The "aforementioned tax" referred to in said proviso refers to local business tax. Stated differently, Section 21 of Tax Ordinance No. 7794 exempts from the payment of the local business tax imposed by said section, businesses that are already paying such tax under other sections of the same tax ordinance. The said proviso, however, was deleted from Section 21 of Tax Ordinance No. 7794 by Tax Ordinances No. 7988 and No. 8011. Following this deletion, petitioners began assessing respondent for the local business tax under Section 21 of Tax Ordinance No. 7794, as amended.1avvphi1

The Court easily infers from the foregoing circumstances that petitioners themselves believed that prior to Tax Ordinance No. 7988 and Tax Ordinance No. 8011, respondent was exempt from the local business tax under Section 21 of Tax Ordinance No. 7794. Hence, petitioners had to wait for the deletion of the exempting proviso in Section 21 of Tax Ordinance No. 7794 by Tax Ordinance No. 7988 and Tax Ordinance No. 8011 before they assessed respondent for the local business tax under said section. Yet, with the pronouncement by this Court in the Coca-Cola case that Tax Ordinance No. 7988 and Tax Ordinance No. 8011 were null and void and without legal effect, then Section 21 of Tax Ordinance No. 7794, as it has been previously worded, with its exempting proviso, is back in effect. Accordingly, respondent should not have been subjected to the local business tax under Section 21 of Tax Ordinance No. 7794 for the third and fourth quarters of 2000, given its exemption therefrom since it was already paying the local business tax under Section 14 of the same ordinance.

Petitioners obstinately ignore the exempting proviso in Section 21 of Tax Ordinance No. 7794, to their own detriment. Said exempting proviso was precisely included in said section so as to avoid double taxation.

Double taxation means taxing the same property twice when it should be taxed only once; that is, "taxing the same person twice by the same jurisdiction for the same thing." It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or character.18

Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila; (2) for the same purpose – to make persons conducting business within the City of Manila contribute to city revenues; (3) by the same taxing authority – petitioner City of Manila; (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods – per calendar year; and (6) of the same kind or character – a local business tax imposed on gross sales or receipts of the business.

The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax Ordinance No. 7794 is specious. The Court revisits Section 143 of the LGC, the very source of the power of municipalities and cities to impose a local business tax, and to which any local business tax imposed by petitioner City of Manila must conform. It is apparent from a perusal thereof that when a municipality or city has already imposed a business tax on manufacturers, etc. of liquors, distilled spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no longer subject the same manufacturers, etc. to a business tax under Section 143(h) of the same Code. Section 143(h) may be imposed only on businesses that are subject to excise tax, VAT, or percentage tax under the NIRC, and that are "not otherwise specified in preceding paragraphs." In the same way, businesses such as respondent’s, already subject to a local business tax under Section 14 of Tax Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no longer be made liable for local business tax under Section 21 of the same Tax Ordinance [which is based on Section 143(h) of the LGC].

WHEREFORE, premises considered, the instant Petition for Review on Certiorari is hereby DENIED. No costs.

SO ORDERED.

G.R. No. 147375             June 26, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.BANK OF THE PHILIPPINE ISLANDS, Respondent.

D E C I S I O N

TINGA, J.:

At issue is the question of whether the 20% final tax on a bank’s passive income, withheld from the bank at source, still forms part of the bank’s gross income for the purpose of computing its gross receipts tax liability. Both the Court of Tax Appeals (CTA) and the Court of Appeals answered in the negative. We reverse, in favor of petitioner, following our ruling in China Banking Corporation v. Court of Appeals.1

A brief background of the tax law involved is in order.

Domestic corporate taxpayers, including banks, are levied a 20% final withholding tax on bank deposits under Section 24(e)(1)2 in relation to Section 50(a)3 of Presidential Decree No. 1158, otherwise known as the National Internal Revenue Code of 1977 ("Tax Code"). Banks are also liable for a tax on gross receipts derived from sources within the Philippines under Section 1194 of the Tax Code, which provides, thus:

Sec. 119. Tax on banks and non-bank financial intermediaries. — There shall be collected a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule:

(a) On interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived.

Short-term maturity — not in excess of two (2) years . . . . . . . . 5%

Medium-term maturity — over two (2) years but not exceeding four (4) years . . . . . . . . . . . . . . . . . . . 3%

Long term maturity —

(i) Over four (4) years but not exceeding seven (7) years . . . . . . . . . . . . . . . . . . . . . 1%

(ii) Over seven (7) years . . . . . . . . . . . . . . . . . . . . . . . . . . 0%

(b) On dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0%

(c) On royalties, rentals of property, real or personal, profits from exchange and all other items treated as gross income under Section 28 of this Code . . . . . . . . . . . . . . . . . . . . . . . . . 5%

Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short, medium or long term and the correct rate of tax shall be applied accordingly.

Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar banking activities.

As a domestic corporation, the interest earned by respondent Bank of the Philippine Islands (BPI) from deposits and similar arrangements are subjected to a final withholding tax of 20%. Consequently, the interest income it receives on amounts that it lends out are always net of the 20% withheld tax. As a bank, BPI is furthermore liable for a 5% gross receipts tax on all its income.

For the four (4) quarters of the year 1996, BPI computed its 5% gross receipts tax payments by including in its tax base the 20% final tax on interest income that had been withheld and remitted directly to the Bureau of Internal Revenue (BIR).

On 30 January 1996, the CTA rendered a decision in Asian Bank Corporation v. Commissioner of Internal Revenue,5 holding that the 20% final tax withheld on a bank’s interest income did not form part of its taxable gross receipts for the purpose of computing gross receipts tax.

BPI wrote the BIR a letter dated 15 July 1998 citing the CTA Decision in Asian Bank and requesting a refund of alleged overpayment of taxes representing 5% gross receipts taxes paid on the 20% final tax withheld at source.

Inaction by the BIR on this request prompted BPI to file a Petition for Review against the Commissioner of Internal Revenue (Commissioner) with the CTA on 19 January 1999. Conceding its claim for the first three quarters of the year as having been barred by prescription, BPI only claimed alleged overpaid taxes for the final quarter of 1996.

Following its own doctrine in Asian Bank, the CTA rendered a Decision,6 holding that the 20% final tax withheld did not form part of the respondent’s taxable gross

receipts and that gross receipts taxes paid thereon are refundable. However, it found that only P13,843,455.62 in withheld final taxes were substantiated by BPI; it awarded a refund of the 5% gross receipts tax paid thereon in the amount of P692,172.78.

On appeal, the Court of Appeals promulgated a Decision7 affirming the CTA. It cited this Court’s decision inCommissioner of Internal Revenue v. Tours Specialists, Inc.,8 in which we held that the "gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer’s benefit" in concluding that "it would be unjust and confiscatory to include the withheld 20% final tax in the tax base for purposes of computing the gross receipts tax since the amount corresponding to said 20% final tax was not received by the taxpayer and the latter derived no benefit therefrom."9

The Court of Appeals also held that Section 4(e) of Revenue Regulations No. 12-80 mandates the deduction of the final tax paid on interest income in computing the tax base for the gross receipts tax. Section 4(e) provides, thus:

Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other non-bank financial intermediaries, not performing quasi-banking activities. – The rates of taxes to be imposed on the gross receipts of such financial institutions shall be based on all items of income actually received. Mere accrual shall not be considered, but once payment is received on such accrual or in case of prepayment, then the amount actually received shall be included in the tax base of such financial institutions, as provided hereunder. (Emphasis supplied.)

The present Petition for Review filed by the Commissioner seeks to annul the adverse Decisions of the CTA and the Court of Appeals and raises the sole issue of whether the 20% final tax withheld on a bank’s passive income should be included in the computation of the gross receipts tax.

In assailing the findings of the lower courts, the Commissioner makes the following arguments: (1) the term "gross receipts" must be applied in its ordinary meaning; (2) there is no provision in the Tax Code or any special laws that excludes the 20% final tax in computing the tax base of the 5% gross receipts tax; (3) Revenue Regulations No. 12-80, Section 4(e), is inapplicable in the instant case; and (4) income need not actually be received to form part of the taxable gross receipts. Additionally, petitioner points out that the CTA Asian Bank case cited by petitioner BPI has already been superseded by the CTA decisions in Standard Chartered Bank v. Commissioner of Internal Revenue and Far East Bank and Trust Company v. Commissioner of Internal Revenue, both promulgated on 16 November 2001.

The issues raised by the Commissioner have already been ruled upon in his favor by this Court in China Banking Corporation v. Court of Appeals10 and reiterated in Commissioner of Internal Revenue v. Solidbank Corporation11and more recently in Commissioner of Internal Revenue v. Bank of Commerce.12 Consequently, the petition must be granted.

The Tax Code does not provide a definition of the term "gross receipts."13 Accordingly, the term is properly understood in its plain and ordinary meaning14 and must be taken to comprise of the entire receipts without any deduction.15 We, thus, made the following disquisition in Bank of Commerce:16

The word "gross" must be used in its plain and ordinary meaning. It is defined as "whole, entire, total, without deduction." A common definition is "without deduction." "Gross" is also defined as "taking in the whole; having no deduction or abatement; whole, total as opposed to a sum consisting of separate or specified parts." Gross is the antithesis of net. Indeed, in China Banking Corporation v. Court of Appeals, the Court defined the term in this wise:

As commonly understood, the term "gross receipts" means the entire receipts without any deduction. Deducting any amount from the gross receipts changes the result, and the meaning, to net receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax on gross receipts, unless the law itself makes an exception. As explained by the Supreme Court of Pennsylvania in Commonwealth of Pennsylvania v. Koppers Company, Inc., —

Highly refined and technical tax concepts have been developed by the accountant and legal technician primarily because of the impact of federal income tax legislation. However, this in no way should affect or control the normal usage of words in the construction of our statutes; and we see nothing that would require us not to include the proceeds here in question in the gross receipts allocation unless statutorily such inclusion is prohibited. Under the ordinary basic methods of handling accounts, the term gross receipts, in the absence of any statutory definition of the term, must be taken to include the whole total gross receipts without any deductions, x x x. [Citations omitted] (Emphasis supplied)"

Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri held:

The word "gross" appearing in the term "gross receipts," as used in the ordinance, must have been and was there used as the direct antithesis of the word "net." In its usual and ordinary meaning "gross receipts" of a business is the whole and entire amount of the receipts without deduction, x x x. On the contrary, "net receipts" usually are the receipts which remain after deductions are made from the gross amount thereof of the expenses and cost of doing business, including fixed charges and depreciation. Gross receipts become net receipts after certain proper deductions are made from the gross. And in the use of the words "gross receipts," the instant ordinance, of course, precluded plaintiff from first deducting its costs and expenses of doing business, etc., in arriving at the higher base figure upon which it must pay the 5% tax under this ordinance. (Emphasis supplied)

Absent a statutory definition, the term "gross receipts" is understood in its plain and ordinary meaning. Words in a statute are taken in their usual and familiar signification, with due regard to their general and popular use. The Supreme Court of Hawaii held in Bishop Trust Company v. Burns that —

x x x It is fundamental that in construing or interpreting a statute, in order to ascertain the intent of the legislature, the language used therein is to be taken in the generally accepted and usual sense. Courts will presume that the words in a statute were used to express their meaning in common usage. This principle is equally applicable to a tax statute. [Citations omitted] (Emphasis supplied)

Additionally, we held in Solidbank, to wit:17"[W]e note that US cases have persuasive effect in our jurisdiction, because Philippine income tax law is patterned after its US counterpart.

"‘[G]ross receipts’ with respect to any period means the sum of: (a) The total amount received or accrued during such period from the sale, exchange, or other

disposition of x x x other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business, and (b) The gross income, attributable to a trade or business, regularly carried on by the taxpayer, received or accrued during such period x x x."

"x x x [B]y gross earnings from operations x x x was intended all operations x x x including incidental, subordinate, and subsidiary operations, as well as principal operations."

"When we speak of the ‘gross earnings’ of a person or corporation, we mean the entire earnings or receipts of such person or corporation from the business or operations to which we refer."

From these cases, "gross receipts"] refer to the total, as opposed to the net, income. These are therefore the total receipts before any deduction for the expenses of management. Webster’s New International Dictionary, in fact, defines gross as "whole or entire."

The legislative intent to apply the term in its ordinary meaning may also be surmised from a historical perspective of the levy on gross receipts. From the time the gross receipts tax on banks was first imposed in 1946 under R.A. No. 39 and throughout its successive reenactments,18 the legislature has not established a definition of the term "gross receipts." Absent a statutory definition of the term, the BIR had consistently applied it in its ordinary meaning, i.e., without deduction. On the presumption that the legislature is familiar with the contemporaneous interpretation of a statute given by the administrative agency tasked to enforce the statute, subsequent legislative reenactments of the subject levy sans a definition of the term "gross receipts" reflect that the BIR’s application of the term carries out the legislative purpose.19

Furthermore, Section 119 (a)20 of the Tax Code expressly includes interest income as part of the base income from which the gross receipts tax on banks is computed. This express inclusion of interest income in taxable gross receipts creates a presumption that the entire amount of the interest income, without any deduction, is subject to the gross receipts tax.21

The exclusion of the 20% final tax on passive income from the taxpayer’s tax base is effectively a tax exemption, the application of which is highly disfavored.22 The rule is that whoever claims an exemption must justify this right by the clearest grant of organic or statute law.23 Like the other banks who have asserted a right tantamount

to exception under these circumstances, BPI has failed to present a clear statutory basis for its claim to take away the interest income withheld from the purview of the levy on gross tax receipts.

Bereft of a clear statutory basis on which to hinge its claim, BPI’s view, as adopted by the Court of Appeals, is that Section 4(e) of Revenue Regulations No. 12-80 establishes the exclusion of the 20% final tax withheld from the bank’s taxable gross receipts.

However, we agree with the Commissioner that BPI’s asserted right under Section 4(e) of Revenue Regulations No. 12-80 presents a misconstruction of the provision. While, indeed, the provision states that "[t]he rates of taxes to be imposed on the gross receipts of such financial institutions shall be based on all items of income

actually received," it goes on to distinguish actual receipt from accrual, i.e., that "[m]ere accrual shall not be considered, but once payment is received on such accrual or in case of prepayment, then the amount actually received shall be included in the tax base of such financial institutions x x x."

Section 4(e) recognizes that income could be recognized by the taxpayer either at the time of its actual receipt or its accrual,24 depending on the accounting method used by the taxpayer,25 but establishes the rule that, for purposes of gross receipts tax, interest income is taxable upon actual receipt of the income, as opposed to the time of its accrual. Section 4(e) does not exclude accrued interest income from gross receipts but merely postpones its inclusion until actual payment of the interest to the lending bank, thus mandating that "[m]ere accrual shall not be considered, but once payment is received on such accrual or in case of prepayment, then the amount actually received shall be included in the tax base of such financial institutions x x x."26

Even if Section 4(e) had been properly construed, it still cannot be the basis for deducting the income tax withheld since Section 4(e) has been superseded by Section 7 of Revenue Regulations No. 17-84, which states, thus:

SECTION 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes. —

(a) The interest earned on Philippine Currency bank deposits and yield from deposit substitutes subjected to the withholding taxes in accordance with these regulations need not be included in the gross income in computing the depositor's/investor's income tax liability in accordance with the provision of Section 29(b), (c) and (d) of the National Internal Revenue Code, as amended.

(b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared for purposes of imposing the withholding taxes in accordance with these regulations shall be allowed as interest expense deductible for purposes of computing taxable net income of the payor.

(c) If the recipient of the above-mentioned items of income are financial institutions, the same shall be included as part of the tax base upon which the gross receipt tax is imposed. (Emphasis supplied.)

The provision categorically provides that if the recipient of interest subjected to withholding taxes is a financial institution, the interest shall be included as part of the tax base upon which the gross receipts tax is imposed.

The implied repeal of Section 4(e) is undeniable. Section 4(e) imposes the gross receipts tax only on all items of income actually received, as opposed to their mere accrual, while Section 7 of Revenue Regulations No. 17-84 includes all interest income (whether actual or accrued) in computing the gross receipts tax.27 Section 4(e) of Revenue Regulations No. 12-80 was superseded by the later rule, because Section 4(e) thereof is not restated in Revenue Regulations No. 17-84.28 Clearly, then, the current revenue regulations requires interest income, whether actually received or merely accrued, to form part of the bank’s taxable gross receipts.29

The Commissioner correctly controverts the conclusion made by the Court of Appeals that it would be "unjust and confiscatory to include the withheld 20% final

tax in the tax base for purposes of computing the gross receipts tax since the amount corresponding to said 20% final tax was not received by the taxpayer and the latter derived no benefit therefrom."30

Receipt of income may be actual or constructive. We have held that the withholding process results in the taxpayer’s constructive receipt of the income withheld, to wit:

By analogy, we apply to the receipt of income the rules on actual and constructive possession provided in Articles 531 and 532 of our Civil Code.

Under Article 531:

"Possession is acquired by the material occupation of a thing or the exercise of a right, or by the fact that it is subject to the action of our will, or by the proper acts and legal formalities established for acquiring such right."

Article 532 states:

"Possession may be acquired by the same person who is to enjoy it, by his legal representative, by his agent, or by any person without any power whatever; but in the last case, the possession shall not be considered as acquired until the person in whose name the act of possession was executed has ratified the same, without prejudice to the juridical consequences of negotiorum gestio in a proper case."

The last means of acquiring possession under Article 531 refers to juridical acts—the acquisition of possession by sufficient title—to which the law gives the force of acts of possession. Respondent argues that only items of income actually received should be included in its gross receipts. It claims that since the amount had already been withheld at source, it did not have actual receipt thereof.

We clarify. Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is through the proper acts and legal formalities established therefor. The withholding process is one such act. There may not be actual receipt of the income withheld; however, as provided for in Article 532, possession by any person without any power whatsoever shall be considered as acquired when ratified by the person in whose name the act of possession is executed.

In our withholding tax system, possession is acquired by the payor as the withholding agent of the government, because the taxpayer ratifies the very act of possession for the government. There is thus constructive receipt. The processes of bookkeeping and accounting for interest on deposits and yield on deposit substitutes that are subjected to FWT are indeed—for legal purposes—tantamount to delivery, receipt or remittance.31 (Emphasis supplied.)

Thus, BPI constructively received income by virtue of its acquiescence to the extinguishment of its 20% final tax liability when the withholding agents remitted BPI’s income to the government. Consequently, it received the amounts corresponding to the 20% final tax and benefited therefrom.

The cases cited by BPI, Commissioner of Internal Revenue v. Tours Specialists, Inc.32 and Commissioner of Internal Revenue v. Manila Jockey Club, Inc.,33 in which this Court held that "gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit,"34 only further substantiate the fact that BPI benefited from the withheld amounts.

In Tours Specialists and Manila Jockey Club, the taxable entities held the subject monies not as income earned but as mere trustees. As such, they held the money entrusted to them but which neither belonged to them nor redounded to their benefit. On the other hand, BPI cannot be considered as a mere trustee; it is the actual owner of the funds. As owner thereof, it was BPI’s tax obligation to the government that was extinguished upon the withholding agent’s remittance of the 20% final tax. We elucidated on BPI’s ownership of the funds in China Banking, to wit:

Manila Jockey Club does not support CBC’s contention but rather the Commissioner’s proposition. The Court ruled in Manila Jockey Club that receipts not owned by the Manila Jockey Club but merely held by it in trust did not form part of Manila Jockey Club’s gross receipts. Conversely, receipts owned by the Manila Jockey Club would form part of its gross receipts.

In the instant case, CBC owns the interest income which is the source of payment of the final withholding tax. The government subsequently becomes the owner of the money constituting the final tax when CBC pays the final withholding tax to extinguish its obligation to the government. This is the consideration for the transfer of ownership of the money from CBC to the government. Thus, the amount constituting the final tax, being originally owned by CBC as part of its interest income, should form part of its taxable gross receipts.

In Commissioner v. Tours Specialists, Inc., the Court excluded from gross receipts money entrusted by foreign tour operators to Tours Specialists to pay the hotel accommodation of tourists booked in various local hotels. The Court declared that Tours Specialists did not own such entrusted funds and thus the funds were not subject to the 3% contractor’s tax payable by Tours Specialists. The Court held:

x x x [G]ross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer’s benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code.

x x x [T]he room charges entrusted by the foreign travel agencies to the private respondent do not form part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the private respondent. The private respondent never benefited from their payment to the local hotels. x x x [T]his arrangement was only to accommodate the foreign travel agencies.

Unless otherwise provided by law, ownership is essential in determining whether interest income forms part of taxable gross receipts. Ownership is the circumstance that makes interest income part of the taxable gross receipts of the taxpayer. When the taxpayer acquires ownership of money representing interest, the money constitutes income or receipt of the taxpayer.

In contrast, the trustee or agent does not own the money received in trust and such money does not constitute income or receipt for which the trustee or agent is taxable. This is a fundamental concept in taxation. Thus, funds received by a money remittance agency for transfer and delivery to the beneficiary do not constitute income or gross receipts of the money remittance agency. Similarly, a travel agency that collects ticket fares for an airline does not include the ticket fare in its gross

income or receipts. In these cases, the money remittance agency or travel agency does not acquire ownership of the funds received.35 (Emphasis supplied.)

BPI argues that to include the 20% final tax withheld in its gross receipts tax base would be to tax twice its passive income and would constitute double taxation. Granted that interest income is being taxed twice, this, however, does not amount to double taxation. There is no double taxation if the law imposes two different taxes on the same income, business or property. 36 In Solidbank, we ruled, thus:

Double taxation means taxing the same property twice when it should be taxed only once; that is, "x x x taxing the same person twice by the same jurisdiction for the same thing." It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character.

First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT [Final Withholding Tax] is the passive income generated in the form of interest on deposits and yield on deposit substitutes, while the subject matter of the GRT [Gross Receipts Tax] is the privilege of engaging in the business of banking.

A tax based on receipts is a tax on business rather than on the property; hence, it is an excise rather than a property tax. It is not an income tax, unlike the FWT. In fact, we have already held that one can be taxed for engaging in business and further taxed differently for the income derived therefrom. Akin to our ruling in Velilla v. Posadas, these two taxes are entirely distinct and are assessed under different provisions.

Second, although both taxes are national in scope because they are imposed by the same taxing authority—the national government under the Tax Code—and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned.

Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to withholding, while the GRT is a percentage tax not subject to withholding.

In short, there is no double taxation, because there is no taxing twice, by the same taxing authority, within the same jurisdiction, for the same purpose, in different taxing periods, some of the property in the territory. Subjecting interest income to a 20% FWT and including it in the computation of the 5% GRT is clearly not double taxation.37

Clearly, therefore, despite the fact that that interest income is taxed twice, there is no double taxation present in this case.

An interpretation of the tax laws and relevant jurisprudence shows that the tax on interest income of banks withheld at source is included in the computation of their gross receipts tax base.

WHEREFORE, the Petition is GRANTED. The assailed Decisions of the Court of Appeals and the Court of Tax Appeals are REVERSED AND SET ASIDE. Petitioner

Commissioner of Internal Revenue’s denial of respondent Bank of Philippine Islands’ claim for refund is SUSTAINED. No costs.

SO ORDERED.

G.R. No. 181277               July 3, 2013

SWEDISH MATCH PHILIPPINES, INC., Petitioner, vs.THE TREASURER OF THE CITYOF MANILA, Respondent.

D E C I S I O N

SERENO, CJ.:

This is a Petition for Review on Certiorari1 filed by Swedish Match Philippines, Inc. (petitioner) under Rule 45 of the 1997 Rules of Civil Procedure assailing the Court of Tax Appeals En Bane (CTA En Bane) Decision2 dated 1 October 2007 and Resolution3 dated 14 January 2008 in C.T.A. EB No. 241.

THE FACTS

On 20 October 2001, petitioner paid business taxes in the total amount of P470,932.21.4 The assessed amount was based on Sections 145 and 216 of Ordinance No. 7794, otherwise known as the Manila Revenue Code, as amended by Ordinance Nos. 7988 and 8011. Out of that amount, P164,552.04 corresponded to the payment under Section 21.7

Assenting that it was not liable to pay taxes under Section 21, petitioner wrote a letter8 dated 17 September 2003 to herein respondent claiming a refund of business taxes the former had paid pursuant to the said provision. Petitioner argued that payment under Section 21 constituted double taxation in view of its payment under Section 14.

