Legal Accounting Cases

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SECOND DIVISION[G.R. No. 150154. August 9, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOSHIBAINFORMATION EQUIPMENT (PHILS.), INC., respondent .

D E C I S I O N

CHICO-NAZARIO, J .:

In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner ofInternal Revenue (CIR) prays for the reversal of the decision of the Court of Appeals in CA-G.R.SP No. 59106,[1] affirming the order of the Court of Tax Appeals (CTA) in CTA Case No.5593,[2] which ordered said petitioner CIR to refund or, in the alternative, to issue a tax creditcertificate to respondent Toshiba Information Equipment (Phils.), Inc. (Toshiba), in the amountof P16,188,045.44, representing unutilized input value-added tax (VAT) payments for the firstand second quarters of 1996.

There is hardly any dispute as to the facts giving rise to the present Petition.

Respondent Toshiba was organized and established as a domestic corporation, duly-registered with the Securities and Exchange Commission on 07 July 1995,[3] with the primary purpose of engaging in the business of manufacturing and exporting of electrical and mechanicalmachinery, equipment, systems, accessories, parts, components, materials and goods of all kinds,including, without limitation, to those relating to office automation and information technology,and all types of computer hardware and software, such as HDD, CD-ROM and personalcomputer printed circuit boards.[4]

On 27 September 1995, respondent Toshiba also registered with the Philippine EconomicZone Authority (PEZA) as an ECOZONE Export Enterprise, with principal office in LagunaTechnopark, Biñan, Laguna.[5] Finally, on 29 December 1995, it registered with the Bureau of

Internal Revenue (BIR) as a VAT taxpayer and a withholding agent.

[6]

Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year

1996, reporting input VAT in the amountof P13,118,542.00[7] and P5,128,761.94,[8] respectively, or a total of P18,247,303.94. It allegedthat the said input VAT was from its purchases of capital goods and services which remainedunutilized since it had not yet engaged in any business activity or transaction for which it may beliable for any output VAT.[9] Consequently, on 27 March 1998, respondent Toshiba filed withthe One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department ofFinance (DOF) applications for tax credit/refund of its unutilized input VAT for 01 January to 31March 1996 in the amount of P14,176,601.28,[10] and for 01 April to 30 June 1996 in the amountof P5,161,820.79,[11] for a total of P19,338,422.07. To toll the running of the two-year

prescriptive period for judicially claiming a tax credit/refund, respondent Toshiba, on 31 March1998, filed with the CTA a Petition for Review. It would subsequently file an Amended Petitionfor Review on 10 November 1998 so as to conform to the evidence presented before the CTAduring the hearings.

In his Answer to the Amended Petition for Review before the CTA, petitioner CIR raisedseveral Special and Affirmative Defenses, to wit –

5. Assuming without admitting that petitioner filed a claim for refund/tax credit, the sameis subject to investigation by the Bureau of Internal Revenue.

6. Taxes are presumed to have been collected in accordance with law. Hence, petitionermust prove that the taxes sought to be refunded were erroneously or illegally collected.

7. Petitioner must prove the allegations supporting its entitlement to a refund.

8. Petitioner must show that it has complied with the provisions of Sections 204(c) and229 of the 1997 Tax Code on the filing of a written claim for refund within two (2)years from the date of payment of the tax.

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9. Claims for refund of taxes are construed strictly against claimants, the same being inthe nature of an exemption from taxation.[12]

After evaluating the evidence submitted by respondent Toshiba,[13] the CTA, in its Decisiondated 10 March 2000, ordered petitioner CIR to refund, or in the alternative, to issue a tax credit

certificate to respondent Toshiba in the amount of P16,188,045.44.

[14]

In a Resolution, dated 24 May 2000, the CTA denied petitioner CIR‘s Motion for

Reconsideration for lack of merit.[15]

The Court of Appeals, in its Decision dated 27 September 2001, dismissed petitioner CIR‘s

Petition for Review and affirmed the CTA Decision dated 10 March 2000.

Comes now petitioner CIR before this Court assailing the above-mentioned Decision of theCourt of Appeals based on the following grounds –

1. The Court of Appeals erred in holding that petitioner‘s failure to raise in the Tax Courtthe arguments relied upon by him in the petition, is fatal to his cause.

2. The Court of Appeals erred in not holding that respondent being registered with thePhilippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise, its business is not subject to VAT pursuant to Section 24 of Republic Act No. 7916 inrelation to Section 103 (now 109) of the Tax Code.

3. The Court of Appeals erred in not holding that since respondent‘s business is notsubject to VAT, the capital goods and services it purchased are considered not used inVAT taxable business, and, therefore, it is not entitled to refund of input taxes on suchcapital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-95 and ofinput taxes on services pursuant to Section 4.103-1 of said Regulations.

4. The Court of Appeals erred in holding that respondent is entitled to a refund or taxcredit of input taxes it paid on zero-rated transactions.[16]

Ultimately, however, the issue still to be resolved herein shall be whether respondentToshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods andservices, to which this Court answers in the affirmative.

I

An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by

persons from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%).

Respondent Toshiba bases its claim for tax credit/refund on Section 106(b) of the Tax Codeof 1977, as amended, which reads:

SEC. 106. Refunds or tax credits of creditable input tax. –

…

(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 theextent that such input taxes have not been applied against output taxes. The application may bemade only within two (2) years after the close of the taxable quarter when the importation or purchase was made.[17]

Petitioner CIR, on the other hand, opposes such claim on account of Section 4.106-1(b) ofRevenue Regulations (RR) No. 7-95, otherwise known as the VAT Regulations, as amended,which provides as follows –



























Sec. 4.106-1. Refunds or tax credits of input tax. –

. . .

(b) Capital Goods. -- Only a VAT-registered person may apply for issuance of a tax credit

certificate or refund of input taxes paid on capital goods imported or locally purchased. Therefund shall be allowed to the extent that such input taxes have not been applied against outputtaxes. The application should be made within two (2) years after the close of the taxable quarterwhen the importation or purchase was made.

Refund of input taxes on capital goods shall be allowed only to the extent that such capital goodsare used in VAT taxable business. If it is also used in exempt operations, the input taxrefundable shall only be the ratable portion corresponding to the taxable operations.

―Capital goods or properties‖ refer to goods or properties with estimated useful life greater thanone year and which are treated as depreciable assets under Section 29(f), used directly or

indirectly in the production or sale of taxable goods or services. (Underscoring ours.)

Petitioner CIR argues that although respondent Toshiba may be a VAT-registered taxpayer,it is not engaged in a VAT-taxable business. According to petitioner CIR, respondent Toshiba isactually VAT-exempt, invoking the following provision of the Tax Code of 1977, as amended –

SEC. 103. Exempt transactions. – The following shall be exempt from value-added tax.

…

(q) Transactions which are exempt under special laws, except those granted under Presidential

Decree No. 66, 529, 972, 1491, and 1590, and non-electric cooperatives under Republic Act No.6938, or international agreements to which the Philippines is a signatory.[18]

Since respondent Toshiba is a PEZA-registered enterprise, it is subject to the five percent(5%) preferential tax rate imposed under Chapter III, Section 24 of Republic Act No. 7916,otherwise known as The Special Economic Zone Act of 1995, as amended. According to thesaid section, ―[e]xcept for real property taxes on land owned by developers, no taxes, local and

national, shall be imposed on business establishments operating within the ECOZONE. In lieuthereof, five percent (5%) of the gross income earned by all business enterprises within theECOZONE shall be paid…‖ The five percent (5%) preferential tax rate imposed on the gross

income of a PEZA-registered enterprise shall be in lieu of all national taxes, including VAT.

Thus, petitioner CIR contends that respondent Toshiba is VAT-exempt by virtue of a special law,Rep. Act No. 7916, as amended.

It would seem that petitioner CIR failed to differentiate between VAT-exempt transactionsfrom VAT-exempt entities. In the case of Commissioner of Internal Revenue v. Seagate

Technology (Philippines),[19] this Court already made such distinction –

An exempt transaction, on the one hand, involves goods or services which, by their nature, arespecifically listed in and expressly exempted from the VAT under the Tax Code, without regardto the tax status – VAT-exempt or not – of the party to the transaction…

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax

Code, a special law or an international agreement to which the Philippines is a signatory, and byvirtue of which its taxable transactions become exempt from VAT…

Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relatesto VAT-exempt transactions. These are transactions exempted from VAT by special laws orinternational agreements to which the Philippines is a signatory. Since such transactions are notsubject to VAT, the sellers cannot pass on any output VAT to the purchasers of goods,




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properties, or services, and they may not claim tax credit/refund of the input VAT they had paidthereon.

Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions ofrespondent Toshiba because although the said section recognizes that transactions covered byspecial laws may be exempt from VAT, the very same section provides that those falling under

Presidential Decree No. 66 are not. Presidential Decree No. 66, creating the Export ProcessingZone Authority (EPZA), is the precursor of Rep. Act No. 7916, as amended,[20] under which theEPZA evolved into the PEZA. Consequently, the exception of Presidential Decree No. 66 fromSection 103(q) of the Tax Code of 1977, as amended, extends likewise to Rep. Act No. 7916, asamended.

This Court agrees, however, that PEZA-registered enterprises, which would necessarily belocated within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No.7916, as amended, which imposes the five percent (5%) preferential tax rate on gross income ofPEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the samestatute which establishes the fiction that ECOZONES are foreign territory.

It is important to note herein that respondent Toshiba is located within an ECOZONE. AnECOZONE or a Special Economic Zone has been described as –

. . . [S]elected areas with highly developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and financial centerswhose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONEmay contain any or all of the following: industrial estates (IEs), export processing zones (EPZs),free trade zones and tourist/recreational centers.[21]

The national territory of the Philippines outside of the proclaimed borders of the ECOZONEshall be referred to as the Customs Territory.[22]

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage andoperate the ECOZONES as a separate customs territory;[23] thus, creating the fiction that theECOZONE is a foreign territory.[24] As a result, sales made by a supplier in the CustomsTerritory to a purchaser in the ECOZONE shall be treated as an exportation from the CustomsTerritory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in theCustoms Territory shall be considered as an importation into the Customs Territory.

Given the preceding discussion, what would be the VAT implication of sales made by asupplier from the Customs Territory to an ECOZONE enterprise?

The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no

VAT shall be imposed to form part of the cost of goods destined for consumption outside of theterritorial border of the taxing authority. Hence, actual export of goods and services from thePhilippines to a foreign country must be free of VAT; while, those destined for use orconsumption within the Philippines shall be imposed with ten percent (10%) VAT.[25]

Applying said doctrine to the sale of goods, properties, and services to and from theECOZONES,[26] the BIR issued Revenue Memorandum Circular (RMC) No. 74-99, on 15October 1999. Of particular interest to the present Petition is Section 3 thereof, which reads –

SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from TheCustoms Territory, To a PEZA Registered Enterprise. –

(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, inlieu of all taxes, except real property tax, pursuant to R.A. No. 7916, as amended:

(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence, consideredsubject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus Investments Code.






























(b) Sale of service. – This shall be treated subject to zero percent (0%) VAT under the “cross

border doctrine ” of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime,hence, subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes

under the NIRC rather than the 5% special tax regime:

(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence, consideredsubject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916 in relation to ART. 77(2) of the Omnibus Investments Code.

(b) Sale of Service. – This shall be treated subject to zero percent (0%) VAT under the “crossborder doctrine” of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.

(3) In the final analysis, any sale of goods, property or services made by a VAT registeredsupplier from the Customs Territory to any registered enterprise operating in the ecozone,

regardless of the class or type of the latter‘s PEZA registration, is actually qualified and thuslegally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property tosuch enterprise made by a VAT registered supplier from the Customs Territory shall be treatedsubject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of theOmnibus Investments Code, while all sales of services to the said enterprises, made by VATregistered suppliers from the Customs Territory, shall be treated effectively subject to the 0%VAT, pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. No. 7916 andthe ―Cross Border Doctrine‖ of the VAT system.

This Circular shall serve as a sufficient basis to entitle such supplier of goods, property orservices to the benefit of the zero percent (0%) VAT for sales made to the aforementioned

ECOZONE enterprises and shall serve as sufficient compliance to the requirement for priorapproval of zero-rating imposed by Revenue Regulations No. 7-95 effective as of the date of theissuance of this Circular.

Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is aVAT-exempt entity. The VAT treatment of sales to it, however, varies depending on whetherthe supplier from the Customs Territory is VAT-registered or not.

Sales of goods, properties and services by a VAT-registered supplier from the CustomsTerritory to an ECOZONE enterprise shall be treated as export sales. If such sales are made by aVAT-registered supplier, they shall be subject to VAT at zero percent (0%). In zero-ratedtransactions, the VAT-registered supplier shall not pass on any output VAT to the ECOZONE

enterprise, and at the same time, shall be entitled to claim tax credit/refund of its input VATattributable to such sales. Zero-rating of export sales primarily intends to benefit the exporter(i.e., the supplier from the Customs Territory), who is directly and legally liable for the VAT,making it internationally competitive by allowing it to credit/refund the input VAT attributableto its export sales.

Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplierwould only be exempt from VAT and the supplier shall not be able to claim credit/refund of itsinput VAT.

Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is aVAT-exempt entity that could not have engaged in a VAT-taxable business, this Court still

believes, given the particular circumstances of the present case, that it is entitled to acredit/refund of its input VAT.

IIPrior to RMC No. 74-99, however, PEZA-registered enterprises availing of the income tax

holiday under Executive Order No. 226, as amended, were deemed subject to VAT.

In his Petition, petitioner CIR opposed the grant of tax credit/refund to respondent Toshiba,reasoning thus –



In the first place, respondent could not have paid input taxes on its purchases of goods andservices from VAT-registered suppliers because such purchases being zero-rated, that is, nooutput tax was paid by the suppliers, no input tax was shifted or passed on to respondent. TheVAT is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transfereeor lessee of the goods, properties or services (Section 105, 1997 Tax Code).

…

Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:

―SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which is ataxable transaction for VAT purposes, shall not result in any output tax. However, the input taxon his purchases of goods, properties or services related to such zero-rated sale shall be availableas tax credit or refund in accordance with these regulations.‖

From the foregoing, the VAT-registered person who can avail as tax credit or refund of the input

tax on his purchases of goods, services or properties is the seller whose sale is zero-rated.Applying the foregoing provision to the case at bench, the VAT-registered supplier, whose saleof goods and services to respondent is zero-rated, can avail as tax credit or refund the input taxeson its (supplier) own purchases of goods and services related to its zero-rated sale of goods andservices to respondent. On the other hand, respondent, as the buyer in such zero-rated sale ofgoods and services, could not have paid input taxes for which it can claim as tax credit orrefund.[27]

Before anything else, this Court wishes to point out that petitioner CIR is working on theerroneous premise that respondent Toshiba is claiming tax credit or refund of input VAT basedon Section 4.100-2,[28] in relation to Section 4.106-1(a),[29] of RR No. 7-95, as amended, which

allows the tax credit/refund of input VAT on zero-rated sales of goods, properties or services.Instead, respondent Toshiba is basing its claim for tax credit or refund on Sec. 4.106-1(b) of thesame regulations, which allows a VAT-registered person to apply for tax credit/refund of theinput VAT on its capital goods. While in the former, the seller of the goods, properties orservices is the one entitled to the tax credit/refund; in the latter, it is the purchaser of the capitalgoods.

Nevertheless, regardless of his mistake as to the basis for respondent Toshiba‘s application

for tax credit/refund, petitioner CIR validly raised the question of whether any output VAT wasactually passed on to respondent Toshiba which it could claim as input VAT subject tocredit/refund. If the VAT-registered supplier from the Customs Territory did not charge anyoutput VAT to respondent Toshiba believing that it is exempt from VAT or it is subject to zero-

rated VAT, then respondent Toshiba did not pay any input VAT on its purchase of capital goodsand it could not claim any tax credit/refund thereof.

The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered enterprise shall be considered an export sale and subject to zero percent (0%) VATwas clearly established only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior tothe said date, however, whether or not a PEZA-registered enterprise was VAT-exempt dependedon the type of fiscal incentives availed of by the said enterprise. This old rule on VAT-exemption or liability of PEZA-registered enterprises, followed by the BIR, also recognized andaffirmed by the CTA, the Court of Appeals, and even this Court ,[30] cannot be lightly disregardedconsidering the great number of PEZA-registered enterprises which did rely on it to determine itstax liabilities, as well as, its privileges.

According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-registered enterprise the option to choose between two sets of fiscal incentives: (a) The five percent (5%) preferential tax rate on its gross income under Rep. Act No. 7916, as amended; and(b) the income tax holiday provided under Executive Order No. 226, otherwise known as theOmnibus Investment Code of 1987, as amended.[31]























The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, asamended, is in lieu of all taxes. Except for real property taxes, no other national or local tax may be imposed on a PEZA-registered enterprise availing of this particular fiscal incentive, not evenan indirect tax like VAT.

Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to

registered pioneer and non-pioneer enterprises for six-year and four-year periods,respectively.[32]Those availing of this incentive are exempt only from income tax, but shall besubject to all other taxes, including the ten percent (10%) VAT.

This old rule clearly did not take into consideration the Cross Border Doctrine essential tothe VAT system or the fiction of the ECOZONE as a foreign territory. It relied totally on thechoice of fiscal incentives of the PEZA-registered enterprise. Again, for emphasis, the old VATrule for PEZA-registered enterprises was based on their choice of fiscal incentives: (1) If thePEZA-registered enterprise chose the five percent (5%) preferential tax on its gross income, inlieu of all taxes, as provided by Rep. Act No. 7916, as amended, then it would be VAT-exempt;(2) If the PEZA-registered enterprise availed of the income tax holiday under Exec. Order No.

226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction was abolished by RMC No. 74-99, which categorically declared that all sales of goods, properties, and servicesmade by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latter‘s type or class of PEZA

registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise asa VAT-exempt entity.

The sale of capital goods by suppliers from the Customs Territory to respondent Toshiba inthe present Petition took place during the first and second quarters of 1996, way before theissuance of RMC No. 74-99, and when the old rule was accepted and implemented by no lessthan the BIR itself. Since respondent Toshiba opted to avail itself of the income tax holidayunder Exec. Order No. 226, as amended, then it was deemed subject to the ten percent (10%)

VAT. It was very likely therefore that suppliers from the Customs Territory had passed onoutput VAT to respondent Toshiba, and the latter, thus, incurred input VAT. It bears emphasisthat the CTA, with the help of SGV & Co., the independent accountant it commissioned to makea report, already thoroughly reviewed the evidence submitted by respondent Toshiba consistingof receipts, invoices, and vouchers, from its suppliers from the Customs Territory. Accordingly,this Court gives due respect to and adopts herein the CTA‘s findings that the suppliers of capitalgoods from the Customs Territory did pass on output VAT to respondent Toshiba and theamount of input VAT which respondent Toshiba could claim as credit/refund.

Moreover, in another circular, Revenue Memorandum Circular (RMC) No. 42-2003, issuedon 15 July 2003, the BIR answered the following question –

Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-registered firms automatically qualify as zero-rated without seeking priorapproval from the BIR effective October 1999.

1) Will the OSS-DOF Center still accept applications from PEZA-registeredclaimants who were allegedly billed VAT by their suppliers before and duringthe effectivity of the RMC by issuing VAT invoices/receipts?

…

A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of allother taxes, the said PEZA-registered taxpayer cannot claim TCC or refund forthe VAT paid on purchases. However, if the taxpayer is availing of the incometax holiday, it can claim VAT credit provided:

a. The taxpayer-claimant is VAT-registered;






b. Purchases are evidenced by VAT invoices or receipts, whichever isapplicable, with shifted VAT to the purchaser prior to the implementation ofRMC No. 74-99; and

c. The supplier issues a sworn statement under penalties of perjury that it shifted

the VAT and declared the sales to the PEZA-registered purchaser as taxablesales in its VAT returns.

For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims forinput VAT by PEZA-registered companies, regardless of the type or class ofPEZA registration, should be denied.

Under RMC No. 42-2003, the DOF would still accept applications for tax credit/refund filed by PEZA-registered enterprises, availing of the income tax holiday, for input VAT on their purchases made prior to RMC No. 74-99. Acceptance of applications essentially implies processing and possible approval thereof depending on whether the given conditions are met.

Respondent Toshiba‘s claim for tax credit/refund arose from the very same circumstancesrecognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It therefore seems irrational andunreasonable for petitioner CIR to oppose respondent Toshiba‘s application for tax credit/refundof its input VAT, when such claim had already been determined and approved by the CTA afterdue hearing, and even affirmed by the Court of Appeals; while it could accept, process, and evenapprove applications filed by other similarly-situated PEZA-registered enterprises at theadministrative level.

IIIFindings of fact by the CTA are respected and adopted by this Court.

Finally, petitioner CIR, in a last desperate attempt to block respondent Toshiba‘s claim for

tax credit/refund, challenges the allegation of said respondent that it availed of the income tax

holiday under Exec. Order No. 226, as amended, rather than the five percent (5%) preferentialtax rate under Rep. Act No. 7916, as amended. Undoubtedly, this is a factual matter that shouldhave been raised and threshed out in the lower courts. Giving it credence would belie petitionerCIR‘s assertion that it is raising only issues of law in its Petition that may be resolved without

need for reception of additional evidences. Once more, this Court respects and adopts thefinding of the CTA, affirmed by the Court of Appeals, that respondent Toshiba had indeedavailed of the income tax holiday under Exec. Order No. 226, as amended.

WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court ofAppeals in CA-G.R. SP. No. 59106, and the order of the CTA in CTA Case No. 5593, orderingsaid petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondentToshiba, in the amount of P16,188,045.44, representing unutilized input VAT for the first and

second quarters of 1996.SO ORDERED.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur .



Republic of the PhilippinesSUPREME COURT

ManilaTHIRD DIVISION

G.R. No. 153866 February 11, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.SEAGATE TECHNOLOGY (PHILIPPINES), respondent.

D E C I S I O NPANGANIBAN, J.:

Business companies registered in and operating from the Special Economic Zone in Naga, Cebu-- like herein respondent -- are entities exempt from all internal revenue taxes and theimplementing rules relevant thereto, including the value-added taxes or VAT. Although exportsales are not deemed exempt transactions, they are nonetheless zero-rated. Hence, in the presentcase, the distinction between exempt entities and exempttransactions has little significance,

because the net result is that the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has complied with all requisites for claiming a tax refund of or credit forthe input VAT it paid on capital goods it purchased. Thus, the Court of Tax Appeals and theCourt of Appeals did not err in ruling that it is entitled to such refund or credit.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside theMay 27, 2002 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision reads as follows:

"WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack ofmerit."3

The Facts

The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:

"As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:

1. [Respondent] is a resident foreign corporation duly registered with the Securities andExchange Commission to do business in the Philippines, with principal office address at the new

Cebu Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform the duties of his office, including, among others, the duty to act and approve claims forrefund or tax credit;

3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has beenissued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, toengage in the manufacture of recording components primarily used in computers for export.Such registration was made on 6 June 1997;

4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VATRegistration Certification No. 97-083-000600-V issued on 2 April 1997;

5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];

6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with

supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition

for Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;

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7. No final action has been received by [respondent] from [petitioner] on [respondent‘s] claim

for VAT refund.

"The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the [petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000

by way of Petition for Review in order to toll the running of the two-year prescriptive period.

"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:

1. [Respondent‘s] alleged claim for tax refund/credit is subject to administrative routinary

investigation/examination by [petitioner‘s] Bureau;

2. Since ‗taxes are presumed to have been collected in accordance with laws and regulations,‘ the[respondent] has the burden of proof that the taxes sought to be refunded were erroneously orillegally collected x x x;

3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:

"A claimant has the burden of proof to establish the factual basis of his or her claim for taxcredit/refund."

4. Claims for tax refund/tax credit are construed in ‗strictissimi juris‘ against the taxpayer. This

is due to the fact that claims for refund/credit [partake of] the nature of an exemption from tax.Thus, it is incumbent upon the [respondent] to prove that it is indeed entitled to the refund/creditsought. Failure on the part of the [respondent] to prove the same is fatal to its claim for taxcredit. He who claims exemption must be able to justify his claim by the clearest grant of organicor statutory law. An exemption from the common burden cannot be permitted to exist upon

vague implications;

5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority(PEZA) registered Ecozone Enterprise, then its business is not subject to VAT pursuant toSection 24 of Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, asamended. As [respondent‘s] business is not subject to VAT, the capital goods and services italleged to have purchased are considered not used in VAT taxable business. As such,[respondent] is not entitled to refund of input taxes on such capital goods pursuant to Section4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on services pursuant toSection 4.103 of said regulations.

6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the1997 Tax Code on filing of a written claim for refund within two (2) years from the date of payment of tax.‘

"On July 19, 2001, the Tax Court rendered a decision granting the claim for refund."4

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a taxcredit certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This

sum represented the unutilized but substantiated input VAT paid on capital goods purchased for

the period covering April 1, 1998 to June 30, 1999.The appellate court reasoned that respondent had availed itself only of the fiscal incentives underExecutive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), notof those under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916.Respondent was, therefore, considered exempt only from the payment of income tax when itopted for the income tax holiday in lieu of the 5 percent preferential tax on gross income earned.







As a VAT-registered entity, though, it was still subject to the payment of other national internalrevenue taxes, like the VAT.

Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it purchased,

respondent correctly filed the administrative and judicial claims for its refund within the two-year prescriptive period. Such payments were -- to the extent of the refundable value -- dulysupported by VAT invoices or official receipts, and were not yet offset against any output VATliability.

Hence this Petition.5

Sole Issue Petitioner submits this sole issue for our consideration:

"Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in theamount ofP12,122,922.66 representing alleged unutilized input VAT paid on capital goods

purchased for the period April 1, 1998 to June 30, 1999."

6

The Court‘s Ruling The Petition is unmeritorious.

Sole Issue:

Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input VAT

No doubt, as a PEZA-registered enterprise within a special economic zone,7 respondent isentitled to the fiscal incentives and benefits8 provided for in either PD 669 or EO 226.10 It shall,moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos.

(RA) 7227

11

and 7844.