On 17 October 2003, for the alleged failure of respondent to act on its claim for a refund, petitioner filed a Petition for Refund of Taxes9 with the RTC of Manila in accordance with Section 196 of the Local Government Code of 1991. The Petition was docketed as Civil Case No. 03-108163.

On 14 June 2004, the Regional Trial Court (RTC), Branch 21 of Manila rendered a Decision10 in Civil Case No. 03-108163 dismissing the Petition for the failure of petitioner to plead the latter’s capacity to sue and to state the authority of Tiarra T. Batilaran-Beleno (Ms. Beleno), who had executed the Verification and Certification of Non-Forum Shopping.

In denying petitioner’s Motion for Reconsideration, the RTC went on to say that Sections 14 and 21 pertained to taxes of a different nature and, thus, the elements of double taxation were wanting in this case.

On appeal, the CTA Second Division affirmed the RTC’s dismissal of the Petition for Refund of Taxes on the ground that petitioner had failed to state the authority of Ms. Beleno to institute the suit.

The CTA En Banc likewise denied the Petition for Review, ruling as follows:

In this case, the plaintiff is the Swedish Match Philippines, Inc. However, as found by the RTC as well as the Court in Division, the signatory of the verification and/or

certification of non-forum shopping is Ms. Beleno, the company’s Finance Manager, and that there was no board resolution or secretary's certificate showing proof of Ms. Beleno’s authority in acting in behalf of the corporation at the time the initiatory pleading was filed in the RTC. It is therefore, correct that the case be dismissed.

WHEREFORE, premises considered, the petition for review is hereby DENIED. Accordingly, the assailed Decision and the Resolution dated August 8, 2006 and November 27, 2006, respectively, are hereby AFFIRMED in toto.

SO ORDERED.11

ISSUES

In order to determine the entitlement of petitioner to a refund of taxes, the instant Petition requires the resolution of two main issues, to wit:

1) Whether Ms. Beleno was authorized to file the Petition for Refund of Taxes with the RTC; and

2) Whether the imposition of tax under Section 21 of the Manila Revenue Code constitutes double taxation in view of the tax collected and paid under Section 14 of the same code.12

THE COURT’S RULING

Authority from the board to sign theVerification and Certification ofNon-Forum Shopping

Anent the procedural issue, petitioner argues that there can be no dispute that Ms. Beleno was acting within her authority when she instituted the Petition for Refund before the RTC, notwithstanding that the Petition was not accompanied by a Secretary’s Certificate. Her authority was ratified by the Board in its Resolution adopted on 19 May 2004. Thus, even if she was not authorized to execute the Verification and Certification at the time of the filing of the Petition, the ratification by the board of directors retroactively applied to the date of her signing.

On the other hand, respondent contends that petitioner failed to establish the authority of Ms. Beleno to institute the present action on behalf of the corporation. Citing Philippine Airlines v. Flight Attendants and Stewards Association of the Philippines (PAL v. FASAP),13 respondent avers that the required certification of non-forum shopping should have been valid at the time of the filing of the Petition. The Petition, therefore, was defective due to the flawed Verification and Certification of Non-Forum Shopping, which were insufficient in form and therefore a clear violation of Section 5, Rule 7 of the 1997 Rules of Civil Procedure.

We rule for petitioner.

Time and again, this Court has been faced with the issue of the validity of the verification and certification of non-forum shopping, absent any authority from the board of directors.

The power of a corporation to sue and be sued is lodged in the board of directors, which exercises its corporate powers.14 It necessarily follows that "an individual corporate officer cannot solely exercise any corporate power pertaining to the corporation without authority from the board of directors."15 Thus, physical acts of

the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors.16

Consequently, a verification signed without an authority from the board of directors is defective. However, the requirement of verification is simply a condition affecting the form of the pleading and non-compliance does not necessarily render the pleading fatally defective.17 The court may in fact order the correction of the pleading if verification is lacking or, it may act on the pleading although it may not have been verified, where it is made evident that strict compliance with the rules may be dispensed with so that the ends of justice may be served.18

Respondent cites this Court’s ruling in PAL v. FASAP,19 where we held that only individuals vested with authority by a valid board resolution may sign a certificate of non-forum shopping on behalf of a corporation. The petition is subject to dismissal if a certification was submitted unaccompanied by proof of the signatory’s authority.20 In a number of cases, however, we have recognized exceptions to this rule. Cagayan Valley Drug Corporation v. Commissioner of Internal Revenue21 provides:

In a slew of cases, however, we have recognized the authority of some corporate officers to sign the verification and certification against forum shopping. In Mactan-Cebu International Airport Authority v. CA, we recognized the authority of a general manager or acting general manager to sign the verification and certificate against forum shopping; in Pfizer v. Galan, we upheld the validity of a verification signed by an "employment specialist" who had not even presented any proof of her authority to represent the company; in Novelty Philippines, Inc., v. CA, we ruled that a personnel officer who signed the petition but did not attach the authority from the company is authorized to sign the verification and non-forum shopping certificate; and in Lepanto Consolidated Mining Company v. WMC Resources International Pty. Ltd. (Lepanto), we ruled that the Chairperson of the Board and President of the Company can sign the verification and certificate against non-forum shopping even without the submission of the board’s authorization.

In sum, we have held that the following officials or employees of the company can sign the verification and certification without need of a board resolution: (1) the Chairperson of the Board of Directors, (2) the President of a corporation, (3) the General Manager or Acting General Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case.

While the above cases do not provide a complete listing of authorized signatories to the verification and certification required by the rules, the determination of the sufficiency of the authority was done on a case to case basis. The rationale applied in the foregoing cases is to justify the authority of corporate officers or representatives of the corporation to sign the verification or certificate against forum shopping, being "in a position to verify the truthfulness and correctness of the allegations in the petition." (Emphases supplied)

Given the present factual circumstances, we find that the liberal jurisprudential exception may be applied to this case.

A distinction between noncompliance and substantial compliance with the requirements of a certificate of non-forum shopping and verification as provided in the Rules of Court must be made.22 In this case, it is undisputed that the Petition filed with the RTC was accompanied by a Verification and Certification of Non-Forum

Shopping signed by Ms. Beleno, although without proof of authority from the board. However, this Court finds that the belated submission of the Secretary’s Certificate constitutes substantial compliance with Sections 4 and 5, Rule 7 of the 1997 Revised Rules on Civil Procedure.

A perusal of the Secretary’s Certificate signed by petitioner’s Corporate Secretary Rafael Khan and submitted to the RTC shows that not only did the corporation authorize Ms. Beleno to execute the required Verifications and/or Certifications of Non-Forum Shopping, but it likewise ratified her act of filing the Petition with the RTC. The Minutes of the Special Meeting of the Board of Directors of petitioner-corporation on 19 May 2004 reads:

RESOLVED, that Tiarra T. Batilaran-Beleno, Finance Director of the Corporation, be authorized, as she is hereby authorized and empowered to represent, act, negotiate, sign, conclude and deliver, for and in the name of the Corporation, any and all documents for the application, prosecution, defense, arbitration, conciliation, execution, collection, compromise or settlement of all local tax refund cases pertaining to payments made to the City of Manila pursuant to Section 21 of the Manila Revenue Code, as amended;

RESOLVED, FURTHER, that Tiarra T. Batilaran-Beleno be authorized to execute Verifications and/or Certifications as to Non-Forum Shopping of Complaints/Petitions that may be filed by the Corporation in the above-mentioned tax-refund cases;

RESOLVED, FURTHER, that the previous institution by Tiarra T. Batilaran-Beleno of tax refund cases on behalf of the Corporation, specifically Civil Cases Nos. 01-102074, 03-108163, and, 04-109044, all titled "Swedish Match Philippines, Inc. v. The Treasurer of the City of Manila" and pending in the Regional Trial Court of Manila, as well as her execution of the Verifications and/or Certifications as to Non-Forum Shopping in these tax refund cases, are hereby, approved and ratified in all respects. (Emphasis supplied)

Clearly, this is not an ordinary case of belated submission of proof of authority from the board of directors. Petitioner-corporation ratified the authority of Ms. Beleno to represent it in the Petition filed before the RTC, particularly in Civil Case No. 03-108163, and consequently to sign the verification and certification of non-forum shopping on behalf of the corporation. This fact confirms and affirms her authority and gives this Court all the more reason to uphold that authority.23

Additionally, it may be remembered that the Petition filed with the RTC was a claim for a refund of business taxes. It should be noted that the nature of the position of Ms. Beleno as the corporation’s finance director/manager is relevant to the determination of her capability and sufficiency to verify the truthfulness and correctness of the allegations in the Petition. A finance director/manager looks after the overall management of the financial operations of the organization and is normally in charge of financial reports, which necessarily include taxes assessed and paid by the corporation. Thus, for this particular case, Ms. Beleno, as finance director, may be said to have been in a position to verify the truthfulness and correctness of the allegations in the claim for a refund of the corporation’s business taxes.

In Mediserv v. Court of Appeals,24 we said that a liberal construction of the rules may be invoked in situations in which there may be some excusable formal deficiency or error in a pleading, provided that the invocation thereof does not subvert the essence of the proceeding, but at least connotes a reasonable attempt at

compliance with the rules. After all, rules of procedure are not to be applied in a very rigid, technical manner, but are used only to help secure substantial justice.25

More importantly, taking into consideration the substantial issue of this case, we find a special circumstance or compelling reason to justify the relaxation of the rule. Therefore, we deem it more in accord with substantive justice that the case be decided on the merits.

Double taxation

As to the substantive issues, petitioner maintains that the enforcement of Section 21 of the Manila Revenue Code constitutes double taxation in view of the taxes collected under Section 14 of the same code. Petitioner points out that Section 21 is not in itself invalid, but the enforcement of this provision would constitute double taxation if business taxes have already been paid under Section 14 of the same revenue code. Petitioner further argues that since Ordinance Nos. 7988 and 8011 have already been declared null and void in Coca-Cola Bottlers Philippines, Inc. v. City of Manila,26 all taxes collected and paid on the basis of these ordinances should be refunded.

In turn, respondent argues that Sections 14 and 21 pertain to two different objects of tax; thus, they are not of the same kind and character so as to constitute double taxation. Section 14 is a tax on manufacturers, assemblers, and other processors, while Section 21 applies to businesses subject to excise, value-added, or percentage tax. Respondent posits that under Section 21, petitioner is merely a withholding tax agent of the City of Manila.

At the outset, it must be pointed out that the issue of double taxation is not novel, as it has already been settled by this Court in The City of Manila v. Coca-Cola Bottlers Philippines, Inc.,27 in this wise:

Petitioners obstinately ignore the exempting proviso in Section 21 of Tax Ordinance No. 7794, to their own detriment. Said exempting proviso was precisely included in said section so as to avoid double taxation.

Double taxation means taxing the same property twice when it should be taxed only once; that is, "taxing the same person twice by the same jurisdiction for the same thing." It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or character.

Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila; (2) for the same purpose – to make persons conducting business within the City of Manila contribute to city revenues; (3) by the same taxing authority – petitioner City of Manila; (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods – per calendar year; and (6) of the same kind or character – a local business tax imposed on gross sales or receipts of the business.

The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax Ordinance No. 7794 is specious. The Court revisits Section 143 of the

LGC, the very source of the power of municipalities and cities to impose a local business tax, and to which any local business tax imposed by petitioner City of Manila must conform. It is apparent from a perusal thereof that when a municipality or city has already imposed a business tax on manufacturers, etc. of liquors, distilled spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no longer subject the same manufacturers, etc. to a business tax under Section 143(h) of the same Code. Section 143(h) may be imposed only on businesses that are subject to excise tax, VAT, or percentage tax under the NIRC, and that are "not otherwise specified in preceding paragraphs." In the same way, businesses such as respondent’s, already subject to a local business tax under Section 14 of Tax Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no longer be made liable for local business tax under Section 21 of the same Tax Ordinance [which is based on Section 143(h) of the LGC].28 (Emphases supplied)

Based on the foregoing reasons, petitioner should not have been subjected to taxes under Section 21 of the Manila Revenue Code for the fourth quarter of 2001, considering that it had already been paying local business tax under Section 14 of the same ordinance.

Further, we agree with petitioner that Ordinance Nos. 7988 and 8011 cannot be the basis for the collection of business taxes. In Coca-Cola,29 this Court had the occasion to rule that Ordinance Nos. 7988 and 8011 were null and void for failure to comply with the required publication for three (3) consecutive days. Pertinent portions of the ruling read:

It is undisputed from the facts of the case that Tax Ordinance No. 7988 has already been declared by the DOJ Secretary, in its Order, dated 17 August 2000, as null and void and without legal effect due to respondents’ failure to satisfy the requirement that said ordinance be published for three consecutive days as required by law. Neither is there quibbling on the fact that the said Order of the DOJ was never appealed by the City of Manila, thus, it had attained finality after the lapse of the period to appeal.1âwphi1

Furthermore, the RTC of Manila, Branch 21, in its Decision dated 28 November 2001, reiterated the findings of the DOJ Secretary that respondents failed to follow the procedure in the enactment of tax measures as mandated by Section 188 of the Local Government Code of 1991, in that they failed to publish Tax Ordinance No. 7988 for three consecutive days in a newspaper of local circulation. From the foregoing, it is evident that Tax Ordinance No. 7988 is null and void as said ordinance was published only for one day in the 22 May 2000 issue of the Philippine Post in contravention of the unmistakable directive of the Local Government Code of 1991.

Despite the nullity of Tax Ordinance No. 7988, the court a quo, in the assailed Order, dated 8 May 2002, went on to dismiss petitioner’s case on the force of the enactment of Tax Ordinance No. 8011, amending Tax Ordinance No. 7988. Significantly, said amending ordinance was likewise declared null and void by the DOJ Secretary in a Resolution, dated 5 July 2001, elucidating that "Instead of amending Ordinance No. 7988, herein respondent should have enacted another tax measure which strictly complies with the requirements of law, both procedural and substantive. The passage of the assailed ordinance did not have the effect of curing the defects of Ordinance No. 7988 which, any way, does not legally exist." Said Resolution of the DOJ Secretary had, as well, attained finality by virtue of the dismissal with finality by this Court of respondents’ Petition for Review on Certiorari

in G.R. No. 157490 assailing the dismissal by the RTC of Manila, Branch 17, of its appeal due to lack of jurisdiction in its Order, dated 11 August 2003.30 (Emphasis in the original)

Accordingly, respondent’s assessment under both Sections 14 and 21 had no basis. Petitioner is indeed liable to pay business taxes to the City of Manila; nevertheless, considering that the former has already paid these taxes under Section 14 of the Manila Revenue Code, it is exempt from the same payments under Section 21 of the same code. Hence, payments made under Section 21 must be refunded in favor of petitioner.

It is undisputed that petitioner paid business taxes based on Sections 14 and 21 for the fourth quarter of 2001 in the total amount of P470,932.21.31 Therefore, it is entitled to a refund of P164,552.0432 corresponding to the payment under Section 21 of the Manila Revenue Code.

WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the Court of Tax Appeals En Banc Decision dated 1 October 2007 and Resolution dated 14 January 2008 are REVERSED and SET ASIDE.

SO ORDERED.

G.R. Nos. 193383-84, January 14, 2015

CBK POWER COMPANY LIMITED, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE,Respondent. 

[G.R. NOS. 193407-08]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CBK POWER COMPANY LIMITED,Respondent.

D E C I S I O N

PERLAS-BERNABE, J.:

Assailed in these consolidated petitions for review on certiorari1 are the Decision2 dated March 29, 2010 and the Resolution3 dated August 16, 2010 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B. Nos. 469 and 494, which affirmed the Decision4 dated August 28, 2008, the Amended Decision5dated February 12, 2009, and the Resolution6 dated May 7, 2009 of the CTA First Division in CTA Case Nos. 6699, 6884, and 7166 granting CBK Power Company Limited (CBK Power) a refund of its excess final withholding tax for the taxable years 2001 to 2003.cralawred

The Facts

CBK Power is a limited partnership duly organized and existing under the laws of the Philippines, and primarily engaged in the development and operation of the Caliraya, Botocan, and Kalayaan hydroelectric power generating plants in Laguna (CBK Project). It is registered with the Board of Investments (BOI) as engaged in a preferred pioneer area of investment under the Omnibus Investment Code of 1987.7chanRoblesvirtualLawlibrary

To finance the CBK Project, CBK Power obtained in August 2000 a syndicated loan from several foreign banks,8  i.e., BNP Paribas, Dai-ichi Kangyo Bank, Limited, Industrial Bank of Japan, Limited, and Societe General (original lenders),  acting through an Inter-Creditor Agent, Dai-ichi Kangyo Bank, a Japanese bank that subsequently merged with the Industrial Bank of Japan, Limited (Industrial Bank of Japan) and the Fuji Bank, Limited (Fuji Bank), with the merged entity being named as Mizuho Corporate Bank (Mizuho Bank). One of the merged banks, Fuji Bank, had a branch in the Philippines, which became a branch of Mizuho Bank as a result of the merger. The Industrial Bank of Japan and Mizuho Bank are residents of Japan for purposes of income taxation, and recognized as such under the relevant provisions of the income tax treaties between the Philippines and Japan.9chanRoblesvirtualLawlibrary

Certain portions of the loan were subsequently assigned by the original lenders to various other banks, including Fortis Bank (Nederland) N.V. (Fortis-Netherlands) and Raiffesen Zentral Bank Osterreich AG (Raiffesen Bank). Fortis-Netherlands, in turn, assigned its portion of the loan to Fortis Bank S.A./N.V. (Fortis-Belgium), a resident of Belgium. Fortis-Netherlands and Raiffesen Bank, on the other hand, are residents of Netherlands and Austria, respectively.10chanRoblesvirtualLawlibrary

In February 2001, CBK Power borrowed money from Industrial Bank of Japan, Fortis-Netherlands, Raiffesen Bank, Fortis-Belgium, and Mizuho Bank for which it remitted interest payments from May 2001 to May 2003.11  It allegedly withheld final taxes from said payments based on the following rates, and paid the same to the Revenue District Office No. 55 of the Bureau of Internal Revenue (BIR): (a) fifteen percent (15%) for Fortis-Belgium, Fortis-Netherlands, and Raiffesen Bank; and (b) twenty percent (20%) for Industrial Bank of Japan and Mizuho Bank.12chanRoblesvirtualLawlibrary

However, according to CBK Power, under the relevant tax treaties between the Philippines and the respective countries in which each of the banks is a resident, the interest income derived by the aforementioned banks are subject only to a preferential tax rate of 10%, viz.:13chanRoblesvirtualLawlibrary

BANK COUNTRY OF  RESIDENCE

PREFERENTIAL RATEUNDER THE RELEVANT TAX TREATY

Fortis Bank S.A./N.V. Belgium 10% (Article 111, RP-Belgium Tax Treaty)

Industrial Bank of Japan Japan 10% (Article 113, RP-Japan Tax Treaty)

Raiffesen Zentral Bank Osterreich AG

Austria 10% (Article 113, RP-Austria Tax Treaty)

Mizuho Corporate Bank Japan 10% (Article 113, RP-Japan Tax Treaty)

Accordingly, on April 14, 2003, CBK Power filed a claim for refund of its excess final withholding taxes allegedly erroneously withheld and collected for the years 2001 and 2002 with the BIR Revenue Region No. 9.  The claim for refund of excess final withholding taxes in 2003 was subsequently filed onMarch 4, 2005.14chanRoblesvirtualLawlibrary

The Commissioner of Internal Revenue’s (Commissioner) inaction on said claims prompted CBK Power to file petitions for review before the CTA, viz.:15chanRoblesvirtualLawlibrary

(1) CTA Case No. 6699 was filed by CBK Power on June 6, 2003 seeking the refund of excess final withholding tax in the total amount of P6,393,267.20 covering the year 2001 with respect to interest income derived by [Fortis-Belgium], Industrial Bank of Japan, and [Raiffesen Bank]. An Answer was filed by the Commissioner on July 25, 2003.

(2) CTA Case No. 6884 was filed by CBK Power on March 5, 2004 seeking for the refund of the amount of P8,136,174.31 covering [the] year 2002 with respect to interest income derived by [Fortis-Belgium], Industrial Bank of Japan, [Mizuho Bank], and [Raiffesen Bank]. The Commissioner filed his Answer on May 7, 2004.

x x x x

(3) CTA Case No. 7166 was filed by CBK [Power] on March 9, 2005 seeking for the refund of [the amount of] P1,143,517.21 covering [the] year 2003 with respect to interest income derived by [Fortis-Belgium], and [Raiffesen Bank]. The Commissioner filed his Answer on May 9, 2005. (Emphases supplied)

CTA Case Nos. 6699 and 6884 were consolidated first on June 18, 2004.  Subsequently, however, all three cases – CTA Case Nos. 6699, 6884, and 7166 – were consolidated in a Resolution dated August 3, 2005.16chanRoblesvirtualLawlibrary

The CTA First Division Rulings

In a Decision17 dated August 28, 2008, the CTA First Division granted the petitions and ordered the refund of the amount of P15,672,958.42 upon a finding that the relevant tax treaties were applicable to the case.18 It cited DA-ITAD Ruling No. 099-0319 dated July 16, 2003, issued by the BIR, confirming CBK Power’s claim that the interest payments it made to Industrial Bank of Japan and Raiffesen Bank were subject to a final withholding tax rate of only 10% of the gross amount of interest, pursuant to Article 11 of the Republic of the Philippines (RP)-Austria and RP-Japan tax treaties. However, in DA-ITAD Ruling No. 126-0320 dated August 18, 2003, also issued by the BIR, interest payments to Fortis-Belgium were likewise subjected to the same rate pursuant to the Protocol Amending the RP-Belgium Tax Treaty, the provisions of which apply on income derived or which accrued beginning January 1, 2000. With respect to interest payments made to Fortis-Netherlands before it assigned its portion of the loan to Fortis-Belgium, the CTA First Division likewise granted the preferential rate.21chanRoblesvirtualLawlibrary

The CTA First Division categorically declared in the August 28, 2008 Decision that

the required International Tax Affairs Division (ITAD) ruling was not a condition sine qua non for the entitlement of the tax relief sought by CBK Power,22 however, upon motion for reconsideration23 filed by the Commissioner, the CTA First Division amended its earlier decision by reducing the amount of the refund from P15,672,958.42 to P14,835,720.39 on the ground that CBK Power failed to obtain an ITAD ruling with respect to its transactions with Fortis-Netherlands.24 In its Amended Decision25 datedFebruary 12, 2009, the CTA First Division adopted26 the ruling in the case of Mirant (Philippines) Operations Corporation (formerly:  Southern Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of Internal Revenue (Mirant),27  cited by the Commissioner in his motion for reconsideration, where the Court categorically pronounced in its Resolution dated February 18, 2008 that an ITAD ruling must be obtained prior to availing a preferential tax rate.

CBK Power moved for the reconsideration28 of the Amended Decision dated February 12, 2009, arguing in the main that the Mirant case, which was resolved in a minute resolution, did not establish a legal precedent. The motion was denied, however, in a Resolution29 dated May 7, 2009 for lack of merit.

Undaunted, CBK Power elevated the matter to the CTA En Banc on petition for review,30 docketed as C.T.A E.B. No. 494. The Commissioner likewise filed his own petition for review,31 which was docketed as C.T.A. E.B. No. 469. Said petitions were subsequently consolidated.32chanRoblesvirtualLawlibrary

CBK Power raised the lone issue of whether or not an ITAD ruling is required before it can avail of the preferential tax rate. On the other hand, the Commissioner claimed that CBK Power failed to exhaust administrative remedies when it filed its petitions before the CTA First Division, and that said petitions were not filed within the two-year prescriptive period for initiating judicial claims for refund.33chanRoblesvirtualLawlibrary

The CTA En Banc Ruling

In a Decision34 dated March 29, 2010, the CTA En Banc affirmed the ruling of the CTA First Division that a prior application with the ITAD is indeed required by Revenue Memorandum Order (RMO) 1-2000,35 which administrative issuance has the force and effect of law and is just as binding as a tax treaty. The CTA En Banc declared the Mirant case as without any binding effect on CBK Power, having been resolved by this Court merely through minute resolutions, and relied instead on the mandatory wording of RMO 1-2000, as follows:36chanRoblesvirtualLawlibrary

III. Policies:

x x x x

2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e. payment of dividends, royalties, etc.,accompanied by supporting documents justifying the relief. x x x.