12

Preferential Tax Treatment Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary,respondent shall not be subject to internal revenue laws and regulations for raw materials,supplies, articles, equipment, machineries, spare parts and wares, except those prohibited by law, brought into the zone to be stored, broken up, repacked, assembled, installed, sorted, cleaned,graded or otherwise processed, manipulated, manufactured, mixed or used directly or indirectlyin such activities.13 Even so, respondent would enjoy a net-operating loss carry over; accelerateddepreciation; foreign exchange and financial assistance; and exemption from export taxes, local

taxes and licenses.

14

Comparatively, the same exemption from internal revenue laws and regulations applies if EO22615 is chosen. Under this law, respondent shall further be entitled to an income tax holiday;additional deduction for labor expense; simplification of customs procedure; unrestricted use ofconsigned equipment; access to a bonded manufacturing warehouse system; privileges forforeign nationals employed; tax credits on domestic capital equipment, as well as for taxes andduties on raw materials; and exemption from contractors‘ taxes, wharfage dues, taxes and duties

on imported capital equipment and spare parts, export taxes, duties, imposts and fees,16localtaxes and licenses, and real property taxes.17

A privilege available to respondent under the provision in RA 7227 on tax and duty-freeimportation of raw materials, capital and equipment18 -- is, ipso facto, also accorded to thezone19 under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws, rulesand regulations to the contrary -- extends20 to that zone the provision stating that no local ornational taxes shall be imposed therein.21 No exchange control policy shall be applied; and freemarkets for foreign exchange, gold, securities and future shall be allowed andmaintained.22Banking and finance shall also be liberalized under minimum Bangko Sentral







































































regulation with the establishment of foreign currency depository units of local commercial banksand offshore banking units of foreign banks.23

In the same vein, respondent benefits under RA 7844 from negotiable tax credits24 for locally- produced materials used as inputs. Aside from the other incentives possibly already granted to it

by the Board of Investments, it also enjoys preferential credit facilities

25

and exemption from PD1853.26

From the above-cited laws, it is immediately clear that petitioner enjoys preferential taxtreatment.27 It is not subject to internal revenue laws and regulations and is even entitled to taxcredits. The VAT on capital goods is an internal revenue tax from which petitioner as an entity isexempt. Although the transactions involving such tax are not exempt, petitioner as a VAT-registered person,28 however, is entitled to their credits.

Nature of the VAT and the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percentlevied on every importation of goods, whether or not in the course of trade or business, orimposed on each sale, barter, exchange or lease of goods or properties or on each rendition ofservices in the course of trade or business29 as they pass along the production and distributionchain, the tax being limited only to the value added30 to such goods, properties or services by theseller, transferor or lessor .31 It is an indirect tax that may be shifted or passed on to the buyer,transferee or lessee of the goods, properties or services.32 As such, it should be understood not inthe context of the person or entity that is primarily, directly and legally liable for its payment, butin terms of its nature as a tax on consumption.33 In either case, though, the same conclusion isarrived at.

The law

34

that originally imposed the VAT in the country, as well as the subsequent amendmentsof that law, has been drawn from the tax credit method .35 Such method adopted the mechanicsand self-enforcement features of the VAT as first implemented and practiced in Europe andsubsequently adopted in New Zealand and Canada.36Under the present method that relies oninvoices, an entity can credit against or subtract from the VAT charged on its sales or outputs theVAT paid on its purchases, inputs and imports.37

If at the end of a taxable quarter the output taxes38 charged by a seller 39 are equal to the inputtaxes40 passed on by the suppliers, no payment is required. It is when the output taxes exceed theinput taxes that the excess has to be paid.41 If, however, the input taxes exceed the output taxes,the excess shall be carried over to the succeeding quarter or quarters.42 Should the input taxesresult from zero-rated or effectively zero-rated transactions or from the acquisition of capitalgoods,43 any excess over the output taxes shall instead be refunded44 to the taxpayer orcredited45 against other internal revenue taxes.46

Zero-Rated and Effectively Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectivelyzero-rated transactions as to their source.

Zero-rated transactions generally refer to the export sale of goods and supply of services.47 Thetax rate is set at zero.48 When applied to the tax base, such rate obviously results in no taxchargeable against the purchaser. The seller of such transactions charges no output tax,49 but canclaim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Effectively zero-rated transactions, however, refer to the sale of goods50 or supply ofservices51 to persons or entities whose exemption under special laws or international agreementsto which the Philippines is a signatory effectively subjects such transactions to a zerorate.52 Again, as applied to the tax base, such rate does not yield any tax chargeable against the






















































































































purchaser. The seller who charges zero output tax on such transactions can also claim a refund ofor a tax credit certificate for the VAT previously charged by suppliers.

Zero Rating and Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent ofrelief that results from either one of them is not.

Applying the destination principle53 to the exportation of goods, automatic zero rating54 is

primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT,making such seller internationally competitive by allowing the refund or credit of input taxes thatare attributable to export sales.55 Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers.

In both instances of zero rating, there is total relief for the purchaser from the burden of the

tax.

56

But in an exemption there is only partial relief ,

57

because the purchaser is not allowed anytax refund of or credit for input taxes paid.58

Exempt Transaction >and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the partiesto the transaction.59

An exempt transaction, on the one hand, involves goods or services which, by their nature, arespecifically listed in and expressly exempted from the VAT under the Tax Code, without regardto the tax status -- VAT-exempt or not -- of the party to the transaction.

60 Indeed, such

transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit forany input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT exemption under the TaxCode, a special law or an international agreement to which the Philippines is a signatory, and byvirtue of which its taxable transactions become exempt from the VAT.61 Such party is also notsubject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, dependingon its registration as a VAT or non-VAT taxpayer.

As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services.62 While

the liability is imposed on one person, theburden may be passed on to another. Therefore, if aspecial law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted toit by its VAT-registered suppliers, the purchase transaction is not exempt. Applying this principle to the case at bar, the purchase transactions entered into by respondent are not VAT-exempt.

Special laws may certainly exempt transactions from the VAT.63 However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the speciallaw under which respondent was registered. The purchase transactions it entered into are,therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register.

Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent,64 depending again on the application of the destination principle.65

If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for use or consumption outside the Philippines, these shall be subject to 0 percent.66 If enteredinto with a purchaser for use or consumption in the Philippines, then these shall be subject to 10

























































percent,67 unless the purchaser is exempt from the indirect burden of the VAT, in which case itshall also be zero-rated.

Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero.Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero

rate,

68

because the ecozone within which it is registered is managed and operated by the PEZA asa separate customs territory.69 This means that in such zone is created the legal fiction of foreignterritory.70 Under the cross-border principle

71 of the VAT system being enforced by the Bureauof Internal Revenue (BIR),72 no VAT shall be imposed to form part of the cost of goods destinedfor consumption outside of the territorial border of the taxing authority. If exports of goods andservices from the Philippines to a foreign country are free of the VAT,73 then the same rule holdsfor such exports from the national territory -- except specifically declared areas -- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity areconsidered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-registered person in the customs territory are deemed imports from a foreign country.74 An

ecozone -- indubitably a geographical territory of the Philippines -- is, however, regarded in lawas foreign soil.75 This legal fiction is necessary to give meaningful effect to the policies of thespecial law creating the zone.76 If respondent is located in an export processing zone77within thatecozone, sales to the export processing zone, even without being actually exported, shall in fact be viewed as constructively exported under EO 226.78 Considered as export sales,79 such purchase transactions by respondent would indeed be subject to a zero rate.80

Tax Exemptions Broad and Express

Applying the special laws we have earlier discussed, respondent as an entity is exempt frominternal revenue laws and regulations.

This exemption covers both direct and indirect taxes, stemming from the very nature of the VATas a tax on consumption, for which the direct liability is imposed on one person but theindirect burden is passed on to another. Respondent, as an exempt entity, can neither be directlycharged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, theequivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where thelaw does not distinguish, we ought not to distinguish.

Moreover, the exemption is both express and pervasive for the following reasons:

First , RA 7916 states that "no taxes, local and national, shall be imposed on businessestablishments operating within the ecozone."81 Since this law does not exclude the VAT fromthe prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. Anexception confirms the rule in cases not excepted; that is, a thing not being excepted must beregarded as coming within the purview of the general rule.

Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention ofthe law. That no VAT shall be imposed directly upon business establishments operating withinthe ecozone under RA 7916 also means that no VAT may be passed on and imposedindirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly.

Second , when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except forreal property taxes that presently are imposed on land owned by developers .82 This similar andrepeated prohibition is an unambiguous ratification of the law‘s intent in not imposing local ornational taxes on business enterprises within the ecozone.

Third , foreign and domestic merchandise, raw materials, equipment and the like "shall not besubject to x x x internal revenue laws and regulations" under PD 6683 -- the original charter of





































































PEZA (then EPZA) that was later amended by RA 7916.84 No provisions in the latter law modifysuch exemption.

Although this exemption puts the government at an initial disadvantage, the reduced taxcollection ultimately redounds to the benefit of the national economy by enticing more business

investments and creating more employment opportunities.

85

Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- exceptthose prohibited by law -- "shall not be subject to x x x internal revenue laws and regulations x xx"86 if brought to the ecozone‘s restricted area

87 for manufacturing by registered exportenterprises,88 of which respondent is one. These rules also apply to all enterprises registered withthe EPZA prior to the effectivity of such rules.89

Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI) underEO 226 patently enjoy exemption from national internal revenue taxes on imported capitalequipment reasonably needed and exclusively used for the manufacture of their products;91 on

required supplies and spare part for consigned equipment;

92

and on foreign and domesticmerchandise, raw materials, equipment and the like -- except those prohibited by law -- broughtinto the zone for manufacturing.93 In addition, they are given credits for the value of the nationalinternal revenue taxes imposed on domestic capital equipment also reasonably needed andexclusively used for the manufacture of their products,94 as well as for the value of such taxesimposed on domestic raw materials and supplies that are used in the manufacture of their export products and that form part thereof .95

Sixth, the exemption from local and national taxes granted under RA 722796 are ipso factoaccorded to ecozones.97 In case of doubt, conflicts with respect to such tax exemption privilegeshall be resolved in favor of the ecozone.98

And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used inthe production of export goods,99 and for locally produced raw materials, capital equipment andspare parts used by exporters of non-traditional products100 -- shall also be continuously enjoyed by similar exporters within the ecozone.101Indeed, the latter exporters are likewise entitled tosuch tax exemptions and credits.

Tax Refund as Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi juri s102 against the

taxpayer 103 and liberally in favor of the taxing authority.104

Tax refunds are in the nature of such exemptions.105 Accordingly, the claimants of those refunds bear the burden of proving the factual basis of their claims;106 and of showing, by words too plain to be mistaken, that the legislature intended to exempt them.107 In the present case, all thecited legal provisions are teeming with life with respect to the grant of tax exemptions too vividto pass unnoticed. In addition, respondent easily meets the challenge.

Respondent, which as an entity is exempt, is different from its transactions which are not exempt.The end result, however, is that it is not subject to the VAT. The non-taxability of transactionsthat are otherwise taxable is merely a necessary incident to the tax exemption conferred by lawupon it as an entity, not upon the transactions themselves.108 Nonetheless, its exemption as anentity and the non-exemption of its transactions lead to the same result for the followingconsiderations:

First , the contemporaneous construction of our tax laws by BIR authorities who are called uponto execute or administer such laws109 will have to be adopted. Their prior tax issuances have heldinconsistent positions brought about by their probable failure to comprehend and fully appreciatethe nature of the VAT as a tax on consumption and the application of the destination principle.

110 Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and













































































































correctly provides that any VAT-registered supplier‘s sale of goods, property or services from

the customs territory to any registered enterprise operating in the ecozone -- regardless of theclass or type of the latter‘s PEZA registration -- is legally entitled to a zero rate.111

Second , the policies of the law should prevail. Ratio legis est anima. The reason for the law is its

very soul.

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as theestablishment of export processing zones, seeks "to encourage and promote foreign commerce asa means of x x x strengthening our export trade and foreign exchange position, of hasteningindustrialization, of reducing domestic unemployment, and of accelerating the development ofthe country."112

RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating thespecial economic zones, "the government shall actively encourage, promote, induce andaccelerate a sound and balanced industrial, economic and social development of the country x x

x through the establishment, among others, of special economic zones x x x that shall effectivelyattract legitimate and productive foreign investments."113

Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which shallx x x meet the tests of international competitiveness[,] accelerate development of less developedregions of the country[,] and result in increased volume and value of exports for theeconomy."114 Fiscal incentives that are cost-efficient and simple to administer shall be devisedand extended to significant projects "to compensate for market imperfections, to reward performance contributing to economic development,"115 and "to stimulate the establishment andassist initial operations of the enterprise."116

Wisely accorded to ecozones created under RA 7916

117

was the government‘s policy -- spelledout earlier in RA 7227 -- of converting into alternative productive uses118 the former militaryreservations and their extensions,119as well as of providing them incentives120 to enhance the benefits that would be derived from them121 in promoting economic and social development.122

Finally, under RA 7844, the State declares the need "to evolve export development into anational effort"123 in order to win international markets. By providing many export and taxincentives,124 the State is able to drive home the point that exporting is indeed "the key tonational survival and the means through which the economic goals of increased employment andenhanced incomes can most expeditiously be achieved."125

The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increaseeconomic activity; and x x x create a robust environment for business to enable firms to compete better in the regional as well as the global market."126 After all, international competitivenessrequires economic and tax incentives to lower the cost of goods produced for export. Stateactions that affect global competition need to be specific and selective in the pricing of particulargoods or services.127

All these statutory policies are congruent to the constitutional mandates of providing incentivesto needed investments,128 as well as of promoting the preferential use of domestic materials andlocally produced goods and adopting measures to help make these competitive.129 Tax credits fordomestic inputs strengthen backward linkages. Rightly so, "the rule of law and the existence ofcredible and efficient public institutions are essential prerequisites for sustainable economicdevelopment."130

VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund

Registration is an indispensable requirement under our VAT law.131 Petitioner alleges thatrespondent did register for VAT purposes with the appropriate Revenue District Office.However, it is now too late in the day for petitioner to challenge the VAT-registered status of





















































































respondent, given the latter‘s prior representation before the lower courts and the mode of appeal

taken by petitioner before this Court.

The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting frominternal revenue laws and regulations the equipment -- including capital goods -- that registered

enterprises will use, directly or indirectly, in manufacturing.

132

EO 226 even reiterates this privilege among the incentives it gives to such enterprises.133 Petitioner merely asserts that byvirtue of the PEZA registration alone of respondent, the latter is not subject to the VAT.Consequently, the capital goods and services respondent has purchased are not considered usedin the VAT business, and no VAT refund or credit is due.134 This is a non sequitur. By theVAT‘s very nature as a tax on consumption, the capital goods and services respondent has

purchased are subject to the VAT, although at zero rate. Registration does not determinetaxability under the VAT law.

Moreover, the facts have already been determined by the lower courts. Having failed to presentevidence to support its contentions against the income tax holiday privilege of

respondent,

135

petitioner is deemed to have conceded. It is a cardinal rule that "issues andarguments not adequately and seriously brought below cannot be raised for the first time onappeal."136 This is a "matter of procedure"137 and a "question of fairness."138 Failure to assert"within a reasonable time warrants a presumption that the party entitled to assert it either hasabandoned or declined to assert it."139

The BIR regulations additionally requiring an approved prior application for effective zerorating140 cannot prevail over the clear VAT nature of respondent‘s transactions. The scope of

such regulations is not "within the statutory authority x x x granted by the legislature.141

First , a mere administrative issuance, like a BIR regulation, cannot amend the law; the former

cannot purport to do any more than interpret the latter .

142

The courts will not countenance onethat overrides the statute it seeks to apply and implement.143

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires an additional application to be made for such taxpayer‘s

transactions to be considered effectively zero-rated. An effectively zero-rated transaction doesnot and cannot become exempt simply because an application therefor was not made or, if made,was denied. To allow the additional requirement is to give unfettered discretion to those officialsor agents who, without fluid consideration, are bent on denying a valid application. Moreover,the State can never be estopped by the omissions, mistakes or errors of its officials or agents.144

Second , grantia argumenti that such an application is required by law, there is still the presumption of regularity in the performance of official duty.145 Respondent‘s registration carries

with it the presumption that, in the absence of contradictory evidence, an application for effectivezero rating was also filed and approval thereof given. Besides, it is also presumed that the lawhas been obeyed146 by both the administrative officials and the applicant.

Third, even though such an application was not made, all the special laws we have tackledexempt respondent not only from internal revenue laws but also from the regulations issued pursuant thereto. Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur economic growth in the country and attain global competitiveness as envisionedin those laws.

A VAT-registered status, as well as compliance with the invoicing requirements,147 is sufficientfor the effective zero rating of the transactions of a taxpayer. The nature of its business andtransactions can easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to apply for their effective zero rating. Otherwise, their VAT exemptionwould be determined, not by their nature, but by the taxpayer‘s negligence -- a result not at allcontemplated. Administrative convenience cannot thwart legislative mandate.
































































Tax Refund or Credit in Order

Having determined that respondent‘s purchase transactions are subject to a zero VAT rate, thetax refund or credit is in order.

As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentivesin EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime insteadof the 5 percent preferential tax regime.

The latter scheme is not a perfunctory aftermath of a simple registration under the PEZAlaw,148 for EO 226149also has provisions to contend with. These two regimes are in factincompatible and cannot be availed of simultaneously by the same entity. While EO 226 merelyexempts it from income taxes, the PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only from the paymentof income tax for a certain number of years, depending on its registration as a pioneer or a non-

pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned inlieu of local and national taxes imposable upon business establishments within the ecozonecannot outrightly determine a VAT exemption. Being subject to VAT, payments erroneouslycollected thereon may then be refunded or credited.

Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA7916, Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such provision merely exempts respondent from taxes imposed on business. To repeat, the VAT is atax imposed on consumption, not on business. Although respondent as an entity is exempt, thetransactions it enters into are not necessarily so. The VAT payments made in excess of the zerorate that is imposable may certainly be refunded or credited.

Compliance with All Requisites for VAT Refund or Credit

As further enunciated by the Tax Court, respondent complied with all the requisites for claiminga VAT refund or credit.150

First , respondent is a VAT-registered entity. This fact alone distinguishes the present case fromContex, in which this Court held that the petitioner therein was registered as a non-VATtaxpayer .151 Hence, for being merely VAT-exempt, the petitioner in that case cannot claim anyVAT refund or credit.

Second, the input taxes paid on the capital goods of respondent are duly supported by VATinvoices and have not been offset against any output taxes. Although enterprises registered withthe BOI after December 31, 1994 would no longer enjoy the tax credit incentives on domesticcapital equipment -- as provided for under Article 39(d), Title III, Book I of EO 226152 -- startingJanuary 1, 1996, respondent would still have the same benefit under a general and expressexemption contained in both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c)of RA 7227, extended to the ecozones by RA 7916.

There was a very clear intent on the part of our legislators, not only to exempt investors inecozones from national and local taxes, but also to grant them tax credits. This fact was revealed by the sponsorship speeches in Congress during the second reading of House Bill No. 14295,which later became RA 7916, as shown below:

"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from nationaland local taxes; x x x tax credit for locally-sourced inputs x x x."

"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating anenvironment conducive for investors, the bill offers incentives such as the exemption from localand national taxes, x x x tax credits for locally sourced inputs x x x."153
























And third, no question as to either the filing of such claims within the prescriptive period or thevalidity of the VAT returns has been raised. Even if such a question were raised, the taxexemption under all the special laws cited above is broad enough to cover even the enforcementof internal revenue laws, including prescription.154

Summary

To summarize, special laws expressly grant preferential tax treatment to business establishmentsregistered and operating within an ecozone, which by law is considered as a separate customsterritory. As such, respondent is exempt from all internal revenue taxes, including the VAT, andregulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5 percent preferential tax regime. As a matter of law and procedure, its registration status entitlingit to such tax holiday can no longer be questioned. Its sales transactions intended for export maynot be exempt, but like its purchase transactions, they are zero-rated. No prior application for theeffective zero rating of its transactions is necessary. Being VAT-registered and havingsatisfactorily complied with all the requisites for claiming a tax refund of or credit for the input

VAT paid on capital goods purchased, respondent is entitled to such VAT refund or credit.

WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as tocosts.

SO ORDERED.

Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.








Manila

THIRD DIVISION

G.R. No. 104171 February 24, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.B.F. GOODRICH PHILS., INC. (now SIME DARBY INTERNATIONAL TIRE CO.,

INC.) and THE COURT OF APPEALS, respondents.

PANGANIBAN, J.:

Notwithstanding the expiration of the five-year prescriptive period, may the Bureau of InternalRevenue (BIR) still assess a taxpayer even after the latter has already paid the tax due, on theground that the previous assessment was insufficient or based on a "false" return?

The Case

This is the main question raised before us in this Petition for Review on Certiorari assailing theDecision 1 dated February 14, 1992, promulgated by the Court of Appeals 2 in CA-GR SP No.25100. The assailed Decision reversed the Court of Tax Appeals (CTA) 3 which upheld the BIRcommissioner's assessments made beyond the five-year statute of limitations.

The Facts

The facts undisputed. 4 Private Respondent BF Goodrich Phils., Inc. (now Sime DarbyInternational Tire Co, Inc.), was an American-owned and controlled corporation previous to July3, 1974. As a condition for approving the manufacture by private respondent of tires and otherrubber products, the Central Bank of the Philippines required that it should develop a rubber plantation. In compliance with this requirement, private respondent purchased from thePhilippine government in 1961, under the Public Land Act and the Parity Amendment to the1935 Constitution, certain parcels of land located in Tumajubong, Basilan, and there developed arubber plantation.

More than a decade later, on August 2, 1973, the justice secretary rendered an opinion statingthat, upon the expiration of the Parity Amendment on July 3, 1974, the ownership rights ofAmericans over public agricultural lands, including the right to dispose or sell their real estate,would be lost. On the basis of this Opinion, private respondent sold to Siltown RealtyPhilippines, Inc. on January 21, 1974, its Basilan landholding for P500,000 payable ininstallments. In accord with the terms of the sale, Siltown Realty Philippines, Inc. leased the said parcels of land to private respondent for a period of 25 years, with an extension of another 25years at the latter's option.

Based on the BIR's Letter of Authority No. 10115 dated April 14, 1975, the books and accountsof private respondent were examined for the purpose of determining its tax liability for taxableyear 1974. The examination resulted in the April 23, 1975 assessment of private respondent fordeficiency income tax in the amount of P6,005.35, which it duly paid.

Subsequently, the BIR also issued Letters of Authority Nos. 074420 RR and 074421 RR andMemorandum Authority Reference No. 749157 for the purpose of examining Siltown's business,



income and tax liabilities. On the basis of this examination, the BIR commissioner issued against private respondent on October 10, 1980, an assessment for deficiency in donor's tax in theamount of P1,020,850, in relation to the previously mentioned sale of its Basilan landholdings toSiltown. Apparently, the BIR deemed the consideration for the sale insufficient, and thedifference between the fair market value and the actual purchase price a taxable donation.

In a letter dated November 24, 1980, private respondent contested this assessment. On April 9,1981, it received another assessment dated March 16, 1981, which increased to P 1,092,949 theamount demanded for the alleged deficiency donor's tax, surcharge, interest and compromise penalty.

Private respondent appealed the correctness and the legality of these last two assessments to theCTA. After trial in due course, the CTA rendered its Decision dated March 29, 1991, thedispositive portion of which reads as follows:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing

petitioner deficiency gift tax is MODIFIED land petitioner is ordered to pay theamount of P1,311,179.01 plus 10% surcharge and 20% annual interest fromMarch 16, 1981 until fully paid provided that the maximum amount that may becollected as interest on delinquency shall in no case exceed an amountcorresponding to a period of three years pursuant to Section 130(b)(l) and (c) ofthe 1977 Tax Code, as amended by P.D. No. 1705, which took effect on August 1,1980.

SO ORDERED. 5

Undaunted, private respondent elevated the matter to the Court of Appeals, which reversed the

CTA, as follows:What is involved here is not a first assessment; nor is it one within the 5-year period stated in Section 331 above. Since what is involved in this case is amultiple assessment beyond the five-year period, the assessment must be based onthe grounds provided in Section 337, and not on Section 15 of the 1974 Tax Code.Section 337 utilizes the very specific terms " fraud , irregularity, and mistake"."Falsity does not appear to be included in this enumeration. Falsity suffices for anassessment, which is a first assessment made within the five-year period. When itis a subsequent assessment made beyond the five-year period, then, it may bevalidly justified only by "fraud, irregularity and mistake" on the part of thetaxpayer. 6

Hence, this Petition for Review under Rule 45 of the Rules of Court. 7

The Issues

Before us, petitioner raises the following issues:

I

Whether or not petitioner's right to assess herein deficiency donor's tax has indeed prescribed as ruled by public respondent Court of Appeals

II

Whether or not the herein deficiency donor's tax assessment for 1974 is valid andin accordance with law

Prescription is the crucial issue in the resolution of this case.



The Court's Ruling

The petition has no merit.

Main Issue: Prescription

The petitioner contends that the Court of Appeals erred in reversing the CTA on the issue of prescription, because its ruling was based on factual findings that should have been leftundisturbed on appeal, in the absence of any showing that it had been tainted with gross error orgrave abuse of

discretion. 8 The Court is not persuaded.

True, the factual findings of the CTA are generally not disturbed on appeal when supported bysubstantial evidence and in the absence of gross error or grave abuse of discretion. However, theCTA's application of the law to the facts of this controversy is an altogether different matter, forit involves a legal question. There is a question of law when the issue is the application of the

law to a given set of facts. On the other hand, a question of fact involves the truth or falsehood ofalleged facts. 9 In the present case, the Court of Appeals ruled not on the truth or falsity of thefacts found by the CTA, but on the latter's application of the law on prescription.

Sec. 331 of the National Internal Revenue Code provides:

Sec. 331. Period of limitation upon assessment and collection. — Except as provided in the succeeding section, internal-revenue taxes shall be assessed withinfive years after the return was filed, and no proceeding in court withoutassessment for the collection of such taxes shall be begun after expiration of such period. For the purposes of this section, a return filed before the last day

prescribed by law for the filing thereof shall be considered as filed on such lastday: Provided , That this limitation shall not apply to cases already investigated prior to the approval of this Code.