The CTA En Banc further held that CBK Power’s petitions for review were filed within the two-year prescriptive period provided under Section 22937 of the National Internal Revenue Code of 199738(NIRC), and that it was proper for CBK Power to

have filed said petitions without awaiting the final resolution of its administrative claims for refund before the BIR; otherwise, it would have completely lost its right to seek judicial recourse if the two-year prescriptive period lapsed with no judicial claim filed.

CBK Power’s motion for partial reconsideration and the Commissioner’s motion for reconsideration of the foregoing Decision were both denied in a Resolution39 dated August 16, 2010 for lack of merit; hence, the present consolidated petitions.

The Issues Before the Court

In G.R. Nos. 193383-84, CBK Power submits the sole legal issue of whether the BIR may add a requirement – prior application for an ITAD ruling – that is not found in the income tax treaties signed by the Philippines before a taxpayer can avail of preferential tax rates under said treaties.40chanRoblesvirtualLawlibrary

On the other hand, in G.R. Nos. 193407-08, the Commissioner maintains that CBK Power is not entitled to a refund in the amount of P1,143,517.21 for the period covering taxable year 2003 as it allegedly failed to exhaust administrative remedies before seeking judicial redress.41chanRoblesvirtualLawlibrary

The Court’s Ruling

The Court resolves the foregoing in seriatim.

A. G.R. Nos. 193383-84

The Philippine Constitution provides for adherence to the general principles of international law as part of the law of the land. The time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement. In this jurisdiction, treaties have the force and effect of law.42chanRoblesvirtualLawlibrary

The issue of whether the failure to strictly comply with RMO No. 1-2000 will deprive persons or corporations of the benefit of a tax treaty was squarely addressed in the recent case of Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue43 (Deutsche Bank), where the Court emphasized that the obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000, viz.:chanroblesvirtuallawlibrary

We recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA’s outright denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with the objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons or corporations.

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

to confirm the entitlement of the taxpayer to the relief.

The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000. Logically, noncompliance with tax treaties has negative implications on international relations, and unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000 involve an administrative procedure, these may be remedied through other system management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior application for tax treaty relief.44(Emphases and underscoring supplied)

The objective of RMO No. 1-2000 in requiring the application for treaty relief with the ITAD before a party’s availment of the preferential rate under a tax treaty is to avert the consequences of any erroneous interpretation and/or application of treaty provisions, such as claims for refund/credit for overpayment of taxes, or deficiency tax liabilities for underpayment.45 However, as pointed out inDeutsche Bank, the underlying principle of prior application with the BIR becomes moot in refund cases – as in the present case – where the very basis of the claim is   erroneous or there is excessive payment   arising from the non-availment of a tax treaty relief at the first instance. Just as Deutsche Bank was not faulted by the Court for not complying with RMO No. 1-2000 prior to the transaction,46 so should CBK Power. In parallel, CBK Power could not have applied for a tax treaty relief 15 days prior to its payment of the final withholding tax on the interest paid to its lendersprecisely because it erroneously paid said tax on the basis of the regular rate as prescribed by the NIRC, and not on the preferential tax rate provided under the different treaties. As stressed by the Court, the prior application requirement under RMO No. 1-2000 then becomes illogical.47chanRoblesvirtualLawlibrary

Not only is the requirement illogical, but it is also an imposition that is not found at all in the applicable tax treaties. In Deutsche Bank, the Court categorically held that the BIR should not impose additional requirements that would negate the availment of the reliefs provided for under international agreements, especially since said tax treaties do not provide for any prerequisite at all for the availment of the benefits under said agreements.48chanRoblesvirtualLawlibrary

It bears reiterating that the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.49 Since CBK Power had requested for confirmation from the ITAD on June 8, 2001 and October 28, 200250 before it filed on April 14, 2003 its administrative claim for refund of its excess final withholding taxes, the same should be deemed substantial compliance with RMO No. 1-2000, as in Deutsche Bank. To rule otherwise would defeat the purpose of Section 229 of the NIRC in providing the taxpayer a remedy for erroneously paid tax solely on the ground of failure to make prior application for tax treaty relief.51 As the Court exhorted in Republic v. GST Philippines, Inc.,52 while the taxpayer has an obligation to honestly pay the right taxes, the government has a corollary duty to implement tax laws in good faith; to discharge its duty to collect what is due to it; and to justly return what has been erroneously and excessively given to it.53chanRoblesvirtualLawlibrary

In view of the foregoing, the Court holds that the CTA En Banc committed reversible error in affirming the reduction of the amount of refund to CBK Power from P15,672,958.42 to P14,835,720.39 to exclude its transactions with Fortis-

Netherlands for which no ITAD ruling was obtained.54 CBK Power’s petition in G.R. Nos. 193383-84 is therefore granted.

The opposite conclusion is, however, reached with respect to the Commissioner’s petition in G.R. Nos. 193407-08.

B. G.R. Nos. 193407-08

The Commissioner laments55 that he was deprived of the opportunity to act on  the administrative claim for refund of excess final withholding taxes covering taxable year 2003 which CBK Power filed on March 4, 2005, a Friday, then the following Wednesday, March 9, 2005, the latter hastily elevated the case on petition for review before the CTA.  He argues56 that the failure on the part of CBK Power to give him a reasonable time to act on said claim is violative of the doctrines of exhaustion of administrative remedies and of primary jurisdiction.

For its part, CBK Power maintains57 that it would be prejudicial to wait for the Commissioner’s ruling before it files its judicial claim since it only has 2 years from the payment of the tax within which to file both its administrative and judicial claims.

The Court rules for CBK Power.

Sections 204 and 229 of the NIRC pertain to the refund of erroneously or illegally collected taxes. Section 204 applies to administrative claims for refund, while Section 229 to judicial claims for refund. In both instances, the taxpayer’s claim must be filed within two (2) years from the date of payment of the tax or penalty. However, Section 229 of the NIRC further states the condition that a judicial claim for refund may not be maintained until a claim for refund or credit has been duly filed with the Commissioner. These provisions respectively read:chanroblesvirtuallawlibrary

SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. – The Commissioner may -

x x x x

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund.

x x x x

SEC. 229. 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, of any sum alleged to have been excessively or in any manner wrongfully collected without authority, or

of any sum alleged to have been excessively 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 filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: x x x. (Emphases and underscoring supplied)

Indubitably, CBK Power’s administrative and judicial claims for refund of its excess final withholding taxes covering taxable year 2003 were filed within the two-year prescriptive period, as shown by the table below:58chanRoblesvirtualLawlibrary

WHEN FINAL INCOME TAXES WERE WITHHELD

WHEN REMITTANCE  RETURN FILED

LAST DAY OF THE 2-YEAR  PRESCRIPTIVE  PERIOD

WHEN  ADMINISTRATIVE  CLAIM WAS FILED

WHEN PETITION  FOR REVIEW  WAS FILED

February 2003 03/10/03 03/10/05 March 4, 2005 03/09/05

May 2003 06/10/03 06/10/05 March 4, 2005 03/09/05

With respect to the remittance filed on March 10, 2003, the Court agrees with the ratiocination of the CTA En Banc in debunking the alleged failure to exhaust administrative remedies. Had CBK Power awaited the action of the Commissioner on its claim for refund prior to taking court action knowing fully well that the prescriptive period was about to end, it would have lost not only its right to seek judicial recourse but its right to recover the final withholding taxes it erroneously paid to the government thereby suffering irreparable damage.59chanRoblesvirtualLawlibrary

Also, while it may be argued that, for the remittance filed on June 10, 2003 that was to prescribe on June 10, 2005, CBK Power could have waited for, at the most, three (3) months from the filing of the administrative claim on March 4, 2005 until the last day of the two-year prescriptive period ending June 10, 2005, that is, if only to give the BIR at the administrative level an opportunity to act on said claim, the Court cannot, on that basis alone, deny a legitimate claim that was, for all intents and purposes, timely filed in accordance with Section 229 of the NIRC. There was no violation of Section 229 since the law, as worded, only requires that an administrative claim be priorly filed.

In the foregoing instances, attention must be drawn to the Court’s ruling in P.J. Kiener Co., Ltd. v. David60 (Kiener), wherein it was held that in no wise does the law, i.e., Section 306 of the old Tax Code (now, Section 229 of the NIRC), imply that the Collector of Internal Revenue first act upon the taxpayer’s claim, and that the taxpayer shall not go to court before he is notified of the Collector’s action. In Kiener, the Court went on to say that the claim with the Collector of Internal Revenue was intended primarily as a notice of warning that unless the tax or penalty alleged to have been collected erroneously or illegally is refunded, court action will follow, viz.:chanroblesvirtuallawlibrary

The controversy centers on the construction of the aforementioned section of the Tax Code which reads:ChanRoblesVirtualawlibrary

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

The preceding provisions seem at first blush conflicting. It will be noticed that, whereas the first sentence requires a claim to be filed with the Collector of Internal Revenue before any suit is commenced, the last makes imperative the bringing of such suit within two years from the date of collection. But the conflict is only apparent and the two provisions easily yield to reconciliation, which it is the office of statutory construction to effectuate, where possible, to give effect to the entire enactment.

To this end, and bearing in mind that the Legislature is presumed to have understood the language it used and to have acted with full idea of what it wanted to accomplish, it is fair and reasonable to say without doing violence to the context or either of the two provisions, that by the first is meant simply that the Collector of Internal Revenue shall be given an opportunity to consider his mistake, if mistake has been committed, before he is sued, but not, as the appellant contends that pending consideration of the claim, the period of two years provided in the last clause shall be deemed interrupted.Nowhere and in no wise does the law imply that the Collector of Internal Revenue must act upon the claim, or that the taxpayer shall not go to court before he is notified of the Collector’s action. x x x. We understand the filing of the claim with the Collector of Internal Revenue to be intended primarily as a notice of warning that unless the tax or penalty alleged to have been collected erroneously or illegally is refunded, court action will follow. x x x.61 (Emphases supplied)

That being said, the foregoing refund claims of CBK Power should all be granted, and, the petition of the Commissioner in G.R. Nos. 193407-08 be denied for lack of merit.chanrobleslaw

WHEREFORE, the petition in G.R. Nos. 193383-84 is GRANTED.  The Decision dated March 29, 2010 and the Resolution dated August 16, 2010 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B. Nos. 469 and 494 are hereby REVERSED and SET ASIDE and a new one entered REINSTATING the Decision of the CTA First Division dated August 28, 2008 ordering the refund in favor of CBK Power Company Limited the amount of P15,672,958.42 representing its excess final withholding taxes for the taxable years 2001 to 2003. On the other hand, the petition in G.R. Nos. 193407-08 is DENIED for lack of merit.

SO ORDERED.cralawlawlibrary

G.R. No. 179115               September 26, 2012

ASIA INTERNATIONAL AUCTIONEERS, INC., Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

R E S O L U T I O N

PERLAS-BERNABE, J.:

Before the Court is a Petition for Review seeking to reverse and set aside the Decision dated August 3, 2007 of the Court of Tax Appeals (CTA) En Banc,  1 and the Resolutions dated November 20, 20062 and February 22, 20073 of the CTA First Division dismissing Asia International Auctioneers, Inc.’s (AIA) appeal due to its alleged failure to timely protest the Commissioner of Internal Revenue’s (CIR) tax assessment.

The Factual Antecedents

AIA is a duly organized corporation operating within the Subic Special Economic Zone. It is engaged in the importation of used motor vehicles and heavy equipment which it sells to the public through auction.4

On August 25, 2004, AIA received from the CIR a Formal Letter of Demand, dated July 9, 2004, containing an assessment for deficiency value added tax (VAT) and excise tax in the amounts of P 102,535,520.00 and P4,334,715.00, respectively, or a total amount of P 106,870,235.00, inclusive of penalties and interest, for auction sales conducted on February 5, 6, 7, and 8, 2004.5

AIA claimed that it filed a protest letter dated August 29, 2004 through registered mail on August 30, 2004.6 It also submitted additional supporting documents on September 24, 2004 and November 22, 2004.7

The CIR failed to act on the protest, prompting AIA to file a petition for review before the CTA on June 20, 2005,8to which the CIR filed its Answer on July 26, 2005.9

On March 8, 2006, the CIR filed a motion to dismiss10 on the ground of lack of jurisdiction citing the alleged failure of AIA to timely file its protest which thereby rendered the assessment final and executory. The CIR denied receipt of the protest letter dated August 29, 2004 claiming that it only received the protest letter dated September 24, 2004 on September 27, 2004, three days after the lapse of the 30-day period prescribed in Section 22811 of the Tax Code.12

In opposition to the CIR’s motion to dismiss, AIA submitted the following evidence to prove the filing and the receipt of the protest letter dated August 29, 2004: (1) the protest letter dated August 29, 2004 with attached Registry Receipt No. 3824;13 (2) a Certification dated November 15, 2005 issued by Wilfredo R. De Guzman, Postman III, of the Philippine Postal Corporation of Olongapo City, stating that Registered Letter No. 3824 dated August 30, 2004 , addressed to the CIR, was dispatched under Bill No. 45 Page 1 Line 11 on September 1, 2004 from Olongapo City to Quezon

City;14 (3) a Certification dated July 5, 2006 issued by Acting Postmaster, Josefina M. Hora, of the Philippine Postal Corporation-NCR, stating that Registered Letter No. 3824 was delivered to the BIR Records Section and was duly received by the authorized personnel on September 8, 2004;15 and (4) a certified photocopy of the Receipt of Important Communication Delivered issued by the BIR Chief of Records Division, Felisa U. Arrojado, showing that Registered Letter No. 3824 was received by the BIR.16 AIA also presented Josefina M. Hora and Felisa U. Arrojado as witnesses to testify on the due execution and the contents of the foregoing documents.

Ruling of the Court of Tax Appeals

After hearing both parties, the CTA First Division rendered the first assailed Resolution dated November 20, 2006 granting the CIR’s motion to dismiss. Citing Republic v. Court of Appeals,17 it ruled that "while a mailed letter is deemed received by the addressee in the course of the mail, still, this is merely a disputable presumption, subject to controversion, and a direct denial of the receipt thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter indeed was received by the addressee."18

The CTA First Division faulted AIA for failing to present the registry return card of the subject protest letter. Moreover, it noted that the text of the protest letter refers to a Formal Demand Letter dated June 9, 2004 and not the subject Formal Demand Letter dated July 9, 2004. Furthermore, it rejected AIA’s argument that the September 24, 2004 letter merely served as a cover letter to the submission of its supporting documents pointing out that there was no mention therein of a prior separate protest letter.19

AIA’s motion for reconsideration was subsequently denied by the CTA First Division in its second assailed Resolution dated February 22, 2007. On appeal, the CTA En Banc in its Decision dated August 3, 2007 affirmed the ruling of the CTA First Division holding that AIA’s evidence was not sufficient to prove receipt by the CIR of the protest letter dated August 24, 2004.

Hence, the instant petition.

Issue Before the Court

Both parties discussed the legal bases for AIA’s tax liability, unmindful of the fact that this case stemmed from the CTA’s dismissal of AIA’s petition for review for failure to file a timely protest, without passing upon the substantive merits of the case.

Relevantly, on January 30, 2008, AIA filed a Manifestation and Motion with Leave of the Honorable Court to Defer or Suspend Further Proceedings20 on the ground that it availed of the Tax Amnesty Program under Republic Act 948021 (RA 9480), otherwise known as the Tax Amnesty Act of 2007. On February 13, 2008, it submitted to the Court a Certification of Qualification22 issued by the BIR on February 5, 2008 stating that AIA "has availed and is qualified for Tax Amnesty for the Taxable Year 2005 and Prior Years" pursuant to RA 9480.

With AIA’s availment of the Tax Amnesty Program under RA 9480, the Court is tasked to first determine its effects on the instant petition.

Ruling of the Court

A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of violating a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate.23

A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority.24

In 2007, RA 9480 took effect granting a tax amnesty to qualified taxpayers for all national internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefor, that have remained unpaid as of December 31, 2005.25

The Tax Amnesty Program under RA 9480 may be availed of by any person except those who are disqualified under Section 8 thereof, to wit:

Section 8. Exceptions. — The tax amnesty provided in Section 5 hereof shall not extend to the following persons or cases existing as of the effectivity of this Act:

(a) Withholding agents with respect to their withholding tax liabilities;

(b) Those with pending cases falling under the jurisdiction of the Presidential Commission on Good Government;

(c) Those with pending cases involving unexplained or unlawfully acquired wealth or under the Anti-Graft and Corrupt Practices Act;

(d) Those with pending cases filed in court involving violation of the Anti-Money Laundering Law;

(e) Those with pending criminal cases for tax evasion and other criminal offenses under Chapter II of Title X of the National Internal Revenue Code of 1997, as amended, and the felonies of frauds, illegal exactions and transactions, and malversation of public funds and property under Chapters III and IV of Title VII of the Revised Penal Code; and

(f) Tax cases subject of final and executory judgment by the courts.(Emphasis supplied)

The CIR contends that AIA is disqualified under Section 8(a) of RA 9480 from availing itself of the Tax Amnesty Program because it is "deemed" a withholding agent for the deficiency taxes. This argument is untenable.

The CIR did not assess AIA as a withholding agent that failed to withhold or remit the deficiency VAT and excise tax to the BIR under relevant provisions of the Tax Code. Hence, the argument that AIA is "deemed" a withholding agent for these deficiency taxes is fallacious.

Indirect taxes, like VAT and excise tax, are different from withholding taxes.1âwphi1 To distinguish, in indirect taxes, the incidence of taxation falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it.26 On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by

withholding, the tax due from income payments to entities arising from certain transactions27and remits the same to the government. Due to this difference, the deficiency VAT and excise tax cannot be "deemed" as withholding taxes merely because they constitute indirect taxes. Moreover, records support the conclusion that AIA was assessed not as a withholding agent but, as the one directly liable for the said deficiency taxes.28

The CIR also argues that AIA, being an accredited investor/taxpayer situated at the Subic Special Economic Zone, should have availed of the tax amnesty granted under RA 939929 and not under RA 9480. This is also untenable.

RA 9399 was passed prior to the passage of RA 9480. RA 9399 does not preclude taxpayers within its coverage from availing of other tax amnesty programs available or enacted in futuro  like RA 9480. More so, RA 9480 does not exclude from its coverage taxpayers operating within special economic zones. As long as it is within the bounds of the law, a taxpayer has the liberty to choose which tax amnesty program it wants to avail.

Lastly, the Court takes judicial notice of the "Certification of Qualification"30 issued by Eduardo A. Baluyut, BIR Revenue District Officer, stating that AlA "has availed and is qualified for Tax Amnesty for the Taxable Year 2005 and Prior Years" pursuant to RA 9480. In the absence of sufficient evidence proving that the certification was issued in excess of authority, the presumption that it was issued in the regular performance of the revenue district officer's official duty stands.31

WHEREFORE, the petition is DENIED for being MOOT and ACADEMIC in view of Asia International Auctioneers, Inc.'s (AlA) availment of the Tax Amnesty Program under RA 9480. Accordingly, the outstanding deficiency taxes of AlA are deemed fully settled.

SO ORDERED.

G.R. No. L-20569 August 23, 1974

JOSE B. AZNAR, in his capacity as Administrator of the Estate of the deceased, Matias H. Aznar,petitioner, vs.COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.

Sato, Enad Garcia for petitioner.

Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Attorney Librada R. Natividad for respondents.

 

ESGUERRA, J.:p

Petitioner, as administrator of the estate of the deceased, Matias H. Aznar, seeks a review and nullification of the decision of the Court of Tax Appeals in C.T.A. Case No. 109, modifying the decision of respondent Commissioner of Internal Revenue and ordering the petitioner to pay the government the sum of P227,691.77 representing deficiency income taxes for the years 1946 to 1951, inclusive, with the condition that if the said amount is not paid within thirty days from the date the decision becomes final, there shall be added to the unpaid amount the surcharge of 5%, plus interest at the rate of 12% per annum from the date of delinquency to the date of payment, in accordance with Section 51 of the National Internal Revenue Code, plus costs against the petitioner.

It is established that the late Matias H. Aznar who died on May 18, 1958, predecessor in interest of herein petitioner, during his lifetime as a resident of Cebu City, filed his income tax returns on the cash and disbursement basis, reporting therein the following:

Year Net Income Amount of Tax Paid

Exhibit

1945 P12,822.00 P114.66 pp. 85-88 B.I.R. rec.

1946 9,910.94 114.66 38-A (pp. 329-332 B.I.R rec.)

1947 10,200.00 132.00 39 (pp. 75-78 B.I.R rec.)

1948 9,148.34 68.90 40 (pp. 70-73 B.I.R. rec.)

1949 8,990.66 59.72 41 (pp. 64-67 B.I.R. rec.)

1950 8,364.50 28.22 42 (pp. 59-62, BIR rec.)

1951 6,800.00 n o n e 43 (pp. 54-57 BIR rec.).

The Commissioner of Internal Revenue having his doubts on the veracity of the reported income of one obviously wealthy, pursuant to the authority granted him by Section 38 of the National Internal Revenue Code, caused B.I.R. Examiner Honorio Guerrero to ascertain the taxpayer's true income for said years by using the net worth and expenditures method of tax investigation. The assets and liabilities of the taxpayer during the above-mentioned years were ascertained and it was discovered that from 1946 to 1951, his net worth had increased every year, which increases in net worth was very much more than the income reported during said years. The findings clearly indicated that the taxpayer did not declare correctly the income reported in his income tax returns for the aforesaid years.

Based on the above findings of Examiner Guerrero, respondent Commissioner, in his letter dated November 28, 1952, notified the taxpayer (Matias H. Aznar) of the assessed tax delinquency to the amount of P723,032.66, plus compromise penalty. The taxpayer requested a reinvestigation which was granted for the purpose of verifying the merits of the various objections of the taxpayer to the deficiency income tax assessment of November 28, 1952.

After the reinvestigation, another deficiency assessment to the reduced amount of P381,096.07 dated February 16, 1955, superseded the previous assessment and notice thereof was received by Matias H. Aznar on March 2, 1955.

The new deficiency assessment was based on the following computations:

1 9 4 6

Net income per return ........................ P9,910.94Add: Under declared income .............. 22,559.94Net income per investigation............... 32,470.45

Deduct: Income tax liability per return as assessed ...................................................... 114.66 Balance of tax due ........................................................... P3,687.10 Add: 50% surcharge ........................................................ 1,843.55 DEFICIENCY INCOME TAX ...................................... P5,530.65

1 9 4 7

Net income per return ..................................................... P10,200.00 Add: Under declared income ............................................ 90,413.56   Net income per reinvestigation ....................................... P100,613.56 Deduct: Personal and additional exemption ...................... 7,000.00 Amount of income subject to tax ...................................... P93,613.56 Total tax liability ............................................................... P24,753.15 Deduct: Income tax liability per return as assessed ............ 132.00 Balance of tax due ........................................................... P24,621.15 Add: 50% surcharge ........................................................ 12,310.58 DEFICIENCY INCOME TAX ...................................... P36,931.73

1 9 4 8

Net income per return ...................................................... P9,148.34 Add: Under declared income ............................................. 15,624.63 Net income per reinvestigation .......................................... P24,772.97 Deduct: Personal and additional exemptions ...................... 7,000.00 Amount of income subject to tax ....................................... P17,772.97   Total tax liability ............................................................... 2,201.40 Deduct: Income tax liability per return as assessed ............ 68.90 Balance of tax due ........................................................... P2,132.500Add: 50% surcharge ........................................................ 1,066.25 DEFICIENCY INCOME TAX ...................................... P3,198.75

1 9 4 9

Net income per return ....................................................... P9,990.66 Add: Under declared income ............................................. 105,418.53 Net income per reinvestigation .......................................... 114,409.19 Deduct: Personal and additional exemptions ...................... P7,000.00 Amount of income subject to tax ....................................... P107,409.19Total tax liability ............................................................... P30,143.68 Deduct: Income tax liability per return as assessed ............. 59.72 Balance of tax due ............................................................ P30,083.96 Add: 50% surcharge ......................................................... 15,041.98 DEFICIENCY INCOME TAX ....................................... P45,125.94

1 9 5 0

Net income per return ....................................................... P8,364.50 Add: Under declared income ............................................. 365,578.76 Net income per reinvestigation .......................................... P373,943.26 Deduct: Personal and additional exemptions ...................... 7,800.00 Amount of income subject to tax ....................................... P366,143.26 Total tax liability ............................................................... P185,883.00Deduct: Income tax liability per return as assessed ............. 28.00 Balance of tax due ............................................................ P185,855.00 Add: 50% surcharge ......................................................... 92,928.00 DEFICIENCY INCOME TAX ....................................... P278,783.00

1 9 5 1

Net income per return ........................................................ P6,800.00 Add: Under declared income ............................................... 33,355.80   Net income per reinvestigation ............................................ P40,155.80 Deduct: Personal and additional exemptions ........................ 7,200.00 Amount of income subject to tax ......................................... P32,955.80 Total tax liability .................................................................. P7,684.00Deduct: Income tax liability per return as assessed ............... - o - .   Balance of tax due .............................................................. P7,684.00 Add: 50% surcharge ........................................................... 3,842.00 DEFICIENCY INCOME TAX .......................................... P11,526.00

S U M M A R Y

1946 .... P5,530.65

1947 .... 36,931.73

1948 .... 3,198.75

1949 .... 45,125.94

1950 .... 278,783.00

1951 .... 11,526.00

Total .... P381,096.07

In determining the unreported income, the respondent Commissioner of Internal Revenue resorted to the networth method which is based on the following computations:

1 9 4 5

Real estate inventory ................................ P64,738.00 Other assets ............................................. 37,606.87Total assets ............................................ P102,344.87Less: Depreciation allowed ...................... 2,027.00 Networth as of Dec. 31, 1945 ................ P100,316.97

1 9 4 6

Real estate inventory ................................. P86,944.18 Other assets ............................................. 60,801.65Total assets ............................................. P147,745.83Less: Depreciation allowed ...................... 4,875.41   Net assets ................................................ P142,870.42 Less: Liabilities .................. P17,000.00 Net Worth as of Jan. 1, 1946 ................... P100,316.97 P117,316.97  

Increase in networth ................................. 25,553.45 Add: Estimated living expenses ................. 6,917.00   Net income .............................................. P32,470.45

1 9 4 7

Real estate inventory .................................. P237,824.18 Other assets ............................................... 54,495.52   Total assets ............................................... P292,319.70 Less: Depreciation allowed ......................... 12,835.72   Net assets .................................................. 279,483.98 Less: Liabilities ................... P60,000.00 Networth as of Jan. 1, 1947 ........................ 125,870.42 P185,870.42   Increase in networth ................................... P93,613.56 Add: Estimated living expenses ................... 7,000.00   Net income ................................................P100,613.56

1 9 4 8

Real estate inventory .................................. P244,824.18 Other assets .............................................. 118,720.60   Total assets ............................................... P363,544.78 Less: Depreciation allowed ........................ 20,936.03   Net assets ................................................. P342,608.75 Less: Liabilities ................... P105,351.80 Networth as of Jan. 1, 1948 ...................... 219,483.98 P324,835.78   Increase in networth ................................... P17,772.97 Add: Estimated living expenses ................... 7,000.00   Net income ................................................ P24,772.97

1 9 4 9

Real estate inventory ................................. P400,515.52 Investment in schools and other colleges .... 23,105.29 Other assets ............................................. 70,311.00   Total assets ............................................... P493,931.81 Less: Depreciation allowed ........................ 32,657.08   Net assets ................................................. P461.274.73 Less; Liabilities .................. P116,608.59 Networth as of Jan. 1, 1949 ...................... 237,256.95 P353,865.54Increase in networth .................................. P107,409.19Add: Estimated living expenses .................. 7,000.00   Net income ............................................... P114,409.19

1 9 5 0

Real estate inventory .................................. P412,465.52 Investment in Schools and other colleges ................................ 193,460.99 October assets .......................................... 310,788.87   Total assets ............................................... P916,715.38 Less; Depreciation allowed ........................ 47,561.99 

Net assets ................................................. P869,153.39 Less: Liabilities .................. P158,343.99 Networth as of Jan. 1, 1950 ... 344,666.14 P503,010.13   Increase in networth ................................... P366,143.26 Add: Estimated living expenses ................... 7,800.00 Net income ................................................. P373,943.26

1 9 5 1

Real estate inventory ................................... P412,465.52 Investment in schools and other colleges ..... 214,016.21 Other assets ............................................... 320,209.40 Total assets ................................................ P946,691.13 Less: Depreciation allowed ......................... 62,466.90 Net assets .................................................. P884,224.23 Less: Liabilities ........................................... P140,459.03 Networth as of Jan. 1, 1951 ................ 710,809.40 P851,268.43   Increase in networth .................................... P32,955.80 Add: Estimated living expenses .................... 7,200.00 Net income ................................................. P40,155.80

(Exh. 45-B, BIR rec. p. 188)

On February 20, 1953, respondent Commissioner of Internal Revenue, thru the City Treasurer of Cebu, placed the properties of Matias H. Aznar under distraint and levy to secure payment of the deficiency income tax in question. Matias H. Aznar filed his petition for review of the case with the Court of Tax Appeals on April 1, 1955, with a subsequent petition immediately thereafter to restrain respondent from collecting the deficiency tax by summary method, the latter petition being granted on February 8, 1956, per C.T.A. resolution, without requiring petitioner to file a bond. Upon review, this Court set aside the C.T.A. resolution and required the petitioner to deposit with the Court of Tax Appeals the amount demanded by the Commissioner of Internal Revenue for the years 1949 to 1951 or furnish a surety bond for not more than double the amount.

On March 5, 1962, in a decision signed by the presiding judge and the two associate judges of the Court of Tax Appeals, the lower court concluded that the tax liability of the late Matias H. Aznar for the year 1946 to 1951, inclusive should be P227,788.64 minus P96.87 representing the tax credit for 1945, or P227,691.77, computed as follows:

1 9 4 6

Net income per return .............................................. P9,910.94 Add: Under declared income ..................................... 22,559.51 Net income ............................................................ P32,470.45 Less: Personal and additional exemptions .................. 6,917.00 Income subject to tax ............................................. P25,553.45 Tax due thereon ...................................................... P3,801.76 Less: Tax already assessed ...................................... 114.66 Balance of tax due .................................................... P3,687.10 Add: 50% surcharge ................................................. 1,843.55 Deficiency income tax ................................................ P5,530.65

1 9 4 7

Net income per return ............................................ P10,200.00 Add: Under declared income .................................. 57,551.19 Net income ........................................................... P67,751.19 Less: Personal and additional exemptions ............... 7,000.00   Income subject to tax ............................................. P60,751.19   Tax due thereon ..................................................... P13,420.38 Less: Tax already assessed ..................................... P132.00   Balance of tax due ................................................... P13,288.38 Add: 50% surcharge ................................................ 6,644.19   Deficiency income tax .............................................. P19,932.57

1 9 4 8

Net income per return .............................................. P9,148.34 Add: Under declared income ..................................... 8,732.10   Net income ............................................................ P17,880.44 Less: Personal and additional exemptions ................. 7,000.00   Income subject to tax .............................................. P10,880.44 Tax due thereon ...................................................... P1,029.67   Less: Tax already assessed ....................................... 68.90 Balance of tax due .................................................... 960.77 Add: 50% surcharge ................................................. 480.38   Deficiency income tax ............................................... P1,441.15

1 9 4 9

Net income per return ................................................. P8,990.66 Add: under declared income ......................................... 43,718.53   Net income ............................................................... P52,709.19 Less: Personal and additional exemptions .................... 7,000.00   Income subject to tax ................................................. P45,709.19   Tax due thereon ......................................................... P8,978.57 Less: Tax already assessed ......................................... 59.72   Balance of tax due ....................................................... P8,918.85 Add: 50% surcharge .................................................... 4,459.42   Deficiency income tax ................................................. P13,378.27

1 9 5 0

Net income per return .................................................. P6,800.00 Add: Under declared income ......................................... 33,355.80   Net income ................................................................. P40,155.80 Less: Personal and additional exemptions ...................... 7,200.00   Income subject to tax .................................................. P32,955.80   Tax due thereon ........................................................... P7,684.00 Less: Tax already assessed ...........................................  -o- . Balance of tax due ........................................................ P7,684.00 Add: 50% surcharge .................................................... 3,842.00Deficiency income tax .................................................. P11,526.00

1 9 5 1

Net income per return ................................................... P8,364.50 Add: Under declared income ........................................  246,449.06   Net income ............................................................... P254.813.56 Less: Personal and additional exemptions .................... 7,800.00   Income subject to tax ................................................ P247,013.56Tax due thereon ........................................................ P117,348.00 Less: Tax already assessed ........................................ 28.00   Balance of tax due ..................................................... P117,320.00 Add: 50% surcharge .................................................. 58,660.00   Deficiency income tax ................................................ P175 980.00

S U M M A R Y

1946 P5,530.65

1947 19,932.57

1948 1,441.15

1949 13,378.27

1950 175,980.00

1951 11,526.00

P227,788.64.

I

The first vital issue to be decided here is whether or not the right of the Commissioner of Internal Revenue to assess deficiency income taxes of the late Matias H. Aznar for the years 1946, 1947, and 1948 had already prescribed at the time the assessment was made on November 28, 1952.

Petitioner's contention is that the provision of law applicable to this case is the period of five years limitation upon assessment and collection from the filing of the returns provided for in See. 331 of the National Internal Revenue Code. He argues that since the 1946 income tax return could be presumed filed before March 1, 1947 and the notice of final and last assessment was received by the taxpayer on March 2, 1955, a period of about 8 years had elapsed and the five year period provided by law (Sec. 331 of the National Internal Revenue Code) had already expired. The same argument is advanced on the taxpayer's return for 1947, which was filed on March 1, 1948, and the return for 1948, which was filed on February 28, 1949. Respondents, on the other hand, are of the firm belief that regarding the prescriptive period for assessment of tax returns, Section 332 of the National Internal Revenue Code should apply because, as in this case, "(a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission" (Sec. 332 (a) of the NIRC).

Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false and fraudulent returns with intent to evade tax, while respondent Commissioner of Internal Revenue insists contrariwise, with respondent Court of Tax Appeals concluding that the very "substantial under declarations of income for six

consecutive years eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade the payment of tax."

To our minds we can dispense with these controversial arguments on facts, although we do not deny that the findings of facts by the Court of Tax Appeals, supported as they are by very substantial evidence, carry great weight, by resorting to a proper interpretation of Section 332 of the NIRC. We believe that the proper and reasonable interpretation of said provision should be that in the three different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the (1) falsity, (2) fraud, (3) omission. Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax, and failure to file a return is strengthened immeasurably by the last portion of the provision which segregates the situations into three different classes, namely "falsity", "fraud" and "omission". That there is a difference between "false return" and "fraudulent return" cannot be denied. While the first merely implies deviation from the truth, whether intentional or not, the second implies intentional or deceitful entry with intent to evade the taxes due.

The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the NIRC should be applicable to normal circumstances, but whenever the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax or failure to file returns, the period of ten years provided for in Sec. 332 (a) NIRC, from the time of the discovery of the falsity, fraud or omission even seems to be inadequate and should be the one enforced.

There being undoubtedly false tax returns in this case, We affirm the conclusion of the respondent Court of Tax Appeals that Sec. 332 (a) of the NIRC should apply and that the period of ten years within which to assess petitioner's tax liability had not expired at the time said assessment was made.

II

As to the alleged errors committed by the Court of Tax Appeals in not deducting from the alleged undeclared income of the taxpayer for 1946 the proceeds from the sale of jewelries valued at P30,000; in not excluding from other schedules of assets of the taxpayer (a) accounts receivable from customers in the amount of P38,000 for 1948, P126,816.50 for 1950, and provisions for doubtful accounts in the amount of P41,810.56 for 1950; (b) over valuation of hospital and dental buildings for 1949 in the amount of P32,000 and P6,191.32 respectively; (c) investment in hollow block business in the amount of P8,603.22 for 1949; (d) over valuation of surplus goods in the amount of P23,000 for the year 1949; (e) various lands and buildings included in the schedule of assets for the years 1950 and 1951 in the total amount of P243,717.42 for 1950 and P62,564.00 for 1951, these issues would depend for their resolution on determination of questions of facts based on an evaluation of evidence, and the general rule is that the findings of fact of the Court of Tax Appeals supported by substantial evidence should not be disturbed upon review of its decision (Section 2, Rule 44, Rules of Court).

On the question of the alleged sale of P30,000 worth of jewelries in 1946, which amount petitioner contends should be deducted from the taxpayer's net worth as of December 31, 1946, the record shows that Matias H. Aznar, when interviewed by B.I.R. Examiner Guerrero, stated that at the beginning of 1945 he had P60,000 worth

of jewelries inherited from his ancestors and were disposed off as follows: 1945, P10,000; 1946, P20,000; 1947, P10,000; 1948, P10,000; 1949, P7,000; (Report of B.I.R. Examiner Guerrero, B.I.R. rec. pp. 90-94).

During the hearing of this case in the Court of Tax Appeals, petitioner's accountant testified that on January 1, 1945, Matias H. Aznar had jewelries worth P60,000 which were acquired by purchase during the Japanese occupation (World War II) and sold on various occasions, as follows: 1945, P5,000 and 1946, P30,000. To corroborate the testimony of the accountant, Mrs. Ramona Agustines testified that she bought from the wife of Matias H. Aznar in 1946 a diamond ring and a pair of earrings for P30,000; and in 1947 a wrist watch with diamonds, together with antique jewelries, for P15,000. Matias H. Aznar, on the other hand testified that in 1945, his wife sold to Sards Parino jewelries for P5,000 and question, Mr. Aznar stated that his transaction with Sards Parino, with respect to the sale of jewelries, amounted to P15,000.

The lower court did not err in finding material inconsistencies in the testimonies of Matias H. Aznar and his witnesses with respect to the values of the jewelries allegedly disposed off as stated by the witnesses. Thus, Mr. Aznar stated to the B.I.R. examiner that jewelries worth P10,000 were sold in 1945, while his own accountant testified that the same jewelries were sold for only P5,000. Mr. Aznar also testified that Mrs. Agustines purchased from his wife jewelries for P35,000, and yet Mrs. Agustines herself testified that she bought jewelries for P30,000 and P15,000 on two occasions, or a total of P45,000.

We do not see any plausible reason to challenge the fundamentally sound basis advanced by the Court of Tax Appeals in considering the inconsistencies of the witnesses' testimony as material, in the following words:

We do not say that witnesses testifying on the same transaction should give identical testimonies. Because of the frailties and the limitations of the human mind, witnesses' statements are apt to be inconsistent in certain points, but usually the inconsistencies refer to the minor phases of the transaction. It is the insignificance of the detail of an occurrence that fails to impress the human mind. When that same mind, made to recall what actually happened, the significant point which it failed to take note is naturally left out. But it is otherwise as regards significant matters, for they leave indelible imprints upon the human mind. Hence, testimonial inconsistencies on the minor details of an occurrence are dismissed lightly by the courts, while discrepancies on significant points are taken seriously and weigh adversely to the party affected thereby.

There is no sound basis for deviating from the lower court's conclusion that: "Taxwise in view of the aforesaid inconsistencies, which we deem material and significant, we dismiss as without factual basis petitioner's allegation that jewelries form part of his inventory of assets for the purpose of establishing his net worth at the beginning of 1946."

As to the accounts receivable from the United States government for the amount of P38,254.90, representing a claim for goods commandered by the U.S. Army during World War II, and which amount petitioner claimed should be included in his net worth as of January 1, 1946, the Court of Tax Appeals correctly concluded that the uncontradicted evidence showed that "the collectible accounts of Mr. Aznar from the U.S. Government in the sum of P38,254.90 should be added to his assets (under accounts receivable) as of January 1, 1946. As of December 31, 1947, and

December 31, 1948, the years within which the accounts were paid to him, the 'accounts receivable shall decrease by P31,362.37 and P6,892.53, respectively."

Regarding a house in Talisay Cebu, (covered by Tax Declaration No. 8165) which was listed as an asset during the years 1945 and 1947 to 1951, but which was not listed as an asset in 1946 because of a notation in the tax declaration that it was reconstructed in 1947, the lower court correctly concluded that the reconstruction of the property did not render it valueless during the time it was being reconstructed and consequently it should be listed as an asset as of January 1, 1946, with the same valuation as in 1945, that is P1,500.

On the question of accounts receivable from customers in the amount of P38,000 for 1948, and P123,816.58 for the years 1950 and 1951, which were included in the assets of Mr. Aznar for those years by the respondent Commissioner of Internal Revenue, it is very clear that those figures were taken from the statements (Exhs. 31 and 32) filed by Mr. Matias H. Aznar with the Philippine National Bank when he was intending to obtain a loan. These statements were under oath and the natural implication is that the information therein reflected must be the true and accurate financial condition of the one who executed those statements. To believe the petitioner's argument that the late Mr. Aznar included those figures in his sworn statement only for the purpose of obtaining a bigger credit from the bank is to cast suspicion on the character of a man who can no longer defend himself. It would be as if pointing the finger of accusation on the late Mr. Aznar that he intentionally falsified his sworn statements (Exhs. 31 and 32) to make it appear that there were non-existent accounts receivable just to increase his assets by fictitious entries so that his credit with the Philippine National Bank could be enhanced. Besides, We do not lose sight of the fact that those statements (Exhs. 31 and 32) were executed before this tax controversy arose and the disputable presumptions that a person is innocent of crime or wrong; that a person intends the ordinary consequences of his voluntary act; that a person takes ordinary care of his concerns; that private transaction have been fair and regular; that the ordinary course of business has been followed; that things have happened according to the ordinary course of nature and the ordinary habits of life; that the law has been obeyed (Sec. 5, (a), (c), (d), (p), (q), (z), (ff), Rule 131 of the Rules of Court), together with the conclusive presumption that "whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act or omission, be permitted to falsify it" (Sec. 3 (a), Rule 131, Rules of Court), convincingly indicate that the accounts receivable stated by Mr. Aznar in Exhibits 31 and 32 were true, in existence, and accurate to the very amounts mentioned.

There is no merit to petitioners argument that those statements were only for the purpose of obtaining a bigger credit from the bank (impliedly stating that those statements were false) and those accounts were allegedly back accounts of students of the Southwestern Colleges and were worthless, and if collected, would go to the funds of the school. The statement of the late Mr. Aznar that they were accounts receivable from customers should prevail over the mere allegation of petitioner, unsupported as they are by convincing evidence. There is no reason to disturb the lower court's conclusion that the amounts of P38,000 and P123,816.58 were accounts receivable from customers and as such must be included as petitioner's assets for the years indicated.

As to the questions of doubtful accounts (bad debts), for the amount of P41,810.56, it is clear that said amount is taken from Exhibit 31, the sworn statement of financial

condition filed by Mr. Matias H. Aznar with the Philippine National Bank. The lower court did not commit any error in again giving much weight to the statement of Mr. Aznar and in concluding that inasmuch as this is an item separate and apart from the taxpayer's accounts receivable and non-deductible expense, it should be reverted to the accounts receivable and, consequently, considered as an asset in 1950.

On the alleged over valuation of two buildings (hospital building which respondent Commissioner of Internal Revenue listed as an asset from 1949-1951 at the basic valuation of P130,000, and which petitioner claims to be over valued by P32,000; dentistry building valued by respondent Commissioner of Internal Revenue at P36,191.34, which petitioner claims to be over valued by P6,191.34), We find no sufficient reason to alter the conclusion of respondent Court of Tax Appeals sustaining the respondent Commissioner of Internal Revenue's valuation of both properties.

Respondent Commissioner of Internal Revenue based his valuation of the hospital building on the representation of Mr. Matias H. Aznar himself who, in his letter (Exh. 35) to the Philippine National Bank dated September 5, 1949, stated that the hospital building cost him P132,000. However in view of the effect of a typhoon in 1949 upon the building, the value allowed was P130,000. Exhibit 35, contrary to petitioner's contention, should be given probative value because, although it is an unsigned plain copy, that exhibit was taken by the investigating examiner of the B.I.R. from the files of the Southwestern Colleges and formed part of his report of investigation as a public official. The estimates of an architect and a civil engineer who agreed that a value of P84,240 is fair for the hospital building, made years after the building was constructed, cannot prevail over the petitioner's own estimate of his property's value.

Respondent Commissioner of Internal Revenue's valuation of P36,191.34 of the Dentistry Building is based on the letter of Mr. and Mrs. Matias H. Aznar to the Southwestern Colleges, dated December 15, 1950, which is embodied in the minutes of the meeting of the Board of Trustees of the Southwestern Colleges held on May 7, 1951 (Exhibit G-1). In Exhibit 26 A, which is the cash book of the Southwestern Colleges, this building was listed as of the same amount. Petitioner's estimate of P30,000 for this building, based on Architect Paca's opinion, cannot stand against the owner's estimate and that which appears in the cash book of the Southwestern Colleges, if we take into consideration that the owner's (Mr. Matias H. Aznar) letter was written long before this tax proceeding was initiated, while architect Paca's estimate was made upon petitioner's request solely for the purpose of evidence in this tax case.

In the inventory of assets of petitioner, respondent Commissioner of Internal Revenue included the administrative building valued at P19,200 for the years 1947 and 1948, and P16,700 for the years 1949 to 1951; and a high school building valued at P48,000 for 1947 and 1948, and P45,000 for 1949, 1950 and 1951. The reduced valuation for the latter years are due to allowance for partial loss resulting from the 1949 typhoon. Petitioner did not question the inclusion of these buildings in the inventory for the years prior to 1950, but objected to their inclusion as assets as of January 1, 1950, because both buildings were destroyed by a typhoon in November of 1949. There is sufficient evidence (Exh. G-1, affidavit of Jesus S. Intan, employee in the office of City Assessor of Cebu City, Exh. 18, Mr. Intan's testimony, a copy of a letter of the City Assessor of Cebu City) to prove that the two buildings

were really destroyed by typhoon in 1949 and, therefore, should be eliminated from the petitioner's inventory of assets beginning December 31, 1949.

On the issue of investment in the hollow blocks business, We see no compelling reason to alter the lower court's conclusion that "whatever was spent in the hollow blocks business is an investment, and being an investment, the same should be treated as an asset. With respect to the amount representing the value of the building, there is no duplication in the listing as the inventory of real property does not include the building in question."

Respondent Commissioner of Internal Revenue included in the inventory, under the heading of other asset, the amount of P8,663.22, treated as investment in the hollow block business. Petitioner objects to the inclusion of P1,683.42 which was spent on the building and in the business and of P674.35 which was spent for labor, fuel, raw materials, office supplies etc., contending that the former amount is a duplication of inventory (included among the list of properties) and the latter is a business expense which should be eliminated from the list of assets.

The inclusion of expenses (labor and raw materials) as part of the hollow block business is sanctioned in the inventory method of tax verification. It is a sound accounting practice to include raw materials that will be used for future manufacture. Inclusion of direct labor is also proper, as all these items are to be embodied in a summary of assets (investment by the taxpayer credited to his capital account as reflected in Exhibit 72-A, which is a working sheet with entries taken from the journal of the petitioner concerning his hollow blocks business). There is no evidence to show that there was duplication in the inclusion of the building used for hollow blocks business as part of petitioner's investment as this building was not included in the listing of real properties of petitioner (Exh. 45-C p. 187 B.I.R. rec.).

As to the question of the real value of the surplus goods purchased by Mr. Matias H. Aznar from the U.S. Army, the best evidence, as observed correctly by the lower court, is the statement of Mr. Matias H. Aznar, himself, as appearing Exh. 35 (copy of a letter dated September 5, 1949 to the Philippine National Bank), to the effect "as part of my assets I have different merchandise from Warehouse 35, Tacloban, Leyte at a total cost of P43,000.00 and valued at no less than P20,000 at present market value." Petitioner's claim that the goods should be valued at only P20,000 in accordance with an alleged invoice is not supported by evidence since the invoice was not presented as exhibit. The lower court's act in giving more credence to the statement of Mr. Aznar cannot be questioned in the light of clear indications that it was never controverted and it was given at a time long before the tax controversy arose.

The last issue on propriety of inclusion in petitioner's assets made by respondent Commissioner of Internal Revenue concerns several buildings which were included in the list of petitioner's assets as of December 31, 1950. Petitioner contends that those buildings were conveyed and ceded to Southwestern Colleges on December 15, 1950, in consideration of P100,723.99 to be paid in cash. The value of the different buildings are listed as: hospital building, P130,000; gymnasium, P43,000; dentistry building, P36,191.34; bodega 1, P781.18; bodega 2, P7,250; college of law, P10,950; laboratory building, P8,164; home economics, P5,621; morgue, P2,400; science building, P23,600; faculty house, P5,760. It is suggested that the value of the buildings be eliminated from the real estate inventory and the sum of P100,723.99 be included as asset as of December 31, 1950.