Applying this provision of law to the facts at hand, it is clear that the October 16, 1980 and theMarch 1981 assessments were issued by the BIR beyond the five-year statute of limitations. TheCourt has thoroughly studied the records of this case and found no basis to disregard the five-year period of prescription. As succinctly pronounced by the Court of Appeals:

The subsequent assessment made by the respondent Commissioner on October40, 1980, modified by that of March 16, 1981, violates the law. Involved in this

petition is the income of the petitioner for the year 1974, the returns for whichwere required to be filed on or before April 15 of the succeeding year. The returnsfor the year 1974 were duly filed by the petitioner, and assessment of taxes duefor such year — including that on the transfer of properties on June 21, 1974 — was made on April 13, 1975 and acknowledged by Letter of Confirmation No.101155 terminating the examination on this subject. The subsequent assessmentof October 10, 1980 modified, by that of March 16, 1981, was made beyond the period expressly set in Section 331 of the National Internal Revenue Code . . . . 10

Petitioner relies on the CTA ruling, the salient portion of which reads:

Falsity is what we have here, and for that matter, we hasten to add that the secondassessment (March 16, 1981) of the Commissioner was well-advised having beenmade in contemplation of his power under Section 15 of the 1974 Code (nowSection 16, of NIRC) to assess the proper tax on thebest evidenceobtainable "when there is reason to believe that a report of a taxpayer is false,incomplete or erroneous. More, when there is falsity with intent to evade tax as inthis case, the ordinary period of limitation upon assessment and collection does



not apply so that contrary to the averment of petitioner, the right to assessrespondent has not prescribed.

What is the considered falsity? The transfer through sale of the parcels of land inTumajubong, Lamitan, Basilan in favor of Siltown Realty for the sum of

P500,000.00 only whereas said lands had been sworn to under Presidential Decree No. 76 (Dec. 6, 1972) as having a value of P2,683,467 (P2,475,467 + P207,700)( see Declaration of Real Property form, p. 28, and p. 15, no. 5, BIR Record). 11

For the purpose of safeguarding taxpayers from any unreasonable examination, investigation orassessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the lawon prescription, being a remedial measure, should be liberally construed in order to afford such protection. 12 As a corollary, the exceptions to the law on prescription should perforce be strictlyconstrued.

Sec. 15 of the NIRC, on the other hand, provides that "[w]hen a report required by law as a basis

for the assessment of any national internal revenue tax shall not be forthcoming within the timefixed by law or regulation, or when there is reason to believe that any such report is false,incomplete, or erroneous, the Commissioner of Internal Revenue shall assess the proper tax onthe best evidence obtainable." Clearly, Section 15 does not provide an exception to the statute oflimitations on the issuance of an assessment, by allowing the initial assessment to be made on the basis of the best evidence available. Having made its initial assessment in the manner prescribed,the commissioner could not have been authorized to issue, beyond the five-year prescriptive period, the second and the third assessments under consideration before us.

Nor is petitioner's claim of falsity sufficient to take the questioned assessments out of the ambitof the statute of limitations. The relevant part of then Section 332 of the NIRC, which

enumerates the exceptions to the period of prescription, provides:Sec. 332. Exceptions as to period of limitation of assessment and collection of

taxes. — (a) In the case of a false or fraudulent return with intent to evade a tax orof a failure to file a return, the tax may be assessed, or a proceeding in court forthe collection of such tax may be begun without assessment, at any time withinten years after the discovery of the falsity, fraud, or omission: . . . .

Petitioner insists that private respondent committed "falsity" when it sold the property for a pricelesser than its declared fair market value. This fact alone did not constitute a false return whichcontains wrong information due to mistake, carelessness or ignorance. 13 It is possible that real property may be sold for less than adequate consideration for a bona fide business purpose; insuch event, the sale remains an "arm's length" transaction. In the present case, the privaterespondent was compelled to sell the property even at a price less than its market value, becauseit would have lost all ownership rights over it upon the expiration of the parity amendment. Inother words, private respondent was attempting to minimize its losses. At the same time, it wasable to lease the property for 25 years, renewable for another 25. This can be regarded as anotherconsideration on the price.

Furthermore, the fact that private respondent sold its real property for a price less than itsdeclared fair market value did not by itself justify a finding of false return. Indeed, private

respondent declared the sale in its 1974 return submitted to the BIR. 14 Within the five-year prescriptive period, the BIR could have issued the questioned assessment, because the declaredfair market value of said property was of public record. This it did not do, however, during allthose five years. Moreover, the BIR failed to prove that respondent's 1974 return had been filedfraudulently. Equally significant was its failure to prove respondent's intent to evade the paymentof the correct amount of tax.

Ineludibly, the BIR failed to show that private respondent's 1974 return was filed fraudulentlywith intent to evade the payment of the correct amount of tax. 15 Moreover, even though a



donor's tax, which is defined as "a tax on the privilege of transmitting one's property or property

rights to another or others without adequate and full valuable consideration," 16 is different fromcapital gains tax, a tax on the gain from the sale of the taxpayer's property forming part of capitalassets, 17 the tax return filed by private respondent to report its income for the year 1974 wassufficient compliance with the legal requirement to file a return. In other words, the fact that the

sale transaction may have partly resulted in a donation does not change the fact that privaterespondent already reported its income for 1974 by filing an income tax return.

Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent returnwith the intent to evade tax, or that it had failed to file a return at all, the period for assessmentshas obviously prescribed. Such instances of negligence or oversight on the part of the BIR cannot prejudice taxpayers, considering that the prescriptive period was precisely intended to give them peace of mind.

Based on the foregoing, a discussion of the validity and legality of the assailed assessments has become moot and unnecessary.

WHEREFORE, the Petition for Review is DENIED and the assailed Decision of the Court ofAppeals is AFFIRMED. No costs.

SO ORDERED.

Romero, Purisima and Gonzaga-Reyes, JJ., concur.




ManilaEN BANC

G.R. No. 115455 October 30, 1995ARTURO M. TOLENTINO, petitioner,vs.

THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, respondents.G.R. No. 115525 October 30, 1995JUAN T. DAVID, petitioner,vs.TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of Internal Revenue; and their AUTHORIZED AGENTS OR REPRESENTATIVES, respondents.G.R. No. 115543 October 30, 1995RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,vs.THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE BUREAU OF INTERNALREVENUE AND BUREAU OF CUSTOMS, respondents.G.R. No. 115544 October 30, 1995PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN PUBLISHING CORPORATION;PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L. DIMALANTA, petitioners,vs.HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON. TEOFISTO T. GUINGONA, JR., in hiscapacity as Executive Secretary; and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of Finance, respondents.

G.R. No. 115754 October 30, 1995CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner,vs.THE COMMISSIONER OF INTERNAL REVENUE, respondent.G.R. No. 115781 October 30, 1995KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO,EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G.FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS FORBROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT COALITION, INC., andPHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO TAÑADA, petitioners,vs.THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL REVENUE and THECOMMISSIONER OF CUSTOMS, respondents.G.R. No. 115852 October 30, 1995PHILIPPINE AIRLINES, INC., petitioner,vs.THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL REVENUE, respondents.G.R. No. 115873 October 30, 1995COOPERATIVE UNION OF THE PHILIPPINES, petitioner,vs.HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON. TEOFISTO T. GUINGONA, JR., in

his capacity as Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of Finance, respondents.G.R. No. 115931 October 30, 1995PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION OF PHILIPPINE BOOKSELLERS, petitioners,vs.HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO, as the Commissioner of Internal

Revenue; and HON. GUILLERMO PARAYNO, JR., in his capacity as the Commissioner of Customs, respondents.

R E S O L U T I O N

MENDOZA, J.:

These are motions seeking reconsideration of our decision dismissing the petitions filed in thesecases for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as theExpanded Value-Added Tax Law. The motions, of which there are 10 in all, have been filed bythe several petitioners in these cases, with the exception of the Philippine Educational PublishersAssociation, Inc. and the Association of Philippine Booksellers, petitioners in G.R. No. 115931.

The Solicitor General, representing the respondents, filed a consolidated comment, to which the

Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc., petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R. No. 115525, each filed areply. In turn the Solicitor General filed on June 1, 1995 a rejoinder to the PPI's reply.

On June 27, 1995 the matter was submitted for resolution.



I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners(Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate andBuilders Association (CREBA)) reiterate previous claims made by them that R.A. No. 7716 didnot "originate exclusively" in the House of Representatives as required by Art. VI, §24 of theConstitution. Although they admit that H. No. 11197 was filed in the House of Representatives

where it passed three readings and that afterward it was sent to the Senate where after firstreading it was referred to the Senate Ways and Means Committee, they complain that the Senatedid not pass it on second and third readings. Instead what the Senate did was to pass its ownversion (S. No. 1630) which it approved on May 24, 1994. Petitioner Tolentino adds that whatthe Senate committee should have done was to amend H. No. 11197 by striking out the text ofthe bill and substituting it with the text of S. No. 1630. That way, it is said, "the bill remains aHouse bill and the Senate version just becomes the text (only the text ) of the House bill."

The contention has no merit.

The enactment of S. No. 1630 is not the only instance in which the Senate proposed an

amendment to a House revenue bill by enacting its own version of a revenue bill. On at least twooccasions during the Eighth Congress, the Senate passed its own version of revenue bills, which,in consolidation with House bills earlier passed, became the enrolled bills. These were:

R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BYEXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX ANDDUTY EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was approved by the President on April 10, 1992. This Act is actually a consolidation of H. No. 34254, whichwas approved by the House on January 29, 1992, and S. No. 1920, which was approved by theSenate on February 3, 1992.

R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVEREWARD TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES)which was approved by the President on May 22, 1992. This Act is a consolidation of H. No.22232, which was approved by the House of Representatives on August 2, 1989, and S. No. 807,which was approved by the Senate on October 21, 1991.

On the other hand, the Ninth Congress passed revenue laws which were also the result of theconsolidation of House and Senate bills. These are the following, with indications of the dates onwhich the laws were approved by the President and dates the separate bills of the two chambersof Congress were respectively passed:

1. R.A. NO. 7642

AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDINGFOR THIS PURPOSE THE PERTINENT SECTIONS OF THE NATIONALINTERNAL REVENUE CODE (December 28, 1992).

House Bill No. 2165, October 5, 1992

Senate Bill No. 32, December 7, 1992

2. R.A. NO. 7643

AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUETO REQUIRE THE PAYMENT OF THE VALUE-ADDED TAX EVERYMONTH AND TO ALLOW LOCAL GOVERNMENT UNITS TO SHARE INVAT REVENUE, AMENDING FOR THIS PURPOSE CERTAIN SECTIONSOF THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992)

House Bill No. 1503, September 3, 1992



Senate Bill No. 968, December 7, 1992

3. R.A. NO. 7646

AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE

TO PRESCRIBE THE PLACE FOR PAYMENT OF INTERNAL REVENUETAXES BY LARGE TAXPAYERS, AMENDING FOR THIS PURPOSECERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,AS AMENDED (February 24, 1993)

House Bill No. 1470, October 20, 1992

Senate Bill No. 35, November 19, 1992

4. R.A. NO. 7649

AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICALSUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES INCLUDINGGOVERNMENT-OWNED OR CONTROLLED CORPORATIONS (GOCCS)TO DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT THERATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR THEPURCHASE OF GOODS AND SIX PERCENT (6%) ON GROSS RECEIPTSFOR SERVICES RENDERED BY CONTRACTORS (April 6, 1993)

House Bill No. 5260, January 26, 1993

Senate Bill No. 1141, March 30, 1993

5. R.A. NO. 7656

AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLEDCORPORATIONS TO DECLARE DIVIDENDS UNDER CERTAINCONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR OTHERPURPOSES (November 9, 1993)

House Bill No. 11024, November 3, 1993

Senate Bill No. 1168, November 3, 1993

6. R.A. NO. 7660

AN ACT RATIONALIZING FURTHER THE STRUCTURE ANDADMINISTRATION OF THE DOCUMENTARY STAMP TAX, AMENDINGFOR THE PURPOSE CERTAIN PROVISIONS OF THE NATIONALINTERNAL REVENUE CODE, AS AMENDED, ALLOCATING FUNDS FORSPECIFIC PROGRAMS, AND FOR OTHER PURPOSES (December 23, 1993)

House Bill No. 7789, May 31, 1993

Senate Bill No. 1330, November 18, 19937. R.A. NO. 7717

AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OFSHARES OF STOCK LISTED AND TRADED THROUGH THE LOCALSTOCK EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING,AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE



CODE, AS AMENDED, BY INSERTING A NEW SECTION ANDREPEALING CERTAIN SUBSECTIONS THEREOF (May 5, 1994)

House Bill No. 9187, November 3, 1993

Senate Bill No. 1127, March 23, 1994

Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exerciseof its power to propose amendments to bills required to originate in the House, passed its ownversion of a House revenue measure. It is noteworthy that, in the particular case of S. No. 1630, petitioners Tolentino and Roco, as members of the Senate, voted to approve it on second andthird readings.

On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino,concerns a mere matter of form. Petitioner has not shown what substantial difference it wouldmake if, as the Senate actually did in this case, a separate bill like S. No. 1630 is instead enacted

as a substitute measure, "taking into Consideration . . . H . B. 11197 ."

Indeed, so far as pertinent, the Rules of the Senate only provide:

RULE XXIX

AMENDMENTS

xxx xxx xxx

§68. Not more than one amendment to the original amendment shall be

considered.

No amendment by substitution shall be entertained unless the text thereof is

submitted in writing .

Any of said amendments may be withdrawn before a vote is taken thereon.

§69. No amendment which seeks the inclusion of a legislative provision foreign tothe subject matter of a bill (rider) shall be entertained.

xxx xxx xxx

§70-A. A bill or resolution shall not be amended by substituting it with anotherwhich covers a subject distinct from that proposed in the original bill orresolution. (emphasis added).

Nor is there merit in petitioners' contention that, with regard to revenue bills, the PhilippineSenate possesses less power than the U.S. Senate because of textual differences betweenconstitutional provisions giving them the power to propose or concur with amendments.

Art. I, §7, cl. 1 of the U.S. Constitution reads:

All Bills for raising Revenue shall originate in the House of Representatives; butthe Senate may propose or concur with amendments as on other Bills.

Art. VI, §24 of our Constitution reads:

All appropriation, revenue or tariff bills, bills authorizing increase of the publicdebt, bills of local application, and private bills shall originate exclusively in the



House of Representatives, but the Senate may propose or concur withamendments.

The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the phrase "as on other Bills" in the American version, according to petitioners, shows the intention

of the framers of our Constitution to restrict the Senate's power to propose amendments torevenue bills. Petitioner Tolentino contends that the word "exclusively" was inserted to modify"originate" and "the words 'as in any other bills' ( sic) were eliminated so as to show that these bills were not to be like other bills but must be treated as a special kind."

The history of this provision does not support this contention. The supposed indicia ofconstitutional intent are nothing but the relics of an unsuccessful attempt to limit the power of theSenate. It will be recalled that the 1935 Constitution originally provided for a unicameral National Assembly. When it was decided in 1939 to change to a bicameral legislature, it becamenecessary to provide for the procedure for lawmaking by the Senate and the House ofRepresentatives. The work of proposing amendments to the Constitution was done by the

National Assembly, acting as a constituent assembly, some of whose members, jealous of preserving the Assembly's lawmaking powers, sought to curtail the powers of the proposedSenate. Accordingly they proposed the following provision:

All bills appropriating public funds, revenue or tariff bills, bills of localapplication, and private bills shall originate exclusively in the Assembly, but theSenate may propose or concur with amendments. In case of disapproval by theSenate of any such bills, the Assembly may repass the same by a two-thirds voteof all its members, and thereupon, the bill so repassed shall be deemed enactedand may be submitted to the President for corresponding action. In the event thatthe Senate should fail to finally act on any such bills, the Assembly may, after

thirty days from the opening of the next regular session of the same legislativeterm, reapprove the same with a vote of two-thirds of all the members of theAssembly. And upon such reapproval, the bill shall be deemed enacted and may be submitted to the President for corresponding action.

The special committee on the revision of laws of the Second National Assembly vetoed the proposal. It deleted everything after the first sentence. As rewritten, the proposal was approved by the National Assembly and embodied in Resolution No. 38, as amended by Resolution No.73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed amendmentwas submitted to the people and ratified by them in the elections held on June 18, 1940.

This is the history of Art. VI, §18 (2) of the 1935 Constitution, from which Art. VI, §24 of the present Constitution was derived. It explains why the word "exclusively" was added to theAmerican text from which the framers of the Philippine Constitution borrowed and why the phrase "as on other Bills" was not copied. Considering the defeat of the proposal, the power ofthe Senate to propose amendments must be understood to be full, plenary and complete "as onother Bills." Thus, because revenue bills are required to originate exclusively in the House ofRepresentatives, the Senate cannot enact revenue measures of its own without such bills. After arevenue bill is passed and sent over to it by the House, however, the Senate certainly can pass itsown version on the same subject matter. This follows from the coequality of the two chambers ofCongress.

That this is also the understanding of book authors of the scope of the Senate's power to concuris clear from the following commentaries:

The power of the Senate to propose or concur with amendments is apparentlywithout restriction. It would seem that by virtue of this power, the Senate can practically re-write a bill required to come from the House and leave only a traceof the original bill. For example, a general revenue bill passed by the lower houseof the United States Congress contained provisions for the imposition of an



inheritance tax . This was changed by the Senate into a corporation tax. Theamending authority of the Senate was declared by the United States SupremeCourt to be sufficiently broad to enable it to make the alteration. [Flint v. StoneTracy Company, 220 U.S. 107, 55 L. ed. 389].

(L. TAÑADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES247 (1961))

The above-mentioned bills are supposed to be initiated by the House ofRepresentatives because it is more numerous in membership and therefore alsomore representative of the people. Moreover, its members are presumed to bemore familiar with the needs of the country in regard to the enactment of thelegislation involved.

The Senate is, however, allowed much leeway in the exercise of its power to propose or concur with amendments to the bills initiated by the House of

Representatives. Thus, in one case, a bill introduced in the U.S. House ofRepresentatives was changed by the Senate to make a proposed inheritance tax acorporation tax. It is also accepted practice for the Senate to introduce what isknown as an amendment by substitution, which may entirely replace the billinitiated in the House of Representatives.

(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).

In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills authorizingincrease of the public debt, bills of local application, and private bills must "originate exclusivelyin the House of Representatives," it also adds, "but the Senate may propose or concur with

amendments." In the exercise of this power, the Senate may propose an entirely new bill as asubstitute measure. As petitioner Tolentino states in a high school text, a committee to which a bill is referred may do any of the following:

(1) to endorse the bill without changes; (2) to make changes in the bill omitting oradding sections or altering its language; (3) to make and endorse an entirely new bill as a substitute, in which case it will be known as a committee bill ; or (4) tomake no report at all.

(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))

To except from this procedure the amendment of bills which are required to originate in theHouse by prescribing that the number of the House bill and its other parts up to the enactingclause must be preserved although the text of the Senate amendment may be incorporated in place of the original body of the bill is to insist on a mere technicality. At any rate there is no rule prescribing this form. S. No. 1630, as a substitute measure, is therefore as much an amendmentof H. No. 11197 as any which the Senate could have made.

II. S . No. 1630 a mere amendment of H . No. 11197 . Petitioners' basic error is that they assumethat S. No. 1630 is an independent and distinct bill . Hence their repeated references to itscertification that it was passed by the Senate "in substitution of S . B. No. 1129, taking into

consideration P.S. Res. No. 734 and H . B. No. 11197 ," implying that there is somethingsubstantially different between the reference to S. No. 1129 and the reference to H. No. 11197.From this premise, they conclude that R.A. No. 7716 originated both in the House and in theSenate and that it is the product of two "half-baked bills because neither H. No. 11197 nor S. No.1630 was passed by both houses of Congress."

In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mereamendments of the corresponding provisions of H. No. 11197. The very tabular comparison ofthe provisions of H. No. 11197 and S. No. 1630 attached as Supplement A to the basic petition of



petitioner Tolentino, while showing differences between the two bills, at the same time indicatesthat the provisions of the Senate bill were precisely intended to be amendments to the House bill.

Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate billwas a mere amendment of the House bill, H. No. 11197 in its original form did not have to pass

the Senate on second and three readings. It was enough that after it was passed on first reading itwas referred to the Senate Committee on Ways and Means. Neither was it required that S. No.1630 be passed by the House of Representatives before the two bills could be referred to theConference Committee.

There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630.When the House bill and Senate bill, which became R.A. No. 1405 (Act prohibiting thedisclosure of bank deposits), were referred to a conference committee, the question was raisedwhether the two bills could be the subject of such conference, considering that the bill from onehouse had not been passed by the other and vice versa. As Congressman Duran put the question:

MR. DURAN. Therefore, I raise this question of order as to procedure: If a Housebill is passed by the House but not passed by the Senate, and a Senate bill of a

similar nature is passed in the Senate but never passed in the House, can the twobills be the subject of a conference, and can a law be enacted from these two

bills? I understand that the Senate bill in this particular instance does not refer toinvestments in government securities, whereas the bill in the House, which wasintroduced by the Speaker, covers two subject matters: not only investigation ofdeposits in banks but also investigation of investments in government securities. Now, since the two bills differ in their subject matter, I believe that no law can beenacted.

Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:THE SPEAKER. The report of the conference committee is in order. It is precisely in cases like this where a conference should be had. If the House bill had been approved by the Senate, there would have been no need of a conference; but precisely because the Senate passed another bill on the same subject matter , theconference committee had to be created, and we are now considering the report ofthat committee.

(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))

III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 aredistinct and unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's)contention that because the President separately certified to the need for the immediateenactment of these measures, his certification was ineffectual and void. The certification had to be made of the version of the same revenue bill which at the moment was being considered.Otherwise, to follow petitioners' theory, it would be necessary for the President to certify asmany bills as are presented in a house of Congress even though the bills are merely versions ofthe bill he has already certified. It is enough that he certifies the bill which, at the time he makesthe certification, is under consideration. Since on March 22, 1994 the Senate was considering S. No. 1630, it was that bill which had to be certified. For that matter on June 1, 1993 the Presidenthad earlier certified H. No. 9210 for immediate enactment because it was the one which at thattime was being considered by the House. This bill was later substituted, together with other bills, by H. No. 11197.

As to what Presidential certification can accomplish, we have already explained in the maindecision that the phrase "except when the President certifies to the necessity of its immediateenactment, etc." in Art. VI, §26 (2) qualifies not only the requirement that "printed copies [of a bill] in its final form [must be] distributed to the members three days before its passage" but alsothe requirement that before a bill can become a law it must have passed "three readings on



separate days." There is not only textual support for such construction but historical basis aswell.

Art. VI, §21 (2) of the 1935 Constitution originally provided:

(2) No bill shall be passed by either House unless it shall have been printed andcopies thereof in its final form furnished its Members at least three calendar days prior to its passage, except when the President shall have certified to the necessityof its immediate enactment. Upon the last reading of a bill, no amendment thereofshall be allowed and the question upon its passage shall be taken immediatelythereafter, and the yeas and nays entered on the Journal.

When the 1973 Constitution was adopted, it was provided in Art. VIII, §19 (2):

(2) No bill shall become a law unless it has passed three readings on separatedays, and printed copies thereof in its final form have been distributed to the

Members three days before its passage, except when the Prime Minister certifiesto the necessity of its immediate enactment to meet a public calamity oremergency. Upon the last reading of a bill, no amendment thereto shall beallowed, and the vote thereon shall be taken immediately thereafter, andthe yeas and nays entered in the Journal.

This provision of the 1973 document, with slight modification, was adopted in Art. VI, §26 (2)of the present Constitution, thus:

(2) No bill passed by either House shall become a law unless it has passed threereadings on separate days, and printed copies thereof in its final form have been

distributed to its Members three days before its passage, except when thePresident certifies to the necessity of its immediate enactment to meet a publiccalamity or emergency. Upon the last reading of a bill, no amendment theretoshall be allowed, and the vote thereon shall be taken immediately thereafter, andthe yeasand nays entered in the Journal.

The exception is based on the prudential consideration that if in all cases three readings onseparate days are required and a bill has to be printed in final form before it can be passed, theneed for a law may be rendered academic by the occurrence of the very emergency or publiccalamity which it is meant to address.

Petitioners further contend that a "growing budget deficit" is not an emergency, especially in acountry like the Philippines where budget deficit is a chronic condition. Even if this were thecase, an enormous budget deficit does not make the need for R.A. No. 7716 any less urgent orthe situation calling for its enactment any less an emergency.

Apparently, the members of the Senate (including some of the petitioners in these cases) believed that there was an urgent need for consideration of S. No. 1630, because they respondedto the call of the President by voting on the bill on second and third readings on the same day.While the judicial department is not bound by the Senate's acceptance of the President'scertification, the respect due coequal departments of the government in matters committed tothem by the Constitution and the absence of a clear showing of grave abuse of discretion cautiona stay of the judicial hand.

At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senatewhere it was discussed for six days. Only its distribution in advance in its final printed form wasactually dispensed with by holding the voting on second and third readings on the same day(March 24, 1994). Otherwise, sufficient time between the submission of the bill on February 8,1994 on second reading and its approval on March 24, 1994 elapsed before it was finally votedon by the Senate on third reading.



The purpose for which three readings on separate days is required is said to be two-fold: (1) toinform the members of Congress of what they must vote on and (2) to give them notice that ameasure is progressing through the enacting process, thus enabling them and others interested inthe measure to prepare their positions with reference to it. (1 J. G. SUTHERLAND, STATUTESAND STATUTORY CONSTRUCTION §10.04, p. 282 (1972)). These purposes were

substantially achieved in the case of R.A. No. 7716.

IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and theMovement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that inviolation of the constitutional policy of full public disclosure and the people's right to know (Art.II, §28 and Art. III, §7) the Conference Committee met for two days in executive session withonly the conferees present.

As pointed out in our main decision, even in the United States it was customary to hold suchsessions with only the conferees and their staffs in attendance and it was only in 1975 when anew rule was adopted requiring open sessions. Unlike its American counterpart, the Philippine

Congress has not adopted a rule prescribing open hearings for conference committees.

It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, atleast staff members were present. These were staff members of the Senators and Congressmen,however, who may be presumed to be their confidential men, not stenographers as in this casewho on the last two days of the conference were excluded. There is no showing that theconferees themselves did not take notes of their proceedings so as to give petitioner Kilosbayan basis for claiming that even in secret diplomatic negotiations involving state interests, confereeskeep notes of their meetings. Above all, the public's right to know was fully served because theConference Committee in this case submitted a report showing the changes made on the differingversions of the House and the Senate.