The lower court could not find any evidence of said alleged transfer of ownership from the taxpayer to the Southwestern Colleges as of December 15, 1950, an allegation which if true could easily be proven. What is evident is that those buildings were used by the Southwestern Colleges. It is true that Exhibit G-1 shows that Mr. and Mrs. Matias H. Aznar offered those properties in exchange for shares of stocks of the Southwestern Colleges, and Exhibit "G" which is the minutes of the meeting of the Board of Trustees of the Southwestern Colleges held on August 6, 1951, shows that Mr. Aznar was amenable to the value fixed by the board of trustees and that he requested to be paid in cash instead of shares of stock. But those are not sufficient evidence to prove that transfer of ownership actually happened on December 15, 1950. Hence, the lower court did not commit any error in sustaining the respondent Commissioner of Internal Revenue's act of including those buildings as part of the assets of petitioner as of December 31, 1950.

Petitioner also contends that properties allegedly ceded to the Southwestern Colleges in 1951 for P150,000 worth of shares of stocks, consisting of: land, P22,684; house, P13,700; group of houses, P8,000; building, P12,000; nurses home, P4,100; nurses home, P2,080, should be excluded from the inventory of assets as of December 31, 1951. The evidence (Exh. H), however, clearly shows that said properties were formally conveyed to the Southwestern Colleges only on September 25, 1952. Undoubtedly, petitioner was the owner of those properties prior to September 25, 1952 and said properties should form part of his assets as of December 31, 1951.

The uncontested portions of the lower court's decision consisting of its conclusions that library books valued at P7,041.03, appearing in a journal of the Southwestern Colleges marked as' Exhibit 25-A, being an investment, should be treated as an asset beginning December 31, 1950; that the expenses for construction to the amount of P113,353.70, which were spent for the improvement of the buildings appearing in Exhibit 24 are deemed absorbed in the increased value of the buildings as appraised by respondent Commissioner of Internal Revenue at cost after improvements were made, and should be taken out as additional assets; that the amount receivable of P5,776 from a certain Benito Chan should be treated as petitioner's asset but the amount of P5,776 representing the value of a house and lot given as collateral to secure said loan should not be considered as an asset of petitioner since to do so would result in a glaring duplication of items, are all affirmed. There seems to be no controversy as to the rest of the items listed in the inventory of assets.

III

The second issue which appears to be of vital importance in this case centers on the lower court's imposition of the fraud penalty (surcharge of 50% authorized in Section 72 of the Tax Code). The petitioner insists that there might have been false returns by mistake filed by Mr. Matias H. Aznar as those returns were prepared by his accountant employees, but there were no proven fraudulent returns with intent to evade taxes that would justify the imposition of the 50% surcharge authorized by law as fraud penalty.

The lower court based its conclusion that the 50% fraud penalty must be imposed on the following reasoning: .

It appears that Matias H. Aznar declared net income of P9,910.94, P10,200, P9,148.34, P8,990.66, P8,364.50 and P6,800 for the years 1946, 1947, 1948, 1949, 1950 and 1951, respectively. Using the net worth method of determining the net

income of a taxpayer, we find that he had net incomes of P32,470.45, P67,751.19, P17,880.44, P52,709.11, P254,813.56 and P40,155.80 during the respective years 1946, 1947, 1948, 1949, 1950, and 1951. In consequence, he underdeclared his income by 227% for 1946, 564% for 1947, 95%, for 1948, 486% for 1949, 2,946% for 1950 and 490% for 1951. These substantial under declarations of income for six consecutive years eloquently demonstrate the falsity or fraudulence of the income tax return with an intent to evade the payment of tax. Hence, the imposition of the fraud penalty is proper (Perez vs. Court of Tax Appeals, G.R. No. L-10507, May 30, 1958). (Emphasis supplied)

As could be readily seen from the above rationalization of the lower court, no distinction has been made between false returns (due to mistake, carelessness or ignorance) and fraudulent returns (with intent to evade taxes). The lower court based its conclusion on the petitioner's alleged fraudulent intent to evade taxes on the substantial difference between the amounts of net income on the face of the returns as filed by him in the years 1946 to 1951 and the net income as determined by the inventory method utilized by both respondents for the same years. The lower court based its conclusion on a presumption that fraud can be deduced from the very substantial disparity of incomes as reported and determined by the inventory method and on the similarity of consecutive disparities for six years. Such a basis for determining the existence of fraud (intent to evade payment of tax) suffers from an inherent flaw when applied to this case. It is very apparent here that the respondent Commissioner of Internal Revenue, when the inventory method was resorted to in the first assessment, concluded that the correct tax liability of Mr. Aznar amounted to P723,032.66 (Exh. 1, B.I.R. rec. pp. 126-129). After a reinvestigation the same respondent, in another assessment dated February 16, 1955, concluded that the tax liability should be reduced to P381,096.07. This is a crystal-clear, indication that even the respondent Commissioner of Internal Revenue with the use of the inventory method can commit a glaring mistake in the assessment of petitioner's tax liability. When the respondent Court of Tax Appeals reviewed this case on appeal, it concluded that petitioner's tax liability should be only P227,788.64. The lower court in three instances (elimination of two buildings in the list of petitioner's assets beginning December 31, 1949, because they were destroyed by fire; elimination of expenses for construction in petitioner's assets as duplication of increased value in buildings, and elimination of value of house and lot in petitioner's assets because said property was only given as collateral) supported petitioner's stand on the wrong inclusions in his lists of assets made by the respondent Commissioner of Internal Revenue, resulting in the very substantial reduction of petitioner's tax liability by the lower court. The foregoing shows that it was not only Mr. Matias H. Aznar who committed mistakes in his report of his income but also the respondent Commissioner of Internal Revenue who committed mistakes in his use of the inventory method to determine the petitioner's tax liability. The mistakes committed by the Commissioner of Internal Revenue which also involve very substantial amounts were also repeated yearly, and yet we cannot presume therefrom the existence of any taint of official fraud.

From the above exposition of facts, we cannot but emphatically reiterate the well established doctrine that fraud cannot be presumed but must be proven. As a corollary thereto, we can also state that fraudulent intent could not be deduced from mistakes however frequent they may be, especially if such mistakes emanate from erroneous entries or erroneous classification of items in accounting methods utilized for determination of tax liabilities The predecessor of the petitioner undoubtedly filed his income tax returns for "the years 1946 to 1951 and those tax returns were prepared for him by his accountant and employees. It also appears that petitioner in

his lifetime and during the investigation of his tax liabilities cooperated readily with the B.I.R. and there is no indication in the record of any act of bad faith committed by him.

The lower court's conclusion regarding the existence of fraudulent intent to evade payment of taxes was based merely on a presumption and not on evidence establishing a willful filing of false and fraudulent returns so as to warrant the imposition of the fraud penalty. The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by the law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue committed mistakes in making entries in the returns and in the assessment, respectively, under the inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the respondent as made in good faith.

We conclude that the 50% surcharge as fraud penalty authorized under Section 72 of the Tax Code should not be imposed, but eliminated from the income tax deficiency for each year from 1946 to 1951, inclusive. The tax liability of the petitioner for each year should, therefore, be:

1946 P 3,687.10 1947 13,288.38 1948 960.77 1949 8,918.85 1950 117,320.00 1951 7,684.00   P151,859.10

The total sum of P151,859.10 should be decreased by P96.87 representing the tax credit for 1945, thereby leaving a balance of P151,762.23.

WHEREFORE, the decision of the Court of Tax Appeals is modified in so far as the imposition of the 50% fraud penalty is concerned, and affirmed in all other respects. The petitioner is ordered to pay to the Commissioner of Internal Revenue, or his duly authorized representative, the sum of P151,762.23, representing deficiency income taxes for the years 1946 to 1951, inclusive, within 30 days from the date this decision becomes final. If the said amount is not paid within said period, there shall be added to the unpaid amount the surcharge of 5%, plus interest at the rate of 12% per annum from the date of delinquency to the date of payment, in accordance with Section 51 of the National Internal Revenue Code.

With costs against the petitioner.

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.

D E C I S I O N

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-à-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;

(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;

x x x x 3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes amounting toP76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax, withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to P63,935,351.57 during trial in the First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the exemption on non-profit hospitals that were previously categorized as non-stock, non-profit corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which prevails over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, non-profit charitable institutions and civic organizations promoting social welfare. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and employees directly benefit from its profits and assets. St. Luke's had total revenues of P1,730,367,965 or approximately P1.73 billion from patient services in 1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its free services to patients wasP218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating expenses) ofP334,642,615. 8 St. Luke's also claimed that its income does not inure to the benefit of any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA that Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment of Section 27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section 30 of the NIRC and instead, imposes a preferential rate of 10% on their taxable income. The BIR prays that St. Luke's be ordered to payP57,659,981.19 as deficiency income and expanded withholding tax for 1998 with surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding of a part of its income, 9 as well as the payment of surcharge and delinquency interest. There is no ground for this Court to undertake such a factual review. Under the Constitution 10 and the Rules of Court, 11 this Court's review power is generally limited to "cases in which only an error or question of law is involved." 12 This Court cannot depart from this limitation if a party fails to invoke a recognized exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision dated 23 February 2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED. Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the amount of P110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable year 1998 in the respective amounts of P5,496,963.54 andP778,406.84 or in the sum of P6,275,370.38, x x x.

x x x x

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total amount of P6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997.

SO ORDERED. 13

The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose from the failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came from charitable activities. The CTA cancelled the remainder of the P63,113,952.79 deficiency assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was not applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section 30(E) and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services to its patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's Medical Center, Inc. v. Commissioner of Internal Revenue, 16 which examined the primary purposes of St. Luke's under its articles of incorporation and various documents 17 identifying St. Luke's as a charitable institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a charitable institution does not lose its charitable character and its consequent exemption from taxation merely because recipients of its benefits who are able to pay are required to do so, where funds derived in this manner are devoted to the charitable purposes of the institution x x x." 19 The generation of income from paying patients does not per se destroy the charitable nature of St. Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which ruled that the old NIRC (Commonwealth Act No. 466, as amended) 21 "positively exempts from taxation those corporations or associations which, otherwise, would be subject thereto, because of the existence of x x x net income." 22 The NIRC of 1997 substantially reproduces the provision on charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very responsible organization must be run to at least insure its existence, by operating within the limits of its own resources, especially its regular income. In other words, it should always strive, whenever possible, to have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA explained that to apply the 10% preferential rate, Section 27(B)

requires a hospital to be "non-profit." On the other hand, Congress specifically used the word "non-stock" to qualify a charitable "corporation or association" in Section 30(E) of the NIRC. According to the CTA, this is unique in the present tax code, indicating an intent to exempt this type of charitable organization from income tax. Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is clear that non-stock, non-profit hospitals operated exclusively for charitable purpose are exempt from income tax on income received by them as such, applying the provision of Section 30(E) of the NIRC of 1997, as amended." 25

The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits factual review "when the Court of Appeals [in this case, the CTA] manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA "disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the nature of the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to consider relevant evidence. The CTA obviously considered the evidence and concluded that it is self-serving. The CTA declared that it has "gone through the records of this case and found no other evidence aside from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the amount of P6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest. 32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable and social welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to proprietary educational institutions and proprietary non-profit hospitals. The BIR argues that Congress intended to remove the exemption that non-profit hospitals previously enjoyed under Section 27(E) of the NIRC of 1977, which is now 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. -

x x x x

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A 'proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a charitable institution and an organization promoting social welfare. The arguments of St. Luke's focus on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable institutions. 34 St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to remove the exemption for "proprietary non-profit" hospitals. 35 The relevant provisions of Section 30 state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such:

x x x x

(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;

x x x x

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;

x x x x

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption. The effect of the introduction of Section

27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-profit educational institutions 36 and proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the definition of a "proprietary educational institution" as "any private school maintained and administered by private individuals or groups" with a government permit. "Non-profit" means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino Inc. de Cebu,37 this Court considered as non-profit a sports club organized for recreation and entertainment of its stockholders and members. The club was primarily funded by membership fees and dues. If it had profits, they were used for overhead expenses and improving its golf course. 38 The club was non-profit because of its purpose and there was no evidence that it was engaged in a profit-making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court defined "charity" in Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or [by] otherwise lessening the burden of government." 41 A non-profit club for the benefit of its members fails this test. An organization may be considered as non-profit if it does not distribute any part of its income to stockholders or members. However, despite its being a tax exempt institution, any income such institution earns from activities conducted for profit is taxable, as expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity in Lung Center. The issue in Lung Center concerns exemption from real property tax and not income tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated by its relief from doing public works which would have been funded by appropriations from the Treasury. 42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax exemption are specified by the law granting it. The power of Congress to tax implies the power to exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that "[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of Congress." 43 The requirements for a tax exemption are strictly construed against

the taxpayer 44 because an exemption restricts the collection of taxes necessary for the existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the purpose of exemption from real property taxes. This ruling uses the same premise as Hospital de San Juan 45and 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." 48The 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 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 ofP218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income after expenses was allocated to free or charitable services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS P1,730,367,965.00

OPERATING EXPENSES

Professional care of patients P1,016,608,394.00

Administrative 287,319,334.00

Household and Property 91,797,622.00

P1,395,725,350.00

INCOME FROM OPERATIONS P334,642,615.00 100%

Free Services -218,187,498.00

-65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES

P116,455,117.00 34.80%

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES P133,937,421.00

 

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." x x x The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution and the law. Solely is synonymous with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC. Services to paying patients are activities conducted for profit. They cannot be considered any other way. There is a "purpose to make profit over and above the cost" of services. 55 The P1.73 billion total revenues from paying patients is not even incidental to St. Luke's charity expenditure of P218,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in 1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property, equipment or facilities used for services to paying and non-paying patients, then it cannot be said that the income is "devoted or used altogether to the charitable object which it is intended to achieve." 56 The income is plowed back to the corporation not entirely for charitable purposes, but for profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that income from activities for profit is taxable "regardless of the disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase "any activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee of Conference for the Senate, which introduced the phrase "or from any activity conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no cree Vd. que es una actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha universidad?

x x x x

R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa; pero considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de buena posición social económica, lo que se paga por estos enfermos debe estar sujeto a 'income tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any activity conducted for profit.' 57

The question was whether having a hospital is essential to an educational institution like the College of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid rooms generally occupied by people of good economic standing, then it should be subject to income tax. He said that this was one of the reasons Congress inserted the phrase "or any activity conducted for profit."

The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on the activities of charitable institutions. Activities for profit should not escape the reach of taxation. Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an institution from tax. An institution cannot use its corporate form to prevent its profitable activities from being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be "operated

exclusively" for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for charitable institutions should therefore be limited to institutions beneficial to the public and those which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to the detriment of the government and other taxpayers.1âwphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is "a corporation for purely charitable and social welfare 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. 206526, January 28, 2015

WINEBRENNER & IÑIGO INSURANCE BROKERS, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondents.

D E C I S I O N

MENDOZA, J.:

In this petition for review under Rule 45 of the Rules of Court and Rule 16 of the Revised Rules of the Court of Tax Appeals, Winebrenner & Iñigo Insurance Brokers, Inc. (petitioner) seeks the review of the March 22, 2013 Decision1 of the Court of Tax Appeals En Banc (CTA-En Banc). In the said decision, the CTA-En Banc affirmed the denial of petitioner’s judicial claim for refund or issuance of tax credit certificate for excess and unutilized creditable withholding tax (CWT) for the 1st to 4thquarter of calendar year (CY) 2003 amounting to P4,073,954.00.  In denying the refund, the CTA-En Banc held that petitioner failed to prove that the excess CWT for CY 2003 was not carried over to the succeeding quarters of the subject taxable year.   Under the 1997 National  Internal  Revenue Code  (NIRC),  a  taxpayer must not have exercised the option to carry over the excess CWT for a particular taxable year in order to qualify for refund.

The Factual Antecedents

On April 15, 2004, petitioner filed its Annual Income Tax Return for CY 2003.

About two years thereafter or on April 7, 2006, petitioner applied for the administrative tax credit/refund claiming entitlement to the refund of its excess or unutilized CWT for CY 2003, by filing BIR Form No. 1914 with the Revenue District Office No. 50 of the Bureau of Internal Revenue (BIR).

There being no action taken on the said claim, a petition for review was filed by petitioner before the CTA on April 11, 2006. The case was docketed as CTA Case No. 7440 and was raffled to the Special First Division (CTA Division).

On April 13, 2010, CTA Division partially granted petitioner’s claim for refund of excess and unutilized CWT for CY 2003 in the reduced amount of P2,737,903.34 in its April 13, 2010 Decision2(original decision). The dispositive portion of the decision reads:chanRoblesvirtualLawlibrary

In view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED.Accordingly, respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of P2,737,903.34 representing its excess/unutilized creditable withholding taxes for the year 2003.

SO ORDERED.3

Petitioner filed a Motion for Partial Reconsideration with Leave to Submit Supplemental Evidence. It prayed that an amended decision be issued granting the entirety of its claim for refund, or in the alternative, that it be allowed to submit and offer relevant documents as supplemental evidence.

Respondent Commissioner of Internal Revenue (CIR) also moved for reconsideration, praying for the denial of the entire amount of refund because petitioner failed to present the quarterly Income Tax Returns (ITRs) for CY 2004. To the CIR, the presentation of the 2004 quarterly ITRs was indispensable in proving petitioner’s entitlement to the claimed amount because it would prove that no carry-over of unutilized and excess CWT for the four (4) quarters of CY 2003 to the succeeding four (4) quarters of CY 2004 was made. In the absence of said ITRs, no refund could be granted. In the CIR’s view, this was in accordance with the irrevocability rule under Section 76 of the NIRC which reads:chanRoblesvirtualLawlibrary

SEC. 76. Final Adjustment Return. – Every corporation liable to tax under Section 27 shall file an adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either:chanRoblesvirtualLawlibrary

(A) Pay the balance of tax still due; or(B) Carry-over the excess credits; or(C) Be credited or refunded with the excess amount paid, as the case may be.cralawred

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment

return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor.

On July 27, 2011, the CTA-Division reversed itself. In an Amended Decision,4 it denied the entire claim of petitioner. It reasoned out that petitioner should have presented as evidence its first, second and third quarterly ITRs for the year 2004 to prove that the unutilized CWT being claimed had not been carried over to the succeeding quarters. Thus:chanRoblesvirtualLawlibrary

WHEREFORE, in view of the foregoing, petitioner’s Motion for Partial Reconsideration is hereby DENIED while respondent’s Motion for Reconsideration is hereby GRANTED. Accordingly, the Decision dated April 13, 2010 granting petitioner’s claim in the reduced amount of P2,737,903.34 is hereby REVERSED AND SET ASIDE. Consequently, the instant Petition for Review is hereby DENIED due to insufficiency of evidence.

SO ORDERED.5

Aggrieved, petitioner elevated the case to the CTA En Banc praying for the reversal of the Amended Decision of the CTA Division.

In its March 22, 2013 Decision,6 the CTA-En Banc affirmed the Amended Decision of the CTA-Division. It stated that before a cash refund or an issuance of tax credit certificate for unutilized excess tax credits could be granted, it was essential for petitioner to establish and prove, by presenting the quarterly ITRs of the succeeding years, that the excess CWT was not carried over to the succeeding taxable quarters considering that the option to carry over in the succeeding taxable quarters could not be modified in the final adjustment returns (FAR). Because petitioner did not present the first, second and third quarterly ITRs for CY 2004, despite having offered and submitted the Annual ITR/FAR for the same year, the CTA-En Banc stated that the petitioner failed to discharge its burden, hence, no refund could be granted. In justifying its conclusions, the CTA-En Banc cited its own case of Millennium Business Services, Inc. v. Commissioner of Internal Revenue (Millennium)7 wherein it held as follows:chanRoblesvirtualLawlibrary

Since the burden of proof is upon the claimant to show that the amount claimed was not utilized or carried over to the succeeding taxable quarters, the presentation of the succeeding quarterly income tax return and final adjustment return is indispensable to prove that it did not carry over or utilized the claimed excess creditable withholding taxes. Absent thereof, there will be no basis for  a taxpayer’s claim for refund since there will be no evidence that the taxpayer did not carry over or utilize the claimed excess creditable withholding taxes to the succeeding taxable quarters.

Significantly, a taxpayer may amend its quarterly income tax return or annual income tax return or Final Adjustment Return, which in any case may modify the previous intention to carry-over, apply as tax credit certificate or refund, as the case may be. But the option to carry over in the succeeding taxable quarters under the

irrevocability rule cannot be modified in its final adjustment return.

The presentation of the final adjustment return does not shift the burden of proof that the excess creditable withholding tax was not utilized or carried over to the first three (3) taxable quarters. It remains with the taxpayer claimant. It goes without saying that final adjustment returns of the preceding and the succeeding taxable years are not sufficient to prove that the amount claimed was utilized or carried over to the first three (3) taxable quarters.

The importance of the presentation of the succeeding quarterly income tax return and the annual income tax return of the subsequent taxable year need not be overly emphasized. All corporations subject to income tax, are required to file quarterly income tax returns, on a cumulative basis for the preceding quarters, upon which payment of their income tax has been made. In addition to the quarterly income tax returns, corporations are required to file a final or adjustment return on or before the fifteenth day of April. The quarterly income tax return, like the final adjustment return, is the most reliable firsthand evidence of corporate acts pertaining to income taxes, as it includes the itemization and summary of additions to and deductions from the income tax due. These entries are not without rhyme or reason. They are required, because they facilitate the tax administration process, and guide this Court to the veracity of a petitioner’s claim for refund without which petitioner could not prove with certainty that the claimed amount was not utilized or carried over to the succeeding quarters or the option to carry over and apply the excess was effectively chosen despite the intent to claim a refund.

In the same vein, if the government wants to disprove that the excess creditable withholding tax was not utilized or carried over to the succeeding taxable quarters, the presentation of the succeeding quarterly income tax return and the annual income tax return of the subsequent taxable year indicating utilization or carrying over are [sic] indispensible. However, the claimant must first establish its claim for refund, such that it did not utilize or carry over or that it opted to utilize and carry over to the 1st, 2nd, 3rd quarters and final adjustment return of the succeeding taxable year.

Concomitantly, the presentation of the quarterly income tax return and the annual income tax return to prove the fact that excess creditable withholding tax was not utilized or carried over or opted to be utilized and carried over to the 1st, 2nd, 3rd quarters and final adjustment return of the succeeding taxable quarter is not only for convenience to facilitate the tax administration process but it is part of the requisites to establish the claim for refund. Section 76 of the NIRC of 1997 provides that if the taxpayer claimant carries over and applies the excess quarterly income tax against the income tax due for the taxable quarters of the succeeding taxable years, the same is irrevocable and no application for cash refund or issuance of a tax credit certificate shall be allowed.8

Hence, this petition.

Noteworthy is the fact that the CTA-En Banc ruling was met with two dissents from Associate Justices Juanito C. Castañeda (Justice Castañeda) and Esperanza R. Fabon-Victorino (Justice Fabon-Victorino).

In his Dissenting Opinion9 which was concurred in by Justice Fabon-Victorino, Justice Castañeda expressed the view that the CTA-En Banc should have reinstated the

CTA-Division’s original decision because in the cases of Philam Asset Management Inc. v. Commissioner of Internal Revenue (Philam);10State Land Investment Corporation v. Commissioner of Internal Revenue (State Land);11Commissioner of Internal Revenue v. PERF Realty Corporation (PERF Realty);12 andCommissioner of Internal Revenue v. Mirant (Philippines) Operations, Corporation (Mirant),13 this Court already ruled that requiring the ITR or the FAR for the succeeding year in a claim for refund had no basis in law and jurisprudence. According to him, the submission of the FAR of the succeeding taxable year was not required under the law to prove the claimant’s entitlement to excess or unutilized CWT, and by following logic, the submission of quarterly income tax returns for the subsequent taxable period was likewise unnecessary. He found no justifiable reason not to follow the existing rulings of this Court.

Petitioner’s reasoning in this petition echoes the dissenting opinion of Justice Castaneda. It further submits that despite the non-presentation of the quarterly ITRs, it has sufficiently shown that the excess CWT for CY 2003 was not carried over or applied to its income tax liabilities for CY 2004, as shown in the Annual ITR for 2004 it submitted. Thus, petitioner insists that its refund should have been granted. Petitioner further avers, in its Reply,14 that even if Millennium Business case was applicable, such must be given prospective effect considering that this case was litigated on the basis of the doctrines laid down in Philam, State Land and PERF Realty cases wherein the submission of quarterly ITRs in a case for tax refund was held by this Court as not mandatory.

In its Comment,15 the CIR counters that even if the taxpayer signifies the option for either tax refund or carry-over as tax credit, this does not ipso facto confer the right to avail of the option immediately. There is a need, according to the CIR, for an investigation to ascertain the correctness of the corporate returns and the amount sought to be credited; and part of which is to look into the quarterly returns so that it may be determined whether or not excess and unutilized CWT was carried over into the succeeding quarters of the next taxable year. Because the pertinent quarterly ITRs were not presented, the CIR submits that the petitioner failed to prove its right to a tax refund.

Issue

The sole issue here is whether the submission and presentation of the quarterly ITRs of the succeeding quarters of a taxable year is indispensable in a claim for refund.

The Court’s Ruling

The Court recognizes, as it always has, that the burden of proof to establish entitlement to refund is on the claimant taxpayer.16 Being in the nature of a claim for exemption,17 refund is construed instrictissimi juris against the entity claiming the refund and in favor of the taxing power.18 This is the reason why a claimant must positively show compliance with the statutory requirements provided for under the NIRC in order to successfully pursue one’s claim. As implemented by the applicable rules and regulations and as interpreted in a vast array of decisions, a taxpayer who seeks a refund of excess and unutilized CWT must:chanRoblesvirtualLawlibrary

1) File the claim with the CIR within the two year period from the date of payment of the tax;chanrobleslaw

2) Show on the return that the income received was declared as part of the gross income; and

3) Establish the fact of withholding by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld.19

The original decision of the CTA-Division made plain that the petitioner complied with the above requisites in so far as the reduced amount of P2,737,903.34 was concerned.  In the amended decision, however, it was pointed out that because petitioner failed to present the quarterly ITRs of the subsequent year, there was an impossibility of determining compliance with the irrevocability rule under Section 76 of the NIRC as in those documents could be found evidence of whether the excess CWT was applied to its income tax liabilities in the quarters of 2004. The irrevocability rule under Section 76 of the NIRC means that once an option, either for refund or issuance of tax credit certificate or carry-over of CWT has been exercised, the same can no longer be modified for the succeeding taxable years.20 For said reason, the CTA-En Banc affirmed the conclusion in the amended decision that because of the said impossibility, the claim for refund was not substantiated.

The CIR agrees with the disposition of the CTA-En Banc, stressing that the petitioner failed to carry out the burden of showing that no carry-over was made when it did not present the quarterly ITRs for CY 2004.

Petitioner disagrees, as the dissents did, that the non-submission of quarterly ITRs is fatal to its claim.

Hence, the issue on the indispensability of quarterly ITRs of the succeeding taxable year in a claim for refund.

The Court finds for the petitioner.

There is no question that those who claim must not only prove its entitlement to the excess credits, but likewise must prove that no carry-over has been made in cases where refund is sought.

In this case, the fact of having carried over petitioner’s 2003 excess credits to succeeding taxable year is in issue. According to the CTA-En Banc and the CIR, the only evidence that can sufficiently show that carrying over has been made is to present the quarterly ITRs. Some members of this Court adhere to the same view.

The Court however cannot.

Proving that no carry-over has been made does not absolutely require the presentation of the quarterly ITRs.

In Philam, the petitioner therein sought for recognition of its right to the claimed refund of unutilized CWT. The CIR opposed the claim, on the grounds similar to the case at hand, that no proof was provided showing the non-carry over of excess CWT to the subsequent quarters of the subject year. In a categorical manner, the Court ruled that the presentation of the quarterly ITRs was not necessary. Therein, it was written:chanRoblesvirtualLawlibrary

Requiring that the ITR or the FAR of the succeeding year be presented to the BIR in requesting a tax refund has no basis in law and jurisprudence.

First, Section 76 of the Tax Code does not mandate it. The law merely requires the filing of the FAR for the preceding – not the succeeding – taxable year. Indeed, any refundable amount indicated in the FAR of the preceding taxable year may be credited against the estimated income tax liabilities for the taxable quarters of the succeeding taxable year. However, nowhere is there even a tinge of a hint in any provisions of the [NIRC] that the FAR of the taxable year following the period to which the tax credits are originally being applied should also be presented to the BIR.

Second, Section 5 of RR 12-94, amending Section 10(a) of RR 6-85, merely provides that claims for refund of income taxes deducted and withheld from income payments shall be given due course only (1) when it is shown on the ITR that the income payment received is being declared part of the taxpayer’s gross income; and (2) when the fact of withholding is established by a copy of the withholding tax statement, duly issued by the payor to the payee, showing the amount paid and the income tax withheld from that amount.

It has been submitted that Philam cannot be cited as a precedent to hold that the presentation of the quarterly income tax return is not indispensable as it appears that the quarterly returns for the succeeding year were presented when the petitioner therein filed an administrative claim for the refund of its excess taxes withheld in 1997.

It appears however that there is misunderstanding in the ruling of the Court in Philam. That factual distinction does not negate the proposition that subsequent quarterly ITRs are not indispensable. The logic in not requiring quarterly ITRs of the succeeding taxable years to be presented remains true to this day. What Section 76 requires, just like in all civil cases, is to prove the prima facie entitlement to a claim, including the fact of not having carried over the excess credits to the subsequent quarters or taxable year. It does not say that to prove such a fact, succeeding quarterly ITRs are absolutely needed.

This simply underscores the rule that any document, other than quarterly ITRs may be used to establish that indeed the non-carry over clause has been complied with, provided that such is competent, relevant and part of the records. The Court is thus not prepared to make a pronouncement as to the indispensability of the quarterly ITRs in a claim for refund for no court can limit a party to the means of proving a fact for as long as they are consistent with the rules of evidence and fair play. The means of ascertainment of a fact is best left to the party that alleges the same. The Court’s power is limited only to the appreciation of that means pursuant to the prevailing rules of evidence. To stress, what the NIRC merely requires is to sufficiently prove the existence of the non-carry over of excess CWT in a claim for refund.

The implementing rules similarly support this conclusion, particularly Section 2.58.3 of Revenue Regulation No. 2-98 thereof. There, it provides as follows:chanRoblesvirtualLawlibrary

SECTION 2.58.3. Claim for Tax Credit or Refund.

(A)  The amount of creditable tax withheld shall be allowed as a tax credit against the income tax liability of the payee in the quarter of the taxable year in which income was earned or received.

(B)  Claims for tax credit or refund of any creditable income tax which was deducted and withheld on income payments shall be given due course only when it is shown that the income payment has been declared as part of the gross income and the fact of withholding is established by a copy of the withholding tax statement duly issued by the payer to the payee showing the amount paid and the amount of tax withheld therefrom.

xxx  xxx  xxx

Evident from the above is the absence of any categorical pronouncement of requiring the presentation of the succeeding quarterly ITRs in order to prove the fact of non-carrying over. To say the least, the Court rules that as to the means of proving it, It has no power to unduly restrict it.

In this case, it confounds the Court why the CTA did not recognize and discuss in detail the sufficiency of the annual ITR for 2004,21 which was submitted by the petitioner. The CTA in fact said:chanRoblesvirtualLawlibrary

In the present case, while petitioner did offer its Annual ITR/Final Adjustment Return for taxable year 2004, it appears that petitioner miserably failed to submit and offer as part of its evidence the first, second, and third Quarterly ITRs for the year 2004. Consequently, petitioner was not able to prove that it did not exercise its option to carry-over its excess CWT.22

Petitioner claims that the requirement of proof showing the non-carry over has been established in said document.

Indeed, an annual ITR contains the total taxable income earned for the four (4) quarters of a taxable year, as well as deductions and tax credits previously reported or carried over in the quarterly income tax returns for the subject period. A quick look at the Annual ITR reveals this fact:chanRoblesvirtualLawlibrary

Aggregate Income Tax Due

Less Tax Credits/Payments

Prior Year’s excess Credits – Taxes withheld

Tax Payment (s) for the Previous Quarter (s) of the same taxable year other than MCIT

xxx  xxx  xxxCreditable Tax Withheld for the Previous Quarter (s)Creditable Tax Withheld Per BIR Form No. 2307 for this Quarter

xxx  xxx  xxx23

It goes without saying that the annual ITR (including any other proof that may be sufficient to the Court) can sufficiently reveal whether carry over has been made in subsequent quarters even if the petitioner has chosen the option of tax credit or refund in the immediately 2003 annual ITR.

Section 76 of the NIRC requires a corporation to file a Final Adjustment Return (or Annual ITR) covering the total taxable income for the preceding calendar or fiscal year. The total taxable income contains the combined income for the four quarters of the taxable year, as well as the deductions and excess tax credits carried over in the quarterly income tax returns for the same period.

If the excess tax credits of the preceding year were deducted, whether in whole or in part, from the estimated income tax liabilities of any of the taxable quarters of the succeeding taxable year, the total amount of the tax credits deducted for the entire taxable year should appear in the Annual ITR under the item “Prior Year’s Excess Credits.” Otherwise, or if the tax credits were carried over to the succeeding quarters and the corporation did not report it in the annual ITR, there would be a discrepancy in the amounts of combined income and tax credits carried over for all quarters and the corporation would end up shouldering a bigger tax payable. It must be remembered that taxes computed in the quarterly returns are mere estimates. It is the annual ITR which shows the aggregate amounts of income, deductions, and credits for all quarters of the taxable year. It is the final adjustment return which shows whether a corporation incurred a loss or gained a profit during the taxable quarter.24 Thus, the presentation of the annual ITR would suffice in proving that prior year’s excess credits were not utilized for the taxable year in order to make a final determination of the total tax due.

In this case, petitioner reported an overpayment in the amount of P7,194,213.00 in its annual ITR for the year ended December 2003:chanRoblesvirtualLawlibrary

Annual ITR 2003

Income Tax Due 1,259,259.00

Less: Prior Year’s Excess Credits (2002 Annual ITR) (4,379,518.00)

Creditable Tax Withheld for the 4th Quarter (4,073,954.00)

Tax Payable / (Overpayment) (7,194,213.00)

For the overpayment, petitioner chose the option “To be issued a Tax Credit Certificate.” In its Annual ITR for the year ended December 2004, petitioner did not report the Creditable Tax Withheld for the 4th quarter of 2003 in the amount of P4,073,954.00 as prior year’s excess credits. As shown in the 2004 ITR:chanRoblesvirtualLawlibrary

Annual ITR 2004

Income Tax Due 1,321,409.00

Less: Prior Year’s Excess Credits -

Creditable Tax Withheld for the 4th Quarter (3,689,419.00)

Tax Payable / (Overpayment) (2,368,010.00)

Verily, the absence of any amount written in the Prior Year excess Credit – Tax Withheld portion of petitioner’s 2004 annual ITR clearly shows that no prior excess

credits were carried over in the first four quarters of 2004. And since petitioner was able to sufficiently prove that excess tax credits in 2003 were not carried over to taxable year 2004 by leaving the item “Prior Year’s Excess Credits” as blank in its 2004 annual ITR, then petitioner is entitled to a refund. Unfortunately, the CTA, in denying entirely the claim, merely relied on the absence of the quarterly ITRs despite being able to verify the truthfulness of the declaration that no carry over was indeed effected by simply looking at the 2004 annual ITR.

At this point, worth mentioning is the fact that subsequent cases affirm the proposition as correctly pointed out by petitioner. State Land, PERF and Mirant reiterated the rule that the presentation of the quarterly ITRs of the subsequent year is not mandatory on the part of the claimant to prove its claims.

There are some who challenges the applicability of PERF  in the case at bar. It is said that PERF is not in point because the Annual ITR for the succeeding year had actually been attached to PERF’s motion for reconsideration with the CTA and had formed part of the records of the case.

Clearly, if the Annual ITR has been recognized by this Court in PERF, why then would the submitted 2004 Annual ITR in this case be insufficient despite the absence of the quarterly ITRs? Why then would this Court require more than what is enough and deny a claim even if the minimum burden has been overcome? At best, the existence of quarterly ITRs would have the effect of strengthening a proven fact. And as such, may only be considered corroborative evidence, obviously not indispensable in character. PERF simply affirms that quarterly ITRs are not indispensable, provided that there is sufficient proof that carrying over excess CWT was not effected.

Stateland and Mirant are equally challenged. In all these cases however, the factual distinctions only serve to bolster the proposition that succeeding quarterly ITRs are not indispensable. Implicit from all these cases is the Court’s recognition that proving carry-over is an evidentiary matter and that the submission of quarterly ITRs is but a means to prove the fact of one’s entitlement to a refund and not a condition sine qua non for the success of refund. True, it would have been better, easier and more efficient for the CTA and the CIR to have as basis the quarterly ITRs, but it is not the only way considering further that in this case, the Annual ITR for 2004 is sufficient. Courts are here to painstakingly weigh evidence so that justice and equity in the end will prevail.

It must be emphasized that once the requirements laid down by the NIRC have been met, a claimant should be considered successful in discharging its burden of proving its right to refund. Thereafter, the burden of going forward with the evidence, as distinct from the general burden of proof, shifts to the opposing party,25 that is, the CIR. It is then the turn of the CIR to disprove the claim by presenting contrary evidence which could include the pertinent ITRs easily obtainable from its own files.

All along, the CIR espouses the view that it must be given ample opportunity to investigate the veracity of the claims. Thus, the Court asks: In the process of investigation at the administrative level to determine the right of the petitioner to the claimed amount, did the CIR, with all its resources even attempt to verify the quarterly ITRs it had in its files? Certainly, it did not as the application was met by the inaction of the CIR. And if desirous in its effort to clearly verify petitioner’s claim, it should have had the time, resources and the liberty to do so. Yet, nothing was produced during trial to destroy theprima facie right of the petitioner by

counterchecking the claims with the quarterly ITRs the CIR has on its file. To the Court, it seems that the CIR languished on its duties to ascertain the veracity of the claims and just hoped that the burden would fall on the petitioner’s head once the issue reaches the courts.

This mindset ignores the rule that the CIR has the equally important responsibility of contradicting petitioner’s claim by presenting proof readily on hand once the burden of evidence shifts to its side. Claims for refund are civil in nature and as such, petitioner, as claimant, though having a heavy burden of showing entitlement, need only prove preponderance of evidence in order to recover excess credit in cold cash. To review, “[P]reponderance  of evidence is [defined as] the weight, credit, and value of the aggregate evidence on either side and is usually considered to be synonymous with the term ‘greater weight of the evidence’ or ‘greater weight of the credible evidence.’  It is evidence which is more convincing to the court as worthy of belief than that which is offered in opposition thereto.26chanroblesvirtuallawlibrary

The CIR must then be reminded that in Philam, the CIR’s “failure to present [the quarterly ITRs and AFR] to support its contention against the grant of a tax refund to [a claimant] is certainly fatal.” PERF reinforces this with a sweeping statement holding that the verification process is not incumbent onPERF [or any claimant for that matter]; [but] is the duty of the CIR to verify whether xxx excess income taxes [have been carried over].

And should there be a possibility that a claimant may have violated the irrevocability rule and thereafter claim twice from its credits, no one is to be blamed but the CIR for not discharging its burden of evidence to destroy a claimant’s right to a refund. At any rate, a claimant who defrauds the government cannot escape liability be it criminal or civil in nature.

Verily, with the petitioner having complied with the requirements for refund, and without the CIR showing contrary evidence other than its bare assertion of the absence of the quarterly ITRs, copies of which are easily verifiable by its very own records, the burden of proof of establishing the propriety of the claim for refund has been sufficiently discharged. Hence, the grant of refund is proper.

The Court does not, and cannot, however, grant the entire claimed amount as it finds no error in the original decision of the CTA Division granting refund to the reduced amount of P2,737,903.34. This finding of fact is given respect, if not finality, as the CTA,27 which by the very nature of its functions of dedicating itself exclusively to the consideration of the tax problems has necessarily developed an expertise on the subject.28 It being the case, the Court partly grants this petition to the extent of reinstating the April 23, 2010 original decision of the CTA Division.

The Court reminds the CIR that substantial justice, equity and fair play take precedence over technicalities and legalisms. The government must keep in mind that it has no right to keep the money not belonging to it, thereby enriching itself at the expense of the law-abiding citizen29 or entities who have complied with the requirements of the law in order to forward the claim for refund.  Under the principle of solution indebiti provided in Article 2154 of the Civil Code, the CIR must return anything it has received.30chanroblesvirtuallawlibrary

Finally, even assuming that the Court reverses itself and pronounces the indispensability of presenting the quarterly ITRs to prove entitlement to the claimed refund, petitioner should not be prejudiced for relying on Philam. The CTA En

Banc merely based its pronouncement on a case that does not enjoy the benefit of stare decis et non quieta movere which means "to adhere to precedents, and not to unsettle things which are established."31 As between a CTA En Banc Decision (Millennium) and this Court’s Decision (Philam), it is elementary that the latter should prevail.

WHEREFORE, the Court partly grants the petition. The March 22, 2013 Decision of the Court of Tax Appeals En Banc is REVERSED. The April 13, 2010 Decision of the Court of Tax Appeals Special First Division is REINSTATED. Respondent Commissioner of Internal Revenue is ordered to REFUND to petitioner the amount of P2,737,903.34 as excess creditable withholding tax paid for taxable year 2003. SO ORDERED.

G.R. No. 171586               January 25, 2010

NATIONAL POWER CORPORATION, Petitioner, vs.PROVINCE OF QUEZON and MUNICIPALITY OF PAGBILAO, Respondent.

R E S O L U T I O N

BRION, J.:

The petitioner National Power Corporation (Napocor) filed the present motion for reconsideration1 of the Court’s Decision of July 15, 2009, in which we denied Napocor’s claimed real property tax exemptions. For the resolution of the motion, we deem it proper to provide first a background of the case.

BACKGROUND FACTS

The Province of Quezon assessed Mirant Pagbilao Corporation (Mirant) for unpaid real property taxes in the amount of P1.5 Billion for the machineries located in its power plant in Pagbilao, Quezon. Napocor, which entered into a Build-Operate-Transfer (BOT) Agreement (entitled Energy Conversion Agreement) with Mirant, was furnished a copy of the tax assessment.

Napocor (nota bene, not Mirant) protested the assessment before the Local Board of Assessment Appeals (LBAA), claiming entitlement to the tax exemptions provided under Section 234 of the Local Government Code (LGC), which states:

Section 234. Exemptions from Real Property Tax. – The following are exempted from payment of the real property tax:

x x x x

(c) All machineries and equipment that are actually, directly, and exclusively used by local water districts and government-owned or –controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power;

x x x x

(e) Machinery and equipment used for pollution control and environmental protection.

x x x x

Assuming that it cannot claim the above tax exemptions, Napocor argued that it is entitled to certain tax privileges, namely:

a. the lower assessment level of 10% under Section 218(d) of the LGC for government-owned and controlled corporations engaged in the generation and transmission of electric power, instead of the 80% assessment level for commercial properties imposed in the assessment letter; and

b. an allowance for depreciation of the subject machineries under Section 225 of the LGC.

In the Court’s Decision of July 15, 2009, we ruled that Napocor is not entitled to any of these claimed tax exemptions and privileges on the basis primarily of the defective protest filed by the Napocor. We found that Napocor did not file a valid protest against the realty tax assessment because it did not possess the requisite legal standing. When a taxpayer fails to question the assessment before the LBAA, the assessment becomes final, executory, and demandable, precluding the taxpayer from questioning the correctness of the assessment or from invoking any defense that would reopen the question of its liability on the merits.2

Under Section 226 of the LGC,3 any owner or person having legal interest in the property may appeal an assessment for real property taxes to the LBAA. Since Section 250 adopts the same language in enumerating who may pay the tax, we equated those who are liable to pay the tax to the same entities who may protest the tax assessment. A person legally burdened with the obligation to pay for the tax imposed on the property has the legal interest in the property and the personality to protest the tax assessment.

To prove that it had legal interest in the taxed machineries, Napocor relied on:.

1. the stipulation in the BOT Agreement that authorized the transfer of ownership to Napocor after 25 years;

2. its authority to control and supervise the construction and operation of the power plant; and

3. its obligation to pay for all taxes that may be incurred, as provided in the BOT Agreement.

Napocor posited that these indicated that Mirant only possessed naked title to the machineries.

We denied the first argument by ruling that legal interest should be one that is actual and material, direct and immediate, not simply contingent or expectant.4 We disproved Napocor’s claim of control and supervision under the second argument after reading the full terms of the BOT Agreement, which, contrary to Napocor’s claims, granted Mirant substantial power in the control and supervision of the power plant’s construction and operation.5

For the third argument, we relied on the Court’s rulings in Baguio v. Busuego6 and Lim v. Manila.7 In these cases, the Court essentially declared that contractual assumption of tax liability alone is insufficient to make one liable for taxes. The contractual assumption of tax liability must be supplemented by an interest that the party assuming the liability had on the property; the person from whom payment is sought must have also acquired the beneficial use of the property taxed. In other

words, he must have the use and possession of the property – an element that was missing in Napocor’s case.

We further stated that the tax liability must be a liability that arises from law, which the local government unit can rightfully and successfully enforce, not the contractual liability that is enforceable only between the parties to the contract. In the present case, the Province of Quezon is a third party to the BOT Agreement and could thus not exact payment from Napocor without violating the principle of relativity of contracts.8 Corollarily, for reasons of fairness, the local government units cannot be compelled to recognize the protest of a tax assessment from Napocor, an entity against whom it cannot enforce the tax liability.

At any rate, even if the Court were to brush aside the issue of legal interest to protest, Napocor could still not successfully claim exemption under Section 234 (c) of the LGC because to be entitled to the exemption under that provision, there must be actual, direct, and exclusive use of machineries. Napocor failed to satisfy these requirements.

THE MOTION FOR RECONSIDERATION

Although Napocor insists that it is entitled to the tax exemptions and privileges claimed, the primary issue for the Court to resolve, however, is to determine whether Napocor has sufficient legal interest to protest the tax assessment because without the requisite interest, the tax assessment stands, and no claim of exemption or privilege can prevail.

Section 226 of the LGC, as mentioned, limits the right to appeal the local assessor’s action to the owner or the person having legal interest in the property. Napocor posits that it is the beneficial owner of the subject machineries, with Mirant retaining merely a naked title to secure certain obligations. Thus, it argues that the BOT Agreement is a mere financing agreement and is similar to the arrangement authorized under Article 1503 of the Civil Code, which declares:

Art. 1503. When there is a contract of sale of specific goods, the seller may, by the terms of the contract, reserve the right of possession or ownership in the goods until certain conditions have been fulfilled. The right of possession or ownership may be thus reserved notwithstanding the delivery of the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer.

Where goods are shipped, and by the bill of lading the goods are deliverable to the seller or his agent, or to the order of the seller or of his agent, the seller thereby reserves the ownership in the goods. But, if except for the form of the bill of lading, the ownership would have passed to the buyer on shipment of the goods, the seller's property in the goods shall be deemed to be only for the purpose of securing performance by the buyer of his obligations under the contract.

x x x x

Pursuant to this arrangement, Mirant’s ownership over the subject machineries is merely a security interest, given only for the purpose of ensuring the performance of Napocor’s obligations.

Napocor additionally contends that its contractual assumption liability (through the BOT Agreement) for all taxes vests it with sufficient legal interest because it is actually, directly, and materially affected by the assessment.

While its motion for reconsideration was pending, Napocor filed a Motion to Refer the Case to the Court En Banc considering that "the issues raised have far-reaching consequences in the power industry, the country’s economy and the daily lives of the Filipino people, and since it involves the application of real property tax provision of the LGC against Napocor, an exempt government instrumentality."9

Also, the Philippine Independent Power Producers Association, Inc. (PIPPA) filed a Motion for Leave to Intervene and a Motion for Reconsideration-in-Intervention. PIPPA is a non-stock corporation comprising of privately-owned power generating companies which includes TeaM Energy Corporation (TeaM Energy), successor of Mirant. PIPPA is claiming interest in the case since any decision here will affect the other members of PIPPA, all of which have executed similar BOT agreements with Napocor.