Petitioners cite the rules of both houses which provide that conference committee reports mustcontain "a detailed, sufficiently explicit statement of the changes in or other amendments." Thesechanges are shown in the bill attached to the Conference Committee Report. The members of both houses could thus ascertain what changes had been made in the original bills without theneed of a statement detailing the changes.

The same question now presented was raised when the bill which became R.A. No. 1400 (LandReform Act of 1955) was reported by the Conference Committee. Congressman Bengzon raiseda point of order. He said:

MR. BENGZON. My point of order is that it is out of order to consider the reportof the conference committee regarding House Bill No. 2557 by reason of the provision of Section 11, Article XII, of the Rules of this House which providesspecifically that the conference report must be accompanied by a detailedstatement of the effects of the amendment on the bill of the House. Thisconference committee report is not accompanied by that detailed statement, Mr.Speaker. Therefore it is out of order to consider it.

Petitioner Tolentino, then the Majority Floor Leader, answered:

MR. TOLENTINO. Mr. Speaker, I should just like to say a few words inconnection with the point of order raised by the gentleman from Pangasinan.

There is no question about the provision of the Rule cited by the gentleman fromPangasinan, but this provision applies to those cases where only portions of thebill have been amended . In this case before us an entire bill is

presented ; therefore, it can be easily seen from the reading of the bill what the

provisions are. Besides, this procedure has been an established practice.



After some interruption, he continued:

MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into thereason for the provisions of the Rules, and the reason for the requirement in the provision cited by the gentleman from Pangasinan is when there are only certain

words or phrases inserted in or deleted from the provisions of the bill included inthe conference report, and we cannot understand what those words and phrasesmean and their relation to the bill. In that case, it is necessary to make a detailed

statement on how those words and phrases will affect the bill as a whole; butwhen the entire bill itself is copied verbatim in the conference report, that is not

necessary. So when the reason for the Rule does not exist, the Rule does not exist.

(2 CONG. REC. NO. 2, p. 4056. (emphasis added))

Congressman Tolentino was sustained by the chair. The record shows that when the ruling wasappealed, it was upheld by viva voce and when a division of the House was called, it was

sustained by a vote of 48 to 5. ( Id ., p. 4058)

Nor is there any doubt about the power of a conference committee to insert new provisions aslong as these are germane to the subject of the conference. As this Court held in Philippine Judges Association v. Prado, 227 SCRA 703 (1993), in an opinion written by then Justice Cruz,the jurisdiction of the conference committee is not limited to resolving differences between theSenate and the House. It may propose an entirely new provision. What is important is that itsreport is subsequently approved by the respective houses of Congress. This Court ruled that itwould not entertain allegations that, because new provisions had been added by the conferencecommittee, there was thereby a violation of the constitutional injunction that "upon the last

reading of a bill, no amendment thereto shall be allowed."Applying these principles, we shall decline to look into the petitioners'charges that an amendment was made upon the last reading of the bill thateventually became R.A. No. 7354 and that copiesthereof in its final form were not

distributed among the members of each House. Both the enrolled bill and thelegislative journals certify that the measure was duly enacted i.e., in accordancewith Article VI, Sec. 26 (2) of the Constitution. We are bound by such officialassurances from a coordinate department of the government, to which we owe, atthe very least, a becoming courtesy.

( Id . at 710. (emphasis added))

It is interesting to note the following description of conference committees in the Philippines in a1979 study:

Conference committees may be of two types: free or instructed. These committeesmay be given instructions by their parent bodies or they may be left withoutinstructions. Normally the conference committees are without instructions, andthis is why they are often critically referred to as "the little legislatures." Once bills have been sent to them, the conferees have almost unlimited authority tochange the clauses of the bills and in fact sometimes introduce new measures thatwere not in the original legislation. No minutes are kept, and members' activitieson conference committees are difficult to determine. One congressman known forhis idealism put it this way: "I killed a bill on export incentives for my interestgroup [copra] in the conference committee but I could not have done so anywhereelse." The conference committee submits a report to both houses, and usually it isaccepted. If the report is not accepted, then the committee is discharged and newmembers are appointed.



(R. Jackson, Committees in the Philippine Congress, in COMMITTEES ANDLEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES AND M.SHAW, eds.)).

In citing this study, we pass no judgment on the methods of conference committees. We cite it

only to say that conference committees here are no different from their counterparts in the UnitedStates whose vast powers we noted in Philippine Judges Association v. Prado, supra. At allevents, under Art. VI, §16(3) each house has the power "to determine the rules of its proceedings," including those of its committees. Any meaningful change in the method and procedures of Congress or its committees must therefore be sought in that body itself.

V. The titles of S . No. 1630 and H . No. 11197 . PAL maintains that R.A. No. 7716 violates Art.VI, §26 (1) of the Constitution which provides that "Every bill passed by Congress shall embraceonly one subject which shall be expressed in the title thereof." PAL contends that the amendmentof its franchise by the withdrawal of its exemption from the VAT is not expressed in the title ofthe law.

Pursuant to §13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieuof all other taxes, duties, royalties, registration, license and other fees and charges of any kind,nature, or description, imposed, levied, established, assessed or collected by any municipal, city, provincial or national authority or government agency, now or in the future."

PAL was exempted from the payment of the VAT along with other entities by §103 of the National Internal Revenue Code, which provides as follows:

§103. Exempt transactions. — The following shall be exempt from the value-added tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws or international agreementsto which the Philippines is a signatory.

R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, byamending §103, as follows:

§103. Exempt transactions. — The following shall be exempt from the value-added tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws, except those granted underPresidential Decree Nos. 66, 529, 972, 1491, 1590. . . .

The amendment of §103 is expressed in the title of R.A. No. 7716 which reads:

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM,WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION,AND FOR THESE PURPOSES AMENDING AND REPEALING THE

RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUECODE, AS AMENDED, AND FOR OTHER PURPOSES.

By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT)SYSTEM [BY] WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION,AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANTPROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED AND



FOR OTHER PURPOSES," Congress thereby clearly expresses its intention to amend any provision of the NIRC which stands in the way of accomplishing the purpose of the law.

PAL asserts that the amendment of its franchise must be reflected in the title of the law byspecific reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the

constitutional requirement, since it is already stated in the title that the law seeks to amend the pertinent provisions of the NIRC, among which is §103(q), in order to widen the base of theVAT. Actually, it is the bill which becomes a law that is required to express in its title the subjectof legislation. The titles of H. No. 11197 and S. No. 1630 in fact specifically referred to §103 ofthe NIRC as among the provisions sought to be amended. We are satisfied that sufficient noticehad been given of the pendency of these bills in Congress before they were enacted into what isnow R.A. No. 7716.

In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PALwas rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL

CORPORATION, DEFINING ITS POWERS, FUNCTIONS AND RESPONSIBILITIES,PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSESCONNECTED THEREWITH. It contained a provision repealing all franking privileges. It wascontended that the withdrawal of franking privileges was not expressed in the title of the law. Inholding that there was sufficient description of the subject of the law in its title, including therepeal of franking privileges, this Court held:

To require every end and means necessary for the accomplishment of the generalobjectives of the statute to be expressed in its title would not only be unreasonable but would actually render legislation impossible. [Cooley, ConstitutionalLimitations, 8th Ed., p. 297] As has been correctly explained:

The details of a legislative act need not be specifically stated in itstitle, but matter germane to the subject as expressed in the title, andadopted to the accomplishment of the object in view, may properly be included in the act. Thus, it is proper to create in the same actthe machinery by which the act is to be enforced, to prescribe the penalties for its infraction, and to remove obstacles in the way ofits execution. If such matters are properly connected with thesubject as expressed in the title, it is unnecessary that they shouldalso have special mention in the title. (Southern Pac. Co. v.Bartine, 170 Fed. 725)

(227 SCRA at 707-708)

VI. Claims of press freedom and religious liberty. We have held that, as a general proposition,the press is not exempt from the taxing power of the State and that what the constitutionalguarantee of free press prohibits are laws which single out the press or target a group belongingto the press for special treatment or which in any way discriminate against the press on the basisof the content of the publication, and R.A. No. 7716 is none of these.

Now it is contended by the PPI that by removing the exemption of the press from the VAT whilemaintaining those granted to others, the law discriminates against the press. At any rate, it isaverred, "even nondiscriminatory taxation of constitutionally guaranteed freedom isunconstitutional."

With respect to the first contention, it would suffice to say that since the law granted the press a privilege, the law could take back the privilege anytime without offense to the Constitution. Thereason is simple: by granting exemptions, the State does not forever waive the exercise of itssovereign prerogative.



Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burdento which other businesses have long ago been subject. It is thus different from the tax involved inthe cases invoked by the PPI. The license tax in Grosjean v. American Press Co., 297 U.S. 233,80 L. Ed. 660 (1936) was found to be discriminatory because it was laid on the gross advertisingreceipts only of newspapers whose weekly circulation was over 20,000, with the result that the

tax applied only to 13 out of 124 publishers in Louisiana. These large papers were critical ofSenator Huey Long who controlled the state legislature which enacted the license tax. Thecensorial motivation for the law was thus evident.

On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because although itcould have been made liable for the sales tax or, in lieu thereof, for the use tax on the privilege ofusing, storing or consuming tangible goods, the press was not. Instead, the press was exemptedfrom both taxes. It was, however, later made to pay a special use tax on the cost of paper and inkwhich made these items "the only items subject to the use tax that were component of goods to be sold at retail." The U.S. Supreme Court held that the differential treatment of the press

"suggests that the goal of regulation is not related to suppression of expression, and such goal is presumptively unconstitutional." It would therefore appear that even a law that favors the press isconstitutionally suspect. (See the dissent of Rehnquist, J. in that case)

Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn"absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those previously granted to PAL, petroleum concessionaires, enterprises registered with the ExportProcessing Zone Authority, and many more are likewise totally withdrawn, in addition toexemptions which are partially withdrawn, in an effort to broaden the base of the tax.

The PPI says that the discriminatory treatment of the press is highlighted by the fact that

transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716. Anenumeration of some of these transactions will suffice to show that by and large this is not so andthat the exemptions are granted for a purpose. As the Solicitor General says, such exemptions aregranted, in some cases, to encourage agricultural production and, in other cases, for the personal benefit of the end-user rather than for profit. The exempt transactions are:

(a) Goods for consumption or use which are in their original state (agricultural,marine and forest products, cotton seeds in their original state, fertilizers, seeds,seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods orservices to enhance agriculture (milling of palay, corn, sugar cane and raw sugar,livestock, poultry feeds, fertilizer, ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or use (household and personal effectsof citizens returning to the Philippines) or for professional use, like professionalinstruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used formanufacture of petroleum products subject to excise tax and services subject to percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, andservices rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.



(h) Goods or services with gross annual sale or receipt notexceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp.58-60)

The PPI asserts that it does not really matter that the law does not discriminate against the press because "even nondiscriminatory taxation on constitutionally guaranteed freedom isunconstitutional." PPI cites in support of this assertion the following statement in Murdockv. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):

The fact that the ordinance is "nondiscriminatory" is immaterial. The protectionafforded by the First Amendment is not so restricted. A license tax certainly doesnot acquire constitutional validity because it classifies the privileges protected bythe First Amendment along with the wares and merchandise of hucksters and peddlers and treats them all alike. Such equality in treatment does not save the

ordinance. Freedom of press, freedom of speech, freedom of religion are in preferred position.

The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly forregulation. Its imposition on the press is unconstitutional because it lays a prior restraint on theexercise of its right. Hence, although its application to others, such those selling goods, is valid,its application to the press or to religious groups, such as the Jehovah's Witnesses, in connectionwith the latter's sale of religious books and pamphlets, is unconstitutional. As the U.S. SupremeCourt put it, "it is one thing to impose a tax on income or property of a preacher. It is quiteanother thing to exact a tax on him for delivering a sermon."

A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil.386 (1957) which invalidated a city ordinance requiring a business license fee on those engagedin the sale of general merchandise. It was held that the tax could not be imposed on the sale of bibles by the American Bible Society without restraining the free exercise of its right to propagate.

The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much less a constitutional right. It is imposed on the sale, barter, lease or exchange ofgoods or properties or the sale or exchange of services and the lease of properties purely forrevenue purposes. To subject the press to its payment is not to burden the exercise of its right anymore than to make the press pay income tax or subject it to general regulation is not to violate itsfreedom under the Constitution.

Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceedsderived from the sales are used to subsidize the cost of printing copies which are given free tothose who cannot afford to pay so that to tax the sales would be to increase the price, whilereducing the volume of sale. Granting that to be the case, the resulting burden on the exercise ofreligious freedom is so incidental as to make it difficult to differentiate it from any othereconomic imposition that might make the right to disseminate religious doctrines costly.Otherwise, to follow the petitioner's argument, to increase the tax on the sale of vestments would be to lay an impermissible burden on the right of the preacher to make a sermon.

On the other hand the registration fee of P1,000.00 imposed by §107 of the NIRC, as amended by §7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses ofregistration and enforcement of provisions such as those relating to accounting in §108 of the NIRC. That the PBS distributes free bibles and therefore is not liable to pay the VAT does notexcuse it from the payment of this fee because it also sells some copies. At any rate whether thePBS is liable for the VAT must be decided in concrete cases, in the event it is assessed this tax by the Commissioner of Internal Revenue.



VII. Alleged violations of the due process, equal protection and contract clauses and the rule on

taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2)classifies transactions as covered or exempt without reasonable basis and (3) violates the rulethat taxes should be uniform and equitable and that Congress shall "evolve a progressive systemof taxation."

With respect to the first contention, it is claimed that the application of the tax to existingcontracts of the sale of real property by installment or on deferred payment basis would result insubstantial increases in the monthly amortizations to be paid because of the 10% VAT. Theadditional amount, it is pointed out, is something that the buyer did not anticipate at the time heentered into the contract.

The short answer to this is the one given by this Court in an early case: "Authorities fromnumerous sources are cited by the plaintiffs, but none of them show that a lawful tax on a newsubject, or an increased tax on an old one, interferes with a contract or impairs its obligation,within the meaning of the Constitution. Even though such taxation may affect particular

contracts, as it may increase the debt of one person and lessen the security of another, or mayimpose additional burdens upon one class and release the burdens of another, still the tax must be paid unless prohibited by the Constitution, nor can it be said that it impairs the obligation of anyexisting contract in its true legal sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong,39 Phil. 567, 574 (1919)). Indeed not only existing laws but also " the reservation of the essential

attributes of sovereignty, is . . . read into contracts as a postulate of the legal order." (Philippine-American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968)) Contracts must beunderstood as having been made in reference to the possible exercise of the rightful authority ofthe government and no obligation of contract can extend to the defeat of that authority. (Normanv. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).

It is next pointed out that while §4 of R.A. No. 7716 exempts such transactions as the sale ofagricultural products, food items, petroleum, and medical and veterinary services, it grants noexemption on the sale of real property which is equally essential. The sale of real property forsocialized and low-cost housing is exempted from the tax, but CREBA claims that real estatetransactions of "the less poor," i.e., the middle class, who are equally homeless, should likewise be exempted.

The sale of food items, petroleum, medical and veterinary services, etc., which are essentialgoods and services was already exempt under §103, pars. (b) (d) (1) of the NIRC before theenactment of R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 grantedexemption to these transactions, while subjecting those of petitioner to the payment of the VAT.Moreover, there is a difference between the "homeless poor" and the "homeless less poor" in theexample given by petitioner, because the second group or middle class can afford to rent housesin the meantime that they cannot yet buy their own homes. The two social classes are thusdifferently situated in life. "It is inherent in the power to tax that the State be free to select thesubjects of taxation, and it has been repeatedly held that 'inequalities which result from a singlingout of one particular class for taxation, or exemption infringe no constitutional limitation.'" (Lutzv. Araneta, 98 Phil. 148, 153 (1955). Accord , City of Baguio v. De Leon, 134 Phil. 912 (1968);Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng mga Naglilingkod saPamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).

Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI,§28(1) which provides that "The rule of taxation shall be uniform and equitable. The Congressshall evolve a progressive system of taxation."

Equality and uniformity of taxation means that all taxable articles or kinds of property of thesame class be taxed at the same rate. The taxing power has the authority to make reasonable andnatural classifications for purposes of taxation. To satisfy this requirement it is enough that thestatute or ordinance applies equally to all persons, forms and corporations placed in similarsituation. (City of Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)



Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted.R.A. No. 7716 merely expands the base of the tax. The validity of the original VAT Law wasquestioned in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA383 (1988) on grounds similar to those made in these cases, namely, that the law was"oppressive, discriminatory, unjust and regressive in violation of Art. VI, §28(1) of the

Constitution." (At 382) Rejecting the challenge to the law, this Court held:

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It isuniform. . . .

The sales tax adopted in EO 273 is applied similarly on all goods and servicessold to the public, which are not exempt, at the constant rate of 0% or 10%.

The disputed sales tax is also equitable. It is imposed only on sales of goods orservices by persons engaged in business with an aggregate gross annual salesexceeding P200,000.00. Small corner sari-sari stores are consequently exempt

from its application. Likewise exempt from the tax are sales of farm and marine products, so that the costs of basic food and other necessities, spared as they arefrom the incidence of the VAT, are expected to be relatively lower and within thereach of the general public.

(At 382-383)

The CREBA claims that the VAT is regressive. A similar claim is made by the CooperativeUnion of the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the lawcontravenes the mandate of Congress to provide for a progressive system of taxation because thelaw imposes a flat rate of 10% and thus places the tax burden on all taxpayers without regard to

their ability to pay.The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT,are regressive. What it simply provides is that Congress shall "evolve a progressive system oftaxation." The constitutional provision has been interpreted to mean simply that "direct taxes are. . . to be preferred [and] as much as possible, indirect taxes should be minimized." (E.FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. (1977)). Indeed,the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise,sales taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited withthe proclamation of Art. VIII, §17(1) of the 1973 Constitution from which the present Art. VI,§28(1) was taken. Sales taxes are also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if notimpossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. Inthe case of the VAT, the law minimizes the regressive effects of this imposition by providingfor zero rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC),while granting exemptions to other transactions. (R.A. No. 7716, §4, amending §103 of the NIRC).

Thus, the following transactions involving basic and essential goods and services are exemptedfrom the VAT:

(a) Goods for consumption or use which are in their original state (agricultural,marine and forest products, cotton seeds in their original state, fertilizers, seeds,seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods orservices to enhance agriculture (milling of palay, corn sugar cane and raw sugar,livestock, poultry feeds, fertilizer, ingredients used for the manufacture of feeds).



(b) Goods used for personal consumption or use (household and personal effectsof citizens returning to the Philippines) and or professional use, like professionalinstruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for

manufacture of petroleum products subject to excise tax and services subject to percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, andservices rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt notexceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp.58-60)

On the other hand, the transactions which are subject to the VAT are those which involve goodsand services which are used or availed of mainly by higher income groups. These include real properties held primarily for sale to customers or for lease in the ordinary course of trade or business, the right or privilege to use patent, copyright, and other similar property or right, the

right or privilege to use industrial, commercial or scientific equipment, motion picture films,tapes and discs, radio, television, satellite transmission and cable television time, hotels,restaurants and similar places, securities, lending investments, taxicabs, utility cars for rent,tourist buses, and other common carriers, services of franchise grantees of telephone andtelegraph.

The problem with CREBA's petition is that it presents broad claims of constitutional violations by tendering issues not at retail but at wholesale and in the abstract. There is no fully developedrecord which can impart to adjudication the impact of actuality. There is no factual foundation toshow in the concrete the application of the law to actual contracts and exemplify its effect on property rights. For the fact is that petitioner's members have not even been assessed the VAT.

Petitioner's case is not made concrete by a series of hypothetical questions asked which are nodifferent from those dealt with in advisory opinions.

The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. Amere allegation, as here, does not suffice. There must be a factual foundation ofsuch unconstitutional taint. Considering that petitioner here would condemn sucha provision as void on its face, he has not made out a case. This is merely toadhere to the authoritative doctrine that where the due process and equal protection clauses are invoked, considering that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive character as wouldlead to such a conclusion. Absent such a showing, the presumption of validitymust prevail.

(Sison, Jr. v. Ancheta, 130 SCRA at 661)

Adjudication of these broad claims must await the development of a concrete case. It may be that postponement of adjudication would result in a multiplicity of suits. This need not be the case,however. Enforcement of the law may give rise to such a case. A test case, provided it is anactual case and not an abstract or hypothetical one, may thus be presented.



Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues.Otherwise, adjudication would be no different from the giving of advisory opinion that does notreally settle legal issues.

We are told that it is our duty under Art. VIII, §1, ¶2 to decide whenever a claim is made that

"there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the partof any branch or instrumentality of the government." This duty can only arise if an actual case orcontroversy is before us. Under Art . VIII, §5 our jurisdiction is defined in terms of "cases" andall that Art. VIII, §1, ¶2 can plausibly mean is that in the exercise of that jurisdiction we havethe judicial power to determine questions of grave abuse of discretion by any branch orinstrumentality of the government.

Put in another way, what is granted in Art. VIII, §1, ¶2 is "judicial power," which is "the powerof a court to hear and decide cases pending between parties who have the right to sue and besued in the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), asdistinguished from legislative and executive power. This power cannot be directly appropriated

until it is apportioned among several courts either by the Constitution, as in the case of Art. VIII,§5, or by statute, as in the case of the Judiciary Act of 1948 (R.A. No. 296) and the JudiciaryReorganization Act of 1980 (B.P. Blg. 129). The power thus apportioned constitutes the court's"jurisdiction," defined as "the power conferred by law upon a court or judge to take cognizanceof a case, to the exclusion of all others." (United States v. Arceo, 6 Phil. 29 (1906)) Without anactual case coming within its jurisdiction, this Court cannot inquire into any allegation of graveabuse of discretion by the other departments of the government.

VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Unionof the Philippines (CUP), after briefly surveying the course of legislation, argues that it was toadopt a definite policy of granting tax exemption to cooperatives that the present Constitution

embodies provisions on cooperatives. To subject cooperatives to the VAT would therefore be toinfringe a constitutional policy. Petitioner claims that in 1973, P.D. No. 175 was promulgatedexempting cooperatives from the payment of income taxes and sales taxes but in 1984, becauseof the crisis which menaced the national economy, this exemption was withdrawn by P.D. No.1955; that in 1986, P.D. No. 2008 again granted cooperatives exemption from income and salestaxes until December 31, 1991, but, in the same year, E.O. No. 93 revoked the exemption; andthat finally in 1987 the framers of the Constitution "repudiated the previous actions of thegovernment adverse to the interests of the cooperatives, that is, the repeated revocation of the tax

exemption to cooperatives and instead upheld the policy of strengthening the cooperatives byway of the grant of tax exemptions," by providing the following in Art. XII:

§1. The goals of the national economy are a more equitable distribution ofopportunities, income, and wealth; a sustained increase in the amount of goodsand services produced by the nation for the benefit of the people; and anexpanding productivity as the key to raising the quality of life for all, especiallythe underprivileged.

The State shall promote industrialization and full employment based on soundagricultural development and agrarian reform, through industries that make fulland efficient use of human and natural resources, and which are competitive in both domestic and foreign markets. However, the State shall protect Filipinoenterprises against unfair foreign competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all regions of thecountry shall be given optimum opportunity to develop. Private enterprises,including corporations, cooperatives, and similar collective organizations, shall beencouraged to broaden the base of their ownership.

§15. The Congress shall create an agency to promote the viability and growth ofcooperatives as instruments for social justice and economic development.



Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled outcooperatives by withdrawing their exemption from income and sales taxes under P.D. No. 175,§5. What P.D. No. 1955, §1 did was to withdraw the exemptions and preferential treatments

theretofore granted to private business enterprises in general , in view of the economic crisiswhich then beset the nation. It is true that after P.D. No. 2008, §2 had restored the tax

exemptions of cooperatives in 1986, the exemption was again repealed by E.O. No. 93, §1, butthen again cooperatives were not the only ones whose exemptions were withdrawn. Thewithdrawal of tax incentives applied to all, including government and private entities. In thesecond place, the Constitution does not really require that cooperatives be granted taxexemptions in order to promote their growth and viability. Hence, there is no basis for petitioner's assertion that the government's policy toward cooperatives had been one ofvacillation, as far as the grant of tax privileges was concerned, and that it was to put an end tothis indecision that the constitutional provisions cited were adopted. Perhaps as a matter of policy cooperatives should be granted tax exemptions, but that is left to the discretion ofCongress. If Congress does not grant exemption and there is no discrimination to cooperatives,no violation of any constitutional policy can be charged.

Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are

exempt from taxation. Such theory is contrary to the Constitution under which only the followingare exempt from taxation: charitable institutions, churches and parsonages, by reason of Art. VI,§28 (3), and non-stock, non-profit educational institutions by reason of Art. XIV, §4 (3).

CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperativesthe equal protection of the law because electric cooperatives are exempted from the VAT. Theclassification between electric and other cooperatives (farmers cooperatives, producerscooperatives, marketing cooperatives, etc.) apparently rests on a congressional determination thatthere is greater need to provide cheaper electric power to as many people as possible, especiallythose living in the rural areas, than there is to provide them with other necessities in life. Wecannot say that such classification is unreasonable.

We have carefully read the various arguments raised against the constitutional validity of R.A. No. 7716. We have in fact taken the extraordinary step of enjoining its enforcement pendingresolution of these cases. We have now come to the conclusion that the law suffers from none ofthe infirmities attributed to it by petitioners and that its enactment by the other branches of thegovernment does not constitute a grave abuse of discretion. Any question as to its necessity,desirability or expediency must be addressed to Congress as the body which is electorallyresponsible, remembering that, as Justice Holmes has said, "legislators are the ultimate guardiansof the liberties and welfare of the people in quite as great a degree as are the courts." (Missouri,Kansas & Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as petitioner in G.R. No. 115543 does in arguing that we should enforce the public accountability oflegislators, that those who took part in passing the law in question by voting for it in Congressshould later thrust to the courts the burden of reviewing measures in the flush of enactment. ThisCourt does not sit as a third branch of the legislature, much less exercise a veto power overlegislation.

WHEREFORE, the motions for reconsideration are denied with finality and the temporaryrestraining order previously issued is hereby lifted.

SO ORDERED.