THE COURT’S RULING

At the outset, we resolve to deny the referral of the case to the Court en banc. We do not find the reasons raised by Napocor meritorious enough to warrant the attention of the members of the Court en banc, as they are merely reiterations of the arguments it raised in the petition for review on certiorari that it earlier filed with the Court.10

Who may appeal a real property tax assessment

Legal interest is defined as interest in property or a claim cognizable at law, equivalent to that of a legal owner who has legal title to the property.11 Given this definition, Napocor is clearly not vested with the requisite interest to protest the tax assessment, as it is not an entity having the legal title over the machineries. It has absolutely no solid claim of ownership or even of use and possession of the machineries, as our July 15, 2009 Decision explained.

A BOT agreement is not a mere financing arrangement. In Napocor v. CBAA12 – a case strikingly similar to the one before us, we discussed the nature of BOT agreements in the following manner:

The underlying concept behind a BOT agreement is defined and described in the BOT law as follows:

Build-operate-and-transfer – A contractual arrangement whereby the project proponent undertakes the construction, including financing, of a given infrastructure facility, and the operation and maintenance thereof. The project proponent operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as negotiated and incorporated in the contract to enable the project proponent to recover its investment, and operating and maintenance expenses in the project. The project proponent transfers the facility to the government agency or local government unit concerned at the end of the fixed term which shall not exceed fifty (50) years x x x x.

Under this concept, it is the project proponent who constructs the project at its own cost and subsequently operates and manages it. The proponent secures the return on its investments from those using the project’s facilities through appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as negotiated. At the end of the fixed term agreed upon, the project proponent transfers the ownership of the facility to the government agency. Thus, the government is able to

put up projects and provide immediate services without the burden of the heavy expenditures that a project start up requires.1avvphi1

A reading of the provisions of the parties’ BOT Agreement shows that it fully conforms to this concept. By its express terms, BPPC has complete ownership – both legal and beneficial – of the project, including the machineries and equipment used, subject only to the transfer of these properties without cost to NAPOCOR after the lapse of the period agreed upon. As agreed upon, BPPC provided the funds for the construction of the power plant, including the machineries and equipment needed for power generation; thereafter, it actually operated and still operates the power plant, uses its machineries and equipment, and receives payment for these activities and the electricity generated under a defined compensation scheme. Notably, BPPC – as owner-user – is responsible for any defect in the machineries and equipment.

x x x x

That some kind of "financing" arrangement is contemplated – in the sense that the private sector proponent shall initially shoulder the heavy cost of constructing the project’s buildings and structures and of purchasing the needed machineries and equipment – is undeniable. The arrangement, however, goes beyond the simple provision of funds, since the private sector proponent not only constructs and buys the necessary assets to put up the project, but operates and manages it as well during an agreed period that would allow it to recover its basic costs and earn profits. In other words, the private sector proponent goes into business for itself, assuming risks and incurring costs for its account. If it receives support from the government at all during the agreed period, these are pre-agreed items of assistance geared to ensure that the BOT agreement’s objectives – both for the project proponent and for the government – are achieved. In this sense, a BOT arrangement is sui generis and is different from the usual financing arrangements where funds are advanced to a borrower who uses the funds to establish a project that it owns, subject only to a collateral security arrangement to guard against the nonpayment of the loan. It is different, too, from an arrangement where a government agency borrows funds to put a project from a private sector-lender who is thereafter commissioned to run the project for the government agency. In the latter case, the government agency is the owner of the project from the beginning, and the lender-operator is merely its agent in running the project.

If the BOT Agreement under consideration departs at all from the concept of a BOT project as defined by law, it is only in the way BPPC’s cost recovery is achieved; instead of selling to facility users or to the general public at large, the generated electricity is purchased by NAPOCOR which then resells it to power distribution companies. This deviation, however, is dictated, more than anything else, by the structure and usages of the power industry and does not change the BOT nature of the transaction between the parties.

Consistent with the BOT concept and as implemented, BPPC – the owner-manager-operator of the project – is the actual user of its machineries and equipment. BPPC’s ownership and use of the machineries and equipment are actual, direct, and immediate, while NAPOCOR’s is contingent and, at this stage of the BOT Agreement, not sufficient to support its claim for tax exemption. Thus, the CTA committed no reversible error in denying NAPOCOR’s claim for tax exemption. [Emphasis supplied.]

Given the special nature of a BOT agreement as discussed in the cited case, we find Article 1503 inapplicable to define the contract between Napocor and Mirant, as it refers only to ordinary contracts of sale. We thus declared in Tatad v. Garcia13 that under BOT agreements, the private corporations/investors are the owners of the facility or machinery concerned. Apparently, even Napocor and Mirant recognize this principle; Article 2.12 of their BOT Agreement provides that "until the Transfer Date, [Mirant] shall, directly or indirectly, own the Power Station and all the fixtures, fitting, machinery and equipment on the Site x x x. [Mirant] shall operate, manage, and maintain the Power Station for the purpose of converting fuel of Napocor into electricity."

Moreover, if Napocor truly believed that it was the owner of the subject machineries, it should have complied with Sections 202 and 206 of the LGC which obligates owners of real property to:

a. file a sworn statement declaring the true value of the real property, whether taxable or exempt;14 and

b. file sufficient documentary evidence supporting its claim for tax exemption.15

While a real property owner’s failure to comply with Sections 202 and 206 does not necessarily negate its tax obligation nor invalidate its legitimate claim for tax exemption, Napocor’s omission to do so in this case can be construed as contradictory to its claim of ownership of the subject machineries. That it assumed liability for the taxes that may be imposed on the subject machineries similarly does not clothe it with legal title over the same. We do not believe that the phrase "person having legal interest in the property" in Section 226 of the LGC can include an entity that assumes another person’s tax liability by contract.

A review of the provisions of the LGC on real property taxation shows that the phrase has been repeatedly adopted and used to define an entity:

a. in whose name the real property shall be listed, valued, and assessed;16

b. who may be summoned by the local assessor to gather information on which to base the market value of the real property;17

c. who may protest the tax assessment before the LBAA18 and may appeal the latter’s decision to the CBAA;19

d. who may be liable for the idle land tax,20 as well as who may be exempt from the same;21

e. who shall be notified of any proposed ordinance imposing a special levy,22 as well as who may object the proposed ordinance;23

f. who may pay the real property tax;24

g. who is entitled to be notified of the warrant of levy and against whom it may be enforced;25

h. who may stay the public auction upon payment of the delinquent tax, penalties and surcharge;26 and

i. who may redeem the property after it was sold at the public auction for delinquent taxes.27

For the Court to consider an entity assuming another person’s tax liability by contract as a person having legal interest in the real property would extend to it the privileges and responsibilities enumerated above. The framers of the LGC certainly did not contemplate that the listing, valuation, and assessment of real property can be made in the name of such entity; nor did they intend to make the warrant of levy enforceable against it. Insofar as the provisions of the LGC are concerned, this entity is a party foreign to the operation of real property tax laws and could not be clothed with any legal interest over the property apart from its assumed liability for tax. The rights and obligations arising from the BOT Agreement between Napocor and Mirant were of no legal interest to the tax collector – the Province of Quezon – which is charged with the performance of independent duties under the LGC.28

Some authorities consider a person whose pecuniary interests is or may be adversely affected by the tax assessment as one who has legal interest in the property (hence, possessed of the requisite standing to protest it), citing Cooley’s Law on Taxation.29 The reference to this foreign material, however, is misplaced. The tax laws of the United States deem it sufficient that a person’s pecuniary interests are affected by the tax assessment to consider him as a person aggrieved and who may thus avail of the judicial or administrative remedies against it. As opposed to our LGC, mere pecuniary interest is not sufficient; our law has required legal interest in the property taxed before any administrative or judicial remedy can be availed. The right to appeal a tax assessment is a purely statutory right; whether a person challenging an assessment bears such a relation to the real property being assessed as to entitle him the right to appeal is determined by the applicable statute – in this case, our own LGC, not US federal or state tax laws.

In light of our ruling above, PIPPA’s motion to intervene and motion for reconsideration-in-intervention is already mooted. PIPPA as an organization of independent power producers is not an interested party insofar as this case is concerned. Even if TeaM Energy, as Mirant’s successor, is included as one of its members, the motion to intervene and motion for reconsideration-in-intervention can no longer be entertained, as it amounts to a protest against the tax assessment that was filed without the complying with Section 252 of the LGC, a matter that we shall discuss below. Most importantly, our Decision has not touched or affected at all the contractual stipulations between Napocor and its BOT partners for the former’s assumption of the tax liabilities of the latter.

Payment under protest is required before an appeal to the LBAA can be made

Apart from Napocor’s failure to prove that it has sufficient legal interest, a further review of the records revealed another basis for disregarding Napocor’s protest against the assessment.

The LBAA dismissed Napocor’s petition for exemption for its failure to comply with Section 252 of the LGC30requiring payment of the assailed tax before any protest can be made. Although the CBAA ultimately dismissed Napocor’s appeal for failure to meet the requirements for tax exemption, it agreed with Napocor’s position that "the protest contemplated in Section 252 (a) is applicable only when the taxpayer is questioning the reasonableness or excessiveness of an assessment. It presupposes that the taxpayer is subject to the tax but is disputing the correctness of the amount assessed. It does not apply where, as in this case, the legality of the assessment is put in issue on account of the taxpayer’s claim that it is exempt from tax." The CTA en banc agreed with the CBAA’s discussion, relying mainly on the cases of Ty v. Trampe31 and Olivarez v. Marquez.32

We disagree. The cases of Ty and Olivarez must be placed in their proper perspective.

The petitioner in Ty v. Trampe questioned before the trial court the increased real estate taxes imposed by and being collected in Pasig City effective from the year 1994, premised on the legal question of whether or not Presidential Decree No. 921 (PD 921) was repealed by the LGC. PD 921 required that the schedule of values of real properties in the Metropolitan Manila area shall be prepared jointly by the city assessors in the districts created therein; while Section 212 of the LGC stated that the schedule shall be prepared by the provincial, city or municipal assessors of the municipalities within the Metropolitan Manila Area for the different classes of real property situated in their respective local government units for enactment by ordinance of the Sanggunian concerned. The private respondents assailed Ty’s act of filing a prohibition petition before the trial court contending that Ty should have availed first the administrative remedies provided in the LGC, particularly Sections 252 (on payment under protest before the local treasurer) and 226 (on appeals to the LBAA).

The Court, through former Chief Justice Artemio Panganiban, declared that Ty correctly filed a petition for prohibition before the trial court against the assailed act of the city assessor and treasurer. The administrative protest proceedings provided in Section 252 and 226 will not apply. The protest contemplated under Section 252 is required where there is a question as to the reasonableness or correctness of the amount assessed. Hence, if a taxpayer disputes the reasonableness of an increase in a real property tax assessment, he is required to "first pay the tax" under protest. Otherwise, the city or municipal treasurer will not act on his protest. Ty however was questioning the very authority and power of the assessor, acting solely and independently, to impose the assessment and of the treasurer to collect the tax. These were not questions merely of amounts of the increase in the tax but attacks on the very validity of any increase. Moreover, Ty was raising a legal question that is properly cognizable by the trial court; no issues of fact were involved. In enumerating the power of the LBAA, Section 229 declares that "the proceedings of the Board shall be conducted solely for the purpose of ascertaining the facts x x x." Appeals to the LBAA (under Section 226) are therefore fruitful only where questions of fact are involved.

Olivarez v. Marquez, on the other hand, involved a petition for certiorari, mandamus, and prohibition questioning the assessment and levy made by the City of Parañaque. Olivarez was seeking the annulment of his realty tax delinquency assessment. Marquez assailed Olivarez’ failure to first exhaust administrative remedies, particularly the requirement of payment under protest. Olivarez replied that his petition was filed to question the assessor’s authority to assess and collect realty taxes and therefore, as held in Ty v. Trampe, the exhaustion of administrative remedies was not required. The Court however did not agree with Olivarez’s argument. It found that there was nothing in his petition that supported his claim regarding the assessor’s alleged lack of authority. What Olivarez raised were the following grounds: "(1) some of the taxes being collected have already prescribed and may no longer be collected as provided in Section 194 of the Local Government Code of 1991; (2) some properties have been doubly taxed/assessed; (3) some properties being taxed are no longer existent; (4) some properties are exempt from taxation as they are being used exclusively for educational purposes; and (5) some errors are made in the assessment and collection of taxes due on petitioners’ properties, and that respondents committed grave abuse of discretion in making the improper, excessive and unlawful the collection of taxes against the petitioner." The

Olivarez petition filed before the trial court primarily involved the correctness of the assessments, which is a question of fact that is not allowed in a petition for certiorari, prohibition, and mandamus. Hence, we declared that the petition should have been brought, at the very first instance, to the LBAA, not the trial court.

Like Olivarez, Napocor, by claiming exemption from realty taxation, is simply raising a question of the correctness of the assessment. A claim for tax exemption, whether full or partial, does not question the authority of local assessor to assess real property tax. This may be inferred from Section 206 which states that:

SEC. 206. Proof of Exemption of Real Property from Taxation. - Every person by or for whom real property is declared, who shall claim tax exemption for such property under this Title shall file with the provincial, city or municipal assessor within thirty (30) days from the date of the declaration of real property sufficient documentary evidence in support of such claim including corporate charters, title of ownership, articles of incorporation, bylaws, contracts, affidavits, certifications and mortgage deeds, and similar documents. If the required evidence is not submitted within the period herein prescribed, the property shall be listed as taxable in the assessment roll. However, if the property shall be proven to be tax exempt, the same shall be dropped from the assessment roll. [Emphasis provided]

By providing that real property not declared and proved as tax-exempt shall be included in the assessment roll, the above-quoted provision implies that the local assessor has the authority to assess the property for realty taxes, and any subsequent claim for exemption shall be allowed only when sufficient proof has been adduced supporting the claim. Since Napocor was simply questioning the correctness of the assessment, it should have first complied with Section 252, particularly the requirement of payment under protest. Napocor’s failure to prove that this requirement has been complied with thus renders its administrative protest under Section 226 of the LGC without any effect. No protest shall be entertained unless the taxpayer first pays the tax.

It was an ill-advised move for Napocor to directly file an appeal with the LBAA under Section 226 without first paying the tax as required under Section 252. Sections 252 and 226 provide successive administrative remedies to a taxpayer who questions the correctness of an assessment. Section 226, in declaring that "any owner or person having legal interest in the property who is not satisfied with the action of the provincial, city, or municipal assessor in the assessment of his property may x x x appeal to the Board of Assessment Appeals x x x," should be read in conjunction with Section 252 (d), which states that "in the event that the protest is denied x x x, the taxpayer may avail of the remedies as provided for in Chapter 3, Title II, Book II of the LGC [Chapter 3 refers to Assessment Appeals, which includes Sections 226 to 231]. The "action" referred to in Section 226 (in relation to a protest of real property tax assessment) thus refers to the local assessor’s act of denying the protest filed pursuant to Section 252. Without the action of the local assessor, the appellate authority of the LBAA cannot be invoked. Napocor’s action before the LBAA was thus prematurely filed.

For the foregoing reasons, we DENY the petitioner’s motion for reconsideration.

SO ORDERED.

G.R. No. 92585 May 8, 1992

CALTEX PHILIPPINES, INC., petitioner, vs.THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER BARTOLOME C. FERNANDEZ and HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.

 

DAVIDE, JR., J.:

This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning the authority of the Commission on Audit (COA) in disallowing petitioner's claims for reimbursement from the Oil Price Stabilization Fund (OPSF) and seeking the reversal of said Commission's decision denying its claims for recovery of financing charges from the Fund and reimbursement of underrecovery arising from sales to the National Power Corporation, Atlas Consolidated Mining and Development Corporation (ATLAS) and Marcopper Mining Corporation (MAR-COPPER), preventing it from exercising the right to offset its remittances against its reimbursement vis-a-vis the OPSF and disallowing its claims which are still pending resolution before the Office of Energy Affairs (OEA) and the Department of Finance (DOF).

Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional Commissions 3 may be brought to this Court on certiorari by the aggrieved party within thirty (30) days from receipt of a copy thereof. The certiorari referred to is the special civil action for certiorari under Rule 65 of the Rules of Court. 4

Considering, however, that the allegations that the COA acted with: (a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings and rulings of the administrator of the fund itself and in disallowing a claim which is still pending resolution at the OEA level, and (b) "grave abuse of discretion and completely without jurisdiction" 5 in declaring that petitioner cannot avail of the right to offset any amount that it may be required under the law to remit to the OPSF against any amount that it may receive by way of reimbursement therefrom are sufficient to bring this petition within Rule 65 of the Rules of Court, and, considering further the importance of the issues raised, the error in the designation of the remedy pursued will, in this instance, be excused.

The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.) No. 1956, as amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as follows:

Sec. 8 . There is hereby created a Trust Account in the books of accounts of the Ministry of Energy to be designated as Oil Price Stabilization Fund (OPSF) for the purpose of minimizing frequent price changes brought about by exchange rate adjustments and/or changes in world market prices of crude oil and imported petroleum products. The Oil Price Stabilization Fund may be sourced from any of the following:

a) Any increase in the tax collection from ad valorem tax or customs duty imposed on petroleum products subject to tax under this Decree arising from exchange rate adjustment, as may be determined by the Minister of Finance in consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions of government corporations, as may be determined by the Minister of Finance in consultation with the Board of Energy;

c) Any additional amount to be imposed on petroleum products to augment the resources of the Fund through an appropriate Order that may be issued by the Board of Energy requiring payment by persons or companies engaged in the business of importing, manufacturing and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs paid by oil companies in the importation of crude oil and petroleum products is less than the peso costs computed using the reference foreign exchange rate as fixed by the Board of Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil and imported petroleum products resulting from exchange rate adjustment and/or increase in world market prices of crude oil;

2) To reimburse the oil companies for possible cost under-recovery incurred as a result of the reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without the corresponding reduction in the landed cost of oil inventories in the possession of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy.

The material operative facts of this case, as gathered from the pleadings of the parties, are not disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as Petitioner, directing the latter to remit to the OPSF its collection, excluding that unremitted for the years 1986 and 1988, of the additional tax on petroleum products authorized under the aforesaid Section 8 of P.D. No. 1956 which, as of 31 December 1987, amounted to P335,037,649.00 and informing it that, pending such remittance, all of its claims for reimbursement from the OPSF shall be held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with the OEA showed that the grand total of its unremitted collections of the above tax is P1,287,668,820.00, broken down as follows:

1986 — P233,190,916.001987 — 335,065,650.001988 — 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from receipt of the letter; advising it that the COA will hold in abeyance the audit of all its claims for reimbursement from the OPSF; and directing it to desist from further offsetting the taxes collected against outstanding claims in 1989 and subsequent periods. 7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement certificates from the OPSF covering claims with the Office of Energy Affairs since June 1987 up to March 1989, invoking in support thereof COA Circular No. 89-299 on the lifting of pre-audit of government transactions of national government agencies and government-owned or controlled corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the reimbursement certificates from the OPSF and repeated its earlier directive to petitioner to forward payment of the latter's unremitted collections to the OPSF to facilitate COA's audit action on the reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for the payment of the collections and the recovery of claims, since the outright payment of the sum of P1.287 billion to the OEA as a prerequisite for the processing of said claims against the OPSF will cause a very serious impairment of its cash position. 10 The proposal reads:

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate monitoring of payments and reimbursements will be administered by the ERB/Finance Dept./OEA, as agencies designated by law to administer/regulate OPSF.

(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as payment to OPSF, similarly OEA will deliver to Caltex the same amount in cash reimbursement from OPSF.

(3) The COA audit will commence immediately and will be conducted expeditiously.

(4) The review of current claims (1989) will be conducted expeditiously to preclude further accumulation of reimbursement from OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921 accepting the above-stated proposal but prohibiting petitioner from further offsetting remittances and reimbursements for the current and ensuing years. 11 Decision No. 921 reads:

This pertains to the within separate requests of Mr. Manuel A. Estrella, President, Petron Corporation, and Mr. Francis Ablan, President and Managing Director, Caltex (Philippines) Inc., for reconsideration of this Commission's adverse action embodied in its letters dated February 2, 1989 and March 9, 1989, the former directing immediate remittance to the Oil Price Stabilization Fund of collections made by the

firms pursuant to P.D. 1956, as amended by E.O. No. 137, S. 1987, and the latter reiterating the same directive but further advising the firms to desist from offsetting collections against their claims with the notice that "this Commission will hold in abeyance the audit of all . . . claims for reimbursement from the OPSF."

It appears that under letters of authority issued by the Chairman, Energy Regulatory Board, the aforenamed oil companies were allowed to offset the amounts due to the Oil Price Stabilization Fund against their outstanding claims from the said Fund for the calendar years 1987 and 1988, pending with the then Ministry of Energy, the government entity charged with administering the OPSF. This Commission, however, expressing serious doubts as to the propriety of the offsetting of all types of reimbursements from the OPSF against all categories of remittances, advised these oil companies that such offsetting was bereft of legal basis. Aggrieved thereby, these companies now seek reconsideration and in support thereof clearly manifest their intent to make arrangements for the remittance to the Office of Energy Affairs of the amount of collections equivalent to what has been previously offset, provided that this Commission authorizes the Office of Energy Affairs to prepare the corresponding checks representing reimbursement from the OPSF. It is alleged that the implementation of such an arrangement, whereby the remittance of collections due to the OPSF and the reimbursement of claims from the Fund shall be made within a period of not more than one week from each other, will benefit the Fund and not unduly jeopardize the continuing daily cash requirements of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this Commission perceives no further objectionable feature in the proposed arrangement, provided that 15% of whatever amount is due from the Fund is retained by the Office of Energy Affairs, the same to be answerable for suspensions or disallowances, errors or discrepancies which may be noted in the course of audit and surcharges for late remittances without prejudice to similar future retentions to answer for any deficiency in such surcharges, and provided further that no offsetting of remittances and reimbursements for the current and ensuing years shall be allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director Wenceslao R. De la Paz of the Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and based on our initial verification of documents submitted to us by your Office in support of Caltex (Philippines), Inc. offsets (sic) for the year 1986 to May 31, 1989, as well as its outstanding claims against the Oil Price Stabilization Fund (OPSF) as of May 31, 1989, we are pleased to inform your Office that Caltex (Philippines), Inc. shall be required to remit to OPSF an amount of P1,505,668,906, representing remittances to the OPSF which were offset against its claims reimbursements (net of unsubmitted claims). In addition, the Commission hereby authorize (sic) the Office of Energy Affairs (OEA) to cause payment of P1,959,182,612 to Caltex, representing claims initially allowed in audit, the details of which are presented hereunder: . . .

As presented in the foregoing computation the disallowances totalled P387,683,535, which included P130,420,235 representing those claims disallowed by OEA, details of which is (sic) shown in Schedule 1 as summarized as follows:

Disallowance of COAParticulars Amount

Recovery of financing charges P162,728,475 /aProduct sales 48,402,398 /bInventory lossesBorrow loan arrangement 14,034,786 /cSales to Atlas/Marcopper 32,097,083 /dSales to NPC 558——————P257,263,300

Disallowances of OEA 130,420,235————————— ——————Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate that recovery of financing charges by oil companies is not among the items for which the OPSF may be utilized. Therefore, it is our view that recovery of financing charges has no legal basis. The mechanism for such claims is provided in DOF Circular 1-87.

b. Product Sales –– Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order No. 87-03-095 indicating that (sic) February 7, 1987 as the effectivity date that (sic) oil companies should pay OPSF impost on export sales of petroleum products. Effective February 7, 1987 sales to international vessels/airlines should not be included as part of its domestic sales. Changing the effectivity date of the resolution from February 7, 1987 to October 20, 1987 as covered by subsequent ERB Resolution No. 88-12 dated November 18, 1988 has allowed Caltex to include in their domestic sales volumes to international vessels/airlines and claim the corresponding reimbursements from OPSF during the period. It is our opinion that the effectivity of the said resolution should be February 7, 1987.

c. Inventory losses –– Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions including the related BLA agreement, as they affect the claims for reimbursements of ad valorem taxes. We observed that oil companies immediately settle ad valorem taxes for BLA transaction (sic). Loan balances therefore are not tax paid inventories of Caltex subject to reimbursements but those of the borrower. Hence, we recommend reduction of the claim for July, August, and November, 1987 amounting to P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the suspension of payment of all taxes, duties, fees, imposts and other charges whether direct or indirect due and payable by the copper mining companies in distress to the national and local governments." It is our opinion that LOI 1416 which implements the exemption from payment of OPSF imposts as effected by OEA has no legal basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount as herein authorized shall be subject to availability of funds of OPSF as of May 31, 1989 and applicable auditing rules and regulations. With regard to the disallowances, it is further informed that the aggrieved party has 30 days within which to appeal the decision of the Commission in accordance with law.