ManilaTHIRD DIVISION

G.R. No. 172231 February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,vs.ISABELA CULTURAL CORPORATION, Respondent.

D E C I S I O NYNARES-SANTIAGO, J.:

Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision1 ofthe Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of theCourt of Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside theAssessment Notices for deficiency income tax and expanded withholding tax issued by theBureau of Internal Revenue (BIR) against respondent Isabela Cultural Corporation (ICC).

The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIRAssessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount ofP333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expandedwithholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for thetaxable year 1986.

The deficiency income tax of P333,196.86, arose from:

(1) The BIR‘s disallowance of ICC‘s claimed expense deductions for professional and

security services billed to and paid by ICC in 1986, to wit:

(a) Expenses for the auditing services of SGV & Co.,3 for the year endingDecember 31, 1985;4

(b) Expenses for the legal services [inclusive of retainer fees] of the law firmBengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984and 1985.5

(c) Expense for security services of El Tigre Security & Investigation Agency forthe months of April and May 1986.6

(2) The alleged understatement of ICC‘s interest income on the three promissory notesdue from Realty Investment, Inc.

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) wasallegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimedP244,890.00 deduction for security services.7

On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9,1995, however, it received a final notice before seizure demanding payment of the amountsstated in the said notices. Hence, it brought the case to the CTA which held that the petition is premature because the final notice of assessment cannot be considered as a final decisionappealable to the tax court. This was reversed by the Court of Appeals holding that a demandletter of the BIR reiterating the payment of deficiency tax, amounts to a final decision on the protested assessment and may therefore be questioned before the CTA. This conclusion wassustained by this Court on July 1, 2001, in G.R. No. 135210.8 The case was thus remanded to theCTA for further proceedings.

On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessmentnotices issued against ICC. It held that the claimed deductions for professional and security

































services were properly claimed by ICC in 1986 because it was only in the said year when the bills demanding payment were sent to ICC. Hence, even if some of these professional serviceswere rendered to ICC in 1984 or 1985, it could not declare the same as deduction for the saidyears as the amount thereof could not be determined at that time.

The CTA also held that ICC did not understate its interest income on the subject promissorynotes. It found that it was the BIR which made an overstatement of said income when itcompounded the interest income receivable by ICC from the promissory notes of RealtyInvestment, Inc., despite the absence of a stipulation in the contract providing for a compoundedinterest; nor of a circumstance, like delay in payment or breach of contract, that would justify theapplication of compounded interest.

Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimeddeduction for security services as shown by the various payment orders and confirmationreceipts it presented as evidence. The dispositive portion of the CTA‘s Decision, reads:

WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 fordeficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive ofsurcharges and interest, both for the taxable year 1986, are hereby CANCELLED and SETASIDE.

SO ORDERED.9

Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTAdecision,10 holding that although the professional services (legal and auditing services) wererendered to ICC in 1984 and 1985, the cost of the services was not yet determinable at that time,

hence, it could be considered as deductible expenses only in 1986 when ICC received the billingstatements for said services. It further ruled that ICC did not understate its interest income fromthe promissory notes of Realty Investment, Inc., and that ICC properly withheld and remittedtaxes on the payments for security services for the taxable year 1986.

Hence, petitioner, through the Office of the Solicitor General, filed the instant petitioncontending that since ICC is using the accrual method of accounting, the expenses for the professional services that accrued in 1984 and 1985, should have been declared as deductionsfrom income during the said years and the failure of ICC to do so bars it from claiming saidexpenses as deduction for the taxable year 1986. As to the alleged deficiency interest income andfailure to withhold expanded withholding tax assessment, petitioner invoked the presumptionthat the assessment notices issued by the BIR are valid.

The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction ofthe expenses for professional and security services from ICC‘s gross income; and (2) held that

ICC did not understate its interest income from the promissory notes of Realty Investment, Inc;and that ICC withheld the required 1% withholding tax from the deductions for security services.

The requisites for the deductibility of ordinary and necessary trade, business, or professionalexpenses, like expenses paid for legal and auditing services, are: (a) the expense must beordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it musthave been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must besupported by receipts, records or other pertinent papers.11

The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided for in this Title shall be taken for the taxa ble year in which ‗paid or accrued‘ or ‗paid or

incurred‘, dependent upon the method of accounting upon the basis of which the net income is

computed x x x".















Accounting methods for tax purposes comprise a set of rules for determining when and how toreport income and deductions.12 In the instant case, the accounting method used by ICC is theaccrual method.

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of

accounting, expenses not being claimed as deductions by a taxpayer in the current year whenthey are incurred cannot be claimed as deduction from income for the succeeding year. Thus, ataxpayer who is authorized to deduct certain expenses and other allowable deductions for thecurrent year but failed to do so cannot deduct the same for the next year .13

The accrual method relies upon the taxpayer‘s right to receive amounts or its obligation to pay

them, in opposition to actual receipt or payment, which characterizes the cash method ofaccounting. Amounts of income accrue where the right to receive them become fixed, wherethere is created an enforceable liability. Similarly, liabilities are accrued when fixed anddeterminable in amount, without regard to indeterminacy merely of time of payment.14

For a taxpayer using the accrual method, the determinative question is, when do the facts presentthemselves in such a manner that the taxpayer must recognize income or expense? The accrual ofincome and expense is permitted when the all-events test has been met. This test requires: (1)fixing of a right to income or liability to pay; and (2) the availability of the reasonable accuratedetermination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of suchincome or liability be determined with reasonable accuracy. However, the test does not demandthat the amount of income or liability be known absolutely, only that a taxpayer has at hisdisposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test

is satisfied where a computation may be unknown, but is not as much as unknowable, within thetaxable year. The amount of liability does not have to be determined exactly; it must bedetermined with "reasonable accuracy." Accordingly, the term "reasonable accuracy"implies something less than an exact or completely accurate amount.[15]

The propriety of an accrual must be judged by the facts that a taxpayer knew, or couldreasonably be expected to have known, at the closing of its books for the taxableyear.[16] Accrual method of accounting presents largely a question of fact; such that the

taxpayer bears the burden of proof of establishing the accrual of an item of income ordeduction.17

Corollarily, it is a governing principle in taxation that tax exemptions must be construedin strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and onewho claims an exemption must be able to justify the same by the clearest grant of organic orstatute law. An exemption from the common burden cannot be permitted to exist upon vagueimplications. And since a deduction for income tax purposes partakes of the nature of a taxexemption, then it must also be strictly construed.18

In the instant case, the expenses for professional fees consist of expenses for legal and auditingservices. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees ofthe law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and forreimbursement of the expenses of said firm in connection with ICC‘s tax problems for the year

1984. As testified by the Treasurer of ICC, the firm has been its counsel since the 1960‘s.19 From

the nature of the claimed deductions and the span of time during which the firm was retained,ICC can be expected to have reasonably known the retainer fees charged by the firm as well asthe compensation for its legal services. The failure to determine the exact amount of the expenseduring the taxable year when they could have been claimed as deductions cannot thus beattributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in theexercise of due diligence could have inquired into the amount of their obligation to the firm,especially so that it is using the accrual method of accounting. For another, it could have

































reasonably determined the amount of legal and retainer fees owing to its familiarity with therates charged by their long time legal consultant.

As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the burden of establishing the accrual of an expense or income. However, ICC failed to

discharge this burden. As to when the firm‘s performance of its services in connection with the1984 tax problems were completed, or whether ICC exercised reasonable diligence to inquireabout the amount of its liability, or whether it does or does not possess the information necessaryto compute the amount of said liability with reasonable accuracy, are questions of fact whichICC never established. It simply relied on the defense of delayed billing by the firm and thecompany, which under the circumstances, is not sufficient to exempt it from being charged withknowledge of the reasonable amount of the expenses for legal and auditing services.

In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICCfor the year 1985 cannot be validly claimed as expense deductions in 1986. This is so becauseICC failed to present evidence showing that even with only "reasonable accuracy," as the

standard to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said company would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional services were allowable deductions for the taxable year 1986. Hence, per RevenueAudit Memorandum Order No. 1-2000, they cannot be validly deducted from its gross incomefor the said year and were therefore properly disallowed by the BIR.

As to the expenses for security services, the records show that these expenses were incurred byICC in 198620and could therefore be properly claimed as deductions for the said year.

Anent the purported understatement of interest income from the promissory notes of RealtyInvestment, Inc., we sustain the findings of the CTA and the Court of Appeals that no suchunderstatement exists and that only simple interest computation and not a compounded oneshould have been applied by the BIR. There is indeed no stipulation between the latter and ICCon the application of compounded interest.21 Under Article 1959 of the Civil Code, unless thereis a stipulation to the contrary, interest due should not further earn interest.

Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the requiredwithholding tax from its claimed deductions for security services and remitted the same to theBIR is supported by payment order and confirmation receipts.22 Hence, the Assessment Noticefor deficiency expanded withholding tax was properly cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 fordeficiency income tax should be cancelled and set aside but only insofar as the claimeddeductions of ICC for security services. Said Assessment is valid as to the BIR‘s disallowance of

ICC‘s expenses for professional services. The Court of Appeal‘s cancellation of Assessment

Notice No. FAS-1-86-90-000681 in the amount of P4,897.79 for deficiency expandedwithholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision ofthe Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION thatAssessment Notice No. FAS-1-86-90-000680, which disallowed the expense deduction ofIsabela Cultural Corporation for professional and security services, is declared valid only insofaras the expenses for the professional fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision is affirmed in all otherrespects.

The case is remanded to the BIR for the computation of Isabela Cultural Corporation‘s liability

under Assessment Notice No. FAS-1-86-90-000680. SO ORDERED.














Manila

THIRD DIVISION

G.R. No. 143672 April 24, 2003

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.GENERAL FOODS (PHILS.), INC., respondent.

CORONA, J .:

Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution1 of the Courtof Appeals reversing the decision2 of the Court of Tax Appeals which in turn denied the protest

filed by respondent General Foods (Phils.), Inc., regarding the assessment made against the latterfor deficiency taxes.

The records reveal that, on June 14, 1985, respondent corporation, which is engaged in themanufacture of beverages such as "Tang," "Calumet" and "Kool-Aid," filed its income tax returnfor the fiscal year ending February 28, 1985. In said tax return, respondent corporation claimedas deduction, among other business expenses, the amount of P9,461,246 for media advertising

for "Tang."

On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed byrespondent corporation. Consequently, respondent corporation was assessed deficiency income

taxes in the amount of P2,635, 141.42. The latter filed a motion for reconsideration but the samewas denied.

On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals but theappeal was dismissed:

With such a gargantuan expense for the advertisement of a singular product, which evenexcludes "other advertising and promotions" expenses, we are not prepared to accept thatsuch amount is reasonable "to stimulate the current sale of merchandise" regardless ofPetitioner‘s explanation that such expense "does not connote unreasonableness

considering the grave economic situation taking place after the Aquino assassination

characterized by capital fight, strong deterioration of the purchasing power of thePhilippine peso and the slacking demand for consumer products" (Petitioner‘s

Memorandum, CTA Records, p. 273). We are not convinced with such an explanation.The staggering expense led us to believe that such expenditure was incurred "to create ormaintain some form of good will for the taxpayer‘s trade or business or for the industry

or profession of which the taxpayer is a member." The term "good will" can hardly besaid to have any precise signification; it is generally used to denote the benefit arisingfrom connection and reputation (Words and Phrases, Vol. 18, p. 556 citing Douhart vs. Loagan, 86 III. App. 294). As held in the case of Welch vs. Helvering , efforts to establishreputation are akin to acquisition of capital assets and, therefore, expenses related theretoare not business expenses but capital expenditures. ( Atlas Mining and Development Corp.vs. Commissioner of Internal Revenue, supra). For sure such expenditure was meant notonly to generate present sales but more for future and prospective benefits. Hence,"abnormally large expenditures for advertising are usually to be spread over the period ofyears during which the benefits of the expenditures are received" ( Mertens, supra, citingColonial Ice Cream Co., 7 BTA 154).

WHEREFORE, in all the foregoing, and finding no error in the case appealed from, wehereby RESOLVE to DISMISS the instant petition for lack of merit and ORDER the



Petitioner to pay the respondent Commissioner the assessed amount of P2,635,141.42representing its deficiency income tax liability for the fiscal year ended February 28,1985."3

Aggrieved, respondent corporation filed a petition for review at the Court of Appeals which

rendered a decision reversing and setting aside the decision of the Court of Tax Appeals:

Since it has not been sufficiently established that the item it claimed as a deduction isexcessive, the same should be allowed.

WHEREFORE, the petition of petitioner General Foods (Philippines), Inc. is herebyGRANTED. Accordingly, the Decision, dated 8 February 1994 of respondent Court ofTax Appeals is REVERSED and SET ASIDE and the letter, dated 31 May 1988 ofrespondent Commissioner of Internal Revenue is CANCELLED.

SO ORDERED.4

Thus, the instant petition, wherein the Commissioner presents for the Court‘s consideration alone issue: whether or not the subject media advertising expense for "Tang" incurred byrespondent corporation was an ordinary and necessary expense fully deductible under the National Internal Revenue Code (NIRC).

It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; 5 and he who claims anexemption must be able to justify his claim by the clearest grant of organic or statute law. Anexemption from the common burden cannot be permitted to exist upon vague implications.6

Deductions for income tax purposes partake of the nature of tax exemptions; hence, if taxexemptions are strictly construed, then deductions must also be strictly construed.

We then proceed to resolve the singular issue in the case at bar. Was the media advertisingexpense for "Tang" paid or incurred by respondent corporation for the fiscal year endingFebruary 28, 1985 "necessary and ordinary," hence, fully deductible under the NIRC? Or was it acapital expenditure, paid in order to create "goodwill and reputation" for respondent corporationand/or its products, which should have been amortized over a reasonable period?

Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:

(A) Expenses.-(1) Ordinary and necessary trade, business or professional expenses.-

(a) In general .- There shall be allowed as deduction from gross income allordinary and necessary expenses paid or incurred during the taxable year incarrying on, or which are directly attributable to, the development, management,operation and/or conduct of the trade, business or exercise of a profession.

Simply put, to be deductible from gross income, the subject advertising expense must complywith the following requisites: (a) the expense must be ordinary and necessary; (b) it must have

been paid or incurred during the taxable year; (c) it must have been paid or incurred in carryingon the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.7

The parties are in agreement that the subject advertising expense was paid or incurred within thecorresponding taxable year and was incurred in carrying on a trade or business. Hence, it wasnecessary. However, their views conflict as to whether or not it was ordinary. To be deductible,



an advertising expense should not only be necessary but also ordinary. These two requirementsmust be met.

The Commissioner maintains that the subject advertising expense was not ordinary on theground that it failed the two conditions set by U.S. jurisprudence: first, "reasonableness" of the

amount incurred and second, the amount incurred must not be a capital outlay to create"goodwill" for the product and/or private respondent‘s business. Otherwise, the expense must be

considered a capital expenditure to be spread out over a reasonable time.

We agree.

There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of anadvertising expense. There being no hard and fast rule on the matter, the right to a deductiondepends on a number of factors such as but not limited to: the type and size of business in whichthe taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditureitself; the intention of the taxpayer and the general economic conditions. It is the interplay of

these, among other factors and properly weighed, that will yield a proper evaluation.

In the case at bar, the P9,461,246 claimed as media advertising expense for "Tang" alone wasalmost one-half of its total claim for "marketing expenses." Aside from that, respondent-corporation also claimed P2,678,328 as "other advertising and promotions expense" and anotherP1,548,614, for consumer promotion.

Furthermore, the subject P9,461,246 media advertising expense for "Tang" was almost doublethe amount of respondent corporation‘s P4,640,636 general and administrative expenses.

We find the subject expense for the advertisement of a single product to be inordinately large.

Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible underthen Section 29 (a) (1) (A) of the NIRC.

Advertising is generally of two kinds: (1) advertising to stimulate the current sale ofmerchandise or use of services and (2) advertising designed to stimulate the future sale ofmerchandise or use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayer‘s trade or business or for the

industry or profession of which the taxpayer is a member. If the expenditures are for theadvertising of the first kind, then, except as to the question of the reasonableness of amount,there is no doubt such expenditures are deductible as business expenses. If, however, theexpenditures are for advertising of the second kind, then normally they should be spread out overa reasonable period of time.

We agree with the Court of Tax Appeals that the subject advertising expense was of the secondkind. Not only was the amount staggering; the respondent corporation itself also admitted, in itsletter protest8 to the Commissioner of Internal Revenue‘s assessment, that the subject mediaexpense was incurred in order to protect respondent corporation‘s brand franchise, a critical point

during the period under review.

The protection of brand franchise is analogous to the maintenance of goodwill or title to one‘s

property. This is a capital expenditure which should be spread out over a reasonable period oftime.9

Respondent corporation‘s venture to protect its brand franchise was tantamount to efforts to

establish a reputation. This was akin to the acquisition of capital assets and therefore expensesrelated thereto were not to be considered as business expenses but as capital expenditures.10

True, it is the taxpayer‘s prerogative to determine the amount of advertising expenses it willincur and where to apply them.11 Said prerogative, however, is subject to certain considerations.The first relates to the extent to which the expenditures are actually capital outlays; this



necessitates an inquiry into the nature or purpose of such expenditures.12 The second, which must be applied in harmony with the first, relates to whether the expenditures are ordinary andnecessary. Concomitantly, for an expense to be considered ordinary, it must be reasonable inamount. The Court of Tax Appeals ruled that respondent corporation failed to meet the twoforegoing limitations.

We find said ruling to be well founded. Respondent corporation incurred the subject advertisingexpense in order to protect its brand franchise. We consider this as a capital outlay since itcreated goodwill for its business and/or product. The P9,461,246 media advertising expense forthe promotion of a single product, almost one-half of petitioner corporation‘s entire claim for

marketing expenses for that year under review, inclusive of other advertising and promotionexpenses of P2,678,328 and P1,548,614 for consumer promotion, is doubtlessly unreasonable.

It has been a long standing policy and practice of the Court to respect the conclusions of quasi- judicial agencies such as the Court of Tax Appeals, a highly specialized body specifically createdfor the purpose of reviewing tax cases. The CTA, by the nature of its functions, is dedicated

exclusively to the study and consideration of tax problems. It has necessarily developed anexpertise on the subject. We extend due consideration to its opinion unless there is an abuse orimprovident exercise of authority.13 Since there is none in the case at bar, the Court adheres tothe findings of the CTA.

Accordingly, we find that the Court of Appeals committed reversible error when it declared thesubject media advertising expense to be deductible as an ordinary and necessary expense on theground that "it has not been established that the item being claimed as deduction is excessive." Itis not incumbent upon the taxing authority to prove that the amount of items being claimed isunreasonable. The burden of proof to establish the validity of claimed deductions is on thetaxpayer.14 In the present case, that burden was not discharged satisfactorily.

WHEREFORE, premises considered, the instant petition is GRANTED. The assailed decisionof the Court of Appeals is hereby REVERSED and SET ASIDE. Pursuant to Sections 248 and249 of the Tax Code, respondent General Foods (Phils.), Inc. is hereby ordered to pay itsdeficiency income tax in the amount of P2,635,141.42, plus 25% surcharge for late payment and20% annual interest computed from August 25, 1989, the date of the denial of its protest, untilthe same is fully paid.

SO ORDERED.




Manila

FIRST DIVISION

G.R. No. 124043 October 14, 1998

COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIANASSOCIATION OF THE PHILIPPINES, INC., respondents.

PANGANIBAN, J.:

Is the income derived from rentals of real property owned by the Young Men's ChristianAssociation of the Philippines, Inc. (YMCA) — established as "a welfare, educational andcharitable non-profit corporation" — subject to income tax under the National Internal RevenueCode (NIRC) and the Constitution?

The Case

This is the main question raised before us in this petition for review on certiorari challenging

two Resolutions issued by the Court of Appeals

1

on September 28, 1995

2

and February 29,1996 3 in CA-GR SP No. 32007. Both Resolutions affirmed the Decision of the Court of TaxAppeals (CTA) allowing the YMCA to claim tax exemption on the latter's income from the leaseof its real property.

The Facts

The facts are undisputed. 4 Private Respondent YMCA is a non-stock, non-profit institution,which conducts various programs and activities that are beneficial to the public, especially theyoung people, pursuant to its religious, educational and charitable objectives.

In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, andP44,259.00 from parking fees collected from non-members. On July 2, 1984, the commissionerof internal revenue (CIR) issued an assessment to private respondent, in the total amount ofP415,615.01 including surcharge and interest, for deficiency income tax, deficiency expandedwithholding taxes on rentals and professional fees and deficiency withholding tax on wages.Private respondent formally protested the assessment and, as a supplement to its basic protest,filed a letter dated October 8, 1985. In reply, the CIR denied the claims of YMCA.

Contesting the denial of its protest, the YMCA filed a petition for review at the Court of TaxAppeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the

YMCA:. . . [T]he leasing of [private respondent's] facilities to small shop owners, torestaurant and canteen operators and the operation of the parking lot arereasonably incidental to and reasonably necessary for the accomplishment of theobjectives of the [private respondents]. It appears from the testimonies of thewitnesses for the [private respondent] particularly Mr. James C. Delote, formeraccountant of YMCA, that these facilities were leased to members and that they



have to service the needs of its members and their guests. The rentals wereminimal as for example, the barbershop was only charged P300 per month. Healso testified that there was actually no lot devoted for parking space but the parking was done at the sides of the building. The parking was primarily formembers with stickers on the windshields of their cars and they charged P.50 for

non-members. The rentals and parking fees were just enough to cover the costs ofoperation and maintenance only. The earning[s] from these rentals and parkingcharges including those from lodging and other charges for the use of therecreational facilities constitute [the] bulk of its income which [is] channeled tosupport its many activities and attainment of its objectives. As pointed out earlier,the membership dues are very insufficient to support its program. We find itreasonably necessary therefore for [private respondent] to make [the] most out[of] its existing facilities to earn some income. It would have been different ifunder the circumstances, [private respondent] will purchase a lot and convert it toa parking lot to cater to the needs of the general public for a fee, or construct a building and lease it out to the highest bidder or at the market rate for commercial

purposes, or should it invest its funds in the buy and sell of properties, real or personal. Under these circumstances, we could conclude that the activities arealready profit oriented, not incidental and reasonably necessary to the pursuit ofthe objectives of the association and therefore, will fall under the last paragraph ofSection 27 of the Tax Code and any income derived therefrom shall be taxable.

Considering our findings that [private respondent] was not engaged in the business of operating or contracting [a] parking lot, we find no legal basis also forthe imposition of [a] deficiency fixed tax and [a] contractor's tax in the amount[s]of P353.15 and P3,129.73, respectively.

xxx xxx xxx

WHEREFORE, in view of all the foregoing, the following assessments are herebydismissed for lack of merit:

1980 Deficiency Fixed Tax — P353,15;

1980 Deficiency Contractor's Tax — P3,129.23;

1980 Deficiency Income Tax — P372,578.20.

While the following assessments are hereby sustained:

1980 Deficiency Expanded Withholding Tax — P1,798.93;

1980 Deficiency Withholding Tax on Wages — P33,058.82

plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not to exceed three (3) years pursuant to Section 51(e)(2) & (3) of the National Internal Revenue Code effective as of 1984. 5

Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In itsDecision of February 16, 1994, the CA 6 initially decided in favor of the CIR and disposed of theappeal in the following manner:

Following the ruling in the afore-cited cases of Province of Abra vs.

Hernando and Abra Valley College Inc. vs. Aquino, the ruling of the respondentCourt of Tax Appeals that "the leasing of petitioner's (herein respondent's)facilities to small shop owners, to restaurant and canteen operators and theoperation of the parking lot are reasonably incidental to and reasonably necessary



for the accomplishment of the objectives of the petitioners, and the incomederived therefrom are tax exempt, must be reversed.

WHEREFORE, the appealed decision is hereby REVERSED in so far as itdismissed the assessment for:

1980 Deficiency Income Tax P 353.15

1980 Deficiency Contractor's Tax P 3,129.23, &

1980 Deficiency Income Tax P 372,578.20

but the same is AFFIRMED in all other respect. 7

Aggrieved, the YMCA asked for reconsideration based on the following grounds:

I

The findings of facts of the Public Respondent Court of Tax Appeals beingsupported by substantial evidence [are] final and conclusive.

II

The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondentfrom the income on rentals of small shops and parking fees [are] in accord withthe applicable law and jurisprudence. 8

Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and promulgated on September 28, 1995 its first assailed Resolution which, in part, reads:

The Court cannot depart from the CTA's findings of fact, as they are supported byevidence beyond what is considered as substantial.

xxx xxx xxx

The second ground raised is that the respondent CTA did not err in saying that therental from small shops and parking fees do not result in the loss of theexemption. Not even the petitioner would hazard the suggestion that YMCA is

designed for profit. Consequently, the little income from small shops and parkingfees help[s] to keep its head above the water, so to speak, and allow it to continuewith its laudable work.

The Court, therefore, finds the second ground of the motion to be meritorious andin accord with law and jurisprudence.

WHEREFORE, the motion for reconsideration is GRANTED; the respondentCTA's decision is AFFIRMED in toto. 9

The internal revenue commissioner's own Motion for Reconsideration was denied by Respondent

Court in its second assailed Resolution of February 29, 1996. Hence, this petition for reviewunder Rule 45 of the Rules of Court. 10

The Issues

Before us, petitioner imputes to the Court of Appeals the following errors:

I



In holding that it had departed from the findings of fact of Respondent Court ofTax Appeals when it rendered its Decision dated February 16, 1994; and

II

In affirming the conclusion of Respondent Court of Tax Appeals that the incomeof private respondent from rentals of small shops and parking fees [is] exemptfrom taxation. 11

This Court's Ruling

The petition is meritorious.

First Issue: Factual Findings of the CTA

Private respondent contends that the February 16, 1994 CA Decision reversed the factualfindings of the CTA. On the other hand, petitioner argues that the CA merely reversed the"ruling of the CTA that the leasing of private respondent's facilities to small shop owners, torestaurant and canteen operators and the operation of parking lots are reasonably incidental toand reasonably necessary for the accomplishment of the objectives of the private respondent andthat the income derived therefrom are tax exempt." 12 Petitioner insists that what the appellate

court reversed was the legal conclusion, not the factual finding , of the CTA. 13 The commissionerhas a point.

Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported bysubstantial evidence, will be disturbed on appeal unless it is shown that the said court committed

gross error in the appreciation of facts.

14

In the present case, this Court finds that the February16, 1994 Decision of the CA did not deviate from this rule. The latter merely applied the law tothe facts as found by the CTA and ruled on the issue raised by the CIR: "Whether or not thecollection or earnings of rental income from the lease of certain premises and income earnedfrom parking fees shall fall under the last paragraph of Section 27 of the National InternalRevenue Code of 1977, as amended." 15

Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue,as indeed it was expected to. That it did so in a manner different from that of the CTA did notnecessarily imply a reversal of factual findings.

The distinction between a question of law and a question of fact is clear-cut. It has been held that"[t]here is a question of law in a given case when the doubt or difference arises as to what thelaw is on a certain state of facts; there is a question of fact when the doubt or difference arises asto the truth or falsehood of alleged facts." 16 In the present case, the CA did not doubt, much lesschange, the facts narrated by the CTA. It merely applied the law to the facts. That itsinterpretation or conclusion is different from that of the CTA is not irregular or abnormal.

Second Issue:

Is the Rental Income of the YMCA Taxable?

We now come to the crucial issue: Is the rental income of the YMCA from its real estate subjectto tax? At the outset, we set forth the relevant provision of the NIRC:

Sec. 27. Exemptions from tax on corporations. — The following organizationsshall not be taxed under this Title in respect to income received by them as such —

xxx xxx xxx



(g) Civic league or organization not organized for profit but operated exclusivelyfor the promotion of social welfare;

(h) Club organized and operated exclusively for pleasure, recreation, and othernon-profitable purposes, no part of the net income of which inures to the benefit

of any private stockholder or member;

xxx xxx xxx

Notwithstanding the provisions in the preceding paragraphs, the income ofwhatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit,regardless of the disposition made of such income, shall be subject to the taximposed under this Code. (as amended by Pres. Decree No. 1457)

Petitioner argues that while the income received by the organizations enumerated in Section 27

(now Section 26) of the NIRC is, as a rule, exempted from the payment of tax "in respect toincome received by them as such," the exemption does not apply to income derived ". . . fromany of their properties, real or personal, or from any of their activities conducted for profit,regardless of the disposition made of such income . . . ."

Petitioner adds that "rental income derived by a tax-exempt organization from the lease of its properties, real or personal, [is] not, therefore, exempt from income taxation, even if suchincome [is] exclusively used for the accomplishment of its objectives." 17 We agree with thecommissioner.

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict

in interpretation in construing tax exemptions.

18

Furthermore, a claim of statutory exemptionfrom taxation should be manifest. and unmistakable from the language of the law on which it is based. Thus, the claimed exemption "must expressly be granted in a statute stated in a languagetoo clear to be mistaken." 19

In the instant case, the exemption claimed by the YMCA is expressly disallowed by the verywording of the last paragraph of then Section 27 of the NIRC which mandates that the income ofexempt organizations (such as the YMCA) from any of their properties, real or personal, besubject to the tax imposed by the same Code. Because the last paragraph of said sectionunequivocally subjects to tax the rent income of the YMCA from its real property,20 the Court isduty-bound to abide strictly by its literal meaning and to refrain from resorting to any convolutedattempt at construction.

It is axiomatic that where the language of the law is clear and unambiguous, its express terms

must be applied. 21Parenthetically, a consideration of the question of construction must not even begin, particularly when such question is on whether to apply a strict construction or a liberalone on statutes that grant tax exemptions to "religious, charitable and educational propert[ies] orinstitutions." 22

The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification thatthe income from the properties must arise from activities 'conducted for profit' before it may beconsidered taxable." 23 This argument is erroneous. As previously stated, a reading of said paragraph ineludibly shows that the income from any property of exempt organizations, as wellas that arising from any activity it conducts for profit, is taxable. The phrase "any of theiractivities conducted for profit" does not qualify the word "properties." This makes from the property of the organization taxable, regardless of how that income is used — whether for profitor for lofty non-profit purposes.

Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversibleerror when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it



derived from renting out its real property, on the solitary but unconvincing ground that the saidincome is not collected for profit but is merely incidental to its operation. The law does not makea distinction. The rental income is taxable regardless of whence such income is derived and howit is used or disposed of. Where the law does not distinguish, neither should we.

Constitutional Provisions

On Taxation

Invoking not only the NIRC but also the fundamental law, private respondent submits that

Article VI, Section 28 of par. 3 of the 1987 Constitution, 24 exempts "charitable institutions"from the payment not only of property taxes but also of income tax from any source. 25 Insupport of its novel theory, it compares the use of the words "charitable institutions," "actually"and "directly" in the 1973 and the 1987 Constitutions, on the one hand; and in Article VI,Section 22, par. 3 of the 1935 Constitution, on the other hand. 26

Private respondent enunciates three points. First , the present provision is divisible into twocategories: (1) "[c]haritable institutions, churches and parsonages or convents appurtenantthereto, mosques and non-profit cemeteries," the incomes of which are, from whatever source, alltax-exempt; 27 and (2) "[a]ll lands, buildings and improvements actually and directly used forreligious, charitable or educational purposes," which are exempt only from property

taxes. 28 Second, Lladoc v. Commissioner of Internal Revenue, 29 which limited the exemptiononly to the payment of property taxes, referred to the provision of the 1935 Constitution and notto its counterparts in the 1973 and the 1987 Constitutions. 30

Third , the phrase "actually, directlyand exclusively used for religious, charitable or educational purposes" refers not only to "alllands, buildings and improvements," but also to the above-quoted first category which includescharitable institutions like the private respondent. 31

The Court is not persuaded. The debates, interpellations and expressions of opinion of theframers of the Constitution reveal their intent which, in turn, may have guided the people inratifying the Charter. 32 Such intent must be effectuated.

Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now amember of this Court, stressed during the Concom debates that ". . . what is exempted is not theinstitution itself . . .; those exempted from real estate taxes are lands, buildings andimprovements actually, directly and exclusively used for religious, charitable or educational purposes." 33 Father Joaquin G. Bernas, an eminent authority on the Constitution and also amember of the Concom, adhered to the same view that the exemption created by said provision pertained only to property taxes. 34

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax exemptioncovers property taxes only." 35 Indeed, the income tax exemption claimed by private respondentfinds no basis in Article VI, Section 26, par. 3 of the Constitution.

Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 36 claiming thatthe YMCA "is a non-stock, non-profit educational institution whose revenues and assets are usedactually, directly and exclusively for educational purposes so it is exempt from taxes on its

properties and income." 37 We reiterate that private respondent is exempt from the payment of property tax, but not income tax on the rentals from its property. The bare allegation alone that itis a non-stock, non-profit educational institution is insufficient to justify its exemption from the payment of income tax.

As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, forthe YMCA to be granted the exemption it claims under the aforecited provision, it must provewith substantial evidence that (1) it falls under the classification non-stock, non-profit

educational institution; and (2) the income it seeks to be exempted from taxation isused actually, directly, and exclusively for educational purposes. However, the Court notes that



not a scintilla of evidence was submitted by private respondent to prove that it met the saidrequisites.

Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3 ofthe Constitution? We rule that it is not. The term "educational institution" or "institution of

learning" has acquired a well-known technical meaning, of which the members of the

Constitutional Commission are deemed cognizant. 38 Under the Education Act of 1982, suchterm refers to schools. 39 The school system is synonymous with formal education, 40 which"refers to the hierarchically structured and chronologically graded learnings organized and provided by the formal school system and for which certification is required in order for thelearner to progress through the grades or move to the higher levels." 41 The Court has examinedthe "Amended Articles of Incorporation" and "By-Laws" 43 of the YMCA, but found nothing inthem that even hints that it is a school or an educational institution. 44

Furthermore, under the Education Act of 1982, even non-formal education is understood to beschool-based and "private auspices such as foundations and civic-spirited organizations" are

ruled out.

45

It is settled that the term "educational institution," when used in laws granting taxexemptions, refers to a ". . . school seminary, college or educational establishment . . .." 46 Therefore, the private respondent cannot be deemed one of the educational institutionscovered by the constitutional provision under consideration.

. . . Words used in the Constitution are to be taken in their ordinary acceptation.While in its broadest and best sense education embraces all forms and phases ofinstruction, improvement and development of mind and body, and as well ofreligious and moral sentiments, yet in the common understanding and applicationit means a place where systematic instruction in any or all of the useful branchesof learning is given by methods common to schools and institutions of learning.

That we conceive to be the true intent and scope of the term [educationalinstitutions,] as used in theConstitution. 47

Moreover, without conceding that Private Respondent YMCA is an educational institution, theCourt also notes that the former did not submit proof of the proportionate amount of the subjectincome that was actually, directly and exclusively used for educational purposes. Article XIII,Section 5 of the YMCA by-laws, which formed part of the evidence submitted, is patentlyinsufficient, since the same merely signified that "[t]he net income derived from the rentals ofthe commercial buildings shall be apportioned to the Federation and Member Associations as the National Board may decide." 48 In sum, we find no basis for granting the YMCA exemption fromincome tax under the constitutional provision invoked.

Cases Cited by Private

Respondent Inapplicable

The cases 49 relied on by private respondent do not support its cause. YMCA of Manila v.

Collector of Internal Revenue50and Abra Valley College, Inc. v. Aquino 51 are not applicable,

because the controversy in both cases involved exemption from the payment of property tax, notincome tax. Hospital de San Juan de Dios, Inc. v. Pasay City 52 is not in point either, because itinvolves a claim for exemption from the payment of regulatory fees, specifically electricalinspection fees, imposed by an ordinance of Pasay City — an issue not at all related to thatinvolved in a claimed exemption from the payment of income taxes imposed on property leases.

In Jesus Sacred Heart College v. Com. of Internal Revenue, 53 the party therein, which claimedan exemption from the payment of income tax, was an educational institution which submittedsubstantial evidence that the income subject of the controversy had been devoted or used solelyfor educational purposes. On the other hand, the private respondent in the present case has notgiven any proof that it is an educational institution, or that part of its rent income is actually,directly and exclusively used for educational purposes.



Epilogue

In deliberating on this petition, the Court expresses its sympathy with private respondent. Itappreciates the nobility of its cause. However, the Court's power and function are limited merelyto applying the law fairly and objectively. It cannot change the law or bend it to suit its

sympathies and appreciations. Otherwise, it would be overspilling its role and invading the realmof legislation.

We concede that private respondent deserves the help and the encouragement of the government.It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the Court regretsthat, given its limited constitutional authority, it cannot rule on the wisdom or propriety oflegislation. That prerogative belongs to the political departments of government. Indeed, some ofthe members of the Court may even believe in the wisdom and prudence of granting more taxexemptions to private respondent. But such belief, however well-meaning and sincere, cannot bestow upon the Court the power to change or amend the law.

WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals datedSeptember 28, 1995 and February 29, 1996 are hereby REVERSED and SET ASIDE. TheDecision of the Court of Appeals dated February 16, 1995 is REINSTATED, insofar as it ruledthat the income derived by petitioner from rentals of its real property is subject to income tax. No pronouncement as to costs.

SO ORDERED.




ManilaFIRST DIVISION

G.R. No. 153793 August 29, 2006 COMMISSIONER OF INTERNAL REVENUE, Petitioner,vs.JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman (Attorney-in-fact) Respondent.

D E C I S I O NYNARES-SANTIAGO, J .:

Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002Decision1 of the Court of Appeals in CA-G.R. SP No. 59794, which granted the tax refund ofrespondent Juliane Baier-Nickel and reversed the June 28, 2000 Decision2 of the Court of TaxAppeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May 8, 2002 Resolution 3 ofthe Court of Appeals denying its motion for reconsideration.

The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is the

President of JUBANITEX, Inc., a domestic corporation engaged in "[m]anufacturing, marketingon wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling anddisposing embroidered textile products."4

Through JUBANITEX‘s General Manager, Marina Q.Guzman, the corporation appointed and engaged the services of respondent as commission agent.It was agreed that respondent will receive 10% sales commission on all sales actually concludedand collected through her efforts.5

In 1995, respondent received the amount of P1,707,772.64, representing her sales commissionincome from which JUBANITEX withheld the corresponding 10% withholding tax amounting toP170,777.26, and remitted the same to the Bureau of Internal Revenue (BIR). On October 17,1997, respondent filed her 1995 income tax return reporting a taxable income of P1,707,772.64

and a tax due of P170,777.26.6

On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have been mistakenly withheld and remitted by JUBANITEX to the BIR. Respondent contended thather sales commission income is not taxable in the Philippines because the same was acompensation for her services rendered in Germany and therefore considered as income fromsources outside the Philippines.

The next day, April 15, 1998, she filed a petition for review with the CTA contending that noaction was taken by the BIR on her claim for refund.7 On June 28, 2000, the CTA rendered adecision denying her claim. It held that the commissions received by respondent were actually

her remuneration in the performance of her duties as President of JUBANITEX and not as amere sales agent thereof. The income derived by respondent is therefore an income taxable in thePhilippines because JUBANITEX is a domestic corporation.

On petition with the Court of Appeals, the latter reversed the Decision of the CTA, holding thatrespondent received the commissions as sales agent of JUBANITEX and not as Presidentthereof. And since the "source" of income means the activity or service that produce the income,the sales commission received by respondent is not taxable in the Philippines because it arosefrom the marketing activities performed by respondent in Germany. The dispositive portion ofthe appellate court‘s Decision, reads:

WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals datedJune 28, 2000 is hereby REVERSED and SET ASIDE and the respondent court is herebydirected to grant petitioner a tax refund in the amount of Php 170,777.26.

SO ORDERED.8

Petitioner filed a motion for reconsideration but was denied.9 Hence, the instant recourse.

http://www.lawphil.net/judjuris/juri2006/aug2006/gr_153793_2006.html#fnt1


































Petitioner maintains that the income earned by respondent is taxable in the Philippines becausethe source thereof is JUBANITEX, a domestic corporation located in the City of Makati. It thusimplied that source of income means the physical source where the income came from. It furtherargued that since respondent is the President of JUBANITEX, any remuneration she receivedfrom said corporation should be construed as payment of her overall managerial services to the

company and should not be interpreted as a compensation for a distinct and separate service as asales commission agent.

Respondent, on the other hand, claims that the income she received was payment for hermarketing services. She contended that income of nonresident aliens like her is subject to taxonly if the source of the income is within the Philippines. Source, according to respondent isthe situs of the activity which produced the income. And since the source of her income were hermarketing activities in Germany, the income she derived from said activities is not subject toPhilippine income taxation.

The issue here is whether respondent‘s sales commission income is taxable in the Philippines.

Pertinent portion of the National Internal Revenue Code (NIRC), states:

SEC. 25. Tax on Nonresident Alien Individual. –

(A) Nonresident Alien Engaged in Trade or Business Within the Philippines. –

(1) In General. – A nonresident alien individual engaged in trade or business in the Philippinesshall be subject to an income tax in the same manner as an individual citizen and a resident alienindividual, on taxable income received from all sources within the Philippines. A nonresidentalien individual who shall come to the Philippines and stay therein for an aggregate period of

more than one hundred eighty (180) days during any calendar year shall be deemed a‗nonresident alien doing business in the Philippines,‘ Section 22(G) of this Code

notwithstanding.

x x x x

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. – There shall be levied, collected and paid for each taxable year upon the entire income receivedfrom all sources within the Philippines by every nonresident alien individual not engaged in tradeor business within the Philippines x x x a tax equal to twenty-five percent (25%) of such income.x x x

Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged intrade or business, are subject to Philippine income taxation on their income received from allsources within the Philippines. Thus, the keyword in determining the taxability of non-residentaliens is the income‘s "source." In construing the meaning of "source" in Section 25 of the

NIRC, resort must be had on the origin of the provision.

The first Philippine income tax law enacted by the Philippine Legislature was Act No.2833,10 which took effect on January 1, 1920.11 Under Section 1 thereof, nonresident aliens arelikewise subject to tax on income "from all sources within the Philippine Islands," thus –

SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire netincome received in the preceding calendar year from all sources by every individual, a citizen orresident of the Philippine Islands, a tax of two per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources within the Philippine Islands by every individual, anonresident alien, including interest on bonds, notes, or other interest-bearing obligations ofresidents, corporate or otherwise.











Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 asamended by U.S. Revenue Law of 1917.12 Being a law of American origin, the authoritativedecisions of the official charged with enforcing it in the U.S. have peculiar persuasive force inthe Philippines.13

The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as fromsources within the U.S. and specifies when similar types of income are to be treated as fromsources outside the U.S.14 Under the said Code, compensation for labor and personal services performed in the U.S., is generally treated as income from U.S. sources; while compensation forsaid services performed outside the U.S., is treated as income from sources outside the U.S.15 Asimilar provision is found in Section 42 of our NIRC, thus:

SEC. 42. x x x

(A) Gross Income From Sources Within the Philippines. x x x

x x x x

(3) Services. – Compensation for labor or personal services performed in the Philippines;

x x x x

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

x x x x

(3) Compensation for labor or personal services performed without the Philippines;

The following discussions on sourcing of income under the Internal Revenue Code of the U.S.,are instructive:

The Supreme Court has said, in a definition much quoted but often debated, that income may bederived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale ofcapital assets. While the three elements of this attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any inquiry into whether a particular item is from"sources within the United States" and suggest an investigation into the nature and location ofthe activities or property which produce the income.

If the income is from labor the place where the labor is done should be decisive; if it is done inthis country, the income should be from "sources within the United States." If the income is fromcapital, the place where the capital is employed should be decisive; if it is employed in thiscountry, the income should be from "sources within the United States." If the income is from thesale of capital assets, the place where the sale is made should be likewise decisive.

Much confusion will be avoided by regarding the term "source" in this fundamental light. It isnot a place, it is an activity or property. As such, it has a situs or location, and if that situs orlocation is within the United States the resulting income is taxable to nonresident aliens andforeign corporations.

The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and foreign corporations and to make the test of taxability the"source," or situs of the activities or property which produce the income. The result is that, on theone hand, nonresident aliens and nonresident foreign corporations are prevented from derivingincome from the United States free from tax, and, on the other hand, there is no undue impositionof a tax when the activities do not take place in, and the property producing income is notemployed in, this country. Thus, if income is to be taxed, the recipient thereof must be residentwithin the jurisdiction, or the property or activities out of which the income issues or is derived



















must be situated within the jurisdiction so that the source of the income may be said to have asitus in this country.

The underlying theory is that the consideration for taxation is protection of life and property andthat the income rightly to be levied upon to defray the burdens of the United States Government

is that income which is created by activities and property protected by this Government orobtained by persons enjoying that protection. 16

The important factor therefore which determines the source of income of personal services is notthe residence of the payor, or the place where the contract for service is entered into, or the placeof payment, but the place where the services were actually rendered.17

In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,18 the Court addressed theissue on the applicable source rule relating to reinsurance premiums paid by a local insurancecompany to a foreign insurance company in respect of risks located in the Philippines. It washeld therein that the undertaking of the foreign insurance company to indemnify the local

insurance company is the activity that produced the income. Since the activity took place in thePhilippines, the income derived therefrom is taxable in our jurisdiction. Citing Mertens, The Law

of Federal Income Taxation, the Court emphasized that the technical meaning of source ofincome is the property, activity or service that produced the same. Thus:

The source of an income is the property, activity or service that produced the income. Thereinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly,had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability.Said undertaking is the activity that produced the reinsurance premiums, and the same took placein the Philippines. x x x the reinsured, the liabilities insured and the risk originally underwritten by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were

based, were all situated in the Philippines. x x x

19

In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),20 theissue was whether BOAC, a foreign airline company which does not maintain any flight to andfrom the Philippines is liable for Philippine income taxation in respect of sales of air tickets inthe Philippines, through a general sales agent relating to the carriage of passengers and cargo between two points both outside the Philippines. Ruling in the affirmative, the Court applied thecase of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and reiterated the rulethat the source of income is that "activity" which produced the income. It was held that the "saleof tickets" in the Philippines is the "activity" that produced the income and therefore BOACshould pay income tax in the Philippines because it undertook an income producing activity inthe country.

Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. BritishOverseas Airways Corporation in support of their arguments, but the correct interpretation of thesaid case favors the theory of respondent that it is the situs of the activity that determineswhether such income is taxable in the Philippines. The conflict between the majority and thedissenting opinion in the said case has nothing to do with the underlying principle of the law onsourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v. Collectorof Internal Revenue. The divergence in opinion centered on whether the sale of tickets in thePhilippines is to be construed as the "activity" that produced the income, as viewed by themajority, or merely the physical source of the income, as ratiocinated by Justice Florentino P.Feliciano in his dissent. The majority, through Justice Ameurfina Melencio-Herrera, as ponente,interpreted the sale of tickets as a business activity that gave rise to the income of BOAC.Petitioner cannot therefore invoke said case to support its view that source of income is the physical source of the money earned. If such was the interpretation of the majority, the Courtwould have simply stated that source of income is not the business activity of BOAC but the place where the person or entity disbursing the income is located or where BOAC physicallyreceived the same. But such was not the import of the ruling of the Court. It even explained in






















detail the business activity undertaken by BOAC in the Philippines to pinpoint the taxableactivity and to justify its conclusion that BOAC is subject to Philippine income taxation. Thus –

BOAC, during the periods covered by the subject assessments, maintained a general sales agentin the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and

issuing tickets; (2) breaking down the whole trip into series of trips — each trip in the seriescorresponding to a different airline company; (3) receiving the fare from the whole trip; and (4)consequently allocating to the various airline companies on the basis of their participation in theservices rendered through the mode of interline settlement as prescribed by Article VI of theResolution No. 850 of the IATA Agreement." Those activities were in exercise of the functionswhich are normally incident to, and are in progressive pursuit of, the purpose and object of itsorganization as an international air carrier. In fact, the regular sale of tickets, its main activity, isthe very lifeblood of the airline business, the generation of sales being the paramount objective.There should be no doubt then that BOAC was "engaged in" business in the Philippines througha local agent during the period covered by the assessments. x x x21

x x x x

The source of an income is the property, activity or service that produced the income. For thesource of income to be considered as coming from the Philippines, it is sufficient that the incomeis derived from activity within the Philippines. In BOAC's case, the sale of tickets in thePhilippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippineterritory, enjoying the protection accorded by the Philippine government. In consideration ofsuch protection, the flow of wealth should share the burden of supporting the government.

A transportation ticket is not a mere piece of paper. When issued by a common carrier, itconstitutes the contract between the ticket-holder and the carrier. It gives rise to the obligation ofthe purchaser of the ticket to pay the fare and the corresponding obligation of the carrier totransport the passenger upon the terms and conditions set forth thereon. The ordinary ticketissued to members of the traveling public in general embraces within its terms all the elements toconstitute it a valid contract, binding upon the parties entering into the relationship.22

The Court reiterates the rule that "source of income" relates to the property, activity or servicethat produced the income. With respect to rendition of labor or personal service, as in the instantcase, it is the place where the labor or service was performed that determines the source of theincome. There is therefore no merit in petitioner‘s interpretation which equates source of incomein labor or personal service with the residence of the payor or the place of payment of theincome.

Having disposed of the doctrine applicable in this case, we will now determine whetherrespondent was able to establish the factual circumstances showing that her income is exemptfrom Philippine income taxation.

The decisive factual consideration here is not the capacity in which respondent received theincome, but the sufficiency of evidence to prove that the services she rendered were performed inGermany. Though not raised as an issue, the Court is clothed with authority to address the same because the resolution thereof will settle the vital question posed in this controversy.23

The settled rule is that tax refunds are in the nature of tax exemptions and are to beconstrued strictissimi jurisagainst the taxpayer .24 To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax is actually exempt from taxation.

In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated thatthe activity or the service which would entitle her to 10% commission income, are "sales actuallyconcluded and collected through [her] efforts."25 What she presented as evidence to prove that






















she performed income producing activities abroad, were copies of documents she allegedly faxedto JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be used inthe finished products as well as samples of sales orders purportedly relayed to her by clients.However, these documents do not show whether the instructions or orders faxed ripened intoconcluded or collected sales in Germany. At the very least, these pieces of evidence show that

while respondent was in Germany, she sent instructions/orders to JUBANITEX. As to whetherthese instructions/orders gave rise to consummated sales and whether these sales were trulyconcluded in Germany, respondent presented no such evidence. Neither did she establishreasonable connection between the orders/instructions faxed and the reported monthly sales purported to have transpired in Germany.

The paucity of respondent‘s evidence was even noted by Atty. Minerva Pacheco, petitioner‘s

counsel at the hearing before the Court of Tax Appeals. She pointed out that respondent presented no contracts or orders signed by the customers in Germany to prove the saletransactions therein.26 Likewise, in her Comment to the Formal Offer of respondent‘s evidence,

she objected to the admission of the faxed documents bearing instruction/orders marked as

Exhibits "R,"

27

"V," "W", and "X,"

28

for being self serving.

29

The concern raised by petitioner‘scounsel as to the absence of substantial evidence that would constitute proof that the saletransactions for which respondent was paid commission actually transpired outside thePhilippines, is relevant because respondent stayed in the Philippines for 89 days in 1995. Exceptfor the months of July and September 1995, respondent was in the Philippines in the months ofMarch, May, June, and August 1995,30 the same months when she earned commission incomefor services allegedly performed abroad. Furthermore, respondent presented no evidence to prove that JUBANITEX does not sell embroidered products in the Philippines and that herappointment as commission agent is exclusively for Germany and other European markets.

In sum, we find that the faxed documents presented by respondent did not constitute substantialevidence, or that relevant evidence that a reasonable mind might accept as adequate to supportthe conclusion31 that it was in Germany where she performed the income producing servicewhich gave rise to the reported monthly sales in the months of March and May to September of1995. She thus failed to discharge the burden of proving that her income was from sourcesoutside the Philippines and exempt from the application of our income tax law. Hence, the claimfor tax refund should be denied.

The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel ,32 a previous case forrefund of income withheld from respondent‘s remunerations f or services rendered abroad, theCourt in a Minute Resolution dated February 17, 2003,33 sustained the ruling of the Court ofAppeals that respondent is entitled to refund the sum withheld from her sales commissionincome for the year 1994. This ruling has no bearing in the instant controversy because thesubject matter thereof is the income of respondent for the year 1994 while, the instant case dealswith her income in 1995. Otherwise, stated, res judicata has no application here. Its elementsare: (1) there must be a final judgment or order; (2) the court that rendered the judgment musthave jurisdiction over the subject matter and the parties; (3) it must be a judgment on the merits;(4) there must be between the two cases identity of parties, of subject matter, and of causes ofaction. 34 The instant case, however, did not satisfy the fourth requisite because there is noidentity as to the subject matter of the previous and present case of respondent which deals withincome earned and activities performed for different taxable years.

WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8, 2002Resolution of the Court of Appeals in CA-G.R. SP No. 59794, are REVERSED and SETASIDE. The June 28, 2000 Decision of the Court of Tax Appeals in C.T.A. Case No. 5633,which denied respondent‘s claim for refund of income tax paid for the year 1995is REINSTATED.

SO ORDERED.






































EN BANC[G. R. No. 119775. October 24, 2003]

JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIÑO FOUNDATION INC., CENTER FOR ALTERNATIVESYSTEMS FOUNDATION INC., REGINA VICTORIA A. BENAFIN REPRESENTED AND JOINED BY HER MOTHERMRS. ELISA BENAFIN, IZABEL M. LUYK REPRESENTED AND JOINED BY HER MOTHER MRS. REBECCAMOLINA LUYK, KATHERINE PE REPRESENTED AND JOINED BY HER MOTHER ROSEMARIE G. PE, SOLEDADS. CAMILO, ALICIA C. PACALSO ALIAS “KEVAB,” BETTY I. STRASSER, RUBY C. GIRON, URSULA C. PEREZ

ALIAS “BA-YAY,” EDILBERTO T. CLARAVALL, CARMEN CAROMINA, LILIA G. YARANON, DIANE

MONDOC, petitioners, vs . VICTOR LIM, PRESIDENT, BASES CONVERSION DEVELOPMENT AUTHORITY; JOHNHAY PORO POINT DEVELOPMENT CORPORATION, CITY OF BAGUIO, TUNTEX (B.V.I.) CO. LTD., ASIAWORLDINTERNATIONALE GROUP, INC., DEPARTMENT OF ENVIRONMENT AND NATURAL RESOURCES, respondents .

D E C I S I O NCARPIO MORALES, J .:

By the present petition for prohibition, mandamus and declaratory relief with prayer for atemporary restraining order (TRO) and/or writ of preliminary injunction, petitioners assail, in themain, the constitutionality of Presidential Proclamation No. 420, Series of 1994, ―CREATING

AND DESIGNATING A PORTION OF THE AREA COVERED BY THE FORMER CAMPJOHN [HAY] AS THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TOREPUBLIC ACT NO. 7227.‖

Republic Act No. 7227, AN ACT ACCELERATING THE CONVERSION OF MILITARY

RESERVATIONS INTO OTHER PRODUCTIVE USES, CREATING THE BASESCONVERSION AND DEVELOPMENT AUTHORITY FOR THIS PURPOSE, PROVIDINGFUNDS THEREFOR AND FOR OTHER PURPOSES, otherwise known as the ―BasesConversion and Development Act of 1992,‖ which was enacted on March 13, 1992, set out the

policy of the government to accelerate the sound and balanced conversion into alternative productive uses of the former military bases under the 1947 Philippines-United States ofAmerica Military Bases Agreement, namely, the Clark and Subic military reservations as well astheir extensions including the John Hay Station (Camp John Hay or the camp) in the City ofBaguio.[1]

As noted in its title, R.A. No. 7227 created public respondent Bases Conversion and

Development Authority[2]

(BCDA), vesting it with powers pertaining to the multifarious aspectsof carrying out the ultimate objective of utilizing the base areas in accordance with the declaredgovernment policy.

R.A. No. 7227 likewise created the Subic Special Economic [and Free Port] Zone (SubicSEZ) the metes and bounds of which were to be delineated in a proclamation to be issued by thePresident of the Philippines.[3]

R.A. No. 7227 granted the Subic SEZ incentives ranging from tax and duty-freeimportations, exemption of businesses therein from local and national taxes, to other hallmarksof a liberalized financial and business climate.[4]

And R.A. No. 7227 expressly gave authority to the President to create through executive

proclamation, subject to the concurrence of the local government units directly affected, otherSpecial Economic Zones (SEZ) in the areas covered respectively by the Clark militaryreservation, the Wallace Air Station in San Fernando, La Union, and Camp John Hay.[5]

On August 16, 1993, BCDA entered into a Memorandum of Agreement and EscrowAgreement with private respondents Tuntex (B.V.I.) Co., Ltd (TUNTEX) and AsiaworldInternationale Group, Inc. (ASIAWORLD), private corporations registered under the laws of theBritish Virgin Islands, preparatory to the formation of a joint venture for the development ofPoro Point in La Union and Camp John Hay as premier tourist destinations and recreationcenters. Four months later or on December 16, 1993, BCDA, TUNTEX and ASIAWORDexecuted a Joint Venture Agreement[6] whereby they bound themselves to put up a joint venture

company known as the Baguio International Development and Management Corporation whichwould lease areas within Camp John Hay and Poro Point for the purpose of turning such placesinto principal tourist and recreation spots, as originally envisioned by the parties under theirMemorandum of Agreement.

The Baguio City government meanwhile passed a number of resolutions in response to theactions taken by BCDA as owner and administrator of Camp John Hay.

http://sc.judiciary.gov.ph/jurisprudence/2003/oct2003/119775.htm#_ftn1


























By Resolution[7] of September 29, 1993, the Sangguniang Panlungsod of Baguio City(the sanggunian) officially asked BCDA to exclude all the barangays partly or totally locatedwithin Camp John Hay from the reach or coverage of any plan or program for its development.

By a subsequent Resolution[8] dated January 19, 1994, the sanggunian sought from BCDAan abdication, waiver or quitclaim of its ownership over the home lots being occupied by

residents of nine (9) barangays surrounding the military reservation.

Still by another resolution passed on February 21, 1994, the sanggunian adopted andsubmitted to BCDA a 15-point concept for the development of Camp JohnHay.[9] The sanggunian’svision expressed, among other things, a kind of development thataffords protection to the environment, the making of a family-oriented type of tourist destination, priority in employment opportunities for Baguio residents and free access to the base area,guaranteed participation of the city government in the management and operation of the camp,exclusion of the previously named nine barangays from the area for development, and liabilityfor local taxes of businesses to be established within the camp.[10]

BCDA, TUNTEX and ASIAWORLD agreed to some, but rejected or modified the other

proposals of the sanggunian.[11] They stressed the need to declare Camp John Hay a SEZ as acondition precedent to its full development in accordance with the mandate of R.A. No. 7227.[12]

On May 11, 1994, the sanggunian passed a resolution requesting the Mayor to order thedetermination of realty taxes which may otherwise be collected from real properties of CampJohn Hay.[13] The resolution was intended to intelligently guide the sanggunian in determining its position on whether Camp John Hay be declared a SEZ, it (the sanggunian) being of the viewthat such declaration would exempt the camp‘s property and the economic activity therein from

local or national taxation.

More than a month later, however, the sanggunian passed Resolution No. 255, (Series of1994),[14] seeking and supporting, subject to its concurrence, the issuance by then President

Ramos of a presidential proclamation declaring an area of 288.1 hectares of the camp as a SEZ inaccordance with the provisions of R.A. No. 7227. Together with this resolution was submitted adraft of the proposed proclamation for consideration by the President.[15]

On July 5, 1994 then President Ramos issued Proclamation No. 420,[16] the title of whichwas earlier indicated, which established a SEZ on a portion of Camp John Hay and which readsas follows:

x x x

Pursuant to the powers vested in me by the law and the resolution of concurrence by the City

Council of Baguio, I, FIDEL V. RAMOS, President of the Philippines, do hereby create anddesignate a portion of the area covered by the former John Hay reservation as embraced,covered, and defined by the 1947 Military Bases Agreement between the Philippines and theUnited States of America, as amended, as the John Hay Special Economic Zone, and accordinglyorder:

SECTION 1. Coverage of John Hay Special Economic Zone. – The John Hay SpecialEconomic Zone shall cover the area consisting of Two Hundred Eighty Eight and one/tenth(288.1) hectares, more or less, of the total of Six Hundred Seventy-Seven (677) hectares of theJohn Hay Reservation, more or less, which have been surveyed and verified by the Departmentof Environment and Natural Resources (DENR) as defined by the following technical

description:A parcel of land, situated in the City of Baguio, Province of Benguet, Island of Luzon, and particularly described in survey plans Psd-131102-002639 and Ccs-131102-000030 as approvedon 16 August 1993 and 26 August 1993, respectively, by the Department of Environment and Natural Resources, in detail containing :










































Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and Lot 20 of Ccs-131102-000030

-and-

Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot 14, Lot 15, Lot 16, Lot 17, andLot 18 of Psd-131102-002639 being portions of TCT No. T-3812, LRC Rec. No. 87.

With a combined area of TWO HUNDRED EIGHTY EIGHT AND ONE/TENTH HECTARES(288.1 hectares); Provided that the area consisting of approximately Six and two/tenth (6.2)hectares, more or less, presently occupied by the VOA and the residence of the Ambassador ofthe United States, shall be considered as part of the SEZ only upon turnover of the properties tothe government of the Republic of the Philippines.

Sec. 2. Governing Body of the John Hay Special Economic Zone. – Pursuant to Section 15 ofRepublic Act No. 7227, the Bases Conversion and Development Authority is hereby established

as the governing body of the John Hay Special Economic Zone and, as such, authorized todetermine the utilization and disposition of the lands comprising it, subject to private rights, ifany, and in consultation and coordination with the City Government of Baguio after consultationwith its inhabitants, and to promulgate the necessary policies, rules, and regulations to governand regulate the zone thru the John Hay Poro Point Development Corporation, which is itsimplementing arm for its economic development and optimum utilization.

Sec. 3. Investment Climate in John Hay Special Economic Zone. – Pursuant to Section 5(m) andSection 15 of Republic Act No. 7227, the John Hay Poro Point Development Corporation shallimplement all necessary policies, rules, and regulations governing the zone, including investmentincentives, in consultation with pertinent government departments. Among others, the zone shall

have all the applicable incentives of the Special Economic Zone under Section 12 of RepublicAct No. 7227 and those applicable incentives granted in the Export Processing Zones, theOmnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investmentlaws that may hereinafter be enacted.

Sec. 4. Role of Departments, Bureaus, Offices, Agencies and Instrumentalities. – All Heads ofdepartments, bureaus, offices, agencies, and instrumentalities of the government are herebydirected to give full support to Bases Conversion and Development Authority and/or itsimplementing subsidiary or joint venture to facilitate the necessary approvals to expedite theimplementation of various projects of the conversion program.

Sec. 5. Local Authority. – Except as herein provided, the affected local government units shallretain their basic autonomy and identity.

Sec. 6. Repealing Clause. – All orders, rules, and regulations, or parts thereof, which areinconsistent with the provisions of this Proclamation, are hereby repealed, amended, or modifiedaccordingly.

Sec. 7. Effectivity. This proclamation shall take effect immediately.

Done in the City of Manila, this 5 th day of July, in the year of Our Lord, nineteen hundred andninety-four.

The issuance of Proclamation No. 420 spawned the present petition[17] for prohibition, mandamus and declaratory relief which was filed on April 25, 1995 challenging, inthe main, its constitutionality or validity as well as the legality of the Memorandum ofAgreement and Joint Venture Agreement between public respondent BCDA and privaterespondents TUNTEX andASIAWORLD.

Petitioners allege as grounds for the allowance of the petition the following:






I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990 (sic) IN SO FARAS IT GRANTS TAX EXEMPTIONS IS INVALID AND ILLEGAL AS IT IS ANUNCONSTITUTIONAL EXERCISE BY THE PRESIDENT OF A POWERGRANTED ONLY TO THE LEGISLATURE.

II. PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT LIMITS THE

POWERS AND INTERFERES WITH THE AUTONOMY OF THE CITY OFBAGUIO IS INVALID, ILLEGAL AND UNCONSTITUTIONAL.

III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 ISUNCONSTITUTIONAL IN THAT IT VIOLATES THE RULE THAT ALLTAXES SHOULD BE UNIFORM AND EQUITABLE.

IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY ANDBETWEEN PRIVATE AND PUBLIC RESPONDENTS BASES CONVERSIONDEVELOPMENT AUTHORITY HAVING BEENENTERED INTO ONLY BYDIRECT NEGOTIATION IS ILLEGAL.

V. THE TERMS AND CONDITIONS OF THE MEMORANDUM OFAGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND PUBLICRESPONDENT BASES CONVERSION DEVELOPMENTAUTHORITY IS (sic) ILLEGAL.

VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS NOTHAVING UNDERGONE ENVIRONMENTAL IMPACT ASSESSMENT ISBEING ILLEGALLY CONSIDERED WITHOUT A VALID ENVIRONMENTALIMPACT ASSESSMENT.

A temporary restraining order and/or writ of preliminary injunction was prayed for to enjoinBCDA, John Hay Poro Point Development Corporation and the city government from

implementing Proclamation No. 420, and TUNTEX and ASIAWORLD from proceeding withtheir plan respecting Camp John Hay‘s development pursuant to their Joint Venture Agreementwith BCDA.[18]

Public respondents, by their separate Comments, allege as moot and academic the issuesraised by the petition, the questioned Memorandum of Agreement and Joint Venture Agreementhaving already been deemed abandoned by the inaction of the parties thereto prior to the filing ofthe petition as in fact, by letter of November 21, 1995, BCDA formally notified TUNTEX andASIAWORLD of the revocation of their said agreements.[19]

In maintaining the validity of Proclamation No. 420, respondents contend that by extendingto the John Hay SEZ economic incentives similar to those enjoyed by the Subic SEZ which was

established under R.A. No. 7227, the proclamation is merely implementing the legislative intentof said law to turn the US military bases into hubs of business activity or investment. Theyunderscore the point that the government‘s policy of bases conversion can not be achieved

without extending the same tax exemptions granted by R.A. No. 7227 to Subic SEZ to otherSEZs.

Denying that Proclamation No. 420 is in derogation of the local autonomy of Baguio City orthat it is violative of the constitutional guarantee of equal protection, respondents assail petitioners‘ lack of standing to bring the present suit even as taxpayers and in the absence of any

actual case or controversy to warrant this Court‘s exercise of its power of judicial review overthe proclamation.

Finally, respondents seek the outright dismissal of the petition for having been filed indisregard of the hierarchy of courts and of the doctrine of exhaustion of administrative remedies.

Replying,[20] petitioners aver that the doctrine of exhaustion of administrative remedies findsno application herein since they are invoking the exclusive authority of this Court under Section21 of R.A. No. 7227 to enjoin or restrain implementation of projects for conversion of the baseareas; that the established exceptions to the aforesaid doctrine obtain in the present petition; andthat they possess the standing to bring the petition which is a taxpayer‘s suit.















Public respondents have filed their Rejoinder [21] and the parties have filed their respectivememoranda.

Before dwelling on the core issues, this Court shall first address the preliminary proceduralquestions confronting the petition.

The judicial policy is and has always been that this Court will not entertain direct resort to itexcept when the redress sought cannot be obtained in the proper courts, or when exceptional andcompelling circumstances warrant availment of a remedy within and calling for the exercise ofthis Court‘s primary jurisdiction.

[22] Neither will it entertain an action for declaratory relief,which is partly the nature of this petition, over which it has no original jurisdiction.

Nonetheless, as it is only this Court which has the power under Section 21[23] of R.A. No.7227 to enjoin implementation of projects for the development of the former US militaryreservations, the issuance of which injunction petitioners pray for, petitioners‘ direct filing of the

present petition with it is allowed. Over and above this procedural objection to the present suit,this Court retains full discretionary power to take cognizance of a petition filed directly to it ifcompelling reasons, or the nature and importance of the issues raised, warrant .[24] Besides,

remanding the case to the lower courts now would just unduly prolong adjudication of the issues.

The transformation of a portion of the area covered by Camp John Hay into a SEZ is notsimply a re-classification of an area, a mere ascription of a status to a place. It involves turningthe former US military reservation into a focal point for investments by both local and foreignentities. It is to be made a site of vigorous business activity, ultimately serving as a spur to thecountry‘s long awaited economic growth. For, as R.A. No. 7227 unequivocally declares, it is thegovernment‘s policy to enhance the benefits to be derived from the base areas in order to

promote the economic and social development of Central Luzon in particular and the country ingeneral.[25] Like the Subic SEZ, the John Hay SEZ should also be turned into a ―self -sustaining,industrial, commercial, financial and investment center.‖

[26]

More than the economic interests at stake, the development of Camp John Hay as well as ofthe other base areas unquestionably has critical links to a host of environmental and socialconcerns. Whatever use to which these lands will be devoted will set a chain of events that canaffect one way or another the social and economic way of life of the communities where the bases are located, and ultimately the nation in general.

Underscoring the fragility of Baguio City‘s ecology with its problem on the scarcity of its

water supply, petitioners point out that the local and national government are faced with thechallenge of how to provide for an ecologically sustainable, environmentally sound, equitabletransition for the city in the wake of Camp John Hay‘s reversion to the mass of government

property.[27] But that is why R.A. No. 7227 emphasizes the ―sound and balanced conversion of

the Clark and Subic military reservations and their extensions consistent with ecologicaland environmental standards.‖[28]It cannot thus be gainsaid that the matter of conversion of theUS bases into SEZs, in this case Camp John Hay, assumes importance of a national magnitude.

Convinced then that the present petition embodies crucial issues, this Court assumes jurisdiction over the petition.

As far as the questioned agreements between BCDA and TUNTEX and ASIAWORLD areconcerned, the legal questions being raised thereon by petitioners have indeed been renderedmoot and academic by the revocation of such agreements. There are, however, other issues posed by the petition, those which center on the constitutionality of Proclamation No. 420, whichhave not been mooted by the said supervening event upon application of the rules for the judicial

scrutiny of constitutional cases. The issues boil down to:(1) Whether the present petition complies with the requirements for this Court‘s

exercise of jurisdiction over constitutional issues;

(2) Whether Proclamation No. 420 is constitutional by providing for national andlocal tax exemption within and granting other economic incentives to the JohnHay Special Economic Zone; and

































(3) Whether Proclamation No. 420 is constitutional for limiting or interfering withthe local autonomy of Baguio City;

It is settled that when questions of constitutional significance are raised, the court canexercise its power of judicial review only if the following requisites are present: (1) the existenceof an actual and appropriate case; (2) a personal and substantial interest of the party raising the

constitutional question; (3) the exercise of judicial review is pleaded at the earliest opportunity;and (4) the constitutional question is the lis mota of the case.[29]

An actual case or controversy refers to an existing case or controversy that is appropriate orripe for determination, not conjectural or anticipatory.[30] The controversy needs to be definiteand concrete, bearing upon the legal relations of parties who are pitted against each other due totheir adverse legal interests.[31] There is in the present case a real clash of interests and rights between petitioners and respondents arising from the issuance of a presidential proclamation thatconverts a portion of the area covered by Camp John Hay into a SEZ, the former insisting thatsuch proclamation contains unconstitutional provisions, the latter claiming otherwise.

R.A. No. 7227 expressly requires the concurrence of the affected local government units to

the creation of SEZs out of all the base areas in the country.[32] The grant by the law on localgovernment units of the right of concurrence on the bases‘ conversion is equivalent to vesting alegal standing on them, for it is in effect a recognition of the real interests that communitiesnearby or surrounding a particular base area have in its utilization. Thus, the interest of petitioners, being inhabitants of Baguio, in assailing the legality of Proclamation No. 420, is personal and substantial such that they have sustained or will sustain direct injury as a result ofthe government act being challenged.[33] Theirs is a material interest, an interest in issue affected by the proclamation and not merely an interest in the question involved or an incidentalinterest,[34] for what is at stake in the enforcement of Proclamation No. 420 is the very economicand social existence of the people of Baguio City.

Petitioners‘ locus standi parallels that of the petitioner and other residents of Bataan,specially of the town of Limay, in Garcia v. Board of Investments[35] where this Courtcharacterized their interest in the establishment of a petrochemical plant in their place as actual,real, vital and legal, for it would affect not only their economic life but even the air they breathe.

Moreover, petitioners Edilberto T. Claravall and Lilia G. Yaranon were duly electedcouncilors of Baguio at the time, engaged in the local governance of Baguio City and whoseduties included deciding for and on behalf of their constituents the question of whether to concurwith the declaration of a portion of the area covered by Camp John Hay as a SEZ. Certainlythen, petitioners Claravall and Yaranon, as city officials who votedagainst[36] the sanggunian Resolution No. 255 (Series of 1994) supporting the issuance of thenow challenged Proclamation No. 420, have legal standing to bring the present petition.

That there is herein a dispute on legal rights and interests is thus beyond doubt. Themootness of the issues concerning the questioned agreements between public and privaterespondents is of no moment.

―By the mere enactment of the questioned law or the approval of the challenged act, the disputeis deemed to have ripened into a judicial controversy even without any other overt act. Indeed,even a singular violation of the Constitution and/or the law is enough to awaken judicialduty.‖

[37]

As to the third and fourth requisites of a judicial inquiry, there is likewise no question thatthey have been complied with in the case at bar. This is an action filed purposely to bring forthconstitutional issues, ruling on which this Court must take up. Besides, respondents never raisedissues with respect to these requisites, hence, they are deemed waived.

Having cleared the way for judicial review, the constitutionality of Proclamation No. 420, asframed in the second and third issues above, must now be addressed squarely.

The second issue refers to petitioners‘ objection against the creation by Proclamation No.420 of a regime of tax exemption within the John Hay SEZ. Petitioners argue that nowhere in R.





































A. No. 7227 is there a grant of tax exemption to SEZs yet to be established in base areas, unlikethe grant under Section 12 thereof of tax exemption and investment incentives to the thereinestablished Subic SEZ. The grant of tax exemption to the John Hay SEZ, petitioners conclude,thus contravenes Article VI, Section 28 (4) of the Constitution which provides that ―No law

granting any tax exemption shall be passed without the concurrence of a majority of all the

members of Congress.‖ Section 3 of Proclamation No. 420, the challenged provision, reads:

Sec. 3. Investment Climate in John Hay Special Economic Zone. – Pursuant to Section 5(m) andSection 15 of Republic Act No. 7227, the John Hay Poro Point Development Corporation shallimplement all necessary policies, rules, and regulations governing the zone, including investmentincentives, in consultation with pertinent government departments. Among others, the zoneshall have all the applicable incentives of the Special Economic Zone under Section 12 ofRepublic Act No. 7227 and those applicable incentives granted in the Export ProcessingZones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, andnew investment laws that may hereinafter be enacted. (Emphasis and underscoring supplied)

Upon the other hand, Section 12 of R.A. No. 7227 provides:

x x x

(a) Within the framework and subject to the mandate and limitations of the Constitution andthe pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center togenerate employment opportunities in and around the zone and to attract and promote productiveforeign investments;

b) The Subic Special Economic Zone shall be operated and managed as a separate customsterritory ensuring free flow or movement of goods and capital within, into and exported out ofthe Subic Special Economic Zone, as well as provide incentives such as tax and duty freeimportations of raw materials, capital and equipment. However, exportation or removal of goodsfrom the territory of the Subic Special Economic Zone to the other parts of the Philippineterritory shall be subject to customs duties and taxes under the Customs and Tariff Code andother relevant tax laws of the Philippines;

(c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, notaxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises

within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established adevelopment fund of one percent (1%) of the gross income earned by all businesses andenterprises within the Subic Special Economic Zone to be utilized for the Municipality of Subic,and other municipalities contiguous to be base areas. In case of conflict between national andlocal laws with respect to tax exemption privileges in the Subic Special Economic Zone, thesame shall be resolved in favor of the latter;

(d) No exchange control policy shall be applied and free markets for foreign exchange, gold,securities and futures shall be allowed and maintained in the Subic Special Economic Zone;

(e) The Central Bank, through the Monetary Board, shall supervise and regulate the operationsof banks and other financial institutions within the Subic Special Economic Zone;

(f) Banking and Finance shall be liberalized with the establishment of foreign currencydepository units of local commercial banks and offshore banking units of foreign banks withminimum Central Bank regulation;



(g) Any investor within the Subic Special Economic Zone whose continuing investment shallnot be less than Two Hundred fifty thousand dollars ($250,000), his/her spouse and dependentchildren under twenty-one (21) years of age, shall be granted permanent resident status withinthe Subic Special Economic Zone. They shall have freedom of ingress and egress to and fromthe Subic Special Economic Zone without any need of special authorization from the Bureau of

Immigration and Deportation. The Subic Bay Metropolitan Authority referred to in Section 13of this Act may also issue working visas renewable every two (2) years to foreign executives andother aliens possessing highly-technical skills which no Filipino within the Subic SpecialEconomic Zone possesses, as certified by the Department of Labor and Employment. The namesof aliens granted permanent residence status and working visas by the Subic Bay MetropolitanAuthority shall be reported to the Bureau of Immigration and Deportation within thirty (30) daysafter issuance thereof;

x x x (Emphasis supplied)

It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which was

granted by Congress with tax exemption, investment incentives and the like. There is no expressextension of the aforesaid benefits to other SEZs still to be created at the time via presidential proclamation.

The deliberations of the Senate confirm the exclusivity to Subic SEZ of the tax andinvestment privileges accorded it under the law, as the following exchanges between ourlawmakers show during the second reading of the precursor bill of R.A. No. 7227 with respect tothe investment policies that would govern Subic SEZ which are now embodied in the aforesaidSection 12 thereof:

x x x

Senator Maceda: This is what I was talking about. We get into problems here because all ofthese following policies are centered around the concept of free port. And in the main paragraphabove, we have declared both Clark and Subic as special economic zones, subject to these policies which are, in effect, a free-port arrangement.

Senator Angara: The Gentleman is absolutely correct, Mr. President. So we must confine these policies only to Subic.

May I withdraw then my amendment, and instead provide that ―THE SPECIAL ECO NOMICZONE OF SUBIC SHALL BE ESTABLISHED IN ACCORDANCE WITH THEFOLLOWING POLICIES.‖ Subject to style, Mr. President.

Thus, it is very clear that these principles and policies are applicable only to Subic as a free port.

Senator Paterno: Mr. President.

The President: Senator Paterno is recognized.

Senator Paterno: I take it that the amendment suggested by Senator Angara would then preventthe establishment of other special economic zones observing these policies.