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision based on the following grounds: 13

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES, ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF FINANCE AND THE ENERGY REGULATORY BOARD PURSUANT TO EXECUTIVE ORDER NO. 137.

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND ENERGY REGULATORY BOARD ARE LEGAL AND SHOULD BE RESPECTED AND APPLIED UNLESS DECLARED NULL AND VOID BY COURTS OR REPEALED BY LEGISLATION.

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED BY THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS VALID.

xxx xxx xxx

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner Fernandez dissenting in part, handed down Decision No. 1171 affirming the disallowance for recovery of financing charges, inventory losses, and sales to MARCOPPER and ATLAS, while allowing the recovery of product sales or those arising from export sales. 15 Decision No. 1171 reads as follows:

Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the .authority to recover financing charges from the OPSF on the basis of Department of Finance (DOF) Circular 1-87, dated February 18, 1987, which allowed oil companies to "recover cost of financing working capital associated with crude oil shipments," and provided a schedule of reimbursement in terms of peso per barrel. It appears that on November 6, 1989, the DOF issued a memorandum to the President of the Philippines explaining the nature of these financing charges and justifying their reimbursement as follows:

As part of your program to promote economic recovery, . . . oil companies (were authorized) to refinance their imports of crude oil and petroleum products from the normal trade credit of 30 days up to 360 days from date of loading . . . Conformably . . ., the oil companies deferred their foreign exchange remittances for purchases by refinancing their import bills from the normal 30-day payment term up to the desired 360 days. This refinancing of importations carried additional costs (financing charges) which then became, due to government mandate, an inherent part of the cost of the purchases of our country's oil requirement.

We beg to disagree with such contention. The justification that financing charges increased oil costs and the schedule of reimbursement rate in peso per barrel

(Exhibit 1) used to support alleged increase (sic) were not validated in our independent inquiry. As manifested in Exhibit 2, using the same formula which the DOF used in arriving at the reimbursement rate but using comparable percentages instead of pesos, the ineluctable conclusion is that the oil companies are actually gaining rather than losing from the extension of credit because such extension enables them to invest the collections in marketable securities which have much higher rates than those they incur due to the extension. The Data we used were obtained from CPI (CALTEX) Management and can easily be verified from our records.

With respect to product sales or those arising from sales to international vessels or airlines, . . ., it is believed that export sales (product sales) are entitled to claim refund from the OPSF.

As regard your claim for underrecovery arising from inventory losses, . . . It is the considered view of this Commission that the OPSF is not liable to refund such surtax on inventory losses because these are paid to BIR and not OPSF, in view of which CPI (CALTEX) should seek refund from BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that you are entitled to claim recovery from the OPSF pursuant to LOI 1416 issued on July 17, 1984, since these copper mining companies did not pay CPI (CALTEX) and OPSF imposts which were added to the selling price.

Upon a circumspect evaluation, this Commission believes and so holds that the CPI (CALTEX) has no authority to claim reimbursement for this uncollected OPSF impost because LOI 1416 dated July 17, 1984, which exempts distressed mining companies from "all taxes, duties, import fees and other charges" was issued when OPSF was not yet in existence and could not have contemplated OPSF imposts at the time of its formulation. Moreover, it is evident that OPSF was not created to aid distressed mining companies but rather to help the domestic oil industry by stabilizing oil prices.

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it imputes to the COA the commission of the following errors: 16

I

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING CHARGES FROM THE OPSF.

II

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES TO NPC.

III

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS LEGAL RIGHT TO OFFSET ITS REMITTANCES AGAINST ITS REIMBURSEMENT VIS-A-VIS THE OPSF.

V

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE STILL PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition within ten (10) days from notice. 18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the Office of the Solicitor General, filed their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file their respective Memoranda within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment filed on 6 September 1990 be considered as the Memorandum for respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a second purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without the corresponding reduction in the landed cost of oil inventories in the possession of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.

the "other factors" mentioned therein that may be determined by the Ministry (now Department) of Finance may include financing charges for "in essence, financing charges constitute unrecovered cost of acquisition of crude oil incurred by the oil companies," as explained in the 6 November 1989 Memorandum to the President of the Department of Finance; they "directly translate to cost underrecovery in cases where the money market placement rates decline and at the same time the tax on interest income increases. The relationship is such that the presence of underrecovery or overrecovery is directly dependent on the amount and extent of financing charges."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the basis of Department of Finance Circular No. 1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital associated with crude oil shipments, the following guidelines on the utilization of the Oil Price Stabilization Fund pertaining to the payment of the foregoing (sic) exchange risk premium and recovery of financing charges will be implemented:

1. The OPSF foreign exchange premium shall be reduced to a flat rate of one (1) percent for the first (6) months and 1/32 of one percent per month thereafter up to a maximum period of one year, to be applied on crude oil' shipments from January 1, 1987. Shipments with outstanding financing as of January 1, 1987 shall be charged on the basis of the fee applicable to the remaining period of financing.

2. In addition, for shipments loaded after January 1987, oil companies shall be allowed to recover financing charges directly from the OPSF per barrel of crude oil based on the following schedule:

Financing Period Reimbursement RatePesos per Barrel

Less than 180 days None180 days to 239 days 1.90241 (sic) days to 299 4.02300 days to 369 (sic) days 6.16360 days or more 8.28

The above rates shall be subject to review every sixtydays. 22

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the Office of Energy Affairs as follows:

HON. VICENTE T. PATERNODeputy Executive SecretaryFor Energy AffairsOffice of the PresidentMakati, Metro Manila

Dear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and February 5, 1987 and subsequent discussions held by the Price Review committee on February 6, 1987.

On the basis of the representations made, the Department of Finance recognizes the necessity to reduce the foreign exchange risk premium accruing to the Oil Price Stabilization Fund (OPSF). Such a reduction would allow the industry to recover partly associated financing charges on crude oil imports. Accordingly, the OPSF foreign exchange risk fee shall be reduced to a flat charge of 1% for the first six (6) months plus 1/32% of 1% per month thereafter up to a maximum period of one year, effective January 1, 1987. In addition, since the prevailing company take would still leave unrecovered financing charges, reimbursement may be secured from the OPSF in accordance with the provisions of the attached Department of Finance circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the guidelines for the computation of the foreign exchange risk fee and the recovery of financing charges from the OPSF, to wit:

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges directly from the OPSF for both crude and product shipments loaded after January 1, 1987 based on the following rates:

Financing Period Reimbursement Rate(PBbl.)

Less than 180 days None180 days to 239 days 1.90240 days to 229 (sic) days 4.02300 days to 359 days 6.16360 days to more 8.28

2. The above rates shall be subject to review every sixty days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further guidelines on the recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-87 dated February 18, 1987 which allowed the recovery of financing charges directly from the Oil Price Stabilization Fund. (OPSF):

1. The Claim for reimbursement shall be on a per shipment basis.

2. The claim shall be filed with the Office of Energy Affairs together with the claim on peso cost differential for a particular shipment and duly certified supporting documents provided for under Ministry of Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement certificate (Annex A) to be issued by the Office of Energy Affairs. The said certificate may be used to offset against amounts payable to the OPSF. The oil companies may also redeem said certificates in cash if not utilized, subject to availability of funds. 25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the light of the determination of executive agencies. The determination by the Department of Finance and the OEA that financing charges are recoverable from the OPSF is entitled to great weight and consideration. 27 The function of the COA, particularly in the matter of allowing or disallowing certain expenditures, is limited to the promulgation of accounting and auditing rules for, among others, the disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's claim that petitioner is gaining, instead of losing, from the extension of credit, is belatedly raised and not supported by expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular or unnecessary government expenditures and as the monetary claims of petitioner are not allowed by law, the COA acted within its jurisdiction in denying them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from the OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in the second purpose of the OPSF pursuant to E.O. No. 137 can only include "factors which are of the same nature or analogous to those enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the Department of Finance violates P.D. No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise allow reimbursement of financing charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy, We find the theory of petitioner –– that such does not extend to the disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or use of government funds and properties, but only to the promulgation of accounting and auditing rules for, among others, such disallowance –– to be untenable in the light of the provisions of the 1987 Constitution and related laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned and controlled corporations with original charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and universities; (c) other government-owned or controlled corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the government, which are required by law or the granting institution to submit to such audit as a condition of subsidy or equity. However, where the internal control system of the audited agencies is inadequate, the Commission may adopt such measures, including temporary or special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the general accounts, of the Government and, for such period as may be provided by law, preserve the vouchers and other supporting papers pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to define the scope of its audit and examination, establish the techniques and methods required therefor, and promulgate accounting and auditing rules and regulations, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or, unconscionable expenditures, or uses of government funds and properties.

These present powers, consistent with the declared independence of the Commission, 30 are broader and more extensive than that conferred by the 1973 Constitution. Under the latter, the Commission was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to the revenues, and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities including government-owned or controlled corporations, keep the general accounts of the Government and, for such period as may be provided by law, preserve the vouchers pertaining thereto; and promulgate accounting and auditing rules and regulations including those for the prevention of irregular, unnecessary, excessive, or extravagant expenditures or uses of funds and property. 31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's precursor, the General Auditing Office, were, unfortunately, limited; its very role was markedly passive. Section 2 of Article XI thereofprovided:

Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining to the revenues and receipts from whatever source, including trust funds derived from bond issues; and audit, in accordance with law and administrative regulations, all expenditures of funds or property pertaining to or held in trust by the Government or the provinces or municipalities thereof. He shall keep the general accounts of the Government and the preserve the vouchers pertaining thereto. It shall be the duty of the Auditor General to bring to the attention of the proper administrative officer expenditures of funds or property which, in his opinion, are irregular, unnecessary, excessive, or extravagant. He shall also perform such other functions as may be prescribed by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant expenditures or uses of funds, the 1935 Constitution did not grant the Auditor General the power to issue rules and regulations to prevent the same. His was merely to bring that matter to the attention of the proper administrative officer.

The ruling on this particular point, quoted by petitioner from the cases of Guevarra vs. Gimenez 32 and Ramos vs.Aquino, 33 are no longer controlling as the two (2) were decided in the light of the 1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General under the 1935 Constitution and the Commission on Audit under the 1973 Constitution authorized them to disallow illegal expenditures of funds or uses of funds and property. Our present Constitution retains that same power and authority, further strengthened by the definition of the COA's general jurisdiction in Section 26 of the Government Auditing Code of the Philippines 34 and Administrative Code of 1987. 35 Pursuant to its power to promulgate accounting and auditing rules and regulations for the prevention of irregular, unnecessary, excessive or extravagant expenditures or uses of funds, 36 the COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is responsible for the enforcement of the rules and regulations, it goes without saying that failure to comply with them is a ground for disapproving the payment of the proposed expenditure. As observed by one of the Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G. Bernas: 37

It should be noted, however, that whereas under Article XI, Section 2, of the 1935 Constitution the Auditor General could not correct "irregular, unnecessary, excessive or extravagant" expenditures of public funds but could only "bring [the matter] to

the attention of the proper administrative officer," under the 1987 Constitution, as also under the 1973 Constitution, the Commission on Audit can "promulgate accounting and auditing rules and regulations including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures or uses of government funds and properties." Hence, since the Commission on Audit must ultimately be responsible for the enforcement of these rules and regulations, the failure to comply with these regulations can be a ground for disapproving the payment of a proposed expenditure.

Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active role and invested it with broader and more extensive powers, they did not intend merely to make the COA a toothless tiger, but rather envisioned a dynamic, effective, efficient and independent watchdog of the Government.

The issue of the financing charges boils down to the validity of Department of Finance Circular No. 1-87, Department of Finance Circular No. 4-88 and the implementing circulars of the OEA, issued pursuant to Section 8, P.D. No. 1956, as amended by E.O. No. 137, authorizing it to determine "other factors" which may result in cost underrecovery and a consequent reimbursement from the OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges are not included in "cost underrecovery" and, therefore, cannot be considered as one of the "other factors." Section 8 of P.D. No. 1956, as amended by E.O. No. 137, does not explicitly define what "cost underrecovery" is. It merely states what it includes. Thus:

. . . "Cost underrecovery" shall include the following:

i. Reduction in oil company takes as directed by the Board of Energy without the corresponding reduction in the landed cost of oil inventories in the possession of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.

These "other factors" can include only those which are of the same class or nature as the two specifically enumerated in subparagraphs (i) and (ii). A common characteristic of both is that they are in the nature of government mandated price reductions. Hence, any other factor which seeks to be a part of the enumeration, or which could qualify as a cost underrecovery, must be of the same class or nature as those specifically enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad and unrestricted authority to determine or define "other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or things, by words of a particular and specific meaning, such general words are not to be construed in their widest extent, but are held to be as applying only to persons or things of the same kind or class as those specifically mentioned. 38A reading of subparagraphs (i) and (ii) easily discloses that they do not have a common characteristic. The first relates to price reduction as directed by the

Board of Energy while the second refers to reduction in internal ad valorem taxes. Therefore, subparagraph (iii) cannot be limited by the enumeration in these subparagraphs. What should be considered for purposes of determining the "other factors" in subparagraph (iii) is the first sentence of paragraph (2) of the Section which explicitly allows cost underrecovery only if such were incurred as a result of the reduction of domestic prices of petroleum products.

Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the sense that such were incurred as a result of the inability to fully offset financing expenses from yields in money market placements, they do not, however, fall under the foregoing provision of P.D. No. 1956, as amended, because the same did not result from the reduction of the domestic price of petroleum products. Until paragraph (2), Section 8 of the decree, as amended, is further amended by Congress, this Court can do nothing. The duty of this Court is not to legislate, but to apply or interpret the law. Be that as it may, this Court wishes to emphasize that as the facts in this case have shown, it was at the behest of the Government that petitioner refinanced its oil import payments from the normal 30-day trade credit to a maximum of 360 days. Petitioner could be correct in its assertion that owing to the extended period for payment, the financial institution which refinanced said payments charged a higher interest, thereby resulting in higher financing expenses for the petitioner. It would appear then that equity considerations dictate that petitioner should somehow be allowed to recover its financing losses, if any, which may have been sustained because it accommodated the request of the Government. Although under Section 29 of the National Internal Revenue Code such losses may be deducted from gross income, the effect of that loss would be merely to reduce its taxable income, but not to actually wipe out such losses. The Government then may consider some positive measures to help petitioner and others similarly situated to obtain substantial relief. An amendment, as aforestated, may then be in order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the Department of Finance to determine or define "other factors" is to uphold an undue delegation of legislative power, it clearly appearing that the subject provision does not provide any standard for the exercise of the authority. It is a fundamental rule that delegation of legislative power may be sustained only upon the ground that some standard for its exercise is provided and that the legislature, in making the delegation, has prescribed the manner of the exercise of the delegated authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by reason of the foregoing disquisitions. It may nevertheless be stated that petitioner failed to disprove COA's claim that it had in fact gained in the process. Otherwise stated, petitioner failed to sufficiently show that it incurred a loss. Such being the case, how can petitioner claim for reimbursement? It cannot have its cake and eat it too.

II. Anent the claims arising from sales to the National Power Corporation, We find for the petitioner. The respondents themselves admit in their Comment that underrecovery arising from sales to NPC are reimbursable because NPC was granted full exemption from the payment of taxes; to prove this, respondents trace the laws providing for such exemption. 40 The last law cited is the Fiscal Incentives Regulatory Board's Resolution No. 17-87 of 24 June 1987 which provides, in part, "that the tax and duty exemption privileges of the National Power Corporation, including those pertaining to its domestic purchases of petroleum and petroleum products . . . are

restored effective March 10, 1987." In a Memorandum issued on 5 October 1987 by the Office of the President, NPC's tax exemption was confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to the NPC is evident in the recently passed Republic Act No. 6952 establishing the Petroleum Price Standby Fund to support the OPSF. 41 The pertinent part of Section 2, Republic Act No. 6952 provides:

Sec. 2. Application of the Fund shall be subject to the following conditions:

(1) That the Fund shall be used to reimburse the oil companies for (a) cost increases of imported crude oil and finished petroleum products resulting from foreign exchange rate adjustments and/or increases in world market prices of crude oil; (b) cost underrecovery incurred as a result of fuel oil sales to the National Power Corporation (NPC); and (c) other cost underrecoveries incurred as may be finally decided by the SupremeCourt; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products to the National Power Corporation.

III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner relies on Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the suspension of payments of all taxes, duties, fees and other charges, whether direct or indirect, due and payable by the copper mining companies in distress to the national government. Pursuant to this LOI, then Minister of Energy, Hon. Geronimo Velasco, issued Memorandum Circular No. 84-11-22 advising the oil companies that Atlas Consolidated Mining Corporation and Marcopper Mining Corporation are among those declared to be in distress.

In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August 1989 letter to Executive Director Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416 which implements the exemption from payment of OPSF imposts as effected by OEA has no legal basis;" 42 in its Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority to claim reimbursement for this uncollected impost because LOI 1416 dated July 17, 1984, . . . was issued when OPSF was not yet in existence and could not have contemplated OPSF imposts at the time of its formulation." 43 It is further stated that: "Moreover, it is evident that OPSF was not created to aid distressed mining companies but rather to help the domestic oil industry by stabilizing oil prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended to exempt said distressed mining companies from the payment of OPSF dues for the following reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956 creating the OPSF was promulgated on October 10, 1984, while E.O. 137, amending P.D. 1956, was issued on February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line with the government's effort to prevent the collapse of the copper industry. P.D No. 1956, as amended, was issued for the purpose of minimizing frequent price changes brought about by exchange rate adjustments and/or changes in world market prices of crude oil and imported petroleum product's; and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other charges, whether direct or indirect, due and payable by the copper mining companies in distress to the Notional and Local Governments . . ." On the other hand, OPSF dues are not payable by (sic) distressed copper companies but by oil companies. It is to be noted that the copper mining companies do not pay OPSF dues. Rather, such imposts are built in or already incorporated in the prices of oil products. 44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed mining companies, it does not accord petitioner the same privilege with respect to its obligation to pay OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons, however, it is apparent that LOI 1416 was never published in the Official Gazette 45 as required by Article 2 of the Civil Code, which reads:

Laws shall take effect after fifteen days following the completion of their publication in the Official Gazette, unless it is otherwise provided. . . .

In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all unpublished presidential issuances which are of general application, and unless so published they shall have no binding force and effect.

Resolving the motion for reconsideration of said decision, this Court, in its Resolution promulgated on 29 December 1986, 47 ruled:

We hold therefore that all statutes, including those of local application and private laws, shall be published as a condition for their effectivity, which shall begin fifteen days after publication unless a different effectivity date is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders promulgated by the President in the exercise of legislative powers whenever the same are validly delegated by the legislature or, at present, directly conferred by the Constitution. Administrative rules and regulations must also be published if their purpose is to enforce or implement existing laws pursuant also to a valid delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon their approval, or as soon thereafter as possible, be published in full in the Official Gazette, to become effective only after fifteen days from their publication, or on another date specified by the legislature, in accordance with Article 2 of the Civil Code.

LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette after its issuance or at any time after the decision in the abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18 June 1987. As amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their publication either in the Official Gazette or in a newspaper of general circulation in the Philippines, unless it is otherwiseprovided.

We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant to Executive Order No. 200.

Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must still fail. Tax exemptions as a general rule are construed strictly against the grantee and liberally in favor of the taxing authority. 48 The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed. The party claiming exemption must therefore be expressly mentioned in the exempting law or at least be within its purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to ATLAS and MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though LOI 1416 may suspend the payment of taxes by copper mining companies, it does not give petitioner the same privilege with respect to the payment of OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the Department of Finance has still to issue a final and definitive ruling thereon; accordingly, it was premature for COA to disallow it. By doing so, the latter acted beyond its jurisdiction. 49 Respondents, on the other hand, contend that said amount was already disallowed by the OEA for failure to substantiate it. 50 In fact, when OEA submitted the claims of petitioner for pre-audit, the abovementioned amount was already excluded.

An examination of the records of this case shows that petitioner failed to prove or substantiate its contention that the amount of P130,420,235.00 is still pending before the OEA and the DOF. Additionally, We find no reason to doubt the submission of respondents that said amount has already been passed upon by the OEA. Hence, the ruling of respondent COA disapproving said claim must be upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from petitioner may be offset against petitioner's outstanding claims from said fund. Petitioner contends that it should be allowed to offset its claims from the OPSF against its contributions to the fund as this has been allowed in the past, particularly in the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on compensation and Section 21, Book V, Title I-B of the Revised Administrative Code which provides for "Retention of Money for Satisfaction of Indebtedness to Government." 52 Petitioner also mentions communications from the Board of Energy and the Department of Finance that supposedly authorize compensation.

Respondents, on the other hand, citing Francia vs.  IAC and Fernandez, 53 contend that there can be no offsetting of taxes against the claims that a taxpayer may have against the government, as taxes do not arise from contracts or depend upon the will of the taxpayer, but are imposed by law. Respondents also allege that petitioner's reliance on Section 21, Book V, Title I-B of the Revised Administrative Code, is misplaced because "while this provision empowers the COA to withhold payment of a government indebtedness to a person who is also indebted to the government and apply the government indebtedness to the satisfaction of the obligation of the person to the government, like authority or right to make compensation is not given to the private person." 54 The reason for this, as stated in Commissioner of Internal Revenue vs.Algue, Inc., 55 is that money due the

government, either in the form of taxes or other dues, is its lifeblood and should be collected without hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the Revised Administrative Code makes it the respondents' duty to collect petitioner's indebtedness to the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a result of taxation because "P.D. 1956, amended, did not create a source of taxation; it instead established a special fund . . .,"  56 and that the OPSF contributions do not go to the general fund of the state and are not used for public purpose, i.e., not for the support of the government, the administration of law, or the payment of public expenses. This alleged lack of a public purpose behind OPSF exactions distinguishes such from a tax. Hence, the ruling in the Francia case is inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the OPSF; the said law provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall be used to pay any oil company which has an outstanding obligation to the Government without said obligation being offset first, subject to the requirements of compensation or offset under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose because they go to a special fund of the government. Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state. 57 There can be no doubt that the oil industry is greatly imbued with public interest as it vitally affects the general welfare. Any unregulated increase in oil prices could hurt the lives of a majority of the people and cause economic crisis of untold proportions. It would have a chain reaction in terms of, among others, demands for wage increases and upward spiralling of the cost of basic commodities. The stabilization then of oil prices is of prime concern which the state, via its police power, may properly address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is taxation. No amount of semantical juggleries could dim this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may have against the government. 58Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. 59

We may even further state that technically, in respect to the taxes for the OPSF, the oil companies merely act as agents for the Government in the latter's collection since the taxes are, in reality, passed unto the end-users –– the consuming public. In that capacity, the petitioner, as one of such companies, has the primary obligation to account for and remit the taxes collected to the administrator of the OPSF. This duty stems from the fiduciary relationship between the two; petitioner certainly cannot be considered merely as a debtor. In respect, therefore, to its collection for

the OPSF vis-a-vis its claims for reimbursement, no compensation is likewise legally feasible. Firstly, the Government and the petitioner cannot be said to be mutually debtors and creditors of each other. Secondly, there is no proof that petitioner's claim is already due and liquidated. Under Article 1279 of the Civil Code, in order that compensation may be proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) both debts consist in a sum of :money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a practice has no legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims against their OPSF contributions. Instead, it prohibits the government from paying any amount from the Petroleum Price Standby Fund to oil companies which have outstanding obligations with the government, without said obligation being offset first subject to the rules on compensation in the Civil Code.

WHEREFORE, in view of the foregoing,  judgment  is hereby rendered AFFIRMING the challenged decision of the Commission on Audit, except that portion thereof disallowing petitioner's claim for reimbursement of underrecovery arising from sales to the National Power Corporation, which is hereby allowed.

With costs against petitioner.

SO ORDERED.