Senator Angara: No, Mr. President, because during our short caucus, Senator Laurel raised the

point that if we give this delegation to the President to establish other economic zones, that may be an unwarranted delegation.

So we agreed that we will simply limit the definition of powers and description of the zone toSubic, but that does not exclude the possibility of creating other economic zones within the baselands.



Senator Paterno: But if that amendment is followed, no other special economic zone may becreated under authority of this particular bill. Is that correct, Mr. President?

Senator Angara: Under this specific provision, yes, Mr. President. This provision now will beconfined only to Subic.[38]

x x x (Underscoring supplied).

As gathered from the earlier-quoted Section 12 of R.A. No. 7227, the privileges given toSubic SEZ consist principally of exemption from tariff or customs duties, national and localtaxes of business entities therein (paragraphs (b) and (c)), free market and trade of specifiedgoods or properties (paragraph d), liberalized banking and finance (paragraph f), and relaxedimmigration rules for foreign investors (paragraph g). Yet, apart from these, Proclamation No.420 also makes available to the John Hay SEZ benefits existing in other laws such as the privilege of export processing zone-based businesses of importing capital equipment and rawmaterials free from taxes, duties and other restrictions;[39] tax and duty exemptions, tax holiday,

tax credit, and other incentives under the Omnibus Investments Code of 1987;

[40]

and theapplicability to the subject zone of rules governing foreign investments in the Philippines.[41]

While the grant of economic incentives may be essential to the creation and success ofSEZs, free trade zones and the like, the grant thereof to the John Hay SEZ cannot be sustained.The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ, hence, the extension ofthe same to the John Hay SEZ finds no support therein. Neither does the same grant of privilegesto the John Hay SEZ find support in the other laws specified under Section 3 of Proclamation No. 420, which laws were already extant before the issuance of the proclamation or theenactment of R.A. No. 7227.

More importantly, the nature of most of the assailed privileges is one of tax exemption. It is

the legislature, unless limited by a provision of the state constitution, that has full power toexempt any person or corporation or class of property from taxation, its power to exempt beingas broad as its power to tax.[42] Other than Congress, the Constitution may itself provide forspecific tax exemptions,[43] or local governments may pass ordinances on exemption only fromlocal taxes.[44]

The challenged grant of tax exemption would circumvent the Constitution‘s imposition that

a law granting any tax exemption must have the concurrence of a majority of all the members ofCongress.[45] In the same vein, the other kinds of privileges extended to the John Hay SEZ are bytradition and usage for Congress to legislate upon.

Contrary to public respondents‘ suggestions, the claimed statutory exemption of the John

Hay SEZ from taxation should be manifest and unmistakable from the language of the law onwhich it is based; it must be expressly granted in a statute stated in a language too clear to bemistaken.[46] Tax exemption cannot be implied as it must be categorically and unmistakablyexpressed.[47]

If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemptionand incentives given to the Subic SEZ, it would have so expressly provided in the R.A. No.7227.

This Court no doubt can void an act or policy of the political departments of the governmenton either of two grounds – infringement of the Constitution or grave abuse of discretion.[48]

This Court then declares that the grant by Proclamation No. 420 of tax exemption and other

privileges to the John Hay SEZ is void for being violative of the Constitution. This renders itunnecessary to still dwell on petitioners‘ claim that the same grant violates the equal protectionguarantee.

With respect to the final issue raised by petitioners — that Proclamation No. 420 isunconstitutional for being in derogation of Baguio City‘s local autonomy, objection isspecifically mounted against Section 2 thereof in which BCDA is set up as the governing body ofthe John Hay SEZ.[49]



















































Petitioners argue that there is no authority of the President to subject the John Hay SEZ tothe governance of BCDA which has just oversight functions over SEZ; and that to do so is todiminish the city government‘s power over an area within its jurisdiction, hence, Proclamation No. 420 unlawfully gives the President power of control over the local government instead of just mere supervision.

Petitioners‘ arguments are bereft of merit. Under R.A. No. 7227, the BCDA is entrustedwith, among other things, the following purpose:[50]

x x x

(a) To own, hold and/or administer the military reservations of John Hay Air Station, WallaceAir Station, O‘Donnell Transmitter Station, San Miguel Naval Communications Station, Mt. Sta.Rita Station (Hermosa, Bataan) and those portions of Metro Manila Camps which may betransferred to it by the President;

x x x (Underscoring supplied)

With such broad rights of ownership and administration vested in BCDA over Camp John Hay,BCDA virtually has control over it, subject to certain limitations provided for by law. Bydesignating BCDA as the governing agency of the John Hay SEZ, the law merely emphasizes orreiterates the statutory role or functions it has been granted.

The unconstitutionality of the grant of tax immunity and financial incentives as contained inthe second sentence of Section 3 of Proclamation No. 420 notwithstanding, the entire assailed proclamation cannot be declared unconstitutional, the other parts thereof not being repugnant tolaw or the Constitution. The delineation and declaration of a portion of the area covered byCamp John Hay as a SEZ was well within the powers of the President to do so by means of a

proclamation.

[51]

The requisite prior concurrence by the Baguio City government to such proclamation appears to have been given in the form of a duly enacted resolution bythe sanggunian. The other provisions of the proclamation had been proven to be consistent withR.A. No. 7227.

Where part of a statute is void as contrary to the Constitution, while another part is valid, thevalid portion, if separable from the invalid, may stand and be enforced.[52] This Court finds thatthe other provisions in Proclamation No. 420 converting a delineated portion of Camp John Hayinto the John Hay SEZ are separable from the invalid second sentence of Section 3 thereof,hence they stand.

WHEREFORE, the second sentence of Section 3 of Proclamation No. 420 is hereby

declared NULL AND VOID and is accordingly declared of no legal force and effect. Publicrespondents are hereby enjoined from implementing the aforesaid void provision.

Proclamation No. 420, without the invalidated portion, remains valid and effective.

SO ORDERED.
















ManilaSECOND DIVISION

G.R. No. 149636 June 8, 2005 COMMISSIONER OF INTERNAL REVENUE, petitioner,vs.BANK OF COMMERCE, respondent.

D E C I S I O NCALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 52706, affirming the ruling of the Court of Tax Appeals (CTA )2 in CTA Case No.5415.

The facts of the case are undisputed.

In 1994 and 1995, the respondent Bank of Commerce derived passive income in the form ofinterests or discounts from its investments in government securities and private commercial papers. On several occasions during the said period, it paid 5% gross receipts tax on its income,as reflected in its quarterly percentage tax returns. Included therein were the respondent bank‘s passive income from the said investments amounting toP85,384,254.51, which had already been

subjected to a final tax of 20%.

Meanwhile, on January 30, 1996, the CTA rendered judgment in Asia Bank Corporation v.

Commissioner of Internal Revenue, CTA Case No. 4720, holding that the 20% final withholdingtax on interest income from banks does not form part of taxable gross receipts for Gross ReceiptsTax (GRT) purposes. The CTA relied on Section 4(e) of Revenue Regulations (Rev. Reg.) No.12-80.

Relying on the said decision, the respondent bank filed an administrative claim for refund with

the Commissioner of Internal Revenue on July 19, 1996. It claimed that it had overpaid its grossreceipts tax for 1994 to 1995 byP853,842.54, computed as follows:

Gross receipts subjectedto

Final Tax Derived from

Passive Investment P85,384,254.51

x 20%

20% Final Tax Withheld 17,076,850.90at Source x 5%

P 853,842.54

Before the Commissioner could resolve the claim, the respondent bank filed a petition for reviewwith the CTA, lest it be barred by the mandatory two-year prescriptive period under Section 230of the Tax Code (now Section 229 of the Tax Reform Act of 1997).

In his answer to the petition, the Commissioner interposed the following special and affirmativedefenses:

…

5. The alleged refundable/creditable gross receipts taxes were collected and paid pursuantto law and pertinent BIR implementing rules and regulations; hence, the same are notrefundable. Petitioner must prove that the income from which the refundable/creditable

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taxes were paid from, were declared and included in its gross income during the taxableyear under review;

6. Petitioner‘s allegation that it erroneously and excessively paid its gross receipt tax

during the year under review does not ipso facto warrant the refund/credit. Petitioner

must prove that the exclusions claimed by it from its gross receipts must be an allowableexclusion under the Tax Code and its pertinent implementing Rules and Regulations.Moreover, it must be supported by evidence;

7. Petitioner must likewise prove that the alleged refundable/creditable gross receipt taxeswere neither automatically applied as tax credit against its tax liability for the succeedingquarter/s of the succeeding year nor included as creditable taxes declared and applied tothe succeeding taxable year/s;

8. Claims for tax refund/credit are construed in strictissimi juris against the taxpayer as it partakes the nature of an exemption from tax and it is incumbent upon the petitioner to

prove that it is entitled thereto under the law. Failure on the part of the petitioner to provethe same is fatal to its claim for tax refund/credit;

9. Furthermore, petitioner must prove that it has complied with the provision of Section230 (now Section 229) of the Tax Code, as amended.3

The CTA summarized the issues to be resolved as follows: whether or not the final income taxwithheld should form part of the gross receipts4 of the taxpayer for GRT purposes; and whetheror not the respondent bank was entitled to a refund of P853,842.54.5

The respondent bank averred that for purposes of computing the 5% gross receipts tax, the final

withholding tax does not form part of gross receipts.

6

On the other hand, while theCommissioner conceded that the Court defined "gross receipts" as "all receipts of taxpayersexcluding those which have been especially earmarked by law or regulation for the governmentor some person other than the taxpayer" in CIR v. Manila Jockey Club, Inc.,7 he claimed thatsuch definition was applicable only to a proprietor of an amusement place, not a bankinginstitution which is an entirely different entity altogether. As such, according to theCommissioner, the ruling of the Court in Manila Jockey Club was inapplicable.

In its Decision dated April 27, 1999, the CTA by a majority decision 8 partially granted the petition and ordered that the amount of P355,258.99 be refunded to the respondent bank.

The fallo of the decision reads:

WHEREFORE, in view of all the foregoing, respondent is hereby ORDERED to REFUND infavor of petitioner Bank of Commerce the amount of P355,258.99 representing validly proven

erroneously withheld taxes from interest income derived from its investments in governmentsecurities for the years 1994 and 1995.9

In ruling for respondent bank, the CTA relied on the ruling of the Court in Manila Jockey Club,and held that the term "gross receipts" excluded those which had been especially earmarked bylaw or regulation for the government or persons other than the taxpayer. The CTA also cited itsrulings in China Banking Corporation v. CIR

10 and Equitable Banking Corporation v. CIR.11

The CTA ratiocinated that the aforesaid amount of P355,258.99 represented the claim of the

respondent bank, which was filed within the two-year mandatory prescriptive period and wassubstantiated by material and relevant evidence. The CTA applied Section 204(3) of the NationalInternal Revenue Code (NIRC).12

The Commissioner then filed a petition for review under Rule 43 of the Rules of Court before theCA, alleging that:








































The petition is meritorious.

The issues in this case had been raised and resolved by this Court in China Banking Corporationv. Court of Appeals,20 and CIR v. Solidbank Corporation.

21

Section 27(D)(1) of the Tax Code reads:

(D) Rates of Tax on Certain Passive Incomes. –

(1) Interest from Deposits and Yield or any other Monetary Benefit from DepositSubstitutes and from Trust Funds and Similar Arrangements, and Royalties . – A final tax atthe rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank

deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and

similar arrangements received by domestic corporations, and royalties, derived from sources

within the Philippines: Provided, however, That interest income derived by a domesticcorporation from a depository bank under the expanded foreign currency deposit system shall be

subject to a final income tax at the rate of seven and one-half percent (7½%) of such interestincome.

On the other hand, Section 57(A)(B) of the Tax Code authorizes the withholding of final tax oncertain income creditable at source:

SEC. 57. Withholding of Tax at Source. –

(A) Withholding of Final Tax on Certain Incomes. – Subject to rules and regulations,the Secretary of Finance may promulgate, upon the recommendation of the

Commissioner, requiring the filing of income tax return by certain income payees, the tax

imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2),25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4),

28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4),28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of

income shall be withheld by payor-corporation and/or person and paid in the same

manner and subject to the same conditions as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. – The Secretary of Finance may, upon

the recommendation of the Commissioner, require the withholding of a tax on the itemsof income payable to natural or juridical persons, residing in the Philippines, by payor-

corporation/persons as provided for by law, at the rate of not less than one percent (1%)

but not more than thirty-two percent (32%) thereof, which shall be credited against theincome tax liability of the taxpayer for the taxable year.

The tax deducted and withheld by withholding agents under the said provision shall be held as aspecial fund in trust for the government until paid to the collecting officer .22

Section 121 (formerly Section 119) of the Tax Code provides that a tax on gross receipts derivedfrom sources within the Philippines by all banks and non-bank financial intermediaries shall becomputed in accordance with the schedules therein:

(a) On interest, commissions and discounts from lending activities as well as

income from financial leasing, on the basis of remaining maturities of instrumentsfrom 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%

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Long-term maturity –

(1) Over four (4) years but not exceeding seven (7) years 1%

(2) Over seven (7) years 0%

(b) On dividends 0%(c) On royalties, rentals of property, real or personal, profits fromexchange and all other items treated as gross income under Section 32 ofthis Code 5%

Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru

pre-termination, then the maturity period shall be reckoned to end as of the date of pre-termination for purposes of classifying the transaction as short, medium or long-term and thecorrect 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.

The Tax Code does not define "gross receipts." Absent any statutory definition, the Bureau ofInternal Revenue has applied the term in its plain and ordinary meaning.23

In National City Bank v. CIR ,24 the CTA held that gross receipts should be interpreted as the

whole amount received as interest, without deductions; otherwise, if deductions were to be madefrom gross receipts, it would be considered as "net receipts." The CTA changed course, however,when it promulgated its decision in Asia Bank ; it applied Section 4(e) of Rev. Reg. No. 12-80and the ruling of this Court in Manila Jockey Club, holding that the 20% final withholding tax on

the petitioner bank‘s interest income should not form part of its taxable gross receipts, since thefinal tax was not actually received by the petitioner bank but went to the coffers of thegovernment.

The Court agrees with the contention of the petitioner that the appellate court‘s reliance on Rev.

Reg. No. 12-80, the rulings of the CTA in Asia Bank , and of this Court in Manila Jockey

Club has no legal and factual bases. Indeed, the Court ruled in China Banking Corporation v.Court of Appeal s

25 that:

… In Far East Bank & Trust Co. v. Commissioner and Standard Chartered Bank v.Commissioner , both promulgated on 16 November 2001, the tax court ruled that the final

withholding tax forms part of the bank‘s gross receipts in computing the gross receipts tax. Thetax court held that Section 4(e) of Revenue Regulations No. 12-80 did not prescribe thecomputation of the amount of gross receipts but merely authorized "the determination of theamount of gross receipts on the basis of the method of accounting being used by the taxpayer."

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."26 "Gross" is also definedas "taking in the whole; having no deduction or abatement; whole, total as opposed to a sumconsisting of separate or specified parts."27 Gross is the antithesis of net.28 Indeed, in China

Banking Corporation v. Court of Appeals ,29 the Court defined the term in this wise:

As commonly understood, the term "gross receipts" means the entire receipts without anydeduction. Deducting any amount from the gross receipts changes the result, and the meaning, tonet receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax ongross receipts, unless the law itself makes an exception. As explained by the Supreme Court ofPennsylvania in Commonwealth of Pennsylvania v. Koppers Company, Inc., -






























Highly refined and technical tax concepts have been developed by the accountant and legaltechnician primarily because of the impact of federal income tax legislation. However, this in noway should affect or control the normal usage of words in the construction of our statutes; andwe see nothing that would require us not to include the proceeds here in question in the grossreceipts 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 definitionof 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 afterdeductions 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 properdeductions are made from the gross. And in the use of the words "gross receipts," the instantordinance, 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 thisordinance. (Emphasis supplied)

Absent a statutory definition, the term "gross receipts" is understood in its plain and ordinarymeaning. Words in a statute are taken in their usual and familiar signification, with due regard totheir general and popular use. The Supreme Court of Hawaii held in Bishop Trust Company v. Burns that -

xxx It is fundamental that in construing or interpreting a statute, in order to ascertain the intent ofthe 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 commonusage. This principle is equally applicable to a tax statute. [Citations omitted] (Emphasissupplied)

The Court, likewise, declared that Section 121 of the Tax Code expressly subjects interestincome of banks to the gross receipts tax. "Such express inclusion of interest income in taxablegross receipts creates a presumption that the entire amount of the interest income, without anydeduction, is subject to the gross receipts tax. Indeed, there is a presumption that receipts of a person engaging in business are subject to the gross receipts tax. Such presumption may only beovercome by pointing to a specific provision of law allowing such deduction of the finalwithholding tax from the taxable gross receipts, failing which, the claim of deduction has no legto stand on. Moreover, where such an exception is claimed, the statute is construed strictly infavor of the taxing authority. The exemption must be clearly and unambiguously expressed in thestatute, and must be clearly established by the taxpayer claiming the right thereto. Thus, taxationis the rule and the claimant must show that his demand is within the letter as well as the spirit ofthe law."30

In this case, there is no law which allows the deduction of 20% final tax from the respondent bank‘s interest income for the computation of the 5% gross receipts tax. On the other hand,Section 8(a)(c), Rev. Reg. No. 17-84 provides that interest earned on Philippine bank depositsand yield from deposit substitutes are included as part of the tax base upon which the grossreceipts tax is imposed. Such earned interest refers to the gross interest without deduction sincethe regulations do not provide for any such deduction. The gross interest, without deduction, isthe amount the borrower pays, and the income the lender earns, for the use by the borrower ofthe lender‘s money. The amount of the final tax plainly covers for the interest earned and is

consequently part of the taxable gross receipt of the lender .31











The bare fact that the final withholding tax is a special trust fund belonging to the governmentand that the respondent bank did not benefit from it while in custody of the borrower does not justify its exclusion from the computation of interest income. Such final withholding tax coversfor the respondent bank‘s income and is the amount to be used to pay its tax liability to the

government. This tax, along with the creditable withholding tax, constitutes payment which

would extinguish the respondent bank‘s obligation to the government. The bank can only pay themoney it owns, or the money it is authorized to pay.32

In the same vein, the respondent bank‘s reliance on Section 4(e) of Rev. Reg. No. 12-80 and theruling of the CTA in Asia Bank is misplaced. The Court‘s discussion in China Banking

Corporation33 is instructive on this score:

CBC also relies on the Tax Court‘s ruling in Asia Bank that Section 4(e) of Revenue Regulations No. 12-80 authorizes the exclusion of the final tax from the bank‘s taxable gross receipts.

Section 4(e) provides that:

Sec. 4. x x x

(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and

other non-bank financial intermediaries not performing quasi-banking functions. - The rates oftaxes to be imposed on the gross receipts of such financial institutions shall be based on all itemsof income actually received. Mere accrual shall not be considered, but once payment is receivedon such accrual or in cases of prepayment, then the amount actually received shall be included inthe tax base of such financial institutions, as provided hereunder: x x x. (Emphasis supplied byTax Court)

Section 4(e) states that the gross receipts "shall be based on all items of income actually

received." The tax court in Asia Bank concluded that "it is but logical to infer that the final tax,not having been received by petitioner but instead went to the coffers of the government, shouldno longer form part of its gross receipts for the purpose of computing the GRT."

The Tax Court erred glaringly in interpreting Section 4(e) of Revenue Regulations No. 12-80.Income may be taxable either at the time of its actual receipt or its accrual, depending on theaccounting method of the taxpayer. Section 4(e) merely provides for an exception to the rule,making interest income taxable for gross receipts tax purposes only upon actual receipt. Interestis accrued, and not actually received, when the interest is due and demandable but the borrowerhas not actually paid and remitted the interest, whether physically or constructively. Section 4(e)does not exclude accrued interest income from gross receipts but merely postpones its inclusionuntil actual payment of the interest to the lending bank. This is clear when Section 4(e) statesthat "[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."

Actual receipt of interest income is not limited to physical receipt. Actual receipt may either be physical receipt or constructive receipt. When the depository bank withholds the final tax to paythe tax liability of the lending bank, there is prior to the withholding a constructive receipt by thelending bank of the amount withheld. From the amount constructively received by the lending bank, the depository bank deducts the final withholding tax and remits it to the government forthe account of the lending bank. Thus, the interest income actually received by the lending bank,

both physically and constructively, is the net interest plus the amount withheld as final tax.

The concept of a withholding tax on income obviously and necessarily implies that the amountof the tax withheld comes from the income earned by the taxpayer. Since the amount of the taxwithheld constitutes income earned by the taxpayer, then that amount manifestly forms part ofthe taxpayer‘s gross receipts. Because the amount withheld belongs to the taxpayer, he cantransfer its ownership to the government in payment of his tax liability. The amount withheldindubitably comes from income of the taxpayer, and thus forms part of his gross receipts.











The Court went on to explain in that case that far from supporting the petitioner‘s contention, its

ruling in Manila Jockey Club, in fact even buttressed the contention of the Commissioner. Thus:

CBC cites Collector of Internal Revenue v. Manila Jockey Club as authority that the finalwithholding tax on interest income does not form part of a bank‘s gross receipts because the final

tax is "earmarked by regulation" for the government. CBC‘s reliance on the Manila JockeyClub is misplaced. In this case, the Court stated that Republic Act No. 309 and Executive Order No. 320 apportioned the total amount of the bets in horse races as follows:

87 ½% as dividends to holders of winning tickets, 12 ½% as "commission" of the Manila JockeyClub, of which ½% was assigned to the Board of Races and 5% was distributed as prizes forowners of winning horses and authorized bonuses for jockeys.

A subsequent law, Republic Act No. 1933 ("RA No. 1933"), amended the sharing by orderingthe distribution of the bets as follows:

Sec. 19. Distribution of receipts. – The total wager funds or gross receipts from the sale of pari-mutuel tickets shall be apportioned as follows: eighty-seven and one-half per centum shall bedistributed in the form of dividends among the holders of win, place and show horses, as the casemay be, in the regular races; six and one-half per centum shall be set aside as the commission of

the person, racetrack, racing club, or any other entity conducting the races; five and one-half percentum shall be set aside for the payment of stakes or prizes for win, place and show horses andauthorized bonuses for jockeys; and one-half per centum shall be paid to a special fund to beused by the Games and Amusements Board to cover its expenses and such other purposesauthorized under this Act. xxx. ( Emphasis supplied)

Under the "distribution of receipts" expressly mandated in Section 19 of RA No. 1933, the gross

receipts "apportioned" to Manila Jockey Club referred only to its own 6 ½% commission. Thereis no dispute that the 5 ½% share of the horse-owners and jockeys, and the ½% share of theGames and Amusements Board, do not form part of Manila Jockey Club‘s gross receipts. RA

No. 1933 took effect on 22 June 1957, three years before the Court decided Manila JockeyClub on 30 June 1960.

Even under the earlier law, Manila Jockey Club did not own the entire 12 ½% commission.Manila Jockey Club owned, and could keep and use, only 7% of the total bets. Manila JockeyClub merely held in trust the balance of 5 ½% for the benefit of the Board of Races and thewinning horse-owners and jockeys, the real owners of the 5 1/2 % share.

The Court in Manila Jockey Club quoted with approval the following Opinion of the Secretary ofJustice made prior to RA No. 1933:

There is no question that the Manila Jockey Club, Inc. owns only 7-1/2% [sic] of the bets

registered by the Totalizer. This portion represents its share or commission in the total amount ofmoney it handles and goes to the funds thereof as its own property which it may legally disbursefor its own purposes. The 5% [sic] does not belong to the club. It is merely held in trust for

distribution as prizes to the owners of winning horses. It is destined for no other object than the payment of prizes and the club cannot otherwise appropriate this portion without incurringliability to the owners of winning horses. It can not be considered as an item of expense becausethe sum used for the payment of prizes is not taken from the funds of the club but from a certain portion of the total bets especially earmarked for that purpose. (Emphasis supplied)

Consequently, the Court ruled that the 5 ½% balance of the commission, not being owned byManila Jockey Club, did not form part of its gross receipts for purposes of the amusement tax.Manila Jockey Club correctly paid the amusement tax based only on its own 7% commissionunder RA No. 309 and Executive Order No. 320.



Manila Jockey Club does not support CBC‘s contention but rather the Commissioner‘s position.

The Court ruled in Manila Jockey Club that receipts not owned by the Manila Jockey Club butmerely 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.34

We reverse the ruling of the CA that subjecting the Final Withholding Tax (FWT) to the 5% ofgross receipts tax would result in double taxation. In CIR v. Solidbank Corporation ,35 we ruled,

thus:

We have repeatedly said that the two taxes, subject of this litigation, are different from eachother. The basis of their imposition may be the same, but their natures are different, thus leadingus to a final point. Is there double taxation?

The Court finds none.

Double taxation means taxing the same property twice when it should be taxed only once; that is,

"xxx taxing the same person twice by the same jurisdiction for the same thing." It is obnoxiouswhen the taxpayer is taxed twice, when it should be but once. Otherwise described as "directduplicate 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 ofthe FWT is the passive income generated in the form of interest on deposits and yield ondeposit substitutes, while the subject matter of the GRT 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 anexcise rather than a property tax. It is not an income tax, unlike the FWT. In fact, we havealready held that one can be taxed for engaging in business and further taxed differentlyfor the income derived therefrom. Akin to our ruling inVelilla v. Posadas, these two taxesare entirely distinct and are assessed under different provisions.

Second , although both taxes are national in scope because they are imposed by the sametaxing authority – the national government under the Tax Code – and operate within thesame Philippine jurisdiction for the same purpose of raising revenues, the taxing periodsthey affect are different. The FWT is deducted and withheld as soon as the income isearned, 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 inwhich it is earned.

Third, these two taxes are of different kinds or characters. The FWT is an income taxsubject 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 taxingauthority, within the same jurisdiction, for the same purpose, in different taxing periods, some ofthe property in the territory. Subjecting interest income to a 20% FWT and including it in thecomputation of the 5% GRT is clearly not double taxation.

IN LIGHT OF THE FOREGOING, the petition is GRANTED. The decision of the Court ofAppeals in CA-G.R. SP No. 52706 and that of the Court of Tax Appeals in CTA Case No. 5415are SET ASIDE and REVERSED. The CTA is hereby ORDERED to DISMISS the petition ofrespondent Bank of Commerce. No costs.

SO ORDERED.









